By Alyssa Rosenberg - October 7, 2008

The Securities and Exchange Commission will pay $2.7 million to some African-American employees and older workers, and also adjust their salaries in a settlement with the National Treasury Employees Union.

The union had challenged the fairness of the agency's merit system and an arbitrator ruled in 2007 that it resulted in illegal discrimination. SEC and NTEU looked at the financial losses the affected analysts suffered in 2003 and used those numbers to determine the final settlement.

"It was clear from the beginning that the SEC's merit pay system lacked fairness, credibility and transparency," said NTEU President Colleen Kelley. "This case is another example that the best way for agencies to deal with sensitive, complex matters such as merit pay and the range of diversity issues is to work with employees and their representatives, and not to try to go it alone."

African-American SEC employees in General Schedule Grade 8 and employees 40 and older in all GS grades will receive shares of the $2.7 million relief payment. Their annual salaries will be increased between $266 and $2,482, depending on their grade level and the length of time they were affected by the merit pay system, which the SEC adopted in 2003 and terminated in 2007 after the arbitrator's ruling.

The system had created 15 pay levels for SEC employees with as many as 31 steps in each level. Employees could move up a maximum of three steps per year, earning annual raises of about 4.5 percent. NTEU commissioned a statistical analysis of how the agency awarded raises, which found that 16 percent of African-American SEC employees received raises of three steps, while 30 percent of Caucasian employees received the maximum raise. Ten percent of African-American employees received no merit-based pay increase, compared to 6 percent of white Caucasian employees.

That analysis also revealed that while half of SEC employees were 40 or older, 67 percent of the employees who received no merit-based pay increase fell into that age range. Those older employees received 45 percent of all the three-step increases that SEC awarded.

In the 2007 ruling, the arbitrator found that while SEC did not intend to discriminate against African-American or older employees, the merit pay system unintentionally produced illegal discrimination.

Jeff Risinger, SEC's chief human capital officer, said he agreed with NTEU that the old system was flawed and that the performance criteria used to determine step increases were not specific enough.

"Most systems that fail, fail because they're rushed," Risinger said. "When we put this system in place, we were under very tight timelines, we were trying to reduce turnover, and trying to hire a lot of new employees. The system did reduce turnover -- it cut it in half -- but it was not designed to be a very strong, robust performance system."

Risinger said NTEU and SEC were able to reach a settlement in part because they were eager to move forward with a new pay-for-performance system that they crafted together. The new system was based on benchmarks in the public and private sectors, a review of each agency job to determine specific performance criteria, and a training program for managers to help them understand how best to apply ratings.

Risinger praised NTEU local and national leadership for their collaboration on the new system, which is still being hammered out.

The settlement also included a memorandum of understanding to enhance SEC's diversity initiatives and carve out a role for NTEU Chapter 293, the local union that represents SEC employees, in those initiatives. Union officials will sit on the agency's diversity committees and provide input on hiring and outreach initiatives.