SEC Suspends Unfair Pay for Performance System


President's Perspective, March 2008: In February, during Congressional testimony on federal pay for performance systems, the SEC announced its commitment to temporarily separate its performance management system from its much-maligned merit pay system while the agency works with NTEU on implementation of a new performance management system. To accomplish this separation, for the current rating year, all SEC employees who receive an “acceptable” performance rating under the agency’s current two-level performance management system will receive “equivalent share” pay increases that are equal to the overall percentage increase for merit pay in the SEC’s final budget (i.e., all “acceptable” performers will receive the same percentage salary increase).

The agency’s new commitment to temporarily separate performance management from the merit pay system is a major victory for SEC employees in NTEU’s broader fight to fix a broken pay for performance system, and it represents a substantial step towards a potential resolution of the problems with that system. NTEU believes that, by committing to this temporary approach, the SEC is finally recognizing, for the first time, that its pay for performance system is fundamentally flawed and thus should not be utilized to distribute pay raises. SEC management’s recognition of these problems had to occur before they could be addressed. In response to this development, NTEU National President Colleen Kelley recently stated that “This is a welcome decision by the agency. It has been clear for some time that the SEC system, as it has been designed and implemented, needs to be significantly revamped so that it is fair, credible and transparent.”

In fact, the SEC’s commitment is occurring as agencies across the federal government have struggled with their own pay for performance systems, leading to similar moves by other agencies over the past year. For example, the Federal Deposit Insurance Corporation, a sister financial regulatory agency, recently suspended its pay for performance system and shifted to an equivalent share distribution while its performance management system is being revamped. Similarly, the Homeland Security Department also scaled back its performance-based pay system in 2006. In this context, the SEC’s own merit pay system has been receiving increasing scrutiny from the Government Accountability Office, the Office of Personnel Management, the SEC’s Office of the Inspector General, and members of Congress.

A Question of Fairness

The SEC’s current merit pay system is not working. It lacks transparency, it has no objective performance appraisal standards, and it is insufficiently funded in a fashion that forces unfair distributions each year. For that reason, for over five years now, NTEU has fought for substantial changes to the system, to make it more fair, transparent and credible.

As currently constituted, the merit pay system is a “zero sum game” each year, in which one employee must be given a lower award to permit another employee to get a higher one, without real regard to the actual merits of individual performance. Managers are required to tailor their appraisals to fit their employees’ merit pay increases into the agency’s budget. Even if a large percentage of the employees in a particular group are performing extremely well, some of them must draw the short straw each year. And given the lack of anything resembling truly objective performance standards within the system, subjectivity, bias, prejudice and favoritism inexorably seep into the process each year, slowly poisoning the working environment at the SEC and decreasing employee morale.

In recent years this situation has steadily deteriorated, leading to widely varying results across the agency. Last year, for example, one out of four employees in Atlanta and Miami and one out of five employees in IM received zero steps – large percentages of employees in those offices who were essentially rated as “minimally acceptable” and undeserving of any merit pay increase. The union strongly disagrees with these results. In other offices, management strove to move in the opposite direction, flattening out the distribution as much as possible in such a fashion that the result no longer even looked like a performance based system. In NYRO, for example, no employees received a three-step increase, while 144 received one step and 110 received two steps.

These problems demonstrate that the SEC’s current merit pay system is fundamentally flawed, but that is not the only problem with the system. It has also been found to be illegal. Just a few months ago, in a case brought on behalf of SEC employees by NTEU, an independent arbitrator ruled that the merit pay system violated Title VII of the Civil Rights Act, as well as the Age Discrimination in Employment Act, by illegally discriminating against large groups of employees at the agency. As but one piece of evidence from that arbitration, higher graded white employees were almost twice as likely to receive a 3-step merit increase as higher graded African American employees – a disparity that can only be viewed as deeply disturbing to all of us who work at the agency.

Stated plainly, an agency such as the SEC should not continue to knowingly rely upon a flawed system for the distribution of pay raises when that system leads to discriminatory results in violation of federal law. Certainly, the union cannot support an unfair system that has been demonstrated to discriminate against large numbers of the bargaining unit employees that it represents. For that reason, as well as others, the temporary move to equivalent shares this year does not appear to be unreasonable, while we work to move to a new performance management system that is fair, transparent and credible.

NTEU Is Working to Increase the Merit Pay Budget for the Coming Distributions

It is important to understand that the final amount of the “equivalent share” merit pay increases will depend upon how much money Congress ultimately provides for merit pay increases in the SEC’s budget. That budget has not yet been finalized, and the budget process will continue in the months ahead. Currently, the agency is seeking approximately a 2% increase.

NTEU believes that the agency’s budget for merit pay should be returned to the approximately 3% increase that was budgeted in 2003, 2004 and 2005. For the past two years, the SEC has only sought and received merit pay budget increases of approximately 2%, which has led to lower average step increases. As we speak, the union is working with Congressional staffers who are involved with the budget process, seeking to obtain a return to a merit pay budget increase of approximately 3% this year, which would roughly translate into a 2-step merit increase for all employees rated “acceptable.”

Despite the tough budget environment that currently exists in Washington, the union feels that we have solid arguments in favor of a return to full funding this year, and we intend to press those arguments and do everything possible to increase the budget. We will keep you posted on our efforts.

Development of a New Performance Management System That Is Fair and Credible

Under the Federal Service Impasses Panel’s decision on SEC compensation in late 2006, the agency and the union are required to work together to develop a new performance management system that is fair and credible. NTEU is continuing to work with the agency on creating such a system. The new system will have five levels, rather than the current two-level, acceptable/unacceptable format. It will have formal performance standards for different positions at the SEC, and the appraisals will be fed into the merit pay process.

This major effort cannot be completed for the current rating year. For that reason, while NTEU understands that the temporary equivalent share approach this year is not perfect, the union believes that it is not an unreasonable approach, given the alternative of yet another application of the current system that the union believes to be unfair and illegal.

NTEU Is Continuing to Press the Existing Merit Pay National Arbitrations

NTEU is also continuing to press ahead with the national arbitrations on merit pay. In the arbitration that we recently won, the union is seeking a remedy of retroactive pay raises and back pay. The SEC, by contrast, has requested permission from the arbitrator to reappraise the affected employees’ performance and possibly individually adjust their merit pay raises – in effect, a “do-over,” even though the agency has no system in place to perform any kind of objective performance appraisal. The union is steadfast in its opposition to the SEC’s remedy proposal. This remedy issue is currently pending before the arbitrator.

The union is also pushing ahead with hearings on the remaining merit pay arbitrations. Despite the fact that NTEU is fully prepared to continue to prosecute these arbitrations against the agency, it is not in the best interests of the SEC to continue its scorched earth policy of fighting the union tooth and nail on every national arbitration. A regular parade of findings of discrimination against large numbers of SEC employees is unlikely to promote high levels of employee morale, and it is not in the long term reputational interest of the SEC.

The merit pay system is broken. For that reason, the system is being taken offline temporarily while efforts are made to fix it. In this context, a serious effort by the agency to come to the table with the union to resolve the outstanding arbitrations through a fair and equitable settlement makes sense. Nevertheless, to date, the SEC has been unwilling to make such a serious effort. The union will continue to pursue such discussions, as it moves ahead with the arbitrations.

I appreciate your continued support.

by Chapter 293 President Greg Gilman