Designing an Effective Pay for Performance Compensation System A Report to the President and the Congress of the United States by the U.S. Merit Systems Protection BoardTHE CHAIRMAN U.S. MERIT SYSTEMS PROTECTION BOARD 1615 M Street, NW Washington, DC 20419-0001 January 2006 The President President of the Senate Speaker of the House of Representatives Dear Sirs: In accordance with the requirements of 5 U.S.C. 1204(a)(3), it is my honor to submit this Merit Systems Protection Board report, “Designing an Effective Pay for Performance Compensation System.” Federal Government agencies are moving to better align pay with performance and create organizational cultures that emphasize performance rather than tenure. From our research, we have learned that agencies must invest time, money, and effort in the design and implementation of their pay for performance compensation systems in order to succeed. A credible and fair pay for performance system will require an effective performance evaluation system and supervisors who are able and willing to use it properly. Agencies will also need mechanisms such as training and systematic monitoring of pay decisions and outcomes to ensure that pay for performance systems operate as intended. Although the requirements listed above are universal, we believe the long-standing principles of providing “equal pay…for work of equal value” and “appropriate incentives and recognition…for excellence in performance” are best met by agencies designing pay for performance systems to suit their individual missions, workforces, and circumstances with respect to uniform guidelines and principles. Accordingly, this report discusses the critical choices that agency leaders will make during the design and implementation of a pay for performance compensation system. This discussion is intended to help agency leaders better understand how they can adapt pay for performance systems to their organizations