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.