Human Capital: Bonuses to Senior Executives at the Department of Veterans Affairs
Published: 2007-06-12T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Key practices of effective performance management for the Senior Executive Service (SES) include the linkage or "line of sight" between individual performance and organizational success, the importance of linking pay to individual and organizational performance, and the need to make meaningful distinctions in performance. GAO identified certain principles for executive pay plans that should be considered to attract and retain the quality and quantity of executive leadership necessary to address 21st century challenges, including that they be sensitive to hiring and retention trends; reflect knowledge, skills, and contributions; and be competitive. This testimony focuses on the Department of Veterans Affairs' (VA) process for awarding bonuses to SES members, the amount and percentage of bonuses awarded for fiscal years 2004 through 2006 based on data reported by VA, and the Office of Personnel Management's (OPM) and the Office of Management and Budget's (OMB) roles in certifying federal agencies SES performance appraisal systems. GAO analyzed VA's policies and procedures for awarding bonuses and data provided by VA on the amount and percentages of bonuses and interviewed knowledgeable VA officials. Information on OPM's and OMB's certification process was based on our 2007 report on OPM's capacity to lead and implement reform
section_title: What GAO Found
paragraphs: VA requires that each senior executive have an executive performance plan or contract in place for the appraisal year that reflects measures that balance organization results with customer satisfaction, employee perspectives, and other appropriate measures. VA uses four performance review boards (PRB) to review and make recommendations on SES ratings, awards, and pay adjustments based on these performance plans. VA's Secretary appoints members of three of the four boards on the basis of the position held within the agency, and consideration is given to those positions where the holder would have knowledge about the broadest group of executives. Members of the fourth board are appointed by VA's Inspector General. VA's PRBs vary in size, composition, and number of SES members considered for bonuses, and each PRB, within the scope of VA's policies, develops its own procedures and criteria for making bonus recommendations. According to VA policy, bonuses are generally awarded only to those rated outstanding or excellent and who have demonstrated significant individual and organizational achievements during the appraisal period. According to data reported by OPM, in fiscal year 2005, VA awarded higher bonus amounts to its career SES than any other cabinet-level department; however, according to OPM's data, six other cabinet-level departments awarded bonuses to a higher percentage of their career SES. OPM and OMB evaluate agencies' SES performance appraisal systems against nine certification criteria jointly developed by the two agencies and determine that agencies merit full, provisional, or no certification. VA has been granted provisional certification in each of the years 2004 through 2006. Our review of VA's requirements for SES performance plans as represented in both its 2006 submission and 2007 draft submission to OPM show that VA made changes to the requirements for its performance plans to reflect greater emphasis on measurable results.

section_title: Letter
paragraphs: I am pleased to be here today to provide the Subcommittee with  information on the Department of Veterans Affairs’ (VA) process for  providing Senior Executive Service (SES) performance awards (bonuses).  VA’s mission is to serve America’s veterans and their families. Through its  three primary components, in fiscal year 2006, VA operated one of the  largest health care systems that provided services to about 5 million  patients, paid cash disability benefits to more than 3.5 million veterans and  their survivors, and operated 125 national cemeteries in the United States.
In our body of work on senior executive performance management, we  have discussed how high-performing organizations understand that they  need senior leaders who are accountable for results, drive continuous  improvement, and stimulate and support efforts to integrate human capital  approaches with organizational goals and related transformation issues.  We have also identified key practices of effective performance  management for the SES, which include the linkage or “line of sight”  between individual performance and organizational success, the  importance of linking pay to individual and organizational performance,  and the need to make meaningful distinctions in performance. In 2006, we  identified certain principles for executive pay plans that should be  considered to attract and retain the quality and quantity of executive  leadership necessary to address 21st century challenges, including that  they be sensitive to hiring and retention trends; reflect responsibilities,  knowledge, skills, and contributions; and be competitive.
My comments today will focus on (1) VA’s policies, procedures, and  guidelines for evaluating and awarding SES member bonuses, including  the composition and responsibility of VA’s performance review boards  (PRB), which recommend SES bonuses; (2) the number and amount of  bonuses awarded for fiscal years 2004 through 2006 by VA headquarters  and field locations and compared to the amount of bonuses given to SES  members at other major cabinet-level departments; and (3) the Office of  Personnel Management’s (OPM) and the Office of Management and  Budget’s (OMB) roles in certifying VA’s and other agencies’ SES  performance appraisal system. We analyzed VA’s policies and procedures  related to the awarding of SES member bonuses for 2005 through 2007  that were included in VA’s 2005 and 2006 submissions and 2007 draft  submission to OPM concerning VA’s SES and senior-level employee  performance appraisal system. We also interviewed knowledgeable  officials in VA’s Office of Human Resources and Administration. We  analyzed data provided to us by VA on the amount and number of SES  member bonuses for fiscal years 2004 through 2006 and comparable data  from other cabinet-level departments as reported by OPM for fiscal years  2004 and 2005. The numbers we are presenting today are limited to SES  member bonuses and do not include other types of SES member  compensation. Information on OPM’s and OMB’s roles is based on our  review of VA’s senior performance appraisal system certification  submissions and related correspondence and our prior work reviewing  OPM’s capacity to lead and implement reform. We conducted our work in  May and June 2007 in accordance with generally accepted government  auditing standards.
In summary, VA requires that each SES member have an executive  performance plan or contract in place for the appraisal year that reflects  measures that balance organization results with customer satisfaction,  employee perspectives, and other appropriate measures. VA uses four  PRBs that review and make recommendations on SES members’ ratings,  awards, and pay adjustments based on these performance plans. Members  are appointed to the boards on the basis of the positions held, and  consideration is given to those positions where the holder would have  knowledge about the broadest group of executives. VA’s PRBs vary in size,  composition, and the number of SES members considered for bonuses,  and each PRB, within the scope of VA’s policies, develops its own  procedures and criteria for making recommendations. According to VA  policy, bonuses are generally awarded only to those rated outstanding or  excellent and who have demonstrated significant individual and  organizational achievements during the appraisal period. In fiscal year  2006, VA awarded an average of $16,606 in bonuses to 87 percent of its  career SES members. At headquarters, 82 percent of career SES members  received bonuses and 90 percent received bonuses in the field.  Additionally, those in headquarters were awarded an average of about  $4,000 more in bonuses than the career SES members in its field locations.  OPM and OMB evaluate agencies’ SES and senior-level employee  performance appraisal systems against nine certification criteria jointly  developed by the two agencies. OPM also issues guidance to help agencies  improve their systems and reviews submissions to ensure that they meet  the criteria. In providing concurrence, OMB primarily considers measures  of overall agency performance, such as agency President’s Management  Agenda results. Our review of VA’s requirements for SES performance  plans as represented in both its 2006 submission and 2007 draft  submission to OPM shows that VA made changes to the requirements for  its performance plans to reflect greater emphasis on measurable results.
We provided VA officials the opportunity to review the information  contained in my statement. VA officials agreed that the facts presented  accurately reflect VA’s SES bonus process and results.
subsections: section_title: Background
paragraphs: In recent years, Congress has passed legislation designed to strengthen the  linkage between SES performance and pay. Congress established a new  performance-based pay system for the SES and permitted agencies with  SES appraisal systems, which have been certified as making meaningful  distinctions based on relative performance, to apply a higher maximum  SES pay rate and a higher annual cap on total SES compensation. We have  testified that such SES and senior-level employee performance-based pay  systems serve as an important step for agencies in creating alignment or  “line of sight” between executives’ performance and organizational  results. By 2004, an agency could apply a higher cap on SES pay and total  compensation if OPM certifies and OMB concurs that the agency’s  performance management system, as designed and applied, aligns  individual performance expectations with the mission and goals of the  organization and makes meaningful distinctions in performance. Since  2004, VA has received approval to increase the cap on SES pay and total  compensation, which includes bonuses.
By law, only career SES appointees are eligible for SES bonuses. As stated  previously, agencies with certified senior performance appraisal systems  are permitted higher caps on SES base pay and total compensation. With a  certified system, for 2006, an agency was authorized to increase SES base  pay to $165,200 (Level II of the Executive Schedule) and total  compensation to $212,100 (the total annual compensation payable to the  Vice President). Those agencies without certified systems for 2006 were  limited to a cap of $152,000 for base pay (Level III of the Executive  Schedule) and $183,500 (Level I of the Executive Schedule) for total  compensation. SES performance bonuses are included in SES aggregate  total compensation. Agencies are permitted to award bonuses from 5 to 20  percent of an executive’s rate of basic pay from a pool that cannot exceed  the greater of 10 percent of the aggregate rate of basic pay for the agency’s  career SES appointees for the year preceding, or 20 percent of the average  annual rates of basic pay to career SES members for the year preceding.
section_title: VA’s SES Performance Appraisal Process
paragraphs: VA requires that each SES member have an executive performance plan or  contract in place for the appraisal year. According to VA’s policy, the plan  must reflect measures that balance organizational results with customer  satisfaction, employee perspectives, and other appropriate measures. The  plan is to be based on the duties and responsibilities established for the  position and also reflect responsibility for accomplishment of agency goals  and objectives, specifying the individual and organizational performance  or results to be achieved for each element. Toward the end of the  appraisal period, each executive is to prepare a self-assessment relative to  the job requirements in the approved performance plan, and his or her  supervisor then rates the executive on each element and provides a  summary rating. Specifically, according to VA’s policy on the rating  process, the rater is to assess the accomplishment of each established  performance requirement, consider the impact of the individual  requirement on overall performance of the element, and assign one  achievement level for each element. The VA rating is a written record of  the appraisal of each critical and other performance element and the  assignment of a summary rating level by the rater. The summary of each  SES member rating passes to the appropriate reviewing official (if  applicable) and PRBs for consideration.
VA uses four PRBs to review and prepare recommendations on SES  member ratings, awards, and pay adjustments: Veterans Affairs, Veterans  Health Administration, Veterans Benefits Administration, and Office of  Inspector General. The Veterans Affairs PRB has a dual role in VA in that it  functions as a PRB for SES members who work for VA’s central offices,  such as the Office of the Assistant Secretary for Management and the  Office of the Assistant Secretary for Policy and Planning, and those  employed by the National Cemetery Administration. It also reviews the  policies, procedures, and recommendations from the Veterans Health  Administration and Veterans Benefits Administration PRBs.
The Secretary appoints members of three of the four PRBs on an annual  basis; members of the Office of Inspector General PRB are appointed by  the VA Inspector General. VA’s PRBs must have three or more members  appointed by the agency head or Inspector General for the Office of  Inspector General PRB and can include all types of federal executives  from within and outside the agency. As required by OPM, when appraising  career appointees or recommending performance awards for career  appointees, more than one-half of the PRB membership must be career  SES appointees. Federal law prohibits PRB members from taking part in  any PRB deliberations involving their own appraisals. Appointments to  PRBs must also be published in the Federal Register. According to a VA  official in the Office of Human Resources and Administration,  appointments are made on basis of the position held, and consideration is  given to those positions where the holder would have knowledge about  the broadest group of executives. Typically, the same VA positions are  represented on the PRB each year, and there is no limit on the number of  times a person can be appointed to a PRB.
VA’s PRBs vary in size, composition, and number of SES members  considered for bonuses. For example, in 2006, VA’s Veterans Health  Administration PRB was composed of 18 members and made  recommendations on 139 SES members while its Veterans Benefits  Administration PRB was composed of 7 members and made  recommendations on 50 SES members. In 2006, six PRB members sat on  multiple PRBs, and 1 member, the Deputy Chief of Staff, sat on three  PRBs—the Veterans Affairs, Veterans Health Administration, and Veterans  Benefits Administration PRBs. With the exception of the Office of  Inspector General PBR, members of PRBs are all departmental employees,  a practice that is generally consistent across cabinet-level departments.  The Office of Inspector General PRB is composed of 3 external  members—officials from other federal agencies’ offices of inspector  generals—which is generally consistent with PRBs for other federal  offices of inspector general.
Under VA’s policy, each PRB develops its own operating procedures for  reviewing ratings and preparing recommendations. The Veterans Health  Administration and Veterans Benefits Administration PRBs are to submit  their procedures to the chairperson of the Veterans Affairs PRB for  approval and are to include a summary of procedures used to ensure that  PRB members do not participate in recommending performance ratings  for themselves or their supervisors.
VA policy requires any SES member who wishes to be considered for a  bonus to submit a two-page justification based on his or her performance  plan addressing how individual accomplishments contribute towards  organizational and departmental goals, as well as appropriate equal  employment opportunity and President’s Management Agenda  accomplishments. While federal law and OPM regulations permit career  SES members rated fully successful or higher to be awarded bonuses, VA’s  policy calls for bonuses to generally be awarded to only those rated  outstanding or excellent and who have demonstrated significant individual  and organizational achievements during the appraisal period. Beyond  these policies, each PRB determines how it will make its  recommendations. For example, a VA official from its Office of Human  Resources and Administration told us that the Veterans Affairs PRB bases  it’s bonus recommendations on an array of the numerical scores assigned  based on the executive core qualifications. The information that each PRB  receives from its component units also varies. For example, the Veterans  Benefits Administration PRB members receive ratings and recommended  pay adjustments and bonus amounts from Veterans Benefits  Administration units. VA policy requires formal minutes of all PRB  meetings that are to be maintained for 5 years. The official from the Office  of Human Resources and Administration told us that the minutes are  limited to decisions made, such as the recommended bonus amount for  each SES member considered, and generally do not capture the  deliberative process leading to such decisions. Data provided by VA on  one VA component—the Veterans Integrated Services Network—showed  that of the bonuses proposed for fiscal year 2006, the Veterans Health  Administration PRB decreased 45 and increased 9 of the bonuses initially  proposed to that PRB and left the amounts of 64 unchanged.
At the conclusion of their deliberations, the Veterans Health  Administration and Veterans Benefits Administration PRBs send their  recommendations to the Under Secretary for Health and Under Secretary  for Benefits, respectively, who, at their sole discretion, may modify the  recommendations for SES members under their authority. No  documentation of the rationale for modifications is required. The  recommendations, as modified, are then forwarded to the chairperson of  the Veterans Affairs PRB, who reviews the decisions for apparent  anomalies, such as awarding bonuses that exceed maximum amounts. The  chairperson of the Veterans Affairs PRB then forwards the  recommendations from the Veterans Health Administration, Veterans  Benefits Administration, and Veterans Affairs PRBs to the Secretary for  approval.
The Secretary makes final determinations for SES member performance  bonuses, with the exception of SES members in VA’s Office of Inspector  General. Recommendations from the Office of Inspector General PRB are  sent directly to the VA Inspector General for final decision without review  by the Veterans Affairs PRB or approval by the Secretary. The Secretary  has sole discretion in accepting or rejecting the recommendations of the  PRBs. According to an official in the Office of Human Resources and  Administration, the Secretary modified 1 recommendation in 2006, but a  prior secretary modified over 30 in one year.
Recommendations for bonuses for members of the Veterans Affairs,  Veterans Health Administration, and Veterans Benefits Administration  PRBs are made after the PRBs conclude their work. The highest-level  executives of each board rank the members of their respective PRBs and  make recommendations, which are submitted to the Secretary. The  Secretary determines any bonuses for the highest-level executives of the  boards.
section_title: VA SES Bonuses
paragraphs: In 2006, VA’s bonus pool was $3,751,630, or 9 percent of the aggregate  basic pay of its SES members in 2005. VA awarded an average of $16,606 in  bonuses in fiscal year 2006 to 87 percent of its career SES members. At  headquarters, approximately 82 percent of career SES members received  bonuses and 90 percent received bonuses in the field. Additionally, those  in headquarters were awarded an average of about $4,000 more in bonuses  than the career SES members in field locations. Table 1 shows the average  bonus amount, percentage receiving bonuses, and total rated at VA among  career SES members and by headquarters and field locations for 2004  through 2006.
In 2005, according to OPM’s Report on Senior Executive Pay for  Performance for Fiscal Year 2005, the most recent report available, VA  awarded higher average bonuses to its career SES than any other cabinet- level department. OPM data show that six other cabinet-level departments  awarded bonuses to a higher percentage of their career SES members.  When asked about possible reasons for VA’s high average bonus award, a  VA official in the Office of Human Resources and Administration cited the  outstanding performance of VA’s three organizations and the amount  allocated to SES member bonuses.
section_title: OPM’s and OMB’s Roles in the VA Certification Process
paragraphs: Both OPM and OMB play a role in the review of agency’s senior  performance appraisal systems and have jointly developed certification  criteria. OPM issues guidance each year to help agencies improve the  development of their SES performance appraisal systems and also reviews  agency certification submissions to ensure they meet specified criteria. To  make its own determination, OMB examines agency’s performance  appraisal systems against the certification criteria, primarily considering  measures of overall agency performance, such as an agency’s results of a  Program Assessment Rating Tool review or President’s Management  Agenda results.
Specifically, to qualify for the use of SES pay flexibilities, OPM and OMB  evaluate agencies’ senior performance appraisal systems against nine  certification criteria. These certification criteria are broad principles that  position agencies to use their pay systems strategically to support the  development of a stronger performance culture and the attainment of the  agencies’ missions, goals, and objectives. These are alignment,  consultation, results, balance, assessments and guidelines, oversight,  accountability, performance, and pay differentiation. See appendix I for a  description of the certification criteria. There are two levels of  performance appraisal system certification available to agencies: full and  provisional. To receive full certification, the design of the systems must  meet the nine certification criteria, and agencies must, in the judgment of  OPM and with concurrence from OMB, provide documentation of prior  performance ratings to demonstrate compliance with the criteria. Full  certification lasts for 2 calendar years. Provisionally certified agencies are  also granted the authority to apply higher caps on SES pay and total  compensation just as those with fully certified systems are, even though  agencies with provisional certification do not meet all nine of the  certification criteria. Provisional certification lasts for 1 calendar year.  According to OPM, the regulations were designed to cover initial  implementation of the certification process. Now that all agencies have  been under the system, all nine criteria must be met for an agency to be  certified, even provisionally. According to OPM, for an agency to receive  full certification in 2007, it must show that it has 2 years of making  performance differentiation in ratings, pay, and award; and that the agency  performance plans fully met all the criteria without requiring extensive  revision.
After OMB concurrence, the Director of OPM certifies the agency’s  performance appraisal system and formally notifies the agency with a  letter specifying provisional, full certification, or no certification. Of the  42 performance appraisal systems that were certified in 2006, only the  Department of Labor’s system received full certification. According to  OPM’s Web site, as of June 5, 2007, four agencies had received full  certification of their senior performance appraisal systems—the  Department of Commerce for 2007 through 2008, the Department of Labor  for 2006 through 2007, the Federal Communications Commission for 2007  through 2008, and the Federal Energy Regulatory Commission for 2007  through 2008.
If provisional or no certification is recommended, the letter from OPM  provides the agency with specific areas of concern identified through the  review process. These comments may direct an agency to focus more on  making meaningful distinctions in performance or improving the type of  performance measures used to evaluate SES members. For example, in  OPM’s 2007 certification guidance, the OPM Director asked agencies to  place more emphasis on achieving measurable results, noting that many  plans often fall short of identifying the measures used to determine  whether results are achieved. In addition, OPM asked agencies to highlight  in their 2007 certification requests any description or evidence of  improvements made as a result of comments from OPM or OMB in  response to the agency’s 2006 certification submission.
VA received provisional certification for each of the years 2004 through  2006. In 2006, the letter from OPM to VA discussing its decision to grant  the VA provisional certification rather than full certification, OPM stated  that while the VA “system met certification criteria, clear alignment and  measurable results must be evident in all plans across the entire agency.”  In addition, OPM said that it expected to see “well over 50 percent of an  executive’s performance plan focused on business results” and that VA  “needs to ensure its 2007 executive performance plans weight business  results appropriately.” VA officials told us that the 2007 submission is in  draft and they expect to submit it to OPM by the June 30, 2007, deadline.
Our preliminary review of VA’s requirements for performance plans  contained in its 2006 submission and 2007 draft submission show that VA  made changes to the policy requirements for its performance plans to  reflect a greater emphasis on measurable results. Specifically, the  elements of the job requirement in the 2007 policies provides that each  critical element and performance element will be weighted, which was not  previously required in 2006. These performance requirements, according  to the policy, will be described in terms of specific result(s) with metrics  that the SES member must accomplish for the agency to achieve its annual  performance goals and represent at least 60 percent of the overall weight  of the performance plan. The policy further states that the expected  results should be specific, measurable, and aggressive yet achievable,  results-oriented, and time-based.
Responding to concerns expressed by members of Congress and media  reports about SES member bonuses, VA’s Secretary recently requested  that OPM review its performance management program for senior  executives to ensure that its processes are consistent with governing  statutes and OPM regulations and guidance. VA officials indicated that  while OPM’s review encompasses some of the same areas as those  required for 2007 certification, VA requested a separate report from OPM.
We have stated that it is important for OPM to continue to carefully  monitor the implementation of agencies’ systems and the certification  process with the goal of helping all agencies to receive full certification of  their system. Requiring agencies with provisional certification to reapply  annually rather than every 2 years helps to ensure continued progress in  fully meeting congressional intent in authorizing the new performance- based pay system. VA has achieved provisional certification of its SES  performance management system for 2004 through 2006.
Mr. Chairman and Members of the Subcommittee, this concludes my  prepared statement. I would be pleased to respond to any questions that  you have.
section_title: Contacts and Acknowledgments
paragraphs: For further information regarding this statement, please contact J.  Christopher Mihm at (202) 512-6806 or mihmj@gao.gov. Contact points for  our Offices of Congressional Relations and Public Affairs may be found on  the last page of this testimony. Individuals making key contributions to  this statement included George Stalcup, Director; Belva Martin, Assistant  Director; Carole J. Cimitile; Karin Fangman; Tamara F. Stenzel; and Greg  Wilmoth.
section_title: Appendix I: Senior Executive Service Performance Appraisal System Certification Criteria
paragraphs: Individual performance expectations must be linked to or derived from the agency’s  mission, strategic goals, program/policy objectives, and/or annual performance plan.
Individual performance expectations are developed with senior employee involvement and  must be communicated at the beginning of the appraisal cycle.
Individual expectations describe performance that is measurable, demonstrable, or  observable, focusing on organizational outputs and outcomes, policy/program objectives,  milestones, and so forth.
Individual performance expectations must include measures of results, employee and  customer/stakeholder satisfaction, and competencies or behaviors that contribute to  outstanding performance.
The agency head or a designee provides assessments of the performance of the agency  overall, as well as each of its major program and functional areas, such as reports of  agency’s goals and other program performance measures and indicators, and evaluation  guidelines based, in part, upon those assessments to senior employees, and appropriate  senior employee rating and reviewing officials. The guidance provided may not take the  form of quantitative limitations on the number of ratings at any given rating level.
The agency head or designee must certify that (1) the appraisal process makes  meaningful distinctions based on relative performance; (2) results take into account, as  appropriate, the agency’s performance; and (3) pay adjustments and awards recognize  individual/organizational performance.
Senior employee ratings (as well as subordinate employees’ performance expectations  and ratings for those with supervisor responsibilities) appropriately reflect employees’  performance expectations, relevant program performance measures, and other relevant  factors.
Among other provisions, the agency must provide for at least one rating level above Fully  Successful (must include an Outstanding level of performance), and in the application of  those ratings, make meaningful distinctions among executives based on their relative  performance.
The agency should be able to demonstrate that the largest pay adjustments, highest pay  levels (base and performance awards), or both are provided to its highest performers, and  that, overall, the distribution of pay rates in the SES rate range and pay adjustments  reflects meaningful distinctions among executives based on their relative performance.
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