Human Capital: Aligning Senior Executives' Performance with Organizational Results Is an Important Step Toward Governmentwide Transformation
Released: 2006-09-26T00:00:00

Letter

The Regulatory Structure of the Senior Executive Performance Management System Helps Link Executives’ Performance to Organizational Results

Overall, the regulations that OPM developed to administer a performance- based pay system for senior executives serve as a substantive and positive step for agencies in holding senior executives accountable for their performance and contributions to organizational success. The new senior executive pay system raises the cap on base pay and total compensation. For 2006, the caps are $152,000 for base pay (Level III of the Executive Schedule) with a senior executive’s total compensation not to exceed $183,500 (Level I of the Executive Schedule). If an agency’s senior executive performance management system is certified by OPM and OMB concurs, the caps are increased to $165,200 for base pay (Level II of the Executive Schedule) and $212,100 for total compensation (the total annual compensation payable to the Vice President).

To qualify for these flexibilities, agencies’ performance management systems need to meet nine specified certification criteria, including demonstrating that the systems align individual performance expectations with the mission and goals of the organization and that its appraisal system as designed and applied makes meaningful distinctions in performance.

To receive a full 2-calendar-year certification, an agency must provide documentation that its senior executive performance management system meets all nine of the criteria. Otherwise, agencies can meet four of nine criteria and demonstrate that their system in design meets the remaining certification criteria to receive 1-year provisional certification and use the higher pay rates. Agencies with 1-year provisional certification must reapply annually, and agencies with full certification must reapply every 2 years. Those agencies with more than one performance management system for their senior executive employees are to certify each system separately.

The certification criteria are framed as broad principles designed to serve as guidelines to position agencies to use their performance management system(s) strategically to support the development of a strong performance culture and the attainment of the agency’s mission, goals, and objectives. The certification criteria are generally consistent with our body of work identifying key practices for effective performance management. Specifically, we identified key practices, including aligning individual performance expectations with organizational goals, linking pay to individual performance, and making meaningful distinctions in performance, that collectively create a line of sight between an individual’s performance and an organization’s success. These practices are reflected in the final certification criteria.

Key aspects of the OPM certification criteria, as outlined in the regulations, are as follows: (1) Alignment: Individual performance expectations must be linked to or derived from the agency’s mission, strategic goals, program/policy objectives, and/or annual performance plan. (2) Consultation: Individual performance expectations are developed with senior employee involvement and must be communicated at the beginning of the appraisal cycle. (3) Results: Individual expectations describe performance that is measurable, demonstrable, or observable, focusing on organizational outputs and outcomes, policy/program objectives, milestones, etc. (4) Balance: Individual performance expectations must include measures of results, employee and customer/stakeholder satisfaction, and/or competencies or behaviors that contribute to outstanding performance. (5) Assessments and Guidelines: 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. (6) Oversight: 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. (7) Accountability: 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. (8) Performance Differentiation: Among other provisions, the agency must provide for at least one rating level above Fully Successful (must include an Outstanding level), and in the application of those ratings, make meaningful distinctions among executives based on their relative performance. (9) Pay Differentiation: The agency should be able to demonstrate that the largest pay adjustments and/or highest pay levels (base and performance awards) 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.

In commenting on OPM’s draft regulations, we included suggestions intended to help agencies broaden the criteria to reinforce cultures that are results oriented, customer focused, and collaborative in nature. For example, we suggested that OPM require agencies to have their senior executives identify specific programmatic crosscutting, external, and partnership-oriented goals or objectives in their individual performance plans to help foster the necessary collaboration, interaction, and teamwork to achieve results.

Further, based on our previous testimony that performance management processes need to assure reasonable transparency, we noted the new performance management system should have adequate safeguards to ensure fairness and guard against abuse. Specifically, we suggested that OPM require agencies to build in safeguards as part of their senior executive performance management systems when linking pay to performance. For example, communicating the overall results of the performance management decisions to the senior executives, while protecting individual confidentiality, could help enhance the transparency of the performance management process. We also recognized that scalability needs to be considered, and that small agencies might face difficulties communicating overall results of the performance management process while protecting the confidentiality of the fewer numbers of senior executives. In response, OPM changed some aspects of its criteria by incorporating these suggestions into the interim final regulations.

The Process for Certifying Agencies’ Submissions

Agencies can submit their applications to OPM for certification anytime during the year. If fully certified, the certification is good for the remainder of the calendar year in which the agency applied, as well as all of the following calendar year. If provisionally certified, an agency’s certification is only good for the calendar year in which it applied. For example, if an agency is provisionally certified in October 2005, its certification would expire in December 2005. To ensure the agency’s submission is complete, the agency’s OPM contact—the Human Capital Officer (HCO)—first verifies that the application contains the required materials and documents. If complete, the HCO sends copies to the two OPM divisions responsible for reviewing the application, the Human Capital Leadership and Merit System Accountability (HCLMSA) division and the Strategic Human Resources Policy (SHRP) division, and an additional copy to OMB. An agency’s submission is reviewed independently by representatives within HCLMSA and SHRP in an attempt to bring different organizational perspectives to the review.

A submission is reviewed against the nine certification criteria, but each review team has its own method for analyzing the application. After an initial examination, the reviewers from HCLMSA and SHRP hold an informal meeting to discuss the submission. The reviewers meet again in a formal panel after a more thorough review, and this time they are joined by the HCO. This panel decides whether they have enough information to reach a certification decision about the agency. If the panel concludes there is not enough information to reach a decision, the HCO will request that the agency provide any missing or additional supporting information. If the panel decides there is sufficient information to reach a decision, it will either certify or reject the application.

When an application is rejected, the HCO works with the agency to help modify its appraisal system so that it meets the criteria. If the application is approved, the HCO contacts OMB for concurrence. OMB uses the same nine criteria to evaluate agency applications, but primarily focuses on measures of agency performance. If OMB concurrence is not achieved, the HCO works with the agency to address OMB’s concerns until resolution is reached. Once OMB concurs, the Director of OPM certifies the agency’s appraisal system and the HCO provides additional comments to the agency on their system and identifies any improvement needs. For example, these comments may direct the agency to focus more on making meaningful distinctions in performance.

Agencies’ Experience in Implementing the Senior Executive Pay System Highlights Areas Where Improvements Might be Needed

In our ongoing work on OPM’s capacity to lead and implement human capital reform, we asked agency chief human capital officers (CHCO) and human resource (HR) directors to describe their experiences with OPM’s administration of the senior executive pay-for-performance certification process. As the Comptroller General testified before this Subcommittee in June 2006, we heard a number of concerns from agencies regarding OPM’s ability to communicate expectations, guidance, and deadlines to agencies in a clear and consistent manner. When the senior executive certification process began in 2004, OPM provided agencies with limited guidance for implementing the new regulations. OPM’s initial guidance consisted of a list of documents required for provisional and full certification and a sample cover letter to accompany each application. The lack of more specific guidance created confusion as agencies attempted to interpret the broadly defined regulatory criteria and adjust to the requirements for certification. Officials at a majority of the CHCO Council agencies told us they did not have enough guidance to properly prepare for certification. As a result, agencies did not fully understand what was required in the regulations to receive certification.

For example, one official noted that while OPM tries to point agencies in the right direction, it will not give agencies discrete requirements. This leads to uncertainty about what agencies must and should demonstrate to OPM. Some CHCOs and HR directors also told us that, in some cases, OPM changed expectations and requirements midstream with little notice or explanation. However, OPM explains that it intentionally allowed some ambiguity in the regulations for the new senior executive appraisal system, in an attempt to provide agencies with management flexibilities. A senior OPM official said OPM did not provide agencies with “best practices” examples because OPM did not want agencies to think there was only one “right” way to get certified.

Agencies also indicated that because OPM did not issue guidance for calendar year 2006 submissions until January 5, 2006, some were unable to deliver their submissions to OPM before the beginning of the calendar year. Further, OPM clarified this guidance in a January 30, 2006, memorandum to agencies, telling agencies that senior executive performance appraisal systems would not be certified for calendar year 2006 if the performance plans did not hold senior executives accountable for achieving measurable business outcomes. As a result, agencies had to revise their submissions, where necessary, to meet OPM’s additional requirements.

Some agencies indicated that OPM’s late issuance of guidance also created an uneven playing field among agencies, as those that chose to wait until OPM issued guidance before applying for certification were unable to give their senior executives higher pay, while those who did not wait got certified sooner. OPM officials we spoke with about this agreed that they need to be able to provide clear and consistent guidance to agencies and said they are working to improve this. Further, they said their evaluation of agencies’ submissions is evolving as their understanding of the senior executive certification criteria is increasing.

OPM’s Role in Evaluating and Monitoring the Pay- for-Performance System

The regulations include several positive internal checks and balances that should help maintain the rigorous application of the new senior executive pay system. As I noted earlier, agencies granted full certification are to have their systems renewed for an additional 2 calendar years and agencies granted provisional certification are to reapply for certification after 1 calendar year in order to continue setting the rate of basic pay for senior executives at the higher level. In addition, OPM can suspend certification at any time during the certification period if it determines, with OMB concurrence, that the agency’s system is not in compliance with the certification criteria. OPM’s regulations also require review of each senior executive’s rating by a performance review board appointed by the agency head. As noted above, the regulations also require oversight of the performance appraisal system by the agency head who must certify that the system makes meaningful distinctions in relative performance.

According to OPM data, 26 performance management systems at 24 agencies were certified during calendar year 2006. Of these 26, only the Department of Labor’s system received full certification. As of September 19, 2006, the remaining 25 systems received only provisional certification. These findings are not surprising. In our April 2005 testimony before this Subcommittee, we stated that a number of agencies would be challenged in the short term to provide the necessary performance data on their senior executives in order to receive full certification or to maintain their certification (agencies must provide 2 years of performance rating and bonus data showing that meaningful distinctions in senior executive performance were made to qualify). Other factors might also be at work. For example, a number of agencies have told us that the certification process is burdensome. One agency said that OPM’s requirements for the certification of a submission are time intensive, laborious, and can disrupt an agency’s recruitment and retention efforts.

As we also noted at the April 2005 hearing, OPM will need to carefully monitor the implementation of agencies’ performance management systems, especially those that have provisional certification. This is because, as I have stated earlier, agencies with provisional certification can still receive the flexibilities of the new pay system, even though they do not meet all of OPM’s certification requirements. In other words, agencies can receive the benefits of the new pay-for-performance system without meeting all of its requirements and safeguards. We believe that, going forward, it will be important for OPM to continue to monitor the certification process, determine whether any obstacles are impeding agencies from receiving full certification, and take appropriate measures to address them. These actions will help ensure that agencies continue to make substantive progress toward modernized performance management systems, and that provisional certifications do not become the norm.

Once agencies have provisional or full certification, OPM monitors senior executive performance appraisal systems by measuring the distributions of agencies’ performance ratings and pay. This information helps OPM determine if agencies are making meaningful distinctions among the performance of their senior executives. Such distinctions are important because effective performance management requires the organization’s leadership to make meaningful distinctions between acceptable and outstanding performance and appropriately reward those who perform at the highest level.

In its Report on Senior Executive Pay for Performance for Fiscal Year 2005, OPM stated that the data indicate that federal agencies are taking seriously the requirement to develop rigorous appraisal systems and to make meaningful distinctions in performance ratings and pay. All reporting agencies have moved away from pass/fail appraisal systems and now have at least one performance level above “fully successful.” In 2005, 43 percent of career SES governmentwide were rated at the highest performance level, compared to 75 percent in 2003 prior to the implementation of the SES pay-for-performance system. Further, OPM reported for fiscal year 2005 that the percentage of SES rated at the highest performance level declined 16 percent from the prior year. OPM also reported that the largest increases in salary went to SES rated at the highest performance level. Although SES pay and performance award amounts vary by agency based on factors such as compensation strategy, funding, and agency performance levels, OPM believes these general trends suggest a further refinement may be occurring in the process of distinguishing outstanding performers.

Concluding Remarks

As we have said in our prior reports and testimonies, senior executives need to lead the way in transforming their agencies’ cultures to be more results oriented, customer focused, and collaborative in nature. Credible performance management systems, specifically those that (1) align individual, team, and unit performance to organizational results; (2) contain built-in safeguards; and (3) are effectively implemented, can help manage and direct this process.

The pay-for-performance system for the government’s senior executives that I have discussed today is an important milestone on the march toward modern compensation systems that are more market based and performance oriented. Although OPM and agencies have encountered various challenges in implementing the system, such challenges are not surprising given the cultural shift that the new system represents. Moreover, just 2 years have passed since OPM issued its regulations for certifying agencies’ pay-for-performance systems, and some growing pains are to be expected given agencies’ lack of experience with performance management systems that meet OPM’s requirements. Moving forward, what will be important is how OPM works with agencies to provide the tools and resources they need to design and implement performance management systems that meet the certification criteria in as streamlined a fashion as possible.

The lessons learned in implementing the senior executive pay-for- performance system will be critical to modernizing the performance management systems under which other federal employees are compensated. In particular, establishing an explicit line of sight between individual, team, and unit performance and organizational success, as well highlighting opportunities to improve guidance, communications, transparency, and safeguards, will serve the government well moving forward. We stand ready to assist OPM and Congress in exploring and implementing these critical human capital reforms.

Chairman Voinovich, Senator Akaka, and Members of the Subcommittee, this completes my prepared statement. I would be pleased to respond to any questions that you may have.

Contact and Acknowledgments

For further information regarding this statement, please contact Brenda S. Farrell, Acting Director, Strategic Issues, at (202) 512-6806 or farrellb@gao.gov. Individuals making key contributions to this statement include Carole J. Cimitile, William Colvin, Laura Miller Craig, William Doherty, Robert Goldenkoff, Janice Latimer, Trina Lewis, Jeffrey McDermott, and Michael Volpe.

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.