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Reinventing Human Resource Management

HRM04: Authorize Agencies to Develop Incentive Award and Bonus Systems to Improve Individual and Organizational Performance

Background

Federal law provides for monetary awards for various categories of employees and requires the Office of Personnel Management (OPM) to issue regulations to govern agency awards programs. OPM has issued supplemental guidance for use by agencies in designing and managing productivity gainsharing programs. Agencies also establish nonmonetary and honor award programs under their own broad administrative authority.

Since 1978, Congress, following the lead of the private sector, has attempted to link pay and performance through merit pay and other pay for performance programs. The current merit pay system for nonmanagerial General Schedule (GS) employees provides that employees with a fully successful rating receive within-grade step increases at scheduled intervals (from one to three years depending on position in rate range). In addition, employees may, no more than once a year, receive additional step increases--Quality Step Increases--based on outstanding performance. The Performance Management and Recognition System (PMRS) applies to supervisors and managers at grades 13-15. Employees covered by PMRS who are rated fully successful receive the general GS increase and an annual merit increase and are eligible for performance awards. Employees rated less than fully successful receive a partial or no general increase and are not eligible for merit increases and performance awards.

Congress reaffirmed its commitment to pay for performance in the Federal Employees Pay Comparability Act of 1990. In May 1993, OPM circulated a working draft proposal, "Principles and Features of Performance Management Reform," which describes reform of employee performance planning, assessment, and incentive systems.

In 1991, two congressionally mandated committees made recommendations for improving pay for performance for federal government employees in "Advancing Managerial Excellence: A Report on Improving the Performance Management and Recognition System," which looked at PMRS for managerial employees, and "Strengthening the Link Between Pay and Performance: Report of the Pay for Performance Labor Management Committee," which considered pay for performance for nonmanagerial employees. PMRS expires on October 31, 1993. As a result, legislation will be needed to provide a substitute performance incentive system for GM employees.

Need for Change

Pay for performance programs have had mixed results in both the public and private sectors. After several years of experience and study, informed observers (e.g., the General Accounting Office (GAO), the Merit Systems Protection Board, the National Research Council) agree that (1) there is insufficient empirical evidence that pay for performance programs are effective, and (2) variable pay or bonuses are superior to base pay adjustments for improving employee performance. Federal employees generally do not believe that pay and performance are in fact linked, and the majority of employees do not believe they were treated fairly with regard to awards.

Governmentwide incentive programs are not responsive to organization- specific needs and objectives, workforce characteristics, and agency cultures. The emphasis is primarily on incentives and awards for individual performance, not those that recognize organizational or team performance, or even individual contributions to team accomplishments. The current approach promotes competition, with winners and losers, rather than cooperation and cohesion, which are important elements in most successful government programs. Productivity gainsharing is not widely used even though it has proven to be an effective tool for improving organizational performance. Agencies do not approach bonuses and awards in a comprehensive manner--each award or award category is seen as independent of all other bonuses and awards. Monetary awards tend to be emphasized and non-monetary awards deemphasized. Finally, it is generally believed that pay for performance initiatives have been insufficiently funded, which contributes to their lack of effectiveness.

A promising but relatively little-used approach to linking awards with improved performance is productivity gainsharing. GAO defines gainsharing as "incentive systems that measure gains in employee productivity and share the savings generated between employees and the organization."(1) Typically about half of the savings or gains are retained by the organization, and the other half are divided among the employees who were responsible for those savings. GAO looked at 18 gainsharing programs in the Department of Defense (DOD) and found that all of them reported documented cost savings ($7,000 to over $1 million) and indirect benefits such as decreased sick leave usage and reduction in overtime costs.(2) They concluded: "DOD's gainsharing efforts to date demonstrate that individual/small group programs can generate cost savings and other related improvements."(3) GAO also looked at private gainsharing efforts and found similar success. GAO identified three major trends in private sector gainsharing: "gainsharing programs based on organizationwide productivity measurements are replacing programs based on individual or small group productivity measurements . . . organizational "gainsharing programs are achieving high success rates . . . [and] private sector firms are increasingly using employee participation systems in their gainsharing programs."(4)

An ideal performance incentive system provides managers with the tools they need to reward and motivate excellent performance. Base pay adjustments are predictable--which is important to employees; variable pay or bonuses can be used as an incentive for improving employee performance--which is important to managers. The awards available are both monetary and non-monetary and are designed to be consistent with the unique characteristics of the work, the workforce, and culture of the organization. Individuals, teams, and organizations are rewarded and recognized for performance. Productivity gainsharing is used as an incentive to improve organizational performance.

Actions

1. Authorize agencies to develop their own incentive programs. (3)

By fall 1994, the director of OPM should submit draft legislation to Congress to authorize agencies to develop their own incentive programs. Agency-based incentive award and bonus programs should be based on the following principles:

--- The objective of incentive programs is improvement of individual and organizational performance.

--- An employee who meets performance expectations is eligible for recognition through an incentive program that includes monetary awards or bonuses and/or non-monetary awards (base pay adjustments are discussed in HRM02, "Reform the General Schedule Classification and Basic Pay System").

--- Employees and their representatives will be involved in development of incentive programs, which, in the case of employees represented by an employee union, will be through collective bargaining.

--- Departments and agencies are encouraged to experiment with alternatives to traditional employee incentive programs, such as organizational and team recognition and non-monetary recognition (e.g., increased authority, additional resources, or a menu of reward options from which employees or teams of employees can choose).

Complete decentralization of incentives within a framework of governmentwide principles is expected to result in development of agency-based incentive systems that are unified, consistent with agency cultures, and owned by managers and employees who will help develop them. Employee and union involvement will be required. Base pay adjustments should remain predictable and uniform, in keeping with the recommendation of the Pay for Performance Labor Management Committee. Variable pay in the form of non-monetary and monetary incentives would be available as a tool for performance improvement.

2. Encourage agencies to establish productivity gainsharing programs called Federal Performance Sharing to support the reinvention and change effort. (1)

The director of the Federal Quality Institute should form, sponsor, and support a temporary team of government experts to plan and implement a six-month campaign to encourage establishment of gainsharing programs, called Federal Performance Sharing, by agencies governmentwide. To achieve its objective, the team may conduct briefings, develop training programs, organize conferences, consult/provide technical assistance, develop information systems, develop reporting systems, and organize interagency networks. Performance sharing should be a cooperative effort between employees and managers. Employees and their representatives must be involved in the creation, design, and implementation of agency-based Federal Performance Sharing, which, in the case of employees represented by an employee union, will require collective bargaining.

Performance sharing could be an important incentive for employees and managers to implement National Performance Review (NPR) recommendations; if by implementing NPR recommendations, employees and managers can make government work better and cost less, they can share in the savings. Performance sharing emphasizes results, mission accomplishment, and empowerment, and is an appropriate incentive for reinvention.

Cross References to Other NPR Accompanying Reports

Mission-Driven, Results-Oriented Budgeting, BGT02: Effectively Implement the Government Performance and Results Act of 1993.

Endnotes

1. U.S. General Accounting Office, Gainsharing: DOD Efforts Highlight an Effective Tool for Enhancing Federal Productivity, GAO/GGD-86- 143BR (Washington, D.C.: U.S. General Accounting Office, September 1986), p. 2.

2. Ibid., p. 2.

3. Ibid., p. 21.

4. Ibid., p. 10.

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