SEC case proves merit pay is hard

Sometimes the devil is in the details. That’s the case with the Securities and Exchange Commission’s pay-for-performance system, which suffered a setback Sept. 4 when an arbitrator ruled that the agency discriminated against black employees and older workers in awarding merit pay.In his ruling, arbitrator James Harkness called SEC’s pay system a “subjective and discretionary employment policy or practice.”Harkness’ 102-page decision provides a detailed narrative of the daunting complexities involved in implementing aperformance-based pay system, even when a labor union is involved in negotiating its terms. It illustrates the challenges of developing performance measures that are fair and objective.SEC began to build a performance-based pay system in 2002 after Congress authorized the agency to pay its employees — many of them skilled attorneys and analysts — at higher levels of compensation, consistent with merit pay principles.But negotiations over compensation issues between SEC officials and representatives of the National Treasury Employees Union soon broke down. NTEU, which represents about 2,200 SEC employees, then turned to the Federal Service Impasse Panel (FSIP) to resolve the stalemate.In November 2002, the impasse panel issued a binding order requiring SEC and NTEU to adopt a system of merit pay increases based on standardized performance measures developed and tailored for each office and division within the agency.A group of 12 senior managers in each of SEC’s major divisions and offices began to develop a set of performance measures under the FSIP order. They decided to base the system on generic performance measures, or success factors, that would fit employees in all divisions and offices. The managers selected four performance measures for determining whether an employee deserved a merit pay increase: achieves SEC objectives, presents information, analysis and evaluation, and collaborates with others. Each measure had multiple submeasures.In early 2004, NTEU filed a grievance, which states that SEC management “improperly relied on subjective factors” in determining merit pay increases.SEC responded that the system provided a consistent process for making merit pay decisions, noting that it required three levels of review. SEC denied the grievance, and the case was sent to the arbitrator.In his finding that SEC’s pay system is discriminatory, Harkness cited a statistical analysis furnished by NTEU that showed black employees above Grade 8 and employees age 40 and older are adversely affected. Those employees received significantly fewer pay increases than other employees, given their representation in the pool of eligible employees, he said.“The arbitrator’s factual findings fully demonstrate that the agency’s merit pay system is a subjective and discretionary employment practice or policy,” Harkness said.NTEU “warned the SEC that employees would not know how to satisfy these vague standards, that arbitrary treatment would occur and that grievances would undoubtedly follow,” said Colleen Kelley, NTEU’s national president.The arbitrator ordered SEC and NTEU to submit briefs on an appropriate remedy within 60 days.