Delivering more than 210 billion pieces of mail each year, USPS has a mission vital to the nation's communications and commerce. To meet its statutory universal service obligation, which requires it to "serve as nearly as practicable the entire population of the United States," USPS must "provide prompt, reliable, and efficient services to patrons in all areas" and "render postal services to all communities." In selecting modes of transportation, USPS is required to "give highest consideration to the prompt and economical delivery of all mail." Although USPS is authorized by law to receive appropriations for reimbursement of public service costs incurred by it in providing a maximum degree of effective and regular postal service nationwide, in communities where post offices may not be deemed self-sustaining, USPS has neither requested nor received such appropriations since 1982. USPS receives only minimal appropriations for reimbursement for providing free mail for the blind and overseas voting, which USPS refers to as "revenue foregone," that, in fiscal year 2007, represented less than 0.2 percent of its total revenues. USPS generated 99.8 percent of its total revenues from products and services, with mail revenues accounting for the vast majority (94.8 percent of total revenues). However, USPS faces an increasingly competitive environment. As some communications and payments have migrated to electronic alternatives, including the Internet, First-Class Mail, which historically has covered most overhead costs, has declined in volume, and more declines are expected. According to USPS, "The projected decline of First-Class Mail impacts the Postal Service's ability to continue to finance the growing universal service network. This is the single greatest challenge facing the Postal Service." Although Standard Mail (primarily advertising) is USPS's largest class of mail and key growth product, it is more price sensitive. Standard Mail volume has recently declined in the wake of postal rate increases and the economic downturn, and its future prospects are unclear as advertising expenditures continue to shift to the Internet. In this regard, a joint USPS-mailer work group recently reported that "Standard Mail must be delivered in a timely and consistent manner to the end customer according to published standards, in order to remain a viable growth product for its users and the Postal Service, and to remain competitive with alternative advertising media." Standard Mail growth will be critical to offset rising costs, primarily rising compensation and benefits costs that have consistently represented nearly 80 percent of USPS's expenses. USPS has restrained cost growth in recent years, in part through automation and other productivity initiatives that helped reduce the number of career employees from a peak of nearly 800,000 in September 1999 to fewer than 670,000 in September 2007. However, as USPS has recognized, continued productivity gains are needed in the face of the changing mail mix, sustained and evolving competition, and a challenging economic environment. USPS has recognized that given its workforce costs, continued work hour reductions are necessary to achieve productivity gains. The 2006 postal reform act generally limits rate increases for most mail to an inflationary price cap. The reform act also abolished the statutory mandate to break even financially over time. As a result, USPS generally cannot address financial losses with above-inflation rate increases, which underscores the need to remain financially viable by sufficiently growing revenues, restraining costs, or both. However, USPS recently reported that fiscal year 2008 revenues have not been covering costs, which have grown faster than the price cap. The PFP program includes quantitative corporate and unit indicators of performance and individual performance elements, both of which are used to rate PFP participants. According to USPS, the PFP program places emphasis on performance indicators that are objective and measurable. To this end, target levels of performance, expressed in quantitative terms, are established for the corporate and unit indicators, and PFP participants receive higher ratings as higher targets are achieved. In fiscal year 2008, 12 corporate indicators apply to all PFP participants, including measures of timely mail delivery, productivity, revenue, and net income, among other things. A total of 53 unit indicators apply to selected groups of participants, such as groups of postmasters and managers at various mail processing facilities, depending on their responsibilities and spans of control. Some unit indicators apply to most participants, such as the indicator of total operating expenses. Other indicators apply to relatively few participants, such as indicators of international mail delivery, which apply exclusively to managers at USPS International Service Centers. Besides being rated on results for corporate and unit indicators, each PFP participant is rated on individual performance elements that vary depending on the participant group and, within some groups, are tailored to each participant. Some individual performance elements have target levels of performance defined by narrative standards that are centrally established by USPS. For example, EAS postmasters have two individual performance elements that are defined by narrative standards: (1) fiscal management and (2) leadership and communication. Alternatively, other individual performance elements may be selected from a predefined list and then defined more specifically with target performance levels, based on a discussion that involves the participant and the participant's rater. For example, some individual performance elements for a field operations manager must be selected from a list, which includes, among other things, operational productivity, the rate of scanning barcodes on mail pieces, and overtime usage. If an individual performance element involving operational productivity is selected, it is then defined with target performance levels for specific mail processing, delivery, maintenance, and customer service operations, depending on the responsibilities of the field operations manager. Corporate and unit indicators are weighted to reflect organizational priorities. More heavily weighted indicators play a larger role in determining the overall PFP rating, while less heavily weighted indicators play a smaller role. To the extent that indicator weights vary--which can be substantial, depending on the indicator and the participant's position-- the indicator makes a different contribution to the overall PFP rating and the resulting salary adjustments and any lump sum awards. USPS establishes 15 target performance levels for each corporate and unit indicator. As more challenging targets (i.e., higher levels of performance) are reached, the indicator increases the overall PFP rating and the associated PFP award. Thus, indicator targets create incentives for PFP participants to maximize results for each indicator. Targets for some indicators are based on actual results achieved for the current fiscal year (e.g., the percentage of a specified type of mail delivered on time), while others are based on year-to-year improvement (e.g., the reduction in formal equal employment opportunity complaints). In some cases, targets are based on the USPS budget. For example, unit indicator targets are defined for total operating expenses relative to the final budget. To the extent that operating expenses are reduced below the budgeted level, higher target levels are achieved. These targets can be adjusted by various levels of management throughout the fiscal year, depending on numerous factors, such as changes in USPS's overall financial condition, increases in fuel prices, changes in local mailing volumes, and unexpected local expenses, among other things. Corporate and unit indicators are measured against targets at various levels of geographic aggregation, depending on the indicator and the participant's group. For example, some corporate indicators are measured at the national level, such as indicators of productivity, revenue, and net income. Other indicators are measured at different geographic levels. For example, for a postmaster of a small post office, the unit's total operating expense indicator is defined as the total expenses of that post office. For a district executive, the unit operating expense indicator is defined as the total expenses of the entire district. In some instances, USPS permits "mitigation" adjustments to the data used to measure achievement against targets. Some individual mitigation adjustments are intended to take into account events that are outside the control of the participant, such as a fire that results in the temporary suspension of a post office's operations. Other mitigation adjustments are processed in batches for multiple units and participants, such as adjustments that were made after postal operations were disrupted by Hurricane Katrina. USPS has established a structured process for administering the PFP program. Each participant is assigned a rater, who is generally the participant's immediate supervisor. At the beginning of the fiscal year, the rater is required to discuss PFP indicators and targets with the participant, including goals for corporate and unit indicators and individual performance elements. During the year, a midyear PFP review is used for the participant to record accomplishments to date, and the rater meets with the participant to review progress toward PFP targets. At the end of the year, the participant records accomplishments, and the rater meets with the participant and rates the participant on individual performance elements. USPS then calculates the overall PFP rating for each participant based on the results of corporate and unit indicators and ratings for individual performance elements; this rating is used to determine adjustments to the participant's salary and any lump sum award. The overall PFP rating is used to determine salary increases and any lump sum awards based on separate schedules that apply to EAS and PCES participants. First, for each participant, an overall rating is calculated based on the weighted outcomes for corporate and unit indicators and individual performance elements. Since each indicator and individual performance element produces an outcome ranging from 1 to 15, the overall rating also ranges from 1 to 15. The rating is rounded to the nearest whole number for the purpose of determining the PFP award. For EAS participants, all PFP awards are in the form of percentage increases to their salaries. For fiscal year 2008, the PFP award can range from 0 to 12 percent of the EAS participant's salary, as shown in figure 1. For PCES executives, PFP awards take the form of salary increases and lump sum awards. Salary increases depend on the overall PFP rating, as well as each executive's current salary relative to the maximum of his or her salary range, as shown in table 1. However, no salary increases are converted to lump sum awards, as they may be for EAS participants. In addition to a salary increase, a PCES executive may receive a PFP lump sum award that is based on his or her overall rating. This lump sum award is paid as a percentage of the executive's salary, as shown in table 2, for individuals with an overall rating of 4 and above, which is considered to be a minimum threshold for a lump sum award. Average PFP awards as a percentage of salary for EAS and other non- PCES participants are shown in figure 2, from fiscal year 2004--the first year of the current PFP program for EAS participants--through fiscal year 2007. Average PFP awards for PCES participants are shown in figure 3, from fiscal year 2003--the first year of the current PFP program for PCES participants--through fiscal year 2007. Overall PFP ratings primarily depend on results for corporate and unit indicators related to USPS's strategic goals of increasing efficiency, improving service, and generating revenue. Collectively, these indicators are weighted so that they account for two-thirds (66 percent) of the PFP rating for the average PFP participant in fiscal year 2008 (see fig. 4). Figure 4 shows that for fiscal year 2008, results for efficiency-related indicators, which are corporate and unit indicators, such as USPS's overall productivity and total unit expenses, make up 27 percent of the PFP rating for the average participant. Results for service-related indicators, such as corporate and unit indicators for timely delivery of different types of mail, represent 22 percent of the average rating. Results for corporate and unit revenue-generation indicators, such as national and unit revenues, account for 17 percent of the average rating. An additional 10 percent of the rating consists of results for corporate and unit indicators related to USPS's strategic goal of creating a more customer-focused culture. The remaining 24 percent of the rating reflects the results for individual performance elements, such as oral communication and other quantitative indicators, some of which were tailored to the individual. USPS officials have stated that indicators are weighted to reflect their relative importance to accomplishing USPS's strategic goals, as well as their applicability to individual positions based on the individual's responsibilities and span of control. According to USPS, the PFP program thereby recognizes and rewards individual performance that improves corporate and unit performance, particularly in high-priority areas. Consistent with this approach, some indicators are more heavily weighted than others. Among efficiency-related indicators, two indicators make the largest contribution to the overall PFP rating: total unit expenses (16 percent of the overall rating) and national productivity (5.6 percent of the rating) (see fig. 5). The 22 other efficiency-related indicators account for 5 percent of the overall rating, in part because some of these indicators measure results for specific USPS operations and, thus, are applicable to relatively few PFP participants. However, these indicators can have a significant weight for the participants they apply to. Among service-related indicators, the 13 indicators measuring timely delivery of the various mail types account for 16.4 percent of the overall rating. The 10 other service- related indicators account for 5.4 percent of the rating. Among revenue- generation indicators, the two most heavily weighted indicators are unit retail revenue (e.g., revenue from individual pieces of mail deposited at a post office), which represents 7.7 percent of the overall rating, and national revenue, which represents 5.7 percent of the rating. Five other revenue-generation indicators account for 3.9 percent of the overall rating. The weight of PFP indicators varies considerably by participant group, based on the responsibilities and spans of control of various managerial and executive positions. For example, for the 14,754 full-time postmasters in EAS levels 11 through 16, who generally head small post offices, 33 percent of the overall PFP rating is based on the total unit expenses indicator (see fig. 6). In contrast, this indicator accounts for 12 percent of the rating for the 2,365 postmasters in EAS levels 21 through 26 (see fig. 7), who generally head larger post offices. The overall rating of postmasters in EAS levels 21 through 26 is more dependent on a variety of other indicators related to efficiency, timely mail delivery, and revenue generation. Additional examples of how indicator weights vary for participants in different positions include the following: The retail revenues indicator is most heavily weighted for upper-level EAS postmasters. This indicator accounts for 35 percent of the overall PFP rating for the 6,853 postmasters in EAS levels 18 through 20 and 28 percent of the rating for the 2,365 postmasters in EAS levels 21 through 26; it makes up 5.5 percent of the rating for the 14,754 postmasters in EAS levels 11 through 16 and does not factor into the overall PFP rating for the 1,126 part-time EAS postmasters of small post offices (i.e., Cost Ascertainment Grouping levels A through E). To put the use of this indicator into context, USPS is looking to generate revenues through postmaster and other employee outreach to households and small businesses and has multiple programs for outreach to small business customers to promote the convenience and value of postal services. Three indicators related to equal employment opportunity (EEO) account for 35 percent of the overall PFP rating for the 167 managers with responsibilities in this area. These indicators measure outcomes of EEO complaints, including the percentage of informal complaints that become formal complaints, the number of formal complaints, and the processing time for complaints that are mediated. These indicators support USPS's emphasis on improving EEO processes and processing EEO complaints in a timely manner, and USPS classified these indicators as related to its strategic goal of creating a more customer-focused culture. USPS has provided training to supervisors and managers on the importance of EEO, open communication, and the benefits of resolving complaints at the lowest possible level. Various unit indicators apply to the 13,458 EAS field managers who work in the mail processing area, such as indicators of the efficient use and maintenance of mail processing equipment. These indicators support USPS's efforts to improve efficiency and service, and for some field managers, represent 21 percent of their rating. Other mail processing indicators measure the scanning of barcodes on mail containers and equipment used in mail processing operations--an activity that is critical to USPS's efforts to track mail, thereby improving service and efficiency. As USPS implements the postal reform law's requirements for measuring and reporting its delivery performance for all market-dominant products, which collectively make up nearly 99 percent of mail volume, USPS will have opportunities to incorporate new indicators into its PFP program, notably for Standard Mail and bulk First-Class Mail. PFP indicators of timely delivery apply to only some types of mail because, as we reported in July 2006, USPS measures timely delivery for less than one-fifth of mail volume, with no representative measures for Standard Mail (48.8 percent of volume), bulk First-Class Mail (25.3 percent of volume), Periodicals (4.1 percent of volume), and most types of Package Services (0.5 percent of volume). However, in December 2006, Congress enacted postal reform legislation that requires USPS to measure and report to the Postal Regulatory Commission on the delivery performance of market-dominant products, which include mail such as Standard Mail, bulk and single-piece First-Class Mail, and Periodicals. USPS is in the process of implementing new delivery performance measurement systems for market-dominant mail types that are not currently being measured--such as Standard Mail, bulk First-Class Mail, and Periodicals. Together, these three mail types constitute 78 percent of mail volume, including 49 percent for Standard Mail, 25 percent for bulk First-Class Mail, and 4 percent for Periodicals. USPS has recognized that the successful implementation of these new measurement systems will depend, in part, on mailers' barcoding mail and containers, as well as providing electronic information on mailings. USPS expects these activities to become more widespread over the next several years. Once such systems are fully implemented and mailers' participation is sufficient to generate representative data, USPS will have the opportunity to incorporate new delivery performance indicators into its PFP program. Such action would be consistent with the approach USPS has taken in recent years to incorporate new performance indicators into its PFP program. In addition, the External First-Class Measurement System (EXFC), which is incorporated into the PFP program to measure the timely delivery of single-piece First-Class Mail, has not been a systemwide indicator for this type of mail, in part because EXFC has measured delivery performance for mail deposited in collection boxes only in selected areas of the country. USPS is expanding EXFC coverage to include nearly all geographic areas. According to a senior USPS official, as EXFC coverage is expanded in fiscal year 2008, the additional data are being incorporated into the fiscal year 2008 indicators for single-piece First-Class Mail. This development is consistent with USPS's actions in the past to implement delivery performance measurement systems for Parcel Select and some types of International Mail, establish targets, identify opportunities to improve service, and to incorporate the measurement data into the PFP program to hold managers accountable for results. These actions have been credited with improving timely delivery performance for these types of mail, both of which operate in a highly competitive marketplace. To put these developments into context, in 2006, USPS said that its goal of improving service--which continues to be one of its primary goals--is supported by a "balanced scorecard" that uses service performance metrics for the mail that is measured to support personal and unit accountability. USPS noted that goals for these metrics--which include delivery performance indicators, as well as operational indicators that USPS said are critical to on-time service performance--were incorporated into the PFP program. We have agreed with USPS's focus on improving service and holding its managers accountable for results but noted in 2006 that USPS has not yet achieved its aim of a "balanced scorecard" for delivery performance because its delivery performance indicators cover less than one-fifth of mail volume, and these indicators do not cover Standard Mail, bulk First-Class Mail, Periodicals, and most Package Services mail. We observed that this gap in coverage has impeded USPS's potential for holding its managers accountable for the delivery performance of all types of mail and for balancing increasing financial pressures with the need to maintain quality delivery service. In 2007, the Chairman of the USPS Board of Governors noted in congressional testimony, "To improve service, we need better metrics on performance. As George Mason University President Alan Merten says, 'What gets measured gets better.'" The delivery performance indicators that USPS has implemented and incorporated into PFP incentives have been credited with stimulating improved service. For example, USPS created delivery standards and indicators for Parcel Select service in 1999, which it then incorporated into PFP incentives. In September 2007, the Deputy Postmaster General cited USPS's delivery performance for Parcel Select as an example of substantial improvement resulting from measuring and building results into its PFP program, thereby holding managers accountable. To fulfill its mission of providing universal postal service, USPS is required to provide prompt mail delivery throughout the nation. USPS can help improve delivery service by incorporating new delivery performance indicators for market-dominant products that represent most mail volume into its PFP program. Incorporating new delivery indicators would hold postal managers accountable for results. We recognize that incorporating such indicators would depend on successful implementation of the new measurement systems--which will depend not only on USPS but also on mailers, who must barcode the mail and provide necessary information in electronic format, among other things. It will take time to implement new delivery performance measurement systems at a level that permits meaningful performance measurement and incorporation into the PFP program. Thus, over time, USPS will have an opportunity to incorporate new delivery performance indicators into its PFP program--such as indicators of timely delivery for Standard Mail and bulk First-Class Mail-- to produce a more balanced scorecard of PFP indicators. As USPS has recognized, what gets measured gets better, and PFP indicators help drive performance improvement. We are making one recommendation that the Postmaster General incorporate new delivery performance indicators into the PFP program-- such as indicators that cover Standard Mail and bulk First-Class Mail-- once the necessary measurement systems are successfully implemented, including the actions that mailers must take to permit meaningful performance measurement. USPS provided written comments on a draft of this report in a letter dated August 4, 2008, from the Senior Vice President of Operations and the Vice President of Employee Resource Management. USPS's comments are summarized below and the letter is reproduced in appendix III. In separate correspondence, USPS also provided technical comments, which we incorporated, as appropriate. USPS concurred with our recommendation and said it was committed to incorporating new delivery performance measures into its PFP program. USPS noted that in its June 2008 response to Congress regarding the Postal Accountability and Enhancement Act, USPS identified implementing expanded measurement systems for single-piece First-Class Mail, new systems for bulk First-Class Mail, Standard Mail, Periodicals, and bulk Package Services mail and stated that implementation of these systems will continue through fiscal year 2009. USPS agreed with our draft report that successful implementation of new measurement systems will depend, in part, on mailers barcoding mail and containers, as well as providing electronic information on mailings. USPS said that in addition to expanding measurement systems for its market-dominant products during fiscal year 2009, it will also develop historical data to assist with the creation of future performance targets. USPS also provided comments on its PFP program, stating that the program's approach has been responsible for substantial performance improvements and is consistent with past efforts to ensure the proper balance of performance indicators. We are sending copies of this report to the Chairman of the Senate Committee on Homeland Security and Governmental Affairs; the Ranking Minority Member of the Subcommittee on Federal Financial Management, Government Information, Federal Services, and International Security, Senate Committee on Homeland Security and Governmental Affairs; the Chairman and Ranking Minority Member of the House Committee on Oversight and Government Reform; the Chairman and Ranking Minority Member of the Subcommittee on Federal Workforce, Postal Service, and the District of Columbia, House Committee on Oversight and Government Reform; the Chairman of the USPS Board of Governors; the Postmaster General; the USPS Inspector General; and other interested parties. We also will provide copies to others on request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staffs have any questions about this report, please contact me at herrp@gao.gov or (202) 512-2834. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix IV. U.S. Postal Service (USPS) employee type Headquarters (HQ) and HQ-related EAS employees Attorneys on the Attorney Compensation Schedule Other HQ and HQ-related EAS Postal Career Executive Service (PCES) PCES field executives (including PCES Postmasters) Our objectives were to (1) describe the key features of the U.S. Postal Service's (USPS) pay for performance (PFP) program, (2) provide information on the weight of the PFP program's performance indicators in determining participants' ratings, and (3) assess opportunities for USPS to incorporate new indicators of delivery performance into its PFP program. To address these objectives, we obtained documentation from USPS on its PFP program and interviewed USPS officials responsible for the program. To assess opportunities for USPS to incorporate new delivery performance indicators into its PFP program, we also obtained documentation on USPS's plans to implement new delivery performance measurement systems. We primarily based our assessment on applicable laws--such as laws related to USPS's statutory mission of providing prompt, reliable, and efficient postal services to patrons in all areas at reasonable rates and statutory reporting requirements related to USPS's delivery performance--as well as on interviews with senior USPS officials. We also developed assessment criteria from our past work on other agencies' PFP programs and best practices used by high-performing organizations. We conducted a data reliability assessment of USPS's PFP information and determined that the information was sufficiently reliable for the purposes of our report. Our assessment was based on a review of the documentation and data provided, comparing the consistency of information provided by multiple sources and in multiple data files; interviews with USPS officials to discuss the documentation; and data, including how the data were developed; and follow-up questions to obtain further information. We conducted this performance audit from October 2007 to September 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 addition to the above individuals, Gerald P. Barnes (Assistant Director), Elizabeth Eisenstadt, Brandon Haller, David Hooper, Kenneth E. John, Belva Martin, Laura Shumway, and Crystal Wesco made key contributions to this report.

Summary:
The U.S. Postal Service (USPS) pay for performance (PFP) program for managers includes quantitative performance indicators. PFP ratings are the basis for salary increases and lump sum awards for nearly 750 Postal Career Executive Service (PCES) executives and about 71,700 other participants, mostly Executive and Administrative Schedule (EAS) employees. GAO was requested to provide information about USPS's PFP system. This report (1) describes the key features of USPS's PFP system, (2) provides information on the weight of its performance indicators in determining PFP ratings, and (3) identifies opportunities for USPS to incorporate delivery performance indicators into its PFP system. GAO obtained USPS documents and data, interviewed USPS officials, and primarily based its assessment on laws related to timely delivery and interviews with senior USPS officials. Key features of the PFP program are quantitative corporate and unit indicators of performance and individual performance elements that are used to rate participants and provide the basis for awards. Quantitative performance targets are established for corporate and unit indicators. Corporate indicators apply to all participants and include measures of timely delivery, productivity, revenue, and net income, among others. Unit indicators apply to selected groups of participants and vary according to the groups' responsibilities and span of control. Individual performance elements are tailored to the participant group and, within some groups, to individuals. Individual performance elements may be defined by narrative standards or may be quantitative indicators defined with specific target performance levels. The overall PFP rating is based on results of corporate and unit indicators and individual performance elements and is used to determine the salary adjustment and any lump sum award. PFP indicators related to three USPS strategic goals--increasing efficiency, improving service, and generating revenues--collectively account for two-thirds of the average participant's rating (see fig.). However, indicator weights vary considerably by participant group, based on the responsibilities and span of control of various positions. As USPS implements requirements of the postal reform law for measuring delivery performance, it will have opportunities to incorporate new indicators into its PFP program, notably for timely delivery of Standard Mail (49 percent of mail volume in fiscal year 2007) and bulk First-Class Mail (25 percent of volume). Once new delivery performance measurement systems are fully implemented and mailers' participation is sufficient to generate representative data, USPS will be able to incorporate new delivery performance indicators into its PFP program. These new indicators would create a more "balanced scorecard" that uses service performance metrics for the mail that is measured to support personal and unit accountability.