Oversight of Streamlined Critical Pay Authority Could Be
Improved
June 2003
Reference
Number: 2003-10-116
This report has cleared the Treasury
Inspector General for Tax Administration disclosure review process and
information determined to be restricted from public release has been redacted
from this document.
June
19, 2003
MEMORANDUM FOR
COMMISSIONER EVERSON
FROM: Gordon C. Milbourn III /s/ Gordon C.
Milbourn
Assistant Inspector General
for Audit, Small Business and
Corporate Programs
SUBJECT: Final Audit Report - Oversight
of Streamlined Critical Pay Authority Could Be Improved (Audit #
200210031)
This
report presents the results of our review of Streamlined Critical Pay. The overall objectives of this review were
to determine whether the Internal Revenue Service’s (IRS) use of streamlined
critical pay authority conformed to established laws and regulations and to
analyze the costs associated with the program.
In
summary, IRS salary rates for the critical pay hires were adequately justified,
and the IRS incurred search firm costs of $3.2 million for searches to fill
critical pay positions. Candidates were
often identified for positions before critical pay positions were approved, and
the IRS was not always successful in recruiting qualified outside candidates
under the critical pay authority. In
addition, oversight of the critical pay authority could be improved to ensure
that it is used appropriately as needed.
We
recommended that the Commissioner obtain the IRS Oversight Board’s approval on
the justification, candidate selection, and compensation for all critical pay
positions, and provide the Board’s annual assessment of the IRS’ use of the
critical pay authority to the Congressional committees with IRS oversight
responsibilities.
Management’s
Response: The IRS disagreed with the recommendation to
obtain the IRS Oversight Board’s approval on the justification, candidate
selection, and compensation for all streamlined critical pay positions before
they are filled. Management believes
that additional processes or restrictions would reduce the intended benefits of
the streamlined authority. Management
also believes that the annual assessment of streamlined critical pay authority
that the IRS Oversight Board plans to perform should be adequate to determine
whether the authority has been used appropriately. The agreement between the IRS and the Board regarding the annual
assessment of the streamlined critical pay authority assumed that the results
of the assessment would be provided to Congressional committees with IRS
oversight responsibilities.
In
addition, management stated that certain costs incurred for critical pay
employees, such as bonuses and relocation expenses, may have been incurred
whether or not the critical pay authority was used and, therefore, were not
directly attributable to the critical pay program. Management’s complete
response is contained in Appendix V.
Office
of Audit Comment: Because the
designation of certain positions as critical indicates a high level of
importance to the success of the IRS’ mission, the Treasury Inspector General for Tax Administration
continues to believe that the IRS Oversight
Board should be a part of the approval process for all streamlined critical pay
positions. Table 2, “Costs of the
Critical Pay Authority,” in this report now reflects the classification of
costs associated with the critical pay program that may have been incurred
regardless of the use of critical pay authority as “Other Related Costs.”
Copies of this report are
also being sent to the IRS managers shown on the distribution list. Please contact me at (202) 622-6510 if you
have questions or your staff may contact Daniel R. Devlin, Assistant Inspector
General for Audit (Headquarters Operations and Exempt Organizations Programs),
at (202) 622-8500.
Salary
Rates for Critical Pay Hires Were Adequately Justified
Candidates Were Often Identified for Positions Before Critical Pay Was Approved
Appendix I – Detailed Objectives, Scope, and Methodology
Appendix II – Major Contributors to This Report
Appendix III – Report Distribution List
Appendix
IV – Streamlined
Critical Pay Authority Provisions
Appendix V – Management’s Response to the Draft Report
The Congress included a number of provisions in the Internal Revenue Service (IRS) Restructuring and Reform Act of 1998 (RRA 98) which provide personnel flexibilities to the IRS to help recruit and retain employees. One of the provisions authorizes the Secretary of the Treasury to establish one or more critical pay positions at the IRS if approval is obtained from the Office of Management and Budget (OMB). For these positions, compensation may be set at a higher rate than the pay of most Federal Government executives, but may not exceed the Vice President’s salary ($192,600 for Calendar Year 2002).
Furthermore, the RRA 98 created streamlined critical pay authority for up to 40 positions at the IRS. Use of streamlined critical pay authority requires the approval of the Secretary of the Treasury but does not require the approval of the OMB. The streamlined authority lasts for 10 years, expiring on July 22, 2008. Appointments to these types of positions are limited to a term of 4 years. Use of the authority is permitted only under certain conditions including the following:
1. The positions must require expertise of an extremely high level in an administrative, technical, or professional field and are critical to the IRS’ successful accomplishment of an important mission.
2. Exercise of the authority must be necessary to recruit or retain an individual exceptionally well-qualified for the position.
The Senate Committee report on this provision indicated personnel flexibilities such as the streamlined critical pay authority were to provide the IRS Commissioner with the ability to bring in experts and the flexibility to revitalize the current IRS workforce. The concern was that the hiring practices before 1998 inhibited the ability of the Commissioner to change the IRS’ institutional culture.
Subsequently, there have been questions about whether the IRS has used this authority as intended. The Congress and the press have raised questions about the necessity of the costs associated with the critical pay hires, including recruiting costs, relocation costs, salaries, and bonuses, as well as the types of positions for which the IRS used this authority.
Our review was performed in the Executive Service Division (ESD) in Strategic Human Resources (SHR), Agency-Wide Shared Services, the Small Business/Self-Employed (SB/SE) Division, the Large and Mid-Size Business (LMSB) Division, Modernization and Chief Information Officer (CIO), the Wage and Investment (W&I) Division, and the Department of Treasury Assistant Secretary for Management and Chief Financial Officer (CFO). We also interviewed a search firm representative involved in identifying critical pay candidates for the IRS.
The audit period was from August 1998 to October 2002, and our fieldwork was conducted from July 2002 through October 2002. The audit was conducted in accordance with Government Auditing Standards. Detailed information on our audit objectives, scope, and methodology is presented in Appendix I. Major contributors to the report are listed in Appendix II.
Designation of critical pay positions
During the restructuring of the IRS in 1999, the IRS Commissioner created a committee of top-level officials from the IRS and Department of the Treasury to work with him to determine how best to allocate the 40 critical pay positions. Decisions were made based on the requirements of the various job positions in the IRS divisions and functions, the experience of existing IRS executives, and the potential for drawing experienced executives from other Federal Government agencies. In addition, the committee considered the need to bring in top-level experience from outside the IRS in order to bring new perspectives to organizational challenges.
Table 1 shows the initial allocation of the 40 critical pay positions and the positions filled as of September 2002.
Table 1 – Critical Pay Positions: Initial Allocation (May 1999) and Positions
Filled as of September 2002
|
Business/Functional
Units |
Initial
Allocation |
Positions
Filled |
|---|---|---|
|
Agency-Wide
Shared Services |
2 |
1 |
|
Communications
and Liaison |
1 |
1 |
|
Criminal
Investigation |
1 |
0 |
|
Modernization |
9 |
10 |
|
Large and
Mid-Size Business |
9 |
8 |
|
Small
Business/Self-Employed |
5 |
5 |
|
Tax-Exempt and
Government Entities |
2 |
2 |
|
Wage and
Investment |
7 |
6 |
|
Taxpayer
Advocate |
3 |
1 |
|
Other
(Director of Research) |
1 |
1 |
|
Total |
40 |
35 |
Source: Executive Service Division
Based on their allocation, the business and functional units are required to obtain authorization from the Commissioner once they decide to use critical pay authority to fill a specific position. Once critical pay is approved, the business or functional unit identifies potential candidates from either internal contacts or executive search firms. After a candidate has been identified and selected, the Treasury Assistant Secretary for Management and CFO must approve the selection.
Costs associated
with critical pay
As of September 2002, the IRS had incurred costs of approximately $8 million associated with the critical pay authority. Certain costs, such as the additional salary and search firm expenses are specifically attributable to the critical pay authority. Other costs, such as bonuses and relocation expenses, may have been incurred whether or not a candidate was hired using streamlined critical pay authority. We computed the additional salary cost by comparing the salaries actually paid to the critical pay appointees to what would have been paid to each as a top-level senior executive (we assumed they would have received the highest pay level [ES-6]) had the critical pay authority not been in existence. Table 2 shows the breakdown of costs of the critical pay authority:
Table 2 – Costs of the Critical Pay
Authority
|
Net
Increased Costs for Critical Pay Employees |
|---|
|
Base Salary
Increase........................................... $2,568,591 |
Search Firm Costs............................................... $3,217,921
|
Other
Related Costs
|
|
Performance
Bonuses............................................. $134,625 |
|
Recruitment Bonuses.............................................. $686,847 Relocation Bonuses.................................................. $25,000 |
|
Relocation
Costs................................................. $1,394,479 |
|
Total.................................................................. $8,027,463 |
Source: Executive Service Division
The base pay for members of the Senior Executive Service (SES) in Calendar Year 2002 ranged from $113,000 (ES-1) to $130,000 (ES-6). With locality pay, the maximum salary an executive could receive was $138,200. Under the streamlined critical pay authority, the salaries the IRS paid ranged from $125,000 to $192,600.
When the IRS selects a critical pay candidate to fill a position, a compensation analysis is performed to determine the candidate’s base salary. To determine the base salary, the following six factors are taken into consideration:
1. Current salary rate.
2. Salary rate for the past 4 years.
3. Stock options.
4. Industry assessment.
5. Competing offers.
6. Loss of benefits.
We reviewed the salaries for 48 critical pay hires (this includes 13 who had left the IRS as of October 2002) to determine if the salaries were computed and set according to IRS compensation guidelines. In all instances, the salaries plus performance bonuses were computed according to guidelines and did not exceed the salary of the Vice President ($192,600).
Of the 48 critical pay appointees reviewed, 32 accepted salaries that were lower than their private sector salaries. Moreover, 9 of these 32 accepted salaries that were more than 50 percent lower than their private sector salaries. Fourteen critical pay appointees realized a salary increase when they came to the IRS; 4 of them received an increase of more than 20 percent. All of the increases were properly justified by at least one of the six factors stated above. Two of the critical pay appointees received a salary equal to their private sector salary.
The IRS paid a total of $134,625 in performance bonuses to 8 critical pay appointees in Fiscal Years (FY) 1998 - 2002. Twenty-six critical pay appointees received a total of $686,847 in recruitment bonuses during FYs 1998 - 2002. The dollar amount includes an adjustment (repayment) by a critical pay appointee who left the IRS approximately 4 months after being hired. All performance and recruitment bonuses were paid in accordance with the law and IRS guidelines.
Since the IRS was provided critical pay authority, 22 of the 48 critical pay appointees were authorized to use the IRS relocation program. Because of concerns with the high costs to relocate employees, particularly critical pay appointees, the IRS implemented a new policy in July 2002 to help reduce relocation costs, especially those costs associated with the use of relocation services companies to assist in the sale of employees’ homes. The Treasury Inspector General for Tax Administration issued a separate audit report addressing relocation expenses. For the relocation cases reviewed, expenses appeared to be in conformance with Federal guidelines. The IRS’ new relocation policy should help in containing the costs associated with relocation services companies.
In the past, the IRS has generally not used search firms to identify candidates for executive level positions; however, search firms were used for most critical pay positions. In fact, search firms were used in 44 instances to identify potential critical pay appointees. Total search firm costs for the critical pay authority were approximately $3.2 million, which represents 40 percent ($3.2 million/$8 million) of the total costs of the program. In addition to identifying candidates, the search firms also performed background interviews, reference checks, and other search-related services.
The IRS experienced a 52 percent success rate in filling critical pay positions through the use of search firms
The search firms identified 23 of the candidates that were
hired into critical pay positions at an approximate cost of $1.7 million. However, $1.4 million was spent on search
firms for positions in which the IRS, not the search firm, ultimately
identified the candidate that was hired, although the search firms also
provided services related to recruiting some of the candidates identified by
the IRS. In 10 cases, the IRS
identified the critical pay candidates hired (after incurring total costs of
$674,000 for search firms).
Additionally, the search firms were paid approximately $772,000 for
searches and services related to 9 positions that were ultimately filled at the
SES level instead of a critical pay level.
The IRS’ success rate in using search firms to identify and hire
critical pay candidates is approximately 52 percent (23 placements out of 44 searches).
In certain instances the IRS paid for extensions of time for searches, contrary to standard industry practice
The original search firm contracts included a provision requiring the IRS to pay the search firms for extensions if the searches lasted longer than 120 days. The IRS Procurement staff stated that under industry standard practice, search firms typically continue to search for candidates until one is identified without any additional compensation. However, IRS officials wanted to ensure that search firms were paid for the additional time required for conducting the searches. The IRS paid a total of $377,646 to 2 search firms for search extensions. In the contract negotiations in April 2002, the IRS and search firms agreed that the IRS would no longer be charged for search extensions. Additional contract modifications expanded the use of search firms to include identifying SES and Senior Manager candidates, as well as candidates for the IRS’ Executive Development program.
In January 2000, the IRS implemented new procedures to better define its process for using critical pay authority and hiring critical pay employees. One provision in these procedures is that a critical pay position must be justified based on a need for special skills critical to the functioning of the IRS and must be approved by the Commissioner prior to the start of the recruiting process for a candidate. However, after the new procedures went into effect, 15 of 19 critical pay employees were identified by name in the memoranda sent to the Commissioner requesting that he approve critical pay for the positions.
In certain instances, candidates were identified before positions were created
In 2 of the 15 positions noted above, the positions and the associated duties were defined after candidates were identified.
· Director, E-Learning - The IRS contracted with a search firm to fill the Director of Learning and Education position. The search firm identified two candidates that IRS officials believed were highly qualified for the position. IRS officials then decided that the critical pay position as originally proposed was too much for one person to handle, separated the responsibilities, and made two critical pay positions, the Chief Learning Officer and the Director, E‑Learning. Consequently, both individuals were hired.
· Project Director, Web Services - IRS officials extended a job offer to a critical pay candidate they wanted as Project Director, Web Services, using the streamlined critical pay authority. However, the IRS Commissioner had not approved the position. In this instance, because all the critical pay positions had been designated at that time, the critical pay authority, which had been designated for the position of Director, Field Operations, was used for the Project Director, Web Services, position. However, the IRS was in the process of using a search firm to identify a candidate for the Director, Field Operations, position and had already incurred two-thirds of the search fee ($41,893) before it cancelled the search.
In 9 cases, the IRS designated positions as critical pay positions but subsequently filled them as SES positions because either qualified outside candidates could not be found, the qualified candidates who were identified ultimately declined the positions, or IRS officials identified a candidate internally that they considered to be more highly qualified. Search firms were paid a total of $772,000 for these 9 positions. Once the positions were converted back to SES positions, the critical pay authority was then used for other positions.
For example, the IRS hired a search firm and initiated a search for the Director, Strategy Research and Program Plan (LMSB Division), in November 1999. IRS officials decided not to hire any of the candidates identified for the position by the search firm. The search was closed and the IRS paid the search firm for the list of candidates provided. Approximately 6 months later, the IRS hired a second search firm to conduct a search for the critical pay position Director, Research (LMSB Division), which was essentially the same position with a new title. The IRS did not hire any of the candidates provided by the second firm. Instead, the IRS filled the position at an SES level with a candidate identified by an internal source.
In another example, the IRS contracted with a search firm to identify individuals to fill four critical pay research director positions. The searches for the four candidates began in June and July 2000. The IRS planned to fill two critical pay research director positions within the Headquarters Operations, one within the W&I Division and one within the SB/SE Division. However, the IRS later decided to convert three of the four critical pay research director positions to SES positions and hire one candidate under the critical pay authority within the Headquarters Operations.
While there have been problems associated with determining which positions to designate for streamlined critical pay, as well as recruiting and hiring qualified outside candidates to fill the positions, additional processes or restrictions could reduce the intended benefits of the streamlined authority. The streamlined authority specifically removes the need to seek OMB approval for such positions. However, because the streamlined authority specifies that approval from the Secretary of the Treasury is required, additional scrutiny by the Secretary, as well as the IRS Oversight Board, may help ensure that the authority is used appropriately as needed.
The IRS Oversight Board’s Committee on Personnel and Organization has worked with the ESD to draft procedures that are intended to provide more oversight of the critical pay authority. The Board has the specific responsibility to review the Commissioner’s selection, evaluation, and compensation of IRS senior executives who have program management responsibility over significant functions of the IRS. The Board believes that this direct oversight responsibility covers just those 13 senior executive positions that report directly to the IRS Commissioner. For these positions, the Board and IRS have agreed that the IRS will:
· Inform the Board of any impending vacancies.
· Consult with the Board when the IRS plans to fill a vacancy.
· Send the Board information about potential selectees prior to final selection.
Additionally, the IRS and the Board have agreed to expand the Board’s oversight of the critical pay authority in general. The Board will conduct an annual program review of the authority as a whole rather than review individual cases of critical pay executives who do not report directly to the Commissioner. These draft procedures were reviewed by the IRS Commissioner in April 2001 and approved by the Board in its April 2001 meeting.
We recommend that the Acting Commissioner:
1. Obtain the IRS Oversight Board’s approval on the justification, candidate selection, and compensation for all critical pay positions.
Management’s Response: The IRS disagreed with this recommendation. Management believes that additional processes or restrictions would reduce the intended benefits of the streamlined authority. Management further asserted that the annual assessment of streamlined critical pay authority that the IRS Oversight Board plans to perform should be adequate to determine whether the authority has been used appropriately.
Office of Audit Comment: Because the designation of certain positions as critical indicates a high level of importance to the success of the IRS mission, the Treasury Inspector General for Tax Administration continues to believe that the IRS Oversight Board should be a part of the approval process for all streamlined critical pay positions.
2. Provide the IRS Oversight Board’s annual assessment of the IRS’ use of the critical pay authority to the Congressional committees with IRS oversight responsibilities.
Management’s Response: The IRS stated that their agreement with the IRS Oversight Board in April 2002 regarding the Board’s annual assessment of the IRS’ use of streamlined critical pay authority assumed that the results would be provided to the Congressional committees with IRS oversight responsibilities.
Appendix I
Detailed Objectives,
Scope, and Methodology
The overall objectives of this review were to determine if the Internal Revenue Service’s (IRS) use of streamlined critical pay authority conformed to established laws and regulations and to analyze the costs associated with the program. To accomplish these objectives, we:
A.
Interviewed the Assistant
Deputy Commissioner and determined the criteria used to allocate critical pay
positions within the IRS.
B.
Interviewed Large and
Mid-Size Business Division, Small Business/Self-Employed Division, and Wage and
Investment Division heads and the Deputy Commissioner for Modernization and
Chief Information Officer and identified their processes for creating a
critical pay position in their offices.
C.
Interviewed the IRS’
Executive Service Division (ESD) management in the Office of Strategic Human
Resources and determined the criteria used to establish critical pay positions
in the business units.
1.
Obtained and reviewed the
procedures used for the Streamlined Critical Pay Authority Program by the ESD.
2.
Reviewed all critical pay
position files in the ESD to determine if:
(a) They contained a request to establish the critical pay
position that included a business case justifying the establishment of the
position.
(b) All the elements of a business case were identified in the
request.
(c) The appropriate reviews, approvals, and Commissioner’s
signature had been completed.
D.
Determined whether the
critical pay hire’s qualifications met the needs of the critical pay position.
E.
Determined if the critical
pay hire’s Compensation Package had been prepared in accordance with
guidelines.
F.
Determined whether all the
elements in the Preliminary Package had been satisfied.
G.
Determined whether all the
elements in the Final Package had been satisfied.
H.
Evaluated the Department of
the Treasury’s approval process of the Critical Pay Preliminary and Final
Packages.
A. For those critical pay positions filled using search firms, determined what information the Specialist in the ESD put together when initiating job searches.
B. Reviewed the Procurement office process in the selection of search firms to evaluate the adequacy of the process used.
C. Reviewed task orders under the original contracts, compared them to task orders under renewed contracts, and identified similarities and/or differences.
D. Determined what information the IRS provided to the search firms prior to the firms conducting their searches for a candidate.
E. Determined the process used when the candidates interviewed for a critical pay position were not selected.
F. Determined whether the costs incurred for executive search firms were necessary and proper.
III. Evaluated the costs associated with the critical pay employees and the performance expectations established for each.
A. Determined salary, bonuses (recruitment, relocation, retention, and performance), relocation cost, and search firm cost for each critical pay hire.
B. Determined the extent of IRS Oversight Board involvement with evaluating the Streamlined Critical Pay Authority Program.
C. Determined the number and cost of searches that did not result in filling a critical pay position under the original contracts.
D. Determined the number and cost of searches that resulted in filling a non-critical pay position under the original contracts.
E. Determined the number and cost of extensions for searches made to identify critical pay candidates under the original contracts.
F. Reconciled the number of searches made to the number of critical pay positions to be filled under the original contracts.
Appendix II
Major Contributors to This Report
Daniel R. Devlin,
Assistant Inspector General for Audit (Headquarters Operations and Exempt
Organizations Programs)
Michael E. McKenney, Director
Kevin P. Riley, Audit Manager
Charles Ekunwe, Senior Auditor
Kenneth E. Henderson, Senior Auditor
David Robben, Senior Auditor
Gene Luevano, Auditor
Appendix III
Internal Revenue
Service Oversight Board
Deputy Commissioner
for Operations Support N:DC
Deputy Commissioner
for Services and Enforcement N:DC
Director, Strategic
Human Resources N:ADC:H
Office of
Management Controls N:CFO:AR:M
Chief Counsel CC
Director, Office of
Program Evaluation and Risk Analysis
N:ADC:R:O
National Taxpayer
Advocate TA
Director, Legislative Affairs CL:LA
Appendix
IV
Streamlined Critical Pay
Authority Provisions
The Secretary of the Treasury may, for a period of 10 years after the
date of enactment of this section (July 22, 1998), establish, fix the
compensation of, and appoint individuals to, designated critical
administrative, technical, and professional positions needed to carry out the
functions of the Internal Revenue Service, if -
(1) the
positions -
(A) require expertise of an extremely high level in an administrative,
technical, or professional field; and
(B) are critical to the Internal Revenue Service’s successful
accomplishment of an important mission;
(2) exercise of the authority is
necessary to recruit or retain an individual exceptionally well qualified for
the position;
(3) the number of such positions
does not exceed 40 at any 1 time;
(4) designation of such positions
are approved by the Secretary of the Treasury;
(5) the terms of such
appointments are limited to no more than 4 years;
(6) appointees to such positions
were not Internal Revenue Service employees prior to June 1, 1998;
(7) total annual compensation for
any appointee to such positions does not exceed the highest total annual
compensation payable at the rate determined under section 104 of title 3; and
(8) all such positions are
excluded from the collective bargaining unit.
Appendix V
The response was removed due to its size. To see the complete response, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.