PERFORMANCE PAY PROGRAMS

Michigan Office of the
Auditor General
Thomas H. McTavish, C.P.A.
Auditor General

EXECUTIVE DIGEST #1913099
PERFORMANCE PAY PROGRAMS

INTRODUCTION
This report, issued in March 2001, contains the results of our performance audit of Performance Pay Programs.

AUDIT PURPOSE
This performance audit was conducted as part of the constitutional responsibility of the Office of the Auditor General. Performance audits are conducted on a priority basis related to the potential for improving effectiveness and efficiency.

BACKGROUND
Performance pay is generally defined as a compensation system that rewards employees either individually or as a group for work effort towards the achievement of certain goals or behaviors. Typically, salary increases and/or bonuses are based on appraisals of employee performance. The primary purpose of a performance pay program is to reward employees for their efforts, the quality of their work, and the results they achieve. Objectives of performance pay programs can include: recognizing the efforts and contributions of employees, rewarding employees with compensation directly linked to performance, motivating employees to be more effective, and attracting and retaining high performing employees.

The State's performance pay programs are designed to establish and maintain appropriate relationships among individual and group performance, individual competencies, departmental objectives, departmental budget, and pay. Eligibility for a performance pay award is based upon evaluation of the performance of an individual, a team of eligible individuals, or an entire agency. The department's ability to pay may be considered in setting performance pay award amounts.

As of May 15, 1999, there were 2,087 employees participating in the performance pay programs with the following distribution:

Performance Pay Programs             Number of Employees
Senior Executive Service                                  92
Senior Executive Management
       Assistant Service                                      88
Group 4                                                     1,148
Groups 1, 2, and 3                                        469
Attorneys                                                      290

AUDIT OBJECTIVE, CONCLUSION, AND NOTEWORTHY ACCOMPLISHMENTS
Audit Objective: To assess the effectiveness of the State's performance pay programs in achieving the purpose and objectives for which they were established.

Conclusion: We concluded that the State's performance pay programs were generally effective in achieving the purpose and objectives for which they were established. However, our assessment disclosed reportable conditions relating to performance pay awards, performance management plans, pay increases for performance pay employees, and performance management (Findings 1 through 4).

Noteworthy Accomplishments: The Department of Civil Service (DCS) contracted with PricewaterhouseCoopers in the fall of 1998 to evaluate the performance pay programs for Group 4 and Senior Executive Service employees. PricewaterhouseCoopers issued its report in May 1999. DCS has put an action plan in place to address the issues noted in that report.

AUDIT SCOPE AND METHODOLOGY
Our audit scope was to examine the program and other records relating to the Performance Pay Programs. Our audit was conducted in accordance with Government Auditing Standards issued by the Comptroller General of the United States and, accordingly, included such tests of the records and such other auditing procedures as we considered necessary in the circumstances.

We examined the program records and activities primarily for the period October 1, 1997 through September 30, 1999.

To accomplish our objective, we interviewed staff involved in administering the performance pay programs at DCS and at each department. We analyzed data from DCS's performance pay program database. We tested selected performance management plans and performance appraisals. We surveyed employees in performance pay positions and appointing authorities.

AGENCY RESPONSES AND PRIOR AUDIT FOLLOW-UP
Our audit report contains 4 findings and 5 related recommendations. DCS agreed with our recommendations.

Full Audit Report - #1913099 - PERFORMANCE PAY PROGRAMS

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This page was created on March 1, 2001.


INTRODUCTION This report, issued in March 2001, contains the results of our performance audit of Performance Pay Programs.

AUDIT PURPOSE This performance audit was conducted as part of the constitutional responsibility of the Office of the Auditor General. Performance audits are conducted on a priority basis related to the potential for improving effectiveness and efficiency.

BACKGROUND Performance pay is generally defined as a compensation system that rewards employees either individually or as a group for work effort towards the achievement of certain goals or behaviors. Typically, salary increases and/or bonuses are based on appraisals of employee performance. The primary purpose of a performance pay program is to reward employees for their efforts, the quality of their work, and the results they achieve. Objectives of performance pay programs can include: recognizing the efforts and contributions of employees, rewarding employees with compensation directly linked to performance, motivating employees to be more effective, and attracting and retaining high performing employees. The State's performance pay programs are designed to establish and maintain appropriate relationships among individual and group performance, individual competencies, departmental objectives, departmental budget, and pay. Eligibility for a performance pay award is based upon evaluation of the performance of an individual, a team of eligible individuals, or an entire agency. The department's ability to pay may be considered in setting performance pay award amounts. As of May 15, 1999, there were 2,087 employees participating in the performance pay programs with the following distribution: Performance Pay Programs Number of Employees Senior Executive Service 92 Senior Executive Management Assistant Service 88 Group 4 1,148 Groups 1, 2, and 3 469 Attorneys 290

AUDIT OBJECTIVE, CONCLUSION, AND NOTEWORTHY ACCOMPLISHMENTS Audit Objective: To assess the effectiveness of the State's performance pay programs in achieving the purpose and objectives for which they were established. Conclusion: We concluded that the State's performance pay programs were generally effective in achieving the purpose and objectives for which they were established. However, our assessment disclosed reportable conditions relating to performance pay awards, performance management plans, pay increases for performance pay employees, and performance management (Findings 1 through 4). Noteworthy Accomplishments: The Department of Civil Service (DCS) contracted with PricewaterhouseCoopers in the fall of 1998 to evaluate the performance pay programs for Group 4 and Senior Executive Service employees. PricewaterhouseCoopers issued its report in May 1999. DCS has put an action plan in place to address the issues noted in that report.

AUDIT SCOPE AND METHODOLOGY Our audit scope was to examine the program and other records relating to the Performance Pay Programs. Our audit was conducted in accordance with Government Auditing Standards issued by the Comptroller General of the United States and, accordingly, included such tests of the records and such other auditing procedures as we considered necessary in the circumstances. We examined the program records and activities primarily for the period October 1, 1997 through September 30, 1999. To accomplish our objective, we interviewed staff involved in administering the performance pay programs at DCS and at each department. We analyzed data from DCS's performance pay program database. We tested selected performance management plans and performance appraisals. We surveyed employees in performance pay positions and appointing authorities.

AGENCY RESPONSES AND PRIOR AUDIT FOLLOW-UP Our audit report contains 4 findings and 5 related recommendations. DCS agreed with our recommendations.