Based on the changes Public Law 110181 made to section 9902 of title 5, the revised rule deletes subparts E, F, G, H, and I (dealing with staffing, workforce shaping, adverse actions, appeals, and labor relations, respectively) of the current NSPS regulations.

Public Law 110181 also amended section 9902 by modifying the authority to conduct nationallevel bargaining and retains the rights of employees to organize, bargain collectively and participate through labor organizations of their own choosing in decisions that affect them, subject to any exclusion from coverage or limitation on negotiability established pursuant to law. It extends and expands exclusions from NSPS coverage for certain DoD laboratories through October 1, 2011. Some of these laboratories operate under demonstration project authorities which provide their own payforperformance systems.

In establishing the revised System, only certain provisions of title 5, United States Code, may be waived or modified by DoD and OPM:

Finally, Public Law 110181 has a significant effect on the content of the current regulations governing NSPS. Previous legislation authorizing NSPS permitted the promulgation of regulations outlining a framework for NSPS. Implementing issuances provided the detail lacking in the regulatory framework. Taken together, the regulations and the implementing issuances formed the structure of NSPS. However, Public Law 110181 eliminated the previous legislation's exclusive statutory collaboration process for employee representatives to participate in design and implementation of NSPS. Public Law 110181 mandated the Governmentwide labor relations system in title 5, chapter 71, for NSPS and conferred the status of Governmentwide rule on regulations governing NSPS. Given these new provisions, much of the structure of NSPS must be established in regulation, rather than through the collective bargaining process, for purposes of uniformity and consistency of the operation of NSPS, much like the Governmentwide regulations that establish the structure of the General Schedule. IV. Two Years of Operational Experience Under NSPS

In order to provide consistency and uniformity of application throughout the Department, certain NSPS features
[[Page 56347]]
previously described in DoD implementing issuances have been incorporated into this regulation. DoD now has more than 2 years of experience with these features and has determined that they effectively support key performance parameters of NSPS. In addition, the regulation includes modifications made to NSPS as a result of operational lessons learned over the last two years.
A. Classification

Effective Date of Classification of Position

The regulation now provides specific details for entitlement to retroactive effective date of a classification decision. While the prior regulation provided for both a classification reconsideration process and a retroactive effective date, more detail has been added to provide for a uniform and consistent application.

B. Compensation

The regulation modifies rules governing the current compensation structure by removing the link between increases in the minimum rate of the rate range and acrosstheboard increases. This change enables more flexibility in responding to labor market changes that may impact the lower end of a pay range for an occupation, but not the middle or upper ranges. Also, discretionary authority is now provided to give targeted general salary increases to designated occupational series within a pay band. This flexibility enables management to adjust pay to recognize market forces when the pay band itself is market competitive but, due to rapidly changing markets, the current salaries paid to employees in certain occupations are not.

C. Pay Administration

Several changes have been made in the area of pay administration. Paysetting flexibilities have been expanded to permit discretionary withingrade increase buyins when employees from outside of NSPS move to an NSPS position. Safeguards have been incorporated for employees who are moved to NSPS via managementdirected actions. In these cases, the regulation now specifies a required withingrade increase buyin. A significant level of detail has been added to describe how pay is administered upon promotion, reassignment, reduction in band and appointment to the Federal service. Most of this detail reflects the paysetting rules that have proven effective during the past 2 years in the operation of NSPS.

The regulation retains management's flexibility to set pay within a given range, but provides safeguards by placing limitations on the factors management may use in exercising its discretion as well as establishing pay increase limits that cannot be exceeded without higherlevel review. There have also been some modifications to pay setting practices based on DoD's experience with the System. Most significantly, paysetting rules for employees moving into NSPS from other systems or moving from NSPS positions covered by targeted local market supplements have been revised. Pay for these employees was previously set using ``base salary.'' Pay will now be set using ``adjusted salary'' (includes base salary plus any applicable locality pay, special rate supplement, or other equivalent supplement) and any physicians' comparability allowance payable for the position held prior to the reassignment. In these cases, when the new position is in a different location, a geographic pay conversion will be processed. These rules allow management to set pay more competitively and equitably compensate employees by permitting pay to be set in a manner that prevents a loss in adjusted salary in certain circumstances. Further changes in NSPS paysetting rules include the discretion to adjust the rate of pay of a teacher moving into NSPS up to 20 percent to take into account the shorter work year incorporated in the annual rate of a teacher paid under 20 U.S.C. 901.

Pay Retention

Pay retention rules have been modified to provide a ``grandfather'' clause for employees who are covered by General Schedule grade and pay retention rules at the time they are converted into NSPS. These employees will not be subject to the 104week limit on pay retention. They will be entitled to pay retention indefinitely, subject to specifically identified pay retention termination events. Much detail has been added in the area of pay retention to identify circumstances for which pay retention is mandatory, eligibility requirements for optional pay retention, and events leading to termination of pay retention. These rules reflect current practices under NSPS. Accelerated Compensation for Developmental Positions (ACDP) ``Treatment of Developmental Positions'' (Sec. 9901.345) has been modified to specify criteria for Accelerated Compensation for Developmental Positions (ACDP) increases, identify the range of pay increases that are permitted under this discretionary authority, and to expand the discretionary use of ACDP to employees in developmental or trainee level positions assigned to the lowest pay band of a nonsupervisory pay schedule and trainee level positions or positions assigned to the Student Career Experience Program. To date, this authority has been available only to employees in developmental or trainee level positions in professional and analytical occupations. The change provides additional flexibility in recognition of pay progression patterns in other occupations.

Premium Pay

A critical feature of NSPS compensation is the ability to modify premium pay in response to current and future needs. This flexibility facilitates the Department's ability to accomplish its diverse mission. The revised regulation incorporates rules governing NSPS premium pay. Premium pay includes pay such as overtime pay, compensatory time off, holiday, Sunday, and standby pay. Among the premium pay features unique to NSPS are oncall premium pay for health care personnel in specified circumstances, pay for weekend duty for health care personnel, and foreign language proficiency pay. For the most part, the regulations reflect current premium pay policies under NSPS, which include certain modifications to the standard title 5 premium pay laws and regulations to address unique DoD mission requirements and differences in the NSPS classification and pay structure.

Conversion/Movement Out of NSPS

Regulations have been added to provide a process for converting employees out of NSPS when their position is removed from coverage under the System and to provide a ``virtual GS grade'' to employees who leave their NSPS position to accept employment in a General Schedule position. These rules promote more equitable pay setting upon moves to the General Schedule pay system.
D. Performance and Pay Pool Management

Higher Level Review

The revised regulation more specifically outlines safeguards to ensure the NSPS performance and pay pool management system is fair and equitable based on employee performance. For example, under subpart D, the revised regulation now
[[Page 56348]]
provides for a higher level review of performance expectations and recommendations for ratings of record, share assignment, and payout distribution. This review helps ensure that assigned employee objectives are reviewed for appropriateness and consistency within and across the organization and/or pay pool as well as employee ratings, share assignments, and payout distribution. These safeguards help ensure equity in performance payouts.

Calculating Annual Payout

Rating levels, share assignment ranges, and rounding rules for conversion of raw performance scores are also specified in the revised regulation, as well as formulas for share values and calculation of performance payouts. The language also clarifies the intended application of a common share value (expressed as a percent of pay) throughout an entire pay pool, to include all sub pay pools. This further preserves equity across a pay pool.

Flexibility in Extending Performance Appraisal Periods

The authority to extend individual performance appraisal periods to enable employees to complete minimum periods is specified as well as limitations on this authority. By specifically providing for extension of individual rating cycles, valued performers and higherperforming employees moving to NSPS positions can more quickly benefit from the NSPS performancebased pay features.

Pay Pools

The pay pool concept has also been further defined in this regulation by providing parameters for pay pool composition and specifying the roles of pay pool officials within the pay pool process.

Much thought was given to achieving the ``right'' balance between safeguards and management flexibility. For example, although pay pool share ranges have been specified for each rating level, management still has the flexibility to determine assignment of shares within that range. System safeguards were added to ensure fairness, equity, and a performance focus by expressly stating and limiting the factors which may be used in the determination of share assignment. Similarly, management still retains the flexibility and authority to determine the distribution of a performance payout between base salary increase and bonus or a combination thereof. However, to ensure safeguards within the system, the factors management may use in exercising this authority have also been expressly defined and limited to ensure fairness, equity, and a performance focus. While pay pool funding is still determined by management, higherlevel reviews have been required to provide internal controls. Additional safeguards added include a uniform approach to handling performance payouts for employees who leave a pay pool after the end of the performance period, but before the date of the payout. Finally, to promote transparency of the pay pool process, a requirement has been added for organizations to share with employees the average rating, ratings distribution, share value (or average share value), and average payout (expressed as a percentage of base salary) at the completion of the performance payout process. Reconsideration Process

Employee performance reconsideration opportunities have been expanded to permit reconsideration of individual performance objective ratings in addition to the overall rating of record. This change recognizes that many pay pools use raw performance scores as a guide in determining how many shares to assign to employees. Since raw performance scores may be impacted by individual performance objective ratings, the ability to request review of individual performance objectives enables employees to seek redress on all performance rating decisions affecting their pay.

E. Other Changes

Other changes reflected in this regulation include language providing salary increases for employees who did not meet the minimum period of performance due to an approved paid leave status or performance of labor activities on ``official time.'' These pay adjustments will be based on the modal rating of a pay pool. Likewise, provisions have been made to adjust the pay of employees returning from temporary assignments outside of NSPS or returning from longterm training for which no NSPS performance plan was assigned. These changes ensure that employee pay is not harmed by the inability to meet a minimum performance period or inability to rate performance while employees either exercise statutory leave entitlements or fulfill other roles important to the organization.

Finally, the regulations in subpart D (dealing with performance management) permit limited coverage under NSPS paysetting and classification flexibilities for employees who are appointed for less than 90 days. Providing access to NSPS paysetting flexibilities for these positions enhances DoD's competitive position in the labor market when hiring temporary employees for 90 days or less.
V. Response to Public Comments

A. Major Issues

The proposed rule was published in the Federal Register on May 22, 2008. The public comment period concluded June 23, 2008. In response to the proposed rule, the Department received 526 comment submissions during the 30day public comment period. In reviewing the comment submissions, we discerned several recurring themes that spanned multiple sections of the proposed regulation. Major issues identified included: (1) Specificity of the regulation; (2) collective bargaining and labor relations; (3) performance and pay pool management; (4) the influence of performance versus market factors on pay; and (5) control points. Because these issues are critical to understanding the objectives of NSPS, as well as its implementation, we have given them particular attention in the following sections of this Supplementary Information.

1. Specificity of the Regulation

A significant issue raised in the public comments concerned the level of specificity in the proposed regulation. Some commenters, pointing to a lack of detail regarding specific issues, such as performance management, sought more specificity in the proposed regulation itself as opposed to the Department providing future direction in implementing issuances, which are not open to public comment. However, many of the commenters who weighed in on this issue argued that the proposed regulation is too specific. Commenters suggested that the increased level of detail was written into the proposed regulation not to improve the clarity of the regulation, but to preclude negotiation with labor organizations. Labor organization representatives argued that because DoD, under the National Defense Authorization Act for Fiscal Year 2008 (NDAA 2008), no longer has authority to establish a labor relations system under its control, the Department is attempting to write regulations as narrowly as possible to avoid the collective bargaining process.

Interestingly, during the public comment period for the 2005 regulation, a large number of commenters recommended that the regulation include far greater specificity, with
[[Page 56349]]
numerous commenters stating that they were unable to provide substantive comments without more information. Some additional specificity was written into the final 2005 regulation in response to these comments, but it retained its original goal of establishing a general policy framework to be supplemented by detailed implementing issuances.

This regulation of necessity includes more specificity than the 2005 regulation in order to preserve uniformity and consistency of application of NSPS in the changed statutory environment created by Public Law 110181. The uniform and consistent application of NSPS is important to ensure equitable treatment of all employees, whether bargaining unit or nonbargaining unit; for ease of movement of employees across components and organizations; and to achieve efficiencies in support systems such as automated performance management tools and training. Public Law 110181 restored the Governmentwide labor relations coverage of title 5, chapter 71, to NSPS employees and conferred the status of Governmentwide rule upon this NSPS regulation. It also removed the statutory collaboration process which ensured uniformity and consistency and was the exclusive process for employee representative involvement in the design and
implementation of NSPS. Given those provisions, OPM and DoD concluded the 2005 regulatory framework and detailed implementing issuance construct created unwarranted risk to the goal of uniform and consistent application of NSPS to both bargaining unit and non bargaining unit employees. With much of the operational core of NSPS in its implementing issuances subject to collective bargaining, we concluded the likely outcome of bargaining over the various components of NSPS would be multiple versions of NSPS for bargaining unit employees (there are more than 1,500 local bargaining units in DoD) and one NSPS for nonbargaining unit employees. Therefore, OPM and DoD chose to incorporate sufficient detail in this regulation, under the legislative grant of Governmentwide regulation status, to preserve the uniformity and consistency of a single NSPS. The regulation provides a standardized, yet flexible, DoD NSPS environment that promotes the growth of all employees and improves management's ability to manage the workforce. Labor organizations still retain collective bargaining rights regarding NSPS under title 5, chapter 71. In fact, labor organizations may seek to collectively bargain implementation of NSPS prior to implementation for bargaining unit employees to the same extent bargaining occurs on implementation of other Governmentwide regulations across the Federal Government.

2. Collective Bargaining and Labor Relations

In addition to their concerns on how the specificity of the regulations affects the collective bargaining rights, labor organizations made numerous comments in each subpart that various matters should be subject to collective bargaining under 5 U.S.C. chapter 71. In some cases these matters are not subject to collective bargaining today for bargaining unit employees outside NSPS as such matters are covered by law. In other cases, these matters are limited in collective bargaining because they are covered by Governmentwide regulations encompassing these employees. There were also various suggestions to include language throughout the regulations that collective bargaining rights exist on certain specified matters, even where the scope of collective bargaining rights is actually more limited than what is suggested by the labor organizations.

DoD is committed to fulfilling its obligation to bargain in good faith consistent with Governmentwide labor relations rules under 5 U.S.C. chapter 71 and the requirements of 5 U.S.C. 9902 and section 1106(b) of Public Law 110181. However, it is appropriate that the Department seek uniformity and consistency in its NSPS employment practices through issuance of regulations. We do not believe it is necessary to repeat throughout the regulations a statement regarding any statutory collective bargaining rights and have not adopted the suggestion. This does not occur today in other Governmentwide regulations or agency policies. However, we have added a clarifying general statement in subpart A regarding collective bargaining obligations prior to converting bargaining unit employees to NSPS. 3. Performance and Pay Pool Management

Background

The Department designed NSPS to be a robust performance management system in recognition of the increased importance of performance in making pay and retention decisions. NSPS uses a multilevel appraisal system that makes distinctions in levels of employee performance and links employee achievements, contributions, knowledge, and skills to organization results. NSPS also allows the Department to better recognize and support team contributions and accomplishments. The System ensures that performance expectations are clearly communicated to employees and are linked to the organization's strategic goals and objectives. This provides the ability to recognize valid distinctions in performance and reward employees based on those distinctions, which will foster a highperformance culture within the Department.

NSPS modifies the way DoD employees are paid. NSPS bases individual pay increases on performance instead of primarily on tenure and time ingrade, i.e., the emphasis is on quality of results achieved as opposed to length of experience. In addition, this system is far more marketsensitive. Both of these goals are met through the changes in the classification, pay, and performance management systems.

We believe the Department's payforperformance system is essential to DoD's ability to attract skilled and talented workers; retain and appropriately reward current employees; respond to DoD mission requirements; and create opportunities for employees to participate more fully in the total integrated workforce.

Performance and pay pool management inspired a large number of comments during the public comment period. In fact, many commenters raised issues that related to both subparts C and D, since pay administration and performance management are so closely aligned. In reviewing the comments that addressed aspects of performance management under the proposed regulation, we identified seven recurring issues. These issues are addressed in the following paragraphs.

Fairness

Many commenters expressed concerns about fairness in operation of the NSPS performance management system. Whether they characterized their concern as ``favoritism,'' ``cronyism,'' ``nepotism,'' or the euphemism ``good ol' boy'' system, commenters expressed concerns that NSPS could or would present opportunities for unfairness within the performance appraisal and overall performance management system. These commenters feared supervisors and Pay Pool Managers would assign ratings based on personal preferences and relationships unrelated to performance.

From the beginning, NSPS was designed to be consistent with specific
[[Page 56350]]
guiding principles. Among the principles emphasized in the performance management process are fairness, credibility, and transparency, as well as adherence to merit system principles. The regulation establishes many safeguardsor checks and balancesspecifically designed to guard against favoritism, cronyism, and unfair practices.

First and foremost, the performance management system design features uniform performance criteria across NSPS (see SC 1940 of NSPS implementing issuances). By using uniform criteria, NSPS ensures employees performing similar categories of work are evaluated using the same tools of measurement. To ensure that the measurement tools are interpreted consistently across the organization and in a manner free from favoritism, cronyism, or other inappropriate consideration, NSPS provides multiplelevel reviews of recommended ratings, share assignments, and payout distribution determinations. Not only does the supervisor/rating official offer a recommended rating of record based on an overall assessment of the employee's accomplishments (Sec. 9901.412(b)), but these recommended ratings receive a higherlevel reviewa requirement identified and added to the revised regulation in Sec. 9901.412(c) and made effective via implementing issuances. Following the higherlevel review, a panel of senior leaders (i.e., the Pay Pool Panel) reviews and reconciles ratings within a pay pool (Sec. 9901.412(f)). In reconciling ratings, share assignments and payout distribution recommendations, the panel compares the employee's accomplishments (via supervisory assessments and optional employee self assessments) to job objectives and standard rating criteria to ensure that the same understanding of performance criteria has been applied to employees across a pay pool. The Pay Pool Panel considerations do not include a preestablished distribution of ratings as a factor in determining the rating of record. This is because NSPS regulations also prohibit forced distribution of ratings (Sec. 9901.412(a)). As opposed to a forced alignment of employee ratings against a particular distribution pattern, employee performance reflects a measurement of ``what'' an employee accomplished (and ``how'') against standardized performance measurements. The employee also has a voice in how his or her work is viewed via the opportunity to write a selfassessment of what was accomplished by the employee and in what manner objectives were achieved during the performance cycle. Such assessments become part of the record that is forwarded to the higherlevel reviewer and Pay Pool Panel. Checks and balances such as those described above form the safeguards for fairness and equity built into the regulation and the performance management system.

As with the multilevel review for employee ratings of record, NSPS also provides for reviewing performance plans at multiple levels. First, supervisors are responsible for making sure that performance objectives accurately reflect an employee's work and for engaging employees in that determination (Sec. 9901.406). Employees participate in the development of performance expectations via conversations and written communication with their supervisors (Sec. 9901.406(g)). Second, there is a review of performance expectations at a higher level to ensure that assigned employee objectives are consistent and equitable with similar positions within and across the organization (Sec. 9901.406(h)).

In addition to the checks and balances outlined in the preceding paragraphs, NSPS contains four other important features intended to contribute to the sustainment of a fair, credible, and transparent system. First, supervisors and managers will be held accountable in a specific job objective for effectively managing the performance of employees under their supervision and will be assessed and measured on their performance against this objective (Sec. 9901.406(d)). There is a connection between administration of the performance management system and supervisory performance ratings and, consequently, a supervisor's pay. Second, DoD is committed to extensive training, both initial and ongoing, for supervisors, managers, and employees so that they understand the requirements of the performance management system. For supervisors and managers, in particular, training is focused on how to establish and communicate performance expectations, how to assess employee performance, and how to appropriately translate that assessment into pay adjustments. Third, there are various review and evaluation processes designed to monitor the implementation of NSPS and identify inconsistent, unfair treatment of employees so that these situations, if they occur, can be remedied in a timely manner. As a final check and balance, employees may also request reconsideration of ratings of record as well as ratings for individual job objectives under Sec. 9901.413.

To ensure that employees are treated fairly, there are rules to guard against arbitrary actions, enable employees to challenge or seek review of key decisions, and for setting up accountability mechanisms. All of these safeguards and checks and balances are monitored during regular and recurring reviews and evaluations of NSPS at multiple levels within the Department.

Uniformity and Consistency

Some commenters questioned whether performance would be measured uniformly and consistently among pay bands, occupational areas, and Components. While there is opportunity for some aspects of implementation of NSPS performance management to be handled flexibly to accommodate different circumstances, NSPS is designed to ensure uniformity and consistency in the most important core features of performance management. For example, the regulation mandates a uniform summary rating level pattern (Sec. 9901.405(b)(5)) and share assignment range for each rating level (Sec. 9901.342(f)), and it provides common formulas for determining the share factor value and payout within each pay pool (Sec. 9901.342(g)).

The NSPS implementing issuances and NSPS performance tools further institutionalize uniformity and consistency via the establishment of standardized NSPS performance measures applied across NSPS. For example, NSPS uses standardized performance criteria, which evaluate ``what'' was accomplished (also known as performance indicators), as well as standardized contributing factors and benchmark descriptors, which serve to measure ``how'' an objective was accomplished (SC 1940). The use of standardized criteria and rules helps to ensure consistency across NSPS.

Transparency

Several commenters expressed concern that ratings and performance payout determinations are made ``behind closed doors,'' and commenters questioned whether the NSPS system meets its stated goal of transparency. While it is true that Pay Pool Panels deliberate in private, this is necessary to protect the privacy of employees as individuals as well as to provide an atmosphere for robust performance management discussion. Nevertheless, there are a number of requirements in the system that helps preserve transparency outside of the pay pool deliberation. The regulation adds language to specify requirements for sharing of pay pool information to NSPS
[[Page 56351]]
employees (Sec. 9901.342(g)(10)). In addition, through implementing issuances (SC 1940), NSPS requires notice to employees of additional pay pool related information. This information may include the membership and composition of the pay pool to which the employee belongs; projected pay pool funding amounts; rules for making share assignment and payout distribution determinations; percentage of pay pool funding to be applied to bonuses versus increases to base salary; criteria for Organizational Achievement Recognition (OAR) awards; identity of Pay Pool Manager, Pay Pool Panel members, and Performance Review Authority; and performance indicators and contributing factors. The regulation also specifies that performance expectations (e.g., job objectives) must be communicated to employees in writing (Sec. 9901.406(b)). Performance measurement criteria are available to all employees through Web sites (e.g., http://www.cpms.osd.mil/nsps) and agency implementing issuances. The regulation adds greater detail to performance and pay pool management (such as specifying number of rating levels (Sec. 9901.405(b)(5)), rounding rules for raw performance scores (Sec. 9901.405(b)(6)), share ranges (Sec. 9901.342(f)), factors that may be considered in making a share assignment or payout distribution determination (Sec. 9901.342(g)), share value and payout formulas (Sec. 9901.342(g)), minimum criteria for eligibility for a performance payout (Sec. 9901.342), as well as identification of and procedures for performance payouts for specially situated employees not previously covered in the regulation (Sec. 9901.342(i)(l)).

Premium on Good Appraisal Writing Skills

A few commenters expressed concern that the NSPS system rewards those who can write well, not necessarily those who perform best. Commenters believe that employees who have difficulty communicating their accomplishments in a selfassessment will be at a disadvantage in comparison to good writers, even if their performance level actually exceeds that of the good writers. Another commenter expressed concern that employees are required to write their own appraisals. The written employee selfassessment is optional and is just one of many components of the NSPS performance management system. Another component of the performance management system is that each rating official also prepares a written assessment of employee performance. One of the system safeguards that helps ensure employees are not adversely affected by the ``written word'' is the requirement that Pay Pool Panels afford a rating official the opportunity to provide further justification before the panel changes a recommended rating of record (Sec. 9901.412(f)). This requirement provides an opportunity for further explanation as well as that presented in writing. Additionally, to assist both employees and rating officials in the development of written assessments, DoD has developed and made available both classroom and Webbased writing classes (see ``iSuccess'' training at http://www.cpms.osd.mil/nsps/training.html). Also, DoD has made available guidance in the form of writing tips and ``lessons learned'' by other organizations that have implemented NSPS to help employees and rating officials write effective selfassessments, performance plans, and performance assessments.

Finally, mock pay pool exercises offer both employees and rating officials the opportunity to practice their writing skills. A mock pay pool exercise is a way for organizations to understand the pay pool process. During the exercise, employees may submit written self assessments and rating officials may submit supervisory assessments for consideration by the pay pool panel. Pay pool panels can communicate back to both rating officials and employees the value of those assessments to the appraisal process and make suggestions on how to write such assessments more effectively. Also through mock pay pools, organizations identify ways to improve their process to achieve greater consistency and ensure fairness in ratings and payouts. Past experience has shown that these exercises improve not only participants' familiarity with the process, their understanding of the various aspects of the payforperformance system, and the quality of their decisions, but also their writing skills in the context of the performance management system.
Differences Between GradeBased Systems and NSPS in Rewarding Performance

Commenters noted that the proposed regulation allows organizations with wage grade workers and NSPS employees to reward performance differently, which could result in inequities. We assert differences do not necessarily result in inequities. Without doubt, there are differences between the design of the NSPS personnel and performance award system and the Federal Wage System (FWS) personnel and performance management systems. These differences with the FWS existed even when NSPS positions were still covered by the General Schedule (GS). They are a result of overall differences in the compensation systems. For example, GS grades have 10 steps, with waiting periods from one to three years between steps. Each step represents approximately a 3 percent increase in base pay awarded primarily based on seniority. The FWS has only five steps, but much shorter waiting periods (six months to two years) and larger increases (approximately 4 percent increase in base pay). Like the GS, the FWS also awards steps primarily based on seniority. The basis for pay progression under both GS and FWS systems is primarily a combination of senioritybased pay progression in the form of step increases, promotions, and cost of labor (e.g., locality pay). Performance pay, when awarded, is typically paid out via bonuses. In contrast, the design of the NSPS compensation and classification architecture has no step increases and fewer promotions. The express purpose of this design decision is to redirect pay, formerly paid out based, in part, on seniority, toward rewarding and encouraging performance (i.e., performancebased pay). Therefore, under NSPS, pay progression primarily occurs via performancebased increases. In the absence of step increases and promotions to grades that no longer exist, NSPS applies civilian pay increase dollars that would have been expended on those pay progression methods to performancebased increases and Accelerated Compensation for Developmental Positions (ACDP). In redirecting the senioritybased and promotionbased pay increases under the General Schedule to performance pay, it is appropriate that performance awards under NSPS be greater than performance awards under systems that do not redirect step increases and promotions associated with more defined levels of work to performance. The differences between NSPS and gradestructured systems are simply differences rather than inequities. Therefore, we made no attempt to align NSPS performance rewards to those of other personnel systems. In so doing, we reiterate the belief that Congress and the American people expect their public employees to be paid according to how well they perform, rather than how long they have been on the job.

Another commenter expressed an equity concern that NSPS employees may be disadvantaged over General Schedule employees where there is internal competition for reassignment
[[Page 56352]]
and promotion to other positions. In particular, the commenter expressed a belief that the NSPS performance appraisal system creates an impression that an employee with a ``3'' as his or her last rating of record is inferior to a GS employee with all Level 9's. Despite inconsistencies in rating scales across the government (to include pass/fail, NSPS, and 3 and 4 level rating systems, etc.), the employee's record of accomplishment along with appropriate employment references and a copy of the aggregate NSPS rating distribution (available via NSPS web site) should serve to inform prospective employers of the value of a NSPS Level 3 rating of record.

Communication of Performance Expectations

Commenters also noted that the proposed regulation does not place enough accountability on supervisors to communicate performance expectations. One commenter noted that the proposed regulation does not explicitly require the supervisor to notify the employee of performance expectations. Yet Sec. 9901.406 of the proposed regulation very explicitly states the requirement to communicate performance expectations to employees prior to holding the employee accountable for them (``Performance expectations will be communicated to the employee in writing, prior to holding the employee accountable for them.''). That section further states: ``Performance expectations that comprise a performance plan are considered to be approved when the supervisor has communicated the performance plan to the employee in writing.'' In addition to the employee requirements stated in Sec. 9901.406(c), Sec. 9901.406(d) states that performance expectations of supervisors and managers additionally will include assessment and measurement of how well supervisors and managers plan, monitor, develop, correct, and assess subordinate employees' performance. Inasmuch as the ``planning'' phase of performance management is considered to incorporate development and implementation of subordinate employees' performance plans and those plans, per the regulation, are only considered approved once communicated to the employee in writing, the regulation does in fact hold supervisors and managers accountable for communicating performance expectations.

Perceived Administrative Burden

Some commenters objected to the amount of time and resources needed to administer NSPS, particularly the performance management component. Commenters cited the amount of paperwork required under NSPS and the limitations of the NSPS Performance Appraisal Application (PAA) tool. We agree that the design of NSPS and the safeguards built into the system result in increased time demands, especially during the startup years. However, DoD's experience with Personnel Demonstration Projects indicates that the amount of time required for the same tasks levels off and even decreases as the organization gains experience with the pay pool process. Additionally, as experience and efficiency increase, organizations tend to parlay the process of reviewing individual performance into an examination and driver of overall organizational performance, thus increasing the return on their investment of time. Consequently, we have not altered the requirements, believing that the end result is fairness and consistencykey objectives of NSPSand the ability to further individual as well as organizational performance. Another commenter indicated that there are an insufficient number of characters available in the PAA to adequately provide self assessment information. We continuously evaluate the PAA tool to improve it to better meet user needs. We have addressed many of the initial limitations of the system and are currently reviewing changes to other features such as the limitation on the number of characters that users can enter into various fields.
4. Performance Versus the Influence of Market Factors on Pay

While a number of commenters supported the idea of a performance based pay system, some commenters were less supportive of the consideration of nonperformancerelated factors when setting pay. These commenters objected to the weight given to factors other than performance. For example, one commenter stated: ``The factors used in determining if [employees] get a raise or a bonus are * * * complicated and * * * have nothing to do with performance. Employees have no control over many of these factors, which include attrition rates, shortages of skills, and labor market. Obviously, this really isn't a true payforperformance system.'' In response to this commentand the many commenters who expressed similar concerns about the use of factors other than ``performance'' in setting paywe acknowledge that it is a misperception that compensation under NSPS is based solely on performance. From its inception, NSPS was designed to emphasize both performance pay and compensating employees based on market factors. In the Supplementary Information for the 2005 regulation we said the following about the new system: ``The pay structure will be much more responsive to market conditions'' and ``Labor market conditions will also be considered when making paysetting decisions. As prescribed in the enabling legislation, the new compensation system will better link individual pay to performance * * * ''. We also said: ``As the Department moves away from the General Schedule system, it will become more competitive in setting salaries and it will be able to adjust salaries based on various factors, including labor market conditions, performance, and changes in duties.''

The NSPS compensation system, first described in the 2005 NSPS regulation, is designed to fundamentally change the way employees in the Department are paid. First, it allows DoD, after coordination with OPM, to define occupational career groups and levels of work within each career group that are tailored to the Department's missions and components. Second, it gives DoD considerable discretion, after coordination with OPM, to set and adjust the minimum and maximum rates of pay for each of the pay schedules and pay bands within those career groups based on national and local labor market factors and other conditions. Instead of ``one size fits all'' pay rates and adjustments, NSPS allows DoD to customize those adjustments and optimize valuable but limited resources. This kind of flexibility, which is lacking under the GS and FWS pay systems, enables DoD to allocate payroll dollars to the occupations and locations where they are most needed to carry out the Department's mission. At the same time, NSPS is a system that balances linking individual pay to performance and aligning positions both internally based on position classification and externally based on labor market.

The NSPS classification, compensation, and performance management structures are designed to act in tandem to achieve two significant objectives: Reward performance and pay employees consistent with current national and local market conditions. As a result, beyond providing a system for rewarding performance, NSPS is structured to be far more responsive to applicable labor markets than gradebased systems and provides the flexibility needed to quickly adjust to a constantly changing labor market. Some of the mechanisms by which NSPS responds to applicable markets are
[[Page 56353]]
decisions involving setting the pay of employees initially hired into NSPS positions, payout distributions between base salary and bonus, establishment of control points, establishment of targeted local market supplements, targeted general salary increases, and the adjustment of pay band minimums and maximums. By utilizing contemporary pay practices to establish a marketsensitive system, DoD is better able to establish itself as an attractive employer in a competitive environment.

Under NSPS, DoD has created a system that allows the flexibility necessary to consider both market factors and performance in making compensation decisions. As a result, DoD is in a better position to attract, retain, and reward a workforce that is able to meet the high expectations set for it by the Department's senior leaders for the purpose of accomplishing the Department's missionthe defense of our nation.

5. Control Points

A number of commenters expressed concerns about control points. Many perceived them as inappropriately limiting employees' potential for salary growth in a paybanded system where pay is expected to be based on performance. They f

FOR FURTHER INFORMATION CONTACT

At DoD, Bradley B. Bunn, (703) 696- 5303; for OPM, Charles D. Grimes III, (202) 4183163.