    Financial Regulators: Agencies Have Implemented Key Performance
    Management Practices, but Opportunities for Improvement Exist
    (18-JUN-07, GAO-07-678).

    Congress granted financial regulators flexibility to establish
    their own compensation systems and required certain agencies to
    seek to maintain comparability with each other in pay and
    benefits to help the agencies overcome impediments to recruiting
    and retaining employees and avoid competing for the same
    employees. In response to a request, this report reviews (1) how
    the performance-based pay systems of 10 financial regulators are
    aligned with six key practices for effective performance
    management systems, (2) the actions these agencies have taken to
    assess and implement comparability in pay and benefits, and (3)
    the extent to which employees in selected occupations have moved
    between or left any of the agencies. GAO analyzed agency guidance
    and policies, agency data on performance ratings and pay
    increases, agency pay and benefits surveys, data from the Central
    Personnel Data File, and interviewed agency officials.
    -------------------------Indexing Terms-------------------------
    REPORTNUM:   GAO-07-678
        ACCNO:   A70906
      TITLE:     Financial Regulators: Agencies Have Implemented Key
    Performance Management Practices, but Opportunities for
    Improvement Exist
         DATE:   06/18/2007
      SUBJECT:   Federal agencies
    	     Federal employees
    	     Merit compensation
    	     Pay
    	     Pay rates
    	     Performance appraisal
    	     Performance management
    	     Performance measures
    	     Policy evaluation
    	     Regulatory agencies
    	     Salary increases
    	     Performance-based pay
    	     Transparency

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    GAO-07-678

    Report to Congressional Requesters

    June 2007

    FINANCIAL REGULATORS

    Agencies Have Implemented Key Performance Management Practices, but
    Opportunities for Improvement Exist

    Contents

    Letter 1
    Results in Brief 4
    Background 7
    Financial Regulators Generally Have Linked Pay to Performance
    and Made Distinctions in Performance, but Opportunities Exist
    for Improvements 9
    Agencies Have Taken Various Actions to Seek to Maintain Pay and
    Benefits Comparability 26
    Few Employees Have Moved among the Financial Regulators, Most
    Resigned from Federal Employment 31
    Conclusions 35
    Recommendations for Executive Action 36
    Agency Comments and Our Evaluation 37

    Appendices

    Appendix I: Objectives, Scope, and Methodology 40
    Appendix II: Information on Agencies 47
    Appendix III: Financial Regulators Have Implemented Key Practices in
    Varying Ways 50
    Appendix IV: Actions Taken by Financial Regulators to Seek to Maintain
    Pay and Benefits Comparability and Pay and Benefits Data 87
    Appendix V: Analysis of Movement Data of Financial Regulator
    Employees from Fiscal Years 1990 through 2006 112
    Appendix VI: Comments from the U.S. Commodity Futures Trading
    Commission 136
    Appendix VII: Comments from the Board of Governors of the Federal
    Reserve System 138
    Appendix VIII: Comments from the Federal Housing Finance Board 139
    Appendix IX: Comments from the National Credit Union
    Administration 140
    Appendix X: Comments from the Office of Federal Housing Enterprise
    Oversight 144
    Appendix XI: Comments from the Securities and Exchange Commission 145
    Appendix XII: GAO Contacts and Staff Acknowledgments 146

    Tables

    Table 1: Federal Financial Regulator Pay Comparability Legislative
    Provisions 8
    Table 2: Selected OPM Locality Pay Percentages Compared to
    Financial Regulators� Locality Pay Percentages, Fiscal Year
    2006 30
    Table 3: Performance Appraisal Cycle by Agency 41
    Table 4: Agency Information 47
    Table 5: Pay and Benefits Surveys That Federal Financial
    Regulators Conducted through External Compensation
    Consultants, 1991-2006 88
    Table 6: Selected Examples of Benchmarks Agencies Have Used to
    Assess Pay and Benefits Comparability 92
    Table 7: Selected Examples of Recent Pay and Benefits
    Adjustments Resulting from Agencies� Comparability
    Assessments 93
    Table 8: Agencies� Current Methods for Determining Locality Pay
    Percentages and Adjustments 95
    Table 9: List of Benefits Offered by the 10 Financial Regulators 98
    Table 10: Number of Financial Regulator Employees in
    Mission-Critical and other Occupations Who Moved to
    another Financial Regulator, Fiscal Years 1990�2006 114
    Table 11: Commodity Futures Trading Commission Employment
    and Movement Data, Fiscal Years 1990�2006 116
    Table 12: Farm Credit Administration Employment and Movement
    Data, Fiscal Years 1990-2006 118
    Table 13: Federal Deposit Insurance Corporation Employment and
    Movement Data, Fiscal Years 1990�2006 120
    Table 14: Federal Housing Finance Board Employment and
    Movement Data, Fiscal Years 1990�2006 122
    Table 15: National Credit Union Administration Employment and
    Employee Movement Data, Fiscal Years 1990�2006 124
    Table 16: Office of the Comptroller of the Currency Employment and
    Employee Movement Data, Fiscal Years 1990�2006 126
    Table 17: Office of Federal Housing Enterprise Oversight
    Employment and Employee Movement Data, Fiscal Years
    1990�2006 128
    Table 18: Office of Thrift Supervision Employment and Employee
    Movement Data, Fiscal Years 1990�2006 130
    Table 19: Securities and Exchange Commission Employment and
    Employee Movement Data, Fiscal Years 1990�2006 132
    Contents
    Page iii GAO-07-678 Financial Regulators
    Table 20: Other Federal Agencies Employment and Employee
    Movement Data, Fiscal Years 1990�2006

    Figures

    Figure 1: Percentage of Regulatory Employees by Rating Level for
    Systems with Multiple Rating Levels, for Completed
    Appraisal Cycles Specified 22
    Figure 2: Percentage of Regulatory Employees by Rating Level and
    Merit Increase Category for Agencies with Pass/Fail
    Performance Rating Systems, for Completed Appraisal
    Cycles Specified 24
    Figure 3: Nonexecutive Minimum and Maximum Pay Ranges and
    Average Actual Pay for Mission-Critical Occupations by
    Regulator, 2006 28
    Figure 4: Attrition among Financial Regulators, Fiscal Years 1990�
    2006 33
    Figure 5: Excerpt from an OCC Commissioned Examiner�s
    Individual Performance Plan 56
    Figure 6: Excerpt from an FCA Individual Performance Plan 62
    Figure 7: Example of OFHEO�s Worksheet for Weighting
    Performance Elements 65
    Figure 8: Average Number of Employees in Mission-Critical and
    other Occupations Moving among the 9 Financial
    Regulators, Fiscal Years 1990�2006 113

    Abbreviations

    CFTC Commodity Futures Trading Commission
    CPDF Central Personnel Data File
    EEO Equal Employment Opportunity
    FCA Farm Credit Administration
    FDIC Federal Deposit Insurance Corporation
    FHFB Federal Housing Finance Board
    FIRREA Financial Institutions Reform, Recovery and Enforcement Act
    IT information technology
    NCUA National Credit Union Administration
    OCC Office of the Comptroller of the Currency
    OFHEO Office of Federal Housing Enterprise Oversight
    OPM Office of Personnel Management
    OTS Office of Thrift Supervision
    SEC Securities and Exchange Commission
    SSP Senior Staff Position

    Letter

    June 18, 2007

    Congressional Requesters:

    The federal government must adapt to a range of major trends and
    challenges in the nation and the world, and to respond, it must have the
    institutional capacity to plan more strategically, identify and react more
    expeditiously, and focus on achieving results. Critical to the success of
    this transformation are the federal government's people--its human
    capital. Yet the government has not transformed, in many cases, how it
    classifies, compensates, develops, and motivates its employees to achieve
    maximum results within available resources and existing authorities. One
    of the questions being addressed as the federal government transforms is
    how to update its compensation system to be more market based and
    performance oriented.^1 In this type of system, organizations consider the
    skills, knowledge, and performance of employees as well as the labor
    market when making pay decisions.

    Congress has recognized the need for flexibility in how selected agencies
    compensate employees. Congress granted the federal financial regulatory
    agencies the flexibility to establish their own compensation systems
    recognizing that the existing approach to compensating employees could
    impede these agencies' ability to recruit and retain employees critical to
    meeting their organizational missions. In addition to the flexibility
    provided to the agencies over the years, Congress also directed most of
    the agencies to seek to maintain pay comparability and to consult with
    each other in doing so to ensure the agencies do not compete with each
    other for employees.^2 The 10 federal financial regulatory agencies
    reviewed in this report are the Commodity Futures Trading Commission
    (CFTC), the Farm Credit Administration (FCA), the Federal Deposit
    Insurance Corporation (FDIC), the Federal Housing Finance Board (FHFB),
    the Board of Governors of the Federal Reserve System (Federal Reserve
    Board), the National Credit Union Administration (NCUA), the Office of the
    Comptroller of the Currency (OCC), the Office of Federal Housing
    Enterprise Oversight (OFHEO), the Office of Thrift Supervision (OTS), and
    the Securities and Exchange Commission (SEC).

    ^1GAO, 21st Century Challenges: Reexamining the Base of the Federal Government, GAO-
    05-325SP (Washington, D.C.: February 2005).

    ^2See, e.g., section 1206 of the Financial Institutions Reform, Recovery, and Enforcement Act
    of 1989 (FIRREA), Pub. L. No. 101-73. See also, H. Conf. Rpt. No. 101-222, 457-458 (1989).
    While FIRREA uses �compensation� to mean �pay,� for purposes of this report,
    compensation is defined as employee pay and benefits.

    In our prior work, we identified key practices for effective performance
    management systems that collectively create a "line of sight" showing how
    team, unit, and individual performance can contribute to overall
    organizational goals and help individuals understand the connection
    between their daily activities and the organization's success.^3

    In your February 2006 letter, you noted that the financial regulatory
    agencies are at different stages of implementing their performance-based
    pay systems and compensation authorities and that an examination of how
    they are implementing their systems could be valuable to other agencies
    pursuing performance-based pay systems. Our past work looking at agencies'
    implementation of performance management and performance-based pay systems
    has shown that better linking pay to performance is very much a work in
    progress at the federal level.^4

    In response to your request, this report examines (1) how the
    performance-based pay systems of 10 federal financial regulatory agencies
    are aligned with six key practices for effective performance management
    systems, (2) the actions 10 federal regulatory agencies have taken to
    assess and implement comparability in pay and benefits with each other,
    and (3) the extent to which employees in selected occupations have moved
    between or left any of the agencies.

    For purposes of this review, we focused on six key practices for effective
    performance management, which are more closely related to planning,
    rating, and rewarding individual performance:^5

    ^3GAO, Human Capital: Preliminary Observations on the Administration�s Draft Proposed
    �Working for America Act,� GAO-06-142T (Washington, D.C.: Oct. 5, 2005); Human Capital:
    Senior Executive Performance Management Can Be Significantly Strengthened to
    Achieve Results, GAO-04-614 (Washington, D.C.: May 26, 2004); and Results-Oriented
    Cultures, Creating a Clear Linkage between Individual and Organizational Success,
    GAO-03-488 (Washington, D.C.: Mar. 14, 2003).

    ^4GAO, Human Capital: Implementing Pay for Performance at Selected Personnel
    Demonstration Projects, GAO-04-83 (Washington, D.C.: Jan. 23, 2004).

    ^5The other three key practices are: provide and routinely use performance information to
    track organizational priorities, require follow-up actions to address organizational priorities,
    and maintain continuity during transitions.

    1.Align individual performance expectations with organizational goals.

    2.Connect performance expectations to crosscutting goals.

    3.Use competencies to provide a fuller assessment of performance.

    4.Link pay to individual and organizational performance.

    5.Make meaningful distinctions in performance.

    6.Involve employees and stakeholders to gain ownership of performance
    management systems.

    In this report, we present important aspects of the agencies'
    implementation of the practices of linking pay to individual and
    organizational performance, which includes providing adequate safeguards
    to help ensure fairness and guard against abuse, and making meaningful
    distinctions in performance. We discuss the agencies' implementation of
    the four other practices included in the list in appendix III.

    To address our first objective, we analyzed the selected agencies'
    performance management and pay systems' guidance, policies, and procedures
    and other related documents; interviewed key agency officials and
    representatives of unions or other employee groups; examined a small,
    select set of employees' individual performance plans to illustrate annual
    performance expectations for employees; and analyzed agencies' performance
    management data, such as the distribution of performance ratings and
    performance-based pay increases. The individual performance plans,
    selected in conjunction with agency officials to reflect a mix of key
    locations, occupations, and grade levels at each agency, as well as the
    performance management data from each agency that we examined, pertained
    to each agency's last completed performance appraisal cycle when we began
    this review.^6

    To address our second objective, we analyzed relevant statutes and
    legislative histories for the selected agencies; reviewed the most recent
    pay and benefits surveys from these agencies; obtained agency pay and
    benefits data; and discussed agencies' informal interactions to assess pay
    comparability with agency officials. For the third objective, we analyzed
    data from the Central Personnel Data File (CPDF), which includes
    information on pay, benefits, personnel actions, and other data to support
    statistical analyses of executive branch personnel management programs, to
    determine employee movement.

    ^6The smallest number of performance plans we examined from an agency was 1, in a case
    where the performance plans for all employees are completely standardized, and the largest
    number of plans we reviewed from an agency was 32. See table 3 in appendix I for more
    information on the dates of the performance appraisal cycles we reviewed at each agency.
    We conducted various inspections and electronic testing of agency data
    obtained for the first objective for reasonableness and the presence of
    any obvious or potential errors in accuracy and completeness. We also
    reviewed related agency documentation, interviewed agency officials
    knowledgeable about the data, and brought to the attention of these
    officials any concerns or discrepancies we found with the data for
    correction or updating. On the basis of these procedures, we believe the
    data are sufficiently reliable for use in the analyses presented in this
    report. Our data collection strategies were not designed to guarantee that
    we would identify all potential examples of how agencies may have
    implemented the various practices. An agency may have implemented a
    particular practice even if it is not specifically mentioned in the
    report. We did not independently verify the data in the pay and benefits
    comparability surveys the consultants conducted for the agencies or the
    pay and benefits data we received from the agencies. On the basis of our
    data reliability testing of CPDF data, we believe the CPDF data are
    sufficiently reliable for this review. Appendix I provides additional
    information on our scope and methodology. We conducted our work from
    February 2006 through June 2007 in accordance with generally accepted
    government auditing standards.

    Results in Brief

    Overall, the federal financial regulators have implemented key practices
    for effective performance management systems in ways that consider the
    unique needs of their organizational cultures and structures, but some
    have opportunities to improve implementation of certain practices as they
    continue to refine their systems. All of the regulators awarded some pay
    increases during the appraisal cycles we reviewed that were linked to
    employees' performance ratings. However, CFTC and SEC also provided
    across-the-board increases to employees, even to the few employees who had
    not received acceptable performance ratings, weakening the linkage of pay
    to performance. Officials from both agencies stated that in the future,
    annual pay adjustments will not be awarded to unsuccessful performers.
    While all of the regulators built safeguards into their performance
    management systems to enhance credibility and fairness, SEC did not
    establish and communicate performance standards to its nonexecutives,
    which could compromise the credibility of the system. Several regulators
    did not fully implement the safeguard of providing overall ratings and pay
    increase results to all employees, affecting employees' ability to
    understand where they stood in their organizations. As a result, some
    regulators have opportunities to strengthen an important safeguard for
    providing transparency within their performance-based pay systems.

    The financial regulators have hired external compensation consultants to
    conduct individual, formal comparability surveys, exchanged pay and
    benefits information, explored the feasibility of conducting a common
    survey, or adjusted pay and benefits to seek to maintain comparability
    requirements. Although officials said that they have adjusted pay and
    benefits partly based on the results of their comparability efforts, there
    is some variation in pay ranges and benefit packages among the agencies.
    For example, the regulators have varying minimum and maximum pay ranges
    for similar job series and offer different benefits such as tuition
    reimbursement and supplemental retirement plans. When discussing the
    reasons that may contribute to this variation, agency officials said that
    the year the agencies first became subject to comparability provisions,
    budget constraints, and the needs and preferences of the workforce play a
    role in compensation decisions and contribute to this variation.
    Furthermore, officials emphasized that it was not their goal to have
    identical pay and benefits packages; rather, they considered pay and
    benefits as a total package when seeking to maintain pay and benefits
    comparability and when setting pay policies aimed at recruiting and
    retaining employees.

    From fiscal years 1990 through 2006, the movement of employees among the
    financial regulators was very low and presented no discernible trend over
    the period, but 86 percent (13,433) of the 15,627 employees leaving the
    regulators voluntarily (i.e., moving or resigning), resigned from the
    federal government.^7 The number of employees who moved to another
    financial regulator ranged from a low of 16 of 1,362 who moved or resigned
    in fiscal year 1997 to a high of 97 of 1,229 who moved or resigned in
    fiscal year 1991. The total number of financial regulator employees was
    15,400 (1997) and 19,796 (1991) during those 2 years. (Federal Reserve
    Board data are excluded from the federal government's personnel database
    and are not included in these analyses.) Some agency officials told us
    that they believe that the Financial Institutions Reform, Recovery and
    Enforcement Act (FIRREA) comparability provision and similar provisions in
    subsequent laws applicable to financial regulators have been effective in
    ensuring that regulators' pay and benefits are generally comparable among
    the 10 agencies, which probably helps minimize employee movement among
    financial regulatory agencies. The movement of mission-critical employees,
    including accountants, attorneys, auditors, examiners, economists,
    financial analysts, investigators, information technology specialists, and
    business specialists, to a different financial regulator also produced no
    discernible trends.

    ^7Resignations do not include employees who left an agency due to retirement.

    This report includes recommendations to CFTC, FCA FHFB, NCUA, OFHEO, and
    SEC. FCA, FHFB, and OFHEO should communicate the overall results of the
    performance appraisal and pay increase decisions to all employees
    agencywide while protecting individual confidentiality. NCUA, CFTC, and
    SEC should work with unions to communicate the overall results of the
    performance appraisal and pay increase decisions to all employees
    agencywide while protecting individual confidentiality. SEC should clearly
    communicate the criteria for making performance rating and pay increase
    decisions to nonexecutive employees and should assess senior executives'
    performance at the end of the performance appraisal cycle regardless of
    the amount of funding available for performance-based pay increases.

    We provided a copy of the draft report to the Chairman, Commodity Futures
    Trading Commission; Chairman of the Board and Chief Executive Officer,
    Farm Credit Administration; Chairman, Federal Deposit Insurance
    Corporation; Chairman, Federal Housing Finance Board; Chairman, Board of
    Governors of the Federal Reserve System; Chairman, National Credit Union
    Administration; Comptroller of the Currency, Office of the Comptroller of
    the Currency; Director, Office of Federal Housing Enterprise Oversight;
    Director, Office of Thrift Supervision; and Chairman, Securities and
    Exchange Commission, for review and comment. We received written comments
    from six of the agencies. They generally agreed with the findings and
    recommendations. See appendixes VI, VII, VIII, IX, X, and XI for letters
    received from CFTC, the Federal Reserve Board, FHFB, NCUA, OFHEO, and SEC.
    These six agencies, along with the other four, also provided clarifying
    and technical comments, which we have incorporated as appropriate. Several
    agencies described actions they plan to take to address the recommendation
    to communicate the overall results of the performance appraisal and pay
    increase decisions to all employees on an agency-wide basis while
    protecting individual confidentiality.

    Background

    The 10 federal financial regulatory agencies in our review vary in size,
    mission, funding structure, whether they bargain with a union, and how
    long they have been implementing aspects of performance-based pay systems.
    For example, FHFB is the smallest agency with just over 120 employees,
    while FDIC, the largest agency, had more than 4,300 employees as of
    September 2006 and has been implementing pay for performance since 1998.
    Likewise, these agencies regulate a range of activities including banking
    and securities and futures. Appendix II includes the financial regulators'
    missions, funding structures, and whether they are unionized and bargain
    with a union over pay and benefits.

    Under Title 5 of the U.S. Code, the financial regulatory agencies have the
    flexibility to establish their own compensation programs without regard to
    various statutory provisions on classification and pay for executive
    branch agencies. At the same time these financial regulators received
    increased flexibility regarding compensation, Congress also generally
    required that they seek compensation comparability with each other. A
    provision in FIRREA requires six agencies--FDIC, OCC, NCUA, FHFB, FCA, and
    OTS--in establishing and adjusting compensation and benefits, to inform
    each other and Congress of such compensation and benefits, and to seek to
    maintain comparability regarding compensation and benefits.^8 Additional
    FIRREA provisions require FCA, FHFB, NCUA, OCC, and OTS to seek to
    maintain compensation and benefit comparability with the Federal Reserve
    Board.^9 Although the Federal Reserve Board is under no obligation to seek
    to maintain compensation or benefit comparability with these or any of the
    other financial regulators, it has agreed to share compensation
    information with the other financial regulators.

    The other three agencies are subject to their own compensation
    comparability provisions. As required by its 1992 enabling legislation,
    OFHEO must maintain comparability with the compensation of employees from
    the Federal Reserve Board, OCC, FDIC, and OTS and consult with those
    agencies in that regard.^10 In 2002 legislation, SEC and CFTC were placed
    under comparability requirements. SEC must consult with and seek to
    maintain compensation comparability with FDIC, OCC, NCUA, FHFB, FCA, OTS
    and CFTC.^11 However, as shown in table 1, this legislation did not
    require these agencies to seek to maintain compensation comparability with
    SEC. Similarly, CFTC must consult and seek to maintain compensation
    comparability with the six FIRREA agencies, but those agencies are not
    required to seek to maintain compensation comparability with CFTC.^12

    ^8Pub. L. No. 101-73, section 1206, 103 Stat. 183, 523 (Aug. 9, 1989).

    ^9Sections 301, 702, 1202-3, and 1210 of Pub. L. No. 101-73.

    ^10Section 1315 of the Federal Housing Enterprises Financial Safety and Soundness Act of
    1992, Pub. L. No. 102-550, 106 Stat. 3941 (1992).

    ^11Section 8(a) of the Investor and Capital Markets Fee Relief Act, Pub. L. No. 107-123, 115
    Stat. 2390 (2002).

    ^12Section 10702(a) of the Farm Security and Rural Investment Act of 2002, Pub. L. No. 107-
    171, 116 Stat. 516 (2002).

    Table 1: Federal Financial Regulator Pay Comparability Legislative
    Provisions

                                   Comparability
                                     agencies
    Agency Comparability  Year of     FIRREA     CFTC Federal OFHEO SEC
            provisions   provision   agencies         Reserve

                                        FCA            Board            FDIC FHFB NCUA OCC OTS
    CFTC   Post-FIRREA   2002            x        x      x      x    x   x
    FCA    FIRREA        1989                     x      x      x    x   x         x
    FDIC   FIRREA        1989            x               x      x    x   x
    FHFB   FIRREA        1989            x        x             x    x   x         x
    NCUA   FIRREA        1989            x        x      x           x   x         x
    OCC    FIRREA        1989            x        x      x      x        x         x
    OFHEO  Post-FIRREA   1992                     x                  x   x         x
    OTS    FIRREA        1989            x        x      x      x    x             x
    SEC    Post-FIRREA   2002            x        x      x      x    x   x    x
    FRB    Not required
           but shares
           information
           with a number
           of agencies
           regarding
           compensation
           and benefits

    Source: GAO analysis of comparability legislative provisions.

    We previously identified key practices for effective performance
    management based on public sector organizations' experiences both here and
    abroad.^13 High-performing organizations seek to create pay, incentive,
    and reward systems that clearly link employee knowledge, skills, and
    contributions to organizational results. Performance-based systems reward
    employees according to their performance by using performance ratings as
    the basis for pay increases. Linking pay to performance can help to create
    a performance-oriented culture by providing monetary incentives to become
    a top- performing employee. At the same time, as a precondition to linking
    pay to performance, performance management systems need to provide
    adequate safeguards to ensure fairness and guard against abuse. Providing
    adequate safeguards that help to ensure transparency can improve the
    credibility of the performance-based pay system by promoting fairness and
    trust. Safeguards can include establishing clear criteria for making
    rating decisions and determining merit increases, and providing overall
    results of performance rating and pay increase decisions to all employees,
    while protecting confidentiality. Effective performance management systems
    also make meaningful distinctions between acceptable and outstanding
    performance of individuals and appropriately reward those who perform at
    the highest level. As we have previously reported, effective performance
    management systems can provide management with the objective and
    fact-based information it needs to reward top performance and provide the
    necessary information and documentation to deal with poor performers.^14

    ^13GAO-03-488.

    ^14GAO-04-614.

    Financial Regulators Generally Have Linked Pay to Performance and Made
    Distinctions in Performance, but Opportunities Exist for Improvements

    Overall, the federal financial regulators have implemented key practices
    for effective performance management systems in ways that consider the
    unique needs of their organizational cultures and structures, but some
    have not fully implemented certain practices. For purposes of this
    section, we focus on the regulators' implementation of the two key
    practices of (1) linking pay to performance (which includes building in
    safeguards), and (2) making meaningful distinctions in performance. First,
    we found that while the regulators generally linked pay to performance,
    two regulators awarded across-the-board increases to employees regardless
    of their performance. Second, while most regulators generally used
    safeguards in varying ways to increase transparency, one did not establish
    and communicate performance standards to its nonexecutives, which resulted
    in questions about how decisions were made and could compromise the
    credibility of the performance system. Third, many regulators did not
    fully implement the safeguard of providing overall ratings and pay results
    to all employees, which reduced the transparency of their
    performance-based pay systems. Fourth, we found that while most regulators
    used multiple rating levels to make meaningful distinctions in
    performance, employees were usually concentrated in one or two rating
    categories and all had very few poor performers. Finally, one agency did
    not complete performance ratings for senior officers due to lack of
    funding for pay increases, thereby missing an opportunity to provide
    valuable feedback. For information about the other four key practices as
    well as additional material pertaining to the linking pay to performance
    practice, see appendix III.^15

    Financial Regulators Generally Have Linked Pay to Performance, but Two
    Regulators Still Provided Increases to Performers at All Levels

    All of the regulators awarded some performance-based increases during the
    appraisal cycles we reviewed that were linked to employees' performance
    ratings, although two financial regulators also provided annual pay
    adjustments to employees, regardless of performance, during the appraisal
    cycles we reviewed. Specifically, CFTC provided an across-the-board pay
    increase to all employees to be equivalent to the cost of living
    adjustment received by General Schedule employees of the federal
    government in January 2006. During the 2005 appraisal cycle, SEC also
    provided all employees an across-the-board pay adjustment of 2.1 percent,
    regardless of their performance.^16 SEC officials noted that this
    across-the-board pay adjustment was in accordance with the negotiated
    compensation agreement with the union.^17 While the percentages of
    employees rated as unsuccessful or unacceptable at CFTC and SEC during
    those cycles were extremely small (less than 1 percent), these agencies
    lost opportunities to reinforce the linkage of pay to performance in their
    performance management systems. CFTC officials told us that the
    performance-based pay portion of the new performance management system
    that will begin on July 1, 2007, will require a minimum threshold
    performance rating for an
    employee to be eligible for a pay increase.^18 SEC and its union are
    currently negotiating implementation of a new Compensation and Benefits
    Agreement, which provides that employees rated as unacceptable will not
    receive annual pay adjustments. SEC officials acknowledged that a negative
    perception occurs when employees who are not performing satisfactorily
    receive a pay increase.

    ^15The other four practices are (1) align individual performance expectations with
    organizational goals, (2) connect performance expectations to crosscutting goals, (3) use
    competencies to provide a fuller assessment of performance, and (4) involve employees and
    stakeholders to gain ownership of performance management systems; the financial
    regulators have implemented these important practices in various ways.

    ^16SEC had two distinct performance appraisal cycles, one for senior officers and one for all
    other employees. The completed cycles we examined were as follows: for senior officers
    from October 2004 to September 2005; for all other employees from May 2005 to April 2006.

    ^17According to SEC officials, all employees received the annual across-the-board pay
    increase that all GS employees received.

    ^18During the completed performance appraisal cycle we reviewed for CFTC (July 1, 2005, to
    June 30, 2006), the agency operated under a performance management system in which the
    only increases directly linked to performance ratings were some performance bonuses. In
    October 2006, CFTC introduced a new performance management system directive that
    affects the performance planning and appraisal processes. The agency will introduce an
    accompanying new pay policy in July 2007 that will complete the transition to a
    performance-based pay system under which merit increases will be linked to performance
    ratings. The new system was developed by an agency committee with employee and union
    input and the final approved system took effect on October 1, 2006. (The American
    Federation of Government Employees union has chapters at CFTC�s Chicago and New York
    offices.) CFTC officials informed us that they do not plan to continue the annual pay
    adjustments in the new system, but will continue to use locality pay percentages equivalent
    to General Schedule executive order locality percentage increases.

    Most of the financial regulators used their rating systems to
    differentiate individual performance to award performance-based increases
    and reward top performers during the appraisal cycles we reviewed.
    Furthermore, all of the agencies also provided increases that, while not
    directly linked to performance ratings, considered employee performance in
    some way. These increases included special bonuses or awards given to
    individuals or teams for special accomplishments or contributions, as well
    as promotions and within-pay-band increases. For example, FCA provided
    Achievement or Special Act Awards to employees for significant
    achievements or innovations towards a special program, project, or
    assignment that contributed to the agency's or organizational unit's
    mission, goals, and objectives. To receive these awards, employees had to
    have performed their regular duties at least at a fully successful level
    of performance. FCA also provided some pay increases for competitive and
    noncompetitive promotions during the completed appraisal cycle we
    reviewed.

    Pay increases linked to performance ratings accounted for only part of the
    total increases awarded to individual employees during the appraisal
    cycles we reviewed. See appendix III for more information on the different
    ways in which the regulators translated performance ratings into pay
    increases and budgeted for performance-based increases, as well as more
    information on other pay increases that involved considerations of
    performance.

    Financial Regulators Generally Used Safeguards to Increase Transparency,
    but SEC Did Not Establish or Communicate Performance Standards for its
    Nonexecutive Employees

    All of the financial regulatory agencies have built safeguards into their
    performance management systems to enhance the credibility and fairness of
    their systems, although they varied in how safeguards have been
    implemented. For example, with the exception of SEC, the agencies have
    used the safeguard of establishing and communicating (1) standards for
    differentiating among performance rating categories and (2) criteria for
    performance-based pay decisions, thus enhancing transparency, which can
    improve employee confidence in the performance management system. (See
    app. III for information on the financial regulators' implementation of
    additional safeguards.)

    CFTC's four-level rating system (i.e., unsuccessful, successful, highly
    successful, and exemplary) defined the successful level of performance for
    areas that CFTC had identified as critical to employees' job performance,
    and included some information on how to distinguish variations from the
    successful level of performance. However, an employee representative at
    CFTC maintained that the rating level descriptions did not sufficiently
    communicate to employees the skills and behaviors employees needed to
    demonstrate in order to move, for example, from the "successful" to the
    "highly successful" level. Employee representatives stated that even
    though there was helpful guidance on distinguishing between levels of
    performance in a CFTC manual, these descriptions were hard to understand
    and most employees did not refer to the CFTC manual for guidance. An
    agency official told us that the revised performance management system
    that went into effect in October 2006 is a five-level system, and includes
    descriptions of all five performance levels rather than only the
    successful rating level described in the system it replaced.

    Similarly, OFHEO defined how employees would be rated on its five-level
    rating scale for each of the performance elements included in their
    performance plans. These performance standards defined the middle level of
    performance (fully successful), and included what the rater should look at
    to determine if an employee is performing better or worse than this
    benchmark. An employee's performance for each element was assessed and a
    total score was determined. OFHEO further distinguished between "high" and
    "low" levels within rating categories. For example, a rating of
    "outstanding" would be classified as being in either the high or low level
    of the outstanding rating category based on the performance score the
    employee received. Merit increases at OFHEO have been determined directly
    by employees' performance ratings, so employees could ascertain the merit
    increases they would receive for given performance ratings. For example,
    an employee rated "high" commendable receives a higher merit pay increase
    than one who is rated "low" commendable. OFHEO employee working group
    members noted that both supervisors and employees understand how the
    performance elements and standards have been applied through rating
    decisions, and they stated that employees generally understood what was
    expected of them to attain higher levels of performance and associated
    merit increases. However, an employee working group member also commented
    that when distinguishing between performance rating levels, some managers
    seemed to apply the performance standards more effectively than others,
    which could result in differences in how rating decisions were made.

    At FDIC, for nonexecutive/nonmanager employees to be eligible for
    performance-based pay increases, employees had to first earn a "meets
    expectations" rating. Then, in a second process called the "Pay for
    Performance" system, FDIC nonexecutive/nonmanagers were placed into one of
    four pay groups, based on an assessment of total performance and corporate
    contributions as compared with other employees in the same pay pool.^19
    The pay for performance program was essentially comparative, meaning that
    the contributions and performance of each employee were evaluated and
    rewarded on a relative basis within his or her pay pool, as compared to
    peers. According to union representatives, employees were not informed
    about how management made the distinctions in pay increase groupings.
    According to FDIC officials, there are no definitive descriptions or
    definitions of the performance levels for each of the three pay groups
    because employees are assessed compared to each other, not against fixed
    standards. Officials also said that information on the system for
    determining pay groups was provided to all employees in early 2006 after
    the compensation and benefits agreement became effective, when the system
    was first rolled out, and is explained to new employees at orientation. We
    did not determine how widespread the concern about how management made
    distinctions in pay increase groupings was among FDIC employees.

    In contrast, SEC officials did not establish standards upon which to base
    rating decisions for nonexecutive employees, nor did they communicate
    criteria used to make performance-based pay decisions to these employees.
    For its nonexecutive employees, SEC used a two-level rating system in
    which individuals' performance was rated as acceptable or unacceptable.
    According to agency management, SEC followed the definitions under Title 5
    that are used by the rest of the government for differentiating between
    acceptable and unacceptable performance.^20 However, SEC did not establish
    written performance standards for appraising employees' performance as
    acceptable or unacceptable.

    ^19In the collective bargaining agreement for years 2006-2009, pay group 1 will receive a 5
    percent pay increase and 1 percent lump sum payment, pay group 2 will receive a 3.2
    percent pay increase and 1 percent lump sum, and pay group 3 will receive a 2.4 percent pay
    increase. Pay group 4, containing individuals who did not receive a �meets expectations�
    rating in the first appraisal process, will receive no increase.

    To determine performance-based pay increase amounts for nonexecutive
    employees, SEC developed a second phase process that involved making
    distinctions in contributions for those individuals who received a summary
    performance rating of acceptable. As part of the second phase, employees
    and their supervisors submitted contribution statements summarizing the
    employees' accomplishments during the appraisal cycle. Using the summary
    statements and the supervisors' own assessments, supervisors placed
    employees into one of four categories: (1) made contributions of the
    highest quality, (2) made contributions of high quality, (3) made
    contributions of quality, and (4) made no significant contribution beyond
    an acceptable level of performance. Next, a compensation committee within
    each office or division evaluated the contribution statements and the
    supervisors' placements. For each employee, the committee recommended a
    merit pay increase ranging from zero to 4.41 percent (corresponding to
    "steps" 0 to 3) to an official from each office or division, who made the
    final determination of the employee's merit increase.^21

    However, SEC did not develop criteria to differentiate between the four
    contribution categories that the compensation committees considered when
    recommending merit pay step increase amounts. In addition, SEC employee
    representatives told us that it was not clear to employees how the
    contribution statements and the subsequent supervisory recommendations
    were translated into the decisions about the four contribution categories
    into which employees would be placed. SEC officials noted that employees
    received copies of narratives written by their supervisors to describe the
    employees' contributions; however, they acknowledged that the system could
    be more transparent. According to SEC officials, in an effort to increase
    transparency in the future, they plan to share with employees information
    on supervisors' preliminary recommendations on ratings that are provided
    to the compensation committee, so that employees can see into which of the
    four contribution categories they were recommended for placement and the
    supporting documentation. If the committee changes an initial
    recommendation from a supervisor, SEC will provide the employee with the
    rationale for the change. An agency official indicated they are developing
    broad statements, such as "the committee had a broader perspective of
    employee contributions," that address a range of possible reasons for
    changes.

    ^20Section 4301 of Title 5 of the U.S. Code defines unacceptable performance as failure to
    meet established performance standards in one or more critical performance elements.

    ^21SEC used �steps� to indicate performance-based pay increases. Zero steps meant no
    increase, one step corresponded to an increase of 1.47 percent, two steps to an increase of
    2.94 percent, and three steps to an increase of 4.41 percent.

    Some Financial Regulators Did Not Fully Implement the Safeguard of
    Providing Overall Ratings and Pay Increase Results to All Employees, Which
    Would Increase Transparency in Their Performance-Based Pay Systems

    The extent to which the financial regulators shared the overall results of
    performance ratings and pay increase decisions with all employees varied,
    and some agencies did not make this information widely available to
    employees. We have previously reported that the safeguard of communicating
    the overall results of performance appraisal and pay increase decisions
    while protecting individual confidentiality can improve transparency by
    letting employees know where they stand in the organization.^22 An
    employee's summary performance rating conveys information about how well
    an employee has performed against established performance standards, which
    is important, but not sufficient to provide a clear picture of how the
    employee's performance compares with that of other employees within the
    organization. When the organization communicates where an employee stands,
    management can gain credibility by having honestly disclosed to the
    employee the basis for making pay, promotion, or developmental opportunity
    decisions that may have been based upon relative performance.

    The Federal Reserve Board communicated the overall results of the
    performance appraisal decisions to all employees by sharing annual
    performance rating distributions with all employees, disaggregated by
    division. Since this system for determining the amounts of
    performance-based increases for individuals based on their performance
    ratings is essentially driven by formula, employees know what their merit
    increases will be relative to others after receiving their performance
    ratings.

    ^22GAO-06-142T and GAO-04-614.

    At FDIC, the distribution of pay group assignments for all nonexecutive/
    nonmanager employees who passed the first assessment process is fixed by
    the negotiated agreement with the union, so those employees know how
    performance-based pay increases will be distributed and the amounts of
    increases received by the various pay groups. Further, FDIC officials told
    us that, in accordance with the collective bargaining agreement, after
    completion of each annual pay for performance cycle they share data on the
    results of the pay grouping decisions for employees covered by the
    bargaining unit contract with union representatives. These include summary
    pay group data analyzed according to the agreement with the union, such as
    certain demographic data and individual rating information.

    According to an agency official, OCC began to post some limited
    information on the average size of some performance-based pay increases on
    the agency intranet in November 2006. The information included the
    average, agencywide percentage increases for merit increases, merit
    bonuses, and special act and spot awards, as well as the percentage of
    employees receiving the increases.

    During the performance appraisal cycle we reviewed, OTS shared with union
    representatives some data on average pay increases. The agency did not
    share ratings distribution data with the union, and did not make either
    performance-based pay increase or rating results information available to
    all employees. However, in November 2006, OTS distributed to all employees
    information for the recently completed appraisal cycle on the percentage
    of employees who received each performance rating level and the average
    pay increase percentages to be received by people at each level. The
    information was disaggregated by regions and Washington, D.C.

    While SEC did not make the results of performance rating decisions
    available to all employees, officials said that they reported information
    on performance awards (bonuses) to the union and that, under
    implementation of the compensation and benefits agreement currently being
    negotiated, they plan to publish aggregated information on performance
    ratings under the planned new performance management system for
    nonexecutive employees. SEC officials also told us that they plan to
    provide information at the lowest possible organizational level while
    still protecting individual confidentiality.

    The remaining five financial regulators did not share overall data on
    ratings or performance increases widely with all employees, although in
    some cases some information was shared with managers. The following
    outlines how information was shared:

    oCFTC shared information on the results of ratings and award decisions
    with managers on a Pay Parity Governance Committee, but not with all
    employees, for the appraisal cycle we reviewed. CFTC officials told us
    that there is no prohibition against sharing this type of information
    under the new performance management system directive, and they are aware
    that there is some interest among employees in receiving it. They said
    that the pay parity committee will determine whether there is value in
    releasing this information to all employees in the future.

    oAt FHFB, an official told us that office directors see all the ratings
    within their offices and make the decisions about the performance-based
    pay increases for employees, but this information is not shared across
    offices or with all employees. However, the director of the Office of
    Supervision, FHFB's largest office, has shared information with all staff
    in the office on the ranges of pay increases corresponding to different
    performance rating levels and base salary levels that were received by
    staff within the office for a given year, as well as the standards used to
    assign the merit increase amounts.

    oOfficials at OFHEO told us that just last year they started sharing
    information on the results of ratings and pay increase decisions with
    management, but that they have not yet shared this type of information
    with all employees.

    oFCA officials told us that they do not share aggregate results of the
    performance rating and pay increase decisions with all employees. They
    explained that, under a previous administration, in early 2000, an
    executive summary was prepared and posted that all employees could
    potentially access, which contained information on the results of ratings
    and pay increases. However, this information was not broadly disseminated
    directly to employees.

    oNCUA shares information on the results of the merit pay decisions with
    directors, but not with all employees. An NCUA official told us that it is
    up to the directors to decide whether or not to share this information
    with their staff. In comments on the draft report, NCUA explained that
    this is one of the issues involved in its current negotiations over pay
    and benefits with the National Treasury Employees Union, and that the
    agency's proposal to the union does provide for this type of transparency.

    Agencies provided a variety of reasons for not sharing overall ratings and
    pay increase information more widely. Officials from FHFB and FCA told us
    that the relatively small size of their agencies, 122 and 248 employees,
    respectively, makes it harder to share this type of information while
    protecting individual confidentiality and that an FHFB official was not
    aware of employee demand for this type of information. FCA officials also
    mentioned that the emphasis in their performance management system is on
    rating individual employees against the standards, not against other
    employees and they wanted employees to focus on their individual ratings
    and performance. According to union representatives at OCC, the union has
    made multiple requests for data on the results of the performance rating
    and pay increase decisions but management has declined to share
    information that would enable the union to, in their words, perform a
    meaningful independent analysis of the ratings and pay increase decisions.
    OCC officials told us that they prefer not to share with employees
    disaggregated information on ratings and pay increase distributions
    because organizational units administer the process differently. For
    example, the percentages of individuals rated at the highest level (4) and
    next highest level (3) vary from unit to unit. Because units receive fixed
    pools of funds for performance-based increases, the average size of a
    merit increase that an employee receiving a level 4 may receive can vary
    from unit to unit, depending on how many individuals receive the highest
    rating.^23 OCC officials told us that sharing information on average merit
    increases by unit with employees, without sufficient context of the
    factors considered when making these decisions, including more detailed
    rating information (which is privacy protected), could lead to
    misinterpretation of the data.

    However, not sharing information on the results of the performance rating
    and pay increase decisions processes can detract from the goal of a
    transparent and fair performance management system. This information needs
    to be presented in ways that protect individual confidentiality, such as
    by aggregating it. Without access to this type of information, individual
    employees can lose a valuable opportunity to understand how their
    performance stands relative to others in their organization. In cases
    where agencies negotiate agreements with unions, an important
    consideration is to reach agreement to share aggregate results of the
    rating and pay increase decisions with employees, while protecting
    individual confidentiality.

    ^23See appendix III for a discussion of different ways in which agencies budgeted for
    performance-based increases, including use of funding pools.

    While Financial Regulators Generally Used Multiple Rating Levels to Make
    Meaningful Distinctions in Performance, Employees at Most Agencies Were
    Concentrated in One or Two Rating Categories, with Very Few Poor
    Performers

    While most of the financial regulatory agencies used multiple rating
    levels to assess employee performance and make distinctions in
    performance, at most agencies employees were concentrated in one or two
    rating categories and very few received poor performance ratings. By using
    multiple-level rating systems, agencies have the capability to make
    meaningful distinctions in performance. Effective performance management
    systems make meaningful distinctions between acceptable and outstanding
    performance of individuals and appropriately reward those who perform at
    the highest level. As we have previously reported, performance management
    systems can provide management with the objective and fact-based
    information it needs to reward top performers and provide the necessary
    information and documentation to deal with poor performers.^24 More
    specifically, using multiple rating levels provides a useful framework for
    making distinctions in performance by allowing an agency to differentiate,
    at a minimum, between poor, acceptable, and outstanding performance. We
    have reported that two-level rating systems by definition will generally
    not provide meaningful distinctions in performance ratings, with possible
    exceptions for employees in entry-level or developmental bands.^25

    Eight agencies used four or more rating levels. For example, as described
    earlier, OFHEO used a five-level rating category system to appraise
    employee performance and contributions toward achieving agency goals, and
    further distinguished between high and low performance scores within
    rating categories. As shown in figure 1, at the eight agencies with four-
    or five-level rating systems, the largest percentage of employees fell
    into the second highest rating category, except at OFHEO and the Federal
    Reserve Board. At OFHEO, more than half of the employees were placed into
    the high or low levels of the top rating category. Conversely, at the
    Federal Reserve Board (excluding economists), almost half of the employees
    fell into the third highest or middle (commendable) rating category.
    Across the eight agencies shown in figure 1, the percentage of employees
    who fell into the highest rating category varied from 10.6 percent for
    economists at the Federal Reserve Board, to 55 percent of employees at
    OFHEO.

    ^24GAO-03-488.

    ^25GAO-06-142T.

    Figure 1: Percentage of Regulatory Employees by Rating Level for Systems
    with Multiple Rating Levels, for Completed Appraisal Cycles Specified

    Note: The dates of the performance appraisal cycles varied across
    agencies, as indicated in this figure and in table 3, appendix I. SEC had
    two distinct cycles affecting two different groups of employees.

    ^aOFHEO distinguished between "high" and "low" level performance scores
    within rating categories. The percentage values shown in the graphic
    include employees with scores at both the high and low levels within
    categories. For example, the percentage value shown in the graphic for the
    "Outstanding" rating category includes those employees rated as high-level
    outstanding and low-level outstanding combined. According to OFHEO
    officials, about 32 percent of employees fell into the low-level
    outstanding category.

    ^bThe new CFTC performance management system that went into effect in
    October 2006 has five rating levels.

    SEC and FDIC used two-level rating systems (essentially pass/fail systems)
    to appraise the performance of certain groups of employees. Although
    two-level rating systems by definition will not provide meaningful
    distinctions in performance ratings, both SEC and FDIC used a second
    process to determine performance-based pay increases and effectively make
    more meaningful performance distinctions. As figure 2 shows, the highest
    percentage of employees at FDIC fell into the second highest of four
    categories, in keeping with the fixed percentages included in the
    negotiated agreement with the union. At SEC, the largest percentage of
    employees fell into the third highest of four rating categories.

    Figure 2: Percentage of Regulatory Employees by Rating Level and Merit
    Increase Category for Agencies with Pass/Fail Performance Rating Systems,
    for Completed Appraisal Cycles Specified

    Note: At SEC, senior officers were not rated during this rating cycle
    because, according to officials, the agency did not have the budget to
    fund any merit increases. SK employees at SEC include all employees other
    than senior officers.

    As shown in figures 1 and 2, the percentage of employees rated as poor
    performers at each agency was very small during the completed performance
    appraisal cycles we reviewed. Employees rated at below the successful and
    meets expectations rating levels accounted for less than 3 percent of
    employees across the agencies.^26 OTS had zero employees in the bottom two
    rating categories combined--all OTS employees received fully successful or
    higher ratings. Similarly at NCUA, no executives and 2.1 percent of
    nonexecutives were rated below minimally successful.

    While the financial regulators rated very few employees as poor
    performers, all of the agencies have established procedures to deal with
    poor performers. When an employee does not perform up to a threshold
    standard for satisfactory performance, most agencies place the employee on
    a performance improvement plan or provide counseling for the employee, and
    the employee does not receive a performance-based increase at the end of
    the performance cycle. For example, OTS has addressed poor performance by
    working with the employee to improve his or her area of deficiency. An
    employee who receives a rating at the unacceptable level is placed on a
    performance improvement plan for a minimum of 90 days. Specifically, OTS
    policy advises supervisors to develop a performance improvement plan by
    identifying the performance areas in which the employee is deficient and
    the types of improvements, including specific work products and steps to
    be followed which the employee must complete to attain the fully
    successful performance level. In addition, according to OTS policy, the
    agency may provide the employee with closer supervision, or on-the-job or
    formal training.

    However, governmentwide, 29.7 percent of employees indicated in the 2006
    Office of Personnel Management (OPM) Federal Human Capital Survey that
    they agreed or strongly agreed that differences in performance within the
    work unit were recognized in a meaningful way. Positive responses to this
    question for the eight financial regulators who participated in the survey
    ranged from 24.9 percent for CFTC to 41.6 percent for OCC. None of these
    agencies had a majority of their employees provide positive responses to
    this question, and only three of the eight agencies had more than one
    third of their employees provide positive responses to this question.

    ^26Rating levels at the agencies that accounted for less than 3 percent of employees included
    the following categories: �unacceptable,� �unsatisfactory,� �unsuccessful,� �minimally
    acceptable,� �minimally successful,� �marginal,� and �does not meet expectations.�

    SEC Did Not Complete Performance Ratings for Senior Officers, Missing an
    Opportunity to Provide Valuable Feedback

    While it may have been an isolated incident, for senior officers, SEC
    effectively did not make distinctions in rating their performance during
    the appraisal cycle we reviewed because the agency did not complete
    performance ratings for them in 2005. According to SEC officials, no funds
    were available for performance-based bonuses (which are normally dependent
    on performance ratings) during that assessment cycle. As a result,
    divisions performed assessments of senior officers, but the assessment
    process was not completed and their ratings were not signed by the
    Chairman for the October 1, 2004, to September 30, 2005, performance
    appraisal cycle. A recent SEC Inspector General report confirmed that
    senior officers in SEC's Enforcement Division did not prepare performance
    review documents for the performance cycle that ended on September 30,
    2005, and recommended that required steps of the senior officer
    performance appraisal process be conducted in accordance with Commission
    policy, even when merit increases are not awarded.^27 All senior officers
    received annual across-the-board salary increases during that cycle.
    Conducting performance appraisals and making distinctions in performance
    are important not only for determining performance-based pay increases,
    but for providing feedback to help employees improve their performance and
    assess how their work contributed to achieving organizational goals. By
    not appraising their performance, SEC missed an opportunity to provide
    valuable feedback to senior officers.

    Agencies Have Taken Various Actions to Seek to Maintain Pay and Benefits
    Comparability

    Financial regulators have hired external compensation consultants to
    conduct individual, formal comparability surveys, exchanged pay and
    benefits information, explored the feasibility of conducting a common
    survey, and adjusted pay and benefits to seek to maintain pay and benefits
    comparability. The majority of the financial regulators conducted pay
    comparability surveys that have included other financial regulators and in
    some instances, private-sector entities. To compare pay across agencies,
    consultants send questionnaires on behalf of the sponsoring agency and ask
    participating agencies to match the jobs based on the job descriptions
    provided. To compare benefits, consultants use various methods, such as
    side-by-side comparisons of benefits and calculation of total cost of
    benefits per employee. In addition to these surveys, human capital
    officials at the 10 financial regulators have formed an interagency group
    to exchange information and consult on topics such as updates on merit pay
    ranges and bonuses. However, agency officials told us that because many of
    the financial regulators conduct separate comparability surveys, their
    staffs have to respond to numerous and often overlapping inquiries, which
    can be inefficient. To begin addressing the inefficiencies of this
    process, the agencies formed a subcommittee in December 2006 to study the
    feasibility of conducting a common survey on pay and benefits. According
    to agency officials, the subcommittee also has discussed the feasibility
    of establishing a Web-based data system to make the most current pay and
    benefits information available to participating agencies.

    ^27Securities and Exchange Commission, Office of the Inspector General, Enforcement
    Performance Management, Audit Report No. 423 (Feb. 8, 2007).

    In the absence of a legislative definition of what constitutes
    comparability, agency officials told us that they use various methods to
    assess pay and benefits comparability after they have obtained relevant
    data from the other agencies. For example, FDIC has sought to set its
    total pay ranges (base pay plus locality pay) for specific occupations and
    grade levels within 10 percent of the average of FIRREA agencies. FCA used
    the average market rate paid by other financial regulators as a benchmark.
    Finally, partly on the basis of the results of the comparability surveys
    and discussions among the agencies, the financial regulators have adjusted
    their pay and benefits policies in their efforts to seek to maintain
    comparability. For example, as a result of gaining pay flexibilities, CFTC
    implemented new pay ranges for its 2003 pay schedule, and increased base
    pay by 20 percent for all eligible employees to partially close the 25
    percent gap between CFTC and FIRREA agencies. Appendix IV provides
    additional information on our analysis of individual agency actions.

    While the regulators have taken actions to seek to maintain comparability
    in their pay and benefits, there are some variations in base pay ranges
    and benefit packages among the agencies. Figure 3 shows the base pay
    ranges (minimum and maximum) for the mission-critical occupations,
    excluding executives at the 10 agencies.^28 As shown in the same figure,
    the actual average base pay among the 10 agencies also varies somewhat in
    relation to the agencies' respective base pay ranges, which according to
    agency officials, could be affected by the average length of service of
    employees, and the fact that some agencies tend to hire employees at
    certain grade levels.

    ^28See appendix I for our criteria for selecting mission-critical occupations in our study. We
    excluded executives from the analysis of average actual pay and pay scale. In addition, with
    the exception of the Federal Reserve Board and OFHEO, which do not have separate base
    and locality pay, the base pay shown in figure 3 does not include locality pay percentages.

    Figure 3: Nonexecutive Minimum and Maximum Pay Ranges and Average Actual
    Pay for Mission-Critical Occupations by Regulator, 2006

    ^aThe figure shows the minimum pay of the lowest level and the maximum pay
    of the highest level of an occupation for which agencies have an
    established occupation. Agencies may not currently have incumbents in each
    level of the occupation. The base pay ranges exclude locality pay except
    for the Federal Reserve Board and OFHEO.

    ^bThe actual average base pay data in CPDF did not segregate CFTC's
    examiners and investigators or OFHEO's examiners and financial analysts
    because these occupations are assigned the same OPM job series number.
    Therefore, we did not separately present the actual average pay for these
    four occupations at the two agencies. The combined actual average pay for
    examiners and investigators is $83,501 at CFTC; and $131,294 for examiners
    and financial analysts at OFHEO.

    ^cThe base pay ranges shown for the Federal Reserve Board and OFHEO
    reflect the agencies' total pay ranges because Washington D.C., is the
    agencies' only duty station.

    ^dThe actual average base pay data are provided by the Federal Reserve
    Board because CPDF does not contain data for the Board.

    Because each financial regulator sets its own locality pay percentage
    based on its respective policies, locality pay percentages often differ
    from those that OPM sets for General Schedule employees (with the
    exception of CFTC) and vary among agencies for the same duty station. For
    example, in New York City, the OPM locality pay percentage is 22.97
    percent but the regulators' locality pay percentages range from 21.19 at
    FDIC and FHFB to 33.20 percent at OTS. Table 2 shows the locality pay
    percentages for OPM and for the eight financial regulators that have
    locality pay percentages for selected cities.

    Table 2: Selected OPM Locality Pay Percentages Compared to Financial
    Regulators' Locality Pay Percentages, Fiscal Year 2006

           Locality        OPM  CFTC   OCC   OTS  FDIC     FCA  FHFB  NCUA    SEC
    Atlanta, Ga.     15.10%   N/A   N/A 6.50% 7.43%     N/A 7.43% 8.06% 11.13%
    Boston, Mass.     19.99   N/A 13.00 17.50 22.67     N/A 22.67 18.55  24.29
                                                    ^a
    Chicago, Ill.     21.15 21.15  8.00 11.20 16.20     N/A 16.20 22.26  21.62
    Dallas, Tex.      16.39   N/A  3.00   N/A  9.20    6.50  9.20 11.25  12.92
    Denver, Colo.     19.49   N/A  8.00  2.30   N/A   10.50   N/A 18.27  17.72
    Los Angeles,      23.18   N/A 18.00 18.10 19.28     N/A   N/A 25.70  24.35
    Calif.
    Miami, Fla.       17.84   N/A  3.00  6.80 11.33     N/A   N/A 15.97  15.02
                                                    ^b
    Minneapolis,      17.31 17.31  3.00  7.30 11.76  8.20^c   N/A 13.23    N/A
    Minn.
    New York City,    22.97 22.97 23.00 33.20 21.19     N/A 21.19 23.61  24.92
    N.Y.
    San Francisco,    28.68   N/A 28.00 46.70 32.41     N/A 32.41 36.43  25.14
    Calif.
    Seattle, Wash.    17.93   N/A  8.00 15.80 13.93     N/A 13.93 14.52    N/A
    Washington, D.C.  17.50 17.50  8.00 25.90 13.30 15.20^d 16.30 12.87  17.50

    Source: GAO analysis of agency data.

    Note: Washington D.C. is the Federal Reserve Board's and OFHEO's only duty
    station, thus the agencies do not have separate locality pay percentages.
    For the other agencies, N/A indicates localities where they had no office.

    ^a Locality includes Braintree, Mass.

    ^b Locality includes Sunrise, Fla.

    ^c Locality includes Bloomington, Minn.

    ^d Locality includes McLean, Va.

    The benefits that the 10 financial regulators offered also varied, which
    we discuss in detail in appendix IV. For example, half of the regulators
    offer their employees 401(k) retirement savings plans with varying
    employer contributions in addition to offering the governmentwide Federal
    Thrift Saving Plan (except for the Federal Reserve Board). According to
    agency officials, factors such as the year an agency first became subject
    to comparability provisions, budget constraints, the needs and preferences
    of different workforces, and ways to attract and retain workforces play a
    role in compensation decisions and contribute to the variations in pay
    ranges and benefits. Moreover, agency officials emphasized that it was not
    their goal to have identical pay and benefits packages; rather, they
    considered pay and benefits as a total package when seeking to maintain
    pay and benefits comparability and when setting pay policies aimed at
    recruiting and retaining employees.

    Few Employees Have Moved among the Financial Regulators, Most Resigned
    from Federal Employment

    While the total number of financial regulatory employees resigning from
    federal employment between fiscal years 1990 and 2006 generally declined,
    there was no clear trend among the number who moved to another financial
    regulator. As shown in figure 4, the number of employees leaving one
    federal regulator for another declined from the previous fiscal year in 10
    of the 16 years and increased from the previous fiscal year in the other 6
    years. Figure 4 also shows the percentage of financial regulatory
    employees who went to another financial regulator, went to other federal
    agencies, and resigned from federal employment, and the total number of
    financial regulatory employees during this period. Of all the employees
    who left their financial regulatory agency voluntarily (moved to another
    financial regulator or executive branch agency, or resigned) from fiscal
    year 1990 through fiscal year 2006, the vast majority--86 percent
    (13,433)--of the 15,627 employees leaving the regulators voluntarily
    (i.e., moved or resigned), resigned from the federal government. The
    number of employees who moved to another financial regulator ranged from a
    low of 16 of 1,362 who moved or resigned in fiscal year 1997 to a high of
    97 of 1,229 who moved or resigned in fiscal year 1991. The total number of
    financial regulator employees was 15,400 and 19,796 during those 2 years,
    respectively.^29 Similar lows were also experienced in 1996 and 2003. Some
    agency officials told us that they believe that the FIRREA comparability
    provision and similar provisions in subsequent laws applicable to
    financial regulators have been effective in ensuring that regulators' pay
    and benefits are generally comparable among the 10 agencies, which
    probably helps minimize employee movement among financial regulatory
    agencies. Of the financial regulator employees who moved or resigned, the
    percentage of those who resigned from federal employment fluctuated
    slightly over the period, ranging from a low of 73.7 percent in fiscal
    year 2003 to a high of 94.8 percent in fiscal year 1996.

    ^29The analysis of employee movement does not include data for the Federal Reserve Board,
    because the CPDF does not include data for the agency.

    Figure 4: Attrition among Financial Regulators, Fiscal Years 1990-2006

    Note: This figure does not include data for the Federal Reserve Board.

    The movement of mission-critical employees among financial regulators also
    did not reveal a discernible trend. For the number of employees who moved
    to another financial regulator from fiscal year 1990 through fiscal year
    2006, see table 10 in appendix V. The numbers ranged from no movement for
    7 of the 11 occupational categories (accountants, auditors, business
    specialists, economists, financial analysts, investigators, and
    information technology (IT) specialists) in at least 1 of the fiscal years
    we reviewed to a high of 37 employees (38.1 percent of all those who moved
    that fiscal year) for the "all other" occupational category in fiscal year
    1991.^30 During this period (fiscal years 1990 to 2006), some occupational
    categories experienced very little movement. For example, fewer
    accountants, auditors, business specialists, and investigators moved than
    employees in the other categories. In contrast, examiners had the largest
    number of employees moving among financial regulators in 8 of the 17
    years, including the 3 most recent years for which data were available.
    The average number of employees in mission-critical occupations moving
    among the 9 financial regulators from fiscal year 1990 through fiscal year
    2006 ranged from 0.1 for investigators to 11.7 for examiners. See appendix
    V for additional data on employee movement.

    For those employees that did not move to another financial regulator, we
    could not determine in all cases where the employees moved because CPDF,
    the most complete data set available with federal employment information,
    does not include information on employment outside executive branch
    agencies. We were able to identify those employees that went to another
    federal agency. These numbers ranged from a low of 48 in fiscal year 1994
    to a high of 128 in fiscal year 1991, higher than the number of employees
    who moved to another financial regulator, which was 23 in fiscal year 1994
    and 97 in fiscal year 1991. Officials from the 9 agencies told us that
    they do not track the employment of their employees after the employees
    leave their agencies. Further, they said that their employees generally
    sought employment outside the federal government, including the private
    sector and state and local government, but that their main competitors
    were private-sector entities.

    ^30The �all other� category combines specialists in occupations such as human resources
    management, administration, clerical, management and program analysis, financial
    administration, and paralegal work. The three occupational categories with employee
    movement were attorney, examiner, and supervisor.

    Conclusions

    Like other federal agencies, the experiences of the financial regulators
    illustrate the challenges inherent in establishing well-functioning,
    performance-based pay systems and that these systems are works in progress
    that are constantly evolving. These regulators have taken various
    approaches to revise their performance management systems and introduce
    performance-based pay. Although the regulators have incorporated many of
    the key practices for effective performance management systems,
    opportunities exist for a number of them to make improvements as they
    continue to refine their systems. Specifically, some regulators have
    opportunities in the areas of strengthening safeguards to enhance
    transparency and fairness and making meaningful distinctions in
    performance. As some regulators develop new systems or revise their
    existing systems, they have an opportunity to build in aspects of the key
    practices, such as improving transparency by communicating the overall
    results of performance appraisal rating and performance-based pay increase
    decisions to all employees to help employees understand how they performed
    relative to other employees in their organization, while protecting
    individual confidentiality. For regulators that negotiate with unions,
    there are also opportunities to work together to accomplish this.

    SEC has some additional opportunities to pursue improvements in specific
    aspects of its performance management system, which it is in the process
    of revamping. For example, SEC can establish and communicate to
    nonexecutive employees using the new system clear criteria for making
    performance rating and pay increase decisions. Finally, while it may have
    been an isolated incident, by not completing performance assessments of
    senior officers in the 2005 performance appraisal cycle we reviewed, SEC
    missed an opportunity for two-way feedback and assessments of individual
    and organizational progress toward organizational goals. While funding
    circumstances specific to that appraisal cycle contributed to this
    situation, in the future it will be important to complete assessments
    regardless of the availability of funding for increases.

    The agencies have taken a variety of actions in seeking to maintain pay
    and benefits comparability. While we did find some variation in base pay
    ranges, locality pay percentages, actual average pay, and benefits among
    the agencies, we found that a number of reasons could contribute to the
    variation, including the following: regulators were granted flexibility
    under Title V and subject to comparability requirements at varying times,
    pay and benefits are considered comprehensively in seeking comparability,
    the average length of service of employees, and where employees are
    located. While pay and benefits comparability cannot be precisely
    determined, all the agencies are working to maintain comparability in pay
    and benefits. One recent initiative--studying the feasibility of
    conducting a common survey on pay and benefits--should help to increase
    the efficiency of this effort. In addition, given the relatively small
    amount of employee movement among federal regulators, the variation in
    pay, benefits, and locality pay percentages in some locations across the
    regulators does not appear to be encouraging large numbers of employees to
    move among financial regulators. This may be an indication that the
    comparability provisions of FIRREA and other pertinent legislation have
    been working as intended. Moreover, from fiscal years 1990 through 2006,
    the agencies' attrition rates have trended downward indicating that a
    smaller percentage of employees were leaving.

    Recommendations for Executive Action

    The Chairman of the Board and Chief Executive Officer of the Farm Credit
    Administration, the Chairman of the Federal Housing Finance Board, and the
    Director of the Office of Federal Housing Enterprise Oversight should

    ocommunicate the overall results of the performance appraisal and pay
    increase decisions to all employees agencywide while protecting individual
    confidentiality.

    The Chairman of the National Credit Union Administration and the Chairman
    of the Commodity Futures Trading Commission should

    owork with unions to communicate the overall results of the performance
    appraisal and pay increase decisions to all employees agencywide while
    protecting individual confidentiality.

    The Chairman of the Securities and Exchange Commission should

    ocommunicate clearly the criteria for making performance rating and pay
    increase decisions to nonexecutive employees

    owork with the union to communicate the overall results of the performance
    appraisal and pay increase decisions to all employees agencywide while
    protecting individual confidentiality and

    oassess senior executives' performance at the end of the performance
    appraisal cycle regardless of the amount of funding available for
    performance-based pay increases.

    Agency Comments and Our Evaluation

    We provided drafts of this report to the Chairman, Commodity Futures
    Trading Commission; Chairman of the Board and Chief Executive Officer,
    Farm Credit Administration; Chairman, Federal Deposit Insurance
    Corporation; Chairman, Federal Housing Finance Board; Chairman, Board of
    Governors of the Federal Reserve System; Chairman, National Credit Union
    Administration; Comptroller of the Currency, Office of the Comptroller of
    the Currency; Director, Office of Federal Housing Enterprise Oversight;
    Director, Office of Thrift Supervision; and Chairman, Securities and
    Exchange Commission; for review and comment.

    We received written comments from six of the agencies. See appendixes VI,
    VII, VIII, IX, X, and XI for letters received from CFTC, the Federal
    Reserve Board, FHFB, NCUA, OFHEO, and SEC. These six, along with the other
    four agencies, also provided clarifying and technical comments, which we
    incorporated as appropriate.

    The agencies generally agreed with our recommendations. With respect to
    the recommendation to communicate the overall results of the performance
    appraisal and pay increase decisions on an agency-wide basis, CFTC, FCA,
    FHFB, NCUA, OFHEO, and SEC indicated that they plan to implement the
    recommendation. In describing specific actions, the executive director of
    CFTC explained that the agency has already discussed working with the
    unions to communicate overall results of performance appraisal and pay
    decisions across the agency as part of the development of their new
    performance management and pay-for-performance systems. The Chief Human
    Capital Officer of FCA stated that the agency plans to communicate the
    overall results of the 2006 performance appraisal and 2007 pay increase
    decisions to FCA employees by the end of June 2007. The Executive Director
    of NCUA explained that sharing overall information on ratings and pay
    increase decisions with all employees is one of the issues being
    negotiated as part of the ongoing negotiations over pay and benefits with
    the National Treasury Employees Union, and stated that the agency's
    proposal to the union provides for this type of transparency. The
    Executive Director of SEC agreed with the report findings and stated that
    SEC has established a new branch within the Office of Human Resources to
    oversee performance-related issues and has launched a new pilot
    performance management system that will address the recommendations.
    Finally, the Acting Director of FHFB and the Chief Human Capital Officer
    of OFHEO also stated that their respective agencies will implement the
    recommendation.

    We will send copies of this report to the appropriate congressional
    committees; the Chairman, Commodity Futures Trading Commission; Chairman
    of the Board and Chief Executive Officer, Farm Credit Administration;
    Chairman, Federal Deposit Insurance Corporation; Chairman, Federal Housing
    Finance Board; Chairman, Board of Governors of the Federal Reserve System;
    Chairman, National Credit Union Administration; Comptroller of the
    Currency, Office of the Comptroller of the Currency; Director, Office of
    Federal Housing Enterprise Oversight; Director, Office of Thrift
    Supervision; Chairman, Securities and Exchange Commission; and other
    interested parties. We will make copies available to others upon request.
    The report will also be available at no charge on our Web site at h
    ttp://www.gao.gov.

    If you or your staff have any questions regarding this report, please
    contact Orice M. Williams at (202) 512-8678 or williamso@gao.gov or
    Brenda Farrell at (202)512-5140 or farrellb@gao.gov . Contact
    points for our Offices of Congressional Relations and Public Affairs may
    be found on the last page of this report. GAO staff who made major
    contributions to this report are listed in appendix XII.

    Orice M. Williams, Director
    Financial Markets and Community Investment

    Brenda Farrell, Acting Director
    Strategic Issues

    List of Congressional Requesters

    The Honorable Barney Frank
    Chairman
    The Honorable Spencer Bachus
    Ranking Member
    Committee on Financial Services
    House of Representatives

    The Honorable Luis V. Gutierrez
    Chairman
    Subcommittee on Domestic and International Monetary Policy, Trade,
    and Technology
    Committee on Financial Services
    House of Representatives

    The Honorable Paul E. Kanjorski
    Chairman
    Subcommittee on Capital Markets, Insurance, and Government
    Sponsored Enterprises
    Committee on Financial Services
    House of Representatives

    The Honorable Bernard Sanders
    United States Senate

    Appendix I:  Objectives, Scope, and Methodology

    The objectives of this report were to (1) review how the performance-based
    pay systems of 10 federal financial regulatory agencies are aligned with
    six key practices for effective performance management systems, (2) review
    actions these 10 agencies have taken to assess and implement comparability
    in compensation, and (3) review the extent to which individuals in
    selected occupations have moved between or left any of the agencies. These
    agencies are the Commodity Futures Trading Commission (CFTC), the Farm
    Credit Administration (FCA), the Federal Deposit Insurance Corporation
    (FDIC), the Federal Housing Finance Board (FHFB), the Board of Governors
    of the Federal Reserve System (the Federal Reserve Board), the National
    Credit Union Administration (NCUA), the Office of the Comptroller of the
    Currency (OCC), the Office of Federal Housing Enterprise Oversight
    (OFHEO), the Office of Thrift Supervision (OTS), and the Securities and
    Exchange Commission (SEC).

    To address our first objective, we analyzed documents on the regulators'
    performance management and pay systems, including guidance, policies, and
    procedures on the systems; performance planning and appraisal forms; union
    contracts and agreements; training materials; internal evaluations of
    systems; and materials used to communicate with employees about the
    systems. We also reviewed documents assessing the agencies' systems,
    including results from the 2006 Federal Human Capital Survey conducted by
    the Office of Personnel Management (OPM), recent human resources
    operations audits performed by OPM, and relevant material from agencies'
    offices of inspector general.

    We also interviewed key human resources officials at each agency, as well
    as officials from other functional areas knowledgeable about each agency's
    performance-based pay practices. In addition, we interviewed employees at
    the agencies who served as members of employee groups. At six of the
    agencies, the employees we spoke with were union representatives.
    Specifically, employees at FDIC, OCC, NCUA, and SEC are represented by the
    National Treasury Employees Union, and OTS headquarters staff and CFTC
    staff at two regional offices are represented by the American Federation
    of Government Employees. Employees at FCA, the Federal Reserve Board,
    FHFB, and OFHEO did not have a union; at these agencies we spoke with
    employees who served on employee committees or working groups.

    In addition, we examined small, select sets of individual performance
    plans for employees, which outline the annual performance expectations for
    employees. The selection of these performance plans was not intended to
    allow us to make generalizations about all performance plans at the
    agencies, and we have used information from the plans for illustrative
    purposes only. The performance plans we received were selected by agency
    officials based on our request for a mix of occupations and grade levels
    at each agency. The smallest number of performance plans we examined from
    an agency was one, in a case where the performance plans for all employees
    are completely standardized. The largest number of plans we reviewed from
    an agency was 32. The individual performance plans we examined pertained
    to each agency's last completed performance appraisal cycle when we began
    this review. Table 3 shows the appraisal cycle by agency.

    Table 3: Performance Appraisal Cycle by Agency

                   Agency                     Performance appraisal cycle
    CFTC                           July 1, 2005 to June 30, 2006
    FCA                            October 1, 2004 to September 30, 2005
    FDIC                           January 1, 2005 to December 31, 2005
    Federal Reserve Board          October 1, 2004 to September 30, 2005
    FHFB                           October 1, 2005 to September 30, 2006
    NCUA                           January 1, 2005 to December 31, 2005
    OCC                            October 1, 2004 to September 30, 2005
    OFHEO                          April 1, 2005 to March 31, 2006
    OTS                            January 1, 2005 to December 31, 2005
    SEC:
    for senior officers            October 1, 2004 to September 30, 2005
    for all other employees        May 1, 2005 to April 30, 2006

    Source: Various regulators.

    Finally, we analyzed data from each agency on performance ratings and
    performance-based pay awarded to employees as well as aggregate data on
    all types of pay increases at each agency not linked to performance
    ratings. We used these data to calculate the Spearman rank correlation
    coefficient to show the strength of the relationship between employee
    performance ratings and the associated performance-based percentage pay
    increases at
    each agency.^1 In computing the correlation coefficients, we noted that a
    few agencies used a table or procedure that specified particular pay
    increases corresponding to specific ratings. Taken in isolation, the use
    of the table or procedure would be expected to produce a perfect
    correlation, i.e., +1.0. However, other aspects of these agencies' systems
    contributed to the resulting coefficients being less than +1.0. For
    example, at one agency, employees with rating scores below a certain
    threshold were not eligible for any pay increase. While these employees
    may have had different rating scores, none of them received a pay
    increase, which contributed to a coefficient that was less than perfect.
    Other mechanistic factors in these agencies' systems, such as adjusting or
    changing the specified percentage pay increase based on the grade level or
    current salary of the employee, also had the effect of producing a less
    than perfect coefficient at these agencies. Given the influence that these
    procedural but nondiscretionary variations may have had on the resulting
    coefficients at these agencies, the coefficients are primarily useful in
    their overall demonstration of the positive linkage between ratings and
    pay increases at all the agencies, and the range of coefficients that
    occurs. The magnitude of the coefficients, however, is not sufficient for
    ranking the agencies or making other types of comparisons.

    ^1The performance appraisal and pay systems at FDIC and SEC were sufficiently different
    from those of the other eight agencies that a correlation coefficient would not be a useful
    descriptor of the relationship between ratings and pay increases at these two agencies. Both
    FDIC and SEC use two-phase performance management systems that preclude the
    meaningful use of a single correlation coefficient. Neither the first or second processes in
    their systems are sufficiently comparable to the multilevel performance rating scales and
    pay increase determinations used at the other financial regulators. In the first process at
    FDIC and SEC, almost all employees were rated as �acceptable� on what was essentially a
    two-level, �acceptable/unacceptable� rating scale. The lack of variation in performance
    ratings given in the first process would show little association with pay increases, and
    computing a correlation for this step would yield a coefficient at or around zero. In the
    second process, which was not considered to be a performance rating at these agencies,
    employees were assigned to performance groups at FDIC or awarded steps at SEC that were
    associated with specified percentage increases in pay. Computing a correlation between
    group assignment or steps awarded and percentage of pay increase would yield a perfect
    correlation since group or step assignment was synonymous with a specific percentage
    increase in pay.

    We also analyzed agency data on performance ratings to determine the
    distribution of employee performance ratings at each agency. All data were
    provided to us by agency officials, and pertained to the performance
    appraisal cycles noted in table 3.

    To address our second objective, we first analyzed the content of
    compensation comparability provisions in the agencies' laws and related
    legislative histories. We reviewed the most recent pay and benefits
    surveys conducted by external compensation consultants for these agencies,
    obtained agency pay and benefits data, and analyzed actual pay data from
    CPDF. In addition, we interviewed agency officials about their experience
    with these surveys and the agencies' informal interactions to assess pay
    comparability and to determine the feasibility of conducting a common
    survey.

    To report on the pay ranges for non-executive employees in selected
    occupations, we analyzed the base pay data provided to us for mission-
    critical occupations at nine of the agencies in our review. We selected
    the mission critical occupations by: (1) identifying nonclerical and
    nonblue-collar occupations with 45 or more employees in at least one
    financial regulatory agency and (2) vetting this list with the 10
    agencies.^2 The agencies provided us with pay range information as set
    forth in each agency's pay policies as of September 2006 for every job
    title under each occupational category, including jobs with no incumbents
    at the time the agencies reported the data to us.

    ^2OPM�s six occupational categories are Professional, Administrative, Technical, Clerical,
    Other White-Collar, and Blue Collar, collectively known as �PATCOB.� When we sent the list
    of mission critical occupations to the agencies, we listed the occupational title and asked
    the agency to identify the OPM job series number they used for that occupation. For some
    occupations, all agencies used the same job series (for example, 0905 for attorneys). For
    other occupations, some agencies used different job series for the same or similar
    occupation (for example, agencies used several agency-unique job series for �examiners�
    such as 1831, 0580, and 0570). Two agencies (CFTC and OFHEO) placed employees in the
    same job series (1801 for CFTC and 0501 for OFHEO) into two different occupations
    (examiners and investigators, and examiners and financial analysts, respectively). In both
    cases, we placed all employees in the examiner occupation because the CPDF does not
    facilitate separating employees with the same job series into separate occupations. For a
    few occupations, some agencies used an OPM job series number that we did not expect (for
    example, OFHEO used 0301 for information technology specialists and FCA used 1101 for
    examiners). When we analyzed CPDF data, we used the occupational titles and job series
    numbers the agencies provided to us. Executives were not included in the pay analyses. We
    excluded executives from the analysis of average actual pay and pay scale, because we
    wanted to focus on mid-level management.

    To report on the actual average base pay of employees in the selected
    occupations, we analyzed actual pay data from CPDF for fiscal year 2006.
    Because the CPDF does not include data for all agencies, the Federal
    Reserve Board provided us with actual pay data for our analysis of its
    employees' actual average pay for fiscal year 2006. To show the financial
    regulators' locality pay percentages and general schedule employees'
    locality pay percentages, we selected the cities where four or more
    financial regulators had duty stations in fiscal year 2006. We obtained
    fiscal year 2006 locality pay percentages information from the financial
    regulators and general schedule locality pay percentages from the OPM Web
    site. To report on the benefits offered by the agencies, we obtained and
    analyzed data from each agency that included a list of benefits the
    financial regulators offered as of September 2006 and brief descriptions
    of each benefit. We also interviewed agency officials about the factors
    that affect the actual average base pay, and how each agency sets its
    locality pay percentage.

    To address our third objective, we analyzed movement data from CPDF for
    fiscal years 1990 to 2006, the most recent available data as of December
    2006. For each fiscal year, we identified the number of employees in
    selected mission-critical occupations at a financial regulator who (1)
    moved to another financial regulator, (2) moved to other federal agencies,
    and (3) resigned from federal employment. We identified those who moved
    from one financial regulatory agency to another by identifying employees
    who had a CPDF separation code for a voluntary transfer and who also had a
    CPDF accession code from another financial regulatory agency within 25
    days of the transfer out. Also, for each mission-critical occupation, we
    examined the number of financial regulator employees who moved to another
    financial regulator in each fiscal year and the average number of
    employees who moved among the nine financial regulators over the 16 years
    of our review. Our analysis of supervisors included executives, who
    constituted 1 to 2 percent of all supervisors who moved to another
    financial regulator. We also included all other agency occupations that
    were not classified as "mission-critical occupations" in an "all other"
    category, which includes occupations such as specialists in human
    resources management, administration, clerical, management and program
    analysis, blue collar occupations, financial administration, and paralegal
    work.

    We did not include the Federal Reserve Board in our analysis of the
    movement of financial regulator employees because CPDF does not include
    data on the Federal Reserve Board. Federal Reserve Board officials told us
    that data on employee movement for fiscal years 1990 to 1996 are not
    readily accessible. The agency provided us some data for fiscal years 1997
    to 2005, including data on employees who transferred, resigned, were
    fired, were subject to a reduction in force, or otherwise separated, and
    the agency's total number of employees, but was unable to identify whether
    their employees left for another financial regulator. Because the data the
    agency provided were not comparable with the CPDF data we used for the
    other financial regulators, we did not include the Federal Reserve Board
    in our analysis. We also did not include information on the employment of
    financial regulatory employees after they left federal employment because
    CPDF does not include data on employment outside some agencies and
    officials told us that they do not track the employment of their employees
    after the employees leave their agencies.^3

    ^3We were not able to always find a transfer-in personnel action to match a transfer-out
    personnel action within the time frames stipulated for transfers. Some transfer-in personnel
    actions that we did not find in fiscal year 1990 could be due to the fact that the transfer-out
    personnel action occurred in fiscal year 1989. Similarly, some of the transfer-out personnel
    actions in fiscal year 2006 for which we did not find a matching transfer-in personnel action
    could be due to the fact that they occurred in fiscal year 2007.

    We assessed the reliability of the various sets of data used in our study.
    To assess the reliability of the performance and pay increase data
    provided by the agencies, we conducted various inspections and electronic
    testing of the data for reasonableness and the presence of any obvious or
    potential errors in accuracy and completeness. We also reviewed related
    agency documentation, interviewed agency officials knowledgeable about the
    data, and brought to the attention of these officials any concerns or
    discrepancies we found with the data for correction or updating. Based on
    the results of these procedures, we believe the data are sufficiently
    reliable for use in the analyses presented in this report. We did not
    independently verify the pay and benefits data we received from the
    agencies but consider these data sufficiently reliable for the
    illustrative purpose of our review. Based on our data reliability testing
    of CPDF data, we believe the CPDF data are sufficiently reliable for this
    review. When analyzing employee movement using CPDF data, we found
    exceptions from standard personnel procedures, such as employees with a
    transfer-out code but with an accession code in the hiring agency that was
    not a transfer-in code, or employee records with transfer-out and
    transfer-in dates that exceeded 3 calendar days. We also found duplicate
    separation or accession records for the same individual on the same day.
    We deleted one of the duplicate records. We also found cases where an
    individual had two separation actions on the same day but they were
    different types of actions (e.g., a transfer out and a resignation).
    Because we could not determine which separation action was the correct
    one, we deleted both records. However, these types of data problems
    represented less than one-tenth of 1 percent of the data used. As a
    result, we concluded that the data were sufficiently reliable to show the
    magnitude of movement between financial regulatory agencies, to other
    federal agencies, and to nonfederal employers.

    We conducted our work from February 2006 through June 2007 in accordance
    with generally accepted government auditing standards.

    Appendix II:  Information on Agencies

    Table 4: Agency Information

        Agency        Mission       Number of      Funding^b        Employee    Performance-based
                                  employees^a                    representation        pay
    Commodity      To protect             446  Appropriated      The American   In October 2006,
    Futures        market users                                  Federation of  CFTC began
    Trading        and the public                                Government     transitioning to
    Commission     from fraud,                                   Employees      a new
    (CFTC)         manipulation,                                 represents     performance-based
                   and abusive                                   employees in   pay system that
                   practices                                     CFTC's Chicago will be fully
                   related to the                                and New York   implemented
                   sale of                                       offices only.  beginning in July
                   commodity and                                                2007.^c
                   financial
                   futures and
                   options, and
                   to foster
                   open,
                   competitive,
                   and
                   financially
                   sound
                   commodity
                   futures and
                   option
                   markets.
    Farm Credit    To promote a           248  Nonappropriated^d FCA is not     Performance-based
    Administration safe, sound,                                  unionized. FCA pay began in
    (FCA)          and dependable                                has an         1993; the system
                   source of                                     employee       has had some
                   credit and                                    council.       revisions since
                   related                                                      its inception.
                   services for
                   agriculture
                   and rural
                   America.
    Federal        To maintain           4328  Nonappropriated   The National   Performance-based
    Deposit        stability and                                 Treasury       pay began in
    Insurance      public                                        Employees      1998. FDIC has
    Corporation    confidence in                                 Union has the  essentially two
    (FDIC)         the nation's                                  right to       pay and
                   financial                                     bargain over   performance
                   system by                                     employees' pay management
                   insuring                                      and benefits   systems -- one
                   deposits,                                     at FDIC.       that applied to
                   examining and                                                senior managers,
                   supervising                                                  and one that
                   financial                                                    applied to
                   institutions,                                                bargaining unit
                   and managing                                                 employees as well
                   receiverships.                                               as nonbargaining
                                                                                unit employees.^e
    Federal        To ensure that         122  Nonappropriated   FHFB is not    The
    Housing        the 12 federal                                unionized.     performance-based
    Finance Board  home loan                                     FHFB has an    pay system began
    (FHFB)         banks are safe                                employee       in the mid 1990s;
                   and sound so                                  working group. the system has
                   they serve as                                                been slightly
                   a reliable                                                   revised since its
                   source of                                                    inception.
                   liquidity and
                   funding for
                   the nation's
                   housing
                   finance and
                   community
                   investment
                   needs.
    Board of       To foster the         1855  Nonappropriated   The Board is   The
    Governors of   stability,                                    not unionized. performance-based
    the Federal    integrity, and                                The Board has  pay system began
    Reserve System efficiency of                                 an employee    in 1989; the
                   the nation's                                  representative system has been
                   monetary,                                     committee.     slightly revised
                   financial, and                                               since its
                   payment                                                      inception.
                   systems so as
                   to promote
                   optimal
                   macroeconomic
                   performance.
    National       To facilitate          919  Nonappropriated   The National   The
    Credit Union   the                                           Treasury       performance-based
    Administration availability                                  Employees      pay system began
    (NCUA)         of credit                                     Union has the  in 1991.
                   union services                                right to
                   to all                                        bargain over
                   eligible                                      the impact and
                   consumers,                                    implementation
                   especially                                    of changes
                   those of                                      made to NCUA's
                   modest means,                                 performance
                   through a                                     management
                   regulatory                                    system.
                   environment
                   that fosters a
                   safe and sound
                   federally
                   insured credit
                   union system.
    Office of the  The OCC was           2908  Nonappropriated   The National   Performance-based
    Comptroller    created by                                    Treasury       pay began in
    of  the        Congress to                                   Employees      1981; the current
    Currency (OCC) charter                                       Union has the  performance
                   national                                      right to       management system
    U.S.           banks, to                                     bargain over   began in 2001,
    Department of  oversee a                                     the impact and although some
    the Treasury   nationwide                                    implementation revisions have
                   system of                                     of changes     been made since
                   banking                                       made to OCC's  then.
                   institutions,                                 performance
                   and to assure                                 management
                   that national                                 system, but
                   banks are safe                                not over
                   and sound,                                    employee pay
                   competitive                                   and benefits.
                   and
                   profitable,
                   and capable of
                   serving in the
                   best possible
                   manner the
                   banking needs
                   of their
                   customers.
    Office Of      To promote             204  Nonappropriated^d OFHEO is not   Performance-based
    Federal        housing and a                                 unionized.     pay has existed
    Housing        strong economy                                OFHEO has      since the
    Enterprise     by ensuring                                   established an agency's
    Oversight      the safety and                                ad hoc         inception in
    (OFHEO)        soundness of                                  employee       1992.
                   Fannie Mae and                                working group.
                   Freddie Mac
                   and fostering
                   the strength
                   and vitality
                   of the
                   nation's
                   housing
                   finance
                   system.
    Office of      To supervise           956  Nonappropriated   The American   Performance-based
    Thrift         savings                                       Federation of  pay began in
    Supervision    associations                                  Government     1991.
    (OTS) U.S.     and their                                     Employees
    Department of  holding                                       represents
    the Treasury   companies in                                  some employees
                   order to                                      in OTS's
                   maintain their                                Washington,
                   safety and                                    D.C., office
                   soundness and                                 only.
                   compliance
                   with consumer
                   laws, and to
                   encourage a
                   competitive
                   industry that
                   meets
                   America's
                   financial
                   services
                   needs.
    Securities and To maintain           3488  Appropriated      The National   Performance-based
    Exchange       fair, orderly,                                Treasury       pay began in
    Commission     and efficient                                 Employees      2002.
    (SEC)          securities                                    Union
                   markets,                                      represents
                   facilitate                                    two-thirds of
                   capital                                       SEC employees.
                   formation, and
                   protect
                   investors.

    Source: Various regulators

    ^aEmployment figure for the Federal Reserve Board is from December 2006
    and includes all regular employees; employment figures for all other
    agencies are for career employees and come from the CPDF as of September
    2006.

    ^bSome financial regulators receive funding through appropriations from
    Congress while others are funded from fees collected from members or
    assessed on regulated entities.

    ^cCFTC did not have a performance-based pay system prior to October 2006.

    ^dThe business operations of FCA and OFHEO are not financed by taxpayer
    funds. Their annual operating budgets, however, undergo the federal
    budgetary and appropriations process and are constrained by the amount
    approved by Congress and signed into law by the President.

    ^eThe nonbargaining unit employees are never "covered" by the compensation
    agreement with the union, but rather, the FDIC Board proactively decides
    annually what performance management and performance-based pay standards
    will apply to this population. During the performance appraisal cycle we
    reviewed, the same system that applied to bargaining unit employees was
    applied to nonbargaining unit employees.

    Appendix III:  Financial Regulators Have Implemented Key Practices in Varying
    Ways

    High-performing organizations have recognized that a critical success
    factor in fostering a results-oriented culture is a performance management
    system that creates a "line of sight" showing how team, unit, and
    individual performance can contribute to overall organizational goals and
    helping employees understand the connection between their daily activities
    and the organization's success. Effective performance management systems
    are essential for successfully implementing performance-based pay. In the
    letter, we addressed important aspects of how 10 financial regulatory
    agencies have implemented two key practices: (1) linking pay to
    performance and (2) making meaningful distinctions in performance. This
    appendix provides detailed information on the financial regulators'
    implementation of four additional key practices important for effective
    performance management systems, as well as some additional material
    pertaining to the linking pay to performance practice covered in the
    letter. The four additional practices are:

    oAlign individual performance expectations with organizational goals.

    oConnect performance expectations to crosscutting goals.

    oUse competencies to provide a fuller assessment of performance.

    oInvolve employees and stakeholders to gain ownership of performance
    management systems.

    The 10 financial regulatory agencies have implemented these four key
    practices for effective performance management systems in various ways,
    reflecting the unique needs of their organizational cultures and
    structures.

    Agencies Have Aligned Individual Performance Expectations with
    Organizational Goals in Different Ways

    The 10 federal financial regulatory agencies have implemented the practice
    of alignment in a variety of ways. An explicit alignment of daily
    activities with broader results is a key feature of effective performance
    management systems in high-performing organizations. These organizations
    use their performance management systems to improve performance by helping
    individuals see the connection between their daily activities and
    organizational goals and encouraging individuals to focus on their roles
    and responsibilities in helping to achieve these goals. The financial
    regulators reinforced alignment of individual performance expectations to
    organizational goals in policy and guidance documents for their
    performance management systems, used standardized performance elements or
    standards for employees in their performance plans, used customized
    individual performance expectations that contributed to organizational
    goals in individual performance plans, and included the corresponding
    organizational goals directly on the individual performance plan forms.^1

    Agencies Have Reinforced Alignment in Policies and Guidance for
    Performance Management Systems

    Several of the financial regulatory agencies, including FDIC, OCC, FHFB,
    and OFHEO, have reinforced alignment by including language on linking
    individual performance expectations to organizational goals in policy and
    guidance materials for the performance management systems. The following
    are examples of how selected agencies have reinforced alignment through
    policies and guidance.

    oA key objective of FDIC's performance management program as stated in a
    policy directive is to "establish fair and equitable performance
    expectations and goals for individuals that are tied to accomplishing the
    organization's mission and objectives."^2 The directive further states
    that employees at FDIC are assessed against performance criteria, which
    are defined as "the major goals, objectives, and/or primary
    responsibilities of a position which contribute toward accomplishing
    overall organizational goals and objectives" (as found in FDIC's strategic
    plan and annual performance plan).

    ^1According to OPM, performance elements identify the activities, skills, or responsibilities
    that the employee is expected to achieve during the year and performance standards
    identify how well the employee must meet each performance element to receive a specific
    performance rating.

    ^2Federal Deposit Insurance Corporation, Performance Management Program, Directive
    System Circular 2430.1, Mar. 28, 2002.

    oAt OCC, the Policies and Procedures Manual for the performance management
    system states that the system is designed to align employee performance
    expectations with organizational objectives and priorities. The manual
    also explains that the starting point for identifying individual
    performance expectations should be unit objectives established at the
    executive committee, district, field office, or division level.

    oThe handbook and guide for FHFB's and OFHEO's performance management
    systems, respectively, contain several references to alignment of
    individual expectations to organizational goals.

    Agencies Have Included Alignment in Standardized Performance Elements for
    Employees

    Several of the financial regulators, including FCA, CFTC, FHFB, OCC and
    OTS, have reinforced alignment by including standardized performance
    elements or performance standards that link performance expectations to
    organizational goals in employees' performance plans. We have previously
    reported that results-oriented performance agreements can be effective
    mechanisms to define accountability for specific goals and to align daily
    activities with results.^3 Individuals from the agencies with standardized
    performance elements in their individual performance plans are assessed
    against the same set of performance elements and standards at the end of
    the appraisal cycle, as the following examples illustrate.

    ^3GAO-04-614; GAO, Managing for Results: Emerging Benefits From Selected Agencies� Use
    of Performance Agreements, GAO-01-115, Washington, D.C.: (Oct. 30, 2000).

    oFCA has included a requirement to contribute to the achievement of
    organizational goals in standardized performance elements for all
    employees in their individual performance plans. Specifically, FCA has
    developed a set of standardized performance elements for each of its four
    occupational groups and in some of these elements, requires individuals to
    contribute to achieving organizational goals and objectives. For the
    senior manager's occupational group, individuals have a standardized
    performance element--"Leadership and Motivation Skills"--in their
    individual performance plans that measures the employees' ability to
    accomplish the agency's goals and objectives. For the other three
    occupational groups, individuals have a standardized performance
    element--"Teamwork and Interpersonal Skills"--in their individual
    performance plans that measures the extent to which the employee places
    emphasis on achieving organizational and team goals. In this way, all
    employees at FCA are assessed on the extent to which they contribute to
    organizational objectives through a standardized performance element.

    oWhile not requiring a standardized performance element related to
    alignment in the individual performance plans for all employees, CFTC has
    reinforced alignment through the performance standards used for rating all
    employees at the end of the performance appraisal cycle. Specifically, in
    order for all employees to achieve the highest summary performance rating,
    individuals must "achieve element objectives with extensive impact on
    organizational mission," which reinforces the line of sight between
    individual performance and organizational results. In this way, for all
    employees at CFTC, the individual's contributions to organizational goals
    affect his or her ability to achieve the highest possible performance
    rating. Alignment is further reinforced for managerial employees at CFTC
    because they are also assessed on the standardized performance element of
    "Effective Leadership," which requires them to, among other things,
    accomplish the mission and organizational goals of the work unit, and
    communicate organizational goals to subordinates.

    oFHFB has reinforced alignment in standardized performance elements for
    several occupational groups. Standardized elements for executives,
    managers/supervisors, staff attorneys, and professional positions contain
    references to aligning with or contributing to organizational goals.

    oOCC has applied an alignment focus in a generic performance standard for
    four occupational groups at the agency. Executives, managers, commissioned
    examiners, and specialists are all rated against a standardized
    performance standard that requires them to contribute to organizational
    goals in order to get the highest rating level of 4 for a particular
    performance element. For example, managers have a standardized performance
    element called "leadership skills," for which the highest level
    performance standard includes language on meeting OCC goals and
    objectives. Commissioned examiners and specialists have a standardized
    performance element in their individual performance plans called
    "organizational skills," with an accompanying performance standard that
    requires individuals' work products to be closely aligned with OCC's
    goals, objectives, and priorities in order to receive the highest rating
    level.

    oOTS has reinforced alignment in a standardized performance element for
    managers and senior managers. Under the "Leadership Skills" standardized
    performance element, managers are assessed on accomplishing the agency's
    goals and objectives, taking initiative and incorporating organizational
    objectives into the organization, and scheduling work assignments. In
    addition, senior managers have a supplemental performance element that
    holds them responsible for supporting the achievement of OTS's strategic
    plan. An OTS official stated that the agency is considering expanding the
    requirement for alignment as it makes future changes to the performance
    management system.

    Agencies Have Strengthened Alignment by Linking Customized Individual
    Performance Expectations to Organizational Goals

    Several financial regulatory agencies, including SEC, OCC, and the Federal
    Reserve Board, have reinforced alignment for some individual employees
    through customized performance expectations specific to individuals that
    link to higher organizational goals. We have reported that high-performing
    organizations use their performance management systems to improve
    performance by helping individuals see the connection between their daily
    activities and organizational goals and encouraging individuals to focus
    on their roles and responsibilities to help achieve these goals. One way
    to encourage this is to align performance expectations of individual
    employees with organizational goals in individual performance plans. We
    reviewed a small, select set of individual performance plans from each
    agency, and identified the following examples of individual performance
    expectations that linked to higher organizational goals.

    oThe performance plan for a senior officer at SEC included the performance
    expectation "Plans and Coordinates Inspection Programs and Ensures that
    Internal Management Controls Exist and Operate Effectively" that supports
    SEC's strategic goal to "Maximize the Use of SEC Resources."

    oIn individual performance plans, OCC has used customized performance
    expectations unique to the individual in addition to standardized
    performance elements to appraise employees. Specifically, the performance
    plan for an information technology (IT) specialist included a customized
    expectation to provide timely, professional, and quality IT support to
    promote efficient utilization of OCC resources. This expectation supported
    the annual OCC objective--"OCC reflects an efficient and effective
    organization."

    oAt the Federal Reserve Board, a performance plan for an economist
    contained a performance expectation to produce a weekly monitoring report
    on Japan and cover Japanese banking and financial issues, which
    contributed to one of the Board's annual performance objectives in the
    area of monetary policy function: "contribute to the development of U.S.
    international policies and procedures, in cooperation with the U.S.
    Department of the Treasury and other agencies."

    Agencies Have Strengthened Alignment by Stating Organizational Goals in
    Individual Performance Plans

    FHFB and OCC have reinforced the linkage between the individual's
    performance expectations and organizational goals by including the
    corresponding organizational goals directly on the individual performance
    plan forms. This helps make clear the line of sight between the employee's
    work and agency goals, as the following examples illustrate.

    oFHFB has included the agency mission statement and office mission
    statement to which an employee is contributing at the top of the first
    page of the performance plan form.

    oIn many of the individual performance plans we examined from OCC, the
    annual OCC objective to which each customized performance element
    contributed was listed on the form, along with performance measures.
    According to an official, while OCC's performance management policy does
    not specifically require that the higher organizational objective to which
    each customized performance element contributes be listed on the
    employee's performance evaluation form, managers are advised to include
    the organizational goals and the majority of forms do include them. The
    official stated that it was an oversight not to include this requirement
    in the policy, and they plan to revise the performance evaluation form to
    include space for the corresponding organizational objectives. Figure 5
    shows an example of how a customized performance element on an individual
    performance plan is linked to an agency goal, clarifying the relationship
    between individual and organizational performance.

    Figure 5: Excerpt from an OCC Commissioned Examiner's Individual
    Performance Plan

    Agencies Have Connected Performance Expectations to Crosscutting Goals in
    Different Ways

    The financial regulatory agencies have connected performance expectations
    to crosscutting goals in several ways. As public sector organizations
    shift their focus of accountability from outputs to results, they have
    recognized that the activities needed to achieve those results often
    transcend specific organizational boundaries. We reported that key
    characteristics of high-performing organizations are collaboration,
    interaction, and teamwork across organizational boundaries.^4
    High-performing organizations use their performance management systems to
    strengthen accountability for results, specifically by placing greater
    emphasis on those characteristics fostering the necessary collaboration,
    both within and across organizational boundaries, to achieve results.

    The specific ways in which the financial regulatory agencies have
    connected performance expectations to crosscutting goals vary. In our
    review of a small, select set of performance plans from some of the
    agencies, we identified some examples of customized individual performance
    plans that identified crosscutting goals that would require collaboration
    to achieve, as well as either the internal or external organizations with
    which the individuals would collaborate to achieve those goals. All of the
    agencies recognized the importance of collaboration by including
    performance elements for collaboration or teamwork within and across
    organizational boundaries in individual performance plans for at least
    some employees. Several agencies applied standardized performance elements
    related to teamwork or collaboration to employees.

    Agencies Have Identified Crosscutting Goals and Organizations for
    Collaboration in Individual Performance Plans

    We found examples of performance plans customized to individuals at OCC,
    FCA, the Federal Reserve Board, and SEC that identified crosscutting
    goals, as well as either the internal or external organizations with which
    the individuals would collaborate to achieve these goals. We have reported
    that more progress is needed to foster the necessary collaboration both
    within and across organizational boundaries to achieve results.^5 One
    strategy for fostering collaboration is identifying in individual
    performance plans specific programmatic crosscutting goals that would
    require collaboration to achieve. Another strategy for fostering
    collaboration is identifying the relevant internal or external
    organizations with which individuals would collaborate to reinforce a
    focus across organizational boundaries in individuals' performance plans,
    as the following examples illustrate.

    ^4GAO, Human Capital: Managing Human Capital in the 21st Century, GAO/T-GGD-00-77
    (Washington, D.C.: Mar. 9, 2000).

    ^5GAO-04-614.

    oAt OCC, an employee had an expectation in his individual performance plan
    to enhance the division's ability to work cooperatively and effectively
    together with other operational risk divisions, as well as enhance
    coordination with federal and state agencies and outside banking groups to
    promote consistency and to advance OCC viewpoints, while contributing to
    OCC's objective for U.S. and international financial supervisory
    authorities to cooperate on common interests.

    oA senior manager at FCA had a customized expectation in his individual
    performance plan to work closely with and coordinate Office of Examination
    initiatives with other offices, notably the Office of General Counsel and
    Office of Public Affairs, to support the FCA Chairman and Chief Executive
    Officer's three strategic goals, which are (1) improving communications
    and relationships with the Farm Credit System, (2) gaining greater
    efficiency and effectiveness of the agency, and (3) promoting the Farm
    Credit System to become the Premier Financier of Agriculture and Rural
    America.

    oAn executive at the Federal Reserve Board had an expectation in his
    individual performance plan to undertake expanded discussions with SEC on
    information-sharing, cooperation, and coordination with the aim of
    strengthening consolidated supervision and achieving consistency in the
    implementation of Basel II.^6

    ^6Basel II is a set of proposed changes to the original set of risk-based capital rules based on
    an internationally adopted framework developed by the Basel Committee. In the United
    States, Basel II rules are intended to apply primarily to the largest and most internationally
    active banking organizations.

    oAt SEC, a senior officer in the market regulation division had an
    expectation in his individual performance plan to advance market
    regulation objectives through cooperative efforts by coordinating with
    other SEC offices, other U.S. agencies, self-regulatory organizations,
    international regulators, and the securities industry.

    Agencies Have Included Performance Elements Related to Collaboration or
    Teamwork in Individual Performance Plans

    All of the financial regulators included performance elements related to
    collaboration or teamwork within and across organizational boundaries in
    individual performance plans for at least some of their employees.
    Performance elements related to collaboration or teamwork in individual
    performance plans can help reinforce behaviors and actions that support
    crosscutting goals and provide a consistent message to all employees about
    how they are expected to achieve results. CFTC, FHFB, NCUA, and the
    Federal Reserve Board provide examples of how standardized performance
    elements pertaining to teamwork or collaboration have been applied to
    employees.

    oCFTC has established a standardized performance element for all employees
    that emphasizes collaboration or teamwork, called "Professional Behavior,"
    which requires employees to behave in a professional and cooperative
    manner when interacting with coworkers or the public and willingly
    initiate and respond to collaborative efforts with coworkers, among other
    things.

    oAt FHFB, all employees have performance elements or standards related to
    collaboration or teamwork in the standardized performance plans for their
    occupational groups. For example, the standardized performance plan for
    executives includes a performance element for "teamwork" that requires
    executives to collaborate effectively with associates and promote positive
    and credible relations with associates, among other things. The
    standardized performance plan for administrative positions also includes a
    "teamwork" performance element. For the other three occupational groups,
    collaboration or teamwork is captured in a performance standard. For
    example, the standardized performance plans for professional positions and
    managers/supervisors have a performance element that emphasizes
    collaboration or teamwork, called "Professionalism," which requires the
    employee to develop and maintain effective working relationships with all
    employees at all levels throughout the agency and external to the agency
    and foster effective internal and external communication, among other
    things.

    oNCUA has performance elements related to collaboration or teamwork in the
    standardized individual performance plans for some occupational groups,
    such as examiners. For example, in the standardized performance plan for
    some examiners, there is a performance element for "customer service and
    teamwork" that requires the individual to demonstrate initiative,
    responsibility, and accountability to both internal and external customers
    and work in collaboration with coworkers and others toward common goals.
    NCUA officials stated that a collaboration/teamwork performance element
    may not be applicable to all positions. They also said that, to the extent
    that this is an appropriate performance element on which an employee
    should be rated, the agency has or will include it in that employee's
    performance plan.

    oAccording to Federal Reserve Board officials, the performance plans for
    some occupations at the agency, such as security and administrative
    positions, include teamwork as a standard element. Officials also said
    that customized performance plans for other occupations typically include
    teamwork or collaboration as a competency.

    Agencies Have Used Competencies in Various Ways to Provide a Fuller
    Assessment of Performance

    All 10 of the financial regulatory agencies have used competencies, which
    define the skills and supporting behaviors that individuals are expected
    to demonstrate to carry out their work effectively. High-performing
    organizations use competencies to examine individual contributions to
    organizational results. We have reported that core competencies applied
    organizationwide can help reinforce behaviors and actions that support the
    organization's mission, goals, and values and can provide a consistent
    message about how employees are expected to achieve results.^7 As
    previously discussed, while some of the financial regulatory agencies have
    included customized performance expectations specific to individuals in
    performance plans, we found that all of the agencies have used
    competencies. There are some variations in the ways in which the agencies
    have structured and applied competencies to evaluate employee performance.
    One of these variations concerns whether or not the agency has assigned
    different weights to competencies when determining overall summary ratings
    for individuals.

    ^7GAO-04-614.

    Agencies Have Applied Competencies Organizationwide

    With the exception of the Federal Reserve Board, all of the federal
    financial regulatory agencies have developed sets of core competencies
    that apply to groups of employees, and assess employee performance using
    those competencies as part of the annual performance appraisal process.
    Using competencies can help strengthen the line of sight between
    individual performance and organizational success by reinforcing
    performance expectations that support achievement of the agency's goals,
    as the following examples illustrate.

    oFCA has a different standardized performance plan for each of four
    occupational groups of employees--senior managers, supervisors,
    examiners/attorneys/analysts/other specialists (non-supervisory), and
    administrative/technicians. Each of the plans includes a standard set of
    competencies, called critical elements, which applies to all employees in
    that group. Specifically, the performance plan for employees in the
    examiners/attorneys/analysts/other specialists group contains the
    following competencies--technical and analytical skills; organizational
    and project management skills; teamwork and interpersonal skills; written
    and oral communication skills; and equal employment opportunity (EEO),
    diversity and other agency initiatives. A few sentences are included on
    the performance plan form to describe what each element measures in terms
    of the employee's knowledge, skills, and behavior, as shown in figure 6.

    Figure 6: Excerpt from an FCA Individual Performance Plan

    oFor the July 2005 to June 2006 performance appraisal cycle we reviewed at
    CFTC, all employees were assessed on a set of five competencies, called
    critical elements. Managerial employees were also assessed on three
    additional competencies having to do with leadership, developing staff,
    and supporting diversity and EEO programs.

    oFDIC has 27 different performance plans with corresponding sets of
    competencies, called performance criteria, to cover all employees.
    According to agency officials, FDIC has learned from experience that
    having a performance management system that is based on standardized sets
    of competencies has allowed employees' performance to be compared more
    easily to the standards from period to period. In addition, FDIC's system
    bases merit pay increases for individuals at least partly on corporate
    contributions (defined as contributions to corporate, division, or
    unit-level goals). Officials said that this type of system really enhances
    employee line of sight and has helped employees focus on how their
    contributions align with the achievement of organizational goals. In their
    view, this type of system promotes alignment and consistency more
    effectively than a system of individual contracts between supervisors and
    their employees.

    oNCUA has approximately 240 detailed performance plans that are tailored
    to specific occupations and grade levels of employees and that include
    competencies, which are called elements. All of the employees to whom a
    particular performance plan applies are assessed on the same set of
    elements and performance standards. Elements for some employees within the
    same occupation are universal, but standards can differ by grade level.
    For example, the performance plans for examiners in grades 7, 11, and 12
    all include basically the same elements, but some of the performance
    standards upon which individuals are to be appraised for each element vary
    by grade level.

    oThe Federal Reserve Board differs from the other financial regulatory
    agencies in the way it uses competencies. The agency does not have sets of
    core competencies that apply to specified groups of employees across the
    agency. Instead, divisions have latitude to vary the design and
    implementation of the performance plan form and process. According to
    agency officials, divisions select competencies that best suit
    occupational types and the divisions' goals, because the Board has
    multiple responsibilities dealing with monetary policy and financial
    institution regulation. It is possible for employees in the same
    occupational group, but in different divisions, to be rated against
    different sets of competencies. Agency officials said that they have not
    heard complaints from similar occupational groups that they may be
    assessed against different competencies. Further, all officers, managers,
    and supervisors are rated against the same four management objectives of
    communications, staff development, effective planning and administration
    of financial resources, and equal employment opportunity.

    Agencies Have Assigned Weights to Competencies

    A few of the agencies, such as OFHEO, FCA, and NCUA, allow differing
    weights to be assigned to specific competencies when determining overall
    summary performance ratings for individuals. Using weights enables the
    organization to place more emphasis on selected competencies that are
    deemed to be more important in assessing the overall performance of
    individuals in particular positions. Other agencies, including OCC, OTS,
    FDIC, CFTC, and FHFB, do not assign differing weights to competencies, as
    the following examples illustrate.

    oAt OFHEO, the rating official for each employee assigns a weight to each
    of the competencies (called performance elements) included in the
    individual's performance plan, in consultation with the reviewing
    official. Each competency must have a minimum weight of at least 5, with
    the total weight of all the competencies in an individual performance plan
    equaling 100. Any competency with a weight of 20 or higher is considered
    to be critical. Each competency element is weighted and scored (see figure
    7), and then the weighted ratings for the competencies are summed to
    derive the total summary rating for the individual.^8

    ^8According to an agency official, OFHEO�s weighting system is expected to be modified as
    revisions are made to the performance management system.

    Figure 7: Example of OFHEO's Worksheet for Weighting Performance Elements

    oFCA also permits supervisors to assign different weights to competencies
    for individual employees, within the standardized performance plans, at
    the beginning of the appraisal period. No competency can be weighted less
    than 5 percent or more than 40 percent.

    oAt NCUA, the elements for the various occupations and grade levels have
    different weights assigned to them, depending on the priorities and skills
    pertaining to the positions. The weights are specified on the performance
    plan form for each position.

    oSome of the financial regulatory agencies, including OCC, OTS, FDIC,
    CFTC, and FHFB, do not assign different weights to competencies when
    appraising employee performance. Instead, all of the competencies in an
    employee's performance plan are equally considered during the appraisal.
    For example, at OCC, all of the competencies (which are called skill-based
    performance elements) that are contained in an individual's performance
    plan are considered to be critical, so they receive equal weight when
    determining the overall summary rating for that individual, according to
    an official.

    Agencies Have Involved Employees and Stakeholders in Various Ways to Gain
    Ownership of Performance Management Systems

    The financial regulatory agencies have used several strategies to involve
    employees in their systems, including (1) soliciting or considering input
    from employees on developing or refining their performance management
    systems, (2) offering employees opportunities to participate in the
    performance planning and appraisal process, and (3) ensuring that
    employees were adequately trained on the performance management system
    when rolling out the system and when changes were made to the system.
    Overall, the 10 agencies have employed these strategies differently.
    Effective performance management systems depend on individuals', their
    supervisors', and management's common understanding, support, and use of
    these systems to reinforce the connection between performance management
    and organizational results. Employee involvement improves the quality of
    the system by providing a front-line perspective and helping to create
    organizationwide understanding and ownership.

    Agencies Have Considered Employee Input for Developing or Refining
    Performance Management Systems

    All of the financial regulatory agencies, in some way, solicited or
    considered employee input for developing or refining their performance
    management systems by working with unions or employee groups to gather
    employee opinions or conducting employee surveys or focus groups. An
    important step to ensure the success of a new performance management
    system is to consult a wide range of stakeholders and to do so early in
    the process. High-performing organizations have found that actively
    involving employees and stakeholders, such as unions or other employee
    groups that represent employee views, when developing results-oriented
    performance management systems helps to improve employees' confidence and
    belief in the fairness of the system and increase their understanding and
    ownership of organizational goals and objectives. Feedback obtained from
    these sources is also important when creating or refining competencies and
    performance standards used in performance plans. However, in order for
    employees to gain ownership of the system, employee input must receive
    adequate acknowledgement and consideration from management.

    Agencies Have Involved Employee Groups in the Performance Management
    System Process

    Unions and employee groups had some role in providing comments or input
    into the performance management systems at some of the financial
    regulators. Six of the regulators (CFTC, FDIC, NCUA, OCC, OTS, and SEC)
    had active union chapters, and four agencies (FCA, Federal Reserve Board,
    FHFB, and OFHEO) had employee groups.^9 We have previously reported that
    obtaining union cooperation and support through effective labor-management
    relations can help achieve consensus on planned changes to a system, avoid
    misunderstandings, and more expeditiously resolve problems that occur.^10
    The degree to which unions and employee groups were involved in providing
    comments or input into the development or implementation of performance
    management systems varied from agency to agency. A few of the agencies
    with unions have to negotiate over compensation. Unions at some agencies
    were involved in participating in negotiations, entering into formal
    agreements such as contracts and memoranda of understanding, and
    initiating litigation concerning the development or implementation of
    performance management systems. At other regulators, employee groups were
    invited to comment on aspects of the performance management system, as the
    following examples illustrate.

    ^9Employees at FDIC, NCUA, OCC, and SEC are represented by the National Treasury
    Employees Union. OTS employees in Washington, D.C., and CFTC staff at two offices are
    represented by the American Federation of Government Employees.

    ^10GAO, Human Capital: Practices that Empowered and Involved Employees, GAO-01-1070
    (Washington, D.C.: Sept. 14, 2001).

    oOFHEO has used ad hoc employee working groups to study different human
    capital issues and advise management on recommendations for changes.
    Specifically, OFHEO established a working group to look at teamwork and
    communication in the agency and the group recommended changes to the
    individual performance plans relevant to teamwork and communications. As a
    result of the group's recommendation, OFHEO included additional language
    for the agency's performance plans in the performance elements of teamwork
    and communication.

    oAt FDIC, the union participated with management in formal negotiations
    regarding the establishment of the agency's performance management and pay
    for performance systems and how the systems would work. Both parties are
    bound by the terms of the formal agreements that resulted.

    oAt NCUA, union representatives together with management issued a
    memorandum of understanding in June 2006 detailing how supervisors are
    supposed to introduce new performance plans for specified examiner
    positions. The agreement set the timing of the introduction of new
    performance standards, required training for rating officials, required
    supervisors to give progress reviews to their employees on achievements to
    date, and required supervisors and employees to discuss the new standards.

    oSEC will implement a new compensation and benefits system as a result of
    an October 2006 ruling from the Federal Service Impasses Panel (Panel).^11
    The Panel became involved when SEC and union negotiations over a
    compensation and benefits agreement reached an impasse. SEC management
    told us that they have formed a labor-management working committee to
    discuss how to implement the terms of the new Compensation and Benefits
    Agreement as provided for under the Panel ruling.

    ^11The Federal Service Impasses Panel is part of the Federal Labor Relations Authority and
    resolves impasses between federal agencies and labor unions representing federal
    employees arising from negotiations over conditions of employment. The Panel may make
    recommendations to the parties on how to overcome the impasse, if bargaining and
    mediation are unsuccessful.

    Agencies Have Directly Engaged Employees in Consultations about the
    Performance Management System

    The financial regulatory agencies involved employees in different ways
    when developing their performance management systems. This process can
    involve directly engaging individual employees and collecting opinions
    from all employees through focus groups, surveys, or other forms of
    feedback to develop a successful performance management system. Further,
    soliciting employee input is also important when developing or revising
    competencies or performance elements and related performance standards in
    a performance management system in order to ensure that the competencies
    and standards reflect skills and behaviors that are relevant to employee
    tasks and responsibilities. While all of the financial regulators involved
    employees to some degree, as the following examples illustrate, NCUA did
    not consistently solicit input on developing or revising the competencies
    and standards.

    oIn 2003-2004, when the Federal Reserve Board sought to revamp its
    performance management system, the agency hired an outside consultant to
    conduct focus groups with the intent of identifying issues raised by
    employees and making recommendations to address any concerns. Some focus
    group participants said that the agency's recommended rating distribution
    guidelines might prevent some employees from achieving a rating in the
    highest category. Furthermore, some employees were concerned about
    possible unfairness in ratings and wanted to see the distribution of the
    performance ratings for all employees published. As a result of this
    feedback, management began publishing the agency's ratings distributions,
    and added information on the system's process to the agency's internal Web
    site on the performance management system.

    oWhen developing its first performance-based pay system in 2006, CFTC
    solicited employee input through a variety of methods. The agency hired a
    contractor to conduct focus groups and to survey employees about
    transitioning to a performance-based pay system and the administration of
    a performance management system. The contractor also hosted a Webinar, a
    Web-based interactive seminar that allows for the submission of anonymous
    questions and comments, to present the results of the employee survey.
    Additionally, CFTC conducted town hall meetings to inform employees about
    development of the system. As a result of employee feedback, management
    decided to delay the first phase of implementation of the system from July
    2006 until October 2006 in order to allow additional time for employees to
    learn about the system and make the transition. Union representatives at
    CFTC (Chicago and New York) told us that prior to CFTC's transition to
    performance-based pay, the agency's management communicated frequently
    with the union and provided appropriate notice prior to implementing
    changes.

    oThrough internal surveys, OFHEO received feedback on employee concerns
    regarding opportunities for promotion and the frequency of progress
    reviews. According to an agency official, feedback from an employee survey
    indicated that employees wanted more opportunities for promotion than the
    prior six pay-band system allowed. On the basis of this employee feedback,
    OFHEO made the decision to switch to 18 pay grades and created career
    ladders. Further, employees commented through the survey that they wanted
    more feedback on their performance during the year. As a result, OFHEO
    increased the number of progress review meetings from two to four per
    year. An agency official stated that the Office of Human Resources
    Management monitors these meetings to ensure that they have been held.

    oSEC has analyzed data on SEC responses to OPM's governmentwide Federal
    Human Capital Survey. According to agency officials, SEC has tracked
    employee responses to questions on, for example, how well the agency
    rewards good performers and deals with poor performers. In addition, SEC
    has created a mailbox for anonymous employee comments and constructive
    criticism on the performance management system.

    oFCA circulated a draft of its proposed performance management system in
    2002, and solicited comments from employees. As a result of employee
    comments, FCA revised the descriptions of performance elements in the
    performance plans, changed the weight of an element dealing with equal
    opportunity employment, eliminated one element, and provided additional
    guidance and training. To show how employee feedback was addressed, FCA
    management presented a briefing to employees, which listed some of the
    employee comments about the individual performance plans with accompanying
    responses from management.

    oAccording to an NCUA official present at the time when the agency
    originally developed its performance elements and standards, NCUA
    conducted job analysis studies for all positions, which involved employees
    and supervisors in identifying specific duties, skills, and competencies
    needed to accomplish different jobs. In addition to the studies, she said
    that NCUA surveyed employees and conducted an assessment to identify any
    gaps in the performance elements and standards. In 2006, when NCUA revised
    the elements and standards for some examiner positions, NCUA used a
    committee consisting of managers, supervisors, and one employee to develop
    the new elements and standards. Union representatives told us they were
    briefed on the final version of the elements and standards, but were not
    asked for input. NCUA is currently revising individual performance plans
    for other positions and the process does not include provisions for
    soliciting and incorporating employee input. In comments on the draft of
    this report, NCUA officials stated that NCUA sought to solicit input from
    employees for certain positions, but that it was not necessary for
    positions that are common across the government, since NCUA usually adopts
    the competencies established by OPM for those positions.

    Some union and employee group representatives we spoke with did not think
    that management gave adequate consideration to employee input. For
    example, the Employees' Committee at the Federal Reserve Board, which
    provides advice to the Management Division on a variety of issues, was
    asked to provide comments during the latest revision of the performance
    management system. According to committee members, the committee submitted
    a paper containing recommendations in response to this management request.
    The committee, however, did not receive a written response from management
    acknowledging their recommended changes. Committee members told us they
    are now hesitant to submit input during the current strategic planning
    process because they are concerned about the usefulness of putting time
    and energy into developing recommendations that may not be considered.
    According to agency officials, the responses from the Employees' Committee
    and other employee focus groups held on this topic were summarized by the
    consultant hired for the project and the consultant presented the summary
    comments to management through the executive oversight committee. In
    addition, management officials stated that they met with other committee
    members (i.e., the heads of special interest groups) to discuss their
    input. The Federal Reserve Board's Administrative Governor has also held
    monthly meetings with randomly selected employees as an opportunity for
    employees to voice their concerns about the performance management
    program, among other topics.

    Agencies Have Encouraged Employee Participation in Performance Planning
    and Appraisals

    All of the agencies, including FCA and FHFB, required or encouraged
    employee participation in developing individual performance plans or
    writing self assessments, contribution statements, or reports summarizing
    accomplishments at the end of the appraisal cycle. In high-performing
    organizations, employees and supervisors share the responsibility for
    individual performance management and both should be actively involved in
    identifying how individuals can contribute to organizational results and
    be held accountable for their contributions. By actively participating,
    employees are not just recipients of performance expectations and ratings,
    but rather, have their ideas heard and considered in work planning and
    assessment decisions. However, employee representatives from some
    agencies, such as FDIC, OTS, and OCC, expressed concern that employees
    were not actively involved in the performance planning and appraisal
    processes even when the agency required or encouraged such
    participation.^12

    ^12We did not assess whether meetings involving employees in performance planning or
    appraisals were conducted in accordance with agency policy or the quality of the
    interactions between supervisors and employees. We relied on representatives from
    employee groups and unions to describe their perceptions of actual employee participation
    in expectation-setting meetings and their perceptions of management�s consideration of
    employee input into appraisals.

    oAt FCA, employees could participate in performance planning by working
    with their rating officials to identify accomplishments expected to be
    achieved during the appraisal period. In addition to participating in an
    official mid-year performance review, at the end of the appraisal cycle,
    employees and supervisors could meet for a pre-appraisal interview to
    discuss the employees' accomplishments during the previous year.
    Additionally, employees could submit an optional self assessment of their
    performance. This input was supposed to be considered when the supervisor
    evaluated the employee, according to FCA policy.

    oEmployees at FHFB had several options for participating in developing
    their performance plans--working with the supervisor to develop the plan,
    providing the supervisor with a draft plan, or commenting on a plan
    prepared by the supervisor.

    Although FDIC, OTS, and OCC provided some opportunities for employee
    participation in the planning and appraisal processes, we heard from union
    representatives at these agencies that this participation did not always
    occur, as the following examples illustrate.

    oFDIC's performance management directive requires that the employee and
    the supervisor have a meeting to discuss all performance criteria included
    in the employee's performance plan and any expectations regarding the
    quality, quantity or timeliness of work assignments. The policy also
    encourages the employee to submit an accomplishment report and to submit
    written comments on his or her supervisor's draft assessment of the
    employee's "Total Performance" before it is forwarded to higher levels of
    review within a pay pool. However, union representatives told us that
    expectation-setting meetings have not been consistently conducted;
    instead, sometimes employees have simply signed a form to acknowledge
    receipt of their performance plans. Additionally, employee comments on the
    appraisal form have not been taken into account by supervisors, according
    to union representatives. FDIC officials stated that the rating official
    and employee are required to meet to discuss expectations at the beginning
    of the rating period or whenever there is a change in performance
    criteria. Officials also noted that the performance management program is
    a collaborative process that relies on communication between a manager and
    his or her employees, and that the employee is supposed to seek
    clarification on performance criteria or expectations from the supervisor
    if necessary, as is explained in the directive.

    oAn employee union representative at OTS maintained that employees have
    not been very involved in setting their own performance expectations;
    instead, supervisors have informed them about what they should do at the
    beginning of the performance appraisal cycle. The representative told us
    that supervisors may discuss changing expectations with employees during
    the year, but these discussions have not always occurred. According to an
    agency official, OTS has encouraged managers to regularly meet with their
    employees and provide a clear picture of what is expected of employees for
    the year in terms of their individual roles and responsibilities for the
    standardized performance expectations and what will be considered in
    appraising the employees' performance.

    oAlthough OCC provided opportunities for employee participation in the
    performance planning and appraisal processes, union representatives told
    us that this participation did not always occur. At OCC, employees may
    participate in developing their individual performance plans and are
    supposed to submit accomplishment reports. Further, officials explained
    that many employees at OCC have secondary objectives in their performance
    plans. Because secondary objectives are customized, there should be a
    discussion between the supervisor and the employee. According to an
    official, if an employee has customized secondary objectives included in
    his or her individual performance plan, the employee and supervisor are
    supposed to have a discussion about it.^13 However, representatives from
    the union at OCC told us that performance plans are pretty generic and are
    distributed to individuals based on their grade levels. They said that
    some employees do not sit with their managers to tailor the plans;
    instead, employees just sign the forms to acknowledge receipt of the
    plans.

    ^13According to OCC officials, generic performance plans are established for examiners
    because they all perform similar functions. The primary objectives in these standardized
    plans are generic. Any additional primary objectives or secondary objectives included in the
    examiner performance plans are tailored to individuals. According to officials,
    commissioned examiners should have at least one secondary objective in their performance
    plans so that they have the potential to receive a level 4 (highest) performance rating.
    Precommissioned examiners, who are focused on completing a rigorous training program,
    are not required to have secondary performance objectives, although they are not
    prohibited from having them.

    Agencies Have Provided Training on Performance Management Systems

    All of the financial regulatory agencies have conducted some form of
    training or information dissemination on topics related to performance
    management. Asking employees to provide feedback should not be a one-time
    process, but an ongoing process that occurs through the training of
    employees at all levels of the organization to ensure common understanding
    of the evaluation, implementation, and results of the systems. Providing
    training  when changes are made to a performance management system can
    help ensure that employees stay connected to the system and reinforce the
    importance of connecting individual performance expectations to
    organizational goals. At some agencies, such as SEC and FHFB, training has
    been mainly directed at supervisors, while at FDIC training has been given
    to nonmanagers as well. Formal training for nonsupervisors at the agencies
    has typically been directed at new employees or has occurred when
    significant changes were being made to a performance management system.
    Some agencies have distributed materials through the agency intranet,
    memos, emails, or other written documents, as the following examples
    illustrate.

    oSEC has offered several opportunities for supervisors to learn the
    mechanics and skills necessary for administering the performance
    management system. Specifically, new supervisors have received general
    training on supervisory roles and responsibilities, including performance
    management. For supervisors, SEC has offered two levels of classes on
    managing performance and communicating expectations. Supervisors have also
    had the opportunity to receive training on managing labor relations, which
    has included discussions of SEC's agreement with the union, and the
    performance-based pay and award systems. Supervisors could also attend a
    briefing on performance management concepts and processes. In addition to
    offering supervisor training, SEC informs new employees about the
    performance management system during the orientation program. Performance
    management information is also available to employees through the agency's
    intranet web site. Finally, supervisors are supposed to brief new
    employees on the performance management system at the beginning of the
    rating cycle, during discussions of individual performance standards.

    oMost employees at FHFB have not received training on performance
    management since the late 1990s, and are expected to learn about the
    system from their supervisors. However, FHFB offered training for managers
    and supervisors in 2004 on the performance management system and how to
    conduct performance appraisals.

    oFDIC has conducted several training sessions and disseminated information
    to managers and employees related to its performance management and pay
    for performance programs. This has included in-person training sessions,
    taped sessions made available for viewing on IPTV, and "question and
    answer" documents and policy directives available on the agency intranet.
    FDIC provided specific training for nonsupervisors in 2006 when management
    and union representatives jointly conducted training sessions on the
    agency's new compensation agreement. Training was intended for
    non-management employees, including bargaining unit and non-bargaining
    unit employees, and was conducted in a variety of formats. Sessions
    included discussions of employees' roles and responsibilities in the
    performance management and pay for performance systems.

    Agencies Generally Have Linked Pay to Performance and Built in Safeguards

    As discussed, the 10 financial regulatory agencies linked pay to
    performance and built safeguards into their performance management systems
    but could make improvements to ensure that poor performers do not receive
    pay increases and to improve the communication of performance standards
    and transparency of performance results. This section provides more
    detailed information on the different ways in which the agencies
    translated performance ratings into pay increases and used different
    budgeting strategies for performance-based pay. The section also discusses
    how the agencies awarded pay increases that considered performance but
    were not dependent on ratings. Finally, information is presented on agency
    implementation of two additional safeguards: higher-level reviews of
    performance rating decisions and establishing appeals processes for
    performance rating decisions.

    Agencies Used Differing Methods to Translate Performance Ratings into Pay
    Increases

    For increases that were linked to performance ratings, the financial
    regulatory agencies used different methods to translate employee
    performance ratings into pay increases. These methods included
    establishing ranges for increases, using formulas, and considering current
    salaries when making decisions on the amounts of performance-based pay
    increases for individuals.

    Several agencies established ranges of potential pay increases
    corresponding to the various performance rating levels. These systems gave
    managers the discretion to determine the exact pay increase amounts for
    individuals, within those ranges, as the following examples illustrate.

    oAt OTS, employees who received a rating of 5 (on a 5-level scale)
    received between a 5.5 percent and 7.5 percent pay increase, while
    employees who received a rating of 3 received between a 1.5 percent and
    3.25 percent pay increase during the appraisal cycle we reviewed.
    Employees who received a rating of 1 or 2 did not receive any pay
    increase. OTS gave managers the flexibility to determine the specific pay
    amount each employee would receive within the range of possible pay
    increases corresponding to that performance rating.

    oOCC established ranges of potential pay increases that corresponded to
    different performance rating levels and gave managers the flexibility to
    decide on the exact amount of pay increase that each individual would
    receive within the range that corresponded to that employee's rating
    level. Each year OCC adopts a merit pay matrix that defines a range of
    allowable percentage increases that may be paid for performance rating
    levels 3 and 4 (the two highest rating categories). During the appraisal
    cycle we reviewed, individuals with a level 3 performance rating were
    eligible to receive a merit increase between 2.1 percent and 5.5 percent,
    and individuals with a level 4 rating could receive a merit increase
    between 5 percent and 9 percent. The rating official recommended the
    percentage of merit pay that each employee with a summary rating of 3 or 4
    should receive. Agency officials told us that it can be challenging for
    managers to determine the pay increase amount for each employee within
    those preestablished pay increase ranges. Managers want to ensure
    consistency among employees with similar levels of performance and often
    consult with other managers or human resources staff for advice when
    making these pay increase decisions. Employee representatives expressed
    some concern about the overlapping ranges for pay increases, and a
    representative said that employees are unclear about what performance
    behaviors are needed to achieve merit increases.

    Other agencies used formulas for determining the amounts of pay increases
    linked to performance ratings to be awarded, as the following example
    illustrates.

    oNCUA used a pay matrix tied to employees' performance rating scores
    (which could range from 0 to 300) to calculate the pay increase
    percentages. All employees in the same pay pool that received the same
    performance rating would receive the same pay increase percentage.
    Specifically, an employee who received a performance rating score of 234
    fell within the "fully successful" performance rating range and received a
    pay increase of 3.066 percent. Another employee who received a performance
    rating score of 235 fell within the "highly successful" performance rating
    range and received a pay increase of 3.076 percent. Employees who received
    a performance rating score below 165 fell within the "unsatisfactory" or
    "minimally successful" performance rating ranges and did not receive any
    pay increases.

    Some agencies considered employees' current salaries when deciding on the
    amounts for pay increases linked to performance ratings, as the following
    example illustrates.

    oAt FCA, the percentage pay increase an employee received depended on
    where the employee's current salary fell within the pay band. FCA used a
    merit matrix to calculate merit pay increases. The matrix considered an
    employee's existing salary position within the relevant pay band (with
    position defined in terms of one of five possible quintiles), as well as
    the employee's performance rating, and determined the percentage pay
    increase corresponding to those factors. For example, for the performance
    appraisal cycle we reviewed at FCA, the percentage increase in pay that an
    employee who received a fully successful performance rating could receive
    ranged from 3.5 percent (for an individual whose salary was in the bottom
    quintile of the pay band) to 2.0 percent (for an individual whose salary
    was in the top quintile of the pay band). For employees with the same
    performance rating, an employee whose salary was considered to be below
    market rate at the bottom of the pay band would receive a larger
    percentage pay increase than an employee whose salary was considered to be
    at or above market rate. FCA provided pay increases only to employees who
    performed above a minimally successful rating level.

    At many of the agencies, as an employee's salary approached the top of the
    pay range for a position, increases linked to performance ratings could be
    received as a combination of permanent salary increase and a one-time,
    lump sum cash payment, as the following example illustrates.

    oAt FHFB, for an employee in a position with a pay range of
    $70,000-$90,000, if the individual's salary was near the top of the pay
    range, he or she would receive a performance-based merit increase to take
    his or her salary to the top of the salary range and then receive a lump
    sum payment.

    Across the various methods used to translate performance ratings into pay
    increases, the expectation would be that larger pay increases are
    associated with higher performance ratings. As a means of providing a
    quantified descriptor of how strongly increases in ratings were associated
    with increases in pay linked to those ratings at each of the agencies, we
    computed a Spearman rank correlation coefficient between employees'
    performance ratings and the percentage increases in pay that were linked
    to performance ratings.^14 Although the correlation coefficients for the
    eight agencies varied from +0.63 and +0.94, they all demonstrated a strong
    positive association between higher performance ratings and higher
    ratings-linked pay increases (expressed as a percentage increase in
    salary).^15

    ^14A correlation coefficient is a measure of association (strength) of the relationship between
    two variables; in this case, ratings and percentage increases in pay. A positive correlation
    coefficient would mean that the two variables tend to increase (or decrease) together. A
    positive coefficient would indicate that as the rating goes up, so does the percentage
    increase in pay. A negative coefficient would mean that the two factors have an inverse
    relationship�as one variable increases, the other decreases. Values of the coefficient may
    range from -1.0 to +1.0. The percentage increase in ratings-linked pay was based on the
    combined value of both increases in base pay and lump sum (one time) payments, relative
    to prior annual salary. The performance appraisal and performance-based pay systems at
    FDIC and SEC were sufficiently different from the other eight agencies that we do not
    include correlation coefficients for these two agencies. See appendix I, Objectives, Scope,
    and Methodology, for additional information concerning the exclusion of FDIC and SEC
    from this analysis.

    ^15In those instances where agency rating scales used lower numeric values to indicate higher
    performance levels, the values were reversed so that all coefficients would reflect the
    relationship of an increase in ratings with an increase in pay as a positive coefficient.

    While the correlation coefficients provide some additional perspective on
    the linkage between performance ratings and pay increases at the financial
    regulatory agencies, they should be viewed as a rough gauge of the overall
    strength of the relationship across the agencies and are not sufficient
    for ranking or making other comparisons between agencies.^16 In reviewing
    the coefficients, we noted that agencies with some of the lowest
    correlations were using a four-level rating system that produced rather
    constrained ratings distributions. In one instance, for example, employees
    rated at the two lowest performance levels (called levels 1 and 2) were
    not eligible for pay increases, and over two-thirds of all employees
    received a level 3 rating. Both the base pay increases and bonus amounts
    that could be awarded for level 3 performance overlapped with those for
    level 4 (the highest level), such that some employees rated at level 3
    realized a percentage increase in pay that was twice the amount obtained
    by other level-3-rated employees, as well as even some level-4-rated
    employees.

    ^16See appendix I for additional information on the limitations of the correlation coefficient.

    Agencies Used Different Budgeting Strategies for Performance-Based Pay

    The federal financial agencies also varied in their strategies to budget
    for pay increases directly linked to performance ratings. Many of the
    agencies set aside funds each year for performance-based pay increases. At
    some agencies, these funds were treated as an agencywide funding pool or
    pools for performance-based pay increases, as the following examples
    illustrate.

    oAccording to agency officials, NCUA established two agencywide merit
    funding pools for different employee grade-level groups because higher
    graded employees usually received higher ratings and consequently, higher
    merit pay increases. Officials stated that the establishment of two merit
    funding pools was more advantageous to lower graded employees and
    increased the amount of funds available for their merit pay.

    oSEC established one pool of funds for performance bonuses and quality
    step increases available for senior officers, and another pool for all
    other employees.

    At some agencies the performance-based pay increases budget was divided
    into separate pay pools by suborganizational unit, and the responsibility
    for distributing merit pay increases was delegated to management at the
    subunit level, as the following examples illustrate.^17

    ^17Officials at one agency told us that setting separate budget amounts for merit pay
    increases for each unit helped to ensure that merit pay resources were more fairly
    distributed across the units.

    oFor the "Pay for Performance" program at FDIC that covers bargaining unit
    and nonbargaining unit employees, the agency established pay pools at the
    division level (and at the regional level for the large Division of
    Supervision and Consumer Protection), and allocated funds for
    performance-based pay increases to the pools. Funds were allocated through
    pay pools to each division and office, with subsequent separations of each
    division or office into separate populations for bargaining unit and
    nonbargaining unit employees. (Corporate managers and executives at FDIC
    are covered by a separate pay-at-risk compensation system.)

    oFHFB provided each office with a pay pool for performance-based annual
    pay increases. The merit increase pool amounts were determined based on
    the approved governmentwide general increase plus 2.5 percent of the total
    base salaries for all employees in the office. An FHFB official stated
    that the reason each office was provided with a pool of funds was to avoid
    comparing individuals with different functions and responsibilities to
    each other, and this official believed that FHFB had greater control when
    pay decisions were made at the office level. For example, an office
    director could decide to assess all his staff at the outstanding level,
    but less performance-based pay would be available for each office
    employee. Office directors were responsible for determining the sum of all
    merit increases and lump sum payments for their offices, while not
    exceeding their offices' merit increase pool allocations.

    Agencies Provided Other Increases That Considered Performance

    In addition to providing ratings-based pay increases, the financial
    regulatory agencies awarded pay increases that considered individual
    performance in some way without being directly linked to employees'
    performance ratings. The following are additional examples of these types
    of pay increases at the agencies to supplement the material presented in
    the body of the report.

    oThe Federal Reserve Board offered a cash awards program, which accounted
    for about 2.5 percent of the total agency salary budget, to reward
    employees who sustained exceptional performance or made significant
    contributions to successful projects, according to officials. According to
    the Federal Reserve Board's criteria for this awards program, cash awards
    could be given to employees who initiated, recommended, or accomplished
    actions that achieved important Federal Reserve Board goals, realized
    significant cost reductions, or improved the productivity or quality of
    Board services. These awards could be made in any amount up to a maximum
    of 10 percent of an employee's base pay within the same performance cycle.
    The 10 percent maximum did not apply to variable pay awards, which are
    given instead of cash awards to economists, attorneys, or Federal Reserve
    Board officers.

    oFor some regulators, these types of pay increases were sizeable. For
    example, at OCC, approximately 10 percent of employees were awarded a
    special increase during the completed appraisal cycle we reviewed. The
    awards represented a 5 percent raise for those individuals. According to
    OCC policy, special increases are to be awarded to recognize increased
    value an employee contributes to his or her job by applying desirable
    skills over a significant period of time or by assuming higher-level
    responsibilities within his or her pay band. OCC also provided some pay
    increases for competitive and noncompetitive promotions during the
    appraisal cycle we reviewed. Interestingly, of the eight financial
    regulators that participated in OPM's 2006 Federal Human Capital Survey,
    OCC had the largest percentage of employees agreeing with the view that
    awards in their work units depended on how well employees performed their
    jobs. At OCC, 55.7 percent of employees agreed with this view.
    Governmentwide the corresponding figure was 39.8 percent of employees. Two
    other agencies, FCA and NCUA, also had slightly over 50 percent of their
    employees agreeing with this statement.

    Results from the 2006 OPM Federal Human Capital Survey suggest that the
    financial regulatory agencies have done relatively better than many
    agencies governmentwide in linking pay to performance. All eight of the
    financial regulators that participated in the 2006 survey had percentages
    of positive responses from their employees that were about the same as or
    better than the governmentwide percentage of 21.7 positive responses to an
    item asking employees whether they agreed or disagreed with the statement
    that pay raises depended on how well employees performed their jobs at
    their agencies. The percentage of employees giving a positive response to
    this item was at least twice as high as the governmentwide value for a
    majority of the eight agencies participating in the survey.

    Agencies Built in Safeguards

    While the financial regulatory agencies built safeguards into their
    performance management systems, the agencies established and communicated
    standards for differentiating among performance rating categories and
    criteria for performance-based pay decisions to varying degrees. The
    agencies also built in additional safeguards of establishing higher-level
    reviews of performance rating decisions by either higher-level officials
    or oversight groups, and all have established appeals processes for
    employees to request reconsiderations of performance rating decisions. It
    is important for agencies to have modern, effective, credible, and, as
    appropriate, validated performance management systems in place with
    adequate safeguards to ensure fairness and prevent politicization and
    abuse. We have reported that a common concern that employees express about
    any performance-based pay system is whether supervisors have the ability
    and willingness to assess employees' performance fairly.^18 Using
    safeguards can help to allay these concerns and build a fair and credible
    system.

    ^18GAO-06-142T.

    Agencies Implemented Higher-Level Reviews of Performance Rating Decisions

    Although they have used different approaches, all of the federal financial
    regulatory agencies have provided higher-level reviews of individual
    performance rating decisions to help ensure that performance standards
    were consistently and equitably applied across the agency. All of the
    agencies have established at least one level of review of employees'
    performance ratings to help ensure that performance standards were applied
    appropriately. At some agencies, this oversight process has involved a
    second-line supervisor or higher-level official reviewing the employee's
    performance rating to ensure that the rating was appropriate and
    consistent with any narrative describing the employee's performance. Some
    agencies also have offices outside of the employee's team/office, such as
    the Human Capital Office, review employee performance ratings to ensure
    that rating decisions for groups of employees (agencywide, or by division
    or region) were fair and equitable, as the following examples illustrate.

    oOCC officials indicated that at the end of every appraisal cycle, they
    have evaluated the results of the performance management and pay system by
    looking, for example, at the differentiation in ratings and pay decisions
    and how the pay ranges were used. The human resources officials have
    discussed these results with managers to show them how their employees'
    performance ratings and pay decisions influenced OCC's overall results.
    For example, OCC introduced merit bonuses for the first time in the 2005
    performance appraisal cycle. Upon reviewing the results of the merit bonus
    decisions, OCC officials found that the percentage of employees in each
    organizational unit that received a merit bonus varied widely among the
    units--ranging from a high of over 80 percent of employees receiving a
    bonus in one unit to 30 percent in another unit. As a result, according to
    agency officials, OCC decided to recommend a minimum amount for bonuses
    and restrict the percentage of staff who can receive a bonus to 50 percent
    within each organizational unit. Agency officials also indicated that they
    have identified areas of future training on the system based on the
    results of reviews and subsequent discussions with managers, in order to
    improve implementation of the system.

    oAt NCUA, an employee's performance rating was completed and signed by the
    rating official, and then a reviewing official (an office or regional
    director) reviewed the employee's performance rating to ensure that the
    rating was supported. Reviewers also look for consistency throughout the
    rating process. For example, an Associate Regional Director will look
    across all examiners' ratings in the region for consistency.

    oFHFB provided a supervisory review of performance ratings to help ensure
    that an employee's recommended rating was justified as well as consistent
    with other ratings in the employee's work group. Once the rating official
    (usually a first-line supervisor) recommended an initial summary rating,
    the rating official would forward the rating to a second-line supervisory
    reviewer (usually the division director or deputy director), called a
    reviewing official. According to FHFB officials, the reviewing official
    was usually knowledgeable about the employee's performance and could
    discuss the rating narrative and final rating decision with the rating
    official before the rating was shared with the employee. In addition, the
    reviewing official checked whether performance rating narratives supported
    individual performance elements, summary ratings were properly calculated
    and appropriately signed, and there was consistency of ratings across the
    work group. FHFB employee representatives with whom we spoke stated a
    belief that the rating review process was effective and that supervisors
    did not give ratings unless they first reviewed their decisions with
    management. Employee representatives noted that there is a commitment in
    the agency to be fair and equitable in assigning ratings.

    oFCA provided multiple levels of reviews of ratings to ensure the
    appropriateness of rating scores and consistency in applying performance
    standards across FCA offices. After the rating official completed an
    initial rating, a second-line reviewer was assigned to review each
    employee's rating against the standards. Before final ratings were issued,
    FCA's Office of Management Services provided a check to ensure that
    offices were appropriately and consistently applying performance standards
    and to look for any significant outliers. Employee performance assessments
    rated as outstanding and as less than fully successful would be reviewed
    to determine whether rating scores matched the narrative discussions. Any
    potential issues identified would be brought to the attention of the
    rating official for discussion and resolution. Management officials told
    us that the Chief Human Capital Officer would meet with division
    management to discuss whether the rating criteria were appropriately
    applied and then division managers would determine whether to change any
    performance ratings. In addition, the Office of Management Services
    performed a post-rating distribution audit to review final rating
    distributions to help inform future rating practices.

    Establish Appeals Processes for Performance Rating Decisions

    As mentioned previously, all of the federal financial regulatory agencies
    have established appeals processes for employees to request
    reconsiderations of performance rating decisions to help ensure accuracy
    and fairness in the process. Providing mechanisms for employees to dispute
    rating decisions when they believe decisions are unfair can help employees
    gain more trust in the system, as the following examples illustrate.

    oEmployees at CFTC could ask for an appeal of their overall rating through
    the agency's reconsideration process. An employee could first appeal his
    or her rating to the manager who reviewed the rating (called the reviewing
    official) by defending his or her position orally or in writing. This
    Reviewing Official then considered the employee's justification as well as
    the original rater's opinion and provided a final decision on the matter.
    According to CFTC officials, employees sometimes wanted to change the
    wording in their performance evaluations.

    oOTS has defined a grievance policy for employees who are dissatisfied
    with their performance ratings. Employees covered by the bargaining unit
    agreement may file a grievance under the negotiated agreement while
    employees not covered by the agreement may request a grievance (within 10
    days of receiving their ratings) under the agency's administrative
    grievance procedures. OTS' union representative reported that in the past,
    management and union representatives had resolved many cases of rating
    disputes prior to employees filing formal grievances.

    oThe Federal Reserve Board has established an appeals process so that an
    employee can appeal the fairness of an overall rating decision, the rating
    on an individual element, or any adverse comments appearing on the
    performance assessment form. Employee representatives we spoke with said
    that they believe that employees understand the appeals process, but
    thought that more employees could take advantage of this opportunity. An
    employee may first appeal his or her performance rating to a division
    director, who in turn will notify the appropriate supervisor who submitted
    the rating. Then, the division director will determine whether the rating
    is appropriate based upon a review of documentation provided by both the
    employee and supervisor. If the employee is not satisfied with the
    first-level appeal decision, the employee may make a second-level appeal
    to the Associate Director of Human Resources and specify areas of
    disagreement with the performance assessment. The Associate Director for
    the second-level appeal will then determine whether the division has
    reasonably followed procedures and whether performance assessment
    guidelines were applied consistently to other employees reporting to the
    same supervisor. This supporting documentation submitted by the division
    will be shared with the employee, except in cases where doing so infringes
    on the confidentiality of other employees. As a result, first- or second-
    level appeal decisions may result in changes to an overall rating, changes
    to the rating of an individual element, or changes in the language in the
    employee's performance assessment.

    oOFHEO has established a three-level appeals process to ensure that
    employees can dispute rating decisions when they disagree with rating
    decisions. Employees can appeal the overall performance rating or
    individual performance elements within the rating. For the first-level
    appeal, the employee can submit a request with supporting documentation to
    the performance rating official for reconsideration. If an appeal is not
    resolved at the first level, the employee can request that the
    second-level supervisor review the performance rating and supporting
    documentation. Finally, the employee can request a third-level appeal by
    the third-level supervisor, if necessary.

    Appendix IV:  Actions Taken by Financial Regulators to Seek to Maintain Pay and Benefits
    Comparability and Pay and Benefits Data

    The federal financial regulatory agencies have made an effort to meet the
    comparability requirements as required by the Financial Institutions
    Reform, Recovery, and Enforcement Act of 1989 (FIRREA) and subsequent
    legislation.^1 However, we found that factors such as funding constraints,
    when the agency was granted flexibility under Title V of the U.S. Code,
    the needs or preferences of their respective workforces, and each agency's
    pay and benefits policies can result in some variation in their pay and
    benefits.^2 They have also taken steps to explore a common survey that
    would enable them to more efficiently collect information for pay and
    benefit comparability purposes.

    ^1For the six FIRREA financial regulatory agencies (FCA, FDIC, FHFB, NCUA, OCC, and
    OTS), see sections 301, 702, 120-3, 1206, and 1210 of the Financial Institutions Reform,
    Recovery, and Enforcement Act of 1989, Pub. L. No. 101-73 (1989); for OFHEO, section 1315
    of Pub. L. No. 102-550 (1992); for SEC, section 8(a) of Pub. L. No. 107-123 (2002), and for
    CFTC, section 10702 (a) of Pub. L. No. 107-171 (2002).

    ^2While many of the financial regulatory agencies received increased flexibility under
    FIRREA in 1989, such flexibility was afforded to OFHEO in 1992 and to CFTC and SEC in
    2002.

    Financial Regulators Have Conducted Individual Pay and Benefits
    Comparability Surveys and Regularly Consult with Each Other, but Noted
    Some Inefficiencies in the Process

    To seek to maintain pay and benefits comparability, the majority of the 10
    federal financial regulators have hired external compensation consultants
    to conduct individual formal pay and benefits comparability surveys that
    have included the other financial regulators. As shown in table 5, 7 of
    the 10 financial regulators conducted pay and benefits comparability
    surveys. Of the 7, 5 agencies also have included benefits in their formal
    surveys. According to agency officials, because some of the 10 agencies
    perceive the private sector as their main competitor for skilled
    employees, they have included private-sector entities in their pay and
    benefits surveys or have obtained additional private-sector data through
    the Bureau of Labor Statistics and private vendors to complement their pay
    and benefits surveys.

    Table 5: Pay and Benefits Surveys That Federal Financial Regulators
    Conducted through External Compensation Consultants, 1991-2006

    Agencies    Hired external      Included      Years in        Agencies
                    compensation      benefits in      which     participating in
                   consultants to    comparability agencies have     surveys
                    conduct pay         surveys      conducted
                   comparability                      surveys
                      surveys                         through
                                                     external
                                                   compensation
                                                    consultants
    CFTC     No. In 2003 and      N/A           N/A           Used FDIC and
                2005, used                                       OCC 2002 survey
                consultant to review                             results in 2003;
                existing surveys.                                used interagency
                                                                 group data in
                                                                 2005.
    FCA      Conducts a pay       No            1991, 1993,   The 2002 survey
                survey once every                  1996, 1999,   included FDIC,
                2-3 years.                         2002          FHFB, the
                                                                 Federal Reserve
                                                                 Board, NCUA,
                                                                 OCC, OFHEO, and
                                                                 OTS.
    FDIC     Conducts pay and     Yes           1996, 1999,   The 2005 pay
                benefits survey                    2002, 2005    survey included
                about once every 3                               all FIRREA
                years.                                           agencies as well
                                                                 as the Federal
                                                                 Reserve Board,
                                                                 CFTC, OFHEO,
                                                                 SEC, and several
                                                                 Federal Reserve
                                                                 Banks.

                                                                 The 2005
                                                                 benefits survey
                                                                 included all
                                                                 FIRREA agencies
                                                                 and the Federal
                                                                 Reserve Board.
    FHFB     Conducted a pay and  Yes           2002          The 2003 survey
                benefits survey                                  compared pay and
                once. Also uses                                  benefits with
                FDIC's pay and                                   FCA, FDIC, OCC,
                benefits surveys as                              NCUA, OTS, and
                a guide.                                         the Federal
                                                                 Reserve Board.
    Federal  Conducts pay and     Yes           Annual        The 2005 survey
    Reserve  benefits survey                    surveys       included OCC,
    Board    every 1-2 years.                   conducted     FDIC, NCUA,
                                                   between 1994  OFHEO, OTS, SEC,
                                                   and 2005,     as well as the
                                                   excluding     private-sector
                                                   2003.         entities and
                                                                 academia.
    NCUA     Conducted pay and    Yes           2000, 2004    The 2004 pay and
                benefits surveys                                 benefits survey
                twice.                                           included FDIC,
                                                                 OCC, OTS, FHFB,
                                                                 FCA, SEC, OFHEO,
                                                                 and the private
                                                                 sector.
    OCC      Conducted a pay      No            1999, 2001,   The 2006 pay
                survey every year,                 2002, 2003,   survey included
                alternating between                2006          FCA, FDIC, FHFB,
                a full survey that                               NCUA, OTS,
                covered many                                     OFHEO, SEC, and
                benchmarked jobs and                             the Federal
                a simplified survey                              Reserve Board.
                that covered a few
                of the benchmarked
                jobs.
    OFHEO    Conducted pay and    Yes           2000, 2005    The 2005 pay and
                benefits surveys                                 benefits survey
                every 3 to 5 years.                              included OCC,
                                                                 the Federal
                                                                 Reserve Board,
                                                                 FDIC, OTS, FHFB,
                                                                 and FCA.
    OTS      No. Conducts         N/A           N/A           N/A
                informal benchmark
                surveys as needed.
    SEC      No                   N/A           N/A           N/A

    Source: GAO summary of agency data.

    The remaining three regulators (CFTC, OTS, and SEC) have participated in
    the pay and benefits surveys of other agencies, and officials from these
    agencies said that they have used the results of these surveys, but have
    not conducted their own. For example, an SEC official told us that his
    agency often uses FDIC's data because, like SEC, FDIC has a large number
    of compliance examiners and must negotiate pay and benefits with the same
    union as SEC. In 2002 and 2003, CFTC has also hired consultants to review
    existing surveys from FDIC and OCC as well as from information gathered
    from other regulators.

    The agencies hired external compensation consultants to conduct the
    surveys because, according to officials from FCA and FDIC, these
    consultants provide an objective view of their agencies' pay and benefits.
    And, because they have often worked with other FIRREA agencies, the
    consultants can provide insights and perspectives based on information
    from other agencies. For pay comparability surveys, external compensation
    consultants compare base pay ranges for a given occupation, locality pay
    percentages and, to a lesser extent, annual bonus and other cash award
    policies. To compare pay across agencies, consultants send questionnaires
    on behalf of the sponsoring agency and ask participating agencies to match
    the jobs based on the job descriptions provided. The job descriptions
    usually contain information on duties, scope of responsibilities, and
    educational requirements.  External compensation consultants also have
    used various methods to assess the comparability of benefits. For example,
    the consultant for FDIC did a side-by-side comparison of benefits offered
    at other agencies, and also calculated the total cost of benefits per
    employee.

    In addition to conducting comparability surveys, agency officials told us
    that human capital officials at the 10 regulators have formed an
    interagency Financial Regulatory Agency Group. The members regularly
    consult with each other on pay and benefits issues, and as they prepare
    their budgets for the coming year, they meet to exchange information on
    potential and actual changes to pay and benefits. For example, the group
    has exchanged information on updates in merit pay ranges, bonuses, salary
    pay caps, and benefits such as flexible work schedules. Agency officials
    also have taken turns to update a spreadsheet that lists the pay ranges
    and benefits for all 10 financial regulators, a key document the agencies
    use to compare pay and especially benefits informally across agencies.

    However, in consulting with each other to meet comparability requirements,
    agency officials told us that because many of the financial regulators
    conduct comparability surveys, their staffs have had to respond to
    numerous and often overlapping inquiries, which can be burdensome and
    inefficient. This is especially the case for smaller agencies, such as FCA
    and FHFB, which tend to have smaller human capital (personnel) departments
    than larger agencies that may have pay and benefits specialists who can
    handle comparability issues full time, including filling out and
    processing various comparability surveys. According to officials from a
    few regulators, partly as a result of the substantial investment of time
    and resources, some agencies have not been timely or forthcoming in
    sharing their pay and benefits information.

    Regulators Are Exploring the Feasibility of a Common Survey

    According to several agency officials, in response to renewed interest of
    upper management from several agencies in consolidating pay and benefits
    surveys, the regulators are studying the feasibility of such a method. In
    December 2006, the regulators formed a subcommittee within the Financial
    Regulatory Agency Group to study the feasibility of a common survey.
    Agency officials are exploring whether consolidating the various
    comparability surveys into a common survey will improve the process for
    job matching and result in more efficient use of resources. They also told
    us that the subcommittee also has discussed the feasibility of
    establishing a Web-based data system to make the most current pay and
    benefits information available to participating agencies. The subcommittee
    is working on the details of allocating costs of a common survey among the
    agencies, but has suggested that costs might be prorated based on the size
    of each regulatory agency. As of March 2007, agency officials had not yet
    received cost figures from potential consultants.

    Agency officials who attended the first subcommittee meeting told us that
    implementation of a common survey would require collaboration and
    agreement on a number of matters, such as

    ochoice of external compensation consultant to conduct the common survey,
    since different consultants have different approaches to carry out the
    common survey;

    ogroup of jobs to be benchmarked for the common survey and best approach
    for job matching, as some jobs are unique to certain agencies;

    otiming and frequency of the common survey to meet everyone's needs since
    agencies determine pay and benefits at different times of the year and
    would need the updated information when the need arises;

    onumber and types of organizations to include in the common survey because
    while all agencies would want to include the financial regulators, some
    may need information from certain private-sector entities; and,

    ocost of the common survey may be substantial, which according to some
    agencies, is a potential concern.

    By forming the subcommittee to explore issues associated with developing a
    common survey, agency officials have adopted some of the practices that we
    identified that would enhance and sustain collaborative efforts. These
    practices include defining and articulating a common outcome, establishing
    means to operate across agency boundaries, and leveraging resources.^3

    ^3GAO, Results-Oriented Government: Practices That Can Help Enhance and Sustain
    Collaboration among Federal Agencies, GAO-06-15 (Washington, D.C.: Oct. 21, 2005).

    Agency officials who are members of the subcommittee told us that the
    officials have sent a formal request for information to several consultant
    candidates. The request inquired about the consultants' ability to plan
    and execute a common survey that will provide customizable reports for
    each agency and also create a secure, centralized data source on pay and
    benefits. In addition, agency officials asked how the consultants would
    approach job matching, a complicated task. For example, officials from
    FDIC, OFHEO, and SEC told us that the use of different pay plans and
    grades among agencies and the location of field offices in cities with
    different employment market conditions contributed to the difficulty in
    matching jobs across regulators. In addition, some agency officials said
    that it is difficult to match jobs because agencies have different job
    requirements that may differ even when a job title is the same. The
    subcommittee received responses from various consultants and as of March
    2007 was in the process of contacting the consultants to gather more
    details and to discuss the options available to them.

    Most Regulators Used Benchmarks Developed from Surveys and Other Data to
    Assess Comparability and Make Adjustments to Pay and Benefits

    In the absence of a legislative definition, agency officials told us that
    agencies have used various benchmarks, as shown in table 6, to assess pay
    and benefits comparability. For example, FDIC has sought to set its total
    pay ranges (base pay plus locality pay) for specific occupations and grade
    levels within 10 percent of the average of FIRREA agencies, a benchmark
    that pay and benefits consultants have used in their comparability
    surveys. FCA uses benchmarks, including average market rate paid by other
    financial regulators. CFTC uses average payroll and salary structure
    relative to other regulators. FHFB, NCUA, OTS, and SEC told us that they
    have not used specific benchmarks, and OTS uses informal benchmarks as
    needed.

    Table 6: Selected Examples of Benchmarks Agencies Have Used to Assess Pay
    and Benefits Comparability

          Agencies        Benchmark examples used to     Benchmark examples used
                           assess pay comparability        to assess benefits
    CFTC            Average payroll, salary          Benefits being of similar
                       structure, etc., relative to     types, and relative
                       other regulators.                benefits costs as
                                                        percentage of payroll.
    FCA             Pay at average market rate paid  No specific benchmarks.
                       by other financial regulators.
                       The goal is to be in the middle
                       range of the financial
                       regulators.
    FDIC            Since 1999, total pay (base pay  Benefits being of similar
                       plus locality pay) within 10     types and having
                       percent of the average of FIRREA equivalent or similar
                       agencies. Prior to 1999, no      overall value, without
                       specific benchmarks were used.   necessarily being
                                                        identical.
    FHFB            No specific benchmarks.          No specific benchmarks.
    Federal Reserve Pay at the average of the        Benefits being similar
    Board           market, including regulators and types.
                       other appropriate competitors.
    NCUA            No specific benchmarks.          No specific benchmarks.
    OCC             Pay within 10 percent of the     Benefits being similar
                       other agencies' (or the          types. OCC does not
                       market's) median base pay plus   consider the cost of
                       locality pay for each occupation benefits.
                       and grade.
    OFHEO           Pay within 10 percent of average Benefits being of similar
                       salary of other agencies or      types and having
                       market average for each          equivalent or similar
                       occupation and grade.            overall value, without
                                                        necessarily being
                                                        identical.
    OTS             No specific benchmarks. Informal No specific benchmarks.
                       benchmarks as needed.            Informal benchmarks as
                                                        needed.
    SEC             No specific benchmarks.          No specific benchmarks.

    Source: GAO summary of agency information.

    Agency officials told us that all agencies, including the three agencies
    that have not conducted formal benefits surveys, have assessed their
    benefits comparability by comparing individual benefit items as well as
    agency contributions to specific benefits. They added that most agencies
    have used the interagency group spreadsheet that lists all the benefits
    and agency contributions offered.

    According to agency officials, the financial regulators have used
    information from the pay and benefits comparability surveys and
    discussions among the agencies in their efforts to seek to maintain
    comparability. Table 7 provides some recent examples of these efforts.

    Table 7: Selected Examples of Recent Pay and Benefits Adjustments
    Resulting from Agencies' Comparability Assessments

    Year                Action taken to adjust pay and benefits
    2002 FCA adjusted its pay ranges based on its comparability survey, which
            stated that FCA's pay was lower than other FIRREA agencies.
    2002 In response to recently enacted comparability requirements, SEC
            substantially increased its pay ranges to be comparable to those
            offered at other FIRREA agencies.
    2003 As a result of gaining pay flexibilities, CFTC implemented new pay
            ranges for its 2003 pay schedule; CFTC increased base pay by 20
            percent for all eligible employees to partially close the 25 percent
            gap between CFTC and FIRREA agencies.
    2006 OFHEO increased its pay ranges across the board based on the findings
            from its 2005 pay and benefits survey.
    2006 The FDIC increased its pay scale minimums by 1.5 percent and pay
            scale maximums by 6 percent, effective February 18, 2006, based on
            FDIC's consultant's analysis of its pay and benefits survey.

    Source: GAO analysis of agency information.

    Agency Pay and Benefits Policies and Several Other Factors Contribute to
    Variations in Pay and Benefits

    Although the financial regulators have adjusted their pay and benefits to
    seek to maintain comparability, several factors influence compensation
    decisions that lead to some variations in pay ranges and benefit packages.
    As shown in figure 3 in the report, with the exception of the Federal
    Reserve Board and OFHEO, the financial regulators' total pay ranges
    consist of base pay and locality pay percentages that are calculated based
    on the employees' duty station. The Federal Reserve Board and OFHEO do not
    have separate locality pay percentages because Washington, D.C., is their
    only duty station. Figure 3 also shows that, for examiners, FDIC and NCUA
    pay ranges generally have lower minimum base pay than other agencies, and
    FDIC and OCC have higher maximum base pay for examiners. In addition, for
    economists, CFTC and FDIC pay ranges have
    lower minimum base pay than other agencies, and the CFTC and OCC pay
    ranges have higher maximum base pay.^4

    ^4We did not include the Federal Reserve Board and OFHEO in our example on differences in
    agencies� base pay because the Federal Reserve Board and OFHEO�s base pay include the
    element equivalent to other agencies� locality pay for Washington, D.C.

    Actual average base pay figures that we obtained from the Central
    Personnel Data File and from the Federal Reserve Board also vary among the
    10 agencies in relation to the agencies' respective base pay ranges, as
    shown in figure 3 in the report. For example, the actual average base pay
    for examiners at OCC ($92,371) is 52 percent of the maximum pay range of
    $177,600. However, actual average base pay as a percentage of maximum pay
    can vary considerably, as in the case of SEC attorneys. Their actual
    average base pay ($124,379) is 98 percent of the maximum pay range of
    $126,987.

    According to agency officials, two factors affect where actual average
    base pay falls within an agency's pay range. One is the distribution of
    the length of service among employees. For example, the actual average
    base pay for agencies with a higher proportion of long-tenured employees
    would be closer to the maximum of its pay range. Conversely, actual
    average base pay for agencies with a higher proportion of new hires would
    fall closer to the minimum of the pay scale. An OCC official told us that
    despite the fact that OCC also has a large number of experienced
    examiners, the actual average pay for OCC examiners may seem low compared
    to other agencies because OCC has hired a large number of examiners during
    the last 2 years. Officials from several federal regulators also told us
    that they rarely hire at the lower grade level for some occupations. For
    example, FHFB tends to hire mid-level employees because its relatively
    small office cannot afford a long training period for new hires.

    As shown in table 2 in the report, locality pay percentages vary among
    agencies for the same duty station. Table 8 shows the methods that
    agencies are currently using to determine their respective locality pay
    percentages and adjustments.

    Table 8: Agencies' Current Methods for Determining Locality Pay
    Percentages and Adjustments

              Agency         Methods for determining locality pay percentages and
                                                 adjustments
    CFTC                  Uses OPM locality percentages.
    FCA                   Uses the average rate of 5 FIRREA agencies: FDIC,
                             FHFB, NCUA, OCC, and OTS.
    FDIC                  Uses a formula jointly developed by the National
                             Treasury Employees Union and FDIC primarily based on
                             the Bureau of Labor Statistics National Compensation
                             Survey Cost of Labor data for federally defined
                             locality pay areas, with Runzheimer International
                             cost of living data influence for a very few areas
                             where there are extreme differences between cost of
                             living and cost of labor.
    FHFB                  For Washington, D.C., considers other federal bank
                             regulatory agencies per FHFB's comparability
                             statute. For other locations, uses FDIC locality pay
                             percentages.
    Federal Reserve Board Not Applicable. Washington, D.C., is the only duty
                             station.
    NCUA                  Considers other FIRREA agencies.
    OCC                   Uses primarily cost of labor data from the Economic
                             Research Institute.
    OFHEO                 Not Applicable. Washington, D.C., is the only duty
                             station.
    OTS                   Uses Runzheimer International cost of living data.
    SEC                   Currently adjusts yearly locality pay percentage
                             increases by at least the minimum recommended OPM
                             locality incremental adjustment.

    Source: GAO analysis of agency information.

    The benefits that the 10 financial regulators offered also varied.
    Although all of the agencies offer standard federal government benefits,
    there are variations in the extent of agency contributions and types of
    additional benefits these agencies offer. For example, all financial
    regulators offer the Federal Employees Health Benefits program, but agency
    contributions differ. Some agencies pay for a percentage of the health
    premium (e.g. 70 percent at FCA and 90 percent at OFHEO). CFTC contributes
    100 percent for reservists called to active duty. The following are
    selected examples of the additional benefits that some financial
    regulators offer as of September 2006 unless noted otherwise:

    oFive of the 10 regulators-- FDIC, FHFB, the Federal Reserve Board, OCC,
    and OTS--offer their employees 401(k) retirement savings plans with
    varying employer contributions. In addition, all agencies except the
    Federal Reserve Board offer the federal Thrift Savings Plan.^5

    ^5In addition to these five agencies, FCA offered a 401(k) plan but discontinued it in
    December 2006.

    oThe Federal Reserve Board and OCC offer domestic partner benefits for
    some types of plans.

    oFCA and SEC offer child care subsidies, and FDIC and OTS offer on-site
    day care.

    oFCA, FDIC, FHFB, and OCC reimburse employee expenses related to items
    such as fitness, recreation, and adoption in their wellness accounts.
    Amounts differ from $250 per year at FDIC to $700 per year at FHFB.

    According to agency officials, a number of factors have influenced their
    pay and benefits policies and could have contributed to the variations in
    their pay ranges and benefits. For example, the length of time an agency
    has been under the comparability requirements and related compensation
    flexibility provisions affected compensation. CFTC and SEC officials told
    us that because their agencies received pay and benefits flexibilities and
    were put under a comparability requirement much later (in 2002) than the
    six FIRREA agencies (in 1989), CFTC and SEC have taken an incremental
    approach to slowly increase their pay and benefits to close the gap with
    the other financial regulators. According to a CFTC official, this would
    allow time for employee input and acceptance while building agency
    capacity to manage the authority. Budgetary constraints represent another
    factor. OFHEO officials told us that OFHEO did not implement a new 401(k)
    retirement savings plan recommended by its external compensation
    consultant, Watson Wyatt, in its 2005 comparability survey because OFHEO
    is working to control the growth of its personnel expenses and because
    budget limitations resulting from being part of the appropriations process
    has caused OFHEO to curtail new benefits programs. Furthermore, agency
    officials said that an agency has to consider the particular needs and
    preferences of the agency's workforce as well as ways to attract and
    retain its workforce. For example, CFTC added a fully paid dental benefit
    as a result of an online vote by employees on preferred benefits options.
    FDIC officials indicated that its employees greatly value the matching
    contribution FDIC provides on its 401(k) plan, and found that the matching
    contribution is also an effective retention tool. Similarly, OCC added a
    401(k) retirement savings plan in order to attract and retain employees.
    According to an SEC official, SEC uses a student loan repayment benefit
    because the benefit helps to attract and retain employees, many of whom
    are recent law school graduates. Agency officials emphasized that it was
    not their goal to have identical pay and benefits packages; rather, they
    considered pay and benefits as a total package when seeking to maintain
    pay and benefits comparability and when setting pay and benefits policies
    aimed at recruiting and retaining employees. See table 9 for more detailed
    information on the benefits that the 10 financial regulators offer.

    The following table lists selected benefits identified by 10 financial
    regulators as of September 2006, unless otherwise noted in the table. We
    included the following categories of benefits: insurance, pre-tax
    benefits, child care, leave, travel and relocation, educational and
    professional expenses, retirement, work/life benefits, and other benefits
    and payments.

    Table 9: List of Benefits Offered by the 10 Financial Regulators

    Source: GAO analysis of agency data.

    Appendix V:  Analysis of Movement Data of Financial Regulator Employees from Fiscal
    Years 1990 through 2006

    We reviewed the movement of financial regulator employees from fiscal year
    1990 through 2006 using data from the Central Personnel Data File (CPDF).
    We found that the movement of employees among the financial regulators was
    very low and presented no discernible trend, but that 86 percent (13,433
    of the 15,627) of employees leaving the regulators voluntarily (i.e.,
    moving or resigning) resigned from the federal government. Our analysis
    did not include the Federal Reserve Board of Governors because CPDF does
    not contain data from the Federal Reserve Board. (For more detail on our
    methodology, see app. I.) This appendix includes additional data for
    fiscal years 1990 through 2006 on the average number of these employees
    moving among the 9 financial regulators; the movement of employees among 9
    of the 10 financial regulatory agencies by occupation; and employment by
    occupation and employee movement agency snapshots.

    Figure 8 shows the average number of employees in mission-critical and
    other occupations moving among the 9 financial regulators for which we
    have data from fiscal year 1990 through fiscal year 2006. On average, a
    total of 919 employees per year moved or resigned. Movement ranged from an
    average of less than 1 for investigators to an average of over 11 for
    examiners.

    Figure 8: Average Number of Employees in Mission-Critical and other
    Occupations Moving among the 9 Financial Regulators, Fiscal Years
    1990-2006

    Note: This table does not include data for the Federal Reserve Board
    because CPDF does not include data for the agency. The "all other"
    category combines specialists in occupations such as human resources
    management, administration, clerical, management and program analysis,
    financial administration, and paralegal work.

    Table 10 provides the actual number of financial regulator employees for
    whom we had data, by mission-critical and other occupations, who moved to
    another financial regulator from fiscal year 1990 through 2006.

    Tables 11 through 19 provide employment by occupation and movement data
    for 9 of the 10 agencies from fiscal year 1990 through 2006.^1

    ^1The data in these tables are for permanent employees only.

    Table 10: Number of Financial Regulator Employees in Mission-Critical and
    other Occupations Who Moved to another Financial Regulator, Fiscal Years
    1990-2006

    Source: GAO analysis of CPDF data.

    Note: This table does not include data for the Federal Reserve Board.

    ^aSupervisors included executives, who constituted less than 1 percent of
    all supervisors who moved to another financial regulator.

    ^bThe "all other" category, which combines specialists in occupations such
    as human resources management, administration, clerical, management and
    program analysis, financial administration, and paralegal work.

    ^cCFTC officials told us that some employees in the investigation job
    series 1801 were examiners. Because the CPDF cannot distinguish employees
    in the same job series but in different job titles, we called all the CFTC
    employees classified as 1801 examiners and classified those in job series
    1802 (compliance investigation and support) as investigators at CFTC.

    ^dOFHEO officials told us that some employees in the job series 0501
    (financial administration and program) were examiners; because of
    limitations of the CPDF we put all employees in job series 0501 into the
    examiner job series.

    Table 11: Commodity Futures Trading Commission Employment and Movement
    Data, Fiscal Years 1990-2006

    Source: GAO analysis of CPDF data.

    Table 12: Farm Credit Administration Employment and Movement Data, Fiscal
    Years 1990-2006

    Source: GAO analysis of CPDF data.

    Table 13: Federal Deposit Insurance Corporation Employment and Movement
    Data, Fiscal Years 1990-2006

    Source: GAO analysis of CPDF data.

    Note: During some of the time under review, FDIC was actively downsizing
    its workforce and achieved that in part by providing buyouts and other
    incentives for employees to leave.

    Table 14: Federal Housing Finance Board Employment and Movement Data,
    Fiscal Years 1990-2006

    Source: GAO analysis of CPDF data.

    Table 15: National Credit Union Administration Employment and Employee
    Movement Data, Fiscal Years 1990-2006

    Source: GAO analysis of CPDF data.

    Table 16: Office of the Comptroller of the Currency Employment and
    Employee Movement Data, Fiscal Years 1990-2006

    Source: GAO analysis of CPDF data.

    Table 17: Office of Federal Housing Enterprise Oversight Employment and
    Employee Movement Data, Fiscal Years 1990-2006

    Source: GAO analysis of CPDF data.

    Table 18: Office of Thrift Supervision Employment and Employee Movement
    Data, Fiscal Years 1990-2006

    Source: GAO analysis of CPDF data.

    Table 19: Securities and Exchange Commission Employment and Employee
    Movement Data, Fiscal Years 1990-2006

    Source: GAO analysis of CPDF data.

    Table 20: Other Federal Agencies Employment and Employee Movement Data,
    Fiscal Years 1990-2006

    Source: GAO analysis of CPDF data.

    Appendix VI:  Comments from the U.S. Commodity Futures Trading Commission

    Appendix VII:  Comments from the Board of Governors of the Federal Reserve System

    Appendix VIII:  Comments from the Federal Housing Finance Board

    Appendix IX:  Comments from the National Credit Union Administration

    Appendix X:  Comments from the Office of Federal Housing Enterprise Oversight

    Comments from the Securities and Exchange CommissionAppendix XI

    Appendix XII:  GAO Contacts and

    GAO Contacts

    Orice Williams, (202) 512-8678, or williamso@gao.gov Brenda Farrell,
    (202) 512--5140 or farrellb@gao.gov

    Staff Acknowledgments

    In addition to the contacts named above, Belva Martin and Karen Tremba,
    Assistant Directors; Thomas Beall; Amy Friedlander; Robert Goldenkoff;
    Eugene Gray; Simin Ho; Anne Inserra; Janice Latimer; Donna Miller; Marc
    Molino; Jennifer Neer; Barbara Roesmann; Lou Smith; Tonya Walton; Lindsay
    Welter; Gregory Wilmoth; and Robert Yetvin made major contributions.

    (450460)

    [65]transparent illustrator graphic

    www.gao.gov/cgi-bin/getrpt?GAO-07-678.

    To view the full product, including the scope
    and methodology, click on the link above.

    For more information, contact Orice Williams, 202-512-8678,
    williamso@gao.gov or Brenda Farrell, 202-512-5140, farrellb@gao.gov.

    Highlights of [67]GAO-07-678 , a report to congressional requesters

    June 2007

    FINANCIAL REGULATORS

    Agencies Have Implemented Key Performance Management Practices, but
    Opportunities for Improvement Exist

    Congress granted financial regulators flexibility to establish their own
    compensation systems and required certain agencies to seek to maintain
    comparability with each other in pay and benefits to help the agencies
    overcome impediments to recruiting and retaining employees and avoid
    competing for the same employees. In response to a request, this report
    reviews (1) how the performance-based pay systems of 10 financial
    regulators are aligned with six key practices for effective performance
    management systems, (2) the actions these agencies have taken to assess
    and implement comparability in pay and benefits, and (3) the extent to
    which employees in selected occupations have moved between or left any of
    the agencies. GAO analyzed agency guidance and policies, agency data on
    performance ratings and pay increases, agency pay and benefits surveys,
    data from the Central Personnel Data File, and interviewed agency
    officials.

    [68]What GAO Recommends

    GAO recommends that several regulators take steps to communicate the
    overall results of appraisal and pay increase decisions to all employees
    while protecting individual confidentiality. The regulators generally
    agreed with the recommendations.

    The 10 federal financial regulatory agencies have generally implemented
    key practices for effective performance management but could improve
    implementation of certain practices as they continue to refine their
    systems. All of the financial regulators awarded some pay increases during
    the appraisal cycles we reviewed that were linked to employees'
    performance ratings, although two also provided across-the-board pay
    adjustments, even to employees who had not received acceptable performance
    ratings, weakening the linkage of pay to performance. Both agencies have
    indicated in the future annual pay adjustments will not be awarded to
    unsuccessful performers. The agencies have generally aligned individual
    performance expectations and organizational goals, connected performance
    expectations to crosscutting goals, used competencies to provide a fuller
    assessment of performance, and involved employees and stakeholders in the
    process. All of the agencies built safeguards into their performance
    management systems to enhance credibility and fairness. However, the
    extent to which the agencies communicated overall results of performance
    rating and pay increase decisions to all employees varied, and some could
    increase transparency by letting employees know where they stand relative
    to their peers in the organization, while protecting individual
    confidentiality.

    Financial regulators have hired external compensation consultants to
    conduct pay and benefits comparability surveys, exchanged pay and benefits
    information, explored the feasibility of conducting a common survey, and
    adjusted pay and benefits to seek to maintain comparability with each
    other. Although financial regulators have adjusted pay and benefits partly
    based on the results of their comparability efforts, there is some
    variation in pay ranges and benefit packages among the agencies. According
    to agency officials, factors such as the year the agencies first became
    subject to comparability provisions, budget constraints, and the needs and
    preferences of workforces play a role in compensation decisions and
    contribute to this variation. Furthermore, agency officials emphasized
    that it was not their goal to have identical pay and benefits packages;
    rather, they considered pay and benefits as a total package when seeking
    to maintain comparability and when setting pay policies aimed at
    recruiting and retaining employees.

    Between fiscal years 1990 and 2006, few employees moved among financial
    regulators and the movement among these agencies presented no discernible
    trend. Specifically, 86 percent (13,433) of the 15,627 employees that left
    during this period (i.e., moving or resigning but not retiring), resigned
    from federal employment. Annually, the percentage of employees who moved
    to another financial regulator ranged from a low of 1 percent in fiscal
    year 1997 (16 out of the 1,362 who moved or resigned) to a high of 8
    percent in fiscal year 1991 (97 out of the 1,229 who moved or resigned).
    The total number of financial regulatory employees was 15,400 and 19,796
    during those 2 years, respectively.

    References

    Visible links
       67. http://www.gao.gov/cgi-bin/getrpt?GAO-07-678
    *** End of document. ***