Chapter 1: Basic Components & Legal Environment of Federal Sector Compensation & Benefits Contents INTRODUCTION 2 A FRAMEWORK FOR UNDERSTANDING “STRATEGIC REWARDS” 2 Basic Components of Compensation and Benefits 3 Record your thoughts 4 THE LEGAL ENVIRONMENT OF COMPENSATION AND BENEFITS IN THE FEDERAL SECTOR 5 Roots of the Legal Environment for Compensation & Benefits 5 Merit System Principle on Pay 6 Title 5, Code of Federal Regulations 6 Executive Orders 7 OPM Guidance 7 Implementation of Compensation and Benefits Policies & Programs by Federal Departments and Agencies 8 Collective Bargaining 8 Share Ideas in the Discussion Forum 9 INTRODUCTION What is the Federal Sector? As we begin this lesson, Basic Components & Legal Environment of Federal Sector Compensation & Benefits, it is important to understand what is meant by the term “Federal sector.” No single textbook covers the material introduced in this course. So, when you search for resources, particularly online, you may find information about compensation and benefits in the “public sector” or in “government agencies.” The terms “public sector” and “government agencies” are not synonymous with the “Federal sector.” The terms “public sector” and “government agencies” include State and local governments, as well as the Federal government. The “Federal sector” is a subset of the “public sector” that encompasses only those Federal departments and agencies that are established through legislation enacted by Congress. It does not include private sector employers or employees who perform work for the Federal government through contracts with Federal departments or agencies. A FRAMEWORK FOR UNDERSTANDING “STRATEGIC REWARDS” Compensation involves more than just how much an employee receives in the form of salary payments. This chart provides a useful framework for understanding how the various components of compensation fit together to form what compensation experts call “strategic rewards.” When we think of compensation, most of us probably are most familiar with the forms of payment shown in the upper left-hand quadrant of this chart, which includes our basic salary, other forms of pay that are “variable,” such as bonuses and other one-time performance-based payments, miscellaneous payments for various skills or conditions of work, and pay for time when we are not working (called “leave” in the Federal government). We are also somewhat familiar with the items shown in the upper right-hand “benefits” quadrant. These, too, are forms of payment typically associated with employment. We may be less familiar with the idea that the items shown in the “learning and development” and “work environment” quadrants also are considered part of the “strategic rewards” provided by an employer as part of an employee’s total compensation package. This course will focus primarily on the top half of this rewards framework, but we will also consider benefits that contribute to helping employees ...

1. Chapter 1: Basic Components & Legal Environment of Federal
Sector Compensation & Benefits
Contents
INTRODUCTION 2
A FRAMEWORK FOR UNDERSTANDING “STRATEGIC
REWARDS” 2
Basic Components of Compensation and Benefits 3
Record your thoughts 4
THE LEGAL ENVIRONMENT OF COMPENSATION AND
BENEFITS IN THE FEDERAL SECTOR 5
Roots of the Legal Environment for Compensation & Benefits
5
Merit System Principle on Pay 6
Title 5, Code of Federal Regulations 6
Executive Orders 7
OPM Guidance 7
Implementation of Compensation and Benefits Policies &
Programs by Federal Departments and Agencies 8
Collective Bargaining 8
Share Ideas in the Discussion Forum 9
INTRODUCTION
What is the Federal Sector?
As we begin this lesson, Basic Components & Legal
Environment of Federal Sector Compensation & Benefits, it is
important to understand what is meant by the term “Federal
sector.” No single textbook covers the material introduced in
this course. So, when you search for resources, particularly
online, you may find information about compensation and
benefits in the “public sector” or in “government agencies.”
The terms “public sector” and “government agencies” are not
synonymous with the “Federal sector.”
The terms “public sector” and “government agencies” include

2. State and local governments, as well as the Federal government.
The “Federal sector” is a subset of the “public sector” that
encompasses only those Federal departments and agencies that
are established through legislation enacted by Congress. It does
not include private sector employers or employees who perform
work for the Federal government through contracts with Federal
departments or agencies. A FRAMEWORK FOR
UNDERSTANDING “STRATEGIC REWARDS”
Compensation involves more than just how much an employee
receives in the form of salary payments. This chart provides a
useful framework for understanding how the various
components of compensation fit together to form what
compensation experts call “strategic rewards.” When we think
of compensation, most of us probably are most familiar with the
forms of payment shown in the upper left-hand quadrant of this
chart, which includes our basic salary, other forms of pay that
are “variable,” such as bonuses and other one-time
performance-based payments, miscellaneous payments for
various skills or conditions of work, and pay for time when we
are not working (called “leave” in the Federal government). We
are also somewhat familiar with the items shown in the upper
right-hand “benefits” quadrant. These, too, are forms of
payment typically associated with employment. We may be less
familiar with the idea that the items shown in the “learning and
development” and “work environment” quadrants also are
considered part of the “strategic rewards” provided by an
employer as part of an employee’s total compensation package.
This course will focus primarily on the top half of this rewards
framework, but we will also consider benefits that contribute to
helping employees maintain an appropriate balance between
work and the rest of their lives. We also need to recognize that
even when direct compensation and benefits are appropriate for
a position, employees may become dissatisfied with their
overall “strategic rewards” when one or more of the elements in
the bottom half of this framework is deemed not to be

3. satisfactory.
Basic Components of Compensation and Benefits
Every large employer’s system of compensation and benefits
must answer some basic questions and include policies and
processes that address a common set of issues. Not all
employers will address these issues the same way, of course,
but we can usefully group these issues into a few discrete
categories, as follows:
· Position Classification
· the Federal government’s job evaluation system
· a set of centralized criteria to determine the relationship
among various positions in a large organizational setting
· Pay Schedules & Pay Adjustment Processes
· key terms: pay schedule, basic pay, pay system
· An annual pay adjustment process typically adjusts pay for all
employees covered by the same system
· Non-Federal employers often set up different systems for
FLSA-“exempt” & “nonexempt” employees, but in the Federal
government, both exempt & nonexempt employees are covered
by the same system
· Pay Administration Policies
· typically include rules for adjusting individual employees’
basicpay in specific situations, such as—
· advancement within a rate range (may include “performance-
based pay”)
· promotion, demotion, or change of position
· involuntary reduction to a lower-paying position
· Premium Pay, Allowances & Differentials
· for work under unusual circumstances (e.g., long hours; at
night, on Sundays or holidays; unusual work schedules; remote
locations; outside the 48 contiguous States)
· Tools for Recruiting, Retaining & Rewarding Employees

4. · higher pay or additional pay to recruit or retain employees
with special skills
· bonuses or cash awards to reward an employee’s performance
or contribution
· Paid Time Off & Other Work-Life Benefits
· paid time off policies are established by law to provide strict
accountability for time off
· most programs apply across-the-board to all civilian Federal
employees
· linked to basic pay & premium pay administration policies
· many “family-friendly” features, resulting in a “patchwork
quilt” of leave programs & entitlements
· alternative work schedules & telework provide for more
flexible work arrangements
· Major Employee Benefits Programs (e.g., health benefits,
dental/vision insurance, retirement, long-term care insurance)
· established by law & apply across-the-board to most civilian
Federal employees
· designed to facilitate movement from one department or
agency to another
· paid for jointly by the Federal government & enrollees, but
some operate on an enrollee-pay-all basis
· most include options to be exercised by individual enrollees
· administered centrally by the Office of Personal Management
(OPM)
For more information on the Office of Personal Management,
please visit http://www.opm.gov/.
Record your thoughts
As you think about the concepts we’ve covered so far, consider
these questions and record your responses in this document.
Consider this area of the document your personal notebook,
which should be used to record your thoughts for future

5. reference and reflection when participating in the discussion
forum and completing required assignments. This is not a
graded activity, but it is a way for you to develop your critical
thinking skills and apply them to the lesson concepts.
Questions to Ponder:
· Which components of Federal compensation & benefits
systems should continue to apply across Federal departments &
agencies?
· For which components (if any) might it make sense to devolve
policy development and/or administration to individual Federal
departments & agencies?
There are no “right” or “wrong” answers to these questions,
which are intended to prompt thinking about what criteria might
be appropriate for determining which components of Federal
compensation and benefits systems should continue to apply
across Federal departments and agencies and which components
might usefully be devolved to individual Federal departments
and agencies.
THE LEGAL ENVIRONMENT OF COMPENSATION AND
BENEFITS IN THE FEDERAL SECTOR
In the U.S., all employers generally must adhere to some basic
legal requirements regarding how employees are compensated.
But the “legal environment” within which Federal departments
and agencies work imposes a specific set of legal requirements
on how Federal employees are to be compensated.
With respect to how employees are compensated, the key
consequence of the difference between the legal requirements
applicable to non-Federal employers and those applicable to the
Federal government, as an employer, can be summarized as
follows:
· In the private sector, employers must pay at least the minimum
amount required by Federal or State law
· In the Federal sector, most payments must be calculated so
that employees receive neither more nor less than the precise
amount authorized by Federal law

6. Roots of the Legal Environment for Compensation & Benefits
To understand the legal environment within which Federal
departments and agencies work, it is necessary to go back to the
roots of our legal system. All of the laws applicable to the
Federal government as an employer ultimately derive their
authority from the U.S. Constitution.
· U.S. Constitution
· authorizes Congress “to make all Laws which shall be
necessary and proper for carrying into Execution the . . . Powers
vested by this Constitution in the Government of the United
States, or in any Department or Officer thereof”
· Through the President, the executive branch accomplishes the
work of the Federal government which the legislative branch
(Congress) empowers & funds executive departments &
agencies to do
· Title 5, United States Code (U.S.C.)
· codifies laws enacted by Congress to establish & manage the
civil service (See Appendix A for a list of key provisions
governing Federal compensation & benefits systems)
· includes a set of merit system principles that form the basis
for developing human resources policies affecting Federal
employees
· Other laws (e.g., the Fair Labor Standards Act of 1938, as
amended) also govern certain aspects of Federal compensation
& benefits systems
· State & local government laws are not binding on the Federal
government
Merit System Principle on Pay
In addition to the rules and regulations governing compensation
and benefits in the Federal sector, a key principle that you
should understand is the merit system principle on pay, which
recognizes the importance of balancing internal, external &
individual equity:
“Equal pay should be provided for work of equal value [internal
equity], with appropriate consideration of both national and
local rates paid by employers in the private sector [external

7. equity], and appropriate incentives and recognition should be
provided for excellence in performance [individual equity].“ [5
U.S.C. 2301(b)(3)]
Title 5, Code of Federal Regulations
The laws codified in title 5, U.S. Code, provide only a very
broad outline regarding the policies Congress intends Federal
departments and agencies to follow as they compensate Federal
employees. In most cases, Congress authorizes additional
details to be developed and implemented through the regulatory
process. The body of regulations issued in response to the laws
enacted by Congress is now codified in title 5 of the Code of
Federal Regulations. Once issued through the regulatory
process, regulations have the force and effect of law.
The Office of Personnel Management (OPM) is the Federal
agency whose primary mission is to develop and implement
governmentwide human resources policies through the issuance
of regulations codified in title 5 of the Code of Federal
Regulations. Once these regulations are issued, OPM also is
responsible for providing guidance on how the statutes and
regulations are to be interpreted and implemented by Federal
departments and agencies.
· Title 5, Code of Federal Regulations (CFR)
· Civil service laws generally are worded broadly & authorize
the President or OPM to issue implementing regulations
providing more detail
· Regulations must be issued in keeping with the Administrative
Procedure Act, which requires public notice through publication
in Federal Register and an opportunity for public comment
· Numbering system generally corresponds to title 5, U.S. Code
Executive Orders
In some cases, Executive orders issued by the President provide
specific instructions regarding how a statutory program is to be
administered. In other cases, where the statute states that “the

8. President” is authorized to issue regulations implementing a
policy or program, the President has issued an Executive order
delegating this authority to OPM or another Federal agency.
Executive orders have the force and effect of law, but can be
rescinded by the President who issued the order or by a
subsequent President.
OPM Guidance
Once governmentwide regulations have been issued by OPM
through the regulatory process, OPM typically provides
guidance to Federal agencies regarding how the statute and
regulations are to be interpreted and administered by Federal
departments and agencies. This guidance can take several
forms; in recent years, almost all such guidance is Internet-
based or at least can be found on the Internet. By its own
terms, however, “guidance” is not prescriptive. It merely
provides examples as to how the legally binding provisions in
statute and regulation should be applied in particular situations.
Unlike statutes, regulations, and Executive orders, OPM
guidance does not have the force and effect of law.
· OPM Guidance
· additional materials posted by OPM on its Website include
policy memoranda, summaries, interpretive guides & model
plans
· Web-based salary tables for major governmentwide pay
systems
· an extensive set of Web-based tools to assist employees in
making decisions about retirement & other benefits programs
· See the following link for examples of law, regulation & OPM
guidance: www.opm.gov/policy-data-oversight/pay-
leave/student-loan-repayment. Note: The specific example
shown in this link illustrates the policy trail for the Federal
student loan repayment program. You’ll find a copy of the
statute and regulations governing this program under the
“References” tab. You’ll find examples of OPM guidance under
several of the other tabs, including “Sample Agency Plans” and
“FAQs.”

9. Implementation of Compensation and Benefits Policies &
Programs by Federal Departments and Agencies
Many Federal agencies issue their own set of human resources
policies and regulations to implement governmentwide statutes
and any regulations issued by OPM. These directives must be
consistent with the governmentwide statutes and the regulations
issued by OPM. Departmental or agency regulations may take
the form of binding rules that apply within the agency that
issued them (as long as these rules are not inconsistent with the
governmentwide rules that serve as their foundation), or they
may be in the form of guidance that is not legally binding
within the agency, but which serves to illustrate the agency’s
preference regarding how a particular program should be
administered within that agency. Such rules also may differ
from one Federal agency to another, as long as they are not
inconsistent with the underlying statutes and governmentwide
regulations.
Federal agencies are responsible for determining the level of
responsibility within the agency that may exercise a particular
authority. These decisions typically are issued in the form of
“delegations of authority.”
· Departmental or agency regulations
· Internal regulations or statements of policy implement or
supplement OPM regulations
· Some variations are permissible, as long as internal policies
comply with basic requirements of law & regulation
· Delegations of authority
· Internal regulations or delegations of authority may reserve
specific authorities to a specific level & not permit further
redelegation
Collective Bargaining
The authority to bargain collectively creates yet another
important feature of the legal environment within which Federal
departments and agencies must conduct their business.
Most of us are familiar with the role of “collective bargaining”

10. in the private sector. “Collective bargaining” refers to the
process through which organized workers and their employer
negotiate to determine such matters as wages, hours of work,
work rules, and working conditions. In the Federal sector,
employees may engage in collective bargaining through labor
organizations with respect to conditions of employment.
By law, the term conditions of employment excludes—
· “matters relating to the classification of any position”
· personnel policies & practices “to the extent such matters are
specifically provided for by Federal statute”
· Governmentwide compensation and benefits systems &
programs are “provided for by Federal statute,” but the exercise
of discretionary provisions is subject to collective bargaining
· When a department or agency is authorized to establish &
administer an independent pay system (for which the details are
not specified in law), that system is subject to collective
bargaining unless the legislation authorizing that system
provides otherwise
Share Ideas in the Discussion Forum
Now that you have reviewed the Week 1 (Chapter 1) materials,
it is time to reflect upon the concepts presented here and use
your own experience or ideas to participate in the Week 1
discussion forum in the online course. In this forum, examine
one (1) of the basic components of Federal compensation and
benefits programs. Once a component has been selected by
another student in the course, try not to select the same topic so
we can have a variety of responses. Please read through all
postings carefully. Provide an initial response that addresses
the following questions:
· How does the legal environment affect the development and
implementation of your selected component?
· How does this component compare with its counterpart in the
private sector?
Post your initial response by 11:55 pm Eastern time on
Wednesday in the Week 1 discussion forum. Review all

11. responses and respond to at least one of your peers by 11:55 pm
Eastern time on Sunday elaborating upon their ideas. Be sure to
incorporate lesson topics in all responses. For evaluation
criteria and discussion expectations, refer to the Discussion
Forum Rubric in the Getting Started section.
Appendix A
Title 5, United States Code
Part III—Employees
Subpart C—Employee Performance
Chapter 43—Performance Appraisal [footnoteRef:1] [1:
Not covered in this course except as related to performance-
based pay adjustments. ]
Chapter 45—Incentive Awards [footnoteRef:2] [2:
Summarized in this course. ]
Chapter 47—Personnel Research Programs and
Demonstration Projects
Subpart D—Pay and Allowances
Chapter 51—Classification
Chapter 53—Pay Rates and Systems
Chapter 55—Pay Administration
Chapter 57—Travel, Transportation, and
Subsistence[footnoteRef:3] [3: Generally not covered in this
course, except for recruitment/relocation/retention incentives (5
U.S.C. 5753 and 5754 ) and supervisory differentials (5 U.S.C.
5755).]
Chapter 59—Allowances
Subpart E—Attendance and Leave
Chapter 61—Hours of Work
Chapter 63—Leave
Subpart G—Insurance and Annuities
Chapter 83—Retirement
Chapter 84—Federal Employees’ Retirement System

12. Chapter 87—Life Insurance
Chapter 89—Health Insurance
Chapter 89A—Enhanced Dental Benefits
Chapter 89B—Enhanced Vision Benefits
Chapter 90—Long-Term Care Insurance
Subpart I—Miscellaneous
Chapter 95—Personnel Flexibilities Relating to the
Internal Revenue Service
Chapter 97—Department of Homeland Security
Chapter 99—National Security Personnel System
1