The Civil Service Reform Act of 1978 created the merit pay system and cash award program for federal supervisors and management officials in General Schedule grades 13 through 15. This report assesses the implementation and operation of merit pay for fiscal years 1981 and 1982 at three departments--Agriculture, Housing and Urban Development, and Navy--that employed 28,000 employees under merit pay systems (25 percent of all federal merit pay employees). Data analyzed in the reprot are from interviews with officials, reviews of performance appraisal and pay statistics, analysis of performance ratings of 475 employees, and questionnaires administered to a sample of merit pay employees. The study also separated out and analyzed the responses of top performers. Several areas requiring management attention were discovered: (1) factors other than employee performance have influenced the amount of merit pay employees have received; (2) both the performance standards and the procedures used to establish them need to be improved; (3) Office of Personnel Management efforts to evaluate agencies' merit pay programs have been limited in scope, but are improving; and (4) employee perceptions of the merit pay program were low. Half of the document is composed of 13 appendixes. (MLF)