In Gibbs’ (2006) study analyzing compensation among US Department of Defense scientists and engineers, valuable data were obtained on two early
performance-based compensation demonstrations: the Performance Management and Recognition System (PMRS) and China Lake. These demonstrations were designed to add more flexibility into the pay structure to remain more competitive with the private sector in recruiting and retaining quality personnel to fill increasingly more technical job assignments. These pay plans would challenge the more rigid General Schedule (GS) pay structure comprised of 15 pay levels, each one including 10 steps, with raises “awarded primarily for seniority [time in grade] so that pay for performance came about chiefly through promotions” (Gibbs, 2006, p. 202).
1. Performance Management and Recognition System (PMRS)
Compared to the GS pay system, the PMRS offered a more flexible pay plan that awarded increased salary in the upper GS levels (Grades 13 through 15) based on performance evaluations (Gibbs, 2006). The PMRS was mandated by the Civil Service Reform Act (CSRA) of 1978 to institute performance-based compensation in federal organizations (Perry & Petrakis, 1988). As designed, employees covered under the PMRS would receive compensation based on their performance
evaluations. Employees receiving evaluation appraisals of “fully successful or better [were] assured of receiving the full annual comparability adjustment and all or part of the equivalent within grade increase” (Perry & Petrakis, 1988, p. 361). Those
workers rated above “fully successful” would be eligible for additional awards or bonuses, which were capped at a 2-percent increase if an employee received an evaluation rating that was two levels above “fully successful” (Perry & Petrakis, 1988, p. 361). Total bonus allocations were limited to no more than 1.5 percent of the total payroll. The first pay-for-performance, or merit-based pay system,
implemented under the CSRA was “hailed as [a] means for bringing responsiveness and efficiency back to the federal sector” (Perry & Petrakis, 1988, p. 359). However, limitations in program execution left workers disenchanted and discouraged as the merit-based pay system did not provide adequate “funding for merit pay pools, [contained] pay inequities between managers and non-managers, and low validity of performance appraisal ratings” (Perry & Petrakis, 1988, p. 359).
The PMRS was considered a significant improvement over the original merit- based pay system that was first enacted after the CSRA. However, flaws were still present. The Government Accounting Office reported that more than 1/3 of the surveyed employees were dissatisfied with the 1.5-percent total payroll scheme that forced bonuses into a limited distribution, citing that “the manipulation of ratings undercuts the validity of the performance appraisal system” (Perry & Petrakis, 1988, p. 363). Other critics claimed that the PMRS failed to address the primary issue: improving employee performance (Perry & Petrakis, 1988). According to Perry and Petrakis (1988), additional arguments were made in the following areas:
Bonuses should be larger—larger bonuses are more likely to sustain high performance.
Promotions should be considered as a substitute for rewards—
representing recognition of employee performance—and should be a permanent form of pay increase.
Punishment was uncertain, as it was not clear how the PMRS addressed consistently underperforming employees.
The differentiation between leavers vs. stayers was uncertain; it was vague how the PMRS affected functional turnover.
The PMRS included additional discrepancies. The seven critical components listed by the US Merit Systems Protection Board lay the groundwork to successfully implement performance-based compensation. The PMRS did not follow these components. In particular, inadequate funding seemed to limit the rewards to only 1.5 percent of the total payroll. The evaluation system was plagued as a “time- consuming and sometimes unpleasant task” in which supervisors had difficulty “measuring and documenting performance differentials” (Perry & Petrakis, 1988, p. 365). Employees, who were not confident that their performance would be
accurately reflected in their evaluations, were provided little incentive to work hard. Furthermore, Perry and Petrakis (1988) argued that the inherently self-focused recognition system in performance-based compensation detracted from achieving organizational goals. Ultimately, the PMRS was terminated in 1993.
2. China Lake
The demonstration project at China Lake introduced a multi-tiered promotion ladder that rewarded more technical skills while using pay banding in five primary pay grades, in lieu of the 15 pay grades under the GS system. The compensation changes (which included wider pay bands) introduced to a select employee group of China Lake scientists and engineers were designed to create greater salary flexibility and performance incentives not present under the existing GS system (Gibbs,
2006). According to the Government Accountability Office (2004), the China Lake compensation changes were designed to:
Develop an integrated approach to pay, performance appraisal, and classification;
Allow greater managerial control over personnel functions; and Expand the opportunities available to employees through a more
In instituting a compensation demonstration project, China Lake applied several critical components that would later be identified by the US Merit Systems Protection Board (2006) as critical elements in performance-based compensation. China Lake’s management process was thoroughly involved in the compensation reform. From modifying position responsibilities to supervisor reviews, employees involved in the demonstration project received constant feedback on their
performance. Additionally, China Lake instituted a check-and-balance process that provided a secondary review of all performance evaluations and a grievance
procedure for any employees dissatisfied with their review. Ultimately, the initial success of the trial run was evident in the increased quality of recruits at China Lake (Gibbs, 2006). Further evidence of China Lake’s demonstration success occurred in 1994, when its compensation system was permanently signed into public law (GAO, 2004).
3. Summary
Gibbs’ (2006) return to skills analysis of three different pay plans within the federal government provided mixed results. Table 15 shows the impact of the more flexible pay plans on the PMRS and China Lake test groups with reference to the GS pay system over the 15-year period from 1982-1996.
Table 15. Trends in Returns to Unobserved Skills in GS, PMRS, and China Lake Pay Plans between 1982-1996
(Adapted from Gibbs, 2006)
Years of Service 1-5 6-10 11+ GS BA MA PhD BA MA PhD BA MA PhD Engineer 1982 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 Mathematician 1982 1.00 - - 1.00 1.00 - 1.00 1.00 1.00 Scientist 1982 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 Engineer 1996 0.92 0.96 0.91 0.93 0.91 0.89 0.84 0.90 1.01 Mathematician 1996 0.72 - - 0.93 0.83 - 0.96 0.97 1.13 Scientist 1996 0.97 1.08 0.99 0.87 0.86 0.91 0.92 0.92 1.07 PMRS BA MA PhD BA MA PhD BA MA PhD Engineer 1983 - - - 1.00 1.00 1.00 1.00 1.00 1.00 Mathematician 1983 - - - 1.00 1.00 1.00 Scientist 1983 - - 1.00 - - 1.00 1.00 1.00 1.00 Engineer 1996 - - - 0.98 0.94 1.20 1.01 1.05 1.05 Mathematician 1996 - - - - - - 1.02 1.10 1.00 Scientist 1996 - - 0.83 - - 1.01 1.05 1.05 1.07 China Lake BA MA PhD BA MA PhD BA MA PhD Engineer 1983 1.00 1.00 - 1.00 1.00 - 1.00 1.00 1.00 Mathematician 1983 - - - 1.00 1.00 1.00 Scientist 1983 - - - - - - 1.00 1.00 1.00 Engineer 1996 1.09 1.15 - 0.90 0.98 - 0.99 1.04 0.97 Mathematician 1996 - - - - 0.97 - - 1.18 1.07 1.26 Scientist 1996 - - - 0.96 - - 1.01 1.10 0.95
Represented in Table 15, employees who experienced a positive return to skills and subsequent increased salary are depicted with a value greater than one. Under the GS pay system, nearly all degree holders in each of the three
occupational fields experienced a decreasing return to skill during their career. The two exceptions, however, included scientists with Master’s Degrees in the lowest experience category and PhD holders with greater than 11 years of experience. Under the PRMS pay plan, PhD holders with 6-10 years of experience and all degree holders with greater than 11 years of experience observed a positive return to skills. At China Lake, employees experienced similar positive returns to skills in
the most experienced category, in addition to engineers in the 1-5 years-of- experience group. (Gibbs, 2006)
The results of the PMRS and China Lake pay system demonstration projects are more consistent with the growth of salary and return to skills seen in the private sector. Depicted in Figure 30, the return to skills, as observed by the median salary, remains flat within the GS pay system. There is approximately the same salary differential between GS 7 and GS 15 employees at the start of their careers as there is toward the end. Thus, there is no observed return to skill. (Gibbs, 2006)
Figure 30. Median Salary by Grade, General Schedule Scientists and Engineers
(Gibbs, 2006, p. 203)
By comparison, Figure 31 shows a growing separation of return to skill throughout workers’ careers. In the private sector, there is a growing separation between salaries paid at the lowest level (i.e., Level 1) and the highest level (i.e., Level 8) as workers gain experience. Therefore, the private sector tends to reward experience in a much more lucrative manner than is witnessed in the government sector. Level 1 and Level 8 employees do not continue to receive the same pay
raise throughout their careers, which is unlike pay raises in the GS system. (Gibbs, 2006)
Figure 31. Median Salary by Level of Responsibility, Private-sector Engineers
(Gibbs, 2006, p. 203)
Of great interest to this analysis is whether or not the more flexible pay systems created a greater ability to attract and retain quality employees. There appeared to be:
little evidence that the DOD experienced any decline in its ability to attract and retain high-quality SEs [scientists and engineers] over the 1980s and early 1990s. Measured quality and performance of new hires relative to promotes, and of exits relative to stays, were essentially flat over the period. These findings hold for the most important federal pay plan, the General Schedule, as well as for two other plans that were intended to provide greater flexibility in personnel management. (Gibbs, 2006, pp. 212-213)
Analysis of Gibbs’ (2006) study may suggest little need for the federal government to switch to a compensation structure that models the private sector. Because federal employment has significant intrinsic value that cannot be captured by simple economic models, results were not as conclusive as proponents of
performance-based compensation would like to argue. Patriotism, stability, security, and a vast research budget are just some of the reasons cited in Gibbs’ (2006) study that explain why the PMRS and China Lake pay models do not behave according to existing economic theory.