[Federal Register Volume 72, Number 7 (Thursday, January 11, 2007)]
[Rules and Regulations]
[Pages 1267-1270]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-262]



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  Federal Register / Vol. 72, No. 7 / Thursday, January 11, 2007 / 
Rules and Regulations  

[[Page 1267]]



OFFICE OF PERSONNEL MANAGEMENT

5 CFR Part 451

RIN 3206-AL06


Awards

AGENCY: Office of Personnel Management.

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: The Office of Personnel Management is issuing final 
regulations to amend the incentive awards regulations. The amended 
regulations clarify that if agencies grant rating-based awards, they 
must base such awards on a rating of record of ``Fully Successful'' (or 
equivalent) or higher. In addition, agencies must ensure that rating-
based awards granted make meaningful distinctions based on levels of 
performance.

DATES: The regulations are effective on February 12, 2007.

FOR FURTHER INFORMATION CONTACT: Barbara Colchao by telephone at (202) 
606-2720, by fax at (202) 606-2307, or by e-mail at [email protected].

SUPPLEMENTARY INFORMATION: On June 21, 2006, the Office of Personnel 
Management (OPM) published proposed regulations amending the incentive 
awards regulations in part 451 of title 5, Code of Federal Regulations, 
regarding performance-based cash awards (particularly those authorized 
under 5 U.S.C. 4505a and 5 CFR 451.101(e) and 451.104(a)(3)). The 
proposed regulations clarified that agencies using these incentive 
awards authorities to grant employees performance-based cash awards 
must base them on a rating of record of ``Fully Successful'' (or 
equivalent) or higher and ensure that such awards reflect meaningful 
distinctions based on levels of performance.
    The changes to the regulations address only rating-based awards, 
i.e., those awards given to recognize performance over the course of 
the appraisal period and that require only the rating of record as 
justification for granting the award. These changes do not affect other 
awards agencies may grant, when appropriate, that require independent 
documentation, such as those based on special acts, suggestions, and 
gainsharing or goalsharing formulas tied to group performance. In 
making these changes, OPM intends to retain the flexibilities agencies 
currently have to design their awards programs while reiterating there 
is no statutory entitlement to recognition.
    The proposed regulations provided for a 30-day public comment 
period that ended July 21, 2006. During the public comment period OPM 
received about 74 comments in 39 submissions and 5 phone calls that 
raised multiple questions or concerns. We received written comments 
from 31 individuals (representing approximately 19 Federal agencies, 
and 1 from the private sector), 3 letters from 2 labor unions (American 
Federation of Government Employees and the National Treasury Employees 
Union), and 5 agencies (Departments of Agriculture, Commerce, Justice, 
and Veterans Affairs, and the Nuclear Regulatory Commission).
    Most of the comments can be grouped into ten major themes--support 
for the proposal, concerns about the influence of favoritism and bias, 
the need to train rating officials, the impact on two-level (pass/fail) 
rating systems, funding awards, making meaningful distinctions and 
calculating the awards, the use of performance review boards or awards 
committees, opposition to changing the regulations, base pay and other 
awards, and other miscellaneous observations. The following information 
summarizes and responds to these issues.

Support for the Proposed Regulations

    We received three comments from individuals in support of the 
changes. One comment wholeheartedly supports the proposed regulations. 
Another comment supports the proposed changes and agrees with the 
emphasis on making meaningful distinctions between levels of 
performance. An additional comment suggests that the regulations should 
require employees to have a rating higher than ``Fully Successful'' to 
be eligible to receive a performance-based cash award.
    These regulations are codifying the statutory threshold for 
performance-based cash awards established under 5 U.S.C. 4505a, as 
regulated under 5 CFR 451.101(e) and 451.104(a)(3). Neither the statute 
nor the regulations require granting awards on the basis of any 
specific rating level or to all employees who receive such a rating. 
Therefore, agencies continue to have the flexibility to design their 
awards programs to support their performance culture and can establish 
threshold performance levels that are appropriate for them as long as 
those levels are not lower than the one set forth in statute. Those 
agencies using rating-based awards typically design their programs so 
that the awards increase for employees with higher rating levels. Such 
a design complies with these regulations. Agencies must ensure that in 
applying their rating-based awards program they retain this aspect of 
their design. In doing so, they also retain the flexibility to take 
into consideration other forms of recognition that have been granted to 
the employee, especially if it recognizes aspects of the employee's 
performance that are also captured in the rating of record.

Favoritism and Bias

    By far the most frequent comment expressed in various fashions was 
the concern that awards would be influenced by favoritism or bias. We 
received 11 comments (1 union and 10 individuals) regarding a perceived 
tendency to show favoritism or bias toward particular groups or 
categories of employees. The union comments that the proposed 
regulations do not address possible favoritism and bias, such as the 
prospect that minorities and women might suffer an adverse impact from 
changes in personnel policies. The union recommends that, before 
implementing these regulations, OPM order all Federal agencies to 
conduct an adverse impact analysis to ensure that there will be no 
adverse impact on classes of employees based on race, national origin, 
gender, grade or bargaining unit status. A few comments state that men 
or supervisors and managers would profit from this policy change more 
than others. Several other comments state that supervisors would

[[Page 1268]]

grant awards to their favorite employees.
    OPM understands some employees may fear favoritism will influence 
the distribution of rating-based awards. However, we believe 
establishing and maintaining rating-based awards programs with clear 
guidelines that are applied in a fair and transparent manner and 
consistently granting awards that make meaningful distinctions based on 
differences in levels of performance are effective ways to confront 
favoritism, either real or perceived. Agencies need to inform 
supervisors and employees on the specifics of their rating-based awards 
program and the effective use of recognition and incentives. Since 
rating-based awards are not the only type of award agencies have in 
their award programs, it is important for all involved to understand 
the criteria used to grant different types of awards and how they can 
be used most effectively. Understanding the full range of the types of 
awards available and the bases for which they might be granted supports 
the transparency of any awards program.
    Regarding the union's comment on conducting an impact analysis, 
these regulations formalize a practice that has been prevalent in 
agencies for a long time, i.e., granting performance-based awards so 
that larger awards go to employees with higher ratings of record. We 
concur agencies should include in their evaluation of their awards 
programs the type of analysis recommended by the union comment. We also 
strongly encourage agencies to include checks and balances in the 
design and implementation of their incentive awards and recognition 
programs to further ensure openness and fairness.

Training for Rating Officials

    We received eight comments (two unions, one agency, and five 
individuals) requesting additional training for managers and 
supervisors. Several comments state rating officials need more specific 
guidance and oversight in order to implement a fair and unbiased 
system. Other comments say the regulations are unclear regarding what 
procedure should be followed to ensure ``meaningful distinction.'' One 
union comment recommends funding should be made available for 
performance management training and that legislation should be in place 
to make performance management training mandatory. Two comments concern 
the ability of supervisors who lack training in performance management 
to evaluate employees with special work assignments that cannot be 
compared to the work assignments of their co-workers. Several comments, 
including those from the unions, recommend increasing training for 
managers and holding them accountable for implementing good management 
practices, including the skills to recognize and reward employee 
contributions to their agency.
    We agree that everyone affected by agency awards programs, both 
those who administer them and those who might be eligible to 
participate in them, should understand the types of awards available 
and their eligibility criteria, i.e., the bases for the different types 
of awards. We encourage agencies to provide training to all managers 
and supervisors administering awards programs to ensure these programs 
are administered fairly. We also encourage agencies, as specified in 
existing regulations, to inform employees about the various agency 
awards programs so they understand what is required to be eligible for 
an award. However, we note again that there is no entitlement to an 
award.
    Although these regulations do not amend the performance appraisal 
regulations, we agree that for rating-based awards programs to be 
applied in a way that makes meaningful distinctions based on 
differences in levels of performance, supervisors and managers must 
have the necessary skills to practice effective performance management. 
Agencies are responsible for seeing that their supervisors and managers 
receive the appropriate training to ensure they have these skills. 
Furthermore, we encourage agencies to hold supervisors responsible, 
through their own individual performance plans, for the effective 
management and appraisal of their employees.

Two-Level (Pass/Fail) Rating System

    We received three comments (one union and two individuals) 
concerning the impact of these regulations on employees covered by a 
two-level performance appraisal system, commonly referred to as a pass/
fail performance appraisal system. Two comments observe agencies still 
using a pass/fail system are unable to make meaningful distinctions 
because these systems do not make distinctions above ``Fully 
Successful.'' One comment wants to know how these requirements for 
rating-based awards would affect an agency using a pass/fail system.
    While at one time pass/fail appraisal programs covered nearly half 
of all non-Senior Executive Service employees, in recent years the 
trend has shifted. Under the President's Management Agenda and its 
performance culture initiative, most agencies have returned to using 
appraisal systems that provide for differentiating multiple levels of 
performance. Also, agencies with pass/fail performance appraisal 
programs tend to ``de-link'' awards from ratings and, therefore, did 
not and do not use rating-based awards, which use the rating of record 
as the sole justification for the award. Instead, they commonly use 
other available award authorities to reward specific employee 
accomplishments rather than recognizing year-long performance based on 
their ratings of record, which do not provide differentiation among 
their successful performers. Therefore, even with these regulatory 
changes employees who may still be covered by pass/fail performance 
appraisal programs could be eligible for awards granted on other bases.

Funding and Budgetary Concerns

    Four comments (one union and three individuals) raised concerns 
about the effect of lack of funding or other budgetary constraints on 
awards programs. The union comment notes that any changes involving the 
distribution of performance-based cash awards require extensive 
training for managers, supervisors, and employees and would require 
adequate funding for such training. The union also states OPM should 
mandate that awards budgets for bargaining unit and nonbargaining unit 
employees should be kept separate and distinct and developed based on 
an equitable formula. Individual comments express concerns about 
agency-specific awards funding issues, how award amounts are derived, 
and agencies' ability to operate an awards program with little or no 
money.
    While training and retraining is always an agency concern and 
responsibility, as we have stated previously, many agencies have been 
using rating-based awards for many years. Where they are used and 
employees with higher ratings of record receive larger awards than 
those with lower ratings, these programs would not appear to need to be 
changed since they already would comply with these regulations. 
Agencies retain the flexibility for the design and application of these 
awards programs. OPM recognizes that there are various ways to meet 
these requirements and does not intend to restrict agency flexibility.
    The changes in the award regulations do not directly impact agency 
award funding. Agency funding for awards programs has remained fairly 
constant, around 1 percent of payroll, for many years. Given the 
reality of funding and

[[Page 1269]]

budget constraint concerns, the judicious and effective use of limited 
funds is even more important. To support high performance cultures, 
agencies must ensure that the application of their rating-based awards 
programs makes meaningful distinctions based on differences in 
performance levels, thus reinforcing the message that performance 
matters. In addition, the appropriate use of the full complement of 
employee incentives and recognition can help achieve agencies' 
performance culture objectives, even in times of lean resources.

Making Meaningful Distinctions and Calculating Awards

    While not as numerous as the comments on favoritism, perhaps the 
areas that generated the most confusion were the phrase, ``making 
meaningful distinctions based on levels of performance,'' and the 
explanation that this could be exemplified by employees with higher 
ratings of record receiving larger awards, as a percentage of base pay, 
than those with lower ratings. We received a total of 15 comments 
regarding these two issues (1 union, 4 agencies, and 10 individuals). 
One comment said the terminology regarding meaningful distinctions is 
unnecessarily vague and subject to varying interpretation. Several 
comments inquire whether agencies have the discretion to make the 
distinctions in performance based on the dollar amount of the awards, 
rather than their percentage of base salary. Other comments make 
specific recommendations such as a suggested mathematical formula for 
determining award amounts, or requiring the same dollar amount for the 
same performance rating level by grade, or using a mid-point of the 
grade as the basis for the award rather than the individual employee's 
specific rate of pay. Other comments request additional guidance on 
what procedures agencies should put in place to ensure that managers 
are making meaningful distinctions in performance from one rating level 
to another and how to ensure that the highest awards are granted to the 
highest performers. The union comment suggests that lack of uniformity 
in awards for employees performing at the same high level will cause 
problems and trigger doubts about the credibility and validity of the 
system.
    Current statute provides a specific authority to pay cash awards on 
the basis of an employee's most recent rating of record. Because this 
type of award requires no additional justification beyond the rating of 
record, these regulations require agencies using this authority to 
ensure the amounts of these award payments reflect meaningful 
distinctions based on levels of performance. OPM is confident that 
agencies using ratings of record as the sole basis for granting cash 
awards are doing this already. The regulation codifies this practice to 
ensure that all agencies choosing to use this rating-based award 
authority do so appropriately. Because OPM views the concept of making 
meaningful distinctions as a principle and recognizes that there is 
more than one way meet the requirement to make meaningful distinctions, 
we believe it is essential to retain Governmentwide flexibility in this 
area. Such flexibility is certainly not intended and is not expected to 
result in chaos at the agency level. Each agency program must determine 
how acting on those distinctions can be translated into agency 
procedures that are accurately described and applied fairly.
    Furthermore, OPM does not intend to restrict how agencies calculate 
rating-based awards, whether as a lump-sum dollar amount or a 
percentage of base pay. We believe that expressing the award as a 
percentage of base pay is a common and easily understood way to explain 
that making meaningful distinctions in performance means employees with 
higher performance ratings who get rating-based awards receive larger 
awards than those with lower ratings. Our choice to use percentage of 
base pay in our explanation does not affect agencies' ability to make 
these distinctions by granting employees with higher ratings higher 
lump-sum dollar payments.

Performance Review Boards and Awards Committees

    We received three comments on this issue (one union and two 
individuals). Two comments suggest the establishment of performance 
review boards would provide oversight of the process. In addition, the 
union recommends the use of award committees to assist in keeping the 
awards process open and transparent. The union states performance 
review boards and awards committees will counteract some of the 
perceived secrecy surrounding the awards process, including why 
specific employees receive awards.
    While these regulations do not mandate review boards for awards (as 
required for the Senior Executive Service), agencies have the 
flexibility to establish such boards. OPM encourages agencies to have 
mechanisms in place to provide oversight of and to evaluate their 
awards programs. However, we do not consider it appropriate to mandate 
the establishment of such boards and thus leave that decision to the 
discretion of the agency.

Opposition to Changing the Regulations

    We received six comments (two unions, one agency, and three 
individuals) stating their opposition to the revisions. The agency 
comments that the regulation would result in unnecessarily rigid rules 
that would hinder making meaningful distinctions. One union comments 
that the regulations would undermine the merit principle of equal pay 
for equal work. Another union states there is no need for the 
regulation. Two comments recognize that while they consider the General 
Schedule system to be flawed, it is fair, and they express skepticism 
about the presence of fairness in the regulations. One comment opposes 
the change because it is seen as legislating awards.
    Many of these comments confuse rating-based awards with position 
classification and with pay-for-performance systems that would affect 
the rate of basic pay. Much of the opposition expressed is more 
directly related to pay for performance than to the revisions in the 
awards regulations. The practical effect of these regulations does not 
restrict agency flexibility in its awards programs. Rather, the 
regulations codify a statutory threshold and ensure the appropriate use 
of a specific authority.

Base Pay and Other Awards

    We also received four comments (three individuals and one agency) 
concerning what effect the regulations would have on time-off awards, 
within-grade increases, raises, and gainsharing programs.
    The regulations affect only rating-based awards. Other agency 
incentive and recognition programs are not affected. Furthermore, 
agencies can continue to establish and use decision criteria that take 
into account other pay decisions made so that the total aggregation of 
all forms of compensation and additional recognition do not result in 
unintended, disproportionate rewards for the employee. While time-off 
awards are not direct additional payments to an employee, they do 
represent an expense to the agency and a valued form of recognition to 
the employee. As such, it may be appropriate to consider substantial 
time-off awards granted to recognize an employee's accomplishments that 
are reflected in a rating of record when contemplating the total 
``amount'' of

[[Page 1270]]

compensation/recognition the agency is providing.

Miscellaneous Issues

    One individual comment objects to the waiver of the 60-day comment 
period.
    OPM provided a 30-day comment period in lieu of the 60-day comment 
period to enable issuance of final regulations when most agencies are 
making their awards decisions, which will give practical effect to 
these regulations.
    A union comment expresses concern that the regulation violates the 
merit system principle. In addition, an agency observed that the legal 
citation for the merit system principle is incorrect. The union further 
questions the appropriateness of limiting the awards to employees with 
ratings of record of ``Fully Successful'' or higher since an employee 
with a lower rating may have accomplished something exemplary in a 
single aspect of the job.
    The regulations clearly support the merit system principle that 
provides for appropriate incentives and recognition for excellence in 
performance. Regarding the limitation to employees rated ``Fully 
Successful'' or higher, this restriction applies only to rating-based 
awards and is the statutory threshold. Other authorities within 5 CFR 
part 451 permit agencies to provide recognition for other performance 
when appropriate. The rating-based award is only one way of providing 
recognition. Also, OPM acknowledges that the correct citation for the 
merit system principle referenced is 5 U.S.C. 2301(b)(3).
    One comment questions if the regulations would lead employees rated 
at the ``Fully Successful'' level to feel entitled to a cash award. 
Others said requiring distinctions would result in the forced 
distribution of ratings.
    As we have stated, and we believe most employees understand, awards 
are not an entitlement. Furthermore, the requirement for making 
distinctions in rating-based awards reflects and supports rather than 
drives those distinctions already made in the levels of performance.
    One comment recommends that OPM require agencies to base cash 
awards programs on methodologies that have been shown through research 
to result in improved productivity or quality of performance in the 
entire organization.
    OPM regulations set up broad frameworks within which individual 
agencies design and operate their own specific awards programs. To best 
support their own performance cultures, agencies have the flexibility 
to establish and adapt awards policies and the criteria and conditions 
under which awards may be granted, as long as they do not violate 
regulation or statute.
    One comment asks whether the rate used to compute a rating-based 
award includes locality pay.
    Yes, a recent change in law removed a previous requirement to 
exclude locality pay from rating-based awards when computed as a 
percentage of base pay. These regulations do not change the regulations 
affecting when locality pay is considered to be basic pay.
    Other comments are outside the scope and intent of these 
regulations and thus are not addressed here. These comments include 
concerns about the National Security Personnel System and the perceived 
possible adverse impact of pay for performance in the Federal 
Government, including a decrease in teamwork, low morale and 
competition among employees, and increased departure from Government 
service.

E.O. 12866, Regulatory Review

    This rule has been reviewed by the Office of Management and Budget 
as a significant regulatory action in accordance with E.O. 12866.

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.

List of Subjects in 5 CFR Part 451

    Decorations, Medals, Awards, Government employees.

Office of Personnel Management.
Linda M. Springer,
Director.

0
Accordingly, the Office of Personnel Management is amending 5 CFR part 
451 as follows:

PART 451--AWARDS

0
1. The authority citation for part 451 continues to read as follows:

    Authority: 5 U.S.C. 4302, 4501-4509; E.O. 11438, 33 FR 18085, 3 
CFR, 1966-1970 Comp., p. 755; E.O. 12828, 58 FR 2965, 3 CFR, 1993 
Comp., p. 569.

Subpart A--Agency Awards

0
2. In Sec.  451.101, paragraph (e) is revised to read as follows:


Sec.  451.101  Authority and coverage.

* * * * *
    (e) An agency may grant performance-based cash awards on the basis 
of a rating of record at the fully successful level (or equivalent) or 
above under the authority of 5 U.S.C. 4505a and the provisions of this 
part to eligible non-GS employees who are covered by 5 U.S.C. chapter 
45 and this part and who are not otherwise covered by an explicit 
statutory authority for the payment of such awards, including 5 U.S.C. 
5384 (SES performance awards).

0
3. In Sec.  451.104, paragraph (a)(3) is revised and a new paragraph 
(h) is added to read as follows:


Sec.  451.104  Awards.

    (a) * * *
    (3) Performance as reflected in the employee's most recent rating 
of record (as defined in Sec.  430.203 of this chapter), provided that 
the rating of record is at the fully successful level (or equivalent) 
or above, except that performance awards may be paid to SES members 
only under Sec.  534.405 of this chapter and not on the basis of this 
subpart.
* * * * *
    (h) Programs for granting performance-based cash awards on the 
basis of a rating of record at the fully successful level (or 
equivalent) or above, as designed and applied, must make meaningful 
distinctions based on levels of performance.

[FR Doc. E7-262 Filed 1-10-07; 8:45 am]
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