Human Capital: Using Incentives to Motivate and Reward High Performance
(Testimony, 05/02/2000, GAO/T-GGD-00-118).

This testimony discusses the role of incentive programs in motivating
and rewarding federal employees to achieve high performance in support
of agency missions and goals. GAO found that federal agencies have broad
statutory and regulatory authority to design and implement various
incentive programs, including monetary and nonmonetary incentives. No
one incentive program is optimal for all situations. Second, the use of
monetary incentive programs has varied over time and across agencies.
During the last five years, agencies have made less use of their
performance awards and greater use of other monetary incentives. The
proportion of employees who received monetary performance awards ranged
from less than one percent to as much as 75 percent of an agency's
workforce. Little is known about the use of nonmonetary incentives
because they are harder to measure and generally not documented.
Finally, some agencies regularly monitor and evaluate the effectiveness
of their incentive programs; however, many others have reported that
they did not know whether their incentive programs were effective in
motivating their employees to exceed expectations in support of missions
and goals.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  T-GGD-00-118
     TITLE:  Human Capital: Using Incentives to Motivate and Reward
	     High Performance
      DATE:  05/02/2000
   SUBJECT:  Productivity in government
	     Employee incentives
	     Program evaluation
	     Industrial relations
	     Personnel management
	     Federal employees
	     Performance measures
	     Private sector practices

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GAO/T-GGD-00-118

United States General Accounting Office
GAO

Testimony

Before the Subcommittee on Oversight of
Government Management, Restructuring, and the
District of Columbia, Committee on Governmental
Affairs
U.S. Senate

For Release on Delivery
Expected at
10:00 a.m. EDT
on Tuesday
May 2, 2000
GAO/T-GGD-00-118

HUMAN CAPITAL
Using Incentives to Motivate and Reward High

Performance

Statement of Michael Brostek, Associate Director
Federal Management and Workforce Issues
General Government Division

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Statement
Human Capital:  Using Incentives To Motivate And
Reward High Performance
Page 10                          GAO/T-GGD-00-118
Mr. Chairman and Members of the Subcommittee:

I am pleased to be here today to discuss the role
of incentive programs in motivating and rewarding
federal employees to achieve high performance that
supports agency missions and goals. An agency's
workforce defines its character and its capacity
for performance.  Thus, if federal agencies are to
make major improvements in performance-based
management as envisioned by the Government
Performance and Results Act (GPRA), they must
strategically manage their most important
asset-their human capital-to achieve results.

Incentive programs can be an important part of
performance management systems because they can
serve to align employee performance expectations
with agency missions and goals as well as
reinforce personal accountability for high
performance.  Effective incentive programs that
motivate all employees, and reward those
employees, teams, and organizational units whose
performance exceeds expectations, can help federal
agencies maximize the results they achieve.

My statement makes three main points:

ï¿½    First, federal agencies have broad statutory
and regulatory authority to design and implement a
variety of incentive programs, including monetary
incentives (such as performance and other cash
awards) and nonmonetary incentives (such as
plaques, trophies, and personal expressions of
gratitude and support from superiors) to directly
support their unique missions, goals, and
organizational cultures.  No one incentive program
is optimal for all situations.

ï¿½    Second, the use of monetary incentive
programs has varied over time and across agencies.
Over the past 5 years, agencies have decreased
their use of performance awards and increased
their use of other monetary incentives.  The
proportion of employees who received monetary
performance awards varied by individual agency,
ranging from less than 1 percent to as much as 75
percent of an agency's workforce.   Little is
known about the use of nonmonetary incentives,
because they are more difficult to measure and are
generally not adequately documented across the
government.  The variation in monetary incentive
awards may be attributed to such factors as
differing budgetary limitations and leadership
support for these programs.

ï¿½    Finally, some agencies regularly monitor and
evaluate the effectiveness of their incentive
programs; however, many others have reported that
they did not know whether their incentive programs
were effective in motivating their employees to
exceed expectations in support of missions and
goals.  In doing such an assessment, agencies may
wish to consider the extent to which their
programs incorporate the key elements of incentive
programs used by high-performing organizations.
These elements include leadership support; clearly
defined and transparent criteria; use of multiple
awards for both individuals and teams; targeting
only high-performing teams and employees;
publicizing awards; and regularly monitoring,
evaluating, and if needed, updating incentive
programs on a periodic basis.

My statement today is based on our ongoing and
previous work reviewing the human capital
management of federal agencies and high-performing
private sector organizations.1  We also reviewed
information from the Office of Personnel
Management's (OPM) Central Personnel Data File
(CPDF) and recent reports regarding federal
agencies' use of incentives as well as the current
human capital literature.

Federal Agencies Have Broad Authority to Design
Incentive Programs
Federal agencies have broad statutory and
regulatory authority to design and implement
incentive programs that make use of a range of
incentives-both monetary and nonmonetary.  No one
incentive program is right for all situations,
because no one program will motivate all employees
under all circumstances.  Agencies' authority
allows them to develop multiple incentive programs
that support their missions and goals; reflect
their unique organizational cultures; appeal to
employees' varying motivations; and provide the
flexibility to reward individuals, teams, and
other subgroups of employees.

Monetary Incentives
Federal agencies have broad authority to implement
monetary incentives that motivate and reward
employees for high performance.2  Specifically,
federal executive agencies can offer performance
and other types of monetary incentives, as
described below:

ï¿½    Performance awards are monetary incentives
that reward employees for performance exceeding
expectations, as defined by their formal
performance ratings of record during an appraisal
period.

Other monetary incentives include the following:

ï¿½    Special act or service awards are one-time,
lump-sum monetary awards for employees whose
specific accomplishments exceed performance
expectations during the course of a year.  Special
act or service awards are limited in amount and
can be authorized by first-line supervisors.

ï¿½    Quality step increases are monetary awards
that provide employees with faster than normal
progression through the stepped rates of the
general schedule and represent a permanent
increase in basic pay.
ï¿½    Time-off awards are awards granting employees
leave without charging their annual leave or
requiring that they forego pay.3
ï¿½    Gainsharing is an incentive system that
creates conditions under which management and
employees benefit by working together to achieve
improved productivity.  Under a gainsharing
system, an agency measures gains in productivity
and distributes any associated savings to both
employees and the organization.
Agencies have frequently used monetary incentives
to motivate and reward employees' high
performance, and federal employees have generally
stated that they believe these incentives do
motivate employees.  However, some agency
officials and employees have told us that there
were some disadvantages to these incentives.  For
example, officials and employees alike have stated
that monetary rewards can be an ineffective
motivator because of the relatively low dollar
amounts involved and the belief that these awards
were not directly linked to performance.  In
particular, officials and employees have expressed
concerns about the consistency and fairness of
those monetary awards linked to ineffective
performance appraisal systems.  Monetary
incentives may also foster internal competition
among employees to the detriment of teamwork and
the agency's ability to achieve its mission and
goals.  Moreover, monetary incentives that are
consistently awarded over time may come to be
viewed as entitlements for expected performance
rather than rewards for exceptional performance.
Thus, care must be taken in designing and
implementing monetary award programs to ensure
that they are effective and to limit any
unintended consequences.

Nonmonetary Incentives
Federal agencies also have the authority to
implement nonmonetary incentives to motivate and
reward employees.  For example, agencies can offer
employees medals, certificates, plaques, trophies,
and other tangible incentives that have an award
or honor connotation.  Agencies can also provide
intangible nonmonetary awards.  For example,
employees may have an incentive to perform at
levels exceeding expectations if they believe that
such performance will be rewarded when agency
leaders make decisions regarding organizational
priorities; the allocation of resources, including
training opportunities; and the assignment of
employees to meaningful, challenging, visible, or
prestigious work.  Nonmonetary incentives should
not be overlooked or undervalued, because some
agency officials and employees have stated that
these incentives provide more motivation for high
performance than do monetary incentives.

Federal Agencies' Use of Incentives Varies
Based upon a review of available data from an OPM
database, we found that agencies' use of monetary
incentives has varied over time and across
agencies over the last 5 years.4   Governmentwide,
agencies decreased their use of performance awards
and increased their use of other monetary awards
from fiscal year 1995 to 1999.  Individual
agencies provided different average award amounts
to different proportions of their workforce.
Little is known about the use of nonmonetary
incentives, because these awards are not easily
measured and are generally not documented.

Agency officials have stated that the variation
may be attributed to agencies' broad authority and
flexibility to design incentive programs, as well
as to the difficulty some agencies may experience
in designing incentive programs that support their
unique missions and goals.  Agency officials who
stated that they had difficulty in designing and
implementing incentive programs said that several
factors inhibited their efforts, including budget
limitations and leaders' differing support for
incentive programs.

Governmentwide Use of Monetary Incentives Varied
Over Time
Federal agencies' use of monetary incentives has
varied over the last 5 years.  From 1995 to 1999,
the 24 CFO agencies included in our review
decreased their use of performance awards
(including the number of awards given as well as
the average award amount per employee), while they
increased their use of other monetary awards. As
shown in figure 1, agencies rewarded approximately
4 out of 10 employees on average with performance
awards in fiscal year 1995 compared with
approximately 3 out of 10 employees in fiscal year
1999.  On the other hand, agencies rewarded an
average of approximately 3 out of 10 employees
with other monetary awards in fiscal year 1995
compared with nearly 5 out of 10 employees in
fiscal year 1999.

Figure 1:  Average Number of Monetary Incentive
Awards per Employee for the 24 CFO Agencies,
Fiscal Years 1995-1999

Note 1:  We did not include SES awards in our
calculations.
Note 2:  We calculated the "average number of
awards per employee" by dividing the total number
of awards by the total number of employees
eligible to receive the awards (not the number of
employees who actually received an award) to
facilitate meaningful trend analyses that would
not be affected by the changing number of
employees in the workforce over time.
Note 3:  "Other monetary awards" include
gainsharing, suggestion, invention, special act,
and quality step increase awards. We did not
include time-off awards in the calculations
because they were measured in hours rather than
dollars.
Source:  GAO calculations based on OPM data.

Similarly, as shown in figure 2, agencies'
spending on performance awards decreased from an
average rate of about $300 per employee in fiscal
year 1995 to an average rate of about $240 per
employee in fiscal year 1999.5  Over the same
period, agencies' spending on other monetary
incentives increased from an average rate of about
$140 per employee to an average rate of about $260
per employee.

Figure 2:  Average Dollar Amount of Monetary
Incentive Awards per Employee for the 24 CFO
Agencies, Fiscal Years 1995-1999

Note 1:  We did not include SES awards in our
calculations
Note 2:  We calculated the "average award amount
per employee" by dividing the total dollar amount
of awards by the total number of employees
eligible to receive the awards (not the number of
employees who actually received an award) to
facilitate meaningful trend analyses that would
not be affected by the changing number of
employees in the workforce over time.
Note 3:  "Other monetary awards" include
gainsharing, suggestion, invention, special act,
and quality step increase awards.  We did not
include time-off awards in the calculations
because they were measured in hours rather than
dollars.
Note 4:  Dollar amounts were calculated using
fiscal year 1999 constant dollars.
Source:  GAO calculations based on OPM data.

The actual dollar amounts of both performance and
other monetary awards increased over the 5-year
period, and although their use was declining,
performance awards were generally larger in dollar
amount than other monetary awards.  That is, on
average, agencies provided larger performance
awards to fewer employees in 1999 compared with
1995.  The average performance award increased
from about $730 in fiscal year 1995 to about $830
in fiscal year 1999, while the average for other
monetary awards increased from about $470 in
fiscal year 1995 to about $550 in fiscal year
1999.6

Agencies' Use of Monetary Incentives Varied
The individual CFO agencies differed in their use
of the various monetary incentives in any given
year.  For example, in fiscal year 1999, the
agencies' use of performance awards ranged from an
average of fewer than 1 out of 10 employees
receiving an award at one agency, to as many as 3
out of 4 employees receiving an award at another
agency.7  Similarly, an average of 15 percent of
employees received other monetary awards at one
agency, while individual employees of another
agency each received three of these awards on
average.

The average award amounts also varied across the
24 agencies.  Specifically, in fiscal year 1999,
about 25 percent of the agencies provided
performance awards that averaged less than $750,
about 50 percent provided performance awards that
averaged between $750 and less than $1,250, and
the remaining 25 percent provided performance
awards that averaged $1,250 or more.  As might be
expected, the average amounts of other monetary
awards were somewhat lower than for performance
awards.  About 63 percent of the agencies provided
other monetary awards that averaged less than
$750, and the remaining 37 percent provided other
monetary awards that averaged between $750 and
less than $1,250.  Figure 3 shows how the average
incentive award amounts varied for the 24 CFO
agencies.

Figure 3:  Average Dollar Amounts of Monetary
Incentive Awards for the 24 CFO Agencies, Fiscal
Year 1999

Note 1:  We did not include SES awards in our
calculations
Note 2:  We calculated the average award amount by
dividing the total dollar amount of awards by the
total number of employees who actually received an
award.
Note 3:  "Other monetary awards" include
gainsharing, suggestion, invention, special act,
and quality step increase awards. We did not
include time-off awards in the calculations
because they were measured in hours rather than
dollars.
Source:  GAO calculations based on OPM data.

Agencies have stated that there may be several
factors that account for their varying use of
incentives.  Specifically, agencies funded their
incentive programs out of their discretionary
operating budgets, and some agencies' budgets may
have been more constrained than others over the
last decade.  In addition, agencies' leaders may
have differed in their support for incentives
versus other components of a performance
management system for motivating employee high
performance.

Improving Agencies' Incentive Programs
Agencies that fail to evaluate their incentive
programs have no basis for determining whether
their programs actually motivate and reward
employee high performance.  While some agencies
have stated that they regularly evaluated their
incentive programs, many others have said that
they did not.  Thus, agencies may be offering
their employees "incentives" that could be
discouraging rather than encouraging high
performance.  In fact, over 40 percent of
employees who responded to a recent National
Partnership for Reinventing Government (NPR)
survey indicated that they were dissatisfied with
federal incentive programs and felt that agencies'
use of incentives (1) did not sufficiently reward
high performance in support of missions and goals,
(2) were not clearly based on merit, and (3)
failed to recognize creativity and innovation.8

For those federal agencies interested in improving
the effectiveness of their incentive programs, a
self-assessment of their programs offers them the
opportunity to determine the degree to which their
current use of incentives motivates and rewards
employee high performance.  For example, an agency
might use our human capital checklist, which lists
sample indicators that agencies can use as a
starting point to develop a fact-based
understanding of the effectiveness of their
incentives.9  Completing a self-assessment on a
periodic basis would better equip agency leaders
to design and implement more effective incentive
programs that they could then monitor, evaluate,
and continue to improve upon in the future.

While no one incentive program will motivate all
employees under all circumstances, agencies may
wish to consider determining whether their
programs contain elements that are common to
incentive programs used by high-performing
organizations.  High-performing public and private
sector organizations that used incentive programs
to motivate and reward their workforces have said
that they consistently build certain key elements
into the design, implementation, and evaluation of
their programs.  Based upon a review of our
previous human capital and incentives work, these
key elements include the following:

ï¿½    Leaders support using incentives to manage
performance.
ï¿½    Programs have clearly defined, transparent
criteria that are explicitly linked to
organizational mission and goals.
ï¿½    Organizations use multiple, meaningful awards
to recognize individuals as well as teams and
organizational units.
ï¿½    Organizations target only high-performing
teams and employees for awards.
ï¿½    Organizations publicize incentive awards to
the extent possible.
ï¿½    Organizations regularly monitor, evaluate,
and update their programs as needed.

Secure Leadership Support
High-performing organizations told us that
executive support for incentive programs was vital
to ensure program funding, consistency, and
overall effectiveness.  Because incentive programs
may include performance awards and other monetary
awards that require the use of appropriated funds,
executives must continuously and visibly support
the program to ensure that sufficient
resources-both time and money-are allocated to the
design, implementation, and evaluation of these
programs.  Moreover, managers may have very
different views about the use of these programs,
and executive support for incentives can minimize
disparities that employees working for different
managers within the same organization might
otherwise experience.  Top leadership support of
incentives for high performance also sends a clear
message to employees that efforts that exceed
expectations will be recognized and rewarded,
which in turn can improve an organization's
overall effectiveness.

Use Clearly Defined, Transparent Criteria
High-performing organizations used clearly
defined, transparent criteria that were explicitly
linked to the organizations' missions and goals.
Moreover, the organizations told us that
expectations and measures should reflect only
those dimensions of performance that are within
the control of employees.  The organizations
stated that such criteria were essential to
establishing and maintaining employee confidence
that incentive rewards would go only to those
employees whose performance clearly exceeded
expectations and supported organizational missions
and goals.

Include Multiple Incentives for Individuals and
Teams
The incentive programs of high-performing
organizations included multiple incentives-both
monetary and nonmonetary-to enhance their ability
to motivate as many employees as possible.
Clearly, any incentive will motivate some
employees, teams, or organizational units more
than others.  Some employees prefer monetary
incentives, whereas other employees find
nonmonetary incentives more meaningful.  To avoid
the risk of motivating some employees and not
others to achieve high performance, the
organizations indicated that they offered multiple
and varied incentives to increase the probability
of motivating all their employees according to
their individual preferences.  Moreover, offering
a variety of incentives enhanced the
organizations' flexibility to tailor awards for
specific circumstances.  In particular,
organizations that truly promoted teamwork needed
mechanisms for providing not only individual, but
also team-based incentives.

Target Only High-Performing Teams and Employees
High-performing organizations' incentive programs
differentiated between high-performing and other
teams and employees in order to reward only those
employees whose performance clearly exceeded
expectations, met any established program
criteria, and directly supported organizational
mission and goals.  These organizations stated
that incentive programs that did not target high-
performers for rewards would fail to effectively
motivate employees and could even provide a
disincentive for high performance.  That is,
employees who were rewarded for less than high
performance might come to view such rewards as
entitlements for meeting expectations rather than
incentives to exceed expectations.

Publicize Incentives
High-performing organizations indicated that
leaders or managers must publicize employee
rewards and clearly communicate how the
performance being rewarded exceeded defined
expectations.  The organizations indicated that
employee confidence and belief in the fairness of
incentive programs improved when they understood
why certain employees were rewarded.  Moreover,
public recognition can serve as an additional
motivation for employees to strive for high
performance.

Monitor, Evaluate, and Update Periodically
Finally, high-performing organizations stated that
regular monitoring and evaluation, as well as
periodic updates, of incentive programs helped
ensure that employees were effectively motivated
to achieve high performance and support the
organization's missions and goals.  Sound
management practices dictate that any human
capital policy or practice must include regular
monitoring and evaluation.  The organizations
indicated that program evaluations ensured that
their incentive programs were administered
efficiently and fairly, rewarded only high-
performing employees, and continued to motivate
employees.  The organizations stated that program
evaluations would indicate when certain incentives
or rewards no longer served to motivate employees
and needed to be updated to improve the
effectiveness of the incentive program.  The
organizations further said that including employee
input as a part of the evaluation process improved
employee confidence in the incentive programs and
therefore made these programs more effective.

Summary
     In summary, Mr. Chairman, the federal
government's human capital-its greatest
asset-defines federal agencies' character and
capacity for performance.  If federal agencies
hope to maximize their performance, ensure
accountability, and achieve their strategic goals
and objectives, they must, among other things,
make effective use of incentives-whether monetary
or nonmonetary-to motivate and reward their
workforce in support of their results-based
missions.  Agencies that have yet to develop an
effective incentive program, or that have reported
implementation barriers to doing so in the past,
might consider assessing their current use of
incentives to determine whether their programs are
likely to motivate employee high performance.
Once agencies have a fact-based understanding of
the incentives they already use, they will be
better equipped to update their existing programs
or design new ones, if needed, to support their
missions and goals more effectively.

     At GAO, we hope to encourage and facilitate
the adoption throughout government of a greater
human capital focus, as well as other performance
management principles, and to "lead by example."
Right now, we are making our own human capital a
top priority.  Among other things, we are
assessing our human capital systems from top to
bottom for their alignment with our organizational
mission, strategic goals, and core values.  As a
part of that assessment, we will be looking at our
own use of incentives to determine whether they
are aligned with our organizational mission and
goals and are consistent with the key elements we
identified from our review of high-performing
organizations.

     Mr. Chairman, this concludes my prepared
statement.  I would be pleased to answer any
questions you or other Members of the Subcommittee
may have at this time.

GAO Contacts and Acknowledgements
For further information regarding this testimony,
please contact Michael Brostek, Associate
Director, Federal Management and Workforce Issues,
at (202) 512-8676.  Individuals making key
contributions to this testimony included Jennifer
Cruise, Thomas Fox, Rebecca Shea, and Gregory
Wilmoth.

_______________________________
1For examples of our recent examinations of human
capital management in high-performing
organizations, see Human Capital: Managing Human
Capital in the 21st Century (GAO/T-GGD-00-77, Mar.
9, 2000), Human Capital: Key Principles From Nine
Private Sector Organizations (GAO/GGD-00-28, Jan.
31, 2000), Human Capital: A Self-Assessment
Checklist for Agency Leaders-Discussion Draft
(GAO/GGD-99-179, Sept. 1999), and Performance
Management: Aligning Employee Performance With
Agency Goals at Six Results Act Pilots (GAO/GGD-98-
162, Sept. 4, 1998).
2Agencies are also authorized to implement
incentives that (1) attract and reward job
candidates with unique skills who accept positions
with the federal government and (2) retain and
reward highly-skilled employees who could seek
employment elsewhere.  These incentives include
recruitment incentives, relocation incentives, and
retention incentives.
3Although time-off awards are not cash awards for
employees and cannot be converted to cash, we have
characterized these awards as monetary incentives
because they can represent a significant dollar
cost to agencies and because they allow employees
to receive their normal pay without being charged
annual leave for time off.
4 We used the incentives information available
from OPM's CPDF for the 24 agencies covered by the
Chief Financial Officers (CFO) Act-these agencies
employ approximately 98 percent of the federal
government's total career civilian workforce,
excluding the United States Postal Service.
5 We calculated the "average award amount per
employee" by dividing the total dollar amount of
awards by the total number of employees eligible
to receive the awards (not the number of employees
who actually received an award) to facilitate
meaningful trend analyses that would not be
affected by the changing number of employees in
the workforce over time.
6 We calculated all dollar amounts using fiscal
year 1999 constant dollars.
7 We do not specify the names of these agencies
because we obtained the data from an OPM database,
and we did not verify or discuss this data with
the individual agencies.
8 The results of the Working for the Government:
What Federal Employees Think-1999 Employee Survey
were released on March 31, 2000.  NPR reported
that approximately 40 percent of the 32,265 full-
time federal employees surveyed responded to the
instrument.
9 GAO/GGD-99-179.
*** End of document ***