Human Capital: Implementing Pay for Performance at Selected Personnel Demonstration Projects
Published: 2004-01-23T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: There is a growing understanding that the federal government needs to fundamentally rethink its current approach to pay and to better link pay to individual and organizational performance. Federal agencies have been experimenting with pay for performance through the Office of Personnel Management's (OPM) personnel demonstration projects. GAO identified the approaches that selected personnel demonstration projects have taken to implement their pay for performance systems. These projects include: the Navy Demonstration Project at China Lake (China Lake), the National Institute of Standards and Technology (NIST), the Department of Commerce (DOC), the Naval Research Laboratory (NRL), the Naval Sea Systems Command Warfare Centers (NAVSEA) at Dahlgren and Newport, and the Civilian Acquisition Workforce Personnel Demonstration Project (AcqDemo). We selected these demonstration projects based on factors such as status of the project and makeup of employee groups covered. We provided drafts of this report to officials in the Department of Defense (DOD) and DOC for their review and comment. DOD provided written comments concurring with our report. DOC provided minor technical clarifications and updated information. We provided a draft of the report to the Director of OPM for her information.
section_title: What GAO Found
paragraphs: The demonstration projects took a variety of approaches to designing and implementing their pay for performance systems to meet the unique needs of their cultures and organizational structures. GAO strongly supports the need to expand pay for performance in the federal government. How it is done, when it is done, and the basis on which it is done can make all the difference in whether such efforts are successful. High-performing organizations continuously review and revise their performance management systems. These demonstration projects show an understanding that how to better link pay to performance is very much a work in progress at the federal level. Additional work is needed to strengthen efforts to ensure that performance management systems are tools to help them manage on a day-to-day basis. In particular, there are opportunities to use organizationwide competencies to evaluate employee performance that reinforce behaviors and actions that support the organization's mission, translate employee performance so that managers make meaningful distinctions between top and poor performers with objective and fact-based information, and provide information to employees about the results of the performance appraisals and pay decisions to ensure reasonable transparency and appropriate accountability mechanisms are in place.

section_title: Letter
paragraphs: To successfully transform themselves, high-performing organizations have  found that they must fundamentally change their cultures so that they are  more results-oriented, customer-focused, and collaborative in nature, and  have recognized that an effective performance management system can  help them drive internal change and achieve desired results.  Our prior  work, done at your request, has identified nine key practices for effective  performance management based on experiences in public sector  organizations both in the United States and abroad.  The key practices are  as follows: 1. Align individual performance expectations with organizational goals.  2. Connect performance expectations to crosscutting goals.  3. Provide and routinely use performance information to make program  improvements.  4. Require follow-up actions to address organizational priorities.  5. Use competencies to provide a fuller assessment of performance. 6. Link pay to individual and organizational performance.  7. Make meaningful distinctions in performance.  8.
Involve employees and stakeholders to gain ownership of performance  management systems.  9. Maintain continuity during transitions.
Among these practices, there is a growing understanding that the federal  government needs to fundamentally rethink its current approach to pay  and better link pay to individual and organizational performance.  To this  end, Congress has taken important steps to implement results-oriented pay  reform and modern performance management systems across government.   Most recently, Congress provided the Department of Defense (DOD)  flexibility to revise its performance management system to better link pay  to performance and required DOD to incorporate employee involvement,  provide ongoing performance feedback, and include effective safeguards to  ensure fairness and equity, among other things, in DOD’s revised system.
Congress also established a Human Capital Performance Fund to reward  agencies’ highest performing and most valuable employees.  To be eligible,  agencies are to submit plans for approval by the Office of Personnel  Management (OPM) that incorporate a link between pay for performance  and the agency’s strategic plan, employee involvement, ongoing  performance feedback, and effective safeguards to ensure fair management  of the system, among other things.  In the first year of implementation, up  to 10 percent of the amount appropriated is to be available to train those  involved on making meaningful distinctions in performance.  In addition,  Congress created a wider, more open pay range for senior executive  compensation, thus allowing for pay to be more directly tied to individual  performance, contribution to the agency’s performance, or both, as  determined under a rigorous performance management system that as  designed and applied, makes meaningful distinctions based on relative  performance.
Further, in November 2002, Congress established the Department of  Homeland Security and provided it human capital flexibilities to design a  performance management system and specifically to consider different  approaches to pay.  We reported that the department’s effort to design its  system could be particularly instructive in light of future requests for human capital flexibilities. Legislation is currently pending, which you  sponsored and introduced, that would provide GAO additional authority to  more fully link employees’ annual salary increases to performance.
Federal agencies have been experimenting with pay for performance  through OPM’s personnel demonstration projects.  Over the past 25 years,  OPM has approved 17 projects, 12 of which have implemented pay for  performance systems.  At your request, this report identifies the  approaches that 6 of these personnel demonstration projects have taken to  implement their pay for performance systems.  These projects are   the Navy Demonstration Project at China Lake (China Lake),   the National Institute of Standards and Technology (NIST),   the Department of Commerce (DOC),   the Naval Research Laboratory (NRL),   the Naval Sea Systems Command Warfare Centers (NAVSEA) at  Dahlgren and Newport, and   the Civilian Acquisition Workforce Personnel Demonstration Project  (AcqDemo).
To address the objective of this report, we focused on OPM’s personnel  demonstration projects because they are required to prepare designs,  conduct employee feedback, and complete evaluations of their results,  among other things.  We selected these demonstration projects based on  factors such as status of the project and makeup of employee groups  covered.  We analyzed Federal Register notices outlining the major  features of each demonstration project, operating manuals, annual and  summative evaluations, employee attitude survey results, project briefings,  training materials, rating and payout data, and cost data as reported by the  agencies without verification by GAO, as well as other relevant  documentation.  We also interviewed cognizant officials from OPM;  demonstration project managers, human resource officials, and  participating supervisors and employees; and union and other employee  representatives.  We did not independently evaluate the effectiveness of the  demonstration projects.  We assessed the reliability of cost, salary, rating,  and performance pay distribution data provided by the demonstration  projects and determined that the data were sufficiently reliable for the  purposes of this report, with the exception of the DOC salary data, which  we do not present.
We performed our work in the Washington, D.C., metropolitan area from  December 2002 through August 2003 in accordance with generally  accepted government auditing standards.  Appendix I provides additional  information on our objective, scope, and methodology.  Appendix II  presents profiles of the demonstration projects, including selected  elements of their performance management systems, employee attitude  data, and reported effects.
subsections: section_title: Background
paragraphs: Congress granted OPM the authority to conduct personnel demonstration  projects under the Civil Service Reform Act of 1978 to test new personnel and pay systems.  A federal agency is to obtain the authority from OPM to  waive existing laws and regulations in Title 5 to propose, develop, test, and  evaluate alternative approaches to managing its human capital.  Under the  demonstration project authority, no waivers of law are to be permitted in  areas of employee leave, employee benefits, equal employment  opportunity, political activity, merit system principles, or prohibited  personnel practices.   The law also contains certain limitations and  requirements, including  5-year time limit for duration of projects,  5,000 employee cap on participation,  restriction to 10 concurrent demonstration projects governmentwide,  union and employee consultation,  published formal project plan in the Federal Register,  notification of Congress and employees of the demonstration project,   project evaluations.
OPM guidance requires that agencies conduct at least three evaluations— after implementation, after at least 3 and a half years, and after the original  scheduled end of the project—that are to address the following questions:  Did the project accomplish the intended purpose and goals? If not, why  not?
Was the project implemented and operated appropriately and  accurately?
What were the costs, relative to the benefits of the project?
What was the impact on veterans and other equal employment  opportunity groups?
Were merit systems principles adhered to and prohibited personnel  practices avoided?
Can the project or portions thereof be generalized to other agencies or  governmentwide?
The demonstration projects can link some or all of the funding sources for  pay increases available under the current federal compensation system, the  General Schedule (GS), to an employee’s level of performance.  Table 1  defines selected funding sources.
section_title: Selected Demonstration Projects Took Various Approaches to Implement Their Pay for Performance Systems
paragraphs: High-performing organizations seek to create pay, incentive, and reward  systems based on valid, reliable, and transparent performance management  systems with adequate safeguards and link employee knowledge, skills,  and contributions to organizational results.  To that end, we found that the  demonstration projects took a variety of approaches to designing and  implementing their pay for performance systems to meet the unique needs  of their cultures and organizational structures.  Specifically, the  demonstration projects took different approaches to  using competencies to evaluate employee performance,  translating employee performance ratings into pay increases and   considering current salary in making performance-based pay decisions,  managing costs of the pay for performance system, and  providing information to employees about the results of performance  appraisal and pay decisions.
subsections: section_title: Using Competencies to Evaluate Employee Performance
paragraphs: High-performing organizations use validated core competencies as a key  part of evaluating individual contributions to organizational results.   Competencies define the skills and supporting behaviors that individuals  are expected to demonstrate and can provide a fuller picture of an  individual’s performance.  To this end, we found that the demonstration  projects took different approaches to evaluating employee performance.   AcqDemo and NRL use core competencies for all positions across the  organization.  Other demonstration projects, such as NIST, DOC, and China  Lake, use competencies based primarily on the individual employee’s  position.
Applying competencies organizationwide.  Core competencies applied  organizationwide can help reinforce employee behaviors and actions that  support the organization’s mission, goals, and values and can provide a  consistent message to employees about how they are expected to achieve  results.  AcqDemo evaluates employee performance against one set of  “factors,” which are applied to all employees.  “Discriminators” and  “descriptors” further define the factors by career path and pay band.   According to AcqDemo, taken together, the factors, discriminators, and  descriptors are relevant to the success of a DOD acquisition organization.
AcqDemo’s six factors are (1) problem solving, (2) teamwork/cooperation,  (3) customer relations, (4) leadership/supervision, (5) communication, and  (6) resource management.  Discriminators further define each factor.  For  example, discriminators for problem solving include scope of  responsibility, creativity, complexity, and independence.  Descriptors  identify contributions by pay band.  For example, a descriptor for problem  solving at one pay band level is “resolves routine problems within  established guidelines,” and at a higher level, a descriptor is “anticipates  problems, develops sound solutions and action plans to ensure  program/mission accomplishment.”
All factors must be used and cannot be supplemented.  While the pay pool  manager may weight the factors, according to an official, no organization  within AcqDemo has weighted the factors to date.  Managers are  authorized to use weights sparingly because contributions in all six factors  are important to ensuring AcqDemo’s overall success as well as to  developing the skills of the acquisition workforce.  If weights are used, they  are to be applied uniformly across all positions within the pay pool.  The six  factors are initially weighted equally and no factor can be weighted less  than one-half of its initial weight.  Employees are to be advised of the  weights at the beginning of the rating period.
While AcqDemo applies organizationwide competencies across all  employees, NRL has established “critical elements” for each career path  and allows supervisors to add individual performance expectations.  The  critical elements are the key aspects of work that supervisors are to  consider in evaluating employee performance.  Each critical element has  discriminators and descriptors.  Specifically, for the Science and  Engineering Professionals career path, one critical element is “scientific  and technical problem solving.”  That element’s discriminators are (1) level  of oversight, (2) creativity, (3) technical communications, and  (4) recognition.  For recognition, the descriptors include “recognized  within own organization for technical ability in assigned areas” as one level  of contribution and “recognized internally and externally by peers for  technical expertise” as the next level of contribution.
NRL’s system allows supervisors to supplement the descriptors to further  describe what is expected of employees.  According to an NRL  demonstration project official, this flexibility allows the supervisor to  better communicate performance expectations.  Further, pay pool panels  may weight the critical elements, including a weight of zero.  Weighted  elements are to be applied consistently to groups within a career path, such  as Bench Level, Supervisor, Program Manager, or Support for the Science  and Engineering Professionals career path.  According to an NRL official,  panels commonly weight critical elements but rarely weight an element to  zero.  Further, panels use weighting most often for the Science and  Engineering Professionals career path.
Determining individual position-based competencies.  Other  demonstration projects determine competencies based primarily on the  individual position.  NIST and DOC identify “critical elements” tailored to  each individual position.  According to a DOC demonstration project  official, DOC tailors critical elements to individual positions because their  duties and responsibilities vary greatly within the demonstration project.
Each employee’s performance plan is to have a minimum of two and a  maximum of six critical elements along with the major activities to  accomplish the element.  Supervisors are to assign a weight to each critical  element on the basis of its importance, the time required to accomplish it,  or both.  According to NIST and DOC officials, weighting is done at the  supervisory level and is not tracked at the organizational level.
To evaluate the accomplishment of critical elements, DOC uses its  organizationwide Benchmark Performance Standards.  They range from  the highest standard of performance, “objectives were achieved with  maximum impact, through exemplary work that demonstrated exceptional  originality, versatility, and creativity” to the lowest, “objectives and  activities were not successfully completed, because of failures in quality,  quantity, completeness, or timelines of work.”  Supervisors can develop  supplemental performance standards as needed.
Similarly, each China Lake employee has a performance plan that includes  criteria tailored to individual responsibilities.  The criteria are to be  consistent with the employee’s work unit’s goals and objectives and can be  set in two ways, depending on the nature of the position.  The “task  approach” defines an individual’s output.  The “function approach” defines  the required skills and how well they are to be performed.  Employees and  supervisors choose from a menu of skills, such as planning, analysis,  coordination, and reporting/documentation.  A China Lake official stated  that some of its work units require core competencies, such as teamwork  and self-development, for all employees.  According to the official, while  developing core competencies sends a message about what is important to  the organization, tailoring individual performance plans can focus  employees’ attention on changing expectations.
section_title: Translating Employee Performance Ratings into Pay Increases and Awards
paragraphs: High-performing organizations seek to create pay, incentive, and reward  systems that clearly link employee knowledge, skills, and contributions to  organizational results.  These organizations make meaningful distinctions  between acceptable and outstanding performance of individuals and  appropriately reward those who perform at the highest level.  Performance  management systems in these leading organizations typically seek to  achieve three key objectives: (1) provide candid and constructive feedback  to help individual employees maximize their potential in understanding and  realizing the goals and objectives of the agency, (2) provide management  with the objective and fact-based information it needs to reward top  performers, and (3) provide the necessary information and documentation  to deal with poor performers.
To this end, the demonstration projects took different approaches in  translating individual employee performance ratings into permanent pay  increases, one-time awards, or both in their pay for performance systems.   Some projects, such as China Lake and NAVSEA’s Newport division,  established predetermined pay increases, awards, or both depending on a  given performance rating.  Others, such as DOC and NIST, delegated the  flexibility to individual pay pools to determine how ratings translate into  pay increases, awards, or both.  Overall, while the demonstration projects  made some distinctions among employees’ performance, the data and  experience to date show that making such meaningful distinctions remains  a work in progress.
Setting predetermined pay increases and awards.  China Lake’s  assessment categories translate directly to a predetermined range of  permanent pay increases, as shown in figure 1.  Supervisors are to rate  employees in one of three assessment categories and recommend  numerical ratings, based on employees’ performance and salaries, among  other factors.  For employees receiving “highly successful” ratings, a  Performance Review Board assigns the numerical ratings.  For “less than  fully successful” ratings, the first-line supervisor and a second-level  reviewer assign the numerical ratings, based on a problem-solving team’s  findings and a personnel advisor’s input.  The numerical rating determines  how many  “increments” the employee will receive.  An increment is a  permanent pay increase of about 1.5 percent of an employee’s base salary.
China Lake made some distinctions in performance across employees’  ratings, as shown in figure 2: 11.3 percent of employees received a “1,” the highest numerical rating,   a total of six employees (0.2 percent) were rated “less than fully  successful” and received numerical ratings of “4” or “5.”
At China Lake, the average pay increase rose with performance, as shown  in table 2.
The average permanent pay increase ranged from 1.8 to 5.3 percent.
Six employees were rated as “less than fully successful” and thus were  to receive no performance pay increases and half or none of the GPI.   According to a China Lake official, employees rated as “less than fully  successful” are referred to a problem-solving team, consisting of the  supervisor, reviewer, personnel advisor, and other appropriate officials,  that determines what corrective actions are necessary.
Similar to China Lake, at NAVSEA’s Newport division, a performance rating  category translates directly to a predetermined range of permanent pay  increases, one-time awards, or both, as shown in figure 3.  Newport  translates ratings into pay increases and awards in three steps.  First,  supervisors are to rate employees as “acceptable” or “unacceptable.”   Employees rated as unacceptable are not eligible for pay increases or  awards.  Employees rated as acceptable are to be further assessed on their  performance relative to their salaries.  Supervisors assess acceptable  employees into three rating categories: contributors, major contributors, or  exceptional contributors.  Supervisors also make recommendations for the  number of pay points to be awarded, from 0 to 4, depending on the rating  category and the employees’ salaries.  Pay pool managers review and  department heads finalize supervisor recommendations.  A pay point  equals 1.5 percent of the midpoint salary of the pay band.  Pay points may  be permanent pay increases or one-time awards.
Newport allows for some flexibility in deciding whether employees receive  permanent pay increases, one-time awards, or both.  Newport’s guidelines  state that those who make greater contributions should receive permanent  increases to base pay, while employees whose contributions are  commensurate with their salaries receive one-time awards.  In addition,  employees whose salaries fall below the midpoint of the pay band are more  likely to receive permanent pay increases, while employees above the  midpoint of the pay band are more likely to receive one-time awards.
NAVSEA’s Newport division made some distinctions in performance across  employees’ ratings.  As shown in figure 4,  about 80 percent of employees were rated in the top two categories  (exceptional contributor and major contributor) and   no employees were rated unacceptable.
In addition, at NAVSEA’s Newport division, the average pay increase and  award amount rose with performance, as shown in table 3.
The average permanent pay increase ranged from 1.6 to 2.9 percent.
The average performance award ranged from $1,089 to $2,216.
Delegating pay decisions to pay pools.  Some demonstration projects,  such as NIST and DOC, delegate the flexibility to individual pay pools to  determine how ratings translate into permanent pay increases and one-time  awards.  For example, supervisors are to evaluate employees on a range of  performance elements on a scale of 0 to 100.  Employees with scores less  than 40 are to be rated as “unsatisfactory” and are not eligible to receive  performance pay increases, awards, the GPI, or the locality pay adjustment.   Employees with scores over 40 are to be rated as “eligible;” receive the full  GPI and locality pay adjustment; and be eligible for a performance pay  increase, award, or both.
Pay pool managers have the flexibility to determine the amount of the pay  increase, award, or both for each performance score, depending on where  they fall within the pay band.  Employees lower in the pay band are eligible  for larger pay increases as a percentage of base pay than employees higher  in the pay band, and employees whose salaries are at the top of the pay  band and who therefore can no longer receive permanent salary increases  may receive awards.
According to our analysis, in its 2002 rating cycle, DOC made few  distinctions in performance in its distribution of ratings.  As shown in  figure 5,  100 percent of employees scored 40 or above and over 86 percent of  employees scored 80 or above and  no employees were rated as unsatisfactory.
According to a DOC official, a goal of the demonstration project is to  address poor performance early.  An official also noted that poor  performers may choose to leave the organization before they receive  ratings of unsatisfactory or are placed on a performance improvement  plan.  Employees who are placed on a performance improvement plan and  improve their performance within the specified time frame (typically less  than 90 days) are determined to be eligible for the GPI and locality pay  adjustment for the remainder of the year.
Our analysis also shows that DOC made few distinctions in performance in  its distribution of awards.  As shown in table 4, 10 employees who scored  from 60 to 69 received an average performance award of $925, while  employees who scored from 70 to 79 received an average of $742.  Our  analysis suggests that DOC’s policy of delegating flexibility to individual  pay pools to determine performance awards could explain why, without an  independent reasonableness review, some employees with lower scores  receive larger awards than employees with higher scores.  According to  DOC, it reviews pay pool decisions within but not across organizational  units.
NIST also delegates pay decisions to individual pay pools.  The NIST 100- point rating system is similar to DOC’s system.  Employees with scores  under 40 are rated as “unsatisfactory” and do not receive the GPI, locality  pay adjustment, or performance pay increases or awards.  Employees with  scores over 40 receive the full GPI and locality pay adjustment and are  eligible to receive performance pay increases, awards, or both.  Similar to  DOC, in its 2002 rating cycle, NIST made few distinctions in performance in  its distribution of ratings.  Specifically,  99.9 percent of employees scored 40 or above, and nearly 78 percent of  employees scored 80 or above, and  0.1 percent, or 3 employees, were rated as unsatisfactory.
section_title: Considering Current Salary in Making Performance- Based Pay Decisions
paragraphs: Several of the demonstration projects consider an employee’s current  salary when making decisions on permanent pay increases and one-time  awards.  By considering salary in such decisions, the projects intend to  make a better match between an employee’s compensation and his or her  contribution to the organization.  Thus, two employees with comparable  contributions could receive different pay increases and awards depending  on their current salaries.
At AcqDemo, supervisors recommend and pay pool managers approve  employees’ “contribution scores.”  Pay pools then plot contribution scores  against the employees’ current salaries and a “standard pay line” to  determine if employees are “appropriately compensated,” “under- compensated,” or “over-compensated,” given their contributions.  Figure 6  shows how AcqDemo makes its performance pay decisions for employees  who receive the same contribution scores but earn different salaries.
AcqDemo has reported that it has made progress in matching employees’  compensation to their contributions to the organization.  From 1999 to  2002, appropriately compensated employees increased from about 63  percent to about 72 percent, under-compensated employees decreased  from about 30 percent to about 27 percent, and over-compensated  employees decreased from nearly 7 percent to less than 2 percent.
NRL implemented a similar system intended to better match employee  contributions with salary.  Data from NRL show that it has made progress  in matching employees’ compensation to their contributions to the  organization.  From 1999 to 2002, “normally compensated” employees, or  employees whose contributions match their compensation, increased from  about 68 percent to about 81 percent; under-compensated employees  decreased from about 25 percent to about 16 percent; and over- compensated employees decreased from about 7 percent to about 3  percent.
Similar to AcqDemo’s and NRL’s approach, NAVSEA’s Dahlgren division  recently redesigned its pay for performance system to better match  compensation and contribution.  Because Dahlgren implemented its new  system in 2002, performance data were not available.  Less systematically,  China Lake and NAVSEA’s Newport division consider current salary in  making pay and award decisions.  For example, at Newport, supervisors  within each pay pool are to list all employees in each pay band by salary  before a rating is determined and then evaluate each employee’s  contribution to the organization considering that salary.  If their  contributions exceed expectations, employees are considered for  permanent pay increases.  If contributions meet expectations, employees  are considered for one-time awards.
section_title: Managing Costs of the Pay for Performance System
paragraphs: OPM reports that the increased costs of implementing alternative  personnel systems should be acknowledged and budgeted for up front.   Based on the data the demonstration projects provided us, direct costs  associated with salaries, training, and automation and data systems were  the major cost drivers of implementing their pay for performance systems.   The demonstration projects reported other direct costs, such as  evaluations and administrative expenses.  The demonstration projects used  a number of approaches to manage the direct costs of implementing and  maintaining their pay for performance systems.
subsections: section_title: Salary Costs
paragraphs: Under the current GS system, federal employees annually receive the GPI  and, where appropriate, a locality pay adjustment, as well as periodically  receiving WGIs.  The demonstration projects use these and other funding  sources under the GS to make their pay decisions, as shown in figure 7.
The aggregated average salary data that some of the demonstration  projects were able to provide do not allow us to determine whether total  salary costs for the demonstration projects are higher or lower than their  GS comparison groups.  However, our analysis shows that the  demonstration projects’ cumulative percentage increases in average  salaries varied in contrast to their GS comparison groups.  For example, as  shown in table 5, after the first year of each demonstration project’s  implementation, the differences in cumulative percentage increase in  average salary between the demonstration project employees and their GS  comparison group ranged from –2.9 to 2.7 percentage points.
The demonstration projects used several approaches to manage salary  costs, including (1) choosing the method of converting employees into the  demonstration project, (2) considering fiscal conditions and the labor  market, (3) managing movement through the pay band, and (4) providing a  mix of awards and performance pay increases.
Choosing the method of converting employees into the  demonstration project.  When the demonstration projects converted  employees from the GS system to the pay for performance system, they  compensated each employee for the portion of the WGI that the employee  had earned either as a permanent increase to base pay or a one-time lump  sum payment.  Four of the six demonstration projects (China Lake, NRL,  NAVSEA, and AcqDemo) gave employees permanent increases to base pay,  while the remaining two demonstration projects (NIST and DOC) gave  employees one-time lump sum payments.
Both methods of compensating employees have benefits and drawbacks,  according to demonstration project officials. Giving permanent pay  increases at the point of conversion into the demonstration project  recognizes that employees had already earned a portion of the WGI, but a  drawback is that the salary increases are compounded over time, which  increases the organization’s total salary costs.  However, the officials said  that giving permanent pay increases garnered employees’ support for the  demonstration project because employees did not feel like they would have  been better off under the GS system.
Considering fiscal conditions and the labor market.  In determining  how much to budget for pay increases, demonstration projects considered  the fiscal condition of the organization as well as the labor market.  For  example, China Lake, NIST, NRL, and NAVSEA receive a portion of their  funding from a working capital fund and thus must take into account fiscal  conditions when budgeting for pay increases and awards.  These  organizations rely, in part, on sales revenue rather than direct  appropriations to finance their operations.  The organizations establish  prices for their services that allow them to recover their costs from their  customers.  If the organizations’ services become too expensive (i.e.,  salaries are too high), they become less competitive with the private sector.
A demonstration project official at NAVSEA’s Newport division said that as  an organization financed in part through a working capital fund, it has an  advantage over organizations that rely completely on appropriations  because it can justify adjusting pay increase and awards budgets when  necessary to remain competitive with the private sector.  Newport has had  to make such adjustments.  In fiscal year 2002, the performance pay  increase and award pools were funded at lower levels (1.4 percent and 1.7  percent of total salaries for pay increases and awards, respectively) than in  2001 (1.7 percent and 1.8 percent, respectively) because of fiscal  constraints.  As agreed with one of its unions, Newport must set aside a  minimum of 1.4 percent of salaries for its pay increases, which is equal to  historical spending under GS for similar increases.
NAVSEA’s Newport division also considers the labor market and uses  regional and industry salary information compiled by the American  Association of Engineering Societies when determining how much to set  aside for pay increases and awards.  In fiscal year 2001, Newport funded  pay increases and awards at a higher level (1.7 percent and 1.8 percent of  total salaries, respectively) than in fiscal year 2000 (1.4 percent and 1.6  percent, respectively) in response to higher external engineer, scientist,  and information technology personnel salaries.
Managing movement through the pay band.  Because movement  through the pay band is based on performance, demonstration project  employees could progress through the pay band more quickly than under  the GS.  Some demonstration projects have developed ways intended to  manage this progression to prevent all employees from eventually  migrating to the top of the pay band and thus increasing salary costs.
NIST and DOC manage movement through the pay band by recognizing  performance with larger pay increases early in the pay band and career  path and smaller increases higher in the pay band and career path.  Both of  these demonstration projects divided each pay band into five intervals. The  intervals determine the maximum percentage increase employees could  receive for permanent pay increases.  The intervals, shown in figure 8, have  helped NIST manage salary costs, according to a NIST official.
Similarly, some of the demonstration projects, including China Lake and  NAVSEA’s Dahlgren division, have checkpoints or “speed bumps” in their  pay bands intended to manage salary costs as well as ensure that  employees’ performance coincides with their salaries as they progress  through the band.  These projects established checkpoints designed to  ensure that only the highest performers move into the upper half of the pay  band. For example, when employees’ salaries at China Lake reach the  midpoint of the pay band, they must receive ratings of highly successful,  which are equivalent to exceeding expectations, before they can receive  additional salary increases.  A Performance Review Board, made up of  senior management, is to review all highly successful ratings.
Providing a mix of awards and pay increases.  Some of the  demonstration projects intended to manage costs by providing a mix of  one-time awards and permanent pay increases.  Rewarding an employee’s  performance with an award instead of an equivalent increase to base pay  can reduce salary costs in the long run because the agency only has to pay  the amount of the award one time, rather than annually.  For example, at  NAVSEA’s Newport division, as employees move higher into the pay band,  they are more likely to receive awards than permanent increases to base  pay.  According to a Newport official, expectations increase along with  salaries and thus it is more likely that their contributions would meet,  rather than exceed, expectations.
To manage costs, China Lake allows pay pools to transfer some of their  budgets for permanent pay increases to their budgets for awards.  A China  Lake official said that because China Lake receives a portion of its funding  from a working capital fund, it is not only important to give permanent  salary increases to high-performing employees, but also to give increases  China Lake can afford the next year.  China Lake does not track how much  funding is transferred from performance pay increase budgets to awards  budgets.
section_title: Training Costs
paragraphs: We have reported that agencies will need to invest resources, including  time and money, to ensure that employees have the information, skills, and  competencies they need to work effectively in a rapidly changing and  complex environment.  This includes investments in training and  developing employees as part of an agency’s overall effort to achieve cost- effective and timely results.  Agency managers and supervisors are often  aware that investments in training and development initiatives can be quite  large.  However, across the federal government, evaluation efforts have  often been hindered by the lack of accurate and reliable data to document  the total costs of training efforts.  Each of the demonstration projects  trained employees on the performance management system prior to  implementation to make employees aware of the new approach, as well as  periodically after implementation to refresh employee familiarity with the  system.  The training was designed to help employees understand  competencies and performance standards; develop performance plans;  write self-appraisals; become familiar with how performance is evaluated  and how pay increases and awards decisions are made; and know the roles  and responsibilities of managers, supervisors, and employees in the  appraisal and payout processes.
Generally, demonstration projects told us they incurred direct and indirect  costs associated with training.  Direct training costs that the demonstration  projects reported included costs for contractors, materials, and travel  related to developing and delivering training to employees and managers.   As shown in table 6, total direct costs that the demonstration projects  reported for training through the first 5 years of the projects’  implementation range from an estimated $33,000 at NAVSEA’s Dahlgren  division to more than $1 million at China Lake.  (NIST reported no direct  costs associated with training.)  Training costs, as indicated by the cost per  employee, were generally higher in the year prior to implementation,  except for AcqDemo’s, which increased over time.
While the demonstration projects did not report indirect costs associated  with training employees on the demonstration project, officials stated that  indirect costs, such as employee time spent developing, delivering, or  attending training, could nonetheless be significant.  Likewise, the time  spent on the “learning curve” until employees are proficient with the new  system could also be significant.  For example, although NIST did not  capture its indirect training costs, agency officials told us that prior to  implementation, each NIST employee was in training for 1 day.  Since its  implementation, NIST offers optional one-half day training three times a  year for all employees.  AcqDemo offered 8 hours of training for employees  prior to implementation and a minimum of 4 hours of training after  implementation.  All potential new participants also received eight hours of  training prior to implementation at their site.  Supervisors and human  resources professionals at AcqDemo were offered an additional 8 hours of  training each year after the demonstration project was implemented.   According to a DOC official, prior to conversion to the demonstration  project, DOC provided a detailed briefing to approximately 400 employees  to increase employee understanding of the project.  In addition, employees  could schedule one-on-one counseling sessions with human resources staff  to discuss individual issues and concerns.
Some of the demonstration projects, including China Lake, DOC, and  NAVSEA’s Dahlgren and Newport divisions, managed training costs by  relying on current employees to train other employees on the  demonstration project.  According to demonstration project officials, while  there are still costs associated with developing and delivering in-house  training, total training costs are generally reduced by using employees  rather than hiring contractors to train employees.  For example, China Lake  took a “train the trainer” approach by training a group of employees on the  new flexibilities in the demonstration project and having those employees  train other employees.  According to a demonstration project official, an  added benefit of using employees to train other employees is that if the  person leading the training is respected and known, then the employees are  more likely to support the demonstration project.  The official said that one  drawback is that not all employees are good teachers, so their skills should  be carefully considered.
AcqDemo used a combination of contractors and in-house training to  implement its training strategy.  According to an AcqDemo official, the  relatively higher per demonstration project employee costs in years 4 and 5  are a result of AcqDemo’s recognition that more in-depth and varied  training was needed for current AcqDemo employees to refresh their  proficiency in the system; for new participants to familiarize them with  appraisal and payout processes; as well as for senior management, pay pool  managers and members, and human resources personnel to give them  greater detail on the process.
section_title: Automation and Data Systems Costs
paragraphs: As a part of implementing a pay for performance system, some of the  demonstration projects installed new or updated existing automated  personnel systems.  Demonstration projects reported that total costs  related to designing, installing, and maintaining automation and data  systems ranged from an estimated $125,000 at NAVSEA’s Dahlgren division  to an estimated $4.9 million at AcqDemo, as shown in table 7.
To manage data system costs, some demonstration projects modified  existing data systems rather than designing completely new systems to  meet their information needs.  For example, NAVSEA’s divisions worked  together to modify DOD’s existing Defense Civilian Personnel Data System  to meet their needs for a revised performance appraisal system.  Similarly,  DOC imported the performance appraisal system developed by NIST and  converted the payout system to a Web-based system.  While NIST reported  that it incurred no direct costs for automation and data systems, officials  told us it used in-house employees, NIST’s Information Technology  Laboratory staff, to develop a data system to automate performance  ratings, scores, increases, and awards.
NRL used a combination of in-house employees and contractors to  automate its performance management system.  While reported  automation and data systems’ costs were higher for NRL than for most  other demonstration projects, NRL reports that its automated system has  brought about savings each year of an estimated 10,500 hours of work,  $266,000, and 154 reams of paper since the demonstration project was  implemented in 1999.
section_title: Providing Information to Employees about the Results of Performance Appraisal and Pay Decisions
paragraphs: We have observed that a performance management system should have  adequate safeguards to ensure fairness and guard against abuse.  One such  safeguard is to ensure reasonable transparency and appropriate  accountability mechanisms in connection with the results of the  performance management process.  To this end, NIST, NAVSEA’s Newport  Division, NRL, and AcqDemo publish information for employees on  internal Web sites about the results of performance appraisal and pay  decisions, such as the average performance rating, the average pay  increase, and the average award for the organization and for each  individual unit.  Other demonstration projects publish no information on  the results of the performance cycle.
NAVSEA’s Newport division publishes results of its annual performance  cycle.  Newport aggregates the data so that no individual employee’s rating  or payout can be determined to protect confidentiality.  Employees can  compare their performance rating category against others in the same unit,  other units, and the entire division, as shown in figure 9.
Until recently, only if requested by an employee would NIST provide  information such as the average rating, pay increase, and award amount for  the employee’s pay pool.  To be more open, transparent, and responsive to  employees, NIST officials told us that in 2003, for the first time, NIST began  to publish the results of the performance cycle on its internal Web site.   NIST published averages of the performance rating scores, as shown in  figure 10, as well as the average recommended pay increase amounts and  the average awards by career path, for the entire organization, and for each  organizational unit.  According to one NIST official, the first day the results  were published on the internal Web site, the Web site was visited more than  1,600 times.
Publishing the results of the performance management process can provide  employees with the information they need to better understand the  performance management system.  However, according to an official, DOC  does not currently publish performance rating and payout results even  though DOC’s third year evaluation found that demonstration project  participants continued to raise concerns that indicated their lack of  understanding about the performance appraisal process.  According to the  evaluation, focus group and survey results indicated the need for increased  understanding on topics such as how pay pools work, how salaries are  determined, and how employees are rated.  Employees were also interested  in knowing more about the results of the performance appraisal process.   One union representative told us that a way to improve the demonstration  project would be to publish information.  In past years, according to  employee representatives, some employees and union representatives at  DOC have used the Freedom of Information Act to request and obtain the  information.  According to a DOC official, DOC plans to discuss the  publication of average scores by each major unit and look for options to  increase employee understanding of the performance management system  at upcoming Project Team and Departmental Personnel Management  Board meetings.
section_title: Concluding Observations
paragraphs: Linking pay to performance is a key practice for effective performance  management.  As Congress, the administration, and federal agencies  continue to rethink the current approach to federal pay to place greater  emphasis on performance, the experiences of personnel demonstration  projects can provide insights into how some organizations within the  federal government are implementing pay for performance.  The  demonstration projects took different approaches to using competencies to  evaluate employee performance, translating performance ratings into pay  increases and awards, considering employees’ current salaries in making  performance pay decisions, managing costs of the pay for performance  systems, and providing information to employees about the results of  performance appraisal and pay decisions.  These different approaches  were intended to enhance the success of the pay for performance systems  because the systems were designed and implemented to meet the  demonstration projects’ unique cultural and organizational needs.
We strongly support the need to expand pay for performance in the federal  government.  How it is done, when it is done, and the basis on which it is  done can make all the difference in whether such efforts are successful.   High-performing organizations continuously review and revise their  performance management systems to achieve results, accelerate change,  and facilitate two-way communication throughout the year so that  discussions about individual and organizational performance are integrated  and ongoing.  To this end, these demonstration projects show an  understanding that how to better link pay to performance is very much a  work in progress at the federal level.
Additional work is needed to strengthen efforts to ensure that performance  management systems are tools to help the demonstration projects manage  on a day-to-day basis.  In particular, there are opportunities to use  organizationwide competencies to evaluate employee performance that  reinforce behaviors and actions that support the organization's mission,  translate employee performance so that managers can make meaningful  distinctions between top and poor performers with objective and fact- based information, and provide information to employees about the results  of the performance appraisals and pay decisions to ensure that reasonable  transparency and appropriate accountability mechanisms are in place.
section_title: Agency Comments
paragraphs: We provided drafts of this report to the Secretaries of Defense and  Commerce for their review and comment.  DOD’s Principal Deputy, Under  Secretary of Defense for Personnel and Readiness, provided written  comments, which are presented in appendix III.  DOD concurred with our  report and stated that it is a useful summary of the various approaches that  the demonstration projects undertook to implement their pay for  performance systems and that their experiences provide valuable insight  into federal pay for performance models.  DOD also noted that the NAVSEA  demonstration project training and automation cost data are estimated  rather than actual costs.  We made the appropriate notation.  While DOC  did not submit written comments, DOC’s Classifcation, Pay, and HR  Demonstration Program Manager provided minor technical clarifications  and updated information.  We made those changes where appropriate.  We  provided a draft of the report to the Director of OPM for her information.
As agreed with your offices, unless you publicly announce its contents  earlier, we plan no further distribution of this report until 30 days after its  date. At that time, we will provide copies of this report to other interested  congressional parties, the Secretaries of Defense and Commerce, and the  Director of OPM.  We will also make this report available to others upon  request.  In addition, the report will be available at no charge on the GAO  Web  site  at http://www.gao.gov.
If you have any questions about this report, please contact me or Lisa  Shames on (202) 512-6806.  Other contributors are acknowledged in  appendix IV.
section_title: Objective, Scope, and Methodology
paragraphs: To meet our objective to identify the approaches that selected personnel  demonstration projects have taken to implement their pay for performance  systems, we chose the following demonstration projects: the Navy  Demonstration Project at China Lake (China Lake), the National Institute  of Standards and Technology (NIST), the Department of Commerce (DOC),  the Naval Research Laboratory (NRL), the Naval Sea Systems Command  Warfare Centers (NAVSEA) at Dahlgren and Newport, and the Civilian  Acquisition Workforce Personnel Demonstration Project (AcqDemo).  We  selected these demonstration projects based on our review of the projects  and in consultation with the Office of Personnel Management (OPM).   Factors we considered in selecting these demonstration projects included  the type of pay for performance system, type of agency (defense or  civilian), status of the project (ongoing, permanent, or complete), date the  project was implemented, and number and type of employees covered  (including employees covered by a union).
To identify the different approaches that the demonstration projects took  in implementing their pay for performance systems, we analyzed Federal  Register notices outlining the major features and regulations for each  demonstration project, operating manuals, annual and summative  evaluations, employee attitude survey results, project briefings, training  materials, rating and payout data, cost data, rating distribution data from  OPM’s Central Personnel Data File (CPDF), and other relevant  documentation.  In addition, we spoke with cognizant officials from OPM;  demonstration project managers, human resource officials, and  participating supervisors and employees; and union and other employee  representatives.
We prepared a data collection instrument to obtain actual and estimated  cost data from the six demonstration projects.  We tested the instrument  with a demonstration project official to ensure that the instrument was  clear and comprehensive.  After revising the instrument based on the  official’s recommendations, we administered the instrument via e-mail and  followed up with officials via telephone, as necessary.  Officials from the  six demonstration projects provided actual cost data where available and  estimated data when actual data were not available.  Cost data reported are  actual unless otherwise indicated.  We adjusted cost data for inflation using  the Consumer Price Index, in 2002 dollars.  We provide average salary data,  as reported by the demonstration projects and OPM without verification by  GAO.   The aggregated average salary data do not allow us to determine  whether total salary costs for the demonstration projects are higher or  lower than their General Schedule (GS) comparison groups.
We did not independently evaluate the effectiveness of the demonstration  projects or independently validate the data provided by the agencies or  published in the evaluations.  We assessed the reliability of cost, salary,  rating, and performance pay distribution data provided by the  demonstration projects by (1) performing manual and electronic testing of  required data elements, (2) reviewing existing information about the data,  and (3) interviewing agency officials knowledgeable about the data.  We  determined that the data were sufficiently reliable for the purposes of this  report, with the exception of the DOC salary data, which we do not present.   Based on our review of the DOC salary data we determined that the data  were not adequate for use in our comparative analyses of salary growth.   An evaluation of the DOC demonstration project reported that data were  missing in critical fields, such as pay and performance scores.
We did not independently verify the CPDF data for September 30, 2002.   However, in a 1998 report (OPM's Central Personnel Data File: Data  Appear Sufficiently Reliable to Meet Most Customer Needs, GAO/GGD-98- 199, Sept. 30, 1998), we reported that governmentwide data from the CPDF  for key variables, such as GS-grade, agency, and career status, were 97  percent or more accurate.  However, we did not verify the accuracy of  employee ratings.
We performed our work in the Washington, D.C., metropolitan area from  December 2002 through August 2003 in accordance with generally  accepted government auditing standards.
section_title: Demonstration Project Profiles
subsections: section_title: Navy Demonstration Project at China Lake (China Lake)
subsections: section_title: Purpose
paragraphs: The Navy Demonstration Project was to  develop an integrated approach to pay, performance appraisal, and   allow greater managerial control over personnel functions; and   expand the opportunities available to employees through a more  responsive and flexible personnel system.
section_title: Selected Elements of the Performance Management System
paragraphs: Competencies: Competencies are tailored to an individual’s position. The  employees and their supervisors are to develop performance plans, which  identify the employees’ responsibilities and expected results.  In addition,  all supervisors are to include certain management competencies from a  menu of managerial factors that best define their responsibilities, such as  developing objectives, organizing work, and selecting and developing  people.
Feedback: Supervisors are to conduct two progress reviews of   employees’ performance, set at 5 and 9 months in the performance cycle.
Self-assessment: Employees are strongly encouraged to list  accomplishments for their supervisors’ information when determining the  performance rating.
Levels of performance rating: The levels are highly successful (rating  levels 1 or 2), fully successful (rating level 3), or less than fully successful  (rating levels 4 or 5).
Second-level review: Second-level supervisors are to review all  assessments.  In addition, an overall assessment of highly successful is  to be sent to the appropriate department’s Performance Review Board  for the assignment of an official rating of “1” or “2.”  The supervisor and  reviewer are to assign a “4” or “5” rating based on a problem-solving  team’s findings and a personnel advisor’s input.
Grievance process: Generally, employees may request reconsideration  of their ratings in writing to the third-level supervisor and indicate why a  higher rating is warranted and what rating is desired.  The third-level  supervisor can either grant the request or request that a recommending  official outside of the immediate organization or chain of authority be  appointed.  The employee is to receive a final decision in writing within  21 calendar days.
section_title: Other Interventions
paragraphs: Reduction in force.  To allow for increased retention of high-performing  employees at all levels by ranking employees based on performance for  retention standings.
Salary flexibility. To set entry-level salaries to take into account market  conditions.
section_title: Selected Reported Effects
paragraphs: A demonstration project evaluation reported the following effects.
Employees viewed performance improvements within their control and  reported increased recognition of individual performance.
The perception of a pay-performance link was significantly  strengthened under the demonstration pay for performance system, but  not in the comparison group.
Pay satisfaction increased slightly at the demonstration sites and  declined at the control laboratories.
Employees and supervisors cited improved communication, a more  objective focus, and clearer performance expectations as major system  benefits.
Employees and supervisors perceived their performance appraisal  system to be more flexible than the comparison group, to focus more on  actual work requirements, and thus to be more responsive to laboratory  needs.
Employees at the demonstration project reported having more input  into the development of performance plans than employees in the  comparison group.
section_title: Sources for Additional Information
paragraphs: http://www.nawcwpns.navy.mil/~hrd/demo.htm (Last accessed on Nov. 7,  2003)  http://www.opm.gov/demos/main.asp (Last accessed on Nov. 7, 2003)
section_title: National Institute of Standards and Technology (NIST)
subsections: section_title: Purpose
paragraphs: The NIST demonstration project, formerly known as the National Bureau  of Standards, was to  improve hiring and allow NIST to compete more effectively for high-  motivate and retain staff,  strengthen the manager’s role in personnel management, and   increase the efficiency of personnel systems.
section_title: Selected Elements of the Performance Management System
paragraphs: Competencies: Competencies, called “critical elements,” are based on the  individual position.  Employee performance plans are to have a minimum  of two and a maximum of six critical elements, which the supervisor  weights, based on the importance of the critical element, the time required  to accomplish the critical element, or both.  Managers’ and supervisors’  performance plans are to include a critical element on diversity and it must  be weighted at least 15 points.
Feedback: Supervisors are to conduct midyear reviews of all employees to  discuss accomplishments or deficiencies and modify the initial  performance plans, if necessary.
Self-assessment: Employees are to submit lists of accomplishments for  their supervisors’ information when determining the performance ratings.
Levels of performance rating: The levels are “eligible” or  “unsatisfactory.”  On a scale of 0 to 100, employees who receive scores over  40 are rated eligible and those with scores below 40 unsatisfactory.
Second-level review: Pay pool managers are to review recommended  scores from supervisors and select a payout for each employee. Pay  pool managers are to present the decisions to the next higher official for  review if the pay pool manager is also a supervisor.  The organizational  unit director is to approve awards and review all other decisions.
Grievance procedure: Employees may grieve their performance  ratings, scores, and pay increases by following DOC’s Administrative  Grievance Procedure or appropriate negotiated grievance procedures.
section_title: Other Interventions
paragraphs: Reduction in force.  To credit an employee with an overall performance  score in the top 10 percent of scores within a peer group with 10 additional  years of service for retention purposes.
Supervisory differential. To establish supervisory intervals within a pay  band that allow for a maximum rate up to 6 percent higher than the  maximum rate of the nonsupervisory intervals within the pay band.
Hiring flexibility. To provide flexibility in setting initial salaries within  pay bands for new appointees, particularly for hard-to-fill positions in the  Scientific and Engineering career path.
Extended probation. To require employees in the Scientific and  Engineering career path to serve a probationary period of 1 to 3 years.
section_title: Selected Reported Effects
paragraphs: A demonstration project evaluation reported the following effects.
Recruitment bonuses were used sparingly but successfully to attract  candidates who might not have accepted federal jobs otherwise.
NIST has become more competitive with the private sector and  employees are less likely to leave for reasons of pay.
NIST was able to provide significant performance-based awards, some  with merit increases as high as 20 percent.  NIST succeeded in retaining  more of its high performers than the comparison group.
Managers reported significantly increased authority over hiring and pay  decisions.
Managers reported that they felt significantly less restricted by  personnel rules and regulations than other federal managers.
section_title: Source for Additional Information
paragraphs: http://www.opm.gov/demos/main.asp (Last accessed on Nov. 7, 2003)
section_title: Department of Commerce (DOC)
subsections: section_title: Purpose
paragraphs: The DOC demonstration project was to test whether the interventions of  the NIST demonstration project could be successful in environments with  different missions and different organizational hierarchies.
section_title: Selected Elements of the Performance Management System
paragraphs: Competencies: Competencies, called “critical elements,” are tailored to  each individual position.  Performance plans are to have a minimum of two  and a maximum of six critical elements.  The supervisor is to weight each  critical element, based on the importance of the element, the time required  to accomplish it, or both, so that the total weight of all critical elements is  100 points.  Organizationwide benchmark performance standards are to  define the range of performance, and the supervisor may add supplemental  performance standards to a performance plan.  Performance plans for  managers and supervisors are to include critical elements such as  recommending or making personnel decisions; developing and appraising  subordinates; fulfilling diversity, equal opportunity, and affirmative action  responsibilities; and program and managerial responsibilities.
Feedback: Supervisors are to conduct midyear reviews of all employees to  discuss accomplishments or deficiencies and modify the initial  performance plans, if necessary.
Self-assessment: Employees are to submit lists of accomplishments for  their supervisors’ information when determining the performance ratings.
Levels of performance rating: The levels are “eligible” or  “unsatisfactory.”  On a scale of 0 to 100, employees who receive scores over  40 are rated eligible and those with scores below 40 unsatisfactory.
Second-level review: The pay pool manager is to review  recommended scores from subordinate supervisors and select a payout  for each employee.  The pay pool manager is to present the decisions to  the next higher official for review if the pay pool manager is also a  supervisor.
Grievance procedure: Employees may request reconsideration of  performance decisions, excluding awards, by the pay pool manager  through DOC’s Administrative Grievance Procedure or appropriate  negotiated grievance procedures.
section_title: Other Interventions
paragraphs: Reduction in force. To credit employees with performance scores in the  top 30 percent of a career path in a pay pool with 10 additional years of  service for retention purposes.  Other employees rated “eligible” receive 5  additional years of service for retention credit.
Supervisory performance pay. To offer employees who spend at least 25  percent of their time performing supervisory duties pay up to  6 percent  higher than the regular pay band.
Probationary period. To require a 3-year probationary period for newly  hired science and engineering employees performing research and  development duties.
section_title: Selected Reported Effects
paragraphs: A demonstration project evaluation reported the following effects.
The pay for performance system continues to exhibit a positive link  between pay and performance.  For example, in year 4 of the  demonstration project, employees with higher performance scores were  more likely to receive pay increases and on average received larger pay  increases than employees with lower scores.
Some of the recruitment and staffing interventions have been  successful.  For example, supervisors are taking advantage of their  ability to offer more flexible starting salaries.  Additionally, the  demonstration project has expedited the classification process.  DOC’s  evaluator recommended that DOC should more fully implement the  recruitment and staffing interventions.
The 3-year probationary period for scientists and engineers continues to  be used, but assessing its utility remains difficult.
On the other hand, some retention interventions receive little use or  have not appeared to affect retention.  For example, the supervisor  performance pay intervention is not affecting supervisor retention.
section_title: Sources for Additional Information
paragraphs: http://ohrm.doc.gov/employees/demo_project.htm (Last accessed Nov. 7,  2003) http://www.opm.gov/demos/main.asp (Last accessed Nov. 7, 2003)
section_title: Naval Research Laboratory (NRL)
subsections: section_title: Purpose
paragraphs: The NRL demonstration project was to   provide increased authority to manage human resources,   enable NRL to hire the best qualified employees,  compensate employees equitably at a rate that is more competitive with  the labor market, and   provide a direct link between levels of individual contribution and the  compensation received.
section_title: Selected Elements of the Performance Management System
paragraphs: Competencies: Each career path has two to three “critical elements.”   Each critical element has generic descriptors that explain the type of work,  degree of responsibility, and scope of contributions.  Pay pool managers  may weight critical elements and may establish supplemental criteria.
Feedback: Supervisors and employees are to, on an ongoing basis, hold  discussions to specify work assignments and performance expectations.   The supervisor or the employee can request a formal review during the  appraisal process.
Self-assessment: Employees are to submit yearly accomplishment reports  for the supervisors’ information when determining the performance  appraisals.
Levels of performance rating: The levels are acceptable or  unacceptable.  Employees who are rated acceptable are then determined to  be “over-compensated,” “under-compensated,” or within the “normal pay  range,” based on their contribution scores and salaries.
Second-level review: The pay pool panel and pay pool manager are to  compare element scores for all of the employees in the pay pool; make  adjustments, as necessary; and determine the final contribution scores  and pay adjustments for the employees.
Grievance procedure: Employees can grieve their appraisals through a  two-step process.  Employees are to first grieve their scores in writing,  and the pay pool panel reviews the grievances and makes  recommendations to the pay pool manager, who issues decisions in  writing.  If employees are not satisfied with the pay pool manager’s  decisions, they can then file formal grievances according to NRL’s  formal grievance procedure.
section_title: Other Interventions
paragraphs: Reduction in force.  To credit an employee’s basic Federal Service  Computation Date with up to 20 years based on the results of the appraisal  process.
Hiring flexibility.  To provide opportunities to consider a broader range  of candidates and flexibility in filling positions.
Extended probationary period. To extend the probationary period to 3  years for certain occupations.
section_title: Selected Reported Effects
paragraphs: A demonstration project evaluation reported the following effects.
From 1996 to 2001:  Managers’ satisfaction with authority to determine employees’ pay and  job classification increased from 10 percent of managers to 33 percent.
Employees’ satisfaction with opportunities for advancement increased  from 26 percent to 41 percent.
The perceived link between pay and performance is stronger under the  demonstration project and increased from 41 percent to 61 percent.
On the other hand, the percentage of employees who agreed that other  employers in the area paid more than the government for the kind of  work that they do increased from 67 to 76 percent.
section_title: Sources for Additional Information
paragraphs: http://hroffice.nrl.navy.mil/personnel_demo/index.htm (Last accessed on  Nov. 7, 2003) http://www.opm.gov/demos/main.asp (Last accessed on Nov. 7, 2003)
section_title: Naval Sea Systems Command Warfare Centers (NAVSEA)
subsections: section_title: Purpose
paragraphs: The NAVSEA demonstration project was to  develop employees to meet the changing needs of the organization;   help employees achieve their career goals;  improve performance in current positions;  retain high performers; and  improve communication with customers, colleagues, managers, and  employees.
section_title: Selected Elements of the Performance Management System
paragraphs: Competencies: Each division may implement regulations regarding the  competencies and criteria by which employees are rated.  NAVSEA’s  Dahlgren division uses three competencies for all employees, and the  Newport division uses eight competencies.
Feedback: Each division may implement regulations regarding the timing  and documentation of midyear feedback.  Dahlgren requires at least one  documented feedback session at midyear.  Beginning in fiscal year 2004,  Newport requires a documented midyear feedback session.
Self-assessment: Each division has the flexibility to determine whether  and how employees document their accomplishments.  Dahlgren requires  employees to provide summaries of their contributions for their  supervisors’ information.  Newport encourages employees to provide self- assessments.
Levels of performance rating: All of the divisions use the ratings  “acceptable” and “unacceptable.”
Second-level review: Divisions are to design the performance  appraisal and payout process.  Supervisors at Dahlgren’s division and  department levels review ratings and payouts to ensure that the  competencies are applied uniformly and salary adjustments are  distributed equitably.  At Newport, second-level supervisors review  recommendations by direct supervisors, make changes to achieve  balance and equity within the organization, then submit the  recommendations to pay pool managers, who are to go through the  same process and forward the recommendations to the department  head for final approval.
Grievance procedure: Divisions are to design their grievance  procedures.  Dahlgren and Newport have informal and formal  reconsideration processes.  In Dahlgren’s informal process, the  employee and supervisor are to discuss the employee’s concern and  reach a mutual understanding, and the pay pool manager is to approve  any changes.  If the employee is not satisfied with the result of the  informal process, the employee is to submit a formal request to the pay  pool manager, who is to make the final decision.  In Newport’s informal  process, the employee is to submit a written request to the pay pool  manager, who may revise the rating and payout decision or confirm it.  If  the employee is not satisfied with the result of the informal process, the  employee may formally appeal to the department head, who is to render  a decision.
section_title: Other Interventions
paragraphs: Advanced in-hire rate.  To set, upon initial appointment, an individual’s  pay anywhere within the band level consistent with the qualifications of the  individual and requirements of the position.
Scholastic achievement appointments.  To employ an alternative  examining process that provides NAVSEA the authority to appoint  undergraduates and graduates to professional positions.
section_title: Selected Reported Effects
paragraphs: A demonstration project evaluation reported the following effects.
From 1996 to 2001:  The percentage of people who agreed that their managers promote  effective communication among different work groups increased from  31 to 43 percent.
On the other hand, NAVSEA employees’ response to the statement “High  performers tend to stay with this organization” stayed constant at about  30 percent during this time.
Additionally, the percentage of employees who said that they have all of  the skills needed to do their jobs remained consistent at 59 and 62  percent, respectively.
section_title: Sources for Additional Information
paragraphs: http://www.nswc.navy.mil/wwwDL/XD/HR/DEMO/main.html (Last  accessed on Nov. 7, 2003) http://www.opm.gov/demos/main.asp (Last accessed on Nov. 7, 2003)
section_title: Civilian Acquisition Personnel Demonstration Project (AcqDemo)
subsections: section_title: Purpose
paragraphs: attract, motivate, and retain a high-quality acquisition workforce;  achieve a flexible and responsive personnel system;  link pay to employee contributions to mission accomplishment; and  gain greater managerial control and authority over personnel processes.
section_title: Selected Elements of the Performance Management System
paragraphs: Competencies: Six core contribution “factors,” as well as “discriminators”  and “descriptors,” are used to evaluate every employee.
Feedback: AcqDemo requires at least one formal feedback session  annually and encourages informal and frequent communication between  supervisors and employees, including discussion of any inadequate  contribution.  Each service, agency, or organization may require one or  more additional formal or informal feedback sessions.
Self-assessment: Employees can provide a list of contributions for each  factor.
Levels of performance rating: The levels are “appropriately  compensated,” “over-compensated,” and “under-compensated.”
Second-level review: The supervisors and the pay pool manager are to  ensure consistency and equity across ratings.  The pay pool manager is  to approve the employee’s overall contribution score, which is  calculated based on the employee’s contribution ratings.
Grievance procedure: Employees may grieve their ratings and actions  affecting the general pay increase or performance pay increases.  An  employee covered by a negotiated grievance procedure is to use that  procedure to grieve his or her score.  An employee not under a  negotiated grievance procedure is to submit the grievance first to the  rating official, who will submit a recommendation to the pay pool panel.  The pay pool panel may accept the rating official’s recommendation or  reach an independent decision. The pay pool panel’s decision is final  unless the employee requests reconsideration by the next higher official  to the pay pool manager. That official would then render the final  decision on the grievance.
section_title: Other Interventions
paragraphs: Voluntary emeritus program. To provide a continuing source of  corporate knowledge and valuable on-the-job training or mentoring by  allowing retired employees to voluntarily return without compensation and  without jeopardizing retirement pay.
Extended probationary period.  To provide managers a length of time  equal to education and training assignments outside of the supervisors’  review to properly assess the contribution and conduct of new hires in the  acquisition environment.
Scholastic achievement appointment.  To provide the authority to  appoint degreed candidates meeting desired scholastic criteria to positions  with positive education requirements.
Flexible appointment authority.  To allow an agency to make a modified  term appointment to last from 1 to 5 years when the need for an employee’s  services is not permanent.
section_title: Selected Reported Effects
paragraphs: A demonstration project evaluation reported the following effects.
Attrition rates for over-compensated employees increased from 24.1 in  2000 to 31.6 percent in 2002.  Attrition rates for appropriately  compensated employees increased from 11.5 in 2000 to 14.1 percent in  2002.  Attrition rates for under-compensated employees decreased from  9.0 in 2000 to 8.5 in 2001 and then increased to 10.2 percent in 2002.
Increased pay-setting flexibility has allowed organizations in AcqDemo  to offer more competitive salaries, which has improved recruiting.
Employees’ perception of the link between pay and contribution  increased, from 20 percent reporting that pay raises depend on their  contribution to the organization’s mission in 1998 to 59 percent in 2003.
section_title: Sources for Additional Information
paragraphs: http://www.acq.osd.mil/acqdemo/ (Last accessed on Nov. 7, 2003) http://www.opm.gov/demos/index.asp (Last accessed on Nov. 7, 2003)
section_title: Comments from the Department of Defense
section_title: GAO Contacts and Staff Acknowledgments
subsections: section_title: GAO Contacts
section_title: Acknowledgments
paragraphs: In addition to the individuals named above, Michelle Bracy, Ron La Due  Lake, Hilary Murrish, Adam Shapiro, and Marti Tracy made key  contributions to this report.
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