Page 1 GAO-05-770R Human Capital 

United States Government Accountability Office

Washington, DC 20548 

May 31, 2005 

The Honorable John Warner 

Chairman 

The Honorable Carl Levin 

Ranking Member 

Committee on Armed Services 

United States Senate 

Subject: Questions for the Record Regarding the Department of Defense’s National 

Security Personnel System

It was a pleasure to appear before the Committee on April 14, 2005, to discuss the 

Department of Defense’s (DOD) implementation of the National Security Personnel 

System (NSPS).1 This letter responds to your request for my views on the following 

questions for the record. 

Questions from Senator Inhofe

American Federation of Government Employees 

Please comment on each of the “flashpoints” that the AFGE has raised 

through Mr. Gage’s written statement: 

Q. “DOD has proposed radically reducing the scope of collective bargaining 

in the proposed regulations. . . . The proposed regulations do not follow the

law with respect to its instructions to maintain collective bargaining rights 

for affected DOD employees.” 

Our previous work on individual agencies’ human capital systems has not directly 

addressed the scope of specific issues that should or should not be subject to 

collective bargaining and negotiations. 

Q. “The board that hears labor-management disputes arising from NSPS must 

be independent of DOD management. . . . In the proposed NSPS regulations,

DOD would establish an internal board made up entirely of individuals 

appointed by the Secretary.” 

 

1

 GAO, Human Capital: Preliminary Observations on Proposed Regulations for DOD’s National 

Security Personnel System, GAO-05-559T (Washington, D.C.: Apr. 14, 2005). 
 Page 2 GAO-05-770R Human Capital 

In our previous testimonies on the proposed and final Department of Homeland 

Security (DHS) regulations, we stressed the importance of the actual and perceived 

independence and impartiality of such boards.2 Members of these types of boards 

should be, and appear to be, free from interference in the legitimate performance of 

their duties and should adjudicate cases in an impartial manner, free from initial bias 

and conflicts of interest. 

Consistent with fostering board independence and impartiality, DOD’s proposed 

NSPS regulations provide for staggered-term appointments for members of the 

proposed National Security Labor Relations Board and place some limited conditions 

on the removal of a member. For example, members of the Board would be 

appointed for terms of 3 years, except that the appointments of the initial Board 

members will be for terms of 1, 2, and 3 years. The Secretary of Defense may extend 

the term of any member beyond 3 years when necessary to provide for an orderly 

transition and/or appoint the member for up to two additional 1-year terms. DOD 

could further enhance the independence and impartiality of the Board through the 

appointment and removal process of Board members. This could include such areas 

as (1) a nomination panel that reflects input from appropriate parties and a 

reasonable degree of balance among differing views and interests in the composition 

of the Board to ensure credibility and (2) appropriate notification to interested 

parties in the event that a Board member is removed. 

The proposed regulations allow the Secretary of Defense to appoint and remove 

individual Board members; however, this raises the question of the independence of 

the Board. If the proposed regulations were modified to allow the Secretary of 

Defense to appoint but not remove members, then this may help the credibility and 

independence of the Board. 

Q. “The standard for mitigation by the Merit System Protection Board 

(MSPB) of discipline and penalties imposed on employees under NSPS in the 

proposed regulations is virtually impossible to meet and effectively removes 

the possibility of mitigation.” 

The U.S. Merit Systems Protection Board will not know the actual impact until a 

number of cases are adjudicated.

Q. “. . . under the proposed regulations, not only is there no requirement for 

management to present written standards against which performance will be 

measured, but employees are also denied the right. . .to use negotiated 

grievance and arbitration system. . . .” 

 

2

 GAO, Human Capital: Preliminary Observations on Proposed DHS Human Capital Regulations, 

GAO-04-479T (Washington, D.C.: Feb. 25, 2004) and Human Capital: Preliminary Observations on 

Final Department of Homeland Security Human Capital Regulations, GAO-05-320T 

(Washington, D.C.: Feb. 10, 2005). 
 Page 3 GAO-05-770R Human Capital 

On the basis of our previous work, we believe that performance standards should be 

written. We also advocate the use of competencies—the skills, knowledge, and 

abilities staff need to accomplish the work. We have found that competencies can 

help reinforce employee behaviors and actions that support the department’s 

mission, goals, and values, and can provide a consistent message to employees about 

how they are expected to achieve results. These core competencies must be in 

writing to assure that managers, supervisors, and employees see and understand the 

criteria that will be used to manage and assess employee performance. 

Regarding grievance and arbitration systems, during testimony in April 2005, we 

reaffirmed our position that that there should be both informal and formal appeal 

mechanisms within and outside of the organization if individuals feel that there has 

been abuse or a violation of the policies, procedures, and protected rights of the 

individual. Internal mechanisms could include independent Human Capital Office 

and Office of Opportunity and Inclusiveness reviews that provide reasonable 

assurances that there would be consistency and nondiscrimination.3

 Furthermore, it 

is of critical importance that the external appeal process be independent, efficient, 

effective, and credible. As DOD’s human resources management system efforts move 

forward, DOD will need to define, in more detail than is currently provided, how it 

plans to review such matters as the establishment and implementation of the 

performance appraisal system—and, subsequently, performance rating decisions, pay 

determinations, and promotion actions—before these actions are finalized to ensure 

they are merit based. 

Q. “Strong and unambiguous safeguards must be in place to prevent a 

general lowering of pay for DOD civilian workforce. The proposed 

regulations permit a general reduction in salaries for all DOD personnel 

compared to rates they would have been paid under statutory systems.” 

Under the proposed regulations, DOD could not reduce employees' basic rates of pay 

when converting to pay bands. However, employees’ compensation may increase at a 

rate higher or lower than under the current compensation system because under 

NSPS compensation is designed to be (1) market sensitive, with consideration of 

local market conditions to set pay rates, and (2) performance based. 

Q. “Procedures for deciding who will be affected by a reduction in force must 

be based on more than a worker’s most recent performance appraisal. The 

proposed NSPS regulation would allow an employee with 1 year of service 

and an outstanding rating to have superior retention rights to an employee 

with 30 years of outstanding appraisals and 1 year of having been rated 

merely “above average.” 

 

3

 GAO, Human Capital: Preliminary Observations on Proposed Department of Defense National 

Security Personnel System Regulations, GAO-05-517T (Washington, D.C.: Apr. 12, 2005). 
 Page 4 GAO-05-770R Human Capital 

Under DOD’s proposed regulations, greater emphasis will be given to job 

performance in the reduction-in-force process by placing performance ahead of 

length of service. Under the proposed regulations, employees will be placed on a 

competitive group’s retention list in the following order of precedence: (1) tenure 

group, (2) veterans’ preference, (3) individual performance rating, and (4) length of 

service. DOD may also establish a minimum reduction-in-force competitive area on 

the basis of one or more of the following factors: geographic location(s), line(s) of 

business, product line(s), organizational unit(s), and funding line(s). The proposed 

regulations provide DOD with the flexibility to define competitive groups on the basis 

of career group, pay schedule, occupational series or specialty, pay band, and/or 

trainee status. 

Questions from Senator Lieberman

Civilian Pay 

Q. John Gage in his testimony expressed concern that the NSPS will create 

downward pressure on DOD civilian pay. Are there mechanisms that you 

could suggest to assure that pay levels are adequate for employee 

recruitment and retention and to truly reward good performance?

We have observed that a competitive compensation system can help organizations 

attract and retain a quality workforce.4

 To begin to develop such a system, 

organizations assess the skills and knowledge they need; compare compensation 

against other public, private, or nonprofit entities competing for the same talent in a 

given locality; and classify positions along levels of responsibility. While one size 

does not fit all, organizations generally structure their competitive compensation 

systems to separate base salary—which all employees receive—from other special 

incentives, such as merit increases, performance awards, or bonuses, which are 

provided based on performance and contributions to organizational results. 

We have reported that direct costs associated with salaries were one of the major 

cost drivers of implementing pay for performance systems, based on the data 

provided us by selected Office of Personnel Management demonstration projects.5 

We found that some of the demonstration projects intended to manage costs by 

providing a mix of one-time awards and permanent pay increases. Rewarding an 

employee’s performance with an award instead of an equivalent increase to base pay 

can help contain salary costs in the long run because the agency only has to pay the 

amount of the award one time, rather than annually. 

 

4

 GAO, Additional Posthearing Questions Related to Proposed Department of Homeland Security 

(DHS) Human Capital Regulations, GAO-04-617R (Washington, D.C.: Apr. 30, 2004). 

5

 GAO, Human Capital: Implementing Pay for Performance at Selected Personnel Demonstration 

Projects, GAO-04-83 (Washington, D.C.: Jan. 23, 2004). 
 Page 5 GAO-05-770R Human Capital 

This practice is consistent with modern compensation systems, which typically 

include a mix of base pay increases plus other compensation incentives, such as onetime performance awards or bonuses. In developing pay for performance systems, 

agencies must consider what percentage of performance-based pay should be 

awarded as base pay increases versus one-time cash increases while still maintaining 

fiscally sustainable compensation systems that reward performance. In addition, to 

the costs associated with base pay increases, modern compensation systems typically 

consider an employee’s salary in relation to a competitive range when determining 

the amount of performance pay that should be provided as a base pay adjustment 

versus a cash bonus amount. This base versus bonus concept differs from the largely 

longevity driven base pay adjustments provided to employees under the General 

Schedule. This new direction concerns employees, especially those who are close to 

retirement, who see these regular base pay increases as the foundation of future 

retirement benefits. 

Safeguards Against Abuse 

Q. In your testimony you expressed concern that the proposed regulations do 

not contain adequate safeguards to help ensure fairness and guard against 

abuse. Could you elaborate on what kinds of safeguards you believe should 

be considered in this context? 

As we noted in our statement, although DOD’s proposed regulations provide for some 

safeguards to ensure fairness and guard against abuse, additional safeguards should 

be developed. We have developed an initial list of possible safeguards to help ensure 

that pay-for-performance systems in the government are fair, effective, and credible.6

 

The safeguards include, among other things, the following. 

• Assure that certain predecisional internal safeguards exist to help achieve the 

consistency, equity, nondiscrimination, and nonpoliticization of the 

performance management process (e.g., independent reasonableness reviews 

by Human Capital Offices and/or Offices of Opportunity and Inclusiveness or 

their equivalent in connection with the establishment and implementation of a 

performance appraisal system, as well as reviews of performance rating 

decisions, pay determinations, and promotion actions before they are finalized 

to ensure that they are merit-based; internal grievance processes to address 

employee complaints; and pay panels whose membership is predominately 

made up of career officials who would consider the results of the performance 

appraisal process and other information in connection with final pay 

decisions). 

• Assure that there are reasonable transparency and appropriate accountability 

mechanisms in connection with the results of the performance management 

 

6

 GAO, Defense Transformation: Preliminary Observations on DOD’s Proposed Civilian Personnel 

Reforms, GAO-03-717T (Washington, D.C.: Apr. 29, 2003). 
 Page 6 GAO-05-770R Human Capital 

process. This includes reporting periodically on internal assessments and 

employee survey results relating to the performance management system and 

publishing overall results of performance management and individual pay 

decisions while protecting individual confidentiality. 

• Assure that the agency’s performance management systems (1) link to the 

agency’s strategic plan, related goals, and desired outcomes and (2) result in 

meaningful distinctions in individual employee performance. This should 

include consideration of critical competencies and achievement of concrete 

results. 

• Involve employees, their representatives, and other stakeholders in the design 

of the system, including having employees directly involved in validating any 

related competencies, as appropriate. 

Q. Do you know of agencies where such mechanisms have proven effective to 

guard against unfairness and abuse in a pay-for-performance system? 

The list of safeguards mentioned above are based on our extensive body of work 

looking at the performance management practices used by leading public sector 

organizations both in the United States and in other countries. However, we 

previously reported that DHS created a Homeland Security Compensation Committee 

that is to provide oversight and transparency to the compensation process. The 

committee—consisting of 14 members, including 4 officials of labor organizations—is 

to develop recommendations and options for the Secretary’s consideration on 

compensation and performance management matters, including the annual allocation 

of funds between market and performance pay adjustments. We also reported that 

high performing organizations seek to create pay, incentive, and reward systems 

based on valid, reliable, and transparent performance management systems with 

adequate safeguards and link employee knowledge, skills, and contributions to 

organizational results.7

 To that end, we found that the demonstration projects took a 

variety of approaches to designing and implementing their pay for performance 

systems to meet the unique needs of their cultures and organizational structures. For 

example, the Department of Commerce uses a second-level review process as a 

safeguard. In this review process, the pay pool manager is to review recommended 

scores from subordinate supervisors and select a payout for each employee. The pay 

pool manager is to present the decisions to the next higher official for review if the 

pay pool manager is also a supervisor. In addition, the department had a grievance 

procedure that allowed employees to request reconsideration of performance 

decisions, excluding awards, by the pay pool manager through the department’s 

Administrative Grievance Procedure or appropriate negotiated grievance procedures. 

 

7

GAO-04-83. 
 Page 7 GAO-05-770R Human Capital 

Questions from Senator Akaka

Employee Training 

Q. An issue raised repeatedly in discussions over the personnel changes at 

DOD and DHS is the need for adequate training for all employees on the new 

personnel system. Have you looked into this issue, and if so, what 

recommendations do you have regarding the amount, type, or regularity of 

personnel training that is needed to launch and sustain a new personnel 

system? 

As we noted in our report, Human Capital: A Guide for Assessing Strategic 

Training and Development Efforts in the Federal Government,

8

 training and 

developing new and current staff to fill new roles and work in different ways will be a 

crucial part of the federal government’s endeavors to meet its transformation 

challenges. DOD and DHS are significant components of this transformation. 

In April 2004, GAO and the National Commission on the Public Service 

Implementation Initiative hosted a forum on whether there should be a 

governmentwide framework for human capital reform and, if so, what this framework 

should include. As part of the criteria that agencies should have in place as they plan 

for and manage their new human capital authorities, participants generally agreed 

that adequate resources for planning, implementation, training, and evaluation were 

needed. Additionally, they noted that agencies should ensure adequate training as 

they implement new human capital authorities. 

Selected Office of Personnel Management personnel demonstration projects trained 

employees on the performance management system prior to implementation to make 

employees aware of the new approach, as well as periodically after implementation 

to refresh employee familiarity with the system. The training was designed to help 

employees understand their applicable competencies and performance standards; 

develop performance plans; write self-appraisals; become familiar with how 

performance is evaluated and how pay increases and awards decisions are made; and 

know the roles and responsibilities of managers, supervisors, and employees in the 

appraisal and payout processes. According to the DHS regulations, its performance 

management system is designed to incorporate adequate training and retraining for 

supervisors, managers, and employees in the implementation and operation of the 

system. 

GAO currently is reviewing training and development issues at DHS. Our work 

includes a review of DHS’s training efforts on its new personnel system, maxHR. Our 

report is scheduled to be released this fall. 

 

8

 GAO, Human Capital: A Guide for Assessing Strategic Training and Development Efforts in the 

Federal Government, GAO-04-546G (Washington, D.C.: March 2004). 
 Page 8 GAO-05-770R Human Capital 

Employee Performance 

Q. Both the DHS and DOD personnel systems permit managers to convey 

performance expectations to employees orally. I think this can put 

employees at a disadvantage, especially as their pay will be more closely tied 

to their performance. How can employees be held accountable for 

performance expectations provided orally? 

To help enhance credibility and fairness and avoid any problems, some sort of 

written documentation of performance expectations is appropriate, in addition to 

orally communicating performance expectations. However, the means can vary. 

Guard Against Abuse 

Q. You testified as to the lack of details in the NSPS proposed regulations, 

including the absence of adequate safeguards to ensure fairness and guard 

against abuse in measuring performance and paying employees. What sort of 

oversight do you believe is needed to promote consistency of the 

performance management system and do you believe external review of pay 

and performance decisions is necessary?

In April 2003, when commenting on DOD civilian personnel reforms, we testified that 

Congress should consider establishing statutory standards that an agency must have 

in place before it can implement a more performance-based pay program, and we 

developed an initial list of possible safeguards to help ensure that pay-forperformance systems in the government are fair, effective, and credible.9

 One of the 

safeguards we identified is to assure that certain predecisional internal safeguards 

exist to help achieve the consistency, equity, nondiscrimination, and nonpoliticization 

of the performance management process. For example, independent reasonableness 

reviews by Human Capital Offices and/or Offices of Opportunity and Inclusiveness or 

their equivalent in connection with the establishment and implementation of a 

performance appraisal system, as well as reviews of performance rating decisions, 

pay determinations, and promotion actions before they are finalized to ensure that 

they are merit-based; internal grievance processes to address employee complaints; 

and pay panels whose membership is predominately made up of career officials who 

would consider the results of the performance appraisal process and other 

information in connection with final pay decisions. 

Q. What kind of external review would you propose? 

We reported that independent reasonableness reviews by Human Capital Offices 

and/or Offices of Opportunity and Inclusiveness or their equivalent in connection 

with the establishment and implementation of a performance appraisal system and 

 

9

GAO-03-717T. 
 Page 9 GAO-05-770R Human Capital 

the effective implementation of a compensation committee similar to the Homeland 

Security Compensation Committee are important to assuring that predecisional 

internal safeguards exist to help achieve consistency and equity and assure 

nondiscrimination and nonpoliticization of the performance management process.10

In our report on implementing pay for performance at selected personnel 

demonstration projects, we mentioned that some of the demonstration projects 

implemented as safeguards a second-level review and grievance process, as these 

examples illustrate. 

 Second-level review process: 

• Second-level supervisors are to review all assessments. In addition, an overall 

assessment of “highly successful” is to be sent to the appropriate department’s 

Performance Review Board for the assignment of an official rating of “1” or 

“2”. The supervisor and reviewer are to assign a “4” or “5” rating based on a 

problem-solving team’s findings and a personnel advisor’s input. 

• Pay pool managers review recommended scores from supervisors and select a 

payout for each employee. The pay pool manager is to present the decisions 

to the next higher official for review if the pay pool manager is also a 

supervisor. 

Grievance process: 

• Employees may request reconsideration of their ratings in writing to the thirdlevel supervisor and indicate why a higher rating is warranted and what rating 

is desired. The third-level supervisor can either grant the request or request 

that a recommending official outside of the immediate organization or chain of 

authority be appointed. The employee is to receive a final decision in writing 

within 21 calendar days. 

• Employees may grieve their ratings and actions affecting the general pay 

increase or performance pay increases. An employee covered by a negotiated 

grievance procedure is to use that procedure to grieve his or her score. An 

employee not under a negotiated grievance procedure is to submit the 

grievance first to the rating official, who will submit a recommendation to the 

pay pool panel. The pay pool panel may accept the rating official’s 

recommendation or reach an independent decision. The pay pool panel’s 

decision is final unless the employee requests reconsideration by the next 

higher official to the pay pool manager. The official would then render the 

final decision on the grievance. 

 

10 GAO-04-320T. 
 Page 10 GAO-05-770R Human Capital 

Employee Appeals Process 

Q. The proposed regulations provide for an accelerated MSPB adjudication 

process for employee appeals. I have long been concerned about the impact 

a shortened processing time for one agency may have on employees at other 

agencies with cases pending before the MSPB. Do you believe the NSPS 

regulations will have an adverse effect on employee appeals both at DOD and 

at other federal agencies?

The U.S. Merit Systems Protection Board will not know the actual impact until a 

number of cases are adjudicated.

Question from Senator Nelson

Performance-Based Pay System 

Q. What do you recommend to minimize or mitigate risks? 

The key to a successful organizational transformation is to implement strategies to 

help individuals maximize their full potential in the new organization, while 

simultaneously managing the risk of reduced productivity and effectiveness that 

often occurs as a result of the changes. While there is no one right way to manage a 

successful merger, acquisition, or transformation, the experiences of both successful 

and unsuccessful efforts suggest that there are practices that are key to their success. 

These key practices include the following. 

1. Ensure top leadership drives the transformation. Leadership must set the 

direction, pace, and tone and provide a clear, consistent rationale that brings 

everyone together behind a single mission. 

2. Focus on a key set of principles and priorities at the outset of the 

transformation. A clear set of principles and priorities serves as a framework 

to help the organization create a new culture and drive employee behaviors. 

3. Set implementation goals and a timeline to build momentum and show 

progress from day one. Goals and a timeline are essential because the 

transformation could take years to complete. 

4. Dedicate an implementation team to manage the transformation process. A 

strong and stable team is important to ensure that the transformation receives 

the needed attention to be sustained and successful. 

5. Establish a communication strategy to create shared expectations and 

report related progress. The strategy must reach out to employees, customers, 

and stakeholders and engage them in a two-way exchange.11

 

11 GAO, Results-Oriented Cultures: Implementation Steps to Assist Mergers and Organizational 

Transformations, GAO-03-669 (Washington, D.C.: July 2, 2003). 
 Page 11 GAO-05-770R Human Capital 

For additional information on our work on human capital issues at DOD, please 

contact me on 512-5559 or stewartd@gao.gov, or Eileen Larence, Director, Strategic 

Issues, on governmentwide human capital issues at 512-6510 or larencee@gao.gov. 

Derek B. Stewart 

Director, Defense Capabilities and 

Management 

(350713)