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. § 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 §1105 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. §5363) 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.