Pay increases for Commonwealth public servants will have closer ties to the private sector after the federal government scrapped the two per cent wage cap.
Public service wage rises will no longer be allowed to outstrip workers in the private sector, but increases can exceed the old cap if growth exceeds two per cent.
Performance bonuses for senior Commonwealth executives will be reviewed after scandals at the corporate regulator and Australia Post put extra pay and entitlements under the microscope.
Assistant Public Service Minister Ben Morton said the old wages policy was not sustainable and didn't meet community standards.
"This will ensure that wage increases for Commonwealth public sector employees will be in step with their fellow Australians," he said.
The seasonally adjusted wage price index for the private sector will be the official guide.
Public servants had their wages frozen for six months from April in a coronavirus pandemic austerity measure.
In 2019/20, government departments, businesses and statutory authorities paid out bonuses totalling $12.8 million.
Mr Morton said public servants would benefit from implementing the government's efforts to boost private sector wages through economic growth.
"Commonwealth wages policy should not be used as an excuse or signal to restrain private sector wages growth. This policy will address that," he said.
The bonus review will develop consistent principles and guidance about appropriate pay incentives.
"Where agencies have access to bonus arrangements they should exercise restraint to the furthest extent possible in keeping with community expectations," Mr Morton said.
Prime Minister and Cabinet secretary Phil Gaetjens, Department of Finance secretary Rosemary Huxtable and Australian Public Service Commissioner Peter Woolcott will conduct the review.