[Federal Register Volume 73, Number 118 (Wednesday, June 18, 2008)]
[Notices]
[Pages 34800-34808]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-13733]


=======================================================================
-----------------------------------------------------------------------

OFFICE OF PERSONNEL MANAGEMENT


Proposed Personnel Demonstration Project; Performance-Based Pay 
Adjustments in the Department of Veterans Affairs

AGENCY: U.S. Office of Personnel Management.

ACTION: Notice of a proposed demonstration project plan.

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

SUMMARY: Chapter 47 of title 5, United States Code, authorizes the U.S. 
Office of Personnel Management (OPM), directly or in agreement with one 
or more agencies, to conduct demonstration projects that experiment 
with new and different human resources management concepts to determine 
whether changes in human resources policy or procedures would result in 
improved Federal human resources management. The Department of Veterans 
Affairs (DVA) and OPM propose to test a performance-based pay system 
with open pay ranges linked to the corresponding minimum and maximum 
rates for the grades of the General Schedule pay structure. Section 
4703 of title 5 requires OPM to publish the proposed project plan in 
the Federal Register . This notice fulfills that requirement. The 
proposed project plan has been approved by DVA and OPM.

DATES: Written comments must be submitted on or before July 18, 2008. A 
public hearing on the proposed project plan is scheduled for Tuesday, 
August 5, 2008, and will begin at 10 a.m. Eastern Standard Time. The 
location of the hearing is: U.S. Department of Veterans Affairs, 810 
Vermont Avenue, NW., Washington DC 20420.
    Public parking is limited, but the building is conveniently 
accessible to the ``McPherson Square'' Metro station. This is a secure 
facility. Members of the public must show a government-issued photo ID 
(e.g., State driver's license). Attendees will undergo electronic 
screening, and their personal belongings will be subject to a physical 
search. Personal items prohibited include devices that can transmit and 
record, weapons (guns, knives, explosives, etc.), and alcohol. A member 
of the public possessing such items will be barred from entering, and 
such items are subject to confiscation. There will be a sign-in table 
set up in the main lobby. A greeter, and signs, will direct attendees 
to the main auditorium location.
    There will be a telephone call-in number for members of the public 
who cannot attend in person. That number will be 1-800-767-1750 (access 
code 28773), and the line will be active from 10 a.m. until 
the hearing is adjourned.
    At the time of the hearing, interested persons or organizations may 
present their written or oral comments on the proposed demonstration 
project. The hearing will be informal. However, anyone wishing to 
testify should contact the person listed under FOR FURTHER INFORMATION 
CONTACT, so that DVA and OPM can plan the hearing and provide 
sufficient time for all interested persons and organizations to be 
heard. Priority will be given to those on the schedule, with others 
speaking in any remaining available time. Each speaker's presentation 
will be limited to 10 minutes. Written comments may be submitted to 
supplement oral testimony during the public comment period.

ADDRESSES: Comments may be mailed to Demonstration Projects, U.S. 
Office of Personnel Management, 1900 E Street, NW., Room 7456, 
Washington, DC 20415 or submitted by email to [email protected].

FOR FURTHER INFORMATION CONTACT: (1) Department of Veterans Affairs: 
Lauren Kuiper-Rocha, Demonstration Project Leader, Office of Human 
Resources Management (055), (202) 461-7804, VA Central Office, 810 
Vermont Avenue, NW., Washington, DC 20420; (2) Office of Personnel 
Management: Patsy Stevens, Systems Innovation Group Manager, (202) 606-
1574, U.S. Office of Personnel Management, 1900 E Street,

[[Page 34801]]

NW., Room 7456, Washington, DC 20415.

SUPPLEMENTARY INFORMATION: The goal of this demonstration project is to 
make employees' pay increases more performance-sensitive, so that only 
Fully Successful or better performers will receive any pay adjustments 
and the best performers will receive the largest pay adjustments.

Linda M. Springer,
Director.

Table of Contents

I. Executive Summary
II. Introduction
    A. Purpose
    B. Problems With the Present System
    C. Changes Required/Expected Benefits
    D. Participating Organizations
    E. Participating Employees
    F. Project Design
III. Personnel System Changes
    A. Performance Appraisal
    B. Program Requirements
    C. Supervisory Accountability
    D. Reconsideration of Ratings
    E. Open-Range Pay System
    1. Elimination of Fixed Steps
    2. Rate Range
    3. Pay Administration
    F. Performance-based Pay Adjustments
    1. Pay Pools
    2. Performance Shares
    3. Pay Adjustments
    4. Employees Who Do Not Receive a Pay Adjustment
    5. Locality Pay and Special Rate Supplement
IV. Training
V. Conversion
    A. Conversion to the Demonstration Project
    B. Conversion to the General Schedule
VI. Project Duration
VII. Project Evaluation
VIII. Costs
IX. Waiver of Laws and Regulations Required
    A. Title 5, United States Code
    B. Title 5, Code of Federal Regulations

I. Executive Summary

    This project was designed by DVA in consultation with OPM. The 
demonstration project will modify the General Schedule pay system by 
eliminating fixed steps within each grade and providing for annual pay 
adjustments based on performance. The proposed project will test the 
application of meaningful distinctions in levels of performance to the 
allocation of annual pay increases under the General Schedule.

II. Introduction

A. Purpose

    The purpose of the proposed project is to modify the General 
Schedule (GS) pay system to provide larger annual pay increases to 
employees who are better performers based on performance distinctions 
made under a credible, strategically-aligned performance appraisal 
program and thereby improve the results-oriented performance culture 
within the organization. The proposed project provides no pay increase 
to any participant rated below the Fully Successful performance level.

B. Rationale for a New System

    The current GS pay system provides annual pay increases to all 
employees, even those whose performance is less than Fully Successful. 
Similarly, periodic within-grade pay increases are virtually automatic. 
Although an employee's performance must be determined to be at an 
``acceptable level of competence'' in order for the employee to receive 
a within-grade increase (WGI), this is only a single-level threshold 
and no further distinctions in levels of performance play a role. All 
performance levels above the threshold are treated the same for 
purposes of determining the amount of the increase and the rate at 
which an employee advances through the rate range of his or her grade. 
DVA and OPM believe that a more prudent use of the limited resources 
available to compensate Federal employees is to adjust the pay system 
to make pay more sensitive to performance.
    The current GS pay system does provide some tools to address 
distinctions in levels of performance--namely, quality step increases 
(QSIs) and awards based upon performance. QSIs are discretionary 
adjustments that are not integrated into the normal pay adjustment 
process; thus, limited funds are available to provide QSIs, and the 
decision-making process may not be very transparent. In addition, there 
is no flexibility as to the amount of the QSI; a full step increase is 
required. Also, QSIs may be used only for those with the highest rating 
of record. In summary, QSIs alone cannot be relied upon to establish an 
effective link between pay and performance based on meaningful 
distinctions among different levels of performance.
    As the discussion above reveals, the General Schedule has somewhat 
limited options for the purposes of establishing a more results-
oriented performance culture. DVA would like to use the Human Capital 
Assessment and Accountability Framework (HCAAF) to make its system more 
performance-sensitive. Within the HCAAF, a results-oriented performance 
culture effectively plans, monitors, develops, rates, and rewards 
employee performance, consistent with the merit system principle that 
``appropriate incentives and recognition should be provided for 
excellence in performance'' (5 U.S.C. 2301(b)(3)).

C. Changes Required/Expected Benefits

    The proposed demonstration project responds to the limitation 
identified above by eliminating the 10 fixed steps within each of the 
15 GS grades and by making annual GS pay adjustments performance-
sensitive. Pay adjustments will be funded from a pay pool consisting of 
the amounts that would otherwise be used to pay the annual GS pay 
adjustment, WGIs, and QSIs to employees covered by the demonstration 
project. A share mechanism will be used to allocate pay increases among 
employees with different levels of performance. Implementation of the 
proposed pay system will result in larger pay increases going to 
employees who demonstrate higher performance. By regularly rewarding 
better performance with better pay, the participating organization will 
strengthen the results-oriented performance culture. Among other 
things, they will be better able to retain their good performers and 
recruit new ones.

D. Participating Organizations

    The Department of Veterans Affairs is committed to operating robust 
performance appraisal programs aligned to the organization's strategic 
goals and objectives. The Department of Veterans Affairs Veterans 
Health Administration (VHA) will be participating in the demonstration 
project. DVA is committed to providing the training and resources that 
will be needed to make performance management programs highly 
effective.

E. Participating Employees

    The demonstration project will cover all GS employees in the GS-
0670 Health Systems Administrator series at the GS-14/15 grade levels 
who are organizationally titled Assistant Medical Center Director, 
Associate Medical Center Director, and Deputy Network Director. Table 1 
shows the number of employees to be covered by the project by 
occupational series and grade.

[[Page 34802]]



                                              Table 1.--Covered Employees, by Occupational Series and Grade
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                           Grade
             Series              -----------------------------------------------------------------------------------------------------------------------
                                     1       2       3       4       5       6       7       8       9      10      11      12      13      14      15
--------------------------------------------------------------------------------------------------------------------------------------------------------
0670............................  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......      52      98
    Total.......................  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......      52      98
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Management has provided initial notice to affected employees and 
will continue consultation throughout project implementation.

F. Project Design

    The project has been designed simply to ensure that no 
participating employee with a rating of record of less than Fully 
Successful will receive a pay increase and that funds available for pay 
adjustments will be allocated on the basis of performance.

III. Personnel System Changes

A. Performance Appraisal

    DVA recognizes the importance of maintaining highly credible 
performance management systems. DVA will use a performance appraisal 
program under the Department of Veterans Affairs appraisal system that 
has been approved by OPM consistent with chapter 43 of title 5, United 
States Code. Throughout the duration of the demonstration project, the 
effectiveness of performance management within the project will be 
monitored by examining metrics and assessments that OPM and agencies 
generally apply to performance management systems and programs.
1. Program Requirements
    The performance appraisal program, which is established under 
chapter 43 of title 5, United States Code, requires written performance 
plans for each covered employee containing the employee's performance 
elements and standards. The performance plan links the performance 
elements and standards for individual employees to the organization's 
strategic goals and objectives. Ongoing feedback and dialogue between 
employees and their supervisors regarding performance is required. In 
addition, the program provides for, at a minimum, one mid-year progress 
review.
    The appraisal program, including its performance levels and 
standards, provides for making meaningful distinctions in performance. 
The program uses the following levels for official ratings of record: 
Outstanding, Excellent, Fully Successful, Minimally Satisfactory, and 
Unsatisfactory. Employees must be covered by their performance plan for 
at least 90 days before they can be assigned a rating of record. 
Supervisors and managers apply the program to make appropriate ratings. 
Ratings given accurately reflect actual performance, and are linked, to 
the extent appropriate, to overall organizational performance. As a 
consequence, actual distinctions in levels of performance become 
apparent from the ratings given out. Employees receive a written 
performance appraisal (i.e., a rating of record) annually. There will 
be no forced distribution of ratings. Each annual appraisal period will 
begin on October 1 and end on the following September 30. Performance 
appraisals will be completed in a timely manner to support pay 
decisions in accordance with section III.C below.
2. Supervisory Accountability
    Supervisors are responsible for providing appropriate consequences 
for employee performance by addressing poor performance and recognizing 
exceptional performance. Performance elements for supervisors and 
managers include the degree to which supervisors and managers plan, 
assess, monitor, develop, correct, rate, and reward subordinate 
employees' performance. It is recognized that specific training may be 
provided to prepare supervisors and managers to exercise these 
responsibilities.
3. Reconsideration of Ratings
    To support fairness and transparency for the system and its 
consequences, employees have an opportunity to request formal 
reconsideration of a rating of record by a management official at the 
next level above the official who decided the rating. Requests for 
reconsideration must be in writing and be submitted no more than 15 
calendar days after the official rating of record has been communicated 
to the employee. The request shall state the employee's reasons as to 
why the rating of record should be changed. The management official 
above the deciding official will discuss the request with the employee 
within 10 calendar days after receipt and provide a written response. 
If the employee is not satisfied with the decision of the higher level 
official the employee may then further request a secondary 
reconsideration of the rating to the management official at the 
respective next higher level in the organization. This second level 
reconsideration must be submitted in writing to the management official 
at the respective next higher level in the organization within 10 
calendar days of the receipt of the decision provided by the management 
official above the deciding official. This higher level official 
reviewing the secondary reconsideration will make the final decision 
after full consideration of the record, including any relevant 
information or pleading submitted by the employee, within 15 work days 
after receipt and provide the response in writing. The decision by this 
official will be the final administrative decision in the matter.
    If the reconsideration of the appraisal results in a different 
rating of record, the revised rating of record will become the basis 
for the employee's pay adjustment(s) in accordance with section III.C 
below. If the adjustment occurs after all pay deliberations have been 
finalized, it does not result in a recalculation of other employees' 
pay adjustments.
    The reconsideration request procedures outlined above do not apply 
to employees who receive a rating of Unsatisfactory. Rather, the 
employee's right to a review of an Unsatisfactory rating by an official 
higher than the approving official will occur in conjunction with the 
employee's right to appeal or grieve a subsequent personnel action 
based on the Unsatisfactory rating, such as a reassignment, demotion or 
removal from Federal service. Therefore, the employee's right to 
request reconsideration of the rating will occur within the right to 
file an agency grievance (in the case of a reassignment) or a statutory 
appeal right (in the case of a demotion or removal) and will be in lieu 
of the reconsideration request procedures outlined above.

B. Open-Range Pay System

    Employees will continue to be covered by the 15-grade GS position 
classification system established under 5 U.S.C. chapter 51; however, 
the GS pay system established under 5 U.S.C. chapter 53, subchapter 
III, will be

[[Page 34803]]

modified as described in the following sections. Except as otherwise 
provided in this plan, demonstration project employees will be 
considered to be GS employees in applying other laws, regulations, and 
policies.
1. Elimination of Fixed Steps
    The 10 fixed steps of each GS grade will not apply to employees 
participating in the demonstration project. The fixed-step system was 
designed to reward longevity. An open-range pay system is an important 
element of any effort to make pay more performance-sensitive. No 
employee's pay will be reduced as a result of becoming covered by the 
demonstration project. However, demonstration project employees will no 
longer receive longevity-based, within-grade pay increases at 
prescribed intervals. Instead, they will be granted annual performance 
adjustments as described in section III.C below.
2. Rate Range
    The normal minimum and maximum rates of the rate range for each 
grade will equal the applicable step 1 rate and step 10 rate, 
respectively, in the General Schedule.
    For employees with a rating of record below Fully Successful, the 
minimum rate of the range is extended 5 percent below the normal 
minimum rate. An employee's rate may fall below the normal range 
minimum when that minimum increases as a result of a rate range 
adjustment, but the employee cannot receive a pay adjustment because 
the employee's rating of record is below Fully Successful, as described 
in section III.C.4 below.
    For employees with a rating of record at the highest level 
(Outstanding), the maximum rate of each range is extended 5 percent 
above the normal maximum rate. This feature will help ensure that the 
range of available pay rates will be adequate to recognize truly 
outstanding performance. If an employee within this range extension 
receives a rating of record below Outstanding, special provisions 
apply, as described in section III.B.3 below.
3. Pay Administration
    Performance-based pay adjustments described in section III.C below 
will be made to the rate of basic pay. These adjustments are scheduled 
to be made on the same date that annual rate range adjustments normally 
take effect--i.e., the first day of the first pay period beginning on 
or after January 1.
    Locality-based comparability payments under 5 U.S.C. 5304 and 
special rate supplements under 5 U.S.C. 5305, as applicable, will be 
paid on top of the rate of basic pay in the same manner as those 
payments apply to other GS employees, except as otherwise provided in 
this plan. An adjusted rate cap 5 percent higher than the normal EX-IV 
cap is established to accommodate those Outstanding performers in the 5 
percent upper rate range extension. This higher cap will apply only to 
employees receiving a rate within the upper range extension. If the 
locality rate for an employee at the normal grade maximum is affected 
by the EX-IV cap, resulting in an ``effective locality pay percentage'' 
that is less than the regular locality pay percentage, the locality 
rate for an employee in the upper rate range extension of the same 
grade will be computed using that same effective locality pay 
percentage. (For example, if the regular locality pay percentage is 30 
percent, but the EX-IV cap causes the amount of locality pay actually 
received by an employee at the normal grade maximum to be 20 percent, 
that effective locality pay percentage of 20 percent would be used to 
compute locality pay for an employee in the upper range extension of 
the same grade. Similarly, if the special rate supplement-adjusted rate 
for an employee at the normal grade maximum is affected by the EX-IV 
cap, resulting in an ``effective special rate supplement percentage'' 
that is less than the regular special rate supplement percentage, the 
adjusted rate for an employee in the upper rate range extension of the 
same grade will be computed using that same effective special rate 
supplement percentage.)
    Subject to guidance provided by OPM, DVA will establish pay 
administration rules for determining an employee's rate of pay upon 
initial appointment, promotion, demotion, transfer, reassignment, or 
other position change. In addressing geographic conversions and 
simultaneous pay actions, such rules must be consistent with 5 CFR 
531.205 and 5 CFR 531.206, respectively.
    Upon promotion, an employee is entitled to an increase of 8 
percent, or a higher increase as necessary to set the employee's rate 
at the normal minimum of the range for the higher grade. DVA may 
establish exceptions to this policy to deal with employees receiving a 
retained rate, employees who are re-promoted shortly after a demotion, 
employees with exceptional performance warranting a larger increase 
with higher management approval, etc.
    The grade retention provisions in 5 U.S.C. 5362 and 5 CFR part 536 
continue to be applicable. The pay retention rules in 5 U.S.C. 5363 and 
5 CFR part 536 apply to demonstration project employees, subject to the 
following exceptions:
    (1) An employee with a rating of record below Fully Successful may 
not receive an increase in his or her retained rate under the 50-
percent adjustment rule in 5 U.S.C. 5363(b)(2)(B);
    (2) The cap on retained rates is equal to the rate for level IV of 
the Executive Schedule plus 5 percent (instead of the EX-IV cap 
established in 5 CFR 536.306) in order to accommodate the upper range 
extension;
    (3) An employee in the upper range extension who is rated below 
Outstanding will be converted to a retained rate before processing any 
other pay action; and
    (4) The range maximum rate used in computing retained rate 
adjustments under the 50-percent adjustment rule will be the maximum 
rate of the highest applicable rate range (including any applicable 
locality payment or special rate supplement) taking into consideration 
an employee's rating of record. For retained rate employees rated 
Outstanding, the increase is 50 percent of the dollar change in the 
applicable adjusted rate for the upper range extension maximum. (Note 
that an employee rated Outstanding must have a retained rate in excess 
of the upper range extension maximum adjusted rate, since he or she 
would otherwise be converted to a rate within that range extension.) 
For retained rate employees rated below Outstanding, the increase is 50 
percent of the dollar change in the applicable adjusted rate for the 
normal grade maximum.
    If an employee is receiving a retained rate that is less than the 
applicable adjusted maximum rate (including any applicable locality 
payment or special rate supplement) for the upper range extension for 
the employee's grade, and if that employee receives a rating of record 
of Outstanding, the employee's retained rate will be terminated and 
converted to an equal adjusted rate (base rate in upper range extension 
plus applicable locality payment or special rate supplement). This 
conversion must be processed before any other pay adjustment.
    For a retained rate employee with a rating of record of 
Outstanding, if a retained rate increase provided at the time of a 
range adjustment results in the retained rate falling below the 
applicable adjusted rate for the upper range extension maximum, the 
employee's retained rate will be terminated, and the employee's pay 
will be set at the maximum rate of the upper range extension.

[[Page 34804]]

    For a retained rate employee with a rating of record of Fully 
Successful or Excellent, if a retained rate adjustment provided at the 
time of a range adjustment results in the retained rate falling below 
the applicable adjusted rate for the normal grade maximum, the 
employee's retained rate will be terminated, and the employee's pay 
will be set at the normal grade maximum rate.
    For a retained rate employee with a rating of record below Fully 
Successful, the retained rate is frozen and not subject to adjustment. 
When such an employee's retained rate falls below the applicable 
adjusted rate for the normal grade maximum, the employee's retained 
rate will be terminated, and the employee's pay will be set at an 
adjusted rate equal to the retained rate (i.e., the rate is not set at 
the range maximum).
    As required by 5 CFR 536.304(a)(2) and 536.305(a)(2), any general 
pay adjustment, including a retained rate adjustment as described in 
the preceding paragraphs, must be processed before any other 
simultaneous pay action (such as a geographic pay conversion).
    When applicable, the saved pay rules in 5 U.S.C. 3594 and 5 CFR 
359.705 for former SES members continue to apply to demonstration 
project employees, except that (1) an employee with a rating of record 
below Fully Successful may not receive an increase in his or her saved 
rate under 5 U.S.C. 3594(c)(2); and (2) the 50-percent adjustment rule 
must be applied in the same manner as it is applied for a retained rate 
under 5 U.S.C. 5363, subject to the modifications described in the 
preceding paragraphs. The rules regarding termination of a saved rate 
when it falls below the applicable adjusted maximum rate must be 
parallel to those governing termination of a retained rate under 5 
U.S.C. 5363, subject to the modifications described in the preceding 
paragraphs.
    An employee's rate of basic pay may not exceed the normal maximum 
rate for the employee's grade unless the employee is receiving a 
retained rate under 5 U.S.C. 5363, a saved rate under 5 U.S.C. 3594, or 
is entitled to a rate within the upper range extension for employees 
with an Outstanding rating of record, as provided under section 
III.B.2. An employee's rate of basic pay may not be below the normal 
minimum rate for the employee's grade unless the employee's most recent 
rating of record is below Fully Successful.

C. Performance-Based Pay Adjustments

1. Pay Pools
    Funds that otherwise would be spent on the across-the-board GS pay 
adjustment, WGIs, and QSIs for demonstration project employees will 
instead be placed into a pay pool, which will be used to fund annual 
performance-based pay increases for those employees whose rating of 
record is Fully Successful or higher. A share mechanism will be used 
(1) to ensure that employees with higher ratings of record receive 
greater pay increases than employees with lower ratings and (2) to 
control costs without resorting to a forced distribution of ratings. 
Each employee will be assigned a certain number of shares, based on his 
or her rating of record in accordance with section III.C.2 below. All 
employees in the normal rate range whose rating of record is at least 
Fully Successful will receive an adjustment equal to at least the 
amount of the annual GS base pay comparability increase under 5 U.S.C. 
5303. Employees with a rating of record below Fully Successful will not 
receive any pay adjustment.
    DVA will establish one or more pay pools for allocating performance 
pay increases. DVA will determine which participating employees are 
covered by any pay pool and determine the dollar value of each pay 
pool. In setting the value of pay pools, at a minimum DVA will allocate 
an amount for performance pay increases equal to the estimated value of 
the WGIs, QSIs, and annual GS pay adjustments that otherwise would have 
been paid to participating employees. In computing the estimated value 
of WGIs and QSIs, DVA may use estimated Governmentwide averages as 
computed by the Office of Personnel Management.
2. Performance Shares
    DVA will establish rating/share patterns for each pay pool--that 
is, the relationship between a rating of record and a single number of 
shares. The DVA health care system is characterized by a dynamic 
employment environment, and thus DVA will use two sets of rating/share 
patterns based on the Veterans Health Administration's 2005 Facility 
Complexity Model.
    The Veterans Health Administration's 2005 Facility Complexity Model 
assigns DVA Medical Centers into three complexity levels; one level 
contains two subcomponent levels. The complexity levels are based on a 
cumulative score in regard to seven individual variables, including but 
not limited to, complexity of intensive care units, availability of 
sub-specialty services, diversity of residency training programs, and 
scope of research programs. The positions of Deputy Network Director 
and those Assistant Medical Center Directors and Associate Medical 
Center Directors assigned to a complexity level 1a facility deal with 
the highest level of patient complexity, teaching, and research, and 
their facilities have the greatest number and breadth of clinical 
specialists, as well as the most intensive care units.
    In order to distinguish the higher degree of complexity the number 
of shares for each rating level for the positions of Deputy Network 
Director and Assistant Medical Center Director and Associate Medical 
Center Director at a complexity level 1a facility will initially be as 
follows: 4.5 shares are assigned to the Outstanding rating, 3.5 shares 
to the Excellent rating, 2 shares to the Fully Successful rating, and 0 
shares to a less than Fully Successful rating. The number of shares for 
each rating level for the positions of Assistant Medical Center 
Director and Associate Medical Center Director at complexity level 1b, 
1c, 2, and 3 facilities will initially be as follows: 4 shares are 
assigned to the Outstanding rating, 3 shares to the Excellent rating, 2 
shares to the Fully Successful rating, and 0 shares to a less than 
Fully Successful rating.
    DVA may revise the rating/share pattern in coordination with OPM, 
and after giving affected employees advanced notice. Employees will be 
informed in writing at least 180 days before the end of the appraisal 
period of any decision by DVA to change the rating/share pattern. No 
shares may be assigned to any rating of record below Fully Successful, 
since no pay increase is payable to employees with such a rating of 
record. After the ratings of record and shares are assigned to 
employees, the value of a single share can be calculated.
3. Pay Adjustments
    In general: DVA will determine the value of one performance share, 
expressed as a percentage of the employee's rate of basic pay, based on 
the value of the pay pool and the distribution of shares among pay pool 
employees. An individual employee's performance payout percentage is 
determined by multiplying the determined value of a performance share 
by the number of shares assigned to the employee. On the first day of 
the first pay period beginning on or after January 1 of each year, this 
amount must be paid as an increase in the employee's rate of basic pay, 
but only to the extent that it does not cause the

[[Page 34805]]

employee's rate to exceed the applicable maximum of the employee's rate 
range. Notwithstanding the preceding sentence, employees in the upper 
range extension rated below the highest level are subject to special 
rules as described in section III.B.2 and III.B.3. above. At the 
discretion of the Secretary or the Secretary's designee, any portion of 
the employee's performance payout amount not delivered as a basic pay 
increase may be paid out as a lump sum (with no charge to the pay 
pool). Such a lump-sum payment is not basic pay for any purpose and is 
not a cash award under chapter 45 of title 5, United States Code. 
Special rules apply to retained rate employees as described later in 
this section.
    An employee with a rating of record of Fully Successful or higher 
may not receive a performance payout that is less than the percentage 
value of any simultaneous rate range adjustment, except for (1) an 
employee receiving a retained rate and (2) an employee in the upper 
range extension with a rating of record of Fully Successful or 
Excellent who is converted to a retained rate (as provided in sections 
III.B.2 and III.B.3 above). This guaranteed amount will be used in 
place of any lower performance payout resulting from the share 
methodology. Any additional costs of using the guaranteed amount will 
be funded outside the pay pool. Otherwise, the guaranteed amount is 
applied in the same manner as the regular performance payout.
    The rating period of an employee who has been in the position less 
than 90 days as of September 30 will be extended and a rating of record 
completed after the employee has performed at least 90 days under the 
employee's performance plan. Performance payouts resulting from 
extended rating periods will be funded outside the pay pool and will be 
effective prospectively. Those payouts may be prorated to take into 
account the fact that an employee had less than a full year under the 
performance plan.
    DVA may establish policies on prorating the performance pay 
increases and/or lump-sum payments for an employee who, during the 
period between annual pay adjustments, was (1) hired or promoted, (2) 
in an approved leave status, (3) on a part-time work schedule, or (4) 
in other circumstances that make proration appropriate. Such proration 
policies will provide each eligible employee with the full percentage 
adjustment used to adjust base rate ranges (if any) and may prorate any 
additional amount of performance pay increase that would be applicable 
to the employee.
    If an employee's rating of record that is the basis for a 
performance payout is retroactively revised (after the regular 
effective date of performance payouts) through a reconsideration or 
appeals process, the employee's performance payout must be 
retroactively recomputed using the share value as originally 
determined. Any such retroactive corrections are not funded out of the 
pay pool and do not affect the performance payouts provided to other 
employees in the pay pool. In setting the size of a future pay pool, 
management will take into account past and projected corrections.
    Special provisions for employees returning to duty after an 
extended period of service in the uniformed services or in receipt of 
workers' compensation benefits: Special pay-setting provisions apply to 
employees who were not able to perform under the performance plan for 
at least 90 days (including an opportunity for an extended rating 
period) and who are returning to duty status after a period of leave or 
separation during which the employee was (1) serving in the uniformed 
services (as defined in 38 U.S.C. 4303 and 5 CFR 353.102) with legal 
restoration rights (e.g., 38 U.S.C. 4316), or (2) receiving workers' 
compensation benefits under 5 U.S.C. chapter 81, subchapter I. In these 
cases, DVA will determine the employee's prospective rate of basic pay 
upon return to duty by making performance pay adjustments for the 
intervening period based on the last DVA rating of record for the 
returning employee if the last DVA rating of record is dated within 2 
years of the employee's date of return to duty. If there is no previous 
DVA rating of record, as described, the employee will have pay set 
prospectively by applying the percentage increase equivalent to an 
Excellent rating. The performance pay increases during the intervening 
period may not be prorated based on periods covered by this provision. 
In addition, a performance pay increase that is effective after the 
employee's return to duty may not be prorated based on periods covered 
by this provision. A lump-sum payment for a period including actual 
service performed after the employee's return to duty must be prorated 
(based on service covered by this provision) under the same agency 
proration policies that apply generally to periods of leave.
    Special provision for employees receiving a retained rate of basic 
pay: An employee receiving a retained rate under 5 U.S.C. 5363 or 5 
U.S.C. 3594 is not eligible for a basic pay increase, except in 
conjunction with (1) a rate range adjustment, as described in section 
III.B.3 above; or (2) a geographic conversion under 5 CFR 359.705(e) or 
536.303(b), as applicable. At the discretion of the Secretary or the 
Secretary's designee, a retained rate employee may receive the same 
lump-sum payment approved for an employee in the same pay pool who is 
at the applicable range maximum and who has the same performance rating 
of record and number of shares.
4. Employees Who Do Not Receive a Pay Adjustment
    Employees with a rating of record below Fully Successful are 
prohibited from receiving a pay increase, except if necessary to 
prevent an employee's rate from falling more than 5 percent below the 
normal range minimum. When an employee does not receive a pay increase 
because of performance below the Fully Successful level, his or her pay 
rate may fall below the normal minimum rate of the grade, since that 
range minimum may be increasing. However, in no case may an employee's 
rate of basic pay fall more than 5 percent below the normal range 
minimum.
    Each employee who does not receive an increase in basic pay because 
his or her performance is less than Fully Successful will be entitled 
to be notified promptly in writing of that fact. At the same time, the 
employee must be informed in writing of the right to request that the 
agency reconsider its determination, under the same procedures 
prescribed by OPM regarding the determination not to provide a within-
grade increase under 5 U.S.C. 5335(c). The Merit Systems Protection 
Board will process any appeals under this section in the same manner 
that it processes appeals under 5 U.S.C.5335(c).
5. Locality Pay and Special Rate Supplement
    When a locality-based comparability payment established under 5 
U.S.C. 5304 is increased, a demonstration project employee whose most 
recent rating of record is below Fully Successful is entitled to the 
increased locality payment, but his or her underlying rate of basic pay 
will be reduced in a manner that ensures the employee's total rate of 
pay does not increase. This reduction is necessary to ensure, in an 
administratively feasible way, that an employee rated less than Fully 
Successful will not receive a pay increase; it does not constitute a 
reduction in pay for purposes of applying the adverse action procedures 
in chapter 75 of title 5, United States

[[Page 34806]]

Code. (Exception: An employee's rate of basic pay may not be reduced 
under this paragraph to the extent that the reduction would cause an 
employee's rate to fall more than 5 percent below the normal range 
minimum.)
    Similarly, when a special rate supplement established under 5 
U.S.C. 5305 is increased, a demonstration project employee whose rating 
of record is below Fully Successful is entitled to the increased 
supplement, but his or her underlying rate of basic pay will be reduced 
in a manner that ensures the employee's total rate of pay does not 
increase.
    A locality rate and special rate cap 5 percent higher than the 
normal EX-IV cap is established to accommodate those Outstanding 
performers in the 5 percent upper rate range extension. See section 
III.B.3 for additional information.

IV. Training

    Training for all involved is essential to the success of the 
demonstration project. Training will be provided to employees, 
supervisors, and managers before the project is launched and throughout 
the life of the project. It is important that employees perceive the 
performance management program as fair and transparent; therefore, 
supervisors and managers will be trained in the effective management of 
performance.
    All employees will be trained in the performance appraisal process 
and the pay adjustment mechanism. Various types of training are being 
considered, including videos, on-line tutorials, and train-the-trainer 
concepts.

V. Conversion

A. Conversion to the Demonstration Project

    Employees whose positions are converted to the demonstration 
project will be converted with no change in their rate of basic pay. 
Any simultaneous pay action that was scheduled to take effect under the 
GS pay system on the date of conversion must be processed before 
processing the conversion to the modified GS pay system. Immediately 
after conversion, eligible employees will receive an increase in basic 
pay reflecting the prorated value of the next scheduled WGI. The 
prorated value is determined by calculating the portion of the time-in-
step an employee has completed towards the waiting period for his or 
her next step increase. This within-grade ``buy-in'' adjustment will 
not be made for (1) employees who are at the step 10 rate for their 
grade immediately before conversion to the demonstration project, (2) 
employees who are receiving a retained rate of pay under 5 U.S.C. 5363 
or a saved rate under 5 U.S.C. 3594 immediately before conversion to 
the demonstration project, or (3) employees whose rating of record is 
below Fully Successful. The first performance-based pay increase under 
the project's pay adjustment mechanism will be effective on the first 
day of the first pay period beginning on or after January 1, 2010.
    For employees who enter the demonstration project by lateral 
reassignment or transfer (i.e., not by conversion of position), DVA may 
apply parallel pay conversion rules, including rules for providing a 
prorated adjustment reflecting time accrued toward a GS within-grade 
increase or similar within-range adjustment under another pay system. 
If conversion into the demonstration project is accompanied by a 
geographic move, the employee's pay entitlements under the former pay 
system in the new geographic area must be determined before the pay 
conversion.

B. Conversion to the General Schedule

    If a demonstration project employee is moving to a GS position not 
under the demonstration project, or if the project ends and each 
project employee must be converted back to a GS position not covered by 
the project, the employee's rate of basic pay under the demonstration 
project as in effect immediately before conversion will be used in 
applying any simultaneous pay actions under the regular GS pay system 
that are effective on the date of conversion (e.g., promotion, 
geographic movement). If the rate of basic pay falls between steps 
after applying any simultaneous pay actions, the employee's rate will 
be set at the next higher step.
    If a demonstration project employee is receiving a retained rate 
immediately before conversion back to the regular GS pay system, the 
employee will continue to be entitled to a retained rate upon 
conversion, but the retained rate thereafter will be governed by 5 
U.S.C. 5363 and 5 CFR part 536 or 5 CFR 359.705, as applicable.
    If a demonstration project employee is receiving a rate above the 
normal GS rate range because his or her rate is set within the upper 
range extension for Outstanding performers and converts to the GS pay 
system, that rate must be converted to a retained rate subject to the 
rules and limitations in 5 U.S.C. 5363 and 5 CFR part 536.
    If a demonstration project employee is receiving a rate below the 
normal GS rate range because his or her rate has fallen within the 
lower range extension for less than Fully Successful performers, that 
rate must be converted to the minimum rate for the grade upon 
conversion to the regular GS pay system.

VI. Project Duration

    The initial implementation period for the demonstration project 
will terminate prior to the end of the 5-year period beginning on the 
date which the project takes effect. However, with OPM's concurrence, 
the project may be extended, modified or terminated on or before the 
expiration of the 5-year period.

VII. Project Evaluation

    Section 4703(h) of title 5, U.S.C., requires an evaluation of the 
results of the demonstration project. DVA, in coordination with OPM, 
will develop a plan to evaluate the demonstration project to determine 
the extent to which the pay increases paid to participating employees 
reflect meaningful distinctions among their levels of performance. 
Workforce data will be analyzed to determine whether the project is 
achieving its goal and whether it is resulting in any adverse impact. 
Key features of successful performance-based pay systems, including 
leadership commitment, communication, stakeholder involvement, 
training, planning, mission alignment, and the rewarding of 
performance, will be assessed to determine the effectiveness of the 
demonstration project and ensure compliance with stated project goals. 
The evaluation will address the extent to which the project has 
incorporated the elements required by section 1126 of Public Law 108-
136 (5 U.S.C. 4701 note). DVA will be accountable for exercising and 
maintaining fiscal responsibility in the execution of the demonstration 
project. The project will be examined during each phase of the 
evaluation to assess that costs are being managed effectively. 
Moreover, cost discipline will be examined during each phase of the 
evaluation to ensure spending remains within acceptable limits. 
Finally, employee feedback will be sought through surveys, interviews, 
and focus groups to assess employee perceptions of the fairness and 
integrity of the performance appraisal and pay adjustment processes.

VIII. Costs

A. Buy-in Costs

    There will be added costs resulting from the within-grade increase 
``buy-in'' provision described in section V above; however, those costs 
will be offset by the elimination of within-grade step

[[Page 34807]]

increases that otherwise would have occurred.

B. Recurring Costs

    All funding will be provided through the organization's budget. No 
additional funding will be requested specifically for this project; all 
costs will be charged to available funds through existing 
appropriations, including those incurred in the areas of project 
development, training, and project evaluation.

IX. Waiver of Laws and Regulations Required

A. Waivers to Title 5, United States Code

    Chapter 35, section 3594: Saved pay for former members of the 
Senior Executive Service (only to the extent necessary to (1) bar 
employees with a rating of record below Fully Successful from receiving 
a saved rate increase under 5 U.S.C. 3594(c)(2); and (2) apply rules 
parallel to those governing adjustment and termination of retained 
rates under 5 U.S.C. 5363, as modified under this plan).
    Chapter 53, section 5302(1)(A), (8) and (9): Definitions (only to 
the extent necessary to provide that employees under the demonstration 
project are not considered to be GS employees for the purposes of 
annual adjustments under section 5303 or similar provision of law 
governing annual adjustments for employees covered by section 5303).
    Chapter 53, section 5303: Annual adjustments to pay schedules.
    Chapter 53, section 5304(g)(1): Locality-based comparability 
payments (only to the extent necessary to (1) provide a locality rate 
may not exceed the rate for EX-IV, plus 5 percent for employees in the 
upper range extension; and (2) apply an ``effective'' locality pay 
percentage for employees in the upper range extension under 
circumstances described in the plan).
    Chapter 53, section 5305(a)(1): Special pay authority (only to the 
extent necessary to (1) provide a special rate may not exceed the rate 
for EX-IV, plus 5 percent for employees in the upper range extension; 
(2) to interpret the references to the minimum and maximum rates of a 
grade as references to the normal minimum and maximum rates of a grade 
under this plan; and (3) apply an ``effective'' special rate supplement 
percentage for employees in the upper range extension under 
circumstances described in this plan).
    Chapter 53, subchapter III: General Schedule pay rates (except 
that, for purposes of applying any other laws, regulations, or policies 
that refer to GS employees or to subchapter III of chapter 53 of title 
5, United States Code, the modified pay system established under this 
plan must be considered to be a GS pay system established under such 
subchapter III, except as otherwise provided in this plan; these 
purposes include, but are not limited to, references to the General 
Schedule in section 5304 (relating to locality pay, except as provided 
in the waiver above), section 5545(d) (relating to hazard pay), and 
sections 5753-5754 (dealing with recruitment, relocation, and retention 
incentives)).
    Chapter 53, section 5363: Pay retention (only to the extent 
necessary to (1) bar employees with a less than Fully Successful rating 
of record from receiving retained rate increases under 5 U.S.C. 
5363(b)(2)(B); (2) provide that pay (including any locality adjustment 
or special rate supplement) of an employee in the upper range extension 
who is rated below Outstanding will be converted to a retained rate 
before processing any other actions; (3) provide a retained rate that 
is less than the maximum rate (including any locality adjustment or 
special rate supplement) of the upper range extension for an employee 
who receives a rating of record of Outstanding will be terminated and 
converted to an equal adjusted rate; (4) provide the range maximum rate 
used to compute retained rate adjustments is the normal range maximum 
rate (including any locality adjustment or special rate supplement) for 
employees with a rating of record below Outstanding and the upper range 
maximum rate (including any locality adjustment or special rate 
supplement) for an employee with an Outstanding rating of record; and 
(5) provide when a retained rate for an employee with a rating of 
record below Fully Successful falls below the applicable adjusted rate 
for the normal band maximum, the retained rate will be terminated and 
the employee's pay will be set at an adjusted rate equal to the 
retained rate).
    Chapter 75, section 7512(4): Adverse actions (only to the extent 
necessary to provide that adverse actions do not apply to reductions in 
rates of basic pay to offset a locality pay or special rate supplement 
increase as a result of receiving a rating of record below Fully 
Successful).

    Note: If any of the provisions of title 5, United States Code, 
listed above are amended during the period this demonstration 
project is in effect, DVA may choose to terminate the waiver of one 
or more such provisions with respect to employees participating in 
the project, without formally modifying the project itself. DVA must 
notify OPM when any such waiver is terminated.

B. Waivers to Title 5, Code of Federal Regulations

    Part 359, subpart G, section 359.705: Pay (only to the extent 
necessary to (1) bar employees with a rating of record below Fully 
Successful from receiving a saved rate increase under 5 CFR 
350.705(d)(1); and (2) apply rules parallel to those governing 
adjustment and termination of retained rates under 5 CFR part 536, as 
modified under this plan).
    Part 430, subpart B, section 430.203: Definitions (only to the 
extent necessary to allow an additional rating of record to support a 
pay decision under C.3 or 4 of this project plan).
    Part 530, section 530.304(a): Establishing or increasing special 
rates (only to the extent necessary to (1) provide a special rate may 
not exceed the rate for EX-IV, plus 5 percent for employees in the 
upper range extension; (2) interpret references to the minimum and 
maximum rates of a grade as references to the normal minimum and 
maximum rates of a grade under this plan; and (3) apply an 
``effective'' special rate supplement percentage for employees in the 
upper range extension under circumstances described in this plan).
    Part 531, subpart B: Determining Rate of Basic Pay.
    Part 531, subpart D: Within-Grade Increases.
    Part 531, subpart E: Quality Step Increases.
    Part 531, section 531.604: Determining an employee's locality rate 
(only to the extent necessary to apply an ``effective'' locality pay 
percentage for employees in the upper range extension under 
circumstances described in this plan).
    Part 531, section 531.606: Maximum limits on locality rates (only 
to the extent necessary to provide a locality rate may not exceed the 
rate for EX-IV, plus 5 percent for employees in the upper range 
extension).
    Part 536, subpart C: Pay Retention (only to the extent necessary to 
(1) bar employees with a less than Fully Successful rating of record 
from receiving retained rate increases under 5 CFR 536.305; (2) provide 
that a retained rate may not exceed the rate for EX-IV, plus 5 percent; 
(3) provide the pay (including any locality adjustment or special rate 
supplement) of an employee in the upper range extension who is rated 
below Outstanding will be converted to a retained rate before 
processing any other actions; (4) provide a retained rate that is less 
than the maximum rate (including any locality adjustment or special 
rate supplement)

[[Page 34808]]

of the upper range extension for an employee who receives a rating of 
record of Outstanding will be terminated and converted to an equal 
adjusted rate; (5) provide the range maximum rate used to compute 
retained rate adjustments is the normal range maximum rate (including 
any locality adjustment or staffing supplement) for employees with a 
rating of record below Outstanding and the upper range maximum rate 
(including any locality adjustment or staffing supplement) for an 
employee with an Outstanding rating of record; and (6) provide when a 
retained rate for an employee with a rating of record below Fully 
Successful falls below the applicable adjusted rate for the normal 
grade maximum, the retained rate will be terminated and the employee's 
pay will be set at an adjusted rate equal to the retained rate).
    Part 752, section 752.401(a)(4): Adverse actions (only to the 
extent necessary to provide that adverse action provisions do not apply 
to reductions in rates of basic pay to offset a locality pay or special 
rate supplement increase as a result of receiving a rating of record 
below Fully Successful).

    Note: If any of the provisions of title 5, Code of Federal 
Regulations, listed above are revised during the period this 
demonstration project is in effect, DVA may choose to terminate the 
waiver of one or more such provisions with respect to employees 
participating in the project, without formally modifying the project 
itself. DVA must notify OPM when any such waiver is terminated.

 [FR Doc. E8-13733 Filed 6-17-08; 8:45 am]
BILLING CODE 6325-43-P