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Performance Management Programs Are Integral to Compensation System Design

Performance Management Programs Are Integral to Compensation System Design

When organizations base compensation in any way on employee performance, redesigning a compensation system requires examination of the performance management program. At OPM's 2001 Strategic Compensation Conference, representatives of the Office of the Comptroller of the Currency (OCC) and their adviser, Steve Safier from the Hay Group, described how OCC redesigned its compensation system, which required it to also redesign its performance management program.

Changes Needed

OCC is not covered by General Schedule pay requirements and had been using a 25-grade classification system and a 5-level performance management program. It found that while 25 grades allowed frequent promotions, the system was too complex and made it difficult for managers and employees to differentiate between grades. The base salary system was perceived to be comparable to systems used by similar Federal agencies but not believed to be competitive with private-sector financial institutions. While the performance management program used generic, skill-based standards to make the process easier and provided some differentiation among performance levels and pay increases, the agency perceived that generic standards were not accurate for all employees and that the limited merit budget was not enough for adequate recognition. OCC decided it needed to redesign these systems

Compensation Objectives

OCC used leadership interviews, employee focus groups, and surveys to develop its top 10 compensation objectives. OCC wants:

  • external competitiveness to recruit and retain;
  • to reward performance through salary without grade promotions;
  • rewards for skill acquisition;
  • internal equity among employees;
  • pay for the person rather than just the job;
  • built-in controls and cost constraints;
  • an understandable and equitable system;
  • parallel career paths for managers and technical employees;
  • flexibility to adapt quickly to market changes; and
  • management flexibility to assign a range of duties.

Based on these objectives, OCC used a decision-making tool to help determine which type of classification and pay system supports those objectives best - a 25-grade system, a 12-grade system, or a 9-grade system. By rating these three options as to whether their level of support for the objective is high, medium, or low, OCC found that a 9-grade system supported its objectives best. Next, it turned its attention to designing a supportive performance management program.

Performance Management Redesign

OCC redesigned its performance management program to include the following changes:

  • The appraisal program changed from a five-level program to a four-level program. OCC needed to keep distinctions in performance, but wanted to signal a change to employees. The four levels are not labeled with terms such as "Fully Successful" or "Outstanding" because OCC found that people stopped listening once a label was placed on them.
  • The program maintains generic elements and standards, but now requires that employees also have specific objectives related to the specific work the employee is doing. All standards and objectives are tied back into OCC's strategic plan and goals cascade from executives to front-line employees.

Salary increases are based on employee appraisal ratings. Employees rated 1 or 2 receive no increases at all, not even the general increase given in January. Employees rated 3 or 4 are eligible for a salary increase within a specific range established for each rating. Managers determine the final salary increase.

Lessons Learned

Redesign lessons learned include:

  • employee and leadership involvement is critical to the success of the new programs;
  • training and education on new programs are vital;
  • systematic change requires inter-disciplinary collaboration; and
  • effort in the redesign process pays.

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