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«OFFICE OF INSPECTOR GENERAL January 27, 2016 MEMORANDUM TO: Jeffery Heslop, Chief Operating Officer L/_... / ~ Lacey Dingman, Chief Human Capital ...»

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January 27, 2016


TO: Jeffery Heslop, Chief Operating Officer

L/_... / ~

Lacey Dingman, Chief Human Capital Officer

~~~ ~

FROM: Carl W. Hoecker, Inspector General SUBJECT: Review of the SEC's Pay Transition Program, 15-0NR-0281 -R The U.S. Securities and Exchange Commission (SEC) Office of Inspector General (OIG) Office of Oversight and Review has completed a review of the SEC's pay transition program (Pay Transition). This memorandum summarizes the results of our review.

Introduction and Summary On December 23, 2014, the OIG received an anonymous Hotline complaint about the implementation and unexpected high cost of Pay Transition. Pay Transition is a program resulting from an agreement between SEC management and the National Treasury Employees Union (Union or NTEU), whereby eligible SEC employees could apply to have their pay reviewed, and possibly adjusted, under the pay matrices the SEC adopted in 20 12 to set pay for incoming employees.

The anonymous complaint raised the fo llowing three main areas of concern:

• First, the complaint questioned the way the Office of Human Resources (OHR) was implementing Pay Transition, particularly how the OHR was calculating employee experience levels, which determined the amount an employee should be paid. The complaint listed several examples of employees from one regional office who were allegedly credited with more years of experience than was appropriate. The complaint also stated that the OHR "disregarded whether the employees have advanced degrees and professional certifications."

• Second, the complaint questioned an eligibility provision in the Pay Transition Agreement, which required that an employee' s approved new salary be 5% or greater than the employee's current salary for the employee to qualify for a salary increase. The complaint suggested that the 5% threshold should be increased to 20% to save resources. The complaint also gave an example of one regional office employee who "didn' t make the cut because he was

–  –  –

During its review, the OIG received four additional complaints regarding Pay Transition.

One of those complaints questioned why the OHR had not disclosed to SEC staff that the $3 million cap was being raised; this complaint suggested that the OHR should have reopened the application open season when the additional funds were added. The complaint also asked whether the OHR vetted the resumes that were submitted with the applications. The remaining complaints alleged.

that (1) all or nearly all SEC employees received salary increases ranging from $20,000 to $40,000, and (2) these salary increases were unwarranted and were instituted with "very little consideration about the financial impact to the agency." 1 We performed a review of Pay Transition based on the allegations in the complaints. As discussed in more detail below, we learned that the OHR implemented Pay Transition consistent with an agreement between the NTEU and SEC management, including using agreed-upon paysetting matrices, following a multilayer application review process that included a provision for third party arbitration, and applying an agreed-upon 5% threshold. In addition, we confirmed that the $3 million budget that the NTEU and SEC management initially agreed to for the salary adjustments was significantly lower than the actual amount of the approved salary adjustments.

The actual approved salary adjustments amounted to about $21 million per year, which the SEC Chair decided to fully fund. The OHR informed us that the $3 million cap that was included in the Pay Transition agreement with the NTEU resulted from consultations with SEC senior management. We also learned that the budgeted amount reflected the SEC' s inability to predict how many people would apply and qualify for Pay Transition.

The OHR further informed us that it did not announce the increased Pay Transition budget to the staff because the OHR typically does not announce budgets for its programs. The OHR also informed us that it had extended the open season for Pay Transition by 4 days for all employees, which the OHR had announced to the staff. Furthermore, according to the OHR, about 10 employees were allowed to apply for Pay Transition after the open season deadline because those employees were either on maternity leave or sick leave during the entire open season. Those employees were added to the applicant pool in November or December 2014, and their applications were processed in a similar manner as those of other applicants.

After we completed our review work and were finalizing this memorandum, the OIG received an additional complaint about Pay Transition and the SEC's pay-setting system more generally. The complaint raised some specific concerns related to Pay Transition that are included in this review. Other concerns expressed in the complaint about the SEC's pay-setting system raised matters that are either beyond the scope of this review or that fall within the purview of other agencies.

Pay Transition Review January 27, 2016 Page 3of11


Before 2002, SEC staff were paid according to the General Schedule. In 2002, when the SEC was experiencing high staff tum-over, the Investors and Capital Markets Relief Act (P.L. 107allowed the SEC to create its own compensation system, similar to the systems of other Federal financial regulators. 2 As a result of the legislation, also known as the "Pay Parity Act," the SEC transitioned away from the General Schedule and instituted a compensation system consisting of 17 pay grades. The objective of the pay provisions of the Pay Parity Act was to allow the SEC to provide compensation and benefits at levels comparable with those provided by other Federal financial regulatory agencies.

To implement the Pay Parity Act, the SEC established certain goals for its pay parity effort, which included the following: (1) providing comparability with other Federal financial regulatory agencies; (2) reducing supervisory pay compression; (3) accounting for differences among certain specialized occupations; and (4) increasing the agency's reliance on merit and performance-based management principles. According to the SEC, focusing on these goals would substantially improve its effectiveness and efficiency by allowing it to keep staff longer and to provide more incentives for them to extend their tenures by improving the link between pay and performance. 3 Until 2012, the SEC's new hire pay setting policy was to (1) match current salary, (2) offer up to 6% above current salary with management justification and OHR approval; or (3) offer the maximum rate of pay for the grade. 4 According to the OHR, pay setting was almost exclusively based on an employee's previous salary rather than a valuation of an employee's experience as it relates to a particular job.

In May 2012, based in part on recommendations from outside compensation consultants, the SEC began using a structured pay-setting process for new employees and current employees selected for competitively announced positions. The OHR developed pay matrices that set pay based on a candidate's years of relevant and specialized experience.

According to OHR officials, as the new pay-setting process was being implemented, the OHR received complaints that some SEC employees who were hired before May 2012 would be at a higher salary level if they were newly hired. After negotiations with the NTEU, on August 19, 2014, the SEC and the NTEU executed the Memorandum of Understanding Between Securities and Exchange Commission and the National Treasury Employees Union (Agreement). Section 12 of the Agreement, titled "Pay Transition Committees," contains the Pay Transition provisions.

Section 12(A) of the Agreement states that the purpose of Pay Transition is to benefit employees by comparing actual employee salaries to the salaries that employees would receive if they were newly hired based on the SEC's current pay matrices. The Agreement also explains how Pay Transition will be implemented for bargaining unit employees.

5 U.S.C. § 4802(b) and (c) (2012).

March 6, 2002, SEC Pay Parity I11;1plementation Plan and Report.

October 31, 2012, Towers Watson Final Report to the SEC.

Pay Transition Review January 27, 2016 Page4of11 Section 12(B) of the Agreement establishes a committee in each division and office that is composed of two members appointed by the NTEU and two members appointed by management. 5 According to Section 12(B), the committees "will address historical practices in setting initial salaries of employees with similar qualifications and experience."

Under Section 12(0-E) of the Agreement, eligible applicants6 may submit an application with an updated resume to the OHR during a 15-day open season. Under Section 12(F) of the Agreement, the OHR then performs an initial analysis, makes a pay-setting recommendation, and forwards the application to a committee for review.

Under Section 12(G) of the Agreement, the appropriate committee reviews the applications and, using pay-setting matrices, determines whether the applicants meet the criteria for a pay adjustment and, if so, the amount of that adjustrilent.

The pay-setting matrices, which are discussed in Section 12(C) and are attached to the Agreement, "consider an applicant's relevant education, relevant years of experience, relevant years of specialized experience, and relevant credentials and/or licensing."7 The pay matrices set out the following definitions: (1) "Specialized" experience is "[p]rior technical experience that equips a candidate with the skill and knowledge to successfully perform the duties of a position and is directly related to the duties of the position to be filled;" 8 and (2) "Relevant" experience "[i]ncludes prior experience not directly related to the duties of the position but which nonetheless prepares the candidate for success in the position." Each pay level has several base pay levels that are associated with a range of years of both relevant and specialized experience.

Under Section 12(H-J) of the Agreement, after the committee makes its pay-setting recommendation, the Chief Human Capital Officer (CHCO}, in consultation with the applicant's · division or office, provides the final review of all committee recommendations to ensure each applicant's education, years of experience, years of specialized experience, and relevant credentials/licensing meet the relevant criteria. The CHCO makes a decision on each pay adjustment, but only approves those pay adjustments to base salary that are equal to or in excess of 5% of the employee's current base salary. The CHCO also has the discretion to return any recommendation to the committee for a one-time reconsideration.

Divisions and offices with fewer than 30 bargaining unit employees are reviewed by a joint "at-large" type committee with two members appointed by the NTEU and two members appointed by management.

Under Section 12(E) of the Agreement, applicants are not eligible for a pay adjustment if they: (1) have been disciplined in the last year or are currently on a Performance Improvement Plan; (2) received an "unacceptable" performance rating; (3) entered on duty after May 31, 2012, or have had a salary modification under the pay matrix; or (4) are determined by the committee to be eligible for a salary adjustment of less than 5% of their current base salary.

The term "relevant" means relating to the employee's current position.

The term "directly related" is defined in the pay matrices as "connected to the duties of the position (for example, for a SK-0905-14 General Attorney in the Division of Enforcement, prior experience is directly related if the employee was working as an attorney and conducting investigations, engaging in discovery, taking depositions or testimony, working on securities law matters, or performing duties required for the SK-14 General Attorney position)."

Pay Transition Review January 27, 2016 Page 5of11 Under Section 12(M-N) of the Agreement, the parties agree to hire and use a third-party neutral arbitrator to decide appeals in cases where the CHCO adopts a recommendation that was not supported by at least one NTEU committee member. The arbitrator's decision is final, binding, and not appealable.

Section 12(0) of the Agreement includes a budget of$3 million to cover all salary adjustments for bargaining unit employees. Under Section 12(P), ifthe SEC determines that it has insufficient funds to pay all the approved salary adjustments, the Chair or her designee may declare a "budgetary shortfall," and the SEC will pay each qualifying employee a proportionate share of the $3 million. Under Section 12(Q), pay adjustments are not retroactive; thus, an employee approved for an adjustment is assigned a new salary that is prospective only.

After the Agreement was· approved, the Chair extended Pay Transition to non-bargaining unit employees with a budget of $750,000. Pay Transition for non-bargaining unit employees was essentially the same as for bargaining unit employees, except that non-bargaining unit employees did not have arbitration rights and the committees reviewing non-bargaining unit employees' applications included only representatives from management. 9

The SEC published three notices to the staff regarding Pay Transition as follows:

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According to the OHR, there was no written document applying Pay Transition to non-bargaining unit employees.

However, pursuant to its standard practice of extending negotiated programs to all employees, the SEC applied Pay Transition to both bargaining unit and non-bargaining unit employees.

Pay Transition Review January 27, 2016 Page 6of11

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On October 30, 2015, the CHCO informed us that the NTEU and the OHR had resolved all Pay Transition applications and that the program had concluded in October 2015 without arbitration. 10 Pay Transition took effect for all approved applicants as of June 14, 2015.

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