[title page]
A WHITE PAPER
...
A FRESH START FOR FEDERAL PAY: THE CASE FOR MODERNIZATION
...
KAY COLES JAMES..DIRECTOR
...    
APRIL 2002
...
[at foot of page]
For sale by the Superintendent of Documents, U.S. Government Printing Office;
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Fax: (202) 512-2250; Mail: Stop SSOP, Washington, DC 20402-0001;
ISBN 0-16-051100-3
...
[page iii]
Table of Contents...
A Letter From the Director,	i...
Executive Summary,	v...
Introduction,	1...
A System Whose Time Has Come - and Gone, 4...
The System Is Market Insensitive,	12...
The System Is Performance Insensitive,	17...
An Excess of Internal Equity,	26...
Conceptual Flaws, Tangible Problems,	31...
Final Thoughts About the Timelessness of Merit,	35...
Conclusion and Next Steps,	37...
Supplementary Material...
Closer Looks at Federal Pay,	39...
A Framework for Strategic Rewards,	40...
A Primer on the General Schedule,	43...
Why Not Preserve the General Schedule?	45...
Labor Markets Are Not Supermarkets,	48...
The Problem With Special Salary Rates,	53...
Whither Comparability?	55...
How the System Does - and Doesn't - Reward Performance,	57...
The Challenge of Performance Measurement,	64...
Classification - The Unintended Tool of Choice,	67...
Glossary,	69...
Acknowledgements,	77...

[page v]
Executive Summary...
An ongoing objective of the Office of Personnel Management is to explore ways 
to make Federal pay more performance-oriented and a better tool for improving 
the strategic management of human capital.  As recent events have shown all too 
clearly, Government performance is critically important.  To meet the challenges 
of the present - and to anticipate and overcome the challenges of the future - 
Government must design and use merit-based policies and systems that are more 
modern, strategic, and results-focused.  If the Government is to recruit, manage, 
and retain the human capital needed to accomplish and sustain this 
transformation, its white-collar pay system would need to:
[bullet] Achieve the principle of providing equal pay for work of equal value;
[bullet] Provide agencies the means to offer competitive salary levels on a 
timely, rational basis;
[bullet] Recognize competencies and results, at both the individual and 
organizational level; and
[bullet] Orient employee efforts and pay expenditures toward mission accomplishment.
...
This White Paper examines the extent to which the current Federal white-collar 
pay system - the General Schedule covering 1.2 million employees - achieves 
these objectives.  OPM believes the system would have to be judged as failing this 
examination, for several reasons:
[bullet] The Government asks its agency leaders to face new and unprecedented 
management challenges using an antiquated pay system.  Work level 
descriptions in law that date back more than 50 years are not meaningful for 
today's knowledge-driven organizations.
[bullet] The current pay system does not reflect market pay levels.  Instead, pay 
increases and locality adjustments result from a cumbersome and costly 
measurement system that may be trying to answer the wrong questions.
[bullet] It has minimal ability to encourage and reward achievement and 
results.  Over 75 percent of the increase in Federal pay bears no relationship 
to individual achievement or competence.
...
[page vi]
[bullet] Its structure suits the workforce of 1950, not today's knowledge workers.  
In 1950, over 75 percent of Federal workers - mostly clerical - were in grade 
GS-7 or below; today that percentage has dropped to less than 30 percent.
[bullet] Its prescribed procedures and practices effectively preclude agencies 
from tailoring pay programs to their specific missions and labor 
markets.  It is unlikely that a common and highly structured system is 
appropriate for positions as diverse as those found in agencies such as the 
National Weather Service, the Social Security Administration, the Defense 
Finance and Accounting Service, and the Centers for Disease Control.
[bullet] It is disintegrating.  Through special authorities, a number of agencies 
already have begun to move toward more modern systems, and our ability to 
promote common policies across the Government where appropriate is 
diminishing.
...
OPM does not fault the framers of the General Schedule for designing pay and 
job evaluation systems that reflected their world of work.  But neither can 
a compensation system that was designed in the middle of the 20th century be 
expected to function well in the 21st century where organizations use a broader 
view of strategic rewards.  The result of OPM's examination is clear:  seizing 
systemic, governmentwide opportunities for changing the white-collar pay system 
is no longer a luxury, but a necessity.  In its current condition, the system is an 
impediment to the Government's critical efforts to enhance security and replace 
technical and scientific expertise in the face of looming retirements.
...
This White Paper is pre-decisional:  although it documents many problems in 
our current pay and job evaluations systems, it does not describe the solutions to 
those problems. Its objectives are to help stakeholders learn from the Government's history and experience and to inform the debate over how the Government can preserve core values of public service - such as equity, procedural justice, openness, and accountability - while modernizing its compensation practices.  OPM will distribute the paper widely to stimulate 
dialogue and discussion.  The aim is to surface areas of agreement and 
disagreement and concern and consensus so that the Federal community may be 
fully informed as we pursue future directions for improving pay as a strategic tool 
for managing human capital.
...
[page 1]
Introduction
...
This White Paper takes an in-depth look at the way the Federal Government 
pays its white-collar employees.  Any comprehensive improvements to our pay 
system that may be needed would be momentous.  Consequently, they should be 
considered only after carefully examining the means and implications of ensuring 
that the white-collar pay system is an effective tool for the strategic management 
of human capital.  To that end, any changes in the pay system must support the 
various other initiatives that are underway to improve Federal recruitment, hiring, 
and retention and to focus on meaningful performance distinctions as the key 
drivers for human resources and reward decisions.  Those reform efforts have 
surfaced recurring themes concerning the constraints and contradictions the pay 
system imposes.  That system, in turn, must operate under significant fiscal 
constraints where costs must be forecast, managed, and contained.  Unless the 
Federal Government develops a system that is affordable during difficult budget 
times, there is no hope for success.  Such realities and relationships characterize 
our complex employment environment.
...
In the White Paper presented here, the Office of Personnel Management (OPM) 
focuses only on the General Schedule (GS) pay and job evaluation systems that 
cover the Federal Government's white-collar work.  A number of pay-related 
issues that affect other systems and pay structures have also received attention 
and deserve consideration in another forum.  OPM acknowledges that such other 
systems, including the Federal Wage System that covers blue-collar work, have a 
relationship to GS pay.  For example, the pay compression that currently affects 
members of the Senior Executive Service (SES) could have a significant, if 
indirect, effect on proposals that might be developed to address the pay of GS 
employees.  However, SES compensation design and administration involve 
additional factors - such as their relationship to the Executive Schedule rates of 
pay for the most senior positions in Government - that this White Paper is not 
intended to address.
...
This White Paper lays bare the problems with the Federal Government's current 
white-collar pay and job evaluation  systems that years of experience, research, 
and discussion have exposed. [footnote 1: The term "job evaluation" refers to the process for establishing the relative value of a position in a hierarchy of jobs,in the Federal Government, by classifying positions.  The term does not mean performance evaluation or appraisal.] Significant portions of that research and discussion 
have occurred most recently as OPM staff launched an effort known as the 
Strategic Compensation Initiative.  
...
[page 2]
Framed around a combination of research and outreach, the initiative included an 
extensive examination of the current Federal white-collar pay and classification 
systems.  OPM sought insights from the private sector, the non-Federal public 
sector, and those portions of the Federal sector that have already moved beyond 
the system established under title 5 of the United States Code.
[bullet] The research included staying current on developments and trends in 
compensation, including practices that developed as employers waged the war 
for information technology talent during the "dot.com" bubble.  However, to 
preclude misleading conclusions based on generalizing from short-lived 
"schemes du jour" that might lack strategic staying power, the research OPM 
undertook concentrated on employers whose size and functions made them 
comparable to Federal agencies.  For example, a specific alignment of general 
governmental functions with private sector counterparts led to surveys of 
utilities, banking, accounting, and telecommunications firms, but not retail 
sales or entertainment enterprises.  
[bullet] Research on non-Federal public sector entities surfaced a variety of systems 
and approaches - principally in State governments - where settings ranged 
from States where comprehensive collective bargaining agreements are 
negotiated at the State level to States that have no bargaining units at all.  
States that recently reformed their pay systems to be more performance and 
results driven were of particular interest.  
[bullet] Finally, OPM made a thorough review of Federal settings where alternative 
pay and job evaluation systems had been established, including demonstration 
projects and agencies that Congress granted independent compensation and 
classification authority.  These situations offered particularly useful evidence 
about the kinds of alternatives that have been implemented successfully with 
Federal workforces and cultures.
...
In addition to conducting and sponsoring specialized research, OPM invited 
stakeholders from agencies, Federal employee unions, associations of managerial 
and professional employees, and the public administration community to join in 
examining existing systems and mechanisms, as well as alternatives, and considering 
possibilities that could improve their strategic value for the 21st century.
...
[page 3]
The White Paper is structured around some broad themes and supplemented 
with more in-depth analyses - a series of "Closer Looks" that explore or illustrate 
particular issues.  By this means, beyond merely cataloguing faults, the White 
Paper also surfaces opportunities and the nature of the solutions they represent.  
However, it lays out no specific proposals for changing the General Schedule system.  
The purpose here is to create a shared understanding across the public service 
community can be applied to discussing and shaping approaches that may be 
appropriate to ensure that agencies can use the Federal Government's white-collar pay 
system effectively to improve the strategic management of their human capital.
...
[page 4]
A System Whose Time Has Come - and Gone
...
[introductory material]
The fundamental nature of the Federal compensation system was 
established at the end of the 1940s, a time when over 70 percent of 
Federal white-collar jobs consisted of clerical work.  Government work 
today is highly skilled and specialized "knowledge work."  Yet in the 
age of the computer, the Federal Government still uses - with few 
modifications - pay and job evaluation systems that were designed 
for the age of the file clerk.  The divergence between the Federal pay 
system and the broader world of work where the war for talent must be 
fought has led observers to call for reform of the Federal system.  To 
support achievement of the Government's strategic goals, a new, more 
flexible system may be called for, one that better supports the strategic 
management of human capital and allows agencies to tailor their pay 
practices to recruit, manage, and retain the talent to accomplish their 
mission. 
...
[report text]
The formidable challenges of World War II were overcome by breaking them 
into their component problems and solving those problems through centralized 
planning and the application of uniform methods.  At the end of the 1940s, the 
Federal Government's civilian workforce was ripe for application of this scientific 
management approach, as embodied in the Classification Act of 1949.  Over 
70 percent of Federal white-collar jobs consisted of clerical work - work such as 
posting census figures in ledgers or retrieving taxpayer records from vast file 
rooms.  It made sense to manage this work by breaking it into clearly describable 
positions.  It made sense to sort these positions based on clear-cut, enduring 
differences in the difficulty, responsibility, and skill requirements of the work 
employees carried out.  It made sense to use such differences as the foundation 
for all aspects of human resources management, such as setting pay, thus making 
position the principal driver of most Federal personnel administration systems.  
...
That focus on position rather than performance made sense for this army of 
clerks in the late 1940s.  Indeed, it made little sense for pay to reflect variations in 
employee performance - most of the work was so cut and dried that employees 
had scant opportunity to distinguish themselves from their peers.  As for using 
comparisons with pay outside the Government, that was not even on the map yet.  
Specific pay rates and pay raises for Federal employees were established by 
Congress through legislation, not through any sort of administrative, market-
based procedure.
...
[page 5]
The Classification Act of 1949 used work level descriptions that date to 1912 to 
extend a centralized job evaluation system to all white-collar positions, thereby 
establishing internal equity - a fairness and consistency criterion aimed at ensuring 
that each job is compensated according to its relative place in a single hierarchy of 
positions - as the centerpiece of Federal compensation.  The Act also merged 
several separate "schedules" of pay rates into one "General Schedule."  Finally - 
and fatefully - it defined the Federal Government's pay and job evaluation 
structure in statute, where it has remained essentially unchanged for over 50 years.
...
During this 50-year period, much has changed, including:
[bullet] The nature of work.  When the General Schedule was created, the Federal 
Government was largely a "Government of clerks."  But most Government 
work no longer revolves around the execution of established, stable processes 
or the application of physical effort.  Instead, as illustrated in the chart below, 
Federal white-collar work has become highly skilled and increasingly specialized 
"knowledge work" that is properly classified at higher grade levels.
...
[The chart presents a bar graph showing the changing General Schedule workforce.  The graph shows the employee population by grade as a percentage of all GS employees for 1950 and 2000.  GS1, 1950- 1.8%; 2000- 0%. GS2, 1950- 14.5%; 2000- 0%. GS3, 1950- 20.6%; 2000- 0.5%. GS4, 1950- 14.8%; 2000- 3.2%. GS5, 1950- 10.5%; 2000- 8.4%. GS6, 1950- 4.3%; 2000- 6.8%. GS7, 1950- 10.3%; 2000- 10.2%. GS8, 1950- 2.0%; 2000- 4.0%. GS9, 1950- 8.0%; 2000- 10.4%. GS10, 1950- 1.2%; 2000- 1.3%. GS11, 1950- 5.1%; 2000- 14.7%. GS12, 1950- 3.8%; 2000- 17.2%. GS13, 1950- 2.0%; 2000- 13.8%. GS14, 1950- 0.8%; 2000- 6.2%. GS15, 1950- 0.3%; 2000- 3.2%.]
Some of the work-related features of the General Schedule are not just dated, 
they are counterintuitive.  If two employees perform similar jobs but one 
employee has a much greater workload, can that employee's salary be higher?  
Not under the General Schedule - if the level of difficulty of two jobs is the 
same, they are in same salary range.  If one employee performs a wider variety 
of tasks than other employees, can that result in higher pay?  Not if the tasks 
are at the same level.  If the busier employees complain that this is inequitable, 
what can the agency do?  Take work away from the busier employees.  Years 
ago, spreading clerical tasks across similar, stable positions made sense; in 
today's multi-tasking workplace, the system appears illogical.
...
[page 6]
[bullet] The role of compensation in organizations.  In most organizations, 
particularly those in the private sector, compensation management has 
become considerably more than simply calculating and paying the bill for 
employee efforts.  The concept of compensation and rewards has broadened.  
Organizations have come to view their compensation and reward systems as 
much more than schemes managed out of the comptroller's office and 
designed to contain salary and related benefits costs. [footnote 1: For every dollar increase in basic pay, or "benefits-bearing compensation," agencies routinely budget an additional 
20 to 30 cents as an estimate of related benefits cost obligations that dollar will generate.  In a related development within the Federal Government, President Bush's FY 2003 Budget for the first time displays agencies' future cost accruals for employee benefits at the agency level, thereby reinforcing this Administration's policy that agencies must 
be strategic in their use of all human resources-related funding.  The President's proposed Managerial Flexibility Act includes statutory changes that would effect this accounting change permanently.]  Today, organizations manage their rewards systems out of their human resources offices. [footnote 2: Private Sector Compensation Practices, Booz.Allen & Hamilton - Report to the U.S. Office of Personnel Management, Washington, DC, February 2000.]  They design them to use pay, awards, benefits, learning and development, challenging and satisfying work, work-life balance, and a supportive work environment strategically to attract, manage, develop, and retain high-quality, diverse workforces that meet their specific human capital needs.  This paper's first Closer Look:  A Framework for Strategic Rewards (pages 40-42) provides more detail about this broader view of what employees find rewarding.
...
The purpose and tactics of compensation have also broadened.  Organizations 
no longer view their annual compensation budgets simplistically as the bill for 
"another year's worth of labor inputs."  Instead, they use flexible, targeted 
compensation tools to acquire and retain critical talent.  Compensation's role 
in recruiting gets considerable attention from both employers and potential 
employees.  Organizations no longer use compensation principally to 
encourage and reward unquestioning loyalty from undifferentiated "human 
resources"; instead, they use compensation to communicate and reward 
desired values, behaviors, and outcomes.  Federal agencies are similarly poised 
to use compensation as a strategic tool, rather than a merely administrative 
tool.  This shift is already visible in a wide variety of demonstration projects 
and alternative personnel systems that align agency pay practices and bonus 
and award programs with agency strategic goals.
...
[page 7]
[bullet] Employee expectations.  The employees of the 1940s and 1950s shared 
the experiences of economic depression and war.  They sought stability and 
security.  The Federal compensation system, with its career ladders (where 
employees start their careers in positions at low grades with the prospect of 
advancement over time to higher-grade positions), time-based pay increases, 
and benefits keyed to length of service, reflects a conception of employment 
predicated on a 30-year career with the same employer.  That model is 
designed to reward loyalty by providing stable and secure employment, 
reflecting and meeting those needs.  But increasingly employees neither expect 
nor seek that form of security from their employer.  Instead, they expect 
immediate rewards and recognition for their individual accomplishments and 
consider continued employability the key to security. 
[bullet] Stakeholder expectations.  Employees and their representatives, as well as 
agencies and other stakeholders, have expectations about how human resources 
management systems are developed and implemented today.  With a consistent 
migration away from tightly legislated systems to administrative authorities 
that lend themselves to decentralization and delegation, stakeholders expect to 
influence how those administrative authorities will be designed and used.  
Agencies want the latitude to adapt system features to support their strategic 
needs.  At the same time, elected employee representatives expect to have a 
voice in systems affecting their members.  Engaging unions in fundamental 
workplace change is a sound human capital practice and recognizes that labor 
and management have a shared stake in building a more effective Government 
that delivers results to the American people.
...
Although the Federal white-collar pay system has been refined in response to 
these changes, these refinements have not changed its fundamental character, 
which remains focused on internal equity (to reflect relative place in a hierarchy of 
positions) and leaves little meaningful room for external equity (to accommodate 
changes in labor market rates for different occupations) or individual equity (to 
reward excellent performance).  Consequently, the outdated beliefs and 
expectations underlying our pay and classification systems have diverged from 
those of the broader world of work where the war for talent must be fought 
today. 
...
[page 8]
This divergence has led observers and architects of Government human 
resources management systems to contemplate possible modernization of the 
Federal compensation system. [footnote 3: The possibility of a need for systemic change was acknowledged and anticipated in the Civil Service Reform Act of 1978, which authorized the establishment of "demonstration projects" by the Office of Personnel Management under 5 U.S.C. sec. 4703 to test progressive human resources practices for possible governmentwide adoption.] During the 1980s and early 1990s, these observers advocated reform of various aspects of the Federal compensation system, such as the classification system [footnote 4: See Modernizing Federal Classification:  An Opportunity for Excellence, National Academy of Public Administration, Washington, DC, 1991.] and the pay-setting process, [footnote 5: See Robert W. Hartman, Pay and Pensions for Federal Workers, The Brookings Institution, Washington, DC, 1983.] as well as benefits. [footnote 6: Ibid.]  The calls for reform continue, but their character has changed.
...
Observers continue to recommend measures such as simplifying the classification 
system, but an increasing number believe that incremental changes will not 
suffice.  For example, when the National Academy of Public Administration 
(NAPA) examined Federal information technology (IT) recruitment and retention 
issues in 2001, it recommended that the Federal Government reexamine the core 
values of its compensation system, and noted:
[indented quote]By focusing on internal equity, the federal government's human resources 
management system is severely constrained in competing for IT talent and 
effectively managing the IT talent that it already has. . . .  A new federal 
IT compensation system should move to a better balance between and among 
internal equity, external equity, and contribution equity. [footnote 7: The Transforming Power of Information Technology:  Summary Report, National Academy of Public Administration, Washington, DC, August 2001, pp. 7-8.][end quote]
...
Other observers have reached similar conclusions, [footnote 8: See David Walker, Comptroller General of the United States, testimony before the Subcommittee on Oversight of Government Management, Restructuring, and the District of Columbia, Committee on Governmental Affairs, U.S. Senate, July 17, 2001.] and some now contend that the current system is unsalvageable:
[indented quote] Title 5 provides a rigid, rule-based system that is unlikely to provide the needed flexibility to compete for talent in the twenty-first century. [footnote 9: Civilian Workforce 2020:  Strategies for Modernizing Human Resources Management in the Department of the Navy, National Academy of Public Administration, Washington, DC, August 2000, p. 44.]
...
(The Administration) is quite right to keep pushing for greater flexibility.  If that 
means abolishing the current system and its 450 job classifications, all the better.  
This is one case where nothing is truly better than something. [footnote 10: Paul C. Light, "The Battle of the Bureaus," The Washington Post, March 11, 1999.][end quote]
...
These calls for pay and classification reform have gone largely unheeded.  
Although Congress has, in selected instances, acknowledged the inadequacies of 
the Federal compensation system by authorizing individual agencies to design 
their own systems, this has not led to broader reform.  
...
[page 9]
The phrase "haves and have nots" is often used to contrast conditions.  When 
it comes to compensation in the Federal Government, a more apt phrase might 
be "cans and cannots."  A few agencies "can" design, modify, and manage their 
own compensation systems.  But most agencies "cannot" and must follow the 
General Schedule.  More than 10 percent of white-collar employees are in such 
"can" organizations that have been granted the opportunity to manage 
compensation in ways that meet their strategic goals, from the General 
Accounting Office in the 1970s to the Securities and Exchange Commission in 
2001.  All other agencies - operating in the same economic environment as the 
"cans" and faced with the same expectations to achieve important goals - are 
forced to press on as "cannots."
...
The Federal white-collar pay system continues to be defined by the General 
Schedule - the pay and classification structure established by the Classification 
Act of 1949 - and thus remains essentially unchanged.  Readers less familiar with 
the workings of the General Schedule will find a description of its current design 
and operation in the second Closer Look:  A Primer on the General Schedule (pages 
43-44).
...
The General Schedule and its supporting practices have served us well.  But it is 
not realistic to expect it to remain functional forever.  The third Closer Look:  
Why Not Preserve the General Schedule? (pages 45-47) considers the pros and cons of 
sustaining it further.  The fact that a system like the General Schedule may be at 
the end of its useful life is nothing new in modern post-industrial organizations, as 
the Federal Government must become.  Here is one compensation consultant's 
description of the futility of expecting any private sector compensation system to 
endure indefinitely:
[indented quote] If an organization is within a stable economy, in a stable industry, and operating in a status-quo operation, a pay program can be designed and forgotten.  It [will 
not] need to change.  But, for most organizations, the macroeconomy is 
constantly changing, as is the industry and the company. . . .  Unfortunately, 
many organizations put a pay design in place and, other than periodic market-
based pay level adjustments, forget about it.  Unfortunately, this does not work.  
The business world is dynamic. [footnote 11: Paul Gilles, "Building a Foundation for Effective Pay Programs," Workspan, vol. 44, No. 9, WorldatWork, Scottsdale, AZ, September 2001, p. 31.][end quote]
...
[page 10]
This point is equally applicable to the Federal Government.  In the age of the 
computer, the Federal Government is still using - with relatively minor 
modifications - a compensation system that was custom-built for the process-
obsessed age of the file clerk.  A structure that regarded performance differences 
as negligible in the context of highly standardized clerical routines has lasted to 
a time when the nature of knowledge work makes performance differences a 
crucial element in the value of many jobs.  A structure made to maximize 
internal equity has lasted to a time when the Government may need to make 
more useful comparisons to non-Federal rates of pay.  The result is that many 
observers believe our pay system no longer works and is not a useful tool for the 
strategic management of human capital.  Kay Frances Dolan, Deputy Assistant 
Secretary for Human Resources at the Department of the Treasury, offered this 
perspective:  
[indented quote] We have critical occupations at Treasury that range from economists, to 
criminal investigators, to computer specialists and accountants.  A pay system 
needs to be flexible and responsive so we can compete with other employers in 
the marketplace, and also take into account an individual's competencies and 
performance.  Our current system wasn't built with these goals in mind. [end quote]
...
Even more important, however, is whether the pay system is congruent with the 
values and objectives that 21st century public sector leaders have embraced.  Our 
pay system has significant features that are antithetical to the performance-based 
and results-rewarding Government that the framers of the Government 
Performance and Results Act of 1993 on both sides of the aisle had in mind.
...
If What We've Got Is Wrong, What Would Be Right?  
...
To support achievement of the Government's strategic goals, a more modern pay 
system is needed.  A modernized system could allow agencies considerable 
flexibility so that each agency might develop specific pay programs and practices 
to recruit, manage, and retain the results-oriented competencies necessary to 
accomplish its mission.  Specific elements of effective strategic compensation 
programs - salary levels that target specific labor markets, means of adjusting 
individual pay within a pay range, use of performance-based pay - tend to vary 
with the nature of the workforce needed by different agencies to achieve their 
unique strategic goals.
...
[page 11]
Allowing agencies to tailor their practices to their strategic 
human capital management needs would permit them to reorient their rewards 
systems and reach performance goals and objectives more effectively and 
efficiently.  Changes made to the Government's compensation system would 
impact the working lives of more than a million Federal employees.  While in 
OPM's opinion, bargaining pay should not be part of a new system, it is 
recognized that Congress would establish whether and to what extent that system 
will be subject to collective bargaining.  In advance of any potential legislative 
action, it is also recognized that the only effective way to bring about change on 
this scale is to involve all stakeholders, including employee unions, in the redesign 
process.  The challenge will be to formulate and design a modern, more strategic 
approach to Federal pay that effectively serves the shared interests of Federal 
employees and their representatives, Federal agencies and their missions, and the 
American people in the 21st century.
...
[page 12]
The System Is Market Insensitive
...
[introcutory material] One of the precepts embodied in the Federal Government's merit system 
principles is market sensitivity.  Even with the reforms in the Federal 
Employees Pay Comparability Act of 1990 (FEPCA), however, the Federal 
concept of comparability is two dimensional, reflecting only grade (level 
of work) and locality.  This conception bears little resemblance to 
established compensation practice.  Labor market shortages and 
excesses are described and analyzed in terms of occupations, skills, 
specialties, and locations, not grade level.  Private-sector employers tend 
to respond to labor markets in similar terms.  FEPCA's Achilles heel is 
its inability to reflect pay differences across occupations at the same 
level of work; the auxiliary mechanisms under the General Schedule 
are simply inadequate to recognize occupational differences.  In addition, 
FEPCA's survey methodology loses relevance owing to its pretense of 
precision and its lengthy deliberations.  Alternative means of following 
the merit system principle and giving "appropriate consideration to both 
national and local rates" need to be investigated. 
...
[report text]
The Federal Government's merit system principles include several precepts for 
governing the pay of Federal employees, including:
[indented quote]Equal pay should be provided for work of equal value, with appropriate 
consideration of both national and local rates paid by employers in the private 
sector. [footnote 1: 5 U.S.C. sec. 2301(b)(3)][end quote]
...
Commonly, that principle is cited only in terms of its first element, and even 
that is often misquoted as "equal pay for equal work."  However, as the fuller 
text indicates, the conception of merit includes considering the pay offered by 
employers outside the Federal Government, and thus comprises the principle 
of external equity.  One of the reasons the Federal compensation system falls 
short of this ideal is that it may fail to provide "appropriate consideration" 
of those external rates.  As Gail T. Lovelace, Chief People Officer at the General 
Services Administration put it:  "Under the current system we are unable to 
compete in the labor market for candidates for our most important occupations."
...
This failure in considering external rates, however, is not simply reflected in an 
overall "gap" between Federal and non-Federal pay.  Many observers argue that at 
least some gaps exist for some occupational categories and should be addressed 
appropriately.
...
[page 13]
Under the current methodology for calculating pay gaps, the gaps 
vary significantly by occupational group.  For example, some occupational groups 
in some locations show little or no pay gap, while the gap is as much as 40 percent 
for other occupations in other locations.  
...
The current system does not address such differences effectively.  This is because 
the system recognizes imperfectly - if at all - that:
[bullet] Labor market rates differ across occupations, as well as across pay grades;
[bullet] Labor market rates differ within an occupation;
[bullet] Labor market rates differ across individuals;
[bullet] Labor markets can change rapidly; and
[bullet] Organizations do not respond uniformly to labor market changes, 
because they are not affected uniformly by those changes.
...
In the late 1980s, legislation was proposed to address these shortcomings.  A 
key element of the proposal would have aligned the Federal pay structure more 
closely with labor markets.  The initial proposal would have replaced the General 
Schedule with a national pay structure covering professional and administrative 
positions and a set of local pay structures covering clerical and support positions. [footnote 2: Technically, the division would have followed career patterns, with the national structure covering two-grade interval work and the local structures covering one-grade interval work.] This proposal encountered substantial opposition reflecting concerns that the two pay structures would diverge and that one group of employees might benefit at 
the expense of the other.  Eventually, a compromise was reached in which the 
General Schedule would remain intact, but would be supplemented by locality-
based payments, which could be extended to other employees.  This compromise, 
enacted in the Federal Employees Pay Comparability Act of 1990 (FEPCA), has 
proved problematic.  Although FEPCA was acceptable enough to be enacted into 
law, it was not plausible enough to be fully implemented:
[indented quote] In the 10 years since the FEPCA was enacted, annual pay increases have not 
followed official recommendations to close the "pay gap."  The main reason:  
Neither Congress nor the Administration has found the official methodology 
credible or compelling. [footnote 3: Robert E. Moffit, "Federal Government Pay," A Budget for America, Heritage Foundation, Washington, DC, 2001, p. 339.][end quote]
...
[page 14]
Three factors contribute to this "credibility gap."  The first is rooted in FEPCA's 
definition of comparability, reflected in its statutory principle that "Federal pay 
rates be comparable with non-Federal pay rates for the same levels of work within 
the same local pay area." [footnote 4: 5 U.S.C. sec. 5301(3).]  In other words, FEPCA's conception of labor markets is two-dimensional, with the dimensions being grade (i.e., level of work) and locality.
...
This conception bears little resemblance to the reality of labor markets.  For 
example, labor market shortages and excesses are described and analyzed in terms 
of occupations, skills, specialties, and locations, not grade level.  When the 
Department of Commerce examined employment trends in the information 
technology (IT) workforce, it reported significant job growth and prospective 
shortages in specific occupations, such as database administrator, systems analyst, 
and computer engineer; [footnote 5: U.S. Department of Commerce, Office of Technology Policy, "Update: The Digital Workforce," August 2000.] it did not report a shortage of undifferentiated GS-12s and GS-13s.  The fourth Closer Look:  Labor Markets Are Not Supermarkets (pages 48-52) discusses this issue for Federal compensation in more detail and illustrates what may be FEPCA's Achilles heel - its inability to reflect systematic pay 
differences among occupations at the same level of work.
...
Private sector employers tend to respond to labor markets in terms of 
occupations or specialized skill sets.  For example, companies may raise salaries 
and starting offers for IT professionals with hard-to-find skills, but such actions 
do not automatically result in pay increases for their employees in other 
occupations.  The Federal Government lacks this nimbleness, because its auxiliary 
mechanisms available under the General Schedule to recognize occupational 
differences are inadequate, as discussed in the fifth Closer Look:  The Problem With 
Special Salary Rates (pages 53-54).
...
The second factor underlying FEPCA's credibility gap is that its methodology 
presumes an unrealistic level of precision and requires lengthy deliberation, both 
at the expense of relevance and strategic utility.  Under FEPCA, general pay 
increases are based on changes in the Employment Cost Index (ECI).  Locality 
payments, which are calculated to one one-hundredth of one percent, are based 
on surveys of salaries in each locality pay area. [footnote 6: A survey is also used to calculate locality payments for the "rest of U.S." locality pay area, generally referred to as RUS.  RUS consists of all areas of the continental United States that are not part of another locality pay area.]
...
[page 15]
Because these surveys are extensive and statistically rigorous, significant time lags occur between data gathering and pay-setting and implementation.  After adding the time that the 
Federal budget planning and appropriation processes must necessarily entail, the 
result is a tenuous relationship between pay adjustments and current market 
conditions.
...
The third factor diminishing FEPCA's credibility is that its statutory language 
requires the calculation of a single average pay gap in each locality pay area.  
Even though sophisticated methods of weighting are used to take into account 
the actual presence and distribution of Federal work, the result nonetheless 
disguises and ignores substantial differences in the degree to which Federal and 
non-Federal salaries for particular occupations or grades differ.  By its very nature 
an average is describing a set of values half of which are higher and half are lower 
than the summary statistic.  In this instance, the average the law requires us to use 
in describing a "pay gap" is no Golden Mean, but more of a Great Muddle that 
describes nothing very meaningfully and masks the relevant differences across 
occupations and levels of work in each locality pay area, to the strategic detriment 
of the entire approach.  
...
This is not to say that FEPCA should be rated a failure.  It would be more 
accurate to say that FEPCA has been both a partial success and an unavoidable 
failure.  Under FEPCA, the Federal Government has:
[bullet] Successfully implemented and administered a locality pay system;
[bullet] Gained a better understanding of labor markets;
[bullet] Developed experience in conducting and applying salary surveys;
[bullet] Introduced market-oriented tools such as recruitment bonuses and retention 
allowances; and
[bullet] Learned that defining and implementing comparability in simplified and overly 
broad terms would eventually and inevitably produce the effect of delivering 
actual comparability to relatively few while overpaying or underpaying others.
...
For many years, employee groups and others considering further changes to 
the Federal pay system have taken the position that FEPCA should be fully 
implemented before making more changes. [footnote 7: See Strengthening the Link Between Pay and Performance.  The Report of the Pay-for-Performance Labor-Management Committee, Washington, DC, November 1991.]
...
[page 16]
However, as the Federal budget once again faces deficits, the Administration has not requested and Congress may be unlikely to fund the $11 billion for locality adjustments and related benefits costs - which would subsequently be built into the budget base and increase 
outyear costs - that "full implementation" of FEPCA in 2003 would require.  
This reality is particularly compelling in light of that final "lesson learned" from 
FEPCA implementation - that ignoring occupational differences undermines the 
system's strategic utility.  Rather, it may now be time to build on FEPCA's 
significant lessons and explore and develop alternative means and meanings for 
following the merit system principle to give "appropriate consideration to 
both national and local rates."  The sixth Closer Look:  Whither Comparability? 
(pages 55-56) discusses this issue in more detail.  This much remains clear:  
the market sensitivity that our merit system contemplates is essential for a robust 
21st century pay system. 
...
If What We've Got Is Wrong, What Would Be Right?  
...
Our white-collar pay system should be reexamined to identify and explore 
alternatives for addressing external or market equity and making more useful 
comparisons with non-Federal pay.  External comparisons might better be made 
against segments of outside labor markets - not against the entire economy of 
non-Federal white-collar work - so that a nimble system can recognize and 
accommodate strategic occupational differences.  The methodology for such 
comparisons may need to provide a better balance of cost, timeliness, and 
precision.  And the system should perhaps recognize the limitations of any 
methodology used to give the merit system principle's "appropriate consideration 
of both national and local rates paid by [other] employers" and move beyond 
attempting to survey and measure rates precisely for specific positions in specific 
locations.
...
[page 17]
The System Is Performance Insensitive
...
[introductory material]
In the current Federal white-collar pay system, performance does not 
matter very much.  The way the Government delivers pay increases - 
and the relative value of those pay increases - reinforces the message 
that performance is secondary at best.  In any given year, Federal 
employees receive more pay increases for remaining on the rolls than 
for meeting or exceeding performance expectations.  The dominance 
of these performance-insensitive pay increases can make performance-
oriented tools appear trivial.  As recent events have shown all too 
clearly, Government performance is critically important, and system 
improvements may be needed so that agencies can recognize and value 
the competencies and contributions of their employees better.  To be 
truly results-oriented, the Government would require a compensation 
system where performance truly makes a difference.
...
[report text]
The Federal white-collar pay system sends and reinforces the message that 
performance does not matter.  This message harms both mission accomplishment 
and recruiting effectiveness:
[indented quote](The) current system is weakening the public service it was designed to protect.  It underwhelms at almost every task it undertakes. . . .  Sad to say, when 
young Americans are asked to picture themselves in public service careers, they 
picture themselves in dead-end jobs where seniority, not performance, rules. [footnote 1: Paul C. Light, "Battle of the Bureaus," The Washington Post, March 11, 1999.]
...
This was not the intent of the framers of the system.  The closing words of the 
very same merit system principle that charges us to consider external equity make 
it quite clear that performance should matter:
[indented quote]. . . and appropriate incentives and recognition should be provided for 
excellence in performance. [footnote 2: 5 U.S.C. sec. 2301(b)(3).][end quote]
...
But the current system's structures and incentives were designed for a time when 
"performance" was so highly routinized that many employees simply had little 
means or opportunity to distinguish themselves from their coworkers. 
...
Within the Federal Government, our understanding of "performance" has 
become much more sophisticated, particularly with the advent of the 
Government Performance and Results Act of 1993, which shifted our focus 
away from process and toward results and strategic outcomes.
...
[page 18]
But our compensation system does not reflect that sophistication.  (The Glossary of 
this paper offers a further discussion of this shift in conception of the term 
"performance" on page 74.)
...
At the organizational level, we now understand that performance is the 
organization's success in achieving its mission; it is not the arithmetic average of 
individual employees' performance ratings, nor is it the sum of the organization's 
outputs and activities.  At the individual level, we now understand that 
performance is not limited to how reliably a position's tasks are executed (such as 
the quality and quantity of a typist's output).  Instead, individual performance can 
be measured and recognized in several ways.  For example, an organization can 
evaluate an employee on the significance of his or her work, in addition to its 
objective quality, with rewards contingent on both the employee's contributions 
and the organization's success.  Or an organization can evaluate and reward an 
employee for acquiring the competencies that truly make a difference in achieving 
expected results.  Private sector organizations have recognized such options and 
created supporting compensation practices such as results-driven variable pay and 
pay linked to strategic competencies.  With some exceptions, the Federal 
Government has not done so to any meaningful extent. [footnote 3: Demonstration projects have tested such practices.  Examples include merit pay in the Department of Commerce and contribution-based pay in the Department of the Air Force.  However, attempts to make these practices more broadly available have not been successful.]
...
Worse yet, the Federal Government does not provide clear, strong incentives for 
excellent task execution, let alone individual contributions or organizational 
success.  We do not even have a functioning merit pay system, the prevalent 
mainstay of private sector compensation systems designed for the kind of 
professional [footnote 4: In the private sector, "professional" is a term of art that covers nonsupervisory work that is FLSA-exempt.  The Federal counterpart is two-grade interval professional and administrative work, including occupations such as IT specialist, attorney, and budget analyst.] white-collar knowledge work that now dominates the Federal 
Government.  Some observers have noted a general interest coupled with a 
general hesitancy among public employers to adopt new models for pay design 
and delivery, [footnote 5: Howard Risher, "Are Public Employers Ready for a 'New Pay' Program?"  Public Personnel Management, vol. 28, No. 3, International Personnel Management Association, Alexandria, VA, Fall 1999.] and the most recent attempt at a governmentwide pay-for-performance system, the Performance Management and Recognition System 
(PMRS) for Federal managers in grades GS-13 through GS-15, was abandoned 
nearly a decade ago.  
...
[page 19]
Unfortunately, that system was not replaced by another performance-oriented system that built on the "lessons learned" from PMRS. [footnote 6: Those lessons included a recognition that creating a statutory entitlement to a predetermined base pay increase on the basis of an assigned summary performance rating, in combination with a statutory ban on limiting the use of rating levels - all in the name of "fairness" compared with the treatment of non-managerial employees under the regular General Schedule - produced substantially increased costs with no demonstrable benefit to the taxpayer.  The performance management programs the agencies designed and operated remained largely focused on process measurement and at the termination of the system in 1993, five out of six PMRS employees were rated above "Fully Successful."  See also Achieving Managerial Excellence:  A Report on Improving the Performance Management and Recognition System.  Report of the Performance Management and Recognition System Review Committee, 
November 1991.] Instead, it was replaced by the status quo ante, sending - unintentionally but inevitably - the message that excellence is of little consequence.
...
That message actually begins with the very structure of the General Schedule 
itself.  OPM's research into non-Federal compensation practices shows that in 
private sector organizations carrying out similar kinds of work and recruiting 
similar talent, pay structures provide much more room for performance-based 
distinctions.  The General Schedule uses a 30 percent range width (i.e., a GS 
grade's maximum rate equals 130 percent of its minimum rate).  In contrast, our 
competitors' pay structures typically have range widths of at least 50 percent for 
professional positions, and ranges of 80 percent or more are common under 
paybanding systems. [footnote 7: A recent study of private sector companies with functions comparable to the Federal Government's, carried out for OPM by Booz Allen Hamilton, found that three out of four companies surveyed used ranges wider than 40 percent, with range-widths often falling between 50 and 80 percent.  Only 5 percent of companies report using ranges of 20 to 
30 percent.  Private Sector Compensation Practices, Booz.Allen & Hamilton - Report to the U.S. Office of Personnel Management, Washington, DC, February 2000.  Broadbanding Design, Approaches and Practices, American Compensation Association/Hewitt Associates, 1994.]  In effect, a "pay band" in the Federal sector is simply a normal salary range in the private sector.
...
The General Schedule pay administration rules do have some pay-for-performance features.  But these features do not make the current system a performance-oriented system.  The Department of Energy's Deputy Assistant Secretary for Human Resources, Timothy M. Dirks, put it this way:
[indented quote] Greater flexibility is needed in calibrating pay to individuals' skills, contributions, and value to the enterprise.  The current system is too rigid and does not provide the range of mechanisms needed to make meaningful distinctions.[end quote]
...
Indeed, the way Government delivers pay increases - and the relative value of 
those increases - reinforces the message that performance is secondary at best.  
Consider that:
...
[page 20]
[bullet] The General Schedule system assigns more weight to position than to 
performance.  Promotion - placement in a position at a higher grade - 
results in an immediate pay increase and a substantial increase in long-term 
earnings, while outstanding performance at a particular level of work 
guarantees nothing.  
[bullet] The Federal Government's tools for managing base pay are limited.  
Fundamentally, the pay system treats pay setting and pay adjustments as a 
series of binary decisions.  Exceptions are permissible, but expected to be rare 
and may require higher level approval.  
...
Upon appointment, the pay system takes into account only the fact that the 
employee meets basic qualifications requirements - in our binary scheme, 
the employee is in a "go" status without further differentiation.  Statute then 
specifies that the pay for a newly hired employee must be set at the minimum 
rate of the grade of the employee's position, unless the employee has 
unusually high or unique qualifications or the agency has a special need.  An 
appointee with better than average qualifications still gets the minimum rate.  
Consequently, with rare exceptions, no differentiation can be made to relate 
starting pay to an incoming individual's performance capacity.
...
After initial appointment, pay adjustments occur either within a grade's pay 
range, where the employee progresses further through the grade's fixed-step 
rates, or between ranges, when an employee is promoted to a higher grade.  
Here, too, the law establishes lock-step rules using "go"/"no go" judgments.  
...
[sub-bullet]	The primary means for adjusting an employee's relative position in a 
grade's pay range is the within-grade increase (WGI).  The WGI is 
designed to reward experience and loyalty, not excellence, and is based on 
a judgment that the employee's work is of an "acceptable level of 
competence" - again, a binary decision.  There is no way to make base pay 
distinctions between a very good - but not outstanding - employee and a 
moderately good one; their WGIs are identical.  The quality step increase 
(QSI), which accelerates movement through the range by awarding the 
next higher fixed-step rate in advance of the normal waiting period, is also 
available, but is limited to outstanding employees, and less than 4 percent 
of all General Schedule employees receive them.  In contrast, many private 
sector and demonstration project approaches to managing within-range 
movement are designed to affect employees' relative position in the range, 
and pay policies are often set to give only the best performers access to 
rates in the upper part of a range. [footnote 8: See Alternative Pay Progression Strategies: Broadbanding Applications, U.S. Office of Personnel Management, Washington, DC, April 1996.]
...
[sub-bullet]	When an employee is promoted, statute again dictates the resulting pay 
adjustment.  Promotions, particularly competitive promotions, are perhaps 
the strongest pay-for-performance linkage currently available.  Nonetheless, 
the outcome is invariable and again of a binary character - the promoted 
employee is a "go" and given a predetermined payoff irrespective of 
relative performance or value to the agency.
...
[bullet] Pay-for-performance tools coexist with structural and time-based pay 
increases.  This coexistence creates two problems.  
...
[sub-bullet]	First, it sends the message that pay will - and should - increase with the 
inflation that fuels wage increases - which drive structural adjustments - 
and with the passage of time.  This message is reinforced by actual 
practice.  In a typical year over the past decade, Federal employees 
received more and greater pay increases simply for remaining on the 
payroll than for meeting or exceeding performance expectations.  The 
chart shown below illustrates this point.  
...
[A graph on The Role of Performance in Pay contains the following bullets: *Total increase in payroll as a result of increases to individual employees' pay - 7.1%; *Over three-fourths of that increase in total payroll was insensitive to perforamnce; *General increase and locality pay adjustments - 4.8%; *Over half of the remainig 2.3% total payroll increase was also insensitive to performance.  The chart includes a pie graph showing the following proportions of the overall pay increases: General Increase plus Locality - 68%; Within Grade Increases - 17%; Career Ladder Promotions - 6%; Competitive Promotions - 6%; Quality Step Increases - 3%. Source: Central Personnel Data File.]
...
[page 22]
Of the total pay increases granted, those that are either completely 
automatic or essentially so - given their low threshold and predetermined 
size and distribution - are shown as the non-patterned wedges of this pie.  
They truly overwhelm the two forms of increase in the General Schedule 
system that provide some meaningful performance contingency:  the 
competitive promotion and the QSI.  Automatic and semi-automatic 
increases are artifacts of the fixed-step pay schedule:  there is no way to 
not grant them when the President must issue pay tables with unique dollar 
amounts assigned to each grade and step.  A General Schedule Federal 
employee's grade and step are known, rather than a precise annual salary.  
That latter value is derived through a look-up function tied to a published 
salary table, not through any considered judgment about the value of the 
employee's contributions or competencies.
...
This year, the Government will distribute 5 billion dollars on these 
performance-insensitive pay adjustments and related benefits costs.  An 
employee needs to do little, if anything, to earn these increases; they are 
essentially entitlements. [footnote 9: This characterization is not rhetorical:  statute, appeal rights, and case law make it quite clear that employees do, in fact, have a property right in these increases.]  In contrast, private sector companies take great 
pains to avoid creating pay entitlements and focus instead on the strategic 
leverage that pay delivery tools provide.
...
[sub-bullet]	Second, the dominance of performance-insensitive pay increases makes 
performance-oriented tools appear trivial.  For most employees, their time-
driven increases have much more value than any awards or raises they 
receive for outstanding performance.  Furthermore, the limited extent and 
impact of performance-sensitive pay is strongly at odds with a strategic 
human capital management perspective.  In light of the limitations that 
constraining statutory system features impose, many Federal leaders with a 
General Schedule workforce may well have felt some frustration as they 
applied the General Accounting Office's self-assessment checklist for 
evaluating the effectiveness of their human capital management and scored 
the following item:  
...
[indented quote]
4.	Compensation.  Does the agency's compensation system help it 
attract, motivate, retain, and reward the people it needs to pursue 
its shared vision?
Look for:  Indications that the agency has examined its compensation 
system and considered changes in light of its human capital needs, 
including skill-based compensation, and identified relevant constraints 
and flexibilities.  Evidence that consideration has been given to making 
compensation packages more competitive. . . .  Industry benchmarks 
on compensation and information . . . on average salary and projected 
demand for given occupations. [footnote 10: Human Capital:  A Self-Assessment Checklist for Agency Leaders, General Accounting Office (GAO/OCG-00-14G), Washington, DC, September 2000, p. 21.][end quote]
...
In these various, cumulative ways, the General Schedule pay system sends the 
subtle but unmistakable message - overriding any management protestations 
to the contrary - that performance is a secondary consideration at best.  This 
phenomenon is documented more specifically in the seventh Closer Look:  
How the System Does - and Doesn't - Reward Performance (pages 57-63), which 
examines the relative impact of performance alongside General Schedule 
system features like general increases, time, and position. 
...
[bullet] Agency efforts to strengthen the linkage between pay and performance 
are undermined by the fiscal dynamics of the compensation system.  
One bright spot in the Federal compensation system is awards.  When 
compared to other public sector employers, such as State governments, 
our awards system gives Federal agencies considerable flexibility to reward 
excellence through honorary recognition, cash, or time off.  But few agencies 
offer the financial incentives commonly available in the private-sector, where 
employees may receive bonuses of several percent of salary or more. [footnote 11: Jeremy Handel, "Variable Pay Highlights Year in Compensation," Workspan, vol. 44, No. 9, WorldatWork, Scottsdale, AZ, September 2001.  This article, reporting highlights from a compensation survey, reports that FLSA-exempt employees in the south and east regions of the United States received variable pay worth approximately 10 percent of annual salary.]  This 
is not surprising, because, as the earlier chart illustrates, our system requires 
Federal agencies to deliver a substantial amount of money through pay 
increases that are essentially automatic.  For example, in 2000, General 
Schedule employees received a pay adjustment of approximately 3.7 percent 
of base pay, [footnote 12: This is the average General Schedule increase in 2001 for employees in the continental United States, comprising a 2.7 percent general increase in the basic pay rate and a 1 percent average locality pay adjustment.  Individual increases varied, depending on factors including location and coverage by a special salary rate schedule.] and more than one in every three General Schedule employees received a within-grade increase. [footnote 13: In FY 2000, approximately 38 percent of General Schedule employees received a within-grade increase.  A within-grade increase raises the employee's pay by one step, or approximately 2.6 to 3.3 percent of base pay.]  Such increases do not merely send the message that performance is secondary.  By absorbing the lion's share of annual personnel funding, they may effectively prevent agencies from 
suggesting otherwise through performance-based increases and lump-sum awards.
...
[page 24]
In addition, Congress has on occasion curtailed the limited agency 
spending on performance-driven lump-sum cash awards that does occur - 
few agencies spend more than 1 percent of their basic payroll on awards.  
Such congressional action - usually carried out through the appropriations 
process and affecting only a few agencies at a time - can have a severe 
chilling effect on other agencies' use of these flexibilities to link pay and 
performance.
...
This situation would need to change if the Government is to establish a 
meaningful performance culture.  As recent events have shown all too clearly, 
Government performance is critically important, and we would be better served 
by a compensation system that reflects and reinforces this importance.
...
Of course, it is also important to remember that any compensation system 
changes that increase an emphasis on a performance linkage will only succeed 
to the extent that credible, reliable measures of that performance are readily 
available.  A rigorous performance management system that employees trust to 
make appropriate performance distinctions is the sine qua non for stronger 
linkages, both for setting clear expectations and accountability and for establishing 
measures that can bear the burden of driving pay decisions.  Our eighth Closer 
Look:  The Challenge of Performance Measurement (pages 64-66) discusses this issue 
further.  Past and present efforts aimed at improving financial management and 
information in the Federal Government will support efforts in this regard.  The 
fact that Federal agencies do not have the luxury of refined accounting systems 
measuring a competitive bottom line or economic value added is finally fading as 
an excuse for not defining and measuring expected results.  A results-focused, 
accountable Government operating effectively under the Government 
Performance and Results Act must know where it stands and how it has or has 
not improved.
...
If What We've Got Is Wrong, What Would Be Right?
...
The Federal pay system needs to include improved mechanisms for addressing 
individual equity so that it could allow agencies to recognize and value the 
competencies and contributions of their employees better.  The current system's 
narrow pay ranges, time-based pay progression rules, and across-the-board 
delivery of annual increases impair the Government's ability to use pay, and 
particularly adjustments to base pay, to communicate important values and 
goals and to reward results.  The Government's ability to establish and sustain 
a performance culture is essential.  
...
[page 25]
Such a culture requires clear expectations and 
robust measures that make meaningful distinctions across levels of performance 
and reinforce accountability.  More importantly, however, that culture must 
be supported by a compensation system where those performance distinctions 
matter.  
...
[page 26]
An Excess of Internal Equity
...
[introductory material] The Federal compensation system emphasizes internal equity at the 
expense of external equity and individual equity. The system does not 
permit Federal agencies to allow non-classification factors - such as 
the importance of the work to the employing agency, salaries paid by 
competing employers, and turnover rates - to influence base pay.  The 
classification system's rigid quality defeats strategic human capital 
management and nimbleness.  Most important, this internal equity 
emphasis limits the Government's ability to give external equity and 
individual equity their appropriate weight in compensation decisions.
...
[report text]
The merit system principle governing Federal pay includes as its most familiar and 
most prominent precept that the Government should establish and maintain 
logical and equitable salary relationships inside the organization itself, stated as:
[indented quote]Equal pay should be provided for work of equal value. . . .[footnote 1: 5 U.S.C. sec. 2301(b)(3).][end quote]
... 
As noted earlier, this precept is known as internal equity.  It is an indispensable 
element of fairness in the workplace and a core principle of every modern 
compensation system.  But modern compensation systems balance this principle 
with two other principles, as discussed above:  external equity (relating employee 
pay to external labor market rates) and individual equity (relating employee pay to 
the individual employee's contributions and results).  The merit system principle 
clearly recognizes the need for balance, and its language contemplates all three 
forms of equity:  internal, external, and individual.
...
Unfortunately, the Federal compensation system does not achieve this balance:  it 
emphasizes internal equity at the expense of external and individual equity.  This 
overemphasis is reflected in:
...
[bullet] A rigid linkage between a position's value - as determined by classification [footnote 2: Here, "classification" refers to the Federal Government's job evaluation system, the General Schedule position classification system, which applies centralized criteria across all white-collar work to determine the proper occupational series, position title, and pay grade of each position..  This use of the term "classification" differs from private sector usage, where "classification" refers to a specific method of job evaluation.] - and its grade; and 
...
[bullet] A rigid linkage between a position's grade and the employee's pay.
...
[page 27]
In the Federal Government, job evaluation points = grade = base pay.  Under this 
approach, job evaluation does not simply inform base pay; it dictates base pay.  The 
system's architecture and guidelines do not permit Federal agencies to allow non-
classification factors - such as the importance of the work to the employing 
agency, salaries paid by competing employers, turnover rates, and added value 
derived from employees acquiring additional competencies applicable to the same 
level of work - to influence base pay, other than by notable exception.  OPM's 
research into public and private sector compensation systems suggests that this 
situation is extraordinary.  Even organizations that place a high value on internal 
equity do not implement it in such a confining manner. [footnote 3: One example is the State of Minnesota.  Although internal equity is a primary value of Minnesota's compensation system, job evaluation is not the sole determinant of a position's grade.  Job evaluation produces a preliminary grade, which may be adjusted upward or downward one or two grades based on staffing, market, or other considerations.  (See "State Employee Compensation," Office of the Legislative Auditor, State of Minnesota, St. Paul, MN, February 2000, p. 13.)]  More important, the dominant rigidities of the classification system put strategic human capital management and nimbleness nearly beyond reach.
...
The Government's emphasis on and implementation of internal equity creates 
several problems.
...
[bullet] First, it rewards and perpetuates hierarchy.  Modern communications 
technology and more enlightened, empowering management practices have 
rendered the command-and-control paradigm an irrelevant and inefficient 
allocation of scarce resources.  Past and present executive branch leadership 
has consistently called for agencies to use organization structures that are 
much more flat, responsive, and adaptable:
...
[indented quote]To shrink the distance between citizens and Cabinet members, the 
Administration will flatten the Federal hierarchy, reduce the number of 
layers in the upper echelon of Government, and use work force planning 
to help agencies redistribute higher-level positions to front-line, service 
delivery positions that interact with citizens. [footnote 4: A Blueprint for New Beginnings, Executive Office of the President of the United States of America, U.S. Government Printing Office, Washington, DC, 2001, p. 179.][end quote]
...
On the surface, this inconsistency is surprising because the principle of "equal 
pay for work of equal value" is egalitarian, and using classification to value 
work seems to provide effective controls to limit the potential for unfettered 
"empire building."  But our job evaluation system values work in a way that 
insistently encourages developing and maintaining organizational layers.  
...
[page 28]
For example, the classification system rewards supervision, by requiring - with 
very few exceptions - supervisory positions to be evaluated at least one grade 
higher than subordinate positions. [footnote 5: This oversimplifies the concept of "base level of work supervised," but is generally accurate.]  And the three classification factors that carry the most weight in the classification of nonsupervisory jobs - knowledge 
required, supervisory controls, and guidelines - are all explicitly or implicitly 
related to a position's location in the organization's chain of command. [footnote 6: These are the three dominant factors used under the Factor Evaluation System (FES), a point-factor job evaluation system.  FES classification standards do not cover all occupations, but even non-FES standards use conceptually similar factors.]
...
[bullet] Second, the internal equity emphasis limits the Government's ability to give 
external equity and individual equity their due weight in pay decisions.  This 
limitation has both cultural and technical aspects.  The cultural aspect is a 
continuing - though decreasing - reluctance to make pay distinctions between 
employees based on factors other than job value as measured by classification, 
as illustrated by the history and implementation of the Federal Employees Pay 
Comparability Act.  The technical aspect is that position carries more weight 
in Federal compensation than market pay or performance.  Consequently, 
classification is more readily available - and much more powerful (in dollar 
terms) - than tools for making pay distinctions based on performance and 
labor market considerations.  Congress has delegated to agencies the authority 
to classify positions.  A manager can immediately increase an employee's pay 
substantially by getting the employee's position reclassified to a higher grade. [footnote 7: Depending on the employee's grade and step, reclassification to a higher grade will usually result in an immediate pay increase ranging from 5 to 20 percent.] The additional funding that the higher grade requires, particularly in future 
years, has often been provided automatically through centralized agency 
budgeting processes - like "manna from heaven," as one manager put it.  
Providing an award or retention allowance of comparable value can prove 
much more difficult and may even require OPM approval. [footnote 8: For example, most agencies continue to require multiple internal approvals for substantial payments like significant retention allowances and large cash awards.  For most agencies outside the Department of Defense, OPM approval is required for most cash awards of more than $10,000.]
...
[bullet} Finally, limiting the potential for performance and labor market distinctions to 
influence base pay has actually undermined internal equity, because a lack of 
adequate market- and performance-oriented compensation tools creates a 
strong incentive to misclassify positions.  This paradox is illustrated in the 
final Closer Look:  Classification - The Unintended Tool of Choice (pages 67-68).
...
[page 29]
The outcome of these problems is a classification system that lacks credibility and 
is perceived by many as superfluous at best, a hindrance at worst.  A recent, 
precipitous decline in the number of Federal classification specialists reflects 
broader trends such as reductions in staff functions, the replacement of HR 
specialists with HR generalists, and increased efficiency through automation. [footnote 9: An Occupation in Transition, "Part I:  Federal Human Resources Employment Trends" U.S. Office of Personnel Management, Washington, DC, September 1999.] However, this decline - which shows no signs of reversal even as other human resources functions are being revitalized - can also be construed in part as a management commentary on the "value added" by classification.  The recent OPM research on job evaluation suggests that many organizations are reassessing the costs and benefits of spending scarce resources to operate an elaborate job evaluation apparatus and drastically simplifying their processes. [footnote 10: Robert L. Heneman, Work Evaluation:  Strategic Issues and Alternative Methods, Human Resources Research Organization (HumRRO) - Report to the U.S. Office of Personnel Management, Alexandria, VA, June 2000.][footnote 11: Robert L. Heneman, Work Evaluation: Leading Company Methods and Thought Leader Perspectives, Human Resources Research Organization (HumRRO) - Report to the U.S. Office of Personnel Management, Alexandria, VA, January 2001.] Another possible interpretation of the decline in Federal classifiers is that classification requires a decreasing degree of analysis and extent of expertise.  This would 
certainly be true if classification has become, in many cases, a routinized exercise 
to justify a specific outcome (i.e., a desired grade and pay level) or - worse yet - 
a cynical "game" that is played by a few cagey and artful practitioners, instead of 
a careful analysis of work and a thorough, objective comparison of that work to 
established standards.  These developments contribute to decreasing expertise and 
accuracy in classification - which will further erode the system's credibility and 
perceived value.
...
If What We've Got Is Wrong, What Would Be Right?
...
Equal valuation of work with similar characteristics within an organization 
maintains internal equity, which is an appropriate and important part of any 
sound compensation system.  However, the apparatus used to ensure internal 
equity must be credible and cost effective and add value.  Although internal equity 
may over-dominate the current system - crowding out the ability to make useful 
judgments about external market rates and to reward performance - retaining 
some internal equity structure, grounded in job evaluation, would be critical to 
support fairness to employees.  
...
[page 30]
Some governmentwide framework for job evaluation would also be valuable to ensure accountability and transparency, as well as compliance with the Equal Pay Act, and to support other compensation management functions, such as making pay comparisons with external markets to maintain external equity.
...
[page 31]
Conceptual Flaws, Tangible Problems
...
[introductory material]
The Government's approach to compensation management rests on 
the outmoded idea of the single "correct" answer.  Maintaining a "single 
employer" model for pay has required the Government to retain a level 
of central management that is increasingly at odds with the world we 
live in.  At the same time, striving for the single "correct" answer has 
slowed the Government's decision making ability to the point where 
often even "correct" answers cannot be made in a timely manner.  And 
deviating from the "correct" answer is difficult to achieve and takes 
too long to be effective.
...
[report text]
The problems in Federal white-collar pay and job evaluation are not simply a 
product of ineffective practices; they are also the product of the Government's 
approach to compensation management.  That approach is one of centrally-
designed, uniform solutions based on thorough planning and analysis.  It dates 
to the nationwide application of the General Schedule classification system, and 
it has persevered into the 21st century.  Even as more pay flexibilities became 
available is the 1990s, the central system dominated and distributed the vast 
majority of payments employees received.  This approach supplied and 
reinforced a powerful connotation to the phrase "Government as a single 
employer" - underscoring the idea that there is a single, demonstrably correct 
solution to human resources management problems which every Federal agency 
should use.  In the modern era of strategic human capital management and 
particularly for many areas of compensation management, that conception may 
have outlived its usefulness - because a single correct solution probably does 
not exist and because the search for the correct solution may result in untimely 
action.
...
The limits of "single" solutions
...
Today few compensation problems are amenable to a "single" correct answer.  In 
1949, a "single employer" approach to pay system design and delivery made sense, 
for two reasons.  First, the Federal Government was composed largely of clerical 
employees performing stable, routinized work.   It had, if not a "single employee," 
a highly homogeneous workforce.  Second, there were practical arguments for 
central management of pay.  In a "Government of clerks," the expertise needed 
to design and administer a pay system was not widely distributed.  
...
[page 32]The generally accepted models of personnel administration typically confined wage and salary administration to the comptroller's shop where labor economics models 
predicated on tenure as a surrogate for value cranked out annual salary budgets 
and controls.  And uniform procedures and treatment reduced the possibility of 
administrative error and were more amenable to oversight and inspection.  But 
now, neither reason holds true.
...
The Federal Government's work and workforce are highly complex.  Agencies 
perform diverse missions, with diverse workforces, and increasingly compete in 
different labor markets.  A single approach to pay and job evaluation that closely 
specifies how agencies will evaluate work, how agencies will set and adjust 
individual salaries, and how agencies will move employees through pay ranges 
cannot realistically hope to accommodate this diversity.  Congress has, on 
occasion, acknowledged the inadequacies of a monolithic approach to pay by 
giving selected agencies the authority to design pay and job evaluation systems 
specific to their unique missions and workforces.  But strategic management of 
human capital would call for pay design and delivery tailored to the agency, 
mission, and workforce to become the rule rather than the exception.  This view 
is supported by ongoing agency efforts to be released from the strictures of the 
current compensation system.  An increasing number of Federal agencies have 
demonstrated that they have the capacity to design and manage their own 
compensation systems.
...
Efforts have been made to address the problems of excessive centralization 
through delegation.  This has worked well when the pay system and its tools are 
viable, as is seen increasingly with targeted recruitment and retention payments 
well planned and budgeted in advance.  But delegation will be insufficient if the 
problem lies within the system itself; and, as noted above, our system with its 
myriad technical specifications is increasingly unable to accommodate Federal 
agencies' diverse demands.
...
The problem with searching for the "correct" solution
...
Federal pay practices are implicitly assumed to be "correct."  Once established, 
agencies must implement them as written, often with no or little room for 
judgment.  For example, agencies must classify jobs in accordance with published 
classification standards, must provide within-grade increases in the amount and at 
the time specified by regulation, and must provide the annual pay raises specified 
by governmentwide pay tables.
...
[page 33]
An agency that wishes to change these "correct" practices must prove the need 
to do so.  And the burden of proof is high.  For example, if an agency perceives 
a need to increase salaries for employees in a given occupation, that agency (and 
other agencies in the area) must prepare and submit a request for special salary 
rates. [footnote 1: Consensus among affected agencies is not required, but a lack of consensus may significantly reduce the likelihood that a special salary rate will be established.]  This request must document, in detail, the need for the special salary rate, 
including factors such as vacancy and quit rates, the nature of the existing labor 
market, and the inadequacy of existing pay and non-pay solutions. [footnote 2: Adapted from 5 CFR sec. 530.303.]  Similarly, to establish a personnel demonstration project, [footnote 3: Under current law and regulation, a personnel demonstration project is the only way an agency can implement an alternative approach to classification and pay increases without separate agency-specific legislative authority.] the agency must develop and submit 
a project plan that describes, in detail, the project's intended outcome, methods, 
measurable objectives, costs, and benefits. [footnote 4: These requirements reflect the research function of a demonstration project.]  Then OPM must review and approve 
these submissions.
...
A high burden of proof makes it easier for the Government to defend those 
few deviations from standard pay and job evaluation practices that are allowed.  
But that same burden of proof also makes it costly and difficult to change such 
practices when necessary and even when they offer improved strategic value.  
The planning and consultation a demonstration project requires can consume 
2 years or more.  The result is that the pay system is not nimble; even if the 
Government's response to change is technically appropriate, it may well be 
untimely.
...
In its most recent annual report on locality pay, the President's Pay Agent 
raised questions about the process carried out under the Federal Employees Pay 
Comparability Act of 1990 (FEPCA), which in many respects is emblematic of 
the "single" and "correct" solution approach.  The Pay Agent noted:
...
[indented quote]. . . serious concerns about the utility of a process that focuses too much 
attention on locality payments and not enough attention on the differing labor 
markets for major occupational groups or the performance of individual 
employees. [footnote 5: Report on Locality-Based Comparability Payments for the General Schedule, Annual Report of the President's Pay Agent (Secretary of Labor, Director of the Office of Management and Budget, Director of the Office of Personnel Management), Washington, DC, December 2001.][end quote]
...
[page 34]
...
If What We've Got Is Wrong, What Would Be Right?
...
Of course pay systems and decisions should be grounded in facts and analysis.  
But the Federal Government's current paradigm makes the pay system very 
inflexible and quite unresponsive.  Addressing this shortcoming would require the 
Federal Government to broaden its conception of "Government as a single 
employer."  This likely would entail acknowledging the limitations of centrally-
designed, uniform systems by establishing a more open framework - based on 
some core values and using some umbrella principles - and giving agencies 
greater flexibility to tailor pay systems and practices to their missions and strategic 
objectives.  And that, in turn, would also require more openness to change - a 
greater willingness to adopt, modify, and discard pay systems and practices in the 
interest of effective strategic human capital management.  
...
[page 35]
Final Thoughts About the Timelessness of Merit
...
[introductory material]
Merit system principles, the foundation of the modern idea of a civil 
service, remain important today.  Principles such as equity, procedural 
justice, and openness are essential to a sound public service.  Agencies 
that have already moved outside the mainstream pay and job evaluation 
systems continue to use these principles effectively.  As the Federal 
Government considers modernizing our compensation systems, merit 
system principles can remain our essential guides.
...
[report text]
Even in a modernized pay system, the merit system principles, with their clear 
recognition of internal equity, external equity, and individual equity, can and 
should still serve as the fundamental drivers of Government action.  These core - 
and remarkably timeless - principles sustain the vision that the Government 
remains a single employer in principle, if not in all areas of specific practice.  
...
Some particularly important lessons in this regard emerged from the research 
into Federal agencies that use pay systems outside the general title 5 model, 
either through demonstration projects or through independent authority granted 
by Congress.  The first lesson is that when one looks across the entire 
Government, a significant portion of the Federal Government has already left 
the centralized system, [footnote 1: HRM Policies and Practices in Title 5-Exempt Organizations, U.S. Office of Personnel Management, Washington, DC,August 1998.] so the notion that further change would disrupt a completely stabilized system is misplaced.  Even more important, however, is the second lesson:  when agencies operating under the merit system are free to do "anything," they generally do sensible things. [footnote 2: Demonstration Projects and Alternative Personnel Systems:  HR Flexibilities and Lessons Learned., U.S. Office of Personnel Management, Washington, DC, September 2001.]  They own and adapt what makes sense for them and their missions.  Managers are not given unfettered 
discretion to set and adjust pay, but operate within agency-specific rules and 
guidelines, including budget restrictions.  And these agencies have in fact 
succeeded in using their pay and job evaluation systems to improve the strategic 
management of their human capital by aligning reward systems with strategic 
goals and mission accomplishment.  Congress has recognized such successes by 
its actions to make permanent successful paybanding demonstration projects in 
the Navy and Commerce Departments.
...
[page 36]
Aside from their specific directives related to pay, the merit system principles 
include other precepts that characterize our current systems.  These constitute 
some extremely important elements that are "right" and that ought not to be 
jettisoned as "wrongs" are addressed.  In particular, the merit system principles 
underscore important themes that compensation systems ignore at their peril.  
...
One such theme is the principle of what has come to be called procedural justice, 
whether expressed generally as "all employees . . . should receive fair and 
equitable treatment" [footnote 3: 5 U.S.C. sec.2302(b)(2).]  or spelled out in specific prohibited personnel practices.  A great deal of the dense, rigid administrative detail that characterizes our current pay and job evaluation systems originated in the interest of procedural justice.   The time may have come to recognize that this principle might be equally well served by simpler, more flexible practices designed to fit a particular organization and workforce.  Nonetheless, honoring the procedural justice principle is essential to establish and maintain trust among employees about any core human capital 
management system.
...
Another theme the merit system underscores is openness supported by effective 
communication.  However arcane the Federal pay system may appear to 
outsiders, most Federal employees understand its basic design and deployment.  
Organizations crafting new compensation approaches learn quickly that the key 
to success is constant and consistent communication.  The idea that employees 
should have a clear understanding about what they can expect to happen and 
what will affect the outcomes that impact them is particularly relevant for the pay 
systems and other strategic rewards programs that not only put food on the table, 
but also may subsidize transportation costs and finance educational expenses.  
Any strategic human capital management improvements an agency might hope to 
achieve with a refined strategic rewards approach could be at substantial risk if 
employees are left to divine its contingencies and payoffs on their own.
...
It is appropriate to acknowledge and use the lodestone quality our merit system 
principles provide.  Their core values and fundamental themes can serve well to 
keep the enormous diversity of Federal agencies, missions, and workforces on 
course, even as the Federal community sets out together to consider and explore 
possible system improvements.  
...
[page 37]
Conclusion and Next Steps
...
This White Paper paints a "warts and all" portrait of the current Federal pay 
system.  OPM expects - and indeed genuinely desires - its honesty to provoke 
an equally honest discussion of the disturbing issues it raises.  We have an 
outdated pay system - built on the firm foundation of the merit principles 
but fundamentally out of step with today's work and workplace and workforce.  
Continuing to muddle through with an uneven set of "cans and cannots" across 
the spectrum of Federal agencies is not a meaningful answer for attracting, 
managing, developing, and retaining the quality workforce needed to produce 
the critical results that the American people expect from their Government.  
...
Several valiant attempts have been made to "fix" specific problems - most 
recently the Federal Employees Pay Comparability Act of 1990 (FEPCA) - but 
these fixes ultimately fall short because they cannot overcome the underlying 
root problems.  The question is not whether we can maintain the current system, 
the question is should we.  As Sharon Barbee-Fletcher, Director of Personnel at 
the Pension Benefit Guaranty Corporation, put it:  "The system has outlived the 
time in which it was an effective way to do business.  It is time for a more flexible 
approach."  So perhaps the hour has indeed come to start over, with a blank 
sheet of paper, and design a system that responds to 21st century organizational 
demands and makes sense for today's workers.  
...
The next steps in this journey will involve all the stakeholders in the public service 
community.  OPM will circulate this pre-decisional White Paper widely and 
provide specific opportunities for any and all who wish to comment or submit 
ideas.  The intent is to trigger a broad conversation about the future of Federal 
pay and job evaluation.  In the coming weeks and months, OPM will invite 
interested parties - including agencies, employee unions, and other stakeholders - 
to participate in discussions. OPM anticipates a wide range of views will be shared 
and looks forward to these exchanges and the opportunity to learn about and 
identify our agreements, disagreements, and concerns.  Only through such 
discussion will the ideas emerge to modernize the way the Federal Government 
pays its employees to respond to contemporary market conditions and employee 
concerns.  Ultimately, OPM hopes to build consensus on possible new answers 
for Federal pay and job evaluation for the 21st century.
...
[page 38]
Working together, guided by the merit system principles, OPM believes our 
shared goal can be to identify ways to improve the balance across internal, 
external, and individual equity to promote distributive justice while maintaining 
openness and procedural justice.  By such means, we can ensure that the Federal 
compensation system will serve employees and agencies alike.  The outcome 
can be a system that makes a significant contribution to achieving the strategic, 
results-driven Government that the Government Performance and Results Act 
envisions.
...
Let the conversation begin!
...
[page 39]
Closer Looks at Federal Pay
...
[bullet] A Framework for Strategic Rewards 
[bullet] A Primer on the General Schedule
[bullet] Why Not Preserve the General Schedule?
[bullet] Labor Markets Are Not Supermarkets
[bullet] The Problem With Special Salary Rates
[bullet] Whither Comparability?
[bullet] How the System Does - and Doesn't - Reward Performance
[bullet] The Challenge of Performance Measurement
[bullet] Classification - The Unintended Tool of Choice
...
[page 40]
A Framework for Strategic Rewards
...
Reference:  A System Whose Time Has Come - and Gone (page 6)
...
Over the past 10 years, as compensation theory and practice have secured their 
place within the human capital management arsenal in the war for talent, a related 
shift has occurred as practitioners recognize and leverage strategic value from a 
broader range of rewards than traditional pay and benefits.  Simply put, "It's not 
just about money any more."  Today's conception of reward systems has 
necessarily widened to include a spectrum of conditions that might be termed a 
"reward environment."  The depth of this change in perspective was seen most 
clearly in May 2000 when the American Compensation Association reinvented 
itself as WorldatWork and adopted a "Total Rewards" approach.  
...
In the 1980s and 1990s, employers increased their sophistication in analyzing and 
delivering what their employees - and potential employees - valued.  In particular, 
employers looked for answers to the conundrum of fighting turnover when they 
were already paying salaries well above the market.  Some of the most telling 
research revealed that even well-paid employees will leave when competing 
employers offer a better total rewards package.  Such a package might include a 
commitment to skill development or a clear sense of mission and well-trained 
leaders who recognize results or an opportunity to balance work and family 
responsibilities better.
...
[indneted quote] Increasingly, it has become clear that the battle for talent involves much more than highly effective, strategically designed compensation and benefits 
programs.  While these programs remain critical, the most successful companies 
have realized that they must take a much broader look at the factors involved in 
attraction, retention and motivation.  And they must deploy all of the factors - 
including compensation and benefits - to their strategic advantage. [footnote 1: "A Historical Snapshot," What is Total Rewards? WorldatWork, 2001, Online (URL:
http://www.worldatwork.org/Content/About/aboutwaw-whatis-frame.html)] 
...
Federal agencies are also rethinking how they offer talented and highly-skilled 
employees and applicants the rewards that will engage and focus them on meeting 
strategic objectives.  OPM has developed a Strategic Rewards Framework to aid 
agencies in their analysis and investment in employee rewards.  Strategic rewards 
embrace everything that employees value in the employment setting, and the term 
refers to the complete bundle of employee reward elements.  
...
[page 41]
The framework uses four quadrants that map the overall rewards environment agencies can manage and deliver, as depicted below:
...
[The graphic shows four areas.  Starting at the upper left and going clockwise, they present the following information: Compensation - base salarly, variable pay, other payments, paid time off, support processes; Benefits - health care, retirement, savings, other insurance, support processes; Learning and Development - training, learning experiences, career paths, support processes; Work Environment - work/life balance, leadership, performance culture, organizational climate, support processes.]
...
The top two quadrants of the framework are sometimes called transactional rewards 
because they include the tangible results of the agreement between the employee 
and employer.  In this agreement, or transaction, the employee provides time, 
labor, and competencies in return for salary and benefits.  (NOTE:  OPM includes 
paid time off, or leave, in the compensation [i.e., pay] quadrant simply because 
leave is so closely tied to hours of work and related pay entitlements.)  
...
The framework's bottom two quadrants cover areas that are increasingly 
recognized as critical factors for employee satisfaction and retention.  They are 
sometimes called relational rewards because they tend to represent the relationship 
(vs. the transaction) between employee and employer.  Indeed, effective balanced 
scorecard measures of the employee perspective usually focus on these areas.  
And investing in relational rewards is not a matter of the employer being nice; it's 
a matter of being smart.
...
[page 42]
Each quadrant also refers to support processes.  These include related activities and 
services such as performance management, job evaluation, workforce planning, 
competency modeling and assessment, leadership development, work/life 
program implementation, and employee surveys and analysis.
...
This conception is particularly noteworthy for the Federal Government because 
of the strengths and competitive edge we can achieve in the bottom quadrants.  
Agencies have flexible authorities to invest in learning and development, and 
the opportunities to develop and sustain a performance culture that also values 
work/life balance are strong assets for the Federal employer.  Although many 
of these relational rewards compete for limited funds, there is little doubt about 
the payoff on that investment.  The evidence is clear:  people may join your 
organization for the pay, but they stay for the chances to develop and make 
meaningful contributions under strong leadership.  Were the Government 
overnight to start paying at or above market salaries, we would still have to keep 
employees engaged through strategic investment in relational rewards. 
...
OPM has labeled this framework "Strategic Rewards" (vs. the more commonly 
applied "Total Rewards") to underscore the role its elements play in an agency's 
overall strategic management of human capital.  A reward is "strategic" when:
...
[bullet} it is valued by employees (or job candidates) that the agency must attract, 
retain, and manage because they make a difference for meeting the agency's 
strategic goals and objectives; and
[bullet] the agency can use it to communicate and focus on those strategic goals and 
objectives, and to enhance its capacity to achieve them (e.g., by building skills 
and rewarding results).
...
[page 43]
A Primer on the General Schedule
...
Reference:  A System Whose Time Has Come - and Gone (page 9)
...
The term "General Schedule" denotes the major compensation structure for 
white-collar work in the Federal Government.  The General Schedule covers 
more than 1.2 million Federal employees.  The system has governmentwide rules 
and procedures for setting pay for newly hired employees, for increasing an 
employee's pay, for adjusting the overall pay structure based on comparison with 
outside pay levels, and for paying overtime and other sorts of premium pay (such 
as hazard pay).  
...
At the heart of the General Schedule is a job evaluation (position classification) 
structure that sorts jobs into classes of positions across 15 grade levels and 
hundreds of occupations.  The grade levels are differentiated by the difficulty and 
responsibility of the work.
...
The primary function of the job evaluation structure is to facilitate setting and 
adjusting pay, but this structure was designed to be useful in all aspects of human 
resources management, not just pay.  For example, when Federal hiring was more 
centralized than it is now, the General Schedule job evaluation system helped 
channel applicants to agency jobs through a nationwide examining system.  The 
General Schedule job evaluation system also serves as part of the framework for 
determining how employees are affected during lay-offs.
...
The General Schedule as a Pay Structure
...
The term "schedule" also refers to the schedule of pay rates that make up the 
salary structure for white-collar work.  Each of the 15 grades has a pay range of 
about 30 percent.  (The actual dollar values in the pay ranges for each grade vary 
from one locality to another.)  The pay range for a given grade (in a given locality) 
is the same for all agencies and for all occupations, except that OPM may increase 
the value of the pay range by establishing special salary rates for occupations and 
grade levels for which there is serious difficulty in hiring and retaining staff at the 
regular pay levels.
...
Each pay range is divided into 10 specific rates of pay called "steps."  An 
employee's pay generally has to be fixed at one of the steps.  (There is an 
exception to this rule for managerial employees who were moved to the General 
Schedule upon the termination of the Performance Management and Recognition 
System in 1993.) 
...
[page 44]
An employee moves upward from step to step after serving a prescribed waiting 
period and on the condition that performance is at an "acceptable level 
of competence."  Governmentwide regulations specify that that level is reflected 
through assignment of a summary performance appraisal rating at Level 3 or 
higher.  Generally, agencies describe Level 3 as "Fully Successful."  In appraisal 
programs that use only two summary levels, Level 3 is sometimes referred to as 
"Pass."  The law sets waiting periods for moving from step to step at 1, 2, or 3 
years, depending on an employee's position in the pay range.  An agency may 
accelerate step movement for a high-performing employee by awarding a Quality 
Step Increase.
...
[A bar graph of 2002 General Schedule Grade Ranges and Pay Rates (without locality adjustments) shows the range included between the step one dollar rate and the step 10 dollar rate for each grade. GS1, $16607-$18456; GS2, $18734-$20876; GS3, $20817-$23530; GS4, $23369-$26415; GS5, $26148-$29559; GS6, $29147-$32949; GS7, $32390-$36615; GS8, $35871-$40551; GS9, $39617-$44783; GS10, $43632-$49324; GS11, $47935-$54185; GS12, $57452-$64944; FS13, $68319-$77229; GS14, $80735-$91265; GS15 $94969-$107357.]
...
[page 45]
Why Not Preserve the General Schedule?
...
Reference:  A System Whose Time Has Come - and Gone (page 9)
...
All the reform efforts of the last 50 years - including the Federal Salary Reform 
Act of 1962, the Civil Service Reform Act of 1978, and the Federal Employees 
Pay Comparability Act of 1990 - have left the General Schedule system intact.  
However, as the President and the Congress work to pursue good government 
policies and practices that improve management and accountability, OPM 
believes the time may have come for substantive reform that brings the era of 
the General Schedule to a close.
...
Legitimate arguments can be made for maintaining the current General Schedule 
system.  These include stability, cost containment, and a lack of agency readiness 
or capacity to design and implement an alternative.  OPM recognizes the need to 
maintain the General Schedule in the absence of an alternative and to provide an 
orderly and well-managed transition to any new system.
...
However, should the Government maintain the General Schedule simply because 
it is convenient?  The Government Performance and Results Act - and, more 
broadly, the concept of performance-based government - holds Government 
programs and activities to a much higher test:  they must "add value" by making 
a cost-effective contribution to mission accomplishment.  For the reasons 
described below, the General Schedule system will not meet the "value added" 
test in the presence of a new framework for Federal compensation.
...
Culture
...
First, the Federal Government is shifting its emphasis from inputs and 
processes to performance and results.  A "default" compensation system that 
communicates - however subtly - that position is more important than 
performance will not support the cultural change needed to effect and reinforce 
this shift.  For some organizations - such as those where employees have limited 
scope of action to directly influence organizational results and therefore 
emphasize process improvement - it may still be sensible to have pay and job 
evaluation systems in which internal equity predominates.  It is one thing to 
allow an agency to consciously and deliberately establish such a system as a 
strategic choice.  It is quite another to imply a priori that such a system is 
appropriate by making it the "default."
...
[page 46]
Second, maintaining two systems - with the implicit prospect of returning to the 
old system if the new system is unsuccessful - conveys the message that cultural 
change is optional.  This message would undermine the Government's ability to 
use compensation strategically.  This is amply illustrated by the Federal 
Government's experiment with pay-for-performance under the Performance 
Management and Recognition System (PMRS) in the 1980s.  PMRS, which based 
pay increases on performance ratings, existed side-by-side with the traditional 
General Schedule practice of increases keyed to longevity.  The existence of 
parallel systems proved distracting and counterproductive.  First, many employees 
focused on whether they were "better off" under the new system, devoting more 
attention to their pay than to their performance.  Second, some employees 
perceived that they had "lost" pay because they no longer received full within-
grade increases - even when they had, in fact, demonstrably gained pay by 
receiving partial increases in advance of the within-grade increase schedule.  
The result was that PMRS failed to establish a credible link between pay and 
performance, [footnote 1: Problems in performance measurement and funding were also significant factors contributing to the failure of PMRS.  Rigorous, credible performance measurement and management remain critically important to the success and credibility of any pay-for-performance approach.] and did not measurably improve Government performance.
...
Cost
...
Even if it were desirable to maintain the General Schedule, it would not be 
particularly cost effective or practicable.  The resources and effort needed to 
maintain the General Schedule system - which include developing precisely 
defined locality pay areas and adjustments, establishing and administering 
special rates, developing and applying classification standards, and day-to-day 
pay administration - are substantial and presume considerable numbers of 
employees are still covered by the system.  Given the extent to which agencies 
have already left the regular General Schedule ranks - some estimates are as high 
as 20 percent - and the prospect that progressive agencies would take advantage 
of the opportunity to design and implement more strategic pay systems, the 
dwindling numbers of employees remaining under the General Schedule would 
quickly become a new drain on the system's credibility.  
...
Maintaining the General Schedule would not prove cost effective from another, 
broader perspective as well.  This paper makes the case that the General Schedule 
system has limited capacity to provide strategic support to agency missions.  
...
[page 47]
The goal of the Government Performance and Results Act - and, more broadly, the 
concept of performance-based government - is to direct resources to programs 
and activities that add value for that purpose.  The General Schedule no longer 
meets that value-added test.
...
Concerns about increased costs in the absence of the mechanical cost controls 
that the General Schedule's narrow pay ranges, fixed steps, and tightly scheduled 
within-range pay progression provide are not misplaced.  However, the price 
of that control in the loss of strategic leverage discussed throughout this paper 
carries its own costs in human capital management terms.  Experience from 
demonstration projects and other extra-title 5 systems indicates that the 
Government and its agencies can effectively use alternative cost control 
mechanisms such as salary increase budgets.  In fact, such alternatives are 
better suited to supporting the integration of budget and performance that the 
Government Performance and Results Act envisions.
...
[page 48]
Labor Markets Are Not Supermarkets
...
Reference:  The System Is Market Insensitive (page 14)
...
Venturing into a labor market is not like a trip to the grocery store.  Valuing and 
acquiring talent in the labor market is much more complex than pricing and 
purchasing canned goods or packaged products.  Nevertheless, all markets present 
the buyer with similar challenges:  the need to be clear about what one is 
shopping for, the need to make intelligent comparisons among and between 
possible choices, the need to make decisions with incomplete price information, 
and the need to know when the price one is hoping to pay simply will not obtain 
the necessary level of quality.  The processes the Federal Government is currently 
obliged to use to make pay decisions make it difficult to meet these challenges.
...
Labor market rates differ across occupations, not just grade and locality
...
In the Federal system, grade is the major determinant of base pay.  For example, 
all GS-12s are presumed equal:  the Federal Government will pay GS-12 budget 
analysts, GS-12 attorneys, and GS-12 HR specialists the same amount of money 
unless agencies document the need to do otherwise.  Most employers do not 
make this presumption, because they recognize that employees in different 
occupations are not interchangeable.  For example, a GS-13 attorney is not a 
satisfactory substitute for a GS-13 biologist.  Not surprisingly, labor markets 
reflect this reality:  as shown in the charts on the next page, pay differences 
between occupations are often greater than pay differences between grades or 
localities. [footnote 1: Locality remains important; some areas, such as San Francisco, appear to have uniformly higher labor costs.  However, occupational differences are generally more significant than locality differences - particularly for professional and administrative work.]  For example, in Atlanta, market rates for Occupation 1 at the GS-5 
level are 35 percent higher than the market rates for Occupation 2 at the GS-5 
level.  
...
However, the Federal process for determining whether and how much market 
prices have increased does not even price occupations in the labor market.  It 
prices, instead, the Federal job classification system itself by superimposing the 
Government's internal equity structure onto the non-Federal jobs it looks at.  
Under current methods, when a non-Federal job is sampled, a determination is 
made about which of the 15 GS grades the sampled job would hold if it were a 
Federal job.  Then the process rolls up the data for all the samples in a grade and 
rolls up the grade data into one overall "price" increase.  
...
[page 49]
This result loses all clarity about what one is shopping for - a grocery shopper would not find such rolled-up price data (i.e., the average price of myriad items in the store) helpful in knowing what to pay for meat or milk or soap.  Our pricing method does not 
arrive at accurate marketplace information for any one occupation or even a 
subset of occupations.  Neither does it arrive at a number that Federal decision-
makers find reliable for setting the pay of the entire General Schedule.
...
[first graph:  A bar graph shows the comparison market rates found for three different occupations considered similar to selected technical/clerical occupations at GS5, in each of four major cities plus the rate used for the Rest of the U.S. (RUS). Occupation 1: RUS, $38711; Atlanta, $37423; Chicago, $39978; San Francisco, $42463; Washington, DC, $39838. Occupation 2: RUS, $26439; Atlanta, $27898; Chicago, $33374; San Francisco, $37412; Washington, DC, $29721. Occupation 3: RUS, $30407; Atlanta, $35157; Chicago, $36750; San Francisco, $38382; Washington, DC, $34716. Source: Occupational Compensation Survey Program, Bureau of Labor Statistics.]
...
[second graph:  A bar graph shows the comparison market rates found for three different occupations considered similar to selected professional/adminstrative occupations at GS11 in each of four major cities plus the rate used for the Rest of the U.S. (RUS). Occupation 1: RUS, $61241; Atlanta, $64530; Chicago, $65557; San Francisco, $69813; Washington, DC, $66713. Occupation 2: RUS, $55990; Atlanta, $55175; Chicago, $59000; San Francisco, $67049; Washington, DC, $56090. Occupation 3: RUS, $70583; Atlanta, $67905; Chicago, $75244; San Francisco, $78337; Washington, DC, $72595. Source: Occupational Compensation Survey Program, Bureau of Labor Statistics.]
...
[page 50]
Labor market rates differ within an occupation
...
Occupation remains relevant in pricing the value of work, but it is no longer 
sufficient.  In other words, not all IT specialists - or secretaries or nurses or 
engineers - are equal.  Employees are not interchangeable; their skills, strengths, 
and performance vary.  Labor markets recognize this fact.  A professional 
recruiter, noting that job titles are less important than skills and performance, 
describes how this has changed his approach to interviewing - and valuing - 
job seekers:
...
[indented quote] I used to look at the title.  Now I just ask, "What exactly do you do?" [footnote 2: Jennifer Mateyaschuk, "Salary Survey:  Pay Up,"  Information Week, April 26, 1999.][end quote]
...
The Federal Government has become more willing to acknowledge and act on 
skill- and knowledge-based distinctions.  One example is the establishment of 
special salary rates for support employees with office automation skills.  Another, 
more recent example is the establishment of special salary rates for attorneys and 
accountants performing work directly related to the securities industry.
...
This is a move in the right direction.  But our system assumes that a given 
occupation or skill has a fixed, continuing value. [footnote 3: In theory, special salary rates (SSRs) are subject to ongoing reappraisal and adjustment.  Pending enactment of the President's proposed Managerial Flexibility Act, regulations require annual review of SSRs, and there are strong  disincentives for abolishing them.  Consequently, SSR structures sometimes outlive the need for them.]  This assumption is problematic, for two reasons.  First, skills may be valuable only in combination with other skills.  Second, skills do not necessarily hold their value over time:  they may lose their value if the employee does not maintain currency, if employers' needs change, or if technology changes.  In such a situation, flexibility is required to adjust pay levels sensibly, e.g.., by adjusting the pay ranges for some occupations by a smaller percentage than for other occupations, while offering employees the opportunity to acquire more valuable skills.  It could be useful to be able to go beyond narrow, predetermined categories like pay grade when necessary to make 
intelligent pay choices.  
...
Labor market rates differ across individuals
...
Markets do not differentiate value based on skills alone.  Increasingly, 
organizations recognize that high-performing employees are more valuable - 
to both the organization and to competitors - than average performers, and pay 
their employees accordingly.  
...
[page 51]
One corporation considers it a fundamental practice to align and target pay differently depending on performance level; "distinguished" individual and organizational performance is pegged to what competitors pay at the 75th percentile and "achieved expectations" performance is pegged at the 50th percentile. [footnote 4: Maggie Gagliardi, "When Paying for Performance Simply Isn't Enough," Workspan, vol.44, No. 9, WorldatWork, Scottsdale, AZ, September 2001, p. 38.]
...
As noted above, the Federal Government has become more willing (although 
imperfectly able) to establish pay differentials based on work-based distinctions 
that are finer than occupations.  However, we lack the ability to create similar 
differentials based on performance, because our pay ranges are too narrow and 
our pay progression rules too restrictive.  It could be useful to be able to make 
intelligent choices about paying within the market range for a set of skills and for 
the value added by high-performing employees.
...
Labor markets can change rapidly
...
Market rates are the product of supply and demand.  Supply and demand are, in 
turn, influenced by factors including economic conditions, business opportunities, 
and technological changes.  The result is that labor markets are dynamic.  Market 
rates do not necessarily move in the steady, predictable manner suggested by broad 
indices such as the Employment Cost Index.  This dynamism is amply illustrated 
by two "reports from the front" in the information technology (IT) industry:
...
[indented quote] IT professionals of all ranks are having another big year.  The median annual salary increase across the board was a hefty 8.9%. . . . (April 1999) [footnote 5: Jennifer Mateyaschuk, op. cit.][end quote]
...
[indented quote] If you're a job-seeking Microsoft certified systems engineer, better brush up on your negotiating skills.  The average base salary for MCSEs is down 7% over 
last year, dropping from $67,000 to $63,400. (July 2001) [footnote 6: Sandra Swanson, "Survey Says MCSE Base Salaries Dropping," Information Week, July 24,  2001.][end quote]
...
Replacing the Federal Employees Pay Comparability Act of 1990 (FEPCA) 
mechanisms with "new and improved" versions that simply use the same 
approach, with more variables, so that every employee's salary follows the 
gyrations of the labor market would not appear to be a meaningful development.  
It is not feasible to precisely value every individual employee.  
...
[page 52]
Nonetheless, it could be useful to be able to apply a better approach that acknowledges Federal employees and potential employees - with their individual talents - are not lining 
the shelves of the Nation's labor markets like so many cans of cling peaches, but 
are part of a dynamic labor marketplace that challenges all employers to make the 
intelligent pay decisions necessary to use resources efficiently and get the mission 
accomplished.
...
[page 53]
The Problem With Special Salary Rates
...
Reference:  The System Is Market Insensitive (page 14)
...
The special salary rate authority is the Federal compensation system's primary 
solution to pay-related recruitment and retention problems.  It is the tool 
Congress has provided to address external equity anomalies. Through special 
salary rates, OPM can take steps to ensure that Federal rates are competitive 
enough in the labor market to ensure adequate staffing.  OPM can target special 
salary rates to a particular group of employees defined by occupation, location, 
grade, and other appropriate factors.  Performance is not a factor in establishing 
special salary rates, since the underlying General Schedule pay system is not 
designed to address the performance of individual employees through scheduled 
pay adjustments.
...
The current special salary rate authority, however, is limited in its usefulness - 
primarily because special salary rates still operate within the General Schedule 
system.  Special salary rate employees are still subject to General Schedule pay-
setting and pay progression rules.  They are classified in a GS grade, and their pay 
is set at a fixed GS step.  Movement through the rate range is still largely driven 
by time in grade, with performance (individual equity) having little influence.  
When a special salary rate schedule is approved, all covered employees at a given 
grade receive the same pay increase regardless of their performance.  In contrast, 
private sector employers typically have an open pay range instead of fixed 
longevity-based steps.  Thus, an increase in the pay range (i.e., increases in the 
range's minimum rate and maximum rate) to respond to labor market demands 
does not necessarily translate into pay increases for all current employees in that 
pay range.  Private sector employers can adjust individual pay rates by taking into 
account individual performance, skills, or contributions.  Mediocre performers 
may receive no increase at all, as their value in the labor market may not warrant a 
pay increase.  
...
In recent years, OPM has acted to make special salary rates in the General 
Schedule system more focused and responsive.  OPM has sought to accelerate the 
approval process and has provided agencies with greater levels of assistance.   
Nevertheless, special salary rates remain challenging to administer and difficult to 
terminate, as documented in a previous OPM study of special salary rates. [footnote 1: The Use of Special Salary Rates in Federal Agencies, U.S. Office of Personnel Management, March 1996.]
...
[page 54]
Although legislation has been proposed as part of the President's Managerial 
Flexibility Act to correct many shortcomings of the current special salary rates 
program, this proposal cannot address problems that are rooted in the General 
Schedule pay system itself.  It could be useful for the Federal Government to 
have a more competitive and flexible pay structure that can address external and 
individual equity more effectively.
...
If the Federal employee pay system were to be redesigned to place more emphasis 
on both external and individual equity, there might be less need for "special" 
solutions.  Market-based adjustments could be part of the normal pay-setting 
process.  Individual performance, skills, and contributions could play a stronger 
role in adjusting an employee's pay.  There might, therefore, be less need for 
special rates.  If, however, a subset of jobs still experienced severe recruitment or 
retention problems, those jobs could be placed in a separate category or covered 
by a special salary range or pay supplement.
...
[page 55]
Whither Comparability?
...
Reference:  The System Is Market Insensitive (page 16)
...
Although this report documents numerous problems with the General Schedule 
structure and the existing pay comparability system, the idea of comparability 
should not be abandoned.  The Federal Government cannot recruit, manage, and 
retain the talent needed to perform its missions and functions unless it can 
provide an attractive employment package, which includes a competitive salary.  
...
Our system's current approach to comparability promises much.  The statute 
governing pay comparability states that "any existing pay disparities between 
Federal and non-Federal employees should be completely eliminated." [footnote 1: 5 U.S.C. sec. 5301(4).]  This statement has no qualifiers; it does not say that we will eliminate some disparities, for some employees, on some occasions.  Thus, "comparability" appears to be a promise from the Federal Government to the individual employee.  The difficulty 
is that the Federal Government defines and implements comparability in a collective 
manner.  An individual employee's market value - and thus any gap between his 
or her current pay and that value - is the product of many variables, including 
level of work, locality, occupation, credentials, skills, and accomplishments.  But 
the locality pay system accounts for only two variables - level of work and 
locality.  Consequently it does not - and cannot - precisely determine what 
individual occupations, specialties, or employees should be paid.  
...
The result is that the Federal Government does not deliver on the promise of 
comparability under the current white-collar pay system, because it cannot reliably 
make market comparisons that are meaningful for the purpose of setting and 
adjusting the pay of actual jobs.  Agencies - convinced they cannot offer 
employees "fair market rates" for their occupations - have sought authority to 
leave the General Schedule. [footnote 2: This occurred most recently when Public Law 107-123 was enacted allowing the Securities and Exchange Commission to develop its own pay system consistent with related Federal agencies subject to the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA).]  Therefore, new approaches to comparability 
probably should be explored.  
...
The merit system principle about pay says only to take into consideration other 
national and local rates of pay.  The precise form of that consideration is left 
undefined.  
...
[page 56]
The statutory language of the Federal Employees Pay Comparability 
Act (FEPCA) offers only one operationalization of such consideration or 
comparison - namely, the calculated disparity between General Schedule and 
non-Federal white-collar pay rates.  Others are certainly possible and worth 
examining.  The lessons of FEPCA include much that has been learned about the 
resources that extensive salary surveys require to calculate gaps that leave many 
users and observers still dissatisfied with the results.
...
Possible alternative approaches to addressing the issue of comparability and 
establishing competitive pay approaches might include:
...
[bullet] At the governmentwide level, a commitment to providing a competitive pay 
structure - one that enables agencies to set employee pay at competitive levels 
without resorting to extraordinary measures; and
[bullet] At the agency level, a commitment to monitoring market rates and employee 
compensation levels - and making appropriate pay adjustments - so that 
employees can be fairly and competitively compensated.
...
[page 57]
How the System Does - and Doesn't - Reward Performance
...
Reference:  The System Is Performance Insensitive (page 23)
...
To recruit and retain the talent it needs, the Federal Government points with 
pride to its merit system principles and their promise that excellence will be 
rewarded.  The reality for employees, however, is somewhat different, and it does 
not take a new employee long to discover that time and uniform treatment 
dominate the pay system.  For some employees, the prospect of reliable - if not 
immediate - rewards for steady - if not stellar - performance is a completely 
acceptable employment relationship.  Unfortunately, these systemic properties put 
the Government at a disadvantage when trying to attract and retain top-flight 
employees who may expect more timely recognition of their achievements and 
who keep a careful eye on whether and how the agency also rewards their 
colleagues who may contribute less to meeting the agency's goals and objectives.
...
The pay system's limitations and counterintuitive dynamics can have perverse 
effects on employees.  System properties that may have been sensible for a 
homogeneous workforce of clerks with little latitude to make different 
performance contributions now have serious unintended consequences for 
present and prospective employees.  Characteristics that may have been 
established in the interests of precluding administrative error (e.g., fixed-step pay 
rates) leave employee and employer unable to move beyond rigidities that prevent 
pay distributions that properly reflect differences in performance.  The following 
examples illustrate how these systemic features affect employees, undermine the 
promise to reward merit, and send conflicting messages instead.
...
1. The Distant Relationship Between Pay and Performance
...
The General Schedule system does not permit an agency to send strong messages 
about performance through base pay.  The outcome is that even mediocre 
employees can prosper, and a better performer will not necessarily get better pay.  
In fact, as shown below, the system, even when applied properly, can pay an 
indifferent employee more than a good one.  The only way that an agency could 
avoid this outcome would be to abandon rewarding outstanding performance 
through base pay - which would also be unsatisfactory and inconsistent with the 
general pay-related merit principle.
...
[page 58]
Assumptions
...
[bullet] Both employees were rated under a 5-level system, with 5 being the highest 
possible rating.
...
[bullet] The agency made full use of performance-based salary tools; it granted a 
quality step increase (QSI) when possible and denied a within-grade increase 
(WGI) when possible.
...
[bullet] At the start of the 5-year period, both employees occupied grade 12 General 
Schedule positions and were paid at GS-12, step 4.  The employees remained 
in these positions throughout the 5-year period.
...
[bullet] Both employees were located in Washington, DC.
...
[bullet] Pay changes took effect at the end of the year.  Thus, Employee A's QSI 
affected the Year 2 salary, but not the Year 1 salary.
...
[The table shows a comparison by year over five years for two employees who start with the same salary but receive different performance ratings of record and the performance-based pay adjustments related to them.  Employee A starts out at $48,906. Year 1: Level 5 rating plus a QSI (quality step increase), year 2: Level 3 rating, year 3: Level 3 rating and a WGI (within grade increase), year 4: Level 2 rating, year 5, Level 2 rating and a WGI denied. Employee B also starts out at $48,906. Year 1: Level 4 rating, year 2: Level 4 rating and a WGI, year 3: Level 4 rating, year 4: Level 4 rating and a WGI, year 5: Level 4 rating. At the end of the five years, Employee A has an average rating of 3.0 and a salary of $62,013 (paid $270,982 in cumulative salary) and Employee B has an average rating of 4.0 and a salry of $62,013 (paid $267,824 in cumulative salary).]
...
The employee whose performance actually deteriorated during this period 
"earned" more pay than the employee who maintained a record of good 
performance.  We expect good performers to sustain their efforts even when less 
effective colleagues keep pace and can occasionally move relatively higher in the 
pay range through time-driven WGIs.  The system almost seems predicated on 
employee inertia that will keep the better employees in place even during those 
periods when their base pay may lag somewhat.
...
[page 59]
2. How Time Trumps Performance
...
The following observation about needed changes in Federal civil service systems 
suggests that our pay system should adopt an increased performance orientation:
...
[indented quote] (Civil service) reforms should include placing greater emphasis on skills, 
knowledge, and performance in connection with federal employment and 
compensation decisions, rather than the passage of time and the rate of 
inflation, as is often the case today. [footnote 1: David Walker, Comptroller General of the United States, testimony before the Subcommittee on Oversight of Government Management, Restructuring, and the District of Columbia, Committee on Governmental Affairs, U.S. Senate, July 17, 2001.]
...
It is not apparent why time and inflation should overshadow skills, knowledge 
and performance:  the merit system principles governing Federal human 
resources management do not state that the Federal Government should or must 
compensate employees for years on the job or changes in either the cost of living 
or the cost of labor.  But this is, in fact, the current reality.  As shown on the next 
page, base pay increases are driven primarily by changes in the pay structure and 
the employee's time on the job.  Performance plays almost no role in pay 
increases for the average performer and only a limited role in pay increases for 
the exceptionally good performer.
...
Assumptions
...
[bullet] Both employees were rated under a 5-level system, with 5 being the highest 
possible rating.
...
[bullet] The agency made full use of performance-based salary tools, and granted a 
quality step increase (QSI) when possible.  If it was possible to grant both a 
WGI and a QSI, the agency did so.
...
[bullet] At the start of the 5-year period, both employees occupied grade 11 General 
Schedule positions and were paid at GS-11, step 2.
...
[bullet] Both employees were located in Washington, DC.
...
[page 60]
[The table shows a comparison by year over five years for two employees who start with the same salary but receive different performance ratings of record and the pay adjustments related to them.  Employee A starts out at $38,330. Year 1: Level 3 rating plus a WGI (within grade increase) and the general increase, year 2: Level 3 rating plus a WGI and the general increase, year 3: Level 3 rating plus the general increase, year 4: Level 3 rating plus a WGI and the general increase, year 5, Level 3 rating and the general increase. Employee B also starts out at $38,330. Year 1: Level 5 rating plus a WGI, QSI (quality step increase) and the general increase; year 2: Level 4 rating and the general increase; year 3: Level 5 plus a WGI, QSI and the general increase; year 4: Level 4 rating and the general increase; year 5: Level 4 rating plus a WGI and the general increase. At the end of five years, Employee A has an average rating of 3.0 and salary has increased $11,935 of which 66% is general increases, 34% is longevity (WGI), and 0% is performance (QSI).  Employee B has an average rating of 4.4 and salary has increased $14,891 of which 55% is general increases, 27% is longevity (WGI) and 18% is performance (QSI).]
...
How did this phenomenon come about?  The situation has its roots in efforts to 
make Federal pay more rational and objective, which produced two hallmarks of 
the Federal white-collar pay system:  the periodic within-grade increase (WGI) 
and across-the-board pay increases.
...
The WGI was designed to reward employees for increasing their value to the 
organization.  The WGI is based on the theory of the "learning curve" - the idea 
that an employee will become more productive (and thus more valuable) as he or 
she learns the organization's subject matter and work processes.  But WGIs are 
not based on a rigorous measurement of employee productivity.  Instead, the 
WGI uses a "waiting period" as a proxy for increased value.  Unfortunately, the 
assumptions underlying this practice - that value always increases with experience 
and that the increase does not vary across employees - are questionable.  So it is 
no longer clear that WGIs reflect or reward increased performance, but it remains 
very clear that they reflect the passage of time.
...
Across-the-board pay increases are intended to establish and maintain fair and 
competitive pay levels.  The Federal Employees Pay Comparability Act of 1990 
(FEPCA) established two types of increase: [footnote 2: Technically, these changes are adjustments rather than increases.  In theory, they can be negative; in practice, they are not.]  the general increase and locality adjustments.  
...
[page 61]
These increases are delivered automatically and uniformly [footnote 3: There are some exceptions.  For example, employees on pay retention and employees covered by a special salary rate may receive a lesser increase.] to General Schedule employees.  In effect, the Federal Government uses changes in the Employment Cost Index and changes in salaries in large, geographic areas as a proxy for changes in an individual employee's "market value."  As with WGIs, the assumption underlying this practice - that an employee's "market 
value" is independent of occupation, skills, and level of performance - is questionable.  So it is not clear that an employee's structural pay increases reflect changes in his or her actual "market value" - but it is clear that they reflect the historical rate of labor market inflation.
...
The result, from both a financial and employee perspective, is that time carries 
more weight in pay decisions than does performance.  The history of the Federal 
pay system makes this understandable, but it does not make it appropriate or 
acceptable for today's performance-oriented government. 
...
3. The Relative Rewards of Better Performance vs. Better Position
...
For the employee who defines "advancement" solely in terms of increased 
financial rewards, the path to that advancement is clear:  the pay system will not 
reward improving performance to meet outstanding standards, irrespective of its 
relevance to the agency's strategic objectives, as much as it will reward merely 
acceptable performance at the next higher level of work.  Even allowing for the 
fact that the higher level work requires greater skill or has more responsibility that 
merits greater pay, the agency must still grapple with the challenge of keeping and 
motivating top performers at the other work level on the front line, where more 
direct impact on desirable results may be achieved.  The illustration that follows 
shows why this is so.  Even using unrealistic "best case" assumptions to make 
performance as rewarding as possible, [footnote 4: It is uncommon for a Federal employee - even an outstanding one - to receive both a within-grade increase and a quality step increase in the same year.  It is highly unlikely that this would happen twice, or that an employee would receive QSIs 5 years in a row.  (It is much more probable that the outstanding employee would simply receive within-grade increases - in which case the employee's salary would increase no faster than that of his or her merely satisfactory peers.)] performance remains much less lucrative than promotion.  
...
[page 62]
Moreover, when OPM analyzed how performance and schedule adjustments contribute to pay increases, performance finished - at best - in a dead heat with schedule adjustments.  Why does this happen?  First, because the pay structure and pay-setting rules make position (raises through promotion) more valuable than performance (raises due to high performance).  Second, because structural increases are independent of performance and are delivered 
across-the-board.  Finally, because the current system limits performance-based pay increases to an annual level that will rarely exceed the annual structural increase.
...
Thus, the pay system strongly encourages employees to seek promotion.  This is 
not illogical:  in theory, incentives for promotion support efficient use of human 
capital by channeling the best employees into higher graded positions which will, 
presumably, put their abilities to better use than less demanding, lower graded 
positions.  And this system has often served the Government and its employees 
very well.  The Federal Government has many employees who have "worked 
their way up" to high-level positions, where they serve with distinction.  
...
But our system's overwhelming incentive to seek promotion appears increasingly 
problematic.  First, restructuring agencies and shifting resources to front-line 
work will, over time, reduce the number of available managerial and quasi-
managerial [footnote 5: "Quasi-managerial" positions include positions in policy, internal coordination and control, and administrative functions such as budget and human resources.] positions - traditionally the highest-graded positions in the General 
Schedule.  Retaining a strongly promotion-oriented pay system in this context 
will, at best, generate frustration when employees who aspire to promotion face 
a lack of opportunities.  At worst, it will discourage the reengineering and 
delayering needed to achieve the leaner, flatter structures that increasingly 
characterize modern, more strategically shaped organizations.  Second, it is 
difficult to argue that a system that so strongly encourages an employee to devote 
substantial attention to "the next job" - at the possible expense of the job at hand - 
is truly performance- or results-oriented.
...
[page 63]
Assumptions
...
[bullet] Both employees were rated under a 5-level system, with 5 being the highest 
possible rating.
...
[bullet] The agency made full use of performance-based salary tools, and granted a 
quality step increase (QSI) when possible.  If it was possible to grant both a 
WGI and a QSI, it did so.
...
[bullet] At the start of the 5-year period, both employees occupied grade 12 General 
Schedule positions and were paid at GS-12, step 1.
...
[bullet] Both employees were located in Washington, DC.
...
[The table shows a comparison by year over five years for two employees who start with the same salary but receive different performance ratings of record and the performance-based pay adjustments related to them, but only one is promoted. Employee A starts out at $44,458. Year 1: Level 4 rating and a competitive promotion to GS13 step 1, year 2: Level 3 rating and a WGI (within grade increase), year 3: Level 3 rating and a WGI, year 4: Level 3 rating and a WGI, year 5: Level 3 rating (employee not eligible for WGI until next year). Employee B also starts out at $44,458. Year 1: Level 5 rating plus a WGI and a QSI, year 2: Level 5 rating plus a WGI and a QSI, year 3: Level 5 rating plus a QSI, year 4: Level 5 rating plus a QSI, year 5: Level 5 rating plus a QSI. At the end of 5 years, Employee A has an average rating of 3.2 and a salary of $69,534 (paid $285,796 in cumulative salary). Employee B has an average rating of 5.0 and a salry of $65,556 (paid $265,177 in cumulative salary).]
...
These three examples illustrate some of the undesirable effects produced by the 
apparatus that keeps the General Schedule running.  Its predictability and control 
as positives are starting to be heavily outweighed by the strong negative of 
denying employee performance its relevant place in determining pay.  The 
message is clear - when all is said and done, your performance as a Federal 
employee has little impact on your base pay.
...
[page 64]
The Challenge of Performance Measurement
...
Reference:  The System Is Performance Insensitive (page 24)
...
The success of a performance-oriented compensation system depends heavily on 
the quality of the underlying performance management system.  A universal 
challenge in performance management is establishing and communicating credible 
and reliable measures of performance, whether at the organizational, work unit, or 
individual level.  Informed observers of Government agree that the rigor and 
quality of Federal agency performance management - and performance 
measurement in particular - is uneven at best.
...
Nevertheless, OPM believes it may be time to establish a governmentwide 
framework for making pay distinctions based on performance - whether or not 
agencies are fully prepared to use this framework.  Such a framework could be 
critical to making Government more performance- and results-oriented, as 
envisioned in the Government Performance and Results Act (GPRA), for two 
reasons.
...
First, the Government needs to convey to its employees an unequivocal message 
that performance matters.  For this message to be credited as more than rhetoric, 
however, the compensation system would need to reinforce it.  To that end, 
basing all pay increases on performance may need to become the rule rather than 
the exception.  But this approach could well fail unless the Government makes 
rigorous performance standards and measures a precondition for any performance-
driven system.
...
Second, linking pay to performance will focus agency and employee attention on 
performance management.  This could create a strong and much-needed incentive 
for agencies to improve how they measure and manage performance, as some 
have noted:
...
[indented quote] The new President and Congress should reconsider the issue of pay for 
performance within the federal government.  For a performance appraisal 
system to have real meaning, there must be real consequences.  Tying pay to 
performance by a management that is committed to performance makes the 
system real. [footnote 1: Angela M. Antonelli and Peter B. Sperry, editors, A Budget for America, Heritage Foundation, Washington, DC, 2000, p. 341.]
...
[page 65]
This is also the perspective of the private sector, which links pay to performance 
as a matter of principle. [footnote 2: Some organizations have adopted a total quality management approach and do not link pay to individual performance.  These are few, and are concentrated in manufacturing and other process-centered industries.]  At an absolute minimum, nearly all private sector firms have a merit pay program for their professional [footnote 3: In this context, "professional" refers to salaried employees whose work involves the application of specialized knowledge.  "Professional" includes, but is not limited to, employees in occupations with a positive educational requirement.  The Federal counterpart is employees in two-grade interval positions.] and managerial employees that 
links base pay increases to performance ratings. [footnote 4: Research indicates that merit pay can be problematic.  Criticisms include cost, a lack of credibility in supporting performance measures and evaluations, and limited pay differentiation between high and average performers, particularly in times of low inflation.  Yet merit pay remains prevalent:  private sector organizations link pay to performance as a matter of principle to communicate and reinforce performance as a core value, even if the 
mechanism is flawed.  And few organizations that discontinue merit pay programs abandon the idea of linking pay to performance.  Instead, they take steps to strengthen the linkage.  The trend is to make more pay contingent on organizational and individual performance, not less.]  Our approach - across-the-board general increases and time-based increases - is almost unheard of. [footnote 5: Private Sector Compensation Practices, Booz.Allen & Hamilton - Report to the U.S. Office of Personnel Management, Washington, DC, February 2000.]  This is not to say that merit pay is always appropriate or effective.  Ineffective merit pay 
systems can produce the same muted pay distinctions and lack of credibility that 
afflict our current system.  But they do, at least, send the message that pay 
depends on performance, although the reality may fall short of the ideal.
...
High-performing organizations emphasize the need to differentiate levels of 
performance and to take actions based on those differences.  The Federal 
Government's practices in this area, while perhaps understandable in some 
respects, are impossible to defend.  Many agencies have basically drained all 
meaning from the label "Outstanding" by applying it to such large proportions 
of their workforce that no connotation of "standing out" remains.  Performance 
rated as better than fully successful starts as low as the 20th percentile in many 
agencies.  The dynamics that contribute to rating inflation are well known, 
particularly the perceived, although not substantiated, impact on retention 
standing in a reduction-in-force and the desire not to disadvantage employees 
when "everyone else is doing it" (i.e., inflating ratings).  
...
Perhaps a more daunting and insidious cultural dynamic that mitigates against 
effective differentiation comes from the rigidities of our pay system with its 
predefined and undifferentiated payouts from general increases, within-grade 
increases, and career ladder promotions.  Managers who might be inclined initially 
to differentiate levels of performance among their employees get little or no 
payoff.  
...
[page 66]
As noted elsewhere in this paper, they are extremely limited in their ability 
to deliver differentiated pay increases as rewards, and most agencies still use only 
modest cash awards budgets as a means of distributing differentiated cash 
incentives.  Indeed, many agencies appear to operate under the principle that the 
awards amounts are so small that the prudent course is to distribute them widely 
and evenly and thereby avoid disputes.
...
OPM's hopes in this arena rest with the continued implementation of the 
Government Performance and Results Act of 1993 throughout Government 
and its integration with the strategic management of human capital.  As 
organizational performance measurement improves, OPM is confident that 
agencies will continue to improve employee performance measurement as well.  
There can be no turning back from the shift to measuring results.  Agencies 
increasingly are paying attention to these issues and looking to improve the ways 
they plan and measure employee results as well as program results.  These efforts 
can be expected to continue, and OPM is committed to supporting them. [footnote 6: See A Handbook for Measuring Employee Performance:  Aligning Employee Performance Plans with Organizational Goals, U.S. Office of Personnel Management, Washington, DC, September 2001.]  
Performance-oriented pay that communicates and reinforces what is important 
and provides the "appropriate incentives and recognition . . . for excellence in 
performance" [footnote 7: 5 U.S.C. sec.2301(b)(3).] that the merit system contemplates can work effectively only when 
trusted, credible measures of that performance are available.
...
[page 67]
Classification - The Unintended Tool of Choice
...
Reference:  An Excess of Internal Equity (page 28)
...
The need for a more strategic approach to compensation - and a broader range 
of pay and job evaluation tools - is widespread:
...
[indented quote] A set of tools should be created that is appropriate for the environment and allows managers to do the right thing in each unique situation.  Historically, 
managers have been given only one tool to deal with a variety of situations across the bulk of populations - merit pay.  This is akin to the master carpenter giving an apprentice a hammer and then trying to teach him to build something:  Everything the apprentice looks at appears to be a nail. [footnote 1: Todd M. Manas, CCP, "The Compensation Carpenter," Workspan, vol. 44, No. 9, WorldatWork, Scottsdale, AZ, September 2001, p. 8.]
...
Although the compensation consultant quoted above was discussing the private 
sector, his remarks are equally applicable to the Federal Government, with one 
important difference:  substitute "classification" for "merit pay."  The example 
below illustrates why classification is the "hammer" of the Federal pay system.
...
Suppose an agency has two employees in a work unit who occupy the same 
position.  As is typical in the Federal Government, both were hired at the first 
step of the grade level.  One employee is a recent hire but an excellent performer; 
the other employee has been on the rolls for many years, but is an average, 
although still acceptable, performer.  Consequently, the senior employee is paid 
considerably more than the junior employee.  Using the terms of the merit system 
principle, their work is not of equal value to the organization.  What can the 
agency do about the disconnect between these employees' salary levels and their 
levels of performance and contribution?   Very little, with existing pay-for-
performance provisions. [footnote 2: A quality step increase will not erase the disparity, although it could reduce it.  Retention allowances may not be granted solely on the basis of performance.]
...
Promoting the first employee through reclassification appears much more 
promising.  First, there is a manifest difference in the two employees' work.  
Second, promoting the better performer will help bring the employees' 
compensation in line with their relative contributions by placing the better 
performer in a higher graded - and thus better paying and higher status - 
position.   
...
[page 68]
But a problem lurks:  as every classifier knows, matters such as workload, quality of work, and results are not classification factors under our statutory system. [footnote 3: The classification factor of "scope and effect" is conceptually related to results.  However, it has relatively little weight, and is evaluated in the abstract.]  So the problem is not simply that the only tool available is classification; the problem is that the only tool available is misclassification.  And the incentives to misuse classification are not only financial; they are also cultural and include the following:
...
[bullet] Ease of budgeting.  Although changes are developing in this regard, the fact 
remains that under an FTE-based system, the budget process tends to focus 
on the number of employees.  If an FTE is approved, the associated salary 
may be fully funded, or at least is not subjected to intense scrutiny.  Awards 
and retention allowances, on the other hand, have often been viewed as 
incremental and nonessential expenses.
...
[bullet] Ease of justification.  Rewarding excellence through a cash award or a 
quality step increase is discretionary.  Thus, the agency must decide to reward 
the employee, document the performance, and justify the expenditure.  In 
contrast, to promote an employee through classification, the agency must 
simply document the existence of a sufficient amount of higher level work.  
If that work exists, payment is automatically justified by the principle of 
"equal pay for equal work" and the associated requirement to classify 
positions accurately and pay employees accordingly.
...
[bullet] Acceptability.  Our compensation system places a high value on fairness 
and internal equity.  This has created an organizational culture where pay 
distinctions based on "objective" factors such as classification are less 
controversial than pay distinctions based on "subjective" factors such as 
managers' assessments of employee performance.  Consequently, 
misclassification - although inappropriate - may be much less controversial 
than openly making and rewarding performance distinctions.
...
The point is not that agencies may be abusing the current classification system.  
The point is that agencies should not be forced to choose between complying 
with law and merit principles and managing their workforce effectively.
...
[page 69]
Glossary
...
ACROSS-THE-BOARD INCREASE: 
An equal flat rate (dollars and cents) or percentage increase in 
salary given to every eligible employee.  Also known as a 
general increase.
...
AWARD:
Something given (e.g., cash or a certificate) or an action taken 
(e.g., granting time off with pay or holding a ceremony) to 
provide an incentive or recognition for individual or group 
achievements that contribute to meeting organizational 
goals or improving the efficiency, effectiveness, or economy 
of the Government.  Examples of specific types of awards 
include:  honorary award, informal recognition, time off 
award, performance award, special act or service award, on-
the-spot award, group incentive, suggestion award, referral 
bonus, and travel savings incentive.
...
BASE PAY:
The basic cash compensation that an employer pays for the 
work performed, typically expressed as an annual salary.  
Also referred to as basic pay, which generally means an 
employee's regular and recurring base pay excluding irregular 
payments such as overtime pay.  In some contexts, "basic pay" 
has different definitions for different purposes.  When pay is 
used as the basis for computing another payment or benefit, 
it is basic pay for that purpose.  
...
CLASS:
In statute, a class (of positions) contains all positions that 
are so similar in their type and level of work that they can be 
treated similarly for all human resources purposes.  
Essentially, a "class" includes all jobs in the same grade and 
the same occupation.  (The word "class" is not used often by 
Federal HR workers.)  The Office of Personnel Management 
produces standards and guidance agencies must use in placing 
positions in their correct classes.
...
[page 70]
CLASSIFICATION:
A hierarchical structure of jobs, usually arranged into classes 
or pay grades according to some form of job evaluation.  Also 
the term generally used to describe the Federal Government's 
job evaluation system.
...
COMPENSATION:
Generally, all forms of financial returns and services 
employees receive as part of an employment relationship.  
Historically the term included benefits such as insurance and 
retirement income plans like annuities.  More commonly 
today, practitioners refer to benefits design and administration 
separately and use "compensation" to denote only the various 
forms of pay, including equity pay, the employer may offer as 
part of a broader strategic or total rewards design.  
...
Under the Federal compensation statutes, the results of 
position classification are so rigidly tied to employee pay that 
the term "compensation" is sometimes construed to cover 
both pay and job evaluation.
...
EMPLOYMENT COST INDEX (ECI):
A number of statistical measures published quarterly by the 
Bureau of Labor Statistics to measure changes in specified 
non-Federal compensation.  ECIs for different quarters are 
used to adjust the General Schedule and the Executive 
Schedule.
...
EQUITY:
A general term denoting fairness and the means and criteria 
established to ensure fairness.  Equity is properly distinguished 
from equality, which more often connotes uniformity.
[indented quote] NOTE:  In compensation practice, the term equity pay applies 
to forms of compensation that publicly traded private sector 
corporations offer as financial rewards - usually stock options 
(i.e., equity in the company) provided to executives and managers 
and increasingly to other employees as well - to promote risk 
sharing and engage employee commitment.[end quote]
...
EXTERNAL EQUITY:
A fairness criterion that directs an employer to set pay levels 
based on comparisons with rates prevailing in external 
markets for an occupation.
...
[page 71]
INDIVIDUAL EQUITY:
A fairness criterion that provides a guideline for employers to 
set salary rates for individual employees (people on the same 
job, in the simplest case) according to individual variation in 
merit.  Also sometimes referred to as contribution equity.
...
INTERNAL EQUITY:
A fairness criterion that directs an employer to set pay rates 
that correspond to each job's relative value to the organization.
...
FEDERAL EMPLOYEES PAY COMPARABILITY ACT OF 1990 (FEPCA):
The pay reform legislation that made several changes in the 
way pay is set for the white-collar Federal workforce covering 
a broad range of compensation issues, including locality pay, 
pay for administrative law judges and Boards of Contract 
Appeals, a new aggregate limitation on pay, higher pay for 
critical positions, interim geographic adjustments for New 
York, Los Angeles, and San Francisco, law enforcement 
officer special pay entitlements, recruitment and relocation 
bonuses and retention allowances, senior level pay, expanded 
special rate authority, supervisory differentials, time off as an 
incentive award, payment for academic degree training, travel 
and transportation expenses for interviewees and new 
appointments, and higher uniform allowances.
...
GENERAL SCHEDULE (GS):
The classification and pay system for most white-collar 
employees in the Federal Government.  The pay structure for 
the General Schedule has 15 grade levels, with 10 salary steps 
at each grade.  Positions are classified using governmentwide 
standards to determine their proper occupational series, title, 
and grade within the General Schedule.
...
GRADE:
Each of the 15 grades in the General Schedule represents a 
unique band of difficulty and responsibility and is defined in 
statute at 5 U.S.C. sec.5104..  Grades are the same across 
different occupations, so that a GS-7 secretary, a GS-7 
engineer, and a GS-7 photographer are in positions of 
equivalent difficulty and responsibility.  Each of the 15 grades 
is defined in statute (the definitions were written in 1949).  In 
the General Schedule system, grade also is used to mean level 
of work.
...
[page 72]
GRADE INTERVAL - "TWO-GRADE INTERVAL", "ONE-GRADE INTERVAL":
The terms "two-grade interval" and "one-grade interval" 
refer to the differing patterns of career advancement through 
a sequence of General Schedule grades.  The two basic 
patterns reflect a basic distinction between the two general 
kinds of white-collar work covered by the General Schedule.  
Two-grade interval work generally comprises jobs in the 
professional and administrative occupational categories, and 
promotions are granted in two-grade increments from grades 
GS-5 through 11 and in one-grade increments at GS 12 and 
beyond.  One-grade interval work generally comprises jobs in 
the clerical and technical occupational categories, and 
promotions are granted in one-grade increments.  
...
These two labels perform roughly the same function that 
"exempt" and "non-exempt" tend to have in the private 
sector as a short-hand way to distinguish higher level 
"professional" work and lower-level clerical and technical 
work.  The Fair Labor Standards Act (FLSA) did not apply to 
the Federal Government when the General Schedule was 
established.  Therefore, the FLSA categories do not serve, in 
the Federal compensation environment, as a basic distinction 
upon which the pay structure is built.   
...
JOB EVALUATION:
A formal process by which management determines the 
relative value to be placed on various jobs within the 
organization. The end result of job evaluation consists of an 
assignment of jobs to a hierarchy of grades or some other 
hierarchical index of job value.  Job evaluation is most closely 
associated with the criterion of internal equity.  
...
Job evaluation methods can focus on the position being 
evaluated, irrespective of any information about its market 
value, or determine the market price of that work among 
other employers, or use some combination.  The Federal 
Government's job evaluation system relies on the first method 
in its position classification system.
...
LOCALITY PAY:
Supplemental locality-based payments in addition to the rate of 
basic pay that apply in the 48 contiguous States in areas where 
non-Federal pay exceeds Federal pay by more than 5 percent.  
Most Federal employees - including GS, SES, and Senior-
Level employees, but excluding blue-collar employees and 
officials paid under the Executive Schedule - are eligible for 
locality pay.
...  
A locality pay area is a geographic area that serves as the basis 
for setting pay and is established by the President's Pay Agent 
for General Schedule employees in the 48 contiguous States 
and Washington, DC.  The Pay Agent has established 32 GS 
locality pay areas, including the Rest of U.S. locality pay area.
...
PAYBANDING:
A salary structure divided into fewer, broader pay ranges than 
traditional grades.  Broad grades reduce the number of 
traditional grades, widen them, and generally retain traditional 
salary administration.  Career bands are fewer and broader 
than broad grades and involve alternative salary 
administration.  Also commonly called broadbanding.
...
PAY PROGRESSION:
The positive movement of salary within a pay range.  For 
example, pay progression is approximately 1% if salary 
increases by 4% while the pay range increases by 3%.  An 
organization's policies for managing position-in-range are 
implemented through the pay system's pay progression method 
(e.g., the conditions an employee must meet to advance in the 
range or to be paid the top rates in a pay range).
...
[page 74]
PERFORMANCE:
1.	The act of going through or executing in the proper, 
customary, or established manner.
2.	The manner in which or the efficiency with which 
something reacts or fulfills its intended purpose.
...
[indented quote[ NOTE:  These two complementary, but distinct, definitions of 
performance reflect the fundamental evolution in conception that 
occurred throughout the public sector in the late years of the 20th 
century as expectations and accountability shifted from processes 
(definition 1) to results (definition 2).  Further, the connotation of 
"results" has increasingly expanded to entail constant improvement.  
Given continually evolving technologies and expected improvements 
in human capital and financial management, performance goals 
typically describe increases in terms of results (e.g., customer 
satisfaction index targeted to improve from 85 to 90, unit cost 
decreased by 8 percent) rather than in terms of process. [end quote]
...
PERFORMANCE MANAGEMENT:
In the context of employee performance, an integrated set 
of managerial processes that consists of:
...
[bullet] planning performance - both by translating organizational 
goals and objectives to specific results employees and units 
are expected to achieve and by establishing the measures 
that will be used to assess such achievement and maintain 
accountability, 
...
[bullet] monitoring performance - through ongoing observation 
and feedback, including taking steps to address and resolve 
poor performance,
...
[bullet] developing the capacity to perform - both by increasing 
needed employee competencies through learning 
management and by improving business processes, 
...
[bullet] appraising performance - including formally measuring 
and reporting individual, group, and organizational 
achievements and periodically summarizing performance in 
an employee's formal rating of record, and 
...
[bullet] rewarding performance - both informally using ongoing 
recognition and formally using financial rewards such as 
variable pay based on organizational, group, or individual 
achievements and adjustments to individual rates of pay. (continued)
...
[page 75]
PERFORMANCE MANAGEMENT (continued):
In the context of program performance, an integrated set of 
managerial processes to establish and assess organizational 
goals and accountability for results, such as those carried out 
in the Federal Government under the requirements of the 
Government Performance and Results Act of 1993.
...
POSITION-IN-RANGE:
The position of a pay rate relative to all pay rates in a range.  
Position-in-range is normally expressed as a percentile, but 
may be expressed relative to control points or range zones.
...
QUALITY STEP INCREASE (QSI):
The increase of a General Schedule employee's pay from one 
step rate to the next higher rate for that same grade in advance 
of completion of the applicable waiting period.
...
RANGE:
A range of pay rates, from minimum to maximum.
...
SALARY STRUCTURE:
A hierarchical structure of pay ranges.  The salary structure 
may be expressed in terms of job grades, job-evaluation 
points, or policy lines.  An organization may use different 
salary structures for different categories of employees.
...
SERIES:
Derived from the statutory phrase "series of classes," this 
term is synonymous with occupation for almost all purposes.
...
SPECIAL SALARY RATES:
Rates of basic pay that are higher than the normal GS rates.  
OPM may establish special rates for a group or category of 
GS positions in one or more geographic areas to address 
existing or likely significant handicaps in recruiting or 
retaining well-qualified employees.  Special salary rates address 
staffing problems caused by pay disparities, undesirable 
working conditions, remoteness, or any other circumstance 
considered appropriate.
...
STEPS:
The 10 specific rates of pay within the pay range of a given 
grade at which pay can be set.
...
[page 76]
STRATEGIC REWARDS:
Everything valued by employees that an organization provides 
for the purpose of recruiting, retaining, developing, or aligning 
them in support of strategic organizational goals. Strategic 
rewards refer to the bundle of all employee reward elements, 
including compensation, benefits, development and learning, 
and the work environment. Strategic rewards mix traditional 
with non-traditional rewards and make the employment 
relationship more meaningful and satisfying to the employee.
...
STRUCTURAL ADJUSTMENT:
An equal flat rate (dollars and cents) or percentage increase of 
the pay rates that define a pay structure, including pay range 
minimums, maximums, steps, and control points, if 
applicable.  In non-Federal organizations, the increase is often 
not reflected in employee paychecks (see across-the-board 
increase).  Non-Federal organizations often increase employee 
pay at approximately the same time as a structural adjustment, 
but use other mechanisms to do so, such as merit increases, 
which for most employees might closely track the adjustment 
in amount.  In such circumstances, pay progression occurs to 
the extent employee increases exceed structural adjustments.
...
VARIABLE PAY:
Lump sum pay that is not guaranteed; variable pay is usually 
dependent on employee or organizational performance, or 
both.
...
WITHIN-GRADE INCREASE (WGI):
The increase of a General Schedule employee's pay from 
one step rate to the next higher rate for that same grade at 
the completion of the applicable waiting period.
...
[page 77]
Acknowledgements
...
Over the past 3 years many people have assisted OPM in its efforts to examine 
and develop ways in which Federal pay might be improved to better support 
the accomplishment of agencies' missions.  Throughout this effort we have 
received assistance from many quarters.  A number of State and city governments 
provided information about their pay systems.  Federal agencies with established 
demonstration projects and with unique pay systems provided information freely.  
Agencies, Federal employee unions, and management and professional associations 
sent representatives to informal workgroups to hear about OPM's research and to 
offer observations about the wide range of compensation practices and issues we 
described.  
...
We want to make clear that the views expressed in this paper are those of OPM 
and not necessarily of any of the individuals or organizations who have helped 
us in our endeavor to understand the strengths and the challenges of the Federal 
white-collar pay system.
...
Government of Canada:
Richard Taylor, Treasury Board Secretariat.
...
State Governments:
Christopher Byrd, South Carolina.
Amy Cahoon, Michigan.
Marsha Cope, Maryland.
Carol Culbrecht, Florida.
Dana Denny, Wisconsin.
Thomas Gausvik, Virginia.
Sue Huang, Colorado.
Liz Koncker, Minnesota.
Jim Lippert, Oklahoma.
Lisa Lusk, Louisiana.
Cary Randow, Washington.
Lois Ryan, Kansas.
John Soffey, New York.
Mary Gayle Ulm, Georgia.
Kathie Vaughn, California.
...
[page 78]
Cities:
Patsy Burks, Greensboro, North Carolina.
Richard Dickson, Atlanta, Georgia.
Jose Moreno, Fort Worth, Texas.
Brenda Schrader, Phoenix, Arizona.
Chris Yountz, Greensboro, North Carolina.
...
Federal Agencies:
Donna Adams, Department of Labor.
Phyllis Alexander, Department of Commerce.
Dave Anderson, Department of the Interior.
Daiva Balkus, Environmental Protection Agency.
Nancy Barnett, Department of the Interior.
Judy Bentley, Department of the Navy.
Chris Cejka, Department of the Treasury.
Lois Cheney, Federal Deposit Insurance Corporation.
Bernadette Christie, Internal Revenue Service.
Al Cohen, Department of the Navy.
Carolyn Cohen, Department of the Interior.
Nina Damato, Office of the Comptroller of the Currency.
Kay Frances Dolan, Department of the Treasury.
Christopher Early, Federal Aviation Administration.
Sharon Barbee-Fletcher, Pension Benefit Guaranty Corporation.
Jim Gallo, Department of Commerce.
Carol Gartrell, Department of the Treasury.
Andy Glasgow, Department of Labor.
Sharlyn Grigsby, Department of State.
Ginger Groeber, Department of Defense.
Mike Hamlin, Environmental Protection Agency.
Dave Harrington, Federal Deposit Insurance Corporation.
Saundra Hazel, Defense Logistics Agency.
Beth Helmer, Department of the Army.
Gwen Hopson, Department of Defense.
L. George Jones, U.S. Postal Service.
Jacqueline Johnson, Department of the Interior.
Jan Karicher, Department of Transportation.
Cynthia Keyes, Department of the Interior.
Anne Marie Khinoo, Department of the Navy.
...
[page 79]
Federal Agencies (continued):
Chris Koehle, Department of Defense.
Paul Krumsiek, Department of Justice.
Kimberlee Laws, Department of Labor.
Ed Liverani, Department of the Army.
Jeni Mallios, Department of State.
Sheila Marshall, Department of Justice.
Sally Mavlian, Department of State.
Natasha McCarthy, Pension Benefit Guarantee Corporation.
Mike McClure, Department of the Army.
Cindy Medlock, Federal Deposit Insurance Corporation.
Patricia Miles, Department of Defense.
Jeffrey Neal, Department of Commerce.
David Neerman, Department of the Navy.
Frank Padalino, Department of the Treasury.
Rebecca Parish, Department of Labor.
Pamela Pearson, Pension Benefit Guaranty Corporation.
Steven Rumble, Department of Defense.
Carlos Saavedra, Department of the Navy.
Mari Santangelo, Department of Transportation.
Casey Schaffer, Department of the Interior.
Denise Schossler, Department of Transportation.
Jack Schrader, Department of Defense.
Marvin Schulman, Environmental Protection Agency.
Dulcy Setchfield, Department of the Interior.
David Snyder, Department of the Army.
Donna Stein, Office of the Comptroller of the Currency.
Tali Stepp, Department of Labor.
Cathy Testo, Department of State.
Deborah Thompson, Department of the Treasury.
Jan Thompson, Department of Defense.
Jim Tingwald, National Aeronautics and Space Administration.
Debra Tomchek, Department of Commerce.
Linda Ward, Department of the Army.
Paul Weatherhead, U.S. Postal Service.
Betty Welch, Department of the Navy.
Carolyn Williams, Department of State.
Jim Wohlgemuth, Department of the Interior.
George Youravich, Department of State.
...
[page 80]
Federal Employee Unions:
Laura Bjorklund, National Federation of Federal Employees.
Richard Brown, National Federation of Federal Employees.
Edmund Bronder, American Nurses Association.
Carmela Crimeni, Federal Education Association.
Christopher Donnellon, National Association of Government Employees.
Michael Fanfalone, President, Professional Airways Systems Specialists.
Maureen Gilman, National Treasury Employees Union.
Paul Greaves, National Weather Service Employees Organization.
Bobby Harnage, President, American Federation of Government Employees.
Sequitta Hooker, Federal Education Association.
Stephen Keller, National Treasury Employees Union.
Colleen Kelley, President, National Treasury Employees Union.
Kenneth Lyons, National Association of Government Employees.
Peter Nuhn, National Weather Service Employee Organization.
Terry Rosen, American Federation of Government Employees.
Jacque Simon, American Federation of Government Employees.
Kurt Vorndran, National Treasury Employees Union.
...
Coalition for Effective Change:
Rich Granville, Federal Physicians Association.
Enid Rubenstein, Federal Bar Association.
Rosslyn Kleeman, Chair, Coalition for Effective Change.
Fred Sand, Classification & Compensation Society.
Bruce Moyer, Federal Bar Association.
Alice Thaler, National Association of Federal Veterinarians.
Kristin Royster, Federal Managers Association.
...
[page 81]
Office of Management and Budget:
Meredith Benson.
Jonathan Breul.
James Capretta.
Nancy Dorn.
Mark Everson.
Lisa Fairhall.
Aromie Noe.
Sean O'Keefe.
...
General Accounting Office:
Steve Altman.
Richard Caradine.
Chris Mihm.
Vic Rezendes.
Lisa Shames.
Ed Stephenson.
David Walker.
...
National Academy of Public Administration:
Frank Cipolla.
Kenneth Hunter.
Robert O'Neill.
Myra Howze Shiplett.
Ray Sumser.
Marylou Whelan.
...
Compensation and Public Policy Experts:
Maggi Coil, MAC Consulting.
Howard Risher, HRSolutions.
John Davis, Hewitt Associates.
Steven Safier, Hay Group.
Joseph W. Howe, GRA Personnel Services.
Jay Schuster, Schuster, Zingheim & Associates, Inc.
Robert L. Heneman, The Ohio State University.
A. W. "Pete" Smith, Jr., Private Sector Council.
Paul Light, The Brookings Institution.
...
[page 82]
Office of Personnel Management:
Laura Antle.
Bryce Baker.
Darlene Byrum.
Barbara Colchao.
Carol Cook.
Judith Davis.
Donna Devine.
Vladimir Diaz.
Audrey Funk.
Joy Hall.
Terri Hauser.
Doris Hausser.
Allan Hearne.
Peggy Higgins.
Winford Hooker.
Jeanne Jacobson.
John Landers.
Karen Lebing.
Edward Magee.
Mary Ann Maloney.
Tanet Matos.
Jerome Mikowicz.
Helen Onufrak.
Jo Ann Perrini.
Henry Romero.
Radiah Rose.
Gary Smith.
Jeff Sumberg.
James Tsugawa.
Arthur Walker.
Andrew Wasilisin.
Delmar White.
Paul Whiteley.
Donald Winstead.
Greg Zygiel.
...
SCP-01