HEARING BEFORE THE SUBCOMMITTEE ON
FEDERAL WORKFORCE, POSTAL SERVICE AND THE
COMMITTEE ON OVERSIGHT AND
GOVERNMENT REFORM
FEBRUARY 12, 2008
The Honorable J. Russell George
Treasury Inspector General for Tax Administration
STATEMENT
OF
THE
HONORABLE J. RUSSELL GEORGE
TREASURY
INSPECTOR GENERAL FOR TAX ADMINISTRATION
before
the
SUBCOMMITTEE
ON FEDERAL WORKFORCE, POSTAL SERVICE AND THE
COMMITTEE
ON OVERSIGHT AND GOVERNMENT REFORM
February
12, 2008
Chairman Davis,
Ranking Member Marchant, and Members of the Subcommittee, thank you for the opportunity
to appear before you today to testify on the Internal Revenue Service’s (IRS) pay-for-performance
system. Human capital issues are increasingly
becoming a serious organizational matter, and none are more far-reaching than
the issue of an employee’s pay. While
many Federal agencies have sought to implement some form of pay for
performance, time after time the transition has been met with considerable
resistance. The IRS is no exception.
In 2007, the
Treasury Inspector General for Tax Administration (TIGTA) conducted a review of
the IRS’s pay-for-performance system.[1] We concluded that the IRS needed to improve
both the design and implementation of the system. The current system may not support the IRS’s
initiatives to recruit, retain, and motivate future leaders. On the contrary, it may discourage managers from
seeking promotions and non-managers from applying for manager positions. We identified several reasons for this, which
I will discuss later in my testimony.
The
IRS’s efforts to implement a pay-for-performance system began with the enactment
of the IRS Restructuring and Reform Act of 1998[2] (RRA
98). The RRA 98 gave the IRS the ability
to establish one or more pay-for-performance systems to assist in restructuring
the agency. In December 2000, pursuant
to the RRA 98 directive, the Office of Personnel Management (OPM) provided
guidance to the IRS in designing such a pay system.
The
IRS implemented its pay-for-performance system in three phases, encompassing
all of the agency’s managers:
- The first phase for “Senior Managers” grouped former General
Service (GS) grade 14 and 15 mid-level managers and direct reports to
executives into one pay band. This phase became effective in March 2001.
- The second phase for “Department Managers” grouped
former GS-11 to GS-13 second-level managers[3]
in campuses[4]
into one pay band. It became effective in November 2001.
- The third phase for “Frontline Managers” maintained the
existing 11 pay bands for the former GS-5 to GS-15 Frontline Managers[5]
and became effective in September 2005.
Changing to a
new pay-for-performance system could not have come at a more critical time for
the IRS. According to the IRS, about 66
percent of executives, 50 percent of Senior Managers, 29 percent of Department Managers,
and 36 percent of Frontline Managers will be eligible to retire by the end of
2010.[6] In this environment, it is even more
important to ensure that managers are satisfied with their jobs and that employees
view manager positions favorably. The
IRS’s ability to meet program requirements and the expectations of external and
internal customers depends largely on recruiting and maintaining a highly
skilled and motivated workforce.
TIGTA
identified several areas in the IRS’s pay-for-performance system that needed
improvement, involving both the design and implementation of the system.
Design shortcomings
Among our
findings, TIGTA identified three major design shortcomings in the IRS
pay-for-performance system.
The
first involved how the IRS structured the Frontline Manager system. The IRS did not use the RRA 98 flexibilities
to improve the existing classification system (General Schedule) in the Frontline
Manager system as it had in the Senior Manager and Department Manager systems. Instead, the frontline manager system
reflected the existing grade structure for Frontline Managers. There were two contributing factors for this
design flaw.
The Human
Capital Officer concluded that there were advantages of grouping these GS
grades into broad pay bands, but the existing structure had a wide variety of
occupations and grades that the IRS indicated were difficult to group. After several attempts, IRS senior management
failed to reach an organizational consensus on how to combine the structure.[7] As a result, the IRS simply brought frontline
managers over to the new pay system at their existing grade level, renaming
them “pay bands.”
In addition,
the IRS accelerated its implementation for the frontline manager system by at
least a year. Initial plans were to
implement it at the beginning of Fiscal Year 2007.[8] However, the IRS decided to implement the Frontline
Manager system at the end of Fiscal Year 2005 to minimize the cost of
converting the frontline managers to the pay-for-performance system.[9]
The IRS’s
pay-for-performance structure also did not provide the IRS with the benefits
envisioned in the RRA 98, including: 1) the flexibility to assign new or
different work; 2) a greater ability to hire more quickly and offer competitive
salaries; and 3) providing employees with better opportunities to diversify
their knowledge and advance their careers.
The
second major design shortcoming involved how annual salary increases for
managers were determined. Managers in
all three pay systems may receive less than the annual across-the-board salary
increase established by the President and given to all employees under the GS
pay system. This is a concern to many
managers because the across-the-board increase is not tied to performance
ratings; instead, it addresses the rising cost of labor based on the Employment
Cost Index. Under the RRA 98, the IRS
Commissioner has the flexibility to determine the managers’ annual salary
increases. Therefore, if the
Commissioner decides to provide a larger salary increase to managers with
higher annual evaluations (e.g., Exceeded Expectations or Outstanding) and a
smaller increase to managers with satisfactory evaluations (e.g., Met
Expectations), it could result in some managers receiving less than the annual
across-the-board salary increase. This
could put some managers at a pay disadvantage compared to the approximately
90,000 IRS non-managerial employees who remain in comparable GS pay system
grades and will continue to receive the annual across-the-board salary increase.
The
third major design shortcoming involved a requirement by the OPM that the
lowest and highest salaries for each pay band would be commensurate with the
corresponding GS pay system salary ranges and would automatically increase in
line with any across-the-board salary increases.[10] However, this requirement may lead to inequitable
salary increases for managers within the same pay band. For example, a manager at either end of a pay
band, regardless of their performance ratings, will receive the equivalent of
the across-the-board salary increase. Alternatively,
a manager in the middle of a pay band who received an Outstanding rating could
receive much more than the across-the-board increase, as long as the increase
is within the new salary range of the pay band.
Implementation shortcomings
TIGTA
found that the IRS did not plan for sufficient time to educate managers on the
details of the frontline manager pay system, which resulted in increased
opposition and decreased morale for some Frontline Managers. At the time of our review, the frontline manager
pay system affected 77 percent of all IRS managers.[11] The IRS needed to provide Frontline Managers
with an opportunity to surface questions and concerns about the new pay system
to ensure these managers clearly understood the new process for determining
salary increases under the pay-for-performance system. This emphasis on
communication was especially important because the IRS eliminated its prior
policy of providing managers in the pay-for-performance system with the
equivalent of the across-the-board annual salary increase. This policy change was effective for managers
in all three pay systems.[12] In addition, because the Frontline manager system
was implemented at the end of Fiscal Year 2005 and the IRS Deputy Commissioner
did not advise managers how much their annual salary increase would be until
the beginning of Fiscal Year 2007,[13]
managers were left wondering during the entire 2006 rating period what their
potential salary increase would be. Predictably,
there was significant frustration about the lack of communication on how
managers’ pay would be affected and how the new pay structure was decided.
IRS Response
In
response to our findings, the IRS initiated a third-party evaluation[14]
of the IRS’s pay-for-performance system.
This ongoing evaluation is being conducted in three phases over five
years and will determine whether, and how strongly, the IRS’s current
pay-for-performance system supports its organizational goals to recruit,
retain, and motivate future leaders. We
are concerned with the length of time the IRS is planning to take to further
evaluate its pay-for-performance system.
We plan to monitor the IRS’s corrective actions and will conduct a
follow-up review.
The
IRS plans to continue to partner with the management associations[15]
representing a number of IRS managers on pay-for-performance issues. The IRS also plans to work with IRS operating
divisions and functional stakeholders[16]
to determine the best means to communicate information on pay-for-performance
updates. Further, the IRS agreed to more
effectively communicate with employees before, during, and after implementing
any new changes to the IRS’s pay-for-performance system.
However,
the IRS disagreed with our recommendation to reinstate the policy of providing
annual across-the-board adjustments for managers who receive a Satisfactory (Met
Expectations) or higher performance rating.
The IRS stated that the authority for determining salary increases rests
with the IRS Commissioner and that future commissioners need this flexibility
to set their own policy. The IRS further
stated that this recommendation was not fiscally practicable due to budget
implications and constraints.
I
recognize that the Commissioner has the authority to set pay increases and am
not suggesting that this authority be removed.
I also recognize the Commissioner’s desire to grant pay raises with
meaningful distinctions for highly rated managers. However, I believe that the Commissioner can
do both without decreasing the morale of managers who met their performance
expectations. The Commissioner could allocate amounts that would have been previously
given for within-grade step increases and quality step increases to the higher-rated
managers.
IRS Critical Pay Authority
Another
personnel flexibility granted to the IRS as part of the RRA 98 was the ability
to establish critical pay positions[17]
at the IRS, with approval from the Office of Management and Budget. The RRA 98 also gave the IRS streamlined critical
pay[18]
authority for up to 40 positions for a 10-year period (expiring on July 22,
2008). These streamlined positions were
limited to a term of four years and required approval by the Secretary of the
Treasury but not from the Office of Management and Budget. These two critical pay personnel
flexibilities were intended to provide the Commissioner with the ability to
bring in experts and the flexibility to revitalize the current IRS workforce.
In
Fiscal Year 2003, we reviewed[19]
the IRS’s use of streamlined critical pay authority to determine whether the
IRS conformed to established laws and regulations, and to analyze the costs
associated with the program. We reviewed
the salaries for 48 critical pay hires and determined that, in all instances,
the salaries plus performance bonuses were computed according to guidelines and
did not exceed the salary of the Vice President. As of September 2002, the IRS had incurred
costs of approximately $8 million associated with the critical pay authority,
including base salary increases, search firm costs, bonuses, and relocation
costs. In some cases, the IRS initially
designated positions as critical pay positions but subsequently filled them as
Senior Executive Service positions. This
was done because either qualified outside candidates could not be found or
declined the positions, or IRS officials identified an internal candidate who
was more highly qualified. The IRS and
the IRS Oversight Board agreed to expand the Board’s oversight of the critical
pay authority by having the Board conduct an annual program review of the
authority as a whole.
We recommended
that the IRS obtain the Oversight Board’s approval for all critical pay
positions. The IRS disagreed with this
recommendation, saying that it could reduce the intended benefits of the
streamlined authority and that the Board’s annual assessment should be adequate
to determine whether this authority had been used appropriately. However, because the designation of certain
positions as streamlined critical indicates a high level of importance to the
success of the IRS mission, we believe that the IRS Oversight Board should be a
part of the approval process for all streamlined critical pay positions.
TIGTA’s Audit Strategy on Human Capital
Issues
While
pay-for-performance is an important part of the human capital challenge facing
many agencies, it is only one aspect. Within
the IRS, the term “human capital” represents the philosophy that the linkage of
critical human capital assets to business strategies ultimately leads to
organizational success.[20]
IRS employees are recognized as critical to the attainment of the IRS vision.
Like many
other Federal agencies, the IRS has experienced workforce challenges over the
past few years. Those challenges include
recruiting, training and retraining employees, as well as an increasing number
of employees who are eligible to retire. While the IRS has made some progress,
the strategic management of human capital remains one of the IRS’s major
management challenge areas. As a result,
TIGTA has developed a cross-cutting audit strategy for Fiscal Year 2008 and
beyond that addresses the broader human capital challenge across the IRS.
Our
audit strategy will align our work with the Human Capital Assessment and
Accountability Framework created by the OPM and the Government Accountability
Office. This framework consists of five
human capital processes that together provide a consistent, comprehensive
representation of human capital management for the Federal Government. The framework
includes: strategic alignment; leadership and knowledge management; results-oriented
performance culture; talent management; and accountability.
Currently,
we have ongoing audits in the areas of IRS succession planning activities,
retirement and separation estimates, employee skill gaps in key
mission-critical occupations, the Workers Compensation Program, and use of sick
leave under the Federal Employees Retirement System. We are planning another audit later this year
on recruiting strategies.
I hope my
discussion of this very important issue will assist the Subcommittee with its consideration
of pay-for-performance systems within the Federal Government. Mr. Chairman and Members of the Subcommittee,
thank you for the opportunity to provide TIGTA’s evaluation of this human
capital pay structure. I would be
pleased to answer any questions you may have at the appropriate time.