The SEC launched its new pay for performance system on July 1, 2010 in the Division of Enforcement and the Office of Compliance Inspections and Examinations. At the same time, SEC management also announced its intention to implement this new system throughout the rest of the agency over the course of the next year. Many of you have been directed to execute new “Performance Work Plans” and “Individual Development Plans” as part of this rollout. We know that employees have questions about these plans, and the Union’s position on the SEC’s new system. Below is a brief discussion of the basic “ABCs” of this new system, the Union’s concerns about the system, and what to expect moving forward.

The New System

The proposed new 5-level performance system is intended to replace the old 5-level system that the agency utilized from 2003 through 2007. As many of you are aware, the SEC’s old system suffered from a myriad of fundamental flaws that doomed its chances of success from the start, including insufficient funding, a lack of transparency and a reliance upon vague and subjective performance standards that resulted in a lack of meaningful distinctions between various performance levels. After several independent studies concluded that this old performance system was critically flawed, and after an independent federal arbitrator ruled that it had an impermissible discriminatory impact upon African-American professionals and employees over the age of 40, the SEC ultimately abandoned the system in 2008.

Several years ago, the Federal Services Impasses Panel (“FSIP”) entered an Order on compensation and benefits directing the SEC to develop a new performance system. Under that Order, the Union, as the exclusive representative of SEC employees, was required to make recommendations regarding the new system. For that reason, the Union has expended considerable time and resources over the past year in a good faith effort to review key features of the new system being developed by management and to attempt to work with the SEC in connection with its development. The Union convened numerous focus groups consisting of bargaining unit employees from across the nation who provided feedback and comments on key components of the new system. Union leadership and compensation professionals at NTEU also provided considerable feedback directly to management. The Union’s performance management team, along with the focus groups, generated detailed reviews and recommendations in connection with each of the system’s key components. The vast lion’s share of these comments and recommendations came directly from front-line SEC staff with extensive experience within their particular positions at the SEC.

Regrettably, SEC management rejected these recommendations. In fairness, the FSIP Order did not expressly require that management adopt the Union’s recommendations. As the representative of the SEC’s employees, however, we had hoped that management would treat those recommendations more seriously. They did not.

The key feature of the new system is identical to the key feature, and fundamental flaw, of the old system that it is intended to replace – a 5-level rating system that fails to make meaningful distinctions between performance levels. The new system rates employees on a scale of “1” through “5.” Notwithstanding the volume of material included in this new system and its seemingly complex nature, there is no magic to understanding this rating scale. It is basically the same rating scale used under the old 5-level system, and is also essentially the same as the typical “A through F” grading scale many will recall from our school days.

Under the new system, an employee whose performance is rated as a “1” is “unacceptable,” essentially receiving an “F,” and will probably end up facing discipline or removal for poor performance. A “2” rating is acceptable, but barely, similar to getting a “D.” When the system goes fully into effect, an employee who receives a “2” will not be entitled to receive a merit pay award. A “3” rating means the employee’s performance “meets expectations,” but that he or she has significant room for improvement. An employee rated a “3” is, essentially, receiving an old fashioned “C.” The employee is entitled to a merit pay award, but it will be only one-half of the award reserved for the employee rated a “4” and only one-third of the award given to an employee rated a “5.” A “4” rating means that the employee’s performance “exceeds expectations,” which is similar to receiving a “B,” and a “5” rating means that the employee’s performance “greatly exceeds expectations,” which is similar to earning an “A.”

Unanswered Concerns

Each SEC employee will want to know and understand the differences between the various rating levels in this new system, particularly between levels 3, 4 and 5, which are the ratings that most employees can expect to receive under the new system. This is the single most important element of any performance management system, especially when the rating that your manager assigns to you will directly impact your compensation. In fact, the key feature of the FSIP Order is the requirement that the new system, among other things, be based upon “meaningful distinctions” between performance levels. Unfortunately, however, almost all of the evidence provided to the Union thus far indicates that, notwithstanding the efforts by internal and external experts, the distinctions between these performance levels, particularly between level 3 and level 4, remain fatally vague and subjective.

The new 5-level system attempts to measure concepts such as “timeliness,” “focus,” “attention to detail,” and “workload management” without expressly linking them to anything specific that can be objectively measured. For example, an employee’s performance in connection with written work product will be evaluated based on each manager’s subjective assessment as to whether the employee’s work required the “expected” level of revisions, but no meaningful definition is given to what should be “expected.” Furthermore, an employee may be “marked down” for performing too slowly if a manager concludes that an employee’s work is not “timely,” but nowhere is “timely” defined. Our best judgment is that a highly skilled workforce such as the SEC’s, performing complex tasks every day, cannot fairly or reliably be rated with reference to such vague and subjective standards.

This is an important point. The SEC’s old performance system ultimately failed because there was no transparency regarding what it meant to function at a particular performance level. Although the old system included “success factors,” which in theory were designed to drive ratings, those factors were so vague that in reality managers were essentially given carte blanche to assign ratings without regard to their ability to support the rating with specific evidence of good or poor performance. If an employee who had been designated a “2” asked what standard he or she had to meet to be rated as a “3,” management was unable to articulate such a standard because there was no standard. Often, managers simply told employees to “do better.” As a result, this system had no credibility among bargaining unit employees or the managers who rated them.

We anticipate a similar result under the new system. Although more words are used in this new system to describe performance competencies, objectives and standards, at the end of the day those competencies, objectives and standards remain as subjective and incomprehensible as the old system ever was. Merely calling this new system "evidenced-based" simply does not make it so.

The Union has numerous other concerns about the new system as well. It is overly complicated. It includes so-called “competencies,” “objectives” and “standards” but it is unclear how these various components relate to one another, whether they overlap or how they are different. It is also unnecessarily time-consuming. It will create an environment in which an employee will be required to engage in a non-stop, running dialogue with his or her supervisors regarding progress towards the objectives laid out in the Performance Work Plan (“PWP”) and it will encourage employees to constantly note such progress in regular written communications with managers. These requirements will blur the distinction between meetings about substantive work matters and interim performance-related discussions. The new system also requires that each employee advocate for his or her own rating. Many employees, even high performing ones, have achieved their status by letting their actions speak for themselves. This will no longer suffice under the new system.

The Union recommended a simpler, easy-to-use, results-oriented approach to performance assessments which would measure and reward employees for accomplishing specific agency goals. Such a results-oriented approach would focus managers and staff on achieving specific objectives such as whether a document request called for the production of the appropriate set of documents, whether investigative testimony covered the appropriate issues or whether an examination properly identified a registrant’s deficiencies. The Union requested that management clearly define what each employee had to achieve to be rated at a particular level. We recommended against rating employees with reference to vague or ill-defined terms such as “timely,” or with regard to what a manager “expected.” All too often we were told that our jobs do not lend themselves to such “objective” measurements. Unfortunately, this has led to a system where extremely subjective measurements are expected to suffice.

In short, the Union is concerned that the lack of transparency and fairness inherent in the new performance system will compromise the ratings given by even the best and most well intentioned managers. Our concern is that rather than identifying and rewarding top performers and motivating others to increase the quality of their work, the new 5-level system will instead result in employees having no real understanding of what is required of them to succeed at the SEC. All they will know is the number that their managers assign to their work without the benefit of understanding why. Ultimately, we fear that this will frustrate and undermine employee morale, distort the performance pay system and make it difficult for the agency to recruit and retain the best employees to work at the SEC.

This new system will send the wrong message to the SEC staff. The results of the 2008 Federal Human Capital Survey clearly demonstrated that SEC employees do not have confidence in the process used to identify and reward performance. We support, and the employees that we represent support, identifying and rewarding top performers. And we believe those whose performance is truly deficient should be identified and held accountable. But, no matter how well intentioned, a system that divides employee performance among five different levels without clearly establishing the distinctions between those levels will fail and will inevitably detract from our core mission – protecting investors.

For all of these reasons, the Union does not support the new system as it is currently constituted. The Union’s leadership and many of the employees that it represents, as well as compensation experts from NTEU, have evaluated the new system, and the range of concerns that they have expressed in connection with these reviews is so extensive that we are not able to support the system at this time. In the end, after many months of discussions with management, our sense is that the new system will be essentially a “dressed up” version of the old system and will result in more of the same. We hope to work with management to address these issues as we move forward.

Where Do We Go from Here?

It is important to note that the current rollout of the new performance system in Enforcement and OCIE is essentially a “dry run.” This means that the SEC will rate most Enforcement and OCIE employees under the new system, but that rating will not count as the employees’ official rating. Instead, employees will continue to receive an official rating of “acceptable” or “unacceptable” for the current rating period. All employees who are rated “acceptable” will receive another “equivalent share” merit pay award this fall, in the same fashion as other SEC employees who are continuing to be rated under the old system.

According to SEC management, this “dry run” will generate data and information about how the system works and will enable SEC management and the Union to identify appropriate adjustments before the system goes “live” in 2011. However, notwithstanding the “dry run” nature of this year’s rollout, employees will be required to participate in the new system, which is complicated and time consuming, in order to achieve an “acceptable” rating.

We will continue our efforts to engage SEC management to address the many concerns that have been raised by this new performance system. As you participate in the system, we urge you to provide your comments and suggestions to the Union.