Retention Allowances: Usage and Compliance Vary Among Federal Agencies
Released: 1996-01-03T00:00:00

Letter

Background

The retention allowance authority was established by section 208 of the Federal Employees Pay Comparability Act of 1990 (FEPCA). The act required OPM to issue governmentwide regulations on retention allowances, which it did on March 28, 1991. The act and OPM’s implementing regulations require agencies to document that (1) each allowance paid is based on a determination that unusually high or unique qualifications of the employee or a special need of the agency for the employee’s services makes it essential to retain the employee and (2) in the absence of such an allowance, the employee would be likely to leave federal employment. The agency must also document the extent to which the employee’s departure would affect the agency’s ability to carry out an activity or perform a function deemed essential to the agency’s mission.

The regulations also require agencies to prepare retention allowance plans. The plans must include (1) criteria that must be met or considered in authorizing allowances, including criteria for determining the size of an allowance; (2) a designation of officials with authority to review and approve payment of retention allowances; (3) procedures for paying allowances; and (4) documentation and recordkeeping requirements sufficient to allow reconstruction of the actions taken to award the allowance.

Agencies are permitted to pay employees allowances of up to an additional 25 percent of their basic pay. An agency may continue to pay a retention allowance as long as the conditions giving rise to the original determination to pay the allowance still exist, but it must conduct a formal review at least annually to determine whether the retention allowance is still warranted and document this review by means of an authorized official’s written certification.

Scope and Methodology

To identify which agencies gave the largest number of retention allowances and the highest amounts awarded, as well as to determine the total value of retention allowances and the number of SES employees awarded allowances, we reviewed OPM retention allowance reports for fiscal years 1991 through 1994, which were derived from OPM’s Central Personnel Data File (CPDF). We selected the five agencies that the data showed had the most allowances from fiscal years 1991 through 1994—DOD, Ex-Im Bank, SEC, DOE, and USDA.

To assess whether agencies were preparing retention allowance plans in accordance with OPM regulations, we obtained and reviewed agencies’ retention allowance plans and compared the provisions and other information in these documents with requirements in OPM retention allowance regulations. In addition, we interviewed agency officials about their plans. To perform a limited review of agencies’ retention allowance awards, we interviewed agency officials about their award procedures and reviewed individual retention allowance justification documents for 43 selected awards at the five agencies. We did not evaluate the appropriateness of individual allowance amounts or the proportion of agencies’ employees who received allowances. The 43 awards, although randomly selected from groups of retention allowances that were stratified based on grade levels, are not projectable because we were unable to review sufficient numbers of awards at each agency due to time constraints.

To determine the extent of OPM’s oversight efforts, we interviewed OPM program and oversight officials and reviewed documentation they provided, including reports statistically analyzing retention allowances by agency. We also informed OPM’s program and oversight officials of our preliminary compliance concerns at Ex-Im Bank. Subsequently, OPM officials decided to conduct an in-depth review of Ex-Im Bank’s use of retention allowances and recruitment bonus programs.

We provided a draft of this report for comment to the heads of DOD, DOE, Ex-Im Bank, OPM, SEC, and USDA. Their comments are summarized on pages 12 through 14. Written comments from DOD, Ex-Im Bank, and SEC are reproduced in appendixes I through III, respectively.

Our review was conducted in the agencies’ Washington, D.C., headquarters offices from November 1994 to September 1995 in accordance with generally accepted government auditing standards.

Retention Allowances Were Generally Awarded to a Limited Number of Employees

As of September 30, 1994, 354 employees (excluding HHS employees), or about 0.01 percent of the approximately 2.9 million federal civilian employees, were receiving retention allowances. Of these allowances, 334 (94 percent) had been awarded by the five agencies we reviewed. The number and amount of retention allowances awarded at the five agencies in fiscal years 1991 through 1994 are presented in table 1. As shown in the table, the annualized value of retention allowances for these agencies increased from approximately $21,000 in fiscal year 1991 to about $2.8 million in fiscal year 1994.

The average allowance at the five agencies during fiscal years 1991 through 1994 was $7,789 per employee. In fiscal year 1994, the highest allowance of $28,925 was awarded by DOD, and the average amounts awarded per agency varied from $4,989 at Ex-Im Bank to $14,928 at DOE. In addition, five retention allowances were awarded to SES employees in four of the five agencies during fiscal years 1991 through 1994. Table 2 presents the average and highest amounts for retention allowances awarded by each of the five agencies in fiscal years 1991 through 1994.

Among the five agencies, Ex-Im Bank awarded allowances to the largest proportion of its employees. Ex-Im Bank awarded allowances to 21.7 percent of its 462 employees during fiscal year 1994, while none of the other agencies awarded allowances to more than 0.3 percent of their employees. Table 3 presents the percentage of employees receiving allowances at each of the five agencies during fiscal year 1994.

When Awarding Allowances, Ex-Im Bank Did Not Appear to Determine That an Employee Was Likely to Leave, Absent an Allowance

Ex-Im Bank did not appear to comply with the statutory requirement that it determine that the employee was likely to leave if the employee did not receive an allowance, which could result in unnecessarily spending funds for allowances. None of the seven Ex-Im Bank allowances we reviewed contained information that indicated the employee was considering leaving the agency. Bank officials stated that approximately 90 percent of the 100 allowances awarded were initiated based on management’s recognition of the employees’ special talents and their attractiveness to other employers, rather than on more definitive information, such as whether the employees were considering other job offers.

Ex-Im Bank officials said that high level performance is a major criterion for selecting award recipients; that is, allowance recipients are generally selected from those employees who have outstanding performance ratings because this group includes those most necessary to the Bank’s successful accomplishment of its mission. Officials said that they time the awards of new retention allowances and the recertification of existing allowances to coincide with the results of their performance appraisal process. Ex-Im Bank officials noted, however, that there is no direct linkage between a performance rating and a retention allowance. In justifying the use of performance ratings in awarding retention allowances, Ex-Im Bank officials said that high performing employees have been found to be particularly attractive to the private sector and, therefore, more likely to have opportunities to leave the agency.

In 1992, prior to initiating its retention allowance program, Ex-Im Bank requested special pay rate authorities from OPM to pay certain of its employees more money. Ex-Im Bank officials said that OPM denied their request and encouraged them to consider other remedies to their staffing problems, including retention allowances. OPM officials told us that they had discussed various pay and nonpay flexibilities, including retention allowances, with Ex-Im Bank officials. OPM officials also provided us with copies of the governmentwide guidance that they had provided to Ex-Im Bank. They noted that, while they encourage agencies to use available pay flexibilities, agencies need to follow established regulations—for example, determining whether the employee was likely to leave without the retention allowance and documenting the extent to which the employee’s departure would affect the agency’s ability to carry out its mission. OPM officials said that the fact that an employee had a high performance rating is not sufficient to meet these requirements.

We discussed with OPM officials our concern that, in the seven cases we reviewed, Ex-Im Bank did not appear to determine that the employee was likely to leave if the employee did not receive an allowance. After these discussions and in furtherance of its oversight responsibility, OPM initiated an in-depth review of Ex-Im Bank’s use of pay flexibilities, including retention allowances and recruitment bonuses. Because of OPM’s oversight role and its decision to review a larger number of Ex-Im Bank cases to pursue the compliance issue on a systemic basis, we decided to forgo further work on the issue.

Three Agencies’ Plans Failed to Include Required Rationale for Allowance Amount

While the five agencies’ retention allowance plans included most provisions required by OPM regulations, including designating officials with authority to review and approve allowances and providing criteria for selecting allowance recipients, DOD, Ex-Im Bank, and SEC did not include their rationales for determining the amount of the retention allowances in any of their plans. Without the documented rationale, it is impossible for an approving official to readily assess the appropriateness of the proposed award amount and to ensure that the agency is not awarding higher amounts than are necessary to retain the employee.

A DOD wage administration specialist told us that a specific DOD-wide rationale was not included in its plan because DOD wanted to give the individual approving officials flexibility in awarding allowances, including the authority to determine the amounts of retention allowances. The official said, however, that a planned revision of the plan will indicate that appointing officials should apply criteria for determining retention allowance amounts consistent with OPM’s regulations. SEC said that, as a small agency, it is able to handle the retention allowance process on a case-by-case basis and thus had not seen a need to formalize criteria for determining the size of an allowance. Both the Vice President for Management Services and a personnel specialist at Ex-Im Bank said that the omission of a rationale in their retention allowance plan was an oversight. Both individuals said that the agency wants the plan to comply with all of OPM’s regulations and that the plan would be revised accordingly.

Agencies Have Varying Views About OPM’s Regulatory Requirements for Recertification of Retention Allowances

OPM regulations do not require written recertification when an employee receives an increase in basic pay. However, the agencies we reviewed generally believed that retention allowances should be recertified when their employees received significant increases in basic pay. For minimal increases, such as government-wide pay raises, DOD, DOE, Ex-Im Bank, and USDA do not specifically require recertification, thereby permitting the allowances to continue at the same percentage rates, recognizing that the allowances increase in amounts proportionate to the increases in employees’ basic pay. Ex-Im Bank said that it also allows for automatic recertification for promotions at lower grade levels. Conversely, SEC believed all allowances should be recertified whenever basic pay increases, regardless of the size of the increase.

A USDA official told us that, while most approving officials recertify allowances when employees are promoted, some officials have interpreted OPM’s regulations as allowing the allowances to continue at the same percentage rate when any basic pay increase occurs, including those due to promotions. Similarly, DOD officials said that they believed most approving officials recertify promoted employees’ allowances, but that they could not be sure that some officials do not automatically increase allowances in proportion to promotions or other significant pay increases. DOE and Ex-Im Bank officials said that they believed that promotion to a new position with significantly higher pay results in changes to the conditions that justified the allowance and that the regulations therefore require that a new decision be made regarding the retention allowance.

An SEC personnel official told us that he believed a recertification is required for any increase to an employee’s allowance. He added that it would be unlikely for SEC to increase the value of an allowance when the basic pay rates increased, because the initial award established an amount that the employee in effect agreed was sufficient to retain his/her services. Thus, it would be more likely that the allowance would be decreased or terminated when the employee’s basic pay was increased.

OPM Compensation Administration Division officials said that OPM regulations do not require that the allowance percentage be changed when an employee receives an increase in his/her basic pay. OPM officials pointed out that the law (5 U.S.C. 5754(b)) requires that a retention allowance be stated as a percentage of the rate of basic pay and that this supports the notion that it may be appropriate to adjust retention allowances automatically based on changes in the rate of basic pay. One of the OPM officials told us that OPM intended to allow agencies flexibility in their approaches to these increases, including not necessarily requiring recertification, but that OPM believed that agencies would likely review employees’ allowances when employees received significant increases in basic pay.

OPM noted that, as part of their responsibility for administering the program, agencies are expected to reduce or terminate a retention allowance whenever they become aware that the original set of conditions justifying the allowance have changed to the extent that the approved allowance is no longer warranted. Further, OPM believes that agency evaluations of changes in a variety of related factors—for example, the employee’s rate of basic pay, an agency’s continuing need for the services of the employee, the employee’s performance, and staffing and labor market factors—like the original determinations for granting retention allowances, are matters of judgment that cannot easily be reduced to a precise formula. Moreover, changes in a single factor, such as an increase in the rate of basic pay, do not necessarily mean that a full review and a new written certification are necessary. OPM believes that approving officials need to weigh all relevant factors and that they are in the best position to determine whether and when a formal review or changes are necessary. In any event, OPM’s regulations require agencies to review each retention allowance annually and to certify in writing whether the payment is still warranted.

OPM’s Oversight of the Retention Allowance Program

In carrying out its oversight responsibility, OPM has relied on agencies to report retention allowance activity to OPM’s CPDF. Most federal agencies report specific personnel-related information on the awarding of retention allowances, including the recipient’s name, pay plan, performance rating, basic pay rate, position, and the value of the allowance. OPM has used this information to produce quarterly reports showing active retention allowance data governmentwide. To monitor the program, OPM has done statistical analyses of the agency-provided information, which included determining whether the allowance exceeded the 25-percent limitation and whether the allowance—when added to the total compensation received by the employee during the calendar year—exceeded the rate payable for level I of the Executive Schedule, the current statutory maximum pay rate. OPM officials said that they had not identified any noncompliance using these analyses.

Until March 1994, OPM also conducted periodic longitudinal studies of FEPCA’s incentive pay programs, including retention allowances, to examine both OPM’s and agencies’ implementation of the act. The studies, which began in 1991, resulted in three reports that addressed such issues as statistical comparisons, by sex and race, of retention allowances awarded. OPM officials said that they terminated these studies in fiscal year 1995 because they were not finding any significant problems and because of budget concerns. However, OPM said that it conducted on-site compliance reviews of FEPCA actions at randomly selected installations during this same period.

As previously noted, we discussed with OPM our concerns about Ex-Im Bank’s retention allowance award process, and OPM subsequently decided to conduct an in-depth review of Ex-Im Bank’s use of retention allowances.

Conclusions

Retention allowances were awarded to a limited number of employees governmentwide. With the exception of the Ex-Im Bank, the proportion of agencies’ employees who received allowances was low.

Ex-Im Bank did not appear to comply with a statutory requirement in awarding retention allowances, and Ex-Im Bank’s, DOD’s, and SEC’s retention allowance plans did not satisfy an OPM planning requirement. Also, OPM’s regulations did not address whether agencies should review and/or recertify allowances when employees receive significant pay increases during the year.

Ex-Im Bank appeared to award allowances without determining that employees would be likely to leave in the absence of allowances, a practice which could result in unnecessarily spending allowance funds. OPM, as the agency responsible for governmentwide oversight of retention allowances, is conducting a review of compensation practices at Ex-Im Bank that should enable it to determine whether Ex-Im Bank needs to more adequately address this issue. Accordingly, we decided to forgo further work on the issue.

The retention allowance plans for DOD, Ex-Im Bank, and SEC did not include criteria for determining the amounts of allowances. Without a documented agencywide rationale, lower level managers did not have guidance for establishing the amounts of individual allowances. In addition, since the individual award justifications developed by these managers were not required to include the rationale for the award amount, and thus frequently did not, agency officials and others reviewing the awards lacked sufficient information with which to assess the appropriateness of the amounts awarded. Thus, the agencies could not ensure that the amounts awarded were not in excess of amounts necessary to retain the employee.

OPM’s regulations do not require that allowances be reviewed or recertified in writing whenever there are significant increases to employees’ basic pay during the year. As a result, agencies may not be reviewing or recertifying allowances in conjunction with increases to employees’ basic pay in circumstances where such increases might affect the conditions justifying the allowances. In such circumstances, a review might make a significant difference.

Recommendations

We recommend that the Chairman of Ex-Im Bank, the Secretary of Defense, and the Chairman of SEC include the required criteria for determining the value of retention allowances in their retention allowance plans.

We recommend that the Director of OPM take action to ensure that retention allowance regulations are revised to explicitly address whether, and if so when, an agency should review or recertify the amount of an allowance as a result of basic pay rate increases or other relevant changes in the conditions justifying the allowance.

Agency Comments and Our Evaluation

DOD, DOE, Ex-Im Bank, OPM, SEC, and USDA provided comments on a draft of this report; these comments are summarized below. DOD, Ex-Im Bank, and SEC provided written comments, which are included in their entirety in appendixes I through III, respectively. We received oral comments from the Deputy Assistant Secretary for Human Resources, DOE, on September 25, 1995; the Chief of the Compensation Administration Division, OPM, on September 26, 1995; and the Director of Personnel, USDA, on September 26, 1995.

DOD, DOE, SEC, and USDA concurred with the findings and conclusions in our report. In addition, DOD and SEC agreed to implement our recommendation to them and suggested some technical changes, which we have incorporated in the report. OPM offered a proposed revision to our recommendation that OPM revise its regulations to clearly define whether, and if so when, reviews or recertifications should be performed. OPM also provided technical comments, which we incorporated where appropriate.

Ex-Im Bank granted that it may have “cut some procedural corners” but distinguished this from substance by asserting that its actions were consistent with legislative intent and regulatory guidelines as applied to its particular human resources requirements. Ex-Im Bank also expressed concern that we believed their rationales for determining allowance amounts were suspect or in some way unprincipled because the rationales were insufficiently documented. Ex-Im Bank did concur with our recommendation that it incorporate criteria for determining the amount of an allowance in its plan.

While we agree that a failure to document retention allowance decisions—including the reasoning behind those decisions—is a procedural deficiency, we believe the Bank’s apparent failure to systematically determine that, in the absence of an allowance, an employee would be likely to leave would, if confirmed, be a deficiency of substance. This is the reason we decided to inform OPM of our concerns regarding this issue. Further, both the act and OPM regulations clearly require that each allowance paid should include a determination that, in the absence of such an allowance, the employee would be likely to leave. We note that the Ex-Im Bank’s First Vice President and Vice Chairman, in commenting on a draft of this report, confirmed that he did not typically base his award decisions on whether there might be an actual or imminent competing offer of employment. However, we neither state nor intend to imply in the report that Ex-Im Bank’s rationales for allowance amounts were suspect or unprincipled.

To avoid the misinterpretation that we viewed Ex-Im Bank’s apparent noncompliance as a procedural rather than a substantive deficiency, we eliminated the wording in our draft report that could imply that all five agencies generally complied with federal requirements. We now make it clear that our review showed that Ex-Im Bank did not appear to comply with the “likely to leave” requirement, but we decided to forgo further work when OPM decided to start an in-depth review of Ex-Im Bank’s award decisions. Our draft wording that the agencies generally complied with the requirements was not intended to excuse the Ex-Im Bank’s apparent noncompliance with that specific requirement.

OPM would prefer that we merely recommend that it consider revising the regulations. We continue to believe, however, that, given the agencies’ varying interpretations of OPM’s regulations, OPM needs to explicitly address the issue of whether and when retention allowance reviews and recertifications, other than the current annual requirement, should be conducted. We did modify the draft recommendation, as OPM suggested, to include other reasons for reviewing allowances in addition to the basic one of a pay rate increase.

As arranged with your office, we plan no further distribution of this document until 14 days after the date of issuance unless you publicly announce its contents earlier. At that time, we will send copies of this report to the Chairmen and Ranking Minority Members of the Senate Committee on Governmental Affairs, the House Committee on Government Reform and Oversight, and the House Subcommittee on Civil Service; the Secretaries of Agriculture, Defense, and Energy; the Chairmen of Ex-Im Bank and SEC; and the Director of OPM; and will make copies available to other interested parties.

Major contributors to this report are listed in appendix IV. If you have any questions about this report, please call me at (202) 512-7680.

Comments From the Department of Defense

Comments From the Export-Import Bank

The following is GAO’s comment on Ex-Im Bank’s letter dated September 27, 1995.

GAO Comment

While we made most of the language changes proposed by Ex-Im Bank, we did not revise our report sections addressing allowance determinations. Our reasons for not revising the sections on determinations are addressed on page 13.

Comments From the Securities and Exchange Commission

Major Contributors to This Report

General Government Division, Washington, D.C.

Office of the General Counsel, Washington, D.C.

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