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Performance Management Reference Materials

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Pay-for-Performance is Working!

Pay for performance is working in the Federal Government!

The U. S. Postal Service (USPS) and the U.S. General Accounting Office (GAO) have both adopted programs that compensate their employees based on performance. Representatives from these agencies discussed various aspects of their pay-for-performance programs during the 1999 Strategic Compensation Conference.

Variable Pay at the USPS

Paul Weather-head and George Jones from the USPS described the historical context from which the USPS' pay-for-performance plan arose. During the early 1990s, the USPS experienced severe financial difficulties including a projected budget deficit of some $2 billion in 1992. Factors identified by the USPS that contributed to this crisis were that pay was not related to performance, compensation was not at levels comparable to the private sector, and customer focus was lacking. To help address these problems, the USPS adopted a pay-for-performance plan for its management employees that included a group incentive program (i.e., a variable pay program). (Note: agencies covered by title 5 also can use this type of program.)

The objectives of the USPS' variable pay program are to:

  • drive organizational behavior,
  • drive continuous improvement,
  • make employees stakeholders, and
  • maintain a short and long term focus.

The program is a group incentive plan that provides lump sum cash payouts based upon how well organizational units achieve their objectives. The driving force behind the program is the USPS' "Customer Perfect" performance management model, which is based on balanced measures the USPS refers to as the "Voice of the Customer, the Voice of the Employee, and the Voice of the Business." Performance indicators for these "Voices" include on-time delivery rates, lost workday injuries, and the Economic Value Added (EVA), respectively. EVA financial performance provides the program's funding.

The success of the USPS' pay-for-performance program, as measured by its three "Voices," has been significant. From 1994 to 1998 the percent of on-time delivery for overnight mail has steadily increased each year, while lost workday injuries as a percent of work hours has steadily decreased each year. And, for the first time in its history, the USPS has had a positive net income for 5 consecutive years.

Broadbanding at GAO

Gil Fitzhugh from the GAO described its pay-for-performance program. The program's objectives include basing rewards on contributions and performance, making pay increases available yearly, and providing larger base pay increases than are currently allowed under the General Schedule to top performers.

The plan includes a pay system with four broad pay ranges (i.e., a broadbanding system) that covers all evaluators, evaluator-related specialists, and attorneys at the developmental, full performance, senior, and managerial levels. To determine pay increases, panels made up of unit managers take into consideration the employee's performance appraisal, a contribution statement prepared by the employee, and the panelists' knowledge of the employee's work. Employees are then compared to each other in terms of the extent to which they exceeded job expectations, the magnitude of their contributions, the complexity of their work, the quality standards they met, the teamwork skills they demonstrated, and the innovation or creativity required of their job. Top performing employees can receive as much as a 6 percent pay increase.

Mr. Fitzhugh stressed that successful pay-for-performance plans must have clear and convincing objectives that will improve quality and help the organization operate more efficiently and economically. Additionally, agencies adopting pay-for-performance programs should not underestimate the impact the program will have on the organization's culture and related systems such as recruitment, appraisal, and payroll.

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