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

Letter

Factoring Organizational Performance into Senior Executive Performance Appraisal Decisions

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.

Making Meaningful Distinctions in Senior Executive Performance

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.

Building Safeguards into Senior Executive Performance Appraisal and Pay Systems

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.

Contacts and Acknowledgments

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.

Appendix I: Background on the Senior Executive Performance-Based Pay System and Certification Criteria

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.

Appendix II: Highlights of Selected GAO Products

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.