[Federal Register Volume 69, Number 145 (Thursday, July 29, 2004)]
[Rules and Regulations]
[Pages 45548-45554]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-17319]



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Part VII





Office of Personnel Management





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Office of Management and Budget





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5 CFR Parts 430 and 1330



Executive Performance and Accountability; Interim Rule

  Federal Register / Vol. 69 , No. 145 / Thursday, July 29, 2004 / 
Rules and Regulations  

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OFFICE OF PERSONNEL MANAGEMENT

5 CFR Part 430

OFFICE OF MANAGEMENT AND BUDGET

5 CFR Part 1330

RIN 3206-AJ86


Executive Performance and Accountability

AGENCY: Office of Personnel Management and Office of Management and 
Budget.

ACTION: Interim rule with request for comments.

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SUMMARY: The Office of Personnel Management (OPM) is issuing interim 
regulations jointly with the Office of Management and Budget (OMB) to 
implement a statutory provision that strengthens the relationship 
between the performance and pay of senior employees of the Federal 
Government. These regulations establish rigorous conditions regarding 
an agency's performance appraisal systems for senior employees which, 
if met, would allow its appraisal systems to be certified. These 
regulations set forth the criteria and procedural requirements for such 
certification.

DATES: Effective Date: The regulations are effective on July 29, 2004.
    Comment Date: Comments must be received by OPM on or before August 
30, 2004.

ADDRESSES: Send or deliver comments to Donald J. Winstead, Deputy 
Associate Director for Pay and Performance Policy, Office of Personnel 
Management, Room 7H31, 1900 E Street, NW., Washington, DC 20415-8200; 
by FAX at (202) 606-0824; or by e-mail at [email protected].

FOR FURTHER INFORMATION CONTACT: Barbara Colchao by telephone at (202) 
606-2720; by FAX at (202) 606-2395; or by e-mail at [email protected].

SUPPLEMENTARY INFORMATION: The President holds the head of each agency 
accountable for the performance of that agency. Because an agency's 
success depends in large part on the effective leadership provided by 
its senior executives and senior professionals, the President also 
holds each agency head accountable for effectively managing the 
performance of those key members of the agency's top management team. 
The Office of Personnel Management (OPM) is issuing interim regulations 
jointly with the Office of Management and Budget (OMB) to implement 
section 1322 of the Chief Human Capital Officers Act of 2002 (Title 
XIII of Public Law 107-296, the Homeland Security Act of 2002; November 
25, 2002). This new statutory provision, as implemented by the 
regulations set forth below, will assist an agency head in assuring 
that the agency's senior employee performance management systems make 
meaningful distinctions based on relative performance for an agency's 
Senior Executive Service (SES), senior-level (SL), and scientific or 
professional (ST) employees, thereby strengthening the linkage between 
their performance and their pay.
    Section 1322 of the Chief Human Capital Officers Act of 2002, added 
a new paragraph (d) to 5 U.S.C. 5307 establishing conditions that, if 
met, would permit an agency to apply a higher aggregate limitation on 
pay, equivalent to the rate payable to the Vice President, for certain 
SES members who are paid under 5 U.S.C. 5383 and employees in senior-
level and scientific or professional positions paid under 5 U.S.C. 
5376. However, in order to apply this higher aggregate pay limitation, 
the statute requires that an agency first demonstrate that it has 
developed and implemented performance appraisal systems for these 
employees that make meaningful distinctions based on relative 
performance, as certified by OPM, with OMB concurrence.
    As a separate but related matter, OPM is issuing under separate 
cover regulations to implement section 1125 of the National Defense 
Authorization Act for Fiscal Year 2004 (Public Law 108-136, November 
24, 2003) which (1) amends 5 U.S.C. 5382 and 5383 by replacing a six-
level pay system for SES members with a single, open-range ``payband'' 
with only the minimum and maximum rates of pay set by law and (2) 
requires certification under 5 U.S.C. 5307 to allow an increase in the 
maximum rate of basic pay, from level III to level II of the Executive 
Schedule, for SES members.
    In these regulations, we provide the criteria an agency must meet 
and the procedures it must follow to obtain certification of its 
appraisal system(s). These regulations refer to SES members as ``senior 
executives'' and SL and ST employees as ``senior professionals.'' When 
a distinction between executives and professionals is irrelevant or 
unnecessary, the regulations refer to them as ``senior employees.''

Certification of Performance Appraisal Systems

    These regulations establish a new subpart D in part 430 of title 5, 
Code of Federal Regulations, and a new subpart D in a newly established 
part 1330 of title 5, Code of Federal Regulations. This new subpart 
includes the criteria and procedural requirements for certifying an 
agency's performance appraisal system(s). Agencies may seek 
certification of their OPM-approved appraisal systems for their senior 
employees. Note that under subchapters I and II of 5 U.S.C. chapter 43, 
an agency must establish separate performance appraisal systems for its 
senior professionals and its senior executives. However, such systems 
are subject to the same certification criteria, and an agency may 
choose to establish systems for these groups of employees that are 
essentially identical.
    In some agencies, the performance appraisal system(s) covers 
employees in many organizations and/or components, and their ability to 
meet the criteria required by these regulations may vary significantly. 
In such cases, an agency, at its discretion, may establish separate 
performance appraisal systems for these distinct organizations and/or 
components to ensure timely certification of their performance 
appraisal system(s) for those organizations or components that meet the 
criteria. New appraisal systems established for this purpose must be 
approved by OPM. However, when an agency establishes a new appraisal 
system specifically for the purpose of seeking certification under 
these regulations, the agency may submit that system for certification 
even if it has not yet been approved by OPM. OPM, with OMB concurrence, 
will certify only those systems that OPM approves under subpart B or C 
of 5 CFR part 430. In addition, when an agency with a certified 
appraisal system(s) fails to maintain such system approval or is 
subjected to OPM-mandated corrective action relating to its application 
of the provisions of 5 U.S.C. chapter 43 or 5 CFR part 430, its system 
certification under these regulations is suspended automatically 
without the need for further action by OPM or OMB.
    An agency that has not received appraisal system certification may 
adjust the rate of basic pay for its SES members only up to the rate 
for level III of the Executive Schedule and must apply an aggregate 
limitation on pay of level I of the Executive Schedule to its senior 
employees. Section 5307(d) of title 5, United States Code, requires 
that agencies design and apply performance appraisal systems for their 
senior executives and senior professionals that ``make meaningful 
distinctions based on relative performance'' in order to receive 
appraisal system certification.

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As provided below, an agency's appraisal system(s) for its senior 
executives and senior professionals, as applicable, will be certified 
only if the agency meets the certification criteria and procedures for 
certifying appraisal systems set forth in these regulations. (Note that 
agencies not subject to the provisions and requirements of 5 U.S.C. 
chapter 43 and 5 CFR part 430 must still meet these criteria and 
procedural requirements to obtain certification of their appraisal 
systems.)
    Certification Criteria. The following nine certification criteria 
constitute broad principles designed to guide agencies in the strategic 
use of their senior employee performance appraisal system(s) to support 
the development of a strong performance culture and the attainment of 
the agency's mission, goals, and objectives. The criteria place 
requirements on the design and application of agency appraisal systems 
that must be met to be certified. Although we have specified one 
particular criterion that derives from 5 U.S.C. chapter 43 (i.e., 
consultation), all other requirements of chapter 43 must also be met by 
agencies subject to its provisions. Agency systems will differ in how 
they are designed and implemented and in how they meet these criteria. 
In applying these guidelines, agencies must rate performance in 
accordance with performance expectations, as appropriate and as defined 
and provided for in these regulations. The regulations define 
performance expectations as the critical and other performance elements 
and performance requirements established for senior executives, the 
performance elements and standards established for senior 
professionals, and other appropriate means authorized under performance 
appraisal systems not covered by chapter 43 for communicating work 
requirements to senior employees.
     Alignment--Performance expectations are linked to or 
derived from the agency's mission, strategic goals, program/policy 
objectives, and/or annual performance plan.
     Consultation--Performance expectations are based on senior 
employee involvement and input that are communicated at the beginning 
of the appraisal period and appropriate times thereafter, consistent 
with 5 CFR part 430, subparts B and C.
     Results--Performance expectations for senior employees 
apply to their respective areas of responsibility; reflect expected 
agency or organizational performance; clearly describe performance that 
is measurable, demonstrable, or observable; and focus on tangible 
outputs, outcomes, milestones, or other deliverables.
     Balance--Performance expectations for senior employees 
include appropriate measures or indicators of results; customer/
stakeholder feedback; quality, quantity, timeliness, and cost 
effectiveness, as applicable; and competencies or behaviors that 
contribute to and are necessary to distinguish outstanding performance.
     Assessments and guidelines--The agency head, or an 
individual specifically designated for such purpose, provides 
assessments of performance of the agency overall, as well as each of 
its major program and functional areas, such as reports of the agency's 
Government Performance and Results Act (GPRA) goals and other program 
performance measures and indicators, and evaluation guidelines based, 
in part, upon those assessments to senior employees, appropriate senior 
employee rating and reviewing officials, and Performance Review Board 
members. These assessments and guidelines are to be provided at the 
conclusion of the appraisal period but before ratings are recommended, 
so that they may serve as a basis for individual performance 
evaluations, as appropriate. The guidance provided may not take the 
form of quantitative limitations on the number of ratings at any given 
rating level, and must conform to subpart B or C of 5 CFR part 430, as 
applicable.
     Oversight--Rigorous oversight of the appraisal process is 
provided by the agency head or designee, who certifies that (1) The 
senior employee appraisal process makes meaningful distinctions based 
on relative performance; (2) the results of that process take into 
account, as appropriate, the agency's assessment of its performance 
against program performance measures; and (3) pay adjustments, cash 
awards, and levels of pay accurately reflect and recognize both 
individual and organizational performance. The agency head or designee 
need not perform these duties personally, but does bear responsibility 
for seeing to it that they are done. Furthermore, the organizational 
performance assessment described in this criterion need not be a 
separate assessment done for the purposes of these interim final 
regulations, but may be any official or formal organizational 
assessment done for the purpose of determining how well the agency and 
its individual components have performed during the appraisal period.
     Accountability--Senior employee ratings (as well as 
subordinate employees' performance expectations and ratings for those 
with supervisory responsibilities) appropriately reflect the employee's 
performance expectations, relevant program performance measures, and 
any other relevant factors.
     Performance Differentiation--(1) The appraisal system 
includes a rating level that reflects outstanding performance or, for 
equivalent systems that do not use summary ratings, provides for clear 
differentiation of outstanding performance, as defined in these 
regulations; and (2) the appraisal process results in meaningful 
distinctions in relative performance based on senior employees' actual 
performance against rigorous performance expectations. ``Relative 
performance'' in this context has the meaning given that term in 
Sec. Sec.  430.402 and 1330.402. It does not require ranking senior 
employees against each other. Indeed, such ranking is prohibited for 
the purpose of determining performance ratings. For the agency's senior 
executives covered by 5 CFR part 430 subpart C, appraisal systems must 
include at least four, but not more than five, summary rating levels--
an outstanding level, a fully successful level, an optional level 
between outstanding and fully successful, a minimally satisfactory 
level, and an unacceptable level. For the agency's senior professionals 
covered by 5 CFR part 430 subpart B, appraisal systems must include at 
least three, but not more than five, summary rating levels--an 
outstanding level, a fully successful level, an optional level between 
outstanding and fully successful, an unacceptable level, and an 
optional level between fully successful and unacceptable.
     Pay Differentiation--Individual pay rates and pay 
adjustments, as well as their overall distribution, reflect meaningful 
distinctions among executives based on their relative contribution to 
agency performance. An agency's highest performing senior employees 
should receive the largest pay adjustments and/or highest pay levels 
(including both basic pay and performance awards), particularly above 
the rate for level III of the Executive Schedule. Agencies must provide 
for transparency in the processes for making pay decisions. For 
example, agencies should consider communicating the overall results of 
performance management decisions to senior employees, if individual 
confidentiality can be assured.
    Certification Procedures. To receive appraisal system 
certification, an agency must provide documentation, including its 
performance ratings history where summary ratings are used, to

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demonstrate that its appraisal system(s) meets the criteria and 
procedural requirements of the regulations. Based on that documentation 
and any additional information that OPM and OMB deem necessary, OPM, 
with OMB concurrence, may grant the agency's system(s) full 
certification for 2 calendar years.
    Alternatively, in the case of an agency that has designed, but not 
yet fully implemented an appraisal system(s) for its senior executives 
and/or senior professionals, as applicable, and which may not have a 
history of performance ratings that meets the certification criteria 
and procedural requirements, OPM, with OMB concurrence, may grant 
provisional certification for 1 calendar year. OPM may extend 
provisional certification into the following calendar year in order to 
permit an agency to take any actions needed to adjust pay based on 
annual summary ratings, ratings of record, or other performance 
appraisal results determined during the calendar year for which the 
system was certified.
    Agencies with fully or provisionally certified systems may set a 
senior executive's rate of basic pay up to the rate for level II of the 
Executive Schedule, consistent with 5 CFR part 534, subpart D, as and 
when such subpart is put into effect. In addition, such agencies' 
senior employees who are covered by a fully or provisionally certified 
appraisal system may receive aggregate compensation in a calendar year 
up to an amount equivalent to the total annual compensation payable to 
the Vice President (consistent with 5 CFR part 530, subpart B, as and 
when regulations relevant to the higher aggregate limitation on pay are 
put into effect).
    A senior executive whose rate of basic pay is higher than the rate 
for level III of the Executive Schedule may not suffer a reduction in 
pay because his or her agency's applicable performance appraisal system 
certification is suspended under 5 CFR 430.405(h) and 1330.405(h). The 
senior executive will continue to receive his or her current SES rate 
and is not eligible for a pay adjustment until the senior executive is 
assigned to a position that would allow the employee to receive a pay 
adjustment or until certification of the employing agency's applicable 
performance appraisal system is reinstated under 5 CFR part 430, 
subpart D, and part 1330, subpart D.
    Agencies with provisionally certified appraisal systems must 
reapply for certification in order to continue setting the rate of 
basic pay for senior executives up to the rate for level II of the 
Executive Schedule and applying the higher aggregate limitation on pay 
to its senior employees. OPM expects that most agencies granted 
provisional certification for 2 consecutive years will qualify for full 
certification. However, these agencies must request full certification 
by following the procedures contained in these regulations. OPM, with 
OMB concurrence, also may suspend (with appropriate advance notice) an 
agency's appraisal system certification if it determines that the 
agency is not in compliance with applicable certification requirements.

Regulatory Flexibility Act

    I certify that these regulations will not have a significant 
economic impact on a substantial number of small entities, because they 
will apply only to Federal agencies and employees.

Waiver of Notice of Proposed Rulemaking and Delayed Effective Date

    Pursuant to section 553(b)(3)(B) of title 5 of the United States 
Code, I find that good cause exists for waiving the general notice of 
proposed rule making. Also, pursuant to 5 U.S.C. 553(d)(3), I find that 
good cause exists for making this rule effective in less than 30 days. 
These regulations implement section 1322 of the Chief Human Capital 
Officers Act, which became effective on January 25, 2003, and permits 
the application of higher pay rates for members of the Senior Executive 
Service up to the rate for level II of the Executive Schedule as well 
as access to a higher aggregate limitation on pay up to the salary of 
the Vice President for certain employees. The waiver of the 
requirements for proposed rulemaking and a delay in the effective date 
are necessary to ensure timely implementation of the law as intended by 
Congress and to activate an important tool for the retention of high-
performing senior executives that provides some relief for pay 
compression and provides for paying executives based on their 
individual performance and contribution to agency performance.

E.O. 12866, Regulatory Review

    This rule has been reviewed by the Office of Management and Budget 
in accordance with E.O. 12866.

List of Subjects in 5 CFR Part 430 and 5 CFR Part 1330

    Government employees.

Office of Management and Budget.
Joshua B. Bolten,
Director.
    Office of Personnel Management.
Kay Coles James,
Director.

0
Accordingly, OPM and OMB are amending title 5 of the Code of Federal 
Regulations as follows:

5 CFR Chapter I--Office of Personnel Management

PART 430--PERFORMANCE MANAGEMENT

0
1. The authority citation for part 430 is revised to read as follows:


    Authority: 5 U.S.C. chapter 43 and 5307(d).

0
2. In part 430, a new subpart D is added to read as follows. The text 
of the subpart is the same as the common rule text set out at the end 
of this document.

Subpart D--Performance Appraisal Certification for Pay Purposes

Sec.
430.401 Purpose.
430.402 Definitions.
430.403 System certification.
430.404 Certification criteria.
430.405 Procedures for certifying agency appraisal systems.

0
3. The text of the new subpart is the same as the common rule text set 
out at the end of this document, with the following amendments:
0
a. In Sec.  430.403, the references to ``Sec.  ----.402,'' ``Sec.  --
--.404,'' and ``Sec.  ----.405'' are revised to read ``Sec.  430.402,'' 
``Sec.  430.404,'' and ``Sec.  430.405,'' respectively.
0
b. In Sec.  430.404, the reference to ``Sec.  ----.402'' is revised to 
read ``Sec.  430.402.''
0
c. In Sec.  430.405, the references to ``Sec.  ----.402,'' ``Sec.  --
--.403,'' and ``Sec.  ----.404'' are revised to read ``Sec.  430.402,'' 
``Sec.  430.403,'' and ``Sec.  430.404,'' respectively.
0
d. Add the following note to subpart D:


    Note to Subpart D: Regulations identical to this subpart appear 
at 5 CFR part 1330, subpart D.

5 CFR Chapter III--Office of Management and Budget

0
1. 5 CFR chapter III is amended by establishing a new subchapter C 
consisting of part 1330, subpart D, to read as follows:

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Subchapter C--Joint Regulations with the Office of Personnel Management

PART 1330--HUMAN RESOURCES MANAGEMENT

Subparts A--C [Reserved]

Subpart D--Performance Appraisal Certification for Pay Purposes
Sec.
1330.401 Purpose.
1330.402 Definitions.
1330.403 System certification.
1330.404 Certification criteria.
1330.405 Procedures for certifying agency appraisal systems.


    Authority: 5 U.S.C. 5307(d).

0
2. The text of the new subpart is the same as the common rule text set 
out at the end of this document, with the following amendments:
0
a. In Sec.  1330.403, the references to ``Sec.  ----.402,'' ``Sec.  --
--.404,'' and ``Sec.  ----.405'' are revised to read ``Sec.  
1330.402,'' ``Sec.  1330.404,'' and ``Sec.  1330.405,'' respectively.
0
b. In Sec.  1330.404, the reference to ``Sec.  ----.402'' is revised to 
read ``Sec.  1330.402.''
0
c. In Sec.  1330.405, the references to ``Sec.  ----.402,'' ``Sec.  --
--.403,'' and ``Sec.  ----.404'' are revised to read ``Sec.  
1330.402,'' ``Sec.  1330.403,'' and ``Sec.  1330.404,'' respectively.
0
d. Add the following note to subpart D:


    Note to Subpart D: Regulations identical to this subpart appear 
at 5 CFR part 430, subpart D.

Text of the Common Rule

    The text of the common rule for 5 CFR part 430, subpart D, and 5 
CFR part 1330, subpart D, adopted as set forth above, reads as follows:

Subpart D--Performance Appraisal Certification for Pay Purposes

Sec.
----.401 Purpose.
----.402 Definitions.
----.403 System certification.
----.404 Certification criteria.
----.405 Procedures for certifying agency appraisal systems.


Sec.  ----.401  Purpose.

    (a) This subpart implements 5 U.S.C. 5307(d), as added by section 
1322 of the Chief Human Capital Officers Act of 2002 (Title XIII of 
Public Law 107-296, the Homeland Security Act of 2002; November 25, 
2002), which provides a higher aggregate limitation on pay for certain 
members of the Senior Executive Service (SES) under 5 U.S.C. 5382 and 
5383 and employees in senior-level (SL) and scientific or professional 
(ST) positions paid under 5 U.S.C. 5376. In addition, this subpart is 
necessary to administer rates of basic pay for members of the SES under 
5 U.S.C. 5382, as amended by section 1125 of the National Defense 
Authorization Act for Fiscal Year 2004. The regulations in this subpart 
strengthen the application of pay-for-performance principles to senior 
executives and senior professionals. Specifically, the statutory 
provisions authorize an agency to apply a higher maximum rate of basic 
pay for senior executives (consistent with 5 CFR part 534, subpart D, 
when effective) and apply a higher aggregate limitation on pay 
(consistent with 5 CFR part 530, subpart B) to its senior employees, 
but only after OPM, with OMB concurrence, has certified that the design 
and application of the agency's appraisal systems for these employees 
make meaningful distinctions based on relative performance. This 
subpart establishes the certification criteria and procedures that OPM 
will apply in considering agency requests for such certification.
    (b) Senior executives generally may receive an annual rate of basic 
pay up to the rate for level III of the Executive Schedule under 5 
U.S.C. 5382 and 5 CFR part 534, subpart D, when effective. Senior 
employees generally may receive total compensation in a calendar year 
up to the rate for level I of the Executive Schedule under 5 U.S.C. 
5307(a) and 5 CFR 530.203(a). Only employees covered by an appraisal 
system that OPM, with OMB concurrence, certifies under this subpart are 
eligible for a maximum annual rate of basic pay for senior executives 
up to the rate for level II of the Executive Schedule (consistent with 
5 U.S.C. 5382 and 5 CFR part 534, subpart D, when effective) and a 
higher aggregate pay limitation equivalent to the total annual 
compensation payable to the Vice President (consistent with 5 U.S.C. 
5307(d) and 5 CFR 530.203(b)).


Sec.  ----.402s  Definitions.

    In this subpart--
    Appraisal system means the policies, practices, and procedures an 
agency establishes under 5 U.S.C. chapter 43 and 5 CFR part 430, 
subparts B and C, or other applicable legal authority, for planning, 
monitoring, developing, evaluating, and rewarding employee performance. 
This includes appraisal systems and appraisal programs as defined at 
Sec.  430.203 and performance management systems as defined at Sec.  
430.303.
    GPRA means the Government Performance and Results Act of 1993.
    OMB means the Office of Management and Budget.
    OPM means the Office of Personnel Management.
    Outstanding performance means performance that substantially 
exceeds the normally high performance expected of any senior employee, 
as evidenced by exceptional accomplishments or contributions to the 
agency's performance.
    Performance evaluation means the comparison of the actual 
performance of senior employees against their performance expectations 
and may take into account their contribution to agency performance, 
where appropriate.
    Performance expectations means critical and other performance 
elements and performance requirements that constitute the senior 
executive performance plans (as defined in Sec.  430.303) established 
for senior executives, the performance elements and standards that 
constitute the performance plans (as defined in Sec.  430.203) 
established for senior professionals, or other appropriate means 
authorized under performance appraisal systems not covered by 5 U.S.C. 
chapter 43 for communicating what a senior employee is expected to do 
and the manner in which he/she is expected to do it, and may include 
contribution to agency performance, where appropriate.
    Program performance measures means results-oriented measures of 
performance, whether at the agency, component, or function level, which 
include, for example, measures under the Government Performance and 
Results Act.
    PRB means Performance Review Board, as described at Sec.  430.310.
    Relative performance means the performance of a senior employee 
with respect to the performance of other senior employees, including 
their contribution to agency performance, where appropriate, as 
determined by the application of a certified appraisal system.
    Senior employee means a senior executive or a senior professional.
    Senior executive means a member of the Senior Executive Service 
(SES) paid under 5 U.S.C. 5383.
    Senior professional means an employee in a senior-level (SL) or 
scientific or professional position (ST) paid under 5 U.S.C. 5376.


Sec.  ----.403  System certification.

    (a) The performance appraisal system(s) covering senior employees 
must be certified by OPM, with OMB concurrence, as making meaningful 
distinctions based on relative performance before an agency may apply a 
maximum annual rate of basic

[[Page 45552]]

pay for senior executives equal to the rate for level II of the 
Executive Schedule or apply an annual aggregate limitation on payments 
to senior employees equal to the salary of the Vice President under 5 
U.S.C. 5307(d)). OPM, with OMB concurrence, will certify an agency's 
appraisal system(s) only when a review of that system's design, 
application, and administration reveals that the agency meets the 
certification criteria established in Sec.  ----.404 and has followed 
the procedures for certifying agency appraisal systems in Sec.  --
--.405.
    (b) Except as provided in paragraph (c) of this section, agencies 
subject to 5 U.S.C. chapter 43 and 5 CFR part 430 seeking certification 
of their appraisal systems must submit systems that have been approved 
by OPM under Sec.  430.312 or Sec.  430.210, as applicable. In some 
agencies, the performance appraisal system(s) covers employees in many 
organizations and/or components, and their ability to meet the 
certification criteria in Sec.  ----.404 may vary significantly. In 
such cases, an agency may establish and/or submit separate performance 
appraisal systems for each of these distinct organizations and/or 
components to ensure timely certification of those performance 
appraisal system(s) that meet the criteria. New appraisal systems 
established under 5 CFR part 430, subpart B or C, as applicable based 
on the employees covered, must be approved by OPM.
    (c) When an agency establishes a new appraisal system for the 
purpose of seeking certification under this subpart, the agency may 
submit that system for certification even if it has not yet been 
approved by OPM under Sec.  430.312 or Sec.  430.210, as applicable. 
OPM will certify, with OMB concurrence, only those systems that OPM 
determines meet the approval requirements of 5 CFR part 430, subpart B 
or C, as applicable.
    (d) An agency must establish an appraisal system(s), as defined in 
Sec.  ----.402, for its senior professionals that meets the 
requirements of 5 CFR part 430, subpart B, and is separate from the 
system(s) established to cover its SES members under 5 CFR part 430, 
subpart C. For the purpose of certification under this subpart, such 
senior professional appraisal system(s) must meet the certification 
criteria set forth in Sec.  ----.404. At its discretion, an agency may 
include system features in its senior professional appraisal system(s) 
that are the same as, or similar to, the features of its SES appraisal 
system(s), as appropriate, including procedures that correspond to the 
higher level review procedures under Sec.  430.308(b) and PRB reviews 
of summary ratings under Sec.  430.308(c).
    (e) For agencies subject to 5 U.S.C. chapter 43 and 5 CFR part 430, 
OPM approval of the agency performance appraisal system(s) is a 
prerequisite to certification. Agencies not subject to the appraisal 
provisions of 5 U.S.C. chapter 43 and 5 CFR part 430 and which are 
seeking certification of their appraisal system(s) under this subpart 
must submit appropriate documentation to demonstrate that each system 
complies with the appropriate legal authority that governs the 
establishment, application, and administration of that system.


Sec.  ----.404  Certification criteria.

    (a) To be certified, an agency's applicable appraisal system(s) for 
senior executives or senior professionals must make meaningful 
distinctions based on relative performance and meet the other 
requirements of 5 U.S.C. chapter 43, as applicable, in addition to the 
particular criterion cited here (i.e., consultation). Such system(s) 
must provide for the following:
    (1) Alignment, so that the performance expectations for individual 
senior employees derive from, and clearly link to, the agency's 
mission, GPRA strategic goals, program and policy objectives, and/or 
annual performance plans and budget priorities;
    (2) Consultation, so that the performance expectations for senior 
employees meet the requirements of 5 CFR part 430, subparts B and C, as 
applicable, and/or other applicable legal authority; are developed with 
the input and involvement of the individual senior employees who are 
covered thereby; and are communicated to them at the beginning of the 
applicable appraisal period, and/or at appropriate times thereafter;
    (3) Results, so that the performance expectations for individual 
senior employees apply to their respective areas of responsibility; 
reflect expected agency and/or organizational outcomes and outputs, 
performance targets or metrics, policy/program objectives, and/or 
milestones; identify specific programmatic crosscutting, external, and 
partnership-oriented goals or objectives, as applicable; and are stated 
in terms of observable, measurable, and/or demonstrable performance;
    (4) Balance, so that in addition to expected results, the 
performance expectations for individual senior employees include 
appropriate measures or indicators of employee and/or customer/
stakeholder feedback; quality, quantity, timeliness, and cost 
effectiveness, as applicable; and those technical, leadership and/or 
managerial competencies or behaviors that contribute to and are 
necessary to distinguish outstanding performance;
    (5) Appropriate assessments of the agency's performance--overall 
and with respect to each of its particular missions, components, 
programs, policy areas, and support functions--such as reports of the 
agency's GPRA goals, annual performance plans and targets, program 
performance measures, and other appropriate indicators, as well as 
evaluation guidelines based, in part, upon those assessments, that are 
communicated by the agency head, or an individual specifically 
designated by the agency head for such purpose, to senior employees, 
appropriate senior employee rating and reviewing officials, and PRB 
members. These assessments and guidelines are to be provided at the 
conclusion of the appraisal period but before individual senior 
employee performance ratings are recommended, so that they may serve as 
a basis for individual performance evaluations, as appropriate. The 
guidance provided may not take the form of quantitative limitations on 
the number of ratings at any given rating level, and must conform to 5 
CFR part 430, subpart B or C, as applicable;
    (6) Oversight by the agency head or the individual specifically 
designated under paragraph (a)(5) of this section, who certifies, for a 
particular senior employee appraisal system, that--
    (i) The senior employee appraisal process makes meaningful 
distinctions based on relative performance;
    (ii) The results of the senior employee appraisal process take into 
account, as appropriate, the agency's assessment of its performance 
against program performance measures, as well as other relevant 
considerations; and
    (iii) Pay adjustments, cash awards, and levels of pay based on the 
results of the appraisal process accurately reflect and recognize 
individual performance and/or contribution to the agency's performance;
    (7) Accountability, so that final agency head decisions and any PRB 
recommendations regarding senior employee ratings consistent with 5 CFR 
part 430, subparts B and C, individually and overall, appropriately 
reflect the employee's performance expectations, relevant program 
performance measures, and such other relevant factors as the PRB may 
find appropriate; in the case of supervisory senior employees, ratings 
must reflect the degree to which performance standards, requirements, 
or expectations for individual subordinate employees

[[Page 45553]]

clearly link to organizational mission, GPRA strategic goals, or other 
program or policy objectives and take into account the degree of rigor 
in the appraisal of their subordinate employees;
    (8) Performance differentiation, so that the system(s) includes at 
least one summary level of performance above fully successful, 
including a summary level that reflects outstanding performance, as 
defined in Sec.  ----.402, and so that its annual administration 
results in meaningful distinctions based on relative performance that 
take into account the assessment of the agency's performance against 
relevant program performance measures, as described in paragraph (a)(6) 
of this section, employee performance expectations, and such other 
relevant factors as may be appropriate. Relative performance does not 
require ranking senior employees against each other; such ranking is 
prohibited for the purpose of determining performance ratings. For 
equivalent systems that do not use summary ratings, the appraisal 
system must provide for clear differentiation of performance at the 
outstanding level; and
    (9) Pay differentiation, so that those senior employees who have 
demonstrated the highest levels of individual performance and/or 
contribution to the agency's performance receive the highest annual 
summary ratings or ratings of record, as applicable, as well as the 
largest corresponding pay adjustments, cash awards, and levels of pay, 
particularly above the rate for level III of the Executive Schedule. 
Agencies must provide for transparency in the processes for making pay 
decisions, while assuring confidentiality.
    (b) Consistent with the requirements in section 3(a) of the 
Inspector General Act of 1978, an agency's Inspector General or an 
official he or she designates must perform the functions listed in 
paragraphs (a)(5) and (6) of this section for senior employees in the 
Office of the Inspector General.


Sec.  ----.405  Procedures for certifying agency appraisal systems.

    (a) General. To receive system certification, an agency must 
provide documentation demonstrating that its appraisal system(s), in 
design, application, and administration, meets the certification 
criteria in Sec.  ----.404 as well as the procedural requirements set 
forth in this section.
    (b) Certification requests. In order for an agency's appraisal 
system to be certified, the head of the agency or designee must submit 
a written request for full or provisional certification of its 
appraisal system(s) to OPM. Certification requests may cover an 
agencywide system or a system that applies to one or more agency 
organizations or components and must include--
    (1) A full description of the appraisal system(s) to be certified, 
including--
    (i) Organizational and employee coverage information;
    (ii) Applicable administrative instructions and implementing 
guidance; and
    (iii) The system's use of rating levels that are capable of clearly 
differentiating among senior employees based on appraisals of their 
relative performance against performance expectations in any given 
appraisal period reflecting performance evaluation results that make 
meaningful distinctions based on relative performance, and which 
include--
    (A) For the agency's senior executives covered by 5 CFR part 430, 
subpart C, at least four, but not more than five, summary rating 
levels--an outstanding level, a fully successful level, an optional 
level between outstanding and fully successful, a minimally 
satisfactory level, and an unsatisfactory level;
    (B) For the agency's senior professionals covered by 5 CFR part 
430, subpart B, at least three, but not more than five, summary 
levels--an outstanding level, a fully successful level, an optional 
level between outstanding and fully successful, an unacceptable level, 
and an optional level between fully successful and unacceptable; and
    (C) For agencies not subject to 5 CFR part 430, subparts B and C, a 
summary rating level that reflects outstanding performance or a 
methodology that clearly differentiates outstanding performance, as 
defined in Sec.  ----.402;
    (2) A clearly defined process for reviewing--
    (i) The initial summary ratings and ratings of record, as 
applicable, of senior employees to ensure that annual summary ratings 
or ratings of record are not distributed arbitrarily or on a rotational 
basis, and
    (ii) In the case of senior employees with supervisory 
responsibilities--
    (A) The performance standards, requirements, or expectations for 
the employees they supervise to ensure that they clearly link to 
organizational mission, GPRA strategic goals, or other program and 
policy objectives, as appropriate, and
    (B) The performance standards, requirements, or expectations and 
the performance ratings of the employees they supervise to ensure that 
they reflect distinctions in individual and organizational performance, 
as appropriate;
    (3) Documentation showing that the appraisal system(s) meets the 
applicable certification criteria, as follows:
    (i) For provisional certification, the requirements in Sec.  --
--.404(a)(1)-(4); and
    (ii) For full certification, all of the requirements in Sec.  --
--.404.
    (4) For full certification, data on senior executive annual summary 
ratings and senior professional ratings of record, as applicable (or 
other documentation for agencies that do not use summary ratings), for 
the two appraisal periods preceding the request, as well as 
corresponding pay adjustments, cash awards, and levels of pay provided 
to those senior employees; and
    (5) Any additional information that OPM and OMB may require to make 
a determination regarding certification.
    (c) Certification actions. At the request of an agency, the 
Director of OPM, at his or her discretion and in accordance with the 
requirements of this subpart and with OMB concurrence, may grant full 
or provisional certification of the agency's appraisal system(s). OPM, 
with OMB concurrence, may--
    (1) Grant full certification of an agency's senior employee 
appraisal system(s) for 2 calendar years when an agency has 
demonstrated that it has designed and fully implemented and applied an 
appraisal system(s) for its senior executives or senior professionals, 
as applicable, that meets the certification criteria in Sec.  ----.404 
and the documentation requirements of this section.
    (2) Grant provisional certification of an agency's senior employee 
appraisal system(s) for 1 calendar year when an agency has designed, 
but not yet fully implemented or applied, an appraisal system(s) for 
its senior executives or senior professionals, as applicable, that 
meets the certification criteria in Sec.  ----.404. OPM may extend 
provisional certification into the following calendar year in order to 
permit an agency to take any actions needed to adjust pay based on 
annual summary ratings, ratings of record, or other performance 
appraisal results determined during the calendar year for which the 
system was certified; or
    (3) Suspend certification under paragraph (h) of this section if, 
at any time during the certification period, OPM, with OMB concurrence, 
determines that the agency appraisal system is not in compliance with 
certification criteria.

[[Page 45554]]

    (d) Pay limitations. Absent full or provisional certification of 
its appraisal system(s), an agency must--
    (1) Set a senior executive's rate of basic pay at a rate that does 
not exceed the rate for level III of the Executive Schedule, consistent 
with 5 CFR part 534, subpart D, when effective; and
    (2) Limit aggregate compensation paid to senior employees in a 
calendar year to the rate for level I of the Executive Schedule, 
consistent with 5 CFR 530.203(b).
    (e) Full Certification. (1) OPM, with OMB concurrence, may grant 
full certification when a review of the agency's request and 
accompanying documentation demonstrates that the design, application, 
and administration of the agency's appraisal system(s) meet the 
criteria in Sec.  ----.404 and the documentation requirements of this 
section.
    (2) An agency with a fully-certified appraisal system(s) may set 
the rate of basic pay under 5 CFR part 534, subpart D, when effective, 
for a senior executive covered by a certified system at a rate that 
does not exceed the rate for level II of the Executive Schedule and pay 
senior employees covered by certified system(s) aggregate compensation 
in a certified calendar year in an amount up to the Vice President's 
salary under 3 U.S.C. 104.
    (3) Full certification of an agency's appraisal system will be 
renewed automatically for an additional 2 calendar years, if--
    (i) The agency meets the annual reporting requirements in paragraph 
(g) of this section; and
    (ii) Based on those annual reports, OPM determines, and OMB 
concurs, that the appraisal system(s) continues to meet the 
certification criteria and procedural requirements set forth in this 
subpart.
    (f) Provisional certification. (1) OPM, with OMB concurrence, may 
grant provisional certification when the design of an agency's 
appraisal system(s) for senior executives or senior professionals, as 
applicable, meets the requirements set forth in this subpart, but 
insufficient documentation exists to determine whether the actual 
application and administration of the appraisal system(s) meet the 
requirements for full certification. OPM, with OMB concurrence, may 
grant provisional certification to an agency more than once.
    (2) During the 1-year period of provisional certification, an 
agency may set the rate of basic pay for a senior executive covered by 
the provisionally certified system at a rate that does not exceed the 
rate for level II of the Executive Schedule (consistent with 5 CFR part 
534, subpart D, when effective) and pay senior employees covered by 
provisionally certified systems aggregate compensation in the certified 
calendar year in an amount up to the Vice President's salary under 3 
U.S.C. 104 (consistent with 5 CFR part 530, subpart B).
    (3) An agency must resubmit an application requesting provisional 
certification for every calendar year for which it intends to maintain 
provisional certification. An agency with a provisionally certified 
appraisal system(s) may request that OPM, with OMB concurrence, grant 
full certification upon a showing that its performance appraisal 
systems for senior executives and senior professionals, as applicable, 
meet the certification criteria in Sec.  ----.404 and the documentation 
requirements in this section, particularly with respect to the 
implementation and administration of the system(s) over at least two 
consecutive performance appraisal periods.
    (g) Annual reporting requirement. Agencies with certified appraisal 
systems must provide OPM with a general summary of the annual summary 
ratings and ratings of record, as applicable, and rates of basic pay, 
pay adjustments, cash awards, and aggregate total compensation 
(including any lump-sum payments in excess of the applicable aggregate 
limitation on pay that were paid in the current calendar year as 
required by Sec.  530.204) for their senior employees covered by a 
certified appraisal system at the conclusion of each appraisal period 
that ends during a calendar year for which the certification is in 
effect, in accordance with OPM instructions.
    (h) Suspension of Certification. (1) When OPM determines that an 
agency's certified appraisal system is no longer in compliance with 
certification criteria, OPM, with OMB concurrence, may suspend such 
certification, as provided in paragraph (c)(3) of this section.
    (2) An agency's system certification is automatically suspended 
when OPM withdraws performance appraisal system approval or mandates 
corrective action because of misapplication of the system as authorized 
under Sec. Sec.  430.210(c), 430.312(c), and ----.403(e).
    (3) OPM will notify the head of the agency at least 30 calendar 
days in advance of the suspension and the reason(s) for the suspension, 
as well as any expected corrective action. Upon such notice, and until 
its system certification is reinstated, the agency must set a senior 
executive's rate of basic pay under 5 CFR part 534, subpart D, when 
effective, at a rate that does not exceed the rate for level III of the 
Executive Schedule. While certification is suspended, an agency must 
limit aggregate compensation received in a calendar year by a senior 
employee to the rate for level I of the Executive Schedule. Pay 
adjustments, cash awards, and levels of pay in effect prior to that 
notice will remain in effect unless OPM finds that any such decision 
and subsequent action was in violation of law, rule, or regulation.
    (4) OPM, with OMB concurrence, may reinstate an agency's suspended 
certification only after the agency has taken appropriate corrective 
action.
    (5) OPM may reinstate the certification of an appraisal system that 
has been automatically suspended under paragraph (h)(2) of this section 
upon the agency's compliance with the applicable OPM-mandated 
corrective action(s).

[FR Doc. 04-17319 Filed 7-26-04; 4:54 pm]
BILLING CODE 6325-39-P