Human Capital: Selected Agencies Have Implemented Key Features of Their Senior Executive Performance-Based Pay Systems, but Refinements Are Needed
Published: 2008-07-22T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: In 2003, Congress and the administration established a performance-based pay system for Senior Executive Service (SES) members that requires a link between individual and organizational performance and pay. Specifically, agencies are allowed to raise SES pay caps if their systems are certified by the Office of Personnel Management (OPM) with concurrence by the Office of Management and Budget (OMB) as meeting specified criteria. GAO was asked to testify on preliminary results of ongoing work analyzing selected executive branch agencies' policies and procedures for their SES performance-based pay systems in the following areas: (1) factoring organizational performance into senior executive performance appraisal decisions, (2) making meaningful distinctions in senior executive performance, and (3) building safeguards into senior executive performance appraisal and pay systems. GAO selected the U.S. Departments of Defense (DOD), Energy (DOE), State, and the Treasury; the U.S. Nuclear Regulatory Commission (NRC); and the United States Agency for International Development (USAID) based on variations in agency mission, organizational structure, and size of their career SES workforces. To date, GAO has analyzed agencies' SES performance management policies and guidance and analyzed aggregate SES performance appraisal data as provided by the agencies for fiscal year 2007.
section_title: What GAO Found
paragraphs: Overall, the selected agencies are making positive steps toward three key areas related to OPM and OMB's certification criteria, with some opportunities for refinements in these areas: (1) Factoring organizational performance into senior executive performance appraisal decisions: -all of the selected agencies have policies in place that require senior executives' performance expectations to be aligned with organizational results and organizational performance to be factored into appraisal decisions. Improvements in communicating organizational performance to reviewing officials could be made. (2) Making meaningful distinctions in senior executive performance: -while all of the selected agencies have multiple rating levels in place for assessing senior executive performance, senior executives were concentrated at the top two rating levels in the fiscal year 2007 appraisal cycle. (3) Building safeguards into senior executive performance appraisal and pay systems: -the selected agencies varied in how they implemented predecisional checks of appraisal recommendations through higher-level reviews and Performance Review Boards as well as transparency in the aggregate results with opportunities to improve communication of aggregate appraisal results to all senior executives.

section_title: Letter
paragraphs: I am pleased to be here today to discuss our preliminary results  concerning selected agencies’ policies and procedures for the  performance-based pay systems for career members of the Senior  Executive Service (SES). As you know, in recent years, Congress and the  administration modernized the performance appraisal and pay systems for  senior executives by requiring a clearer link between individual  performance and pay. Specifically, agencies are allowed to raise SES base  pay and total compensation caps if their performance appraisal systems  are certified by the Office of Personnel Management (OPM) with  concurrence by the Office of Management and Budget (OMB) as, among  other things, linking performance for senior executives to the  organization’s goals and making meaningful distinctions based on relative  performance.
In our past work on performance management and pay issues, we have  reported that performance-based pay cannot be simply overlaid on most  organizations’ existing performance management systems. Rather, as a  precondition to effective pay reform, individual expectations must be  clearly aligned with organizational results, communication on individual  contributions to annual goals must be ongoing and two-way, meaningful  distinctions in employee performance must be made, and cultural changes  must be undertaken. Most important, leading organizations have  recognized that effective performance management systems create a “line  of sight” showing how unit and individual performance can contribute to  overall organizational goals and can help them drive internal change and  achieve external results. As you know, effective performance  management systems that hold executives accountable for results can help  provide continuity during times of leadership transition, such as the  upcoming change in the administration, by maintaining a consistent focus  on organizational priorities. We have reported that there are significant  opportunities to strengthen agencies’ efforts in holding senior executives  accountable for results through their performance management systems— in particular, by linking senior executives’ performance expectations to  the achievement of results-oriented organizational goals.
OPM’s recently released 2008 governmentwide SES survey results found  that senior executives across the government recognize the importance of  linking pay to performance with about 93 percent of the respondents  strongly agreeing or agreeing that pay should be based on performance. In  addition, the majority of senior executives reported that their performance  ratings were linked to their salary increases and bonuses to a very great or  great extent. However, senior executives recognized the challenge of  making meaningful distinctions in performance—a key criterion for  agencies’ certification of their SES appraisal systems. Specifically, less  than a third of senior executives governmentwide strongly agreed or  agreed that bonuses or pay distinctions were meaningfully different among  executives.
At your request and Senator Dorgan’s, we are preparing a report  highlighting selected federal agencies’ policies and procedures for their  SES performance appraisal and pay systems and OPM and OMB’s  oversight of the certification process (for additional background on the  governmentwide SES performance-based pay system and certification  criteria, see app. I). Today, I will present preliminary observations from  our ongoing review. As requested, I will discuss the policies and  procedures at selected agencies addressing three key areas: (1) factoring  organizational performance into senior executive performance appraisal  decisions, (2) making meaningful distinctions in senior executive  performance, and (3) building safeguards into senior executive  performance appraisal and pay systems. In our forthcoming report, we  plan to report on OPM and OMB’s oversight role and make  recommendations to the selected agencies on areas of refinement for their  senior executive performance appraisal and pay systems and to OPM and  OMB to strengthen their oversight roles.
For our review, we selected the U.S. Departments of Defense (DOD),  Energy (DOE), State, and the Treasury; the U.S. Nuclear Regulatory  Commission (NRC); and the United States Agency for International  Development (USAID) based on variations in agency mission,  organizational structure, size of their career SES workforces, and past  results of their SES performance appraisal systems through rating and  bonus distributions. To date, we have analyzed these agencies’ SES  performance management policies, directives, and guidance, and other  related documents; interviewed cognizant agency officials, including OPM  and OMB officials, regarding the certification process; and analyzed  aggregate SES performance rating, bonus, and pay adjustment data as  provided by the agencies for fiscal year 2007. In analyzing the fiscal year  2007 appraisal data, we defined our universe of analysis as career senior  executives who received ratings. In calculating the percentage of eligible  senior executives who received bonuses (cash awards) or pay adjustments  (increases to basic pay) and average amounts, we excluded executives  who received a rating less than “fully successful” (level 3), as applicable,  from the eligible population since those executives are not eligible to  receive bonuses or pay increases, according to the selected agencies’  policies. We also excluded senior executives at NRC, Treasury, and State  who received Presidential Rank Awards from our calculations of  percentages of eligible SES members receiving bonuses and average  amounts because those individuals were not considered for bonuses that  year, according to the agencies’ policies. In order to have consistency in  our analysis across selected agencies, we included senior executives who  were rated but left their positions—because of retirement, attrition, or  assignment to a lower grade—prior to performance payouts being made in  our analysis. The agencies’ policies and practices varied in whether or not  senior executives who retired were eligible for performance payouts. We  checked the agency data for reasonableness and the presence of any  obvious or potential errors in accuracy and completeness. We also  reviewed related agency documentation, interviewed agency officials  knowledgeable about the data, and brought to the attention of these  officials any concerns or discrepancies we found with the data for  correction or updating. On the basis of these procedures, we believe the  data are sufficiently reliable for use in the analyses presented in this  statement. Agency officials also verified the accuracy of the facts  presented in this statement.
The examples of the selected agencies’ policies and procedures for their  SES performance-based pay systems are not generalizable to the  governmentwide SES population and all executive branch agencies. We  did not assess how the selected agencies are implementing all the policies  and procedures for their SES performance-based pay systems. An agency  may have implemented a policy related to the three key areas even if it is  not specifically highlighted in this statement. We conducted our work from  October 2007 to July 2008 in accordance with generally accepted  government auditing standards. Those standards require that we plan and  perform the audit to obtain sufficient, appropriate evidence to provide a  reasonable basis for our findings and conclusions based on our audit  objectives. We believe that the evidence obtained provides a reasonable  basis for our findings and conclusions based on our audit objectives.
In summary, the selected agencies are making positive steps in generally  addressing three key areas related to OPM and OMB’s certification criteria  through their SES performance-based pay systems with some  opportunities for refinements of their systems. First, all of the selected  agencies have policies in place that require senior executives’ performance  expectations to be aligned with organizational results and organizational  performance to be factored into senior executive appraisal decisions.  However, OPM has found that while many agencies are doing a good job  of clarifying the alignment of executive performance plans with agency  mission and goals, some of the plans often still fall short of identifying the  measures used to determine whether the results are achieved. While the  agencies identified common organizational assessments for consideration  in senior executive appraisal decisions, NRC and Treasury identified other  types of tools to assess performance at the office or bureau level. OPM has  emphasized the importance of communicating to individuals involved in  appraisal decisions the effect organizational performance can have on  individual ratings and overall rating distributions through briefings or  other communications. Several of the selected agencies shared the  organizational performance assessments and communicated the  importance of considering organizational performance through briefings,  training, or document packages for the Performance Review Board (PRB)  meetings, while State did not communicate any information regarding  organizational performance.
Second, while all of the selected agencies have multiple rating levels in  place for assessing senior executive performance, several of the agencies,  such as NRC, State, and DOE, designed their appraisal systems to help  allow for differentiations when assessing and rewarding executive  performance by establishing tier structures or prescribed performance  payout ranges based on the resulting performance rating. However, our  analysis shows that the senior executives are concentrated at the top two  rating levels for the most recently completed appraisal cycle. Further, at  almost all of the agencies, the highest-performing executives, rated as  “outstanding” (level 5), made up the greatest percentage of eligible  executives receiving bonuses with the largest bonuses on average, with  the exception of NRC where all the eligible executives rated at the top two  levels received a bonus. For pay adjustments, the majority of eligible  senior executives rated at fully successful or higher received pay  increases, but unlike bonus distributions, at some of the selected agencies,  the highest performing executives did not comprise the greatest  percentage of executives receiving pay increases with the largest increases  on average.
Third, all of the selected agencies have built safeguards into their senior  executive performance appraisal and pay systems—such as predecisional  checks of performance appraisal recommendations through higher-level  reviews and PRBs as well as transparency in the aggregate results—to  help enhance the credibility, fairness, and transparency of their systems,  although they varied in how the safeguards have been implemented. Our  preliminary results show that there are opportunities for USAID to  improve the communication of aggregate appraisal results to all senior  executives, rather than just individual appraisal results to the appropriate  executive. Communicating an executive’s individual rating conveys  information about how well the executive has performed against the  expectations in the performance plan, but is not sufficient to provide a  clear picture of how the executive’s performance compares with other  executives in the agency.
subsections: section_title: Factoring Organizational Performance into Senior Executive Performance Appraisal Decisions
paragraphs: In our past work on performance management, we have identified the  alignment of individual performance expectations with organizational  goals as a key practice for effective performance management systems.  Having a performance management system that creates a “line of sight”  showing how unit and individual performance can contribute to overall  organizational goals helps individuals understand the connection between  their daily activities and the organization’s success. According to OPM,  agency systems do not yet place sufficient emphasis on achieving  measurable results. OPM has said that the criterion for alignment with  organizational results is often the hardest of the certification criteria for  agencies to meet. While many agencies are doing a good job of clarifying  the alignment of executive performance plans with agency mission and  goals, some of the plans often still fall short of identifying the measures  used to determine whether the results are achieved, according to OPM.  This challenge of explicitly linking senior executive expectations to  results-oriented organizational goals is consistent with findings from our  past work on performance management.
To help hold senior executives accountable for organizational results,  beginning in 2007, OPM required agencies to demonstrate that at least 60  percent of each senior executive’s performance plan is focused on  achieving results and has clear measures associated with those results to  show whether the goals have been achieved in order to receive  certification of their SES appraisal systems. The selected agencies in our  review have designed their appraisal systems to address OPM’s  requirement of aligning individual expectations with organizational goals.  For example, in setting expectations for the individual performance plans,  DOE requires the senior executives and supervisors to identify three to  five key performance requirements with metrics that the executive must  accomplish in order for the agency to achieve its strategic goals. Weighted  at 60 percent of the summary rating, the performance requirements are to  be specific to the executive’s position and described in terms of specific  results with clear, credible measures (e.g., quality, quantity, timeliness,  cost-effectiveness) of performance, rather than activities. For each  performance requirement, the executive is to identify the applicable  strategic goal in the performance plan. To ensure that agencies are  implementing their policies for alignment of performance expectations  with organizational goals, OPM requires agencies as part of their  certification submissions to provide a sample of executive performance  plans, the strategic plan or other organizational performance documents  for establishing alignment, and a description of the appraisal system  outlining the linkage of executive performance with organizational goals.
Further, OPM requires agencies to consider organizational performance in  appraising senior executive performance to receive certification of their  SES appraisal systems. According to OPM and OMB officials, the main  sources of organizational performance that agencies use are the  performance and accountability reports (PAR) and Program Assessment  Rating Tool (PART) summaries, which capture agencywide as well as  program- or office-specific performance. While identifying appropriate  assessments of organizational performance to be used in appraisal  decisions, agencies are also to communicate the organizational  performance to the senior executives, PRB members, and other reviewing  officials—including supervisors who complete the ratings—involved in  appraisal decisions prior to the completion of individual performance  ratings. In its certification regulations, OPM does not specify the format in  which agencies need to communicate organizational performance;  however, OPM has emphasized the importance of communicating to  individuals involved in appraisal decisions the effect organizational  performance can have on individual ratings and overall rating distributions  through briefings or other communications.
All of the selected agencies have policies in place for factoring  organizational performance into senior executive appraisal decisions.  While the agencies identified common organizational assessments, such as  the President’s Management Agenda (PMA), PAR, or PART results for  consideration in senior executive appraisal decisions, several agencies  identified other types of tools to assess performance at different levels of  the organization, such as the bureau, office, or program levels. For  example, NRC provides summary reports capturing office-level  performance to rating and reviewing officials for appraising senior  executive performance. Twice a year, NRC’s senior performance officials  (SPO)—two top-level executives responsible for assessing organizational  performance—conduct assessments for each office that take into account  quarterly office performance reports on their operating plans, an  interoffice survey completed by the other directors as identified by NRC  on the office’s performance, as well as the office director’s self-assessment  of the office’s performance. According to an NRC official, the resulting  SPO summary reports are used in the midyear feedback by senior  executives and their supervisors to identify areas for improvement for the  remainder of the appraisal cycle. At the end of the appraisal cycle, rating  officials and PRB members are to consider the SPO summary reports in  appraising senior executive performance.
To assess bureau-level performance, Treasury uses a departmentwide  organizational assessment tool that provides a “snapshot” of each bureau’s  performance across various indicators of organizational performance,  such as the PAR, PART results, PMA areas, OPM’s Federal Human Capital  Survey results, budget data, and information on material weaknesses. The  performance information is provided to PRB members and reviewing  officials to help inform their senior executive appraisal recommendations.
The selected agencies varied in how they provided and communicated  organizational performance assessments to PRB members and other  reviewing officials to help inform senior executive appraisal  recommendations. Several of the selected agencies shared the  organizational performance assessments and communicated the  importance of considering organizational performance through briefings,  training, or document packages for the PRB meetings, while one agency  did not provide or communicate any information regarding organizational  performance.
For example, at Treasury, all the PRBs across the department were briefed  on the tool used to assess organizational performance and the importance  of considering organizational performance in appraising senior executive  performance. DOD provided the heads of its components with a  departmentwide organizational assessment to be used in appraising senior  executive performance and, as a check across the components, asked for  copies of the training given to the PRB members and other reviewing  officials on factoring organizational performance into senior executive  appraisal recommendations. Through the office of the Deputy Secretary  for Defense, DOD developed an assessment of the department’s overall  performance against its overall priorities for fiscal year 2007. According to  a DOD official, the components had the flexibility to develop their own  organizational assessments using the department’s assessment as a guide  and to consider other indicators of organizational performance. Having the  components provide the department with their communications of  organizational performance helps provide a check in the process across  the components and ensures that the spirit and policies of the  performance management system are being followed, according to a  senior DOD official.
As part of the documents received prior to the meeting, NRC provides PRB  members with various indicators of organizational performance, such as  the SPO summary reports, PAR, and PART information. As part of  communicating the organizational assessments, NRC instructs the PRB  members to review the summary of proposed ratings and scores for  consistency with SPO reports, PAR, and PART outcomes, with rankings of  executives recommended by office directors, and across offices and  programs. Similarly, DOE provides its PRB members snapshots of the  Consolidated Quarterly Performance Reports relevant to the senior  executives that measure how each departmental element performed  respective to the goals and targets in its annual performance plan.  According to the Director of the Office of Human Capital Management, the  Deputy Secretary also verbally briefed the PRB members on the  importance of considering organizational performance in appraising  executive performance.
On the other hand, State did not provide its PRB members and other  reviewers with any specific information on organizational performance to  help inform their senior executive appraisal recommendations for the  most recently completed appraisal cycle. According to State officials, PRB  members received packages of information to help inform their decisions,  including senior executives’ performance plans and appraisals, the  performance management policy, and the memo from the Director General  of the Foreign Service and Director of Human Resources on performance  bonuses and pay adjustment amounts and distributions for that cycle.  While a senior State human resources official said that the PRB was made  aware of a variety of organizational performance assessments that could  be readily accessible, if needed, the PRB members did not receive any  specific assessments of organizational performance.
section_title: Making Meaningful Distinctions in Senior Executive Performance
paragraphs: Effective performance management systems make meaningful distinctions  between acceptable and outstanding performance of individuals and  appropriately reward those who perform at the highest level. In order to  receive certification of their SES systems from OPM with OMB  concurrence, agencies are to design and administer performance appraisal  systems that make meaningful distinctions based on relative performance  through performance rating and resulting performance payouts (e.g.,  bonuses and pay adjustments). Specifically, agencies are to use multiple  rating levels—four or five levels—and reward the highest-performing  executives with the highest ratings and largest pay adjustments and  bonuses, among other things.
Several of the agencies designed their appraisal systems to help allow for  differentiations when assessing and rewarding executive performance by  establishing tier structures or prescribed performance payout ranges  based on the resulting performance rating. For example, NRC uses three  tiers called position groups to differentiate its senior executives’ basic pay  and the resulting bonus amounts based on ratings received at the end of  the appraisal cycle. NRC divides its executives into three groups (A, B, and  C) based on difficulty of assignment and scope of responsibilities of the  positions and annually sets basic pay ceilings for each of the groups tied to  the levels of the Executive Schedule (EX), as shown in table 1. Pay ceilings  within each group allow NRC to reserve pay above EX-III for executives  who demonstrate the highest levels of performance, including the greatest  contribution to organizational performance as determined through the  appraisal system.
NRC uses the position groups and resulting performance ratings as the  basis for its bonus structure to help ensure that executives in the higher  position groups with the higher performance ratings receive the larger  bonuses. For example, for fiscal year 2007, an executive in the highest  position group (A) that received an outstanding rating was to receive  $30,000, while an executive in the lowest group (C) with the same rating  was to receive a $20,000 bonus. According to an NRC official, the bonus  range for executives in group C with excellent ratings was intended to  help allow for meaningful distinctions in performance to be made within  that group, as well as to give the agency flexibility in the amount of  bonuses to be awarded.
State also uses a structure with six tiers to help differentiate executive  performance based on the ratings and bonuses and allocate pay  adjustment amounts for its senior executives, with executives who are  placed in the highest tier (I) receiving a larger percentage pay adjustment  than executives in a lower tier (V) who received the annual percentage  adjustment to the EX pay schedule, which was 2.5 percent in 2008.
DOE sets prescribed ranges tied to performance ratings prior to finalizing  ratings to help create a greater distinction between bonus amounts for the  top and middle performers and differentiate pay adjustment caps.  Specifically, for fiscal year 2007, DOE required that all executives  receiving an outstanding rating receive a bonus of 12 to 20 percent of base  pay, while executives receiving a meets expectations rating were eligible  to receive a bonus of 5 to 9 percent, but at management’s discretion. For  pay adjustments, executives were eligible to receive a discretionary  increase of up to 5 or 7 percent of basic pay if rated at meets expectations  or outstanding, respectively. Executives who receive the other two rating  levels—needs improvement or unsatisfactory—cannot receive any  bonuses or pay increases.
We have reported that using multiple rating levels provides a useful  framework for making distinctions in performance by allowing an agency  to differentiate among individuals’ performance. All of the selected  agencies have four or five rating levels in place for assessing senior  executive performance. While the selected agencies designed their  appraisal and pay systems to help make meaningful distinctions in  performance through ratings, our analysis shows that the senior  executives were concentrated at the top two rating levels for the most  recently completed appraisal cycle, as shown in figure 1. At State and  USAID, about 69 percent and 60 percent of senior executives, respectively,  received the top performance rating. At the other four agencies, the largest  percentage of executives received the second highest rating—ranging from  about 65 percent at NRC to 45 percent at Treasury. Conversely, less than 1  percent of senior executives across the selected agencies received a rating  below fully successful (level 3). As a point of comparison, about 43  percent of career SES governmentwide received the top performance  rating for fiscal year 2006, the most recent governmentwide data available  as reported by OPM. Similar to the selected agencies, less than 1 percent  of career SES governmentwide received a rating below fully successful in  fiscal year 2006.
According to State’s Deputy Assistant Secretary for the Bureau of Human  Resources, historically, the vast majority of senior executives have  received the highest rating of outstanding, including for fiscal year 2007.  Since the implementation of performance-based pay, this official said State  has struggled with changing the culture and general perception among  senior executives that any rating less than outstanding is a failure. DOD is  communicating the message that a fully successful or equivalent rating is a  valued and quality rating to help change its culture and make more  meaningful distinctions in ratings. Part of this communication is  developing common benchmark descriptors for the performance elements  at the five, four, and three rating levels. The Principal Deputy Under  Secretary of Defense for Civilian Personnel Policy said she hopes that  developing common definitions for the performance elements at all three  levels will aid the development of a common understanding and in turn  make more meaningful distinctions in ratings. The agency official  recognizes that this shift to giving fully successful ratings is a significant  cultural change and it will take some time to fully transform the culture.
The percentage of eligible executives that received bonuses or pay  adjustments varied across the selected agencies for fiscal year 2007, as  shown in table 2. The percentage of eligible senior executives that  received bonuses ranged from about 92 percent at DOD to about 30  percent at USAID, with the average dollar amount ranging from $11,034 at  State to about $17,917 at NRC. For pay adjustments, all eligible executives  at State received pay adjustments, while about 88 percent of eligible  executives at DOE received adjustments, with the average dollar amount  ranging from about $5,414 at NRC to about $6,243 at DOE. As a point of  comparison, about 67 percent of career SES members received bonuses  with an average dollar amount of $13,292 for fiscal year 2006, according to  governmentwide data reported by OPM. The governmentwide percentage  of career SES receiving pay adjustments and average dollar amount of the  adjustments in the aggregate are not available from OPM’s  governmentwide data report for fiscal year 2006.
The selected agencies have policies in place where only senior executives  who receive a rating of fully successful (level 3) or higher are eligible to  receive bonuses or pay increases. Also affecting executives’ bonus  eligibility are the agencies’ policies on awarding bonuses to executives  who also received Presidential Rank Awards that year, which varied  among the selected agencies. NRC, State, and Treasury do not allow  executives to receive both awards in the same year, while DOD, DOE, and  USAID allow the practice.
According to OPM regulations, agencies are to reward the highest- performing executives with the highest ratings and largest bonuses and  pay adjustments. At almost all of the agencies, the highest-performing  executives (rated at level 5) made up the greatest percentage of eligible  executives receiving bonuses, with the exception of NRC where all the  eligible executives rated at the top two levels received a bonus. Similarly,  the executives rated at the highest level received the largest bonuses on  average—about $23,333 at NRC compared to about $11,034 at State. State  only awarded bonuses to executives receiving the top rating of  outstanding for fiscal year 2007. In addition, senior executives at NRC and  USAID rated at fully successful (level 3) did not receive bonuses. (See   fig. 2.)
In a memo to agencies on the certification process, OPM stated that   senior executives who receive a fully successful or higher rating and are  paid at a level consistent with their current responsibilities should receive  a pay increase. According to an OPM official, agencies are not required to  give these executives pay increases, but OPM considers fully successful to  be a good rating and encourages agencies to recognize and reward  executives performing at this rating level. At the selected agencies, the  majority of eligible senior executives rated at fully successful received pay  adjustments for fiscal year 2007, as shown in figure 3. Unlike the bonus  distributions by rating level, at some of the agencies, the highest- performing executives who received a rating of level 5 did not make up the  greatest percentage of executives receiving pay adjustments with the  largest increases on average. For example, at USAID, all eligible  executives who received a level 3 rating received a pay adjustment, while  about 92 percent of eligible executives rated at level 5 received an  adjustment. For all the agencies except Treasury, the executives rated at  the highest level received the largest pay adjustments on average—about  $7,473 at USAID compared to about $6,133 at NRC. At Treasury,  executives rated at levels five, four, and three on average received about  the same pay adjustment amounts primarily due to pay cap issues.
The governmentwide results of the 2008 OPM SES survey show that the  majority of senior executives responded that their bonus or salary  increase was linked to their performance rating to a very great or great  extent. However, less than a third of senior executives strongly agreed or  agreed that bonus amounts or pay distinctions were meaningfully different  among the executives. These results show that making meaningful  distinctions in bonuses and pay can be a challenge.
section_title: Building Safeguards into Senior Executive Performance Appraisal and Pay Systems
paragraphs: We have reported that agencies need to have modern, effective, credible,  and, as appropriate, validated performance management systems in place  with adequate safeguards to ensure fairness and prevent politicization and  abuse. All of the selected agencies have built safeguards into their senior  executive performance appraisal and pay systems—such as predecisional  checks of performance appraisal recommendations through higher-level  reviews and PRBs as well as transparency in communicating the aggregate  results—to help enhance the credibility, fairness, and transparency of their  systems, although they varied in how the safeguards have been  implemented. Our preliminary results show that there are opportunities  for improvement in the communication of aggregate appraisal results to all  senior executives.
By law, as part of their SES appraisal systems, all agencies must provide  their senior executives with an opportunity to view their appraisals and  ratings and to request a review of the recommended performance ratings  by higher-level officials, before the ratings become final. The higher-level  reviewer cannot change the initial summary rating given by the supervisor,  but may recommend a different rating in writing to the PRB that is shared  with the senior executive and the supervisor. For example, according to  State’s policy, an executive may request a higher-level review of the initial  rating in writing prior to the PRB convening at which time the initial  summary rating, the executive’s request, and the higher-level reviewing  official’s written findings and recommendations are considered. The PRB  is to provide a written recommendation on the executive’s summary rating  to State’s Director General of the Foreign Service and Director of Human  Resources, who makes the final appraisal decisions.
Further, all agencies must establish one or more PRBs to help ensure that  performance appraisals reflect both individual and organizational  performance and that rating, bonus, and pay adjustment recommendations  are consistently made. The PRB is to review senior executives’ initial  summary performance ratings and other relevant documents and make  written recommendations on the performance of the senior executives to  the agency head or appointing authority.
The selected agencies varied in their PRB structures and in who provided  the final approval of the appraisal decisions. For example, given its small  number of senior executives, USAID has one PRB that is responsible for  making recommendations to the Administrator for his/her final approval  on all rated career executives for their annual summary ratings, bonuses,  performance-based pay adjustments, and Presidential Rank Award  nominations. On the other hand, DOD has multiple PRBs within and  across its components and agencies with separate authorizing officials  who give the final approval of rating and performance payout  recommendations. According to a DOD official, there is not a central PRB  that oversees all the PRBs within the department responsible for  recommending approval of the final appraisal decisions for all senior  executives. To help ensure consistency in appraisal recommendations  across the department and between the various authorizing officials, the  components are to provide their final rating and performance payout  distributions to the Under Secretary of Defense for Personnel and  Readiness to be validated prior to executives receiving the bonuses and  pay adjustments. As part of the validation process, the Under Secretary of  Defense for Personnel and Readiness checks to ensure that meaningful  distinctions were made and ratings, bonuses, and pay adjustments reflect  organizational and individual performance, among other things, before  performance bonuses and pay increases are made effective.
To help enhance the transparency of the system, agencies can  communicate the overall aggregate results of the performance appraisal  decisions—ratings, bonuses, and pay adjustment distributions—to senior  executives while protecting individual confidentiality, and as a result, let  executives know where they stand in the organization. Further, OPM has  recognized the importance of communicating the overall rating  distributions and performance payout averages through its guidance for  certifying agencies’ SES systems, and factors it into certification decisions.  OPM asks agencies to brief their SES members on the results of the  completed appraisal process to make sure that the dynamics of the general  distribution of ratings and accompanying rewards are fully understood.  The results of the OPM survey of senior executives show that the  communication of overall performance appraisal results is not widely  practiced throughout the government. Specifically, 65 percent of  respondents said that they were not given a summary of their agency’s SES  performance ratings, bonuses, and pay adjustments.
The selected agencies communicated the aggregate results in varying  ways. For example, Treasury and DOD posted the aggregate rating, bonus,  and pay adjustment distributions for senior executives on their Web sites  with comparison of data across previous fiscal years. In communicating  the results of the most recent appraisal cycle, NRC sent an e-mail to all  senior executives sharing the percentage of executives at each rating level  and the percentages receiving bonuses and pay adjustments as well as the  average dollar amounts. According to an NRC official, the agency  periodically holds agencywide “all hands” SES meetings where the results  of the appraisal cycle, among other topics, are communicated to  executives.
Similarly, the Deputy Secretary of DOE provides a memo to all senior  executives summarizing the percentage of executives at the top two rating  levels and the average bonus and pay adjustment amounts. DOE also  includes governmentwide results as reported by OPM as a point of  comparison. Further, in that memo, the Deputy Secretary stated his  concern with the negligible difference in bonuses and pay adjustments  among executives receiving the top two rating levels and stressed the  importance of making meaningful distinctions in the allocation of  compensation tied to performance ratings in the upcoming appraisal cycle.
While USAID shares an individual’s appraisal results with that executive,  agency officials said that they do not communicate aggregate results to all  senior executives. Communicating an executive’s individual rating  conveys information about how well the executive has performed against  the expectations in the performance plan, but is not sufficient to provide a  clear picture of how the executive’s performance compares with that of  other executives in the agency. Further, USAID communicated to all SES  members the pay adjustment distributions in ranges by rating level, but not  the aggregate results showing the percentage of executives receiving the  pay adjustments in total or by rating level. There are opportunities for  further refinements in how the aggregate appraisal results are  communicated to all senior executives.
Mr. Chairman, Senator Voinovich, and Members of the Subcommittee, this  completes my prepared statement. I would be pleased to respond to any  questions that you may have.
section_title: Contacts and Acknowledgments
paragraphs: For further information regarding this statement, please contact   J. Christopher Mihm, Managing Director, Strategic Issues, at (202) 512- 6806 or mihmj@gao.gov or Robert N. Goldenkoff, Director, Strategic  Issues, at (202) 512-6806 or goldenkoffr@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 include Belva Martin, Assistant Director; Amber Edwards;  Janice Latimer; Meredith Moore; Mary Robison; Sabrina Streagle; and Greg  Wilmoth.
section_title: Appendix I: Background on the Senior Executive Performance-Based Pay System and Certification Criteria
paragraphs: In November 2003, Congress authorized a new performance-based pay  system for members of the Senior Executive Service (SES). With the  performance-based pay system, senior executives are to no longer receive  annual across-the-board or locality pay adjustments. Agencies are to base  pay adjustments for senior executives on individual performance and  contributions to the agency’s performance by considering the individual’s  accomplishments and such things as unique skills, qualifications, or  competencies of the individual and the individual’s significance to the  agency’s mission and performance, as well as the individual’s current  responsibilities. The system, which took effect in January 2004, also  replaced the six SES pay levels with a single, open-range pay band and  raised the cap on base pay and total compensation. For 2008, the caps are  $158,500 for base pay (Level III of the Executive Schedule) with a senior  executive’s total compensation not to exceed $191,300 (Level I of the  Executive Schedule). If an agency’s senior executive performance  appraisal system is certified by the Office of Personnel Management  (OPM) and the Office of Management and Budget (OMB) concurs, the caps  are increased to $172,200 for base pay (Level II of the Executive Schedule)  and $221,100 for total compensation (the total annual compensation  payable to the Vice President).
To qualify for senior executive pay flexibilities, agencies’ performance  appraisal systems are evaluated against nine certification criteria and any  additional information that OPM and OMB may require to make  determinations regarding certification. As shown in table 3, the  certification criteria jointly developed by OPM and OMB 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 agency’s mission, goals, and objectives.
section_title: Appendix II: Highlights of Selected GAO Products
paragraphs: Appendix II: Highlights of Selected GAO  Products This is a work of the U.S. government and is not subject to copyright protection in the  United States. It may be reproduced and distributed in its entirety without further  permission from GAO. However, because this work may contain copyrighted images or  other material, permission from the copyright holder may be necessary if you wish to  reproduce this material separately.