§ Legislative Act Compensation
Federal Compensation Modernization
Current Status
The federal government employs approximately 2.2 million civilian workers under the General Schedule (GS) pay system, established by the Classification Act of 1949.¹ The GS system comprises 15 grades with 10 steps each, plus 53 locality pay adjustments, creating over 7,950 distinct pay rates. The current GS-1 Step 1 base rate is $25,517 annually ($12.27/hour). GS-5 Step 1—the typical entry point—is $35,265 ($16.95/hour).²
Federal agencies report persistent recruitment and retention challenges. OPM data indicates federal quit rates in customer-facing agencies (SSA, IRS, VA) exceed 15% annually for GS-5 and below positions.³ The average time-to-hire remains 98 days—nearly three times the private sector average.⁴ Exit surveys consistently cite compensation as the primary factor, particularly in high-cost localities where federal wages lag market rates by 20-35%.³
The bottom four GS grades (GS-1 through GS-4) are functionally obsolete. Fewer than 12,000 positions across the federal government are classified at these levels, as agencies cannot attract applicants at sub-$15/hour rates. Classification specialists spend approximately 2.1 million hours annually adjudicating grade and step determinations.⁴
Federal employee removal rates remain below 0.5% annually—roughly one-tenth the private sector involuntary separation rate.⁵ The adverse action process averages 170 days from initiation to resolution.⁵ MSPB data indicates that 25% of removal actions are reversed or mitigated on appeal, creating risk aversion among managers.⁵ Performance Improvement Plans (PIPs) average 120 days, during which productivity of both the employee and supervising manager degrades substantially.
Problem
Structural Wage Obsolescence: The GS system's base rates have not kept pace with labor market evolution. Entry-level federal positions pay below market-clearing wages in most metropolitan areas, creating a selection problem where agencies hire from a constrained talent pool willing to accept below-market compensation.
Administrative Complexity: The 15-grade, 10-step structure with 53 locality adjustments requires substantial classification infrastructure. OPM employs over 800 classification specialists. Agencies employ thousands more. Position classification disputes average 47 days to resolve, delaying hiring and creating internal equity grievances.⁴
Talent Competition Failure: Critical skill areas—cybersecurity, data science, healthcare, financial regulation—face acute competition from private sector employers offering 40-100% wage premiums plus equity compensation.⁶ The federal government's market share of computer science graduates has declined from 8.2% (2010) to 3.1% (2023).⁶
Wage Compression: Limited step progression within grades creates compression where experienced employees earn minimally more than new hires. Supervisors frequently earn less than private-sector counterparts they must recruit, creating perverse incentive structures.⁶
Service Degradation: Staffing shortfalls directly impact citizen services. SSA field offices average 23-minute wait times. IRS phone answer rates fell to 13% during filing season. VA appointment backlogs exceed 30 days in 67% of facilities.⁷ These outcomes trace substantially to recruitment and retention failures.
Performance Accountability Gap: Current civil service protections, designed when federal compensation lagged private sector, create asymmetric risk. Managers face substantial procedural burden and reversal risk when addressing poor performance, while employees face minimal consequence for sustained underperformance.⁵ This erodes team morale, burdens high performers with compensating workload, and undermines public confidence in government effectiveness.
Adverse Selection Retention: The combination of below-market wages and near-absolute job security creates adverse selection. High performers with external options leave. Underperformers with limited alternatives remain. Over time, this degrades institutional capability and concentrates non-performers in the workforce.
Proposed Reform
Replace the 15-grade General Schedule with a 5-band compensation system establishing a $25/hour ($52,000 annual) minimum floor, with wide salary ranges enabling market-responsive compensation within each band. Eliminate grades GS-1 through GS-4 entirely. Reduce locality tiers from 53 to 3. Grant agency heads discretion to adjust individual compensation within bands based on performance, market conditions, and mission-critical retention needs.
Establish reciprocal performance accountability commensurate with competitive compensation. Streamline adverse action procedures while preserving due process protections against arbitrary or discriminatory action. Create probationary periods adequate for genuine performance assessment. Enable separation for sustained underperformance through expedited, fair processes.
Compensation Band Structure:
| Band | Floor | Ceiling | Scope |
|---|---|---|---|
| Foundation | $52,000 | $70,000 | Entry-level, administrative support, customer service, facilities, clerical |
| Professional | $65,000 | $110,000 | Skilled professionals, technical specialists, analysts, journeyman trades |
| Expert | $95,000 | $160,000 | Senior specialists, team leads, complex technical roles, master trades |
| Leadership | $140,000 | $220,000 | Division managers, senior experts, program directors, branch chiefs |
| Executive | $190,000 | $275,000 | Senior executives, agency leadership (replaces SES structure) |
All ranges denominated in 2025 dollars and adjusted annually by Employment Cost Index.
Locality Tier Structure:
| Tier | Adjustment | Coverage |
|---|---|---|
| High-Cost Metro | +25% to +35% | SF Bay Area, NYC Metro, DC Metro, Seattle, Boston, LA |
| Standard Metro | +10% to +20% | MSAs with population >250,000 |
| Non-Metro | Base rate | All other areas |
OPM shall publish tier assignments based on Bureau of Labor Statistics cost-of-living data, updated triennially.
Manager Compensation Discretion: Agency heads may authorize compensation at any point within an employee's assigned band without further approval. Adjustments within band require documented performance justification or market retention analysis. No employee shall receive a reduction in base compensation as a result of transition to the band system.
Critical Skill Premium: For occupational series designated by OPM as critical skill shortage areas, agency heads may authorize compensation up to 120% of band ceiling with Inspector General notification. Initial designations shall include: cybersecurity (2210 series), data science (1560 series), medical officers (0602 series), and financial examination (0510 series).
Classification Reform: Position classification shall determine band assignment only. Within-band placement determined by hiring manager based on qualifications, market conditions, and internal equity. OPM shall issue band classification standards within 180 days of enactment.
Transition Protection: Current employees shall be placed in appropriate bands at compensation not less than their current rate. Employees whose current compensation exceeds new band ceiling shall be grandfathered at current rate until band ceiling exceeds their compensation through annual adjustment.
Performance Accountability Framework:
| Element | Current State | Reformed State |
|---|---|---|
| Probationary Period | 1 year (often waived) | 2 years, mandatory, no waiver |
| Performance Cycle | Annual, backward-looking | Continuous, real-time feedback |
| PIP Duration | 90-120 days | 45 days with clear metrics |
| Removal Timeline | 170+ days average | 60 days maximum |
| Appeal Window | 30 days + extended litigation | 15 days, expedited review |
| Reversal Standard | Procedural error = reversal | Substantive review only |
Extended Probationary Period: The probationary period for all positions in the competitive service is amended to 24 months.⁸ No waiver authority. Probationary employees may be separated at any time for performance or conduct without adverse action procedures. Separation during probation is not appealable to MSPB except on grounds of prohibited personnel practice under 5 U.S.C. § 2302(b).
Performance Standards: Each agency shall establish objective, measurable performance standards for each position within 90 days of enactment. Standards shall include quantitative metrics where feasible. "Meets expectations" shall represent genuinely acceptable performance, not minimal presence. Employees shall acknowledge standards in writing.
Continuous Performance Management: Supervisors shall document performance observations at least monthly. Documentation shall be contemporaneous and specific. Annual ratings shall derive from documented continuous assessment, not end-of-year recollection.
Expedited Performance Improvement: When an employee's performance falls below standards, the supervisor shall issue a Performance Improvement Plan within 14 days. PIPs shall specify: (1) precise deficiencies with documented examples, (2) specific measurable improvement targets, (3) resources and support provided, (4) 45-day improvement period. No extensions. At conclusion, employee either meets standards or separation proceedings initiate.
Streamlined Adverse Action: Notice period reduced from 30 days to 15 days.⁹ Agency decision required within 15 days of employee response. Total process not to exceed 60 days from notice to effective date. Paid administrative leave during process limited to 10 days. Thereafter, unpaid or assigned to non-sensitive duties.
Expedited Appeal: MSPB appeals shall be decided within 90 days of filing. Review limited to: (1) whether performance standards were communicated, (2) whether deficiency was documented, (3) whether opportunity to improve was provided, (4) whether action was taken for prohibited discriminatory reason. Procedural irregularities not affecting outcome shall not constitute grounds for reversal.
Misconduct Separation: For misconduct unrelated to performance (fraud, theft, violence, security violations, insubordination), separation may proceed without PIP. Notice period 7 days. Immediate removal with pay pending final decision for security-sensitive positions or credible threat.
Manager Accountability: Supervisors who fail to address documented underperformance for more than one rating cycle shall have such failure reflected in their own performance evaluation. Sustained failure to manage performance constitutes grounds for removal from supervisory duties or separation.
Documentation Requirements: All performance actions shall be documented in writing with specific factual basis. Employees shall receive copies of all documentation and opportunity to respond. Documentation shall be retained for 3 years.
Prohibition on Compensation Reduction: No employee shall receive a reduction in base compensation as a result of transition to the band system.
Prohibition on Probationary Waivers: No waiver authority for the 24-month probationary period.
Prohibition on PIP Extensions: Performance Improvement Plans limited to 45 days with no extensions permitted.
Union Limitations: Collective bargaining agreements shall not extend probationary periods or waive performance standards (though may address implementation procedures). Grievance procedures may address performance rating disputes but shall not delay or prevent separation actions.
Agency Inspector General Review: Agency Inspectors General shall review separation patterns annually for evidence of disparate impact or prohibited discrimination. Findings reported to Congress and OPM.
Due Process Protections Preserved: Nothing diminishes protections against discrimination based on race, color, religion, sex, national origin, age, disability, marital status, sexual orientation, gender identity, or political affiliation. Whistleblower protections under 5 U.S.C. § 2302(b)(8) remain in full force.
What Changes
Before: 15 grades × 10 steps × 53 localities = 7,950 pay rates. Entry positions start at $12-17/hour, uncompetitive in most markets. Grade and step changes require classification review. Managers cannot adjust compensation to retain critical talent. Compression limits experienced worker earnings. Agencies lose talent to private sector due to rigid pay constraints. Removal of underperformers takes 170+ days with 25% reversal rate.⁵ Managers avoid confronting poor performance due to procedural burden and career risk. High performers leave. Underperformers remain. "Good enough to not fire" becomes the operative standard.
After: 5 bands × 3 locality tiers = 15 base structures with continuous ranges. $25/hour minimum ensures economic dignity and market competitiveness. Managers have discretion within wide bands to recognize performance and retain talent. Classification determines band only—not specific rate. Critical skills can exceed band ceilings by 20%. Administrative burden reduced by 80%+. Federal employment becomes the wage floor benchmark, creating market pressure for private sector wage increases.¹⁰ Two-year probation enables genuine assessment before tenure. 45-day PIPs with 60-day removal timeline create real accountability. Managers expected to manage. Failure to address underperformance reflects on supervisor. Due process preserved. Procedural gamesmanship eliminated. Compensation and accountability aligned: premium pay for premium performance, separation for sustained failure.
ROI
Federal Budget Impact
Costs:
| Item | 10-Year |
|---|---|
| Direct wage increases (floor + compression) | $72.0B |
| Associated benefit cost increases | $18.0B |
| System transition and training | $1.2B |
| Performance management system upgrades | $0.8B |
| Contingency (15%) | $13.8B |
| Total | $105.8B |
Savings:
| Item | Gross | Capture | Net |
|---|---|---|---|
| Reduced turnover costs | $28.0B | 60% | $16.8B |
| Classification system reduction | $8.5B | 70% | $6.0B |
| Increased tax revenue (higher wages) | $22.0B | 90% | $19.8B |
| Reduced transfer program eligibility | $4.0B | 50% | $2.0B |
| Contractor cost arbitrage reduction | $15.0B | 40% | $6.0B |
| Underperformer separation (productivity gain) | $12.0B | 50% | $6.0B |
| Reduced management time on process | $5.0B | 60% | $3.0B |
| Total | $59.6B |
Result: Net cost $46.2B over 10 years ($4.6B/year average). This represents a 0.07% increase in annual federal spending in exchange for competitive compensation, performance accountability, improved service delivery, and market wage pressure.
Societal Benefits
| Benefit | Annual | NPV (3%) | NPV (7%) |
|---|---|---|---|
| Private sector wage pressure effect | $18.0B | $153.5B | $126.4B |
| Improved government service quality | $12.0B | $102.3B | $84.3B |
| Reduced poverty/assistance dependency | $3.2B | $27.3B | $22.5B |
| Local economic stimulus (federal facility areas) | $5.8B | $49.5B | $40.7B |
| Restored public confidence in government | — | — | — |
| Total | $39.0B | $332.6B | $273.9B |
Governance: Simplified pay administration. Reduced classification disputes. Enhanced agency flexibility. Improved talent pipeline. Market wage benchmark established. Performance culture restored. Manager accountability enabled.
Summary
| Category | 10-Year | Notes |
|---|---|---|
| Federal Budget | -$46.2B | CBO-scoreable net cost |
| Societal | $274B - $333B | NPV at 7% - 3% discount rates |
| Net Societal ROI | 5.9:1 to 7.2:1 | Societal benefit per dollar of federal cost |
Confidence: MEDIUM — Cost estimates based on OPM workforce data and MSPB separation statistics. Societal benefit estimates require modeling assumptions about private sector wage response elasticity, service quality improvements, and productivity gains from performance accountability.
References
- Classification Act of 1949, Pub. L. 81-429; 5 U.S.C. §§ 5331-5338 (General Schedule)
- 5 U.S.C. § 5304 (Locality Pay)
- OPM Federal Employee Viewpoint Survey (retention factors – 2024)
- GAO-23-105388 (Federal Hiring Process – 2023)
- MSPB Annual Report (appeal outcomes, reversal rates – 2024)
- Partnership for Public Service (federal hiring and retention – 2024); CBO Federal Compensation Analysis (2023)
- GAO-24-106234 (Agency Staffing Challenges – 2024)
- 5 U.S.C. § 3321 (Probationary Period)
- 5 U.S.C. Chapter 75 (Adverse Actions); 5 U.S.C. § 7513 (Removal Procedures)
- Dube, Lester, Reich (2010) (minimum wage spillover effects); Card & Krueger (1994) (employment effects of wage floors)
- UK Civil Service Pay Bands (simplified grade structure, manager discretion within bands)
- Australia Public Service Classification (broad-banding reform 2013)
- Canada Pay Equity Act implementation (wage floor effects)
- Georgia state government (at-will reform 1996, outcomes studied)
- 5 U.S.C. Chapter 43 (Performance Appraisal)
- Economic Policy Institute (federal contractor wage analysis – 2024)
Change Log
- 2025-12-07 - Inline Citations: Added superscript citations; standardized References section.
- 2025-12-07 - Legislative Language Removal: Merged unique provisions into Proposed Reform; deleted Legislative Language section.
- 2025-12-07 - Template Standardization: Removed Horizontal Services section. Applied consistent spacing rules. Broke semicolon chains into separate sentences. Converted ROI to table format. Applied template section ordering.