Homeland Security Department officials said Friday that they want to transfer as many as 8,000 employees to a performance-based pay system in fiscal 2005.

The change to the department's personnel system is set to be the first small step in a dramatic overhaul, which will eventually affect 110,000 DHS employees if it is approved in its present form. Homeland Security officials want the majority of the department operating in a system that rewards high performers with better pay and pushes those who do not meet performance requirements out the door.

There would be "no more longevity increases," said Ronald Sanders, the Office of Personnel Management's associate director for human resources management. OPM has worked with DHS officials over the past 10 months to develop the system.

About 70,000 DHS employees would be exempted from the system. Homeland Security officials said the exempted personnel, including uniformed military personnel, administrative law judges and Transportation Security Administration personnel, have different statutory authorities governing their personnel systems.

The department is requesting $12.5 million in next year's budget proposal to provide performance pay for the first 8,000 personnel set to be switched to a performance pay system. Those employees will primarily be from the Homeland Security headquarters and from the nonmilitary, nonwage-grade Coast Guard ranks.

Under the new system, personnel would be organized into occupational pay clusters focused around similar type jobs. DHS officials expect to form between 10 and 15 of these groupings. Within the clusters, employees would be categorized into one of four pay bands: entry level or development, full-performance level, senior expert and first-level supervisor.

The system would grant pay raises according to locality, base pay adjustments across the cluster and performance. No pay raise of any sort would be granted to those employees who failed to score "fully successful or better" on their performance reviews, officials said.

Melissa Allen, senior adviser for human resources at Homeland Security, said locality pay adjustments would be market-driven based on annual assessments of similar private sector jobs in the same geographical area. That shift will allow Homeland Security to draw talented employees to areas with a high cost of living, such as Southern California. According to Allen, some employees are forced to live hours away from their jobs because they cannot afford housing near their place of employment.

"It's a better fit with the market," OPM's Sanders said.

Seeking to calm fears, officials held a briefing Friday and repeatedly emphasized that no DHS personnel would lose their jobs, pay or benefits as they entered the system. They also stressed that the proposals were open to public comment and union consultation, and could potentially change.

Union leaders and lawmakers applauded the news.

John Gage, president of the American Federation of Government Employees, said that he was pleased Homeland Security Secretary Tom Ridge had listened to union pleas to "go slow with the pay-for-performance" implementation. Gage said also that Ridge had promised "meaningful" dialogue with unions during the comment period.

He was concerned, however, that the department would not pay enough in lower cost of living areas to attract "the best and brightest."

"I think the department has a lot of explaining to do on that," Gage said.

Gage and Colleen Kelley, national president of the National Treasury Employees Union, said they were pleased that the system would be implemented gradually, with only 7,000 to 8,000 employees affected in the first year. In the second year, the agency will include employees in its field offices.

"We look at this as the end of phase one," said Steve Cohen, senior adviser for homeland security at the Office of Personnel Management, who added that collaboration between the unions and agency management would continue.

Sen. Susan Collins, R-Maine, chairwoman of the Senate Governmental Affairs Committee, said that she would closely watch upcoming negotiations and the implementation of the system.

"I understand that Secretary Ridge and OPM have pledged to continue the collaborative process with the unions, which is welcome news," Collins said. "As [chairwoman]of the committee with oversight of DHS and the federal workforce, I encourage their ongoing dialogue and will continue to monitor their progress."

DHS' Allen said the agency's proposal will reduce the number of issues it must bargain on with its unions, and will shorten the time period during which the agency bargains on other issues.

Under the plan, the agency will no longer negotiate with its unions on issues deemed to be "core management rights," such as the deployment of personnel, assignment of work and the use of new technology. The proposal would speed up negotiations on other issues by setting a 30-day time limit on all mid-term bargaining and a 60-day deadline for term agreements.

Kelley complained that the proposal "basically strips away collective bargaining" rights. She and Gage said they felt comfortable allowing the agency to make quick decisions in cases of national emergency, but wanted Homeland Security to allow "post-implementation bargaining."

"If you have to move quickly to deliver on the department's mission, we support that 100 percent," Kelley said. "But then talk with us and the employees about how to continue in the long term."

The rules, however, will allow the unions to continue to bargain as they had before on procedures for layoffs, staffing, discipline, vacation time and pay reductions.

A new Homeland Security Department Labor Relations Board will take over some functions of the Federal Labor Relations Authority, which mediates disputes between unions and federal agencies. The new board will consist of three members who do not work for the department. The DHS secretary will appoint all three members; one must be a member of the FLRA. The authority will continue to hear disputes involving unfair labor practices and union elections.

The proposed rules also will quicken and simplify the system for employee disciplinary appeals. Previously, employees could be disciplined for poor performance or misconduct. An employee could appeal the agency's disciplinary action to the Merit Systems Protection Board, a separate federal agency with judges around the country who hear cases and a three-member board in Washington that hears appeals.

To take action against an employee for poor performance, an agency manager currently has to document over the course of months the employee's problems, then provide the employee with a period of time, typically three to four months, in which to improve. After that, the manager can take action. If the employee appeals to the MSPB, the agency has to show that a reasonable person could have come to the same determination as the manager. If MSPB disagrees, it can reduce the penalty or throw it out.

Firing an employee for misconduct is somewhat easier. There is no requirement to document employee performance or to offer an improvement period. But in the event of an appeal, the agency has to show by a preponderance of the evidence that the employee had done something seriously wrong, a slightly higher standard of proof.

Under the proposed changes, Homeland Security will consolidate the two disciplinary systems, and will ask MSPB to streamline its rules for hearing the cases. In the event of poor performance, managers will only have to provide a 20-day window for an employee to improve.

In addition, MSPB will no longer have the opportunity to reduce the agency's penalty decision. An MSPB judge can still dismiss a case, but the judge may not uphold the decision and also reduce the penalty, under the proposal.

Finally, some misconduct cases, such as an Immigration and Customs Enforcement inspector taking a bribe, will trigger a mandatory removal. In those cases an internal agency panel will review the facts. Only the Homeland Security Secretary will have the authority to overturn that panel's decision. MSPB will play no role in these cases.

The agency did not suggest changes to employee rights to make discrimination claims to the Equal Employment Opportunity Commission.

Next week, the department will publish its proposed changes in the Federal Register, and a 30-day public comment period will follow. The Federal Mediation and Conciliation Service will referee disputes between the unions and agency management during a second 30-day period. After that period has elapsed, the agency is required to report unresolved disputes to Congress, but may move forward with implementation of the system as it sees fit.