Shifting federal agencies to pay-for- performance systems "will better serve the needs of the federal government," but it could be several years before the workforce accepts the idea, according to a report to be released today.
The transition to pay-for-performance systems will have "a much higher prospect for success if managers and employees are involved in the planning," the report says, adding that the importance of discussions between management and employees "cannot be overstated" if the change is to be seen as compatible with other workplace practices.
The report, "Pay for Performance: A Guide for Federal Managers," was written by compensation expert Howard Risher and sponsored by the IBM Center for the Business of Government. Risher sees the federal government as ripe for going to performance-based pay, but acknowledges the change will be difficult, in part because it creates perceptions of winners and losers.
"Managers, in many cases for the first time, will be expected to make difficult decisions that affect their people," he writes.
Risher's 65-page report provides definitions, a brief history of federal pay practices and places Bush administration efforts, especially pay changes underway for federal executives, in the context of private-sector compensation. IBM will post the report on its Web site (www.businessofgovernment.org).
By Risher's count, about 40,000 federal employees currently work under policies that link their salary increases to performance. That number will grow by 750,000 when the Departments of Defense and Homeland Security set up new congressionally approved systems, starting next year.
While abandoning the 15-grade General Schedule -- the white-collar pay system for about 1.6 million employees -- will not be easy, Risher believes that most federal employees won't lose economically under systems that base at least part of their annual raises on job performance.
"Very few employees are performing so poorly that they will be denied increases," Risher writes. "For the high performers -- and every agency will define that differently -- their salary will go up more rapidly than under the GS system.
"For most employees, their annual pay increases will effectively be the same as in the past. Employees need to understand that."
But Risher stresses that "the success of the switch to pay for performance will ride on supervisors and how well they perform their role." Agencies will have to set up performance management systems with guidelines for how pay raises are tied to employee ratings, he says.
Under the GS system, Risher suggests, ratings have become inflated and "carried no consequences." But research shows that in the typical work group, only 15 percent to 20 percent of the employees can be considered stars, Risher says.
Managers administering performance-based systems must be trained in their use and should be held accountable for their pay decisions, Risher suggests. In particular, they will be challenged to reward their star performers in a meaningful way while also staying within their budgets.
"The obvious fact is that an above-average increase for one employee reduces the money available for increases for others," Risher notes. "When there are too many high ratings, it forces an employer to reduce the increases to the true high performers."
Risher, who has served as a consultant to National Academy of Public Administration, the Office of Personnel Management and other agencies, acknowledges that the government's track record in establishing credible pay-for-performance projects has had its share of bumps. But the effort is worthwhile because such systems hold the potential to improve agency performance, he says.
"Research over the years confirms that organizations benefit when they recognize and reward employee and group performance," he writes.
"The research also confirms that people respond to reward opportunities. They want to contribute and to realize success. . . . When they understand what they are expected to accomplish, the linkage of pay and performance can be a powerful motivator."
Federal agencies, Risher concludes, "should expect to be viewed as better places to work in the end."