By Stephen Barr
Tuesday, September 25, 2007; D04

The Internal Revenue Service is taking another look at its pay system for managers after complaints by managers and a critical inspector general's report.

The IRS has hired an outside consultant to review the system, which links pay raises to job-performance ratings. The review underscores the challenges that face any agency when pay rules are changed, such as obtaining enough employee support to counter fears of unfair treatment.

The IRS pay system applies only to managers, who have been moved out of the 15-grade General Schedule, the primary government-wide pay system, and into pay bands, which combine two or more of the GS grades. Proponents of pay bands think they encourage high-performance workplaces and put more focus on the individual rather than his position.

Under the system, the performance-based salary increases are given at the discretion of the IRS commissioner. That means some of the nearly 9,000 IRS managers could receive a smaller percentage raise than the 90,000 rank-and-file IRS employees, who receive the government-wide, annual pay raise approved by the Congress, according to the report issued in July by the Treasury Inspector General for Tax Administration.

That could hamper the IRS's ability to groom potential leaders in the career ranks, the report suggested. "The current system may discourage both managers as well as non-managers from applying for management positions," it said.

In 2006, then-IRS commissioner Mark W. Everson briefly considered redistributing money for annual pay raises from managers rated as satisfactory or meeting job expectations, to those whose ratings were higher, outstanding and exceeding expectations, as a way to better reward the agency's best managers.

But the idea brought protests from IRS managers. In surveys conducted by their professional associations, the majority of managers said that their colleagues who do their jobs and meet expectations should be entitled to an annual pay raise.

A majority of managers also opposed the idea of giving a higher raise to the outstanding managers by reducing the raise for those performing at a satisfactory level, according to the inspector general's report.

In the end, the IRS approved pay raises for all eligible managers similar to those provided other federal employees.

The IRS pay system has three primary components: a performance-based salary increase commensurate with a manager's annual job-evaluation rating, the opportunity for a performance-based bonus, and a locality adjustment tied to average private-sector wage increases in the area where the manager works.

IRS managers have been moved into performance-based pay in phases, starting in 2001. The system was authorized by Congress in 1998 as part of a law that reorganized the agency.

The IRS Oversight Board, which monitors agency operations on behalf of taxpayers, discussed the pay system at its August meeting and "questioned whether the IRS has measures that can evaluate the effectiveness of the current pay-for-performance system to motivate high performance," according to a board statement.

The inspector general's July report recommended that the IRS guarantee a minimum pay raise to managers, as it does for rank-and-file employees. But the IRS said such a policy "is not fiscally practicable at this time due to budgetary implications and restraints," the inspector general report said.

Robert Buggs, the IRS chief human capital officer, disputed key findings in the inspector general's report and said the IRS does not believe the pay system poses a risk to recruiting and retaining managers. "We are maintaining roughly the same number of applications per managerial vacancy that we were prior to the establishment of the pay bands," he said in a recent interview.

The design of the new system will provide the opportunity for high-performing managers to earn more than they would have under the General Schedule, Buggs said.

"The design fits for us, and is helping us to realize our business objectives and goals and plans," Buggs said. "I would not be one to recommend that we go back to the General Schedule. I think we need to move forward. I would much rather see the entire workforce under a pay-for-performance system."

Still, Buggs said, the IRS knows the system has not gone over well with most managers. "We could have done a much better job in terms of communicating," he said.

The IRS has hired a Dallas-based consultant to study the pay-for-performance system and determine if it is helping the agency hire and retain managers, Buggs said. "We want to assess and reassess how effective pay bands are working," he said.

Stephen Barr's e-mail address isbarrs@washpost.com.