The Federal Merit Pay Program

Under the Civil Service Reform Act, pay increases for management officials and supervisors are to be based on their performance. If merit pay is to work, it is crucial that it be implemented properly. GAO is concerned about whether agencies are ready to make sound merit pay decisions on the basis of performance appraisals and believes that the Office of Personnel Management's (OPM) method for computing agencies' merit pay funds does not accurately reflect the amount of money allowed under the Act. A GAO report stated that: (1) many agencies were not planning to pretest their systems; (2) additional pay-for-performance training needed to be developed; (3) many agencies had not defined the specific objectives that they wanted their systems to accomplish nor were they developing or using evaluation plans; (4) implementation cost information was not being maintained; and (5) criteria for determining who to include or exclude from merit pay were not clear. OPM has not taken appropriate corrective action to solve these problems. The OPM method for computing agencies' merit pay funds will result in the Government spending from $58 to $74 million more each year than it would have if employees remained under the General Schedule pay system. The merit pay computation formula permits funds that cannot be paid to employees at the statutory pay ceiling to be used to reward employees below the ceiling. The sum in each agency's salary and expense appropriation for merit pay is limited to the amount which would have been spent on within-grade step increases, quality step increases, and comparability adjustments under the pre-merit pay system. Problems still exist in the procedures developed for higher level review. Trying to insure that all agencies meet the October 1, 1981, deadline for merit pay determinations, OPM has concentrated its efforts on reviewing and approving agencies' performance appraisal and merit pay plans for compliance with the law, rather than on assessing the quality of these systems or assuring that they operate properly. OPM needs to take a more aggressive leadership role in assuring that agency merit pay systems are fairly and effectively implemented. Congress should enact legislation to postpone the October 1981 mandatory merit payout date to enable OPM to require agencies to pretest their pay-for-performance systems. OPM should require agencies that have not pretested their systems to petition for exclusion from the deadline.