Develop Incentive Award and Bonus Systems

Authorize Agencies to Develop Incentive Award and Bonus Systems to
Improve Individual and Organizational Performance

Background

Federal law provides for monetary awards for various categories of
employees and requires the Office of Personnel Management (OPM) to issue
regulations to govern agency awards programs. OPM has issued
supplemental guidance for use by agencies in designing and managing
productivity gainsharing programs.  Agencies also establish nonmonetary
and honor award programs under their own broad administrative authority.

Since 1978, Congress, following the lead of the private sector, has
attempted to link pay and performance through merit pay and other pay
for performance programs. The current merit pay system for nonmanagerial
General Schedule (GS) employees provides that employees with a fully
successful rating receive within-grade step increases at scheduled
intervals (from one to three years depending on position in rate range).
In addition, employees may, no more than once a year, receive additional
step increases--Quality Step Increases--based on outstanding
performance. The Performance Management and Recognition System (PMRS)
applies to supervisors and managers at grades 13-15.  Employees covered
by PMRS who are rated fully successful receive the general GS increase
and an annual merit increase and are eligible for performance awards.
Employees rated less than fully successful receive a partial or no
general increase and are not eligible for merit increases and
performance awards.

Congress reaffirmed its commitment to pay for performance in the
Federal Employees Pay Comparability Act of 1990. In May 1993, OPM
circulated a working draft proposal, "Principles and Features of
Performance Management Reform," which describes reform of employee
performance planning, assessment, and incentive systems.

In 1991, two congressionally mandated committees made recommendations
for improving pay for performance for federal government employees in
"Advancing Managerial Excellence: A Report on Improving the Performance
Management and Recognition System," which looked at PMRS for managerial
employees, and "Strengthening the Link Between Pay and Performance:
Report of the Pay for Performance Labor Management Committee," which
considered pay for performance for nonmanagerial employees. PMRS expires
on October 31, 1993. As a result, legislation will be needed to provide
a substitute performance incentive system for GM employees.

Need for Change

Pay for performance programs have had mixed results in both the public
and private sectors. After several years of experience and study,
informed observers (e.g., the General Accounting Office (GAO), the Merit
Systems Protection Board, the National Research Council) agree that (1)
there is insufficient empirical evidence that pay for performance
programs are effective, and (2) variable pay or bonuses are superior to
base pay adjustments for improving employee performance. Federal
employees generally do not believe that pay and performance are in fact
linked, and the majority of employees do not believe they were treated
fairly with regard to awards.

Governmentwide incentive programs are not responsive to organization-
specific needs and objectives, workforce characteristics, and agency
cultures. The emphasis is primarily on incentives and awards for
individual performance, not those that recognize organizational or team
performance, or even individual contributions to team accomplishments.
The current approach promotes competition, with winners and losers,
rather than cooperation and cohesion, which are important elements in
most successful government programs.  Productivity gainsharing is not
widely used even though it has proven to be an effective tool for
improving organizational performance.  Agencies do not approach bonuses
and awards in a comprehensive manner--each award or award category is
seen as independent of all other bonuses and awards. Monetary awards
tend to be emphasized and non-monetary awards deemphasized. Finally, it
is generally believed that pay for performance initiatives have been
insufficiently funded, which contributes to their lack of effectiveness.

A promising but relatively little-used approach to linking awards with
improved performance is productivity gainsharing.  GAO defines
gainsharing as "incentive systems that measure gains in employee
productivity and share the savings generated between employees and the
organization."(1) Typically about half of the savings or gains are
retained by the organization, and the other half are divided among the
employees who were responsible for those savings. GAO looked at 18
gainsharing programs in the Department of Defense (DOD) and found that
all of them reported documented cost savings ($7,000 to over $1 million)
and indirect benefits such as decreased sick leave usage and reduction
in overtime costs.(2) They concluded:  "DOD's gainsharing efforts to
date demonstrate that individual/small group programs can generate cost
savings and other related improvements."(3) GAO also looked at private
gainsharing efforts and found similar success. GAO identified three
major trends in private sector gainsharing: "gainsharing programs based
on organizationwide productivity measurements are replacing programs
based on individual or small group productivity measurements . . .
organizational "gainsharing programs are achieving high success rates .
. . [and] private sector firms are increasingly using employee
participation systems in their gainsharing programs."(4)

An ideal performance incentive system provides managers with the tools
they need to reward and motivate excellent performance.  Base pay
adjustments are predictable--which is important to employees; variable
pay or bonuses can be used as an incentive for improving employee
performance--which is important to managers. The awards available are
both monetary and non-monetary and are designed to be consistent with
the unique characteristics of the work, the workforce, and culture of
the organization. Individuals, teams, and organizations are rewarded and
recognized for performance.  Productivity gainsharing is used as an
incentive to improve organizational performance.

Cross References to Other NPR Accompanying Reports

Mission-Driven, Results-Oriented Budgeting, BGT02: Effectively Implement
the Government Performance and Results Act of 1993.

Endnotes

1. U.S. General Accounting Office, Gainsharing: DOD Efforts Highlight an
Effective Tool for Enhancing Federal Productivity, GAO/GGD-86- 143BR
(Washington, D.C.: U.S. General Accounting Office, September 1986), p.
2.

2. Ibid., p. 2.

3. Ibid., p. 21.

4. Ibid., p. 10.