Most federal employees (59.1%) are paid on the General Schedule (GS), a pay scale that consists of 15 pay grades in which an employee's pay increases are to be based on job performance and length of service. Some Members of Congress, citizens, and public administration scholars have argued that federal employee pay advancement should be more closely linked to job performance. With explicit congressional authorization, the Department of Defense (DOD) developed the National Security Personnel System (NSPS) as a unique personnel and pay system attempting to more closely link employee pay to job performance. NSPS was beset by criticisms since it went into effect in 2006. The system faced legal and political challenges from unions and employees who claimed it was inconsistently applied and caused undeserved pay inequities, among other concerns. On October 7, 2009, House and Senate conferees reported a version of the National Defense Authorization Bill for Fiscal Year 2010 that included language to terminate NSPS. On October 8, 2009, the House agreed to the conference report. The Senate agreed to the conference report on October 22, 2009. On October 28, 2009, the President signed the bill into law ( P.L. 111-84 ). DOD must now return employees currently enrolled in NSPS to the GS or to the pay system in which they were previously enrolled. The return to the GS or other pay system must be completed by January 1, 2012, pursuant to the law. NSPS was initially intended to cover all DOD employees, but had a final total enrollment of roughly 227,000 DOD employees or 31.7% of the department's 717,000-person workforce. In October 2010, DOD sent a report to Congress that said 76% (171,985) of employees formerly in the NSPS pay system had been converted to the GS. Another 20% of employees will be placed in pay scales other than the GS, and 4% of NSPS employees may have their jobs eliminated as a result of closing military bases pursuant to the 2005 Defense Base Realignment and Closure Commission (BRAC) findings. Of those employees who moved into the GS, 72% (124,200) received a pay raise when they were placed in the proper GS grade and step. Every U.S. state has employees who were or are on NSPS. According to DOD, Virginia and California had the largest number of NSPS employees with 38,200 and 22,100, respectively. Vermont had the fewest employees with fewer than 20. Figure A-1 , in the Appendix, includes a U.S. map with NSPS employee counts for each state. As of January 2011, roughly 54,000 DOD employees remain in NSPS. P.L. 111-84 included language preventing any employee from suffering a loss or decrease in pay as a result of the elimination of NSPS. Pursuant to statute (5 U.S.C. SS 5363), 35,117 transitioning employees have been placed on "retained pay," which allows them to maintain their NSPS rate of pay, but requires that they receive half of the annual pay adjustment distributed to employees at the step 10 level of their position's assigned GS pay grade. Some GS employees may argue that the NSPS employees who were in NSPS and who collect a retained pay rate receive a higher pay rate for similar work than does an employee who remained in the GS. Some NSPS employees, however, may argue that the cap on their annual pay increase amounts to a loss in pay. Employees who were in NSPS as of January 2, 2011, and who received a performance rating of "3" or above for 2010, may receive a performance-based bonus or pay raise in 2011. Employees who were in the pay system for only part of 2010, or who received a performance rating of "2" or below, do not qualify for an NSPS performance-based bonus or pay raise. DOD does not require additional appropriations to fund NSPS pay bonuses and salary increases in 2011. Instead, the bonuses and increases will be funded using money already allocated to the pay system. NSPS pools the funding that the GS and other similar pay systems use to fund increases in pay, such as step increases and promotions. In contrast, NSPS uses these so-called pay pools to fund performance-based pay increases. Office of Personnel Management (OPM) guidance said NSPS bonuses do not violate the freeze in federal pay for FY2011, enacted in P.L. 111-322 . According to DOD, 98.5% of NSPS employees rated "3" or higher on their 2010 annual performance reviews--making nearly 53,200 employees eligible for a performance-based bonus. The 112 th Congress may choose to continue its congressional oversight of NSPS employees' transition to other pay systems. This report focuses on the transition of employees from NSPS to non-NSPS pay scales. It does not address the operation of NSPS or other pay schedules. The report discusses how the transition is scheduled to occur and analyzes congressional options for oversight or legislative action. P.L. 111-84 required DOD to begin transitioning NSPS employees to non-NSPS pay scales six months after enactment of the law, which occurred on October 28, 2009. DOD was given until January 1, 2012, to convert all employees in NSPS to the pay system in which they were previously enrolled. If an employee was previously enrolled in a system that no longer exists, if his or her job and description did not exist prior to enrollment in NSPS, or if a new pay system is to be created for an employee to enter into, DOD is required by statute to determine the employee's pay system and transition him or her into that pay system by the January 1, 2012 deadline. Employees not entering the GS are expected to be transitioned to their designated pay systems between spring 2011 and January 1, 2012. According to DOD's NSPS Transition Office, the office in charge of implementing the elimination of NSPS, 171,985 employees (about 76%) had transitioned from NSPS to the GS as of September 30, 2010. Another 20% of employees will be returned to or placed in other systems, including some pay systems that have not yet been created. In addition, 4% of employees will have their jobs eliminated as a result of closing military bases pursuant to the 2005 Defense Base Closure and Realignment Commission (BRAC) findings. As noted above, some NSPS employees will be moved into personnel systems that have not yet been established. P.L. 111-84 SS1105 authorized DOD to create demonstration pay systems at certain defense-related laboratories. Some of the federal employees at certain laboratories were in NSPS. By the end of April 2011, DOD must create new personnel systems at these laboratories and move eligible employees from NSPS into these personnel systems. Most positions in the NSPS system were formerly under GS position classification and grade and step parameters. An employee who occupies a position that previously had a GS grade and step assignment is to be moved to the GS and assume the grade assigned to his or her job classification. The employee's step within the assigned grade would be selected to ensure that the employee's level of pay does not decrease because of his or her return to the GS scale. Pursuant to P.L. 111-84 , an employee's level of pay may not be reduced as a result of his or her transition from NSPS. For example, if an employee's NSPS pay level falls between two GS steps, then the employee would be assigned to the higher step. In some cases, employees in NSPS who were or will be transitioned to the GS or a similar pay scale may have been collecting pay rates higher than the position's GS grade classification permits. Pursuant to P.L. 111-84 , an employee who meets this criterion will continue to receive his or her NSPS rate of pay under pay retention statutes once he or she converts to the GS system. The employee's pay rate cannot be used as a factor in performance evaluation. For example, if an employee's position is evaluated and classified as a GS-13, the highest base pay level (step 10) for such an employee in 2011 is $93,175. If this employee were working in the Washington, DC, locality pay area, his or her locality-adjusted rate of basic pay (annual pay + locality pay) would be $115,742 ($93,175 * 1.2422) in 2011. A supervisory employee in NSPS was not capped at this pay rate, and could have been collecting an annual salary of $95,000 if he or she received positive performance evaluations. Pursuant to statute, this employee would continue to receive a salary of $95,000 after transitioning from NSPS and being assigned to the GS. NSPS provides standard local market supplements, which are identical to GS locality pay rates, so the adjusted basic pay rate of the hypothetical NSPS employee living in Washington, DC, including the standard local market supplement for 2011, would be estimated at $118,009 (95,000 * 1.2422). Pursuant to statute, this hypothetical employee would continue to receive a salary of $118,009 after being transitioned to the GS. The continued NSPS pay rate is defined in statute (5 U.S.C. SS5363) as "pay retention." The employee's manager would evaluate the employee's job duties and responsibilities based on the GS grade assigned to the position--without regard for the employee's pay rate. The statute requires agencies to provide employees on pay retention with half of the annual pay increase given to employees at the maximum payable rate for the GS grade (step 10) to which his or her position is classified. An employee on retained pay, therefore, would not have his or her annual pay increase calculated as a percentage of his or her basic pay. His or her pay increase, instead, would be calculated as a percentage of a pay increase given to an employee who is at step 10 of the GS grade to which his or her position is assigned. The employee would continue to receive a retained rate of pay, until the employee's GS rate of pay eclipsed his or her retained NSPS rate of pay. The length of time it may take for the GS rate to be greater than the NSPS rate would depend on a number of variables, including the level of pay increases enacted by Congress in future years as well as the employee's pay level in relation to the step 10 pay rate of the GS grade to which his or her position is classified. Of the 171,985 former NSPS employees who have already been placed on the GS, approximately 72% (124,200) received a salary increase because of the transition. The average increase in salary was $1,454 per year. Some 7% (12,668) of those who transitioned to the GS kept a salary identical to their NSPS pay rate, while 21% (35,117) of those who transitioned are receiving a retained NSPS pay rate despite a GS classification that is assigned a lower rate of pay. NSPS employees placed in a new pay system have opportunities to grieve certain aspects of their new assignments. A DOD employee may contact his or her human resources office to find out more information about filing an administrative grievance or to seek alternative dispute resolution. Additionally, more than 913 NSPS employees are in a bargaining unit and may contact their local union representatives if they wish to pursue a negotiated grievance procedure. An employee may also appeal his or her case to the Merit Systems Protection Board (MSPB), which is an independent, quasi-judicial agency with jurisdiction over appeals claiming a reduction in pay, pursuant to 5 C.F.R. SSSS752 and 1201. An employee appealing to MSPB would have to establish that the transition from NSPS led to a reduction in pay. An employee moving to the GS who disagrees with his or her position's classification may challenge it pursuant to the process outlined in 5 C.F.R. SS511.601-606. Employees who were covered by NSPS who are then placed on pay retention when moved to a different pay schedule may suggest that they are experiencing a loss in pay because they are not receiving the full annual pay increase that is provided to other federal employees. As explained earlier in this report, an employee who is moved to the GS but who receives a retained pay rate keeps his or her NSPS pay rate--if the NSPS pay rate is above the GS grade classification pay level. The employee, however, receives half of the annual pay increase given to GS employees at the step 10 level of the employee's assigned grade until the pay rate he or she would receive in the GS eclipses his or her retained NSPS pay rate. Once removed from NSPS, these employees can no longer receive annual NSPS performance-based pay increases. A retained pay rate, however, allows the employee to collect higher pay than a similar employee in the GS system. The employee on retained pay also qualifies for larger pension benefits than could have been accrued in the GS. On the other hand, those who disagree with the employees on retained pay may suggest that these employees are receiving a higher rate of pay than would otherwise be permitted on the GS. The employees on retained pay, in fact, may receive pay rates much higher than employees who have the same GS classification and who perform at levels that are quite similar. An employee who remained on the GS, and who never entered the NSPS, did not have the opportunity to increase his or her pay based largely on performance and has no access to a retained pay rate. According to DOD, as of October 10, 2010, five employees who were required to transition from NSPS to the GS have appealed their GS classification. One appeal was denied and four other appeals are pending. When Congress eliminated NSPS in the National Defense Authorization Act for 2010 ( P.L. 111-84 ), it required DOD to return all employees to the pay system in which they were previously enrolled. Congress also required that no employee who was in NSPS experience a loss or reduction in pay as a result of being removed from NSPS and placed in a different pay scale. Some employees in NSPS, however, occupy positions that did not exist prior to NSPS's creation, and they cannot, therefore, be returned to a pre-existing pay scale. Other employees achieved pay rates that are not aligned with rates on their non-NSPS pay scale. Still other employees cannot be returned to a pre-existing pay scale because the pay scale was eliminated while NSPS was active. DOD has been examining ways to place employees who fit into these categories into appropriate pay schedules for their positions, including a solution that involves developing a new pay system. Congress has a variety of options to address these pay and personnel issues, including passing a law that would require all employees receive the full annual pay increase, modifying the GS to better coincide with NSPS pay rates, or permitting DOD to determine the most effective course of action. Congress required DOD to determine where to place NSPS employees who are or were to convert out of the NSPS. DOD must place employees in a variety of pay systems while adhering to all statutory requirements--both requirements in P.L. 111-84 and those that existed prior to the law's enactment. DOD has placed certain employees on retained pay. This policy has led to complaints from some employees who claim that retained pay, in effect, amounts to a loss in pay. Others, however, may claim that retained pay allows certain employees to maintain a higher rate of pay than an employee who is not eligible for retained pay, even though they perform the same work at similar performance levels. Congress may determine that DOD's policies follow the requirements of both P.L. 111-84 and Title 5 of the U.S. Code, which governs most of the civil service. Conversely, Congress may decide that allocating half of the GS step 10 annual pay increase to those on a retained pay rate is contrary to its intention in the language in P.L. 111-84 , which states that employees removed from NSPS should not suffer a loss in pay as a result of the transition to a non-NSPS pay scale. If Congress determines that the reduced pay increase is contrary to its intention in P.L. 111-84 , it could choose to enact legislation that ensures employees who convert to the GS or another pay system and who are on retained pay receive the full annual pay increase. Such legislation, however, would cause the retained pay rates to remain above GS pay rates in perpetuity. GS employees who performed similar work at similar performance levels may never receive the same pay as an employee who receives both the retained pay rate and a full annual pay increase. A policy option that could offset concerns about loss of pay exists. Employees who are on retained pay could also receive a performance-based cash award to supplement their pay to account for any pay they will not receive as a result of the cap on their annual pay adjustment. Pursuant to 5 U.S.C. SS4505a, a federal employee who receives a performance rating of fully successful or above may receive a one-time cash award in an amount deemed appropriate by the head of the agency. The cash award can be up to $10,000 without OPM approval, or up to $25,000 with OPM approval. DOD could use the authority in 5 U.S.C. SS4505a to pay federal employees on retained pay the other half of the annual pay adjustment. Pursuant to statute, the rating-based award could not be given to an employee with performance rating lower than fully successful. In addition, the award would not be considered part of an employee's basic pay and, therefore, would not count toward the employee's annuity. This option, however, may be controversial. The one-time cash award was designed to reward exemplary performance by federal employees. The Code of Federal Regulations lists three reasons why an employer would give an employee this cash incentive. The award may be provided on the basis of the following: A suggestion, invention, superior accomplishment, productivity gain, or other personal effort that contributes to the efficiency, economy, or other improvement of government operations or achieves a significant reduction in paperwork; A special act or service in the public interest in connection with or related to official employment; or Performance as reflected in the employee's most recent rating of record ... provided that the rating of record is at the fully successful level (or equivalent) or above. If an employee on retained pay does not meet one of these criteria, using the award authority may be an improper means of providing that employee additional pay. For employees who do qualify for the cash award, however, DOD could provide the award until the GS rate of basic pay for the employee's position eclipsed the retained NSPS pay rate. If DOD chose to use the performance-based cash award, the agency may need additional appropriation from Congress to fully fund it. Additionally, employees in the GS who perform similar work at similar performance levels will not receive the same pay for their work as the employee on the retained rate of pay. Congress could also choose to modify the GS to better coincide with the pay rates on NSPS. Congress could enact legislation that adds steps to the GS, allowing for NSPS pay rates to be incorporated in the personnel system and also for continued movement up the personnel system's pay scale for all GS employees. Such action, however, could complicate GS operations and policies by requiring new regulations to govern the additional steps. The addition of new GS steps may also prompt additional costs to fund the new pay levels. P.L. 111-84 also required DOD to create a new performance management system and hiring process. Congress may choose to use its oversight authority to ensure that all parties that may be affected by the establishment of such new system and process are afforded an opportunity to offer suggestions and present concerns prior to implementation.

Summary:
Most federal employees (59.1%) are paid on the General Schedule (GS), a pay scale that consists of 15 pay grades in which an employee's pay increases are to be based on performance and length of service. Some Members of Congress, citizens, and public administration scholars have argued that federal employee pay advancement should be more closely linked to job performance than it currently is on the GS. With these concerns in mind and with explicit congressional authorization, the Department of Defense (DOD) began developing the National Security Personnel System (NSPS) in 2003 as a unique pay scale attempting to more closely link employee pay to job performance. NSPS was beset by criticisms since it went into effect in 2006. The system faced legal and political challenges from unions and employees who claimed it was inconsistently applied and caused undeserved pay inequities, among other concerns. On October 7, 2009, House and Senate conferees reported a version of the National Defense Authorization Act for Fiscal Year 2010 that included language to terminate NSPS. On October 8, 2009, the House agreed to the conference report. The Senate agreed to the conference report on October 22, 2009. On October 28, 2009, the President signed the bill into law (P.L. 111-84). DOD must now return employees currently enrolled in NSPS to the GS or to the pay system that previously applied to them or their position. If the employee's position did not exist prior to NSPS or if the previous pay scale was abolished during NSPS's lifetime, DOD must determine an appropriate pay scale for the employee. The return to the GS or other pay system must be completed by January 1, 2012, pursuant to the law. NSPS was initially intended to cover all DOD employees, but had a total final enrollment of roughly 227,000 DOD employees or 31.7% of the department's 717,000-person workforce. In October 2010, DOD sent a report to Congress that said 76% (171,985) of employees formerly in the NSPS pay system had been converted to the GS. Of those employees who moved into the GS, 72% (124,200) received a pay raise when they were placed in the proper GS grade and step. Employees who have not yet been transitioned out of NSPS are to be placed in pay scales other than the GS. As of January 2011, roughly 54,000 DOD employees remain in NSPS. P.L. 111-84 included language preventing any employee from suffering a loss or decrease in pay as a result of the elimination of NSPS. Pursuant to statute, 35,117 employees who transitioned to GS have been placed on "retained pay," which allows them to maintain their NSPS rate of pay instead of transitioning to the GS pay rate assigned to their job's grade. In such cases, the GS rate of pay assigned to the employee's position may not reach the pay level the employee achieved under NSPS. Retained pay, pursuant to statute, requires that an employee receive half of the annual pay adjustment given to employees who are at the maximum payable rate for their GS grade (step 10). Some NSPS employees may argue that the cap on their annual pay increase amounts to a loss in pay, and, therefore, violates P.L. 111-84. The 112th Congress may choose to continue congressional oversight of NSPS employees' transition to other pay systems. This report focuses on the transition of employees from NSPS to non-NSPS pay systems. It does not address the operation of NSPS or other pay schedules. The report discusses how the transition is scheduled to occur and analyzes congressional options for oversight or legislative action.