The forgotten keys to agency performance: senior executives

When companies fail, it is not because of the performance of frontline workers. The same thing happens in healthcare. The current crisis in health care has nothing to do with the care provided to patients or the people who process health insurance claims. That’s true in government, too. In business, workers play an important role, but success starts at the top, and executives are responsible for the company’s performance.

In other sectors, executive selection and development are priorities at the board level. Business executives know that they are responsible for achieving their objectives. Their remuneration is reviewed annually by the board. Rewards based on year-end results contribute to a shared team culture. The word “accountability” rarely appears in corporate reports, but the concept is ingrained in the culture and is reinforced by pay for performance.

Wage increases by 2025 highlight the problem. The pay increases announced included a 1.7% increase in the Senior Executive Service pay scale. Surveys show private sector employers are planning raises of 3.7%, and executive raises are typically somewhat larger. That has been the norm: increases in the private sector have been larger. The gaps are exacerbated as SES salaries consistently fall behind those of their business counterparts.

But the problem goes beyond salary. Appointed agency heads often do not have the experience to create and lead results-focused organizations. Improving performance depends on creating a positive work culture where trust and commitment are priorities and that, in government, starts with senior executives.

Executive performance has not been a priority

The SES pay system is essentially the same today as created under the Civil Service Reform Act 1978. Back then, a stated objective was to “Hold executives accountable for individual and organizational performance.” However, arguably the last presidential statement on the topic, Obama’s 2015 “Strengthening the Senior Executive Service,” says nothing on the matter. Additionally, multiple Government Accountability Organization “Results-Oriented Management” reports failed to find evidence that SESrs are rewarded for agency performance.

Significantly, senior executives are rarely mentioned in discussions of agency performance. OPM’s description of “SES performance evaluation systems” has all the right words, but limited evidence suggests that SES are not held accountable for outcomes.

For years, OPM published a summary of SES ratings, Report on remuneration systems and performance evaluation of senior executivesbut the last one was published in 2016. That year 51.7% of the ratings were at the highest level. Only 15 executives had a rating of Minimally Satisfactory and 13 had a rating of Unsatisfactory. Altogether, that represents 0.4% of the 6,664 SESrs. Agencies must publish their performance metrics along with SES ratings and performance awards.

SESrs work in theory under a pay-for-performance system, but that 2016 report shows that the best performers received a raise of just 2.1%. The same year, CEO compensation at companies increased by 5.3%.

A literature search found only one relevant article, “Executive Performance Evaluation in the Public Sector,” from 2005. The same search, changing “Business” to “Public Sector,” produced 7.6 million results. In business, executive performance receives much more attention.

The CSRA also introduced a performance pay policy for managers. It started in 1981, but the new policy failed and it returned to the General List in 1984. Performance pay is almost universal for managers in other sectors.

The ceiling of SES salaries

Comparative data shows that SES wage increases are significantly lower than for similar jobs in other sectors. This has been a pattern for decades and the gaps are growing at all levels of management.

When Congress established the Executive, Legislative, and Judicial Salary Commission in 1967, it initiated periodic reviews – here “QuadCom” reports – of “appropriate salary levels” for government leaders. The recommendations were developed every four years until the passage of the Ethics Reform Act of 1989. Since then there has been no rigorous evaluation of leader compensation.

From then on, Executive Program (ES) pay increases would be based on increases in the BLS Employment Cost Index, but looking back over what is now 35 years, executive pay increases at companies have been consistently higher. Simply put, the ICE understates increases in executive compensation.

Federal agencies compete for talent in a multitude of labor markets. QuadCom’s reports focused on trends and broad comparisons with jobs associated with high-level federal jobs. One showed that federal judges were paid more than law school deans. That is no longer true. By 2025, district judges will receive $247,400. In 2024, the average dean earned $328,940, and the highest-paid deans now earn more than $450,000. That data could have supported the Judges Act that President Biden recently vetoed.

Finally, ES salaries serve as a political “ceiling” for the SES. The maximum salary for 2025 for SES is $225,700, the same as the ES II salary. There are a number of occupations in which managers and high-performing employees in the private sector receive salaries above that level. There is anecdotal evidence that the ceiling is a disincentive to promotion to SES positions.

In 1965, CEO pay was 20 times the pay of “workers,” between $819,000 and $39,500 (according to a 2013 study). That proportion has steadily increased. A CNN headline from June reported: “CEOs Earn Nearly 200 Times More Than Workers.”

Today, senior executive positions (senior finance, senior legal, senior IT, and senior human resources) are paid significantly less than their CEOs, but they follow the same pattern. On Fortune’s annual list of top companies, the median salary for top financial executives is $446,690. Top legal executives earn $391,551, top engineers earn $297,954, etc. Figures vary depending on industry, location and company size. In larger companies, managers two or three levels below receive higher salaries than SESs. If nothing changes, SES salaries will fall even further behind.

pay and Performance management in comparable systems

There are few organizations comparable in purpose and size to federal agencies. The best comparators are the largest health care systems in the country. Several of the Veterans Affairs secretaries previously worked in one or more of the large systems.

At well-known hospital systems, such as Mayo Clinic and Mass General, CEOs are paid $3 million or more. Two executive positions (top finance and top legal) typically earn $1 million or more.

Of course, the government will never pay salaries anywhere near those levels, but a key point is that there is a huge drop in top NSE salaries. Standard practice in for-profit and nonprofit hospital systems is to adjust salary levels periodically to remain competitive.

When salaries for executive leaders are significantly below market pay levels, it keeps salaries low at lower management levels. It cannot be verified, but the gaps reduce the pool of managers interested in filling vacancies. It also violates the principle of “fair payment.” The gaps in socioeconomic level are enormous.

Perhaps most important is compensation management in today’s hospital operating environment. A report from The Governance Institute, “Modernizing Healthcare Executive Compensation: A Deep Dive or the Board” (December 2023), highlights the issues in the healthcare sector and the importance of the team in the current “crisis period.” Data analyzes show that “over the past 20 years, annual performance-based variable compensation has grown exponentially. . . During that time, goal setting has become more sophisticated, more focused, and based on outcomes rather than process measures.”

Healthcare providers are certainly not unique. Management incentives are effectively universal. The use of cascading SMART (Specific, Measurable, Attainable, Relevant, Timely) objectives to link management levels is also almost universal. Executives and managers are rewarded as a “team,” based on organizational results and the achievement of individual goals. It is a proven practice.

It’s time for a new ‘QuadCom’

It has been 35 years since the Ethics Act ended QuadCom reviews. The latest report from the Federal Wage Council shows that the average pay disparity for white-collar employees is 59%. It’s 81% in the Washington-Baltimore area. The history of executive pay in larger organizations (those similar to federal agencies) suggests that SES pay gaps are much worse.

The government needs to employ specialized experts – high-level positions and scientists or professionals – for the same reason that President-elect Trump now supports hiring foreign experts. Agencies should be able to pay market-competitive salaries to hire experts in all fields of knowledge. There is a serious shortage in STEM fields and medical specialties. Multiple surveys provide market data for these occupations.

Maintaining the EX salary ceiling perpetuates a problem. Both members of Congress and appointees have had successful careers in other sectors. Many are rich and their time in government is limited. SESrs and those who will fill SES vacancies are career workers. Increasing SES salaries will help attract well-qualified talent for the future.

The Quadrennial Commissions recognized the importance of the people most directly responsible for leading and managing federal agencies. Increasing the salaries of senior managers would make all levels of management more attractive career opportunities.

Public agencies have something in common with all other organizations: agency performance is directly related to management effectiveness, and that starts at the highest levels.