	Introduction

As of June 2009, the General Schedule (GS) covered roughly 59.8% of federal employees. Federal employees rise within grades in the GS pay scale based on performance and length of service. The Department of Defense (DOD), however, operates a pay system called the National Security Personnel System (NSPS), which attempts to link pay increases more closely to employee performance without the use of grades or steps. As of June 2009, 211,000 (29.4%) of DOD's 717,000 employees were covered by NSPS. On October 7, 2009, House and Senate conferees reported a version of the National Defense Authorization Bill for Fiscal Year 2010 that included language to terminate NSPS by 2012. On October 28, 2009, the President signed the bill into law ( P.L. DOD must now return employees to the pay system in which they were formerly enrolled prior to the installation of NSPS. This report reviews the creation of the NSPS, examines how NSPS operates, and discusses litigation against it. The report then analyzes lessons that can be learned from NSPS and that may be applied to future attempts to create a federal performance-based pay system. This report will be updated as necessary. An employee must score at least a three—which is equal to a nominal rating of "valued performer"—to be eligible for performance-based pay increases. In NSPS, each employee may be assigned a certain number of performance pay shares. An employee who is at the maximum level of his or her pay band may receive his or her performance-based bonus as a one-time lump sum paid at the beginning of the following year. DOD employees currently in NSPS will be returned to the GS or to whichever pay scale they were on prior to their transition into NSPS. On October 8, 2009, the House agreed to the conference report. The Senate agreed to the conference report on October 22, 2009. 111-84 ). The areas cited for possible improvement were as follows:
to involve employees in the system's design and implementation; to link employee objectives and the agency's strategic goals and mission; to train and retrain employees in the system's operation; to provide ongoing performance feedback between supervisors and employees; to better link individual pay to performance in an equitable manner; to allocate agency resources for the system's design, implementation, and administration; to include predecisional internal safeguards to determine whether rating results are consistent, equitable, and nondiscriminatory; to provide reasonable transparency of the system and its operation; and to impart meaningful distinctions in individual employee performance. Such analyses may be useful as both Congress and the Administration face whether to maintain the GS pay scale or create a new pay scale that more directly links pay to an employee's performance.
Most federal employees (59.8%) are paid on the General Schedule, a pay scale that consists of 15 pay grades in which an employee's pay increases are to be based on performance and length of service. Some Members of Congress, citizens, and public administration scholars have argued that federal employee pay advancement should be more closely linked to job performance. With explicit congressional authorization enacted in 2003, the Department of Defense (DOD) created the National Security Personnel System (NSPS) as a unique pay scale attempting to more closely link employee pay to job performance.
NSPS has been plagued by criticisms since it went into effect in 2006. The system has faced legal and political challenges from unions and employees who claim it is inconsistently applied and causes undeserved pay inequities, among other concerns.
On October 7, 2009, House and Senate conferees reported a version of the National Defense Authorization Bill for Fiscal Year 2010 that included language to terminate NSPS. On October 8, 2009, the House agreed to the conference report. The Senate agreed to the conference report on October 22, 2009. On October 28, 2009, the President signed the bill into law (P.L. 111-84). DOD must now return the employees currently enrolled in NSPS to the GS or to the pay scale in which they were previously enrolled. The return to the GS or other pay scales must be completed by 2012, pursuant to the legislation.
NSPS was initially intended to cover all DOD employees, but has a current enrollment of roughly 211,000 civilian employees, or 29.4% of the department's 717,000-person workforce.
Like other performance-based pay systems, NSPS makes job performance a predominant factor in determining employee pay. A supervisor and an employee who use NSPS are to work together to create an annual appraisal plan that accurately reflects an employee's performance. A supervisor then is to use the appraisal to evaluate the employee. At the end of each appraisal year, an employee may be assigned a percentage increase in pay based on his or her performance. These increases are called pay shares. Lower-performing employees may receive fewer pay shares or no pay shares. An employee must acquire at least a satisfactory performance rating to be eligible for any performance-based bonuses.
This report reviews the creation of the NSPS, examines how NSPS operates, discusses litigation against it, and analyzes lessons that can be learned from NSPS as Congress decides whether to maintain the GS, create a new federal pay system, or modify existing ones. It will be updated as necessary.