a

GAO

United States General Accounting Office

Testimony

Before the Subcommittee on Civil Service and Agency 

Organization, Committee on Government Reform, 

House of Representatives

For Release on Delivery

Expected at 1 p.m. EST

Tuesday, April 1, 2003

RESULTS-ORIENTED 

CULTURES

Modern Performance 

Management Systems Are 

Needed to Effectively 

Support Pay for 

Performance

Statement of J. Christopher Mihm 

Director, Strategic Issues

GAO-03-612T
The need for results-oriented pay reform is one of the most pressing human 

capital issues facing the federal government today. To implement resultsoriented pay reform, commonly referred to as “pay for performance,” 

agencies must have modern, effective, credible, and validated performance 

management systems that are capable of supporting pay and other personnel 

decisions. Pay for performance works only with adequate safeguards, 

including reasonable transparency and appropriate accountability 

mechanisms in place, to ensure its fair, effective, and responsible 

implementation. Modern performance management systems are the 

centerpiece of those safeguards and accountability. 

Most federal agencies are a long way from meeting this test. All too often, 

agencies’ performance management systems are based on episodic and 

paper intensive exercises that are not linked to the strategic plan of the 

organization and have only a modest impact on the pay, use, development, 

and promotion potential of federal workers. Leading organizations, on the 

other hand, use their performance management systems to accelerate 

change, achieve desired organizational results, and facilitate two-way 

communication throughout the year so that discussions about individual and 

organizational performance are integrated and ongoing. Effective 

performance management systems are not merely used for once- or twiceyearly individual expectation setting and ratings processes, but are tools to 

help the organization manage on a day-to-day basis. 

GAO identified key practices leading public sector organizations both here in 

the United States and abroad have used in their performance management 

systems to link organizational goals to individual performance and create a 

“line of sight” between an individual’s activities and organizational results. 

These practices can help agencies develop and implement performance 

management systems with the attributes necessary to effectively support pay 

for performance. 

There is widespread agreement 

that the basic approach to federal 

pay is broken and that it needs to 

be more market- and performancebased. Doing so will be essential if 

the federal government is to 

maximize its performance and 

assure accountability for the 

benefit of the American people. 

While there will be debate and 

disagreement about the merits of 

individual reform proposals, all 

should be able to agree that a 

performance management system 

with adequate safeguards, 

including reasonable transparency 

and appropriate accountability 

mechanisms in place, must serve as 

the fundamental underpinning of 

any fair, effective, and appropriate 

pay reform. 

At the request of the 

Subcommittee, GAO discussed the 

key practices for effective 

performance management that 

federal agencies should consider as 

they develop and implement 

performance management systems 

as part of any pay reform. 

www.gao.gov/cgi-bin/getrpt?GAO-03-612T.

To view the full testimony statement, click on 

the link above. For more information, contact 

J. Christopher Mihm at (202) 512-6806 or 

mihmj@gao.gov. 

Highlights of GAO-03-612T, testimony 

before the Subcommittee on Civil Service 

and Agency Organization, Committee on 

Government Reform, House of 

Representatives 

April 1, 2003

RESULTS-ORIENTED CULTURES

Modern Performance Management 

Systems Are Needed to Effectively 

Support Pay for Performance 
Page 1 GAO-03-612T 

Madam Chairwoman and Members of the Subcommittee:

I am pleased to be here today to discuss the need for results-oriented pay 

reform, one of the most pressing human capital issues currently facing the 

federal government. My major point today is that, as Comptroller General 

Walker has said, in order to implement such reforms, commonly referred to 

as “pay for performance,” agencies must have modern, effective, credible, 

and validated performance management systems that are capable of 

supporting pay and other personnel decisions. Quite simply, pay for 

performance works only with adequate safeguards, including reasonable 

transparency and appropriate accountability mechanisms in place, to 

ensure its fair, effective, and responsible implementation. Modern 

performance management systems are the centerpiece of those safeguards 

and accountability. 

Unfortunately, most federal agencies are a long way from meeting this test. 

All too often, we find that agencies’ performance management systems are 

based on episodic and paper-intensive exercises that are not linked to the 

strategic plans of the organizations and have only a modest impact on the 

pay, use, development, and promotion potential of federal workers. 

Leading organizations, on the other hand, use their performance 

management systems to accelerate change, achieve desired organizational 

results, and facilitate two-way communication throughout the year so that 

discussions about individual and organizational performance are integrated 

and ongoing. Effective performance management systems are not merely 

used for once- or twice-yearly individual expectation setting and ratings 

processes, but are tools to help the organization manage on a day-to-day 

basis. Chairwoman Davis, today you are releasing a report that we 

prepared at your and Senator Voinovich’s request that shows specific 

practices that leading public sector organizations here in the United States 

and abroad have used in their performance management systems to create 

clear linkages between individual performance and organizational 

success.1

There can be little question that modernizing agency performance 

management systems and linking them to agency strategic plans and 

desired outcomes should be a top priority. The Office of Personnel 

1

U.S. General Accounting Office, Results-Oriented Cultures: Creating a Clear Linkage 

between Individual Performance and Organizational Success, GAO-03-488 (Washington, 

D.C.: Mar. 14, 2003).
Page 2 GAO-03-612T 

Management’s (OPM) recently released 2002 Federal Human Capital 

Survey found that better performance management systems are needed in 

federal agencies. The results show that while 80 percent of federal 

employees believe they are held accountable for results, most are not 

satisfied with the recognition or the rewards they receive for a job well 

done. Specifically, less than half of employees believe that the awards in 

their work units depend on how well employees perform their jobs and less 

than a third of employees believe that their organizations’ awards programs 

provide them with an incentive to do their best. Also, less than a third of 

employees agree that steps are taken to deal with poor performers. 

These results appear to reinforce the findings from OPM’s white paper on 

modernizing federal pay issued in April 2002.2

 The paper described the 

need for the federal pay system to be more performance-oriented, flexible, 

and market-sensitive as well as a better tool for improving strategic human 

capital management. It amply demonstrated that the current federal pay 

system was designed for the heavily clerical and low graded workforce of 

the 1950s rather than today’s knowledge-based government. Similarly, 

OPM’s survey results underscore the findings of the National Commission 

on the Public Service’s recent report, Urgent Business for America: 

Revitalizing the Federal Government for the 21st Century. The 

commission observed that agencies need greater freedom to connect pay 

both to the market and to performance. As the nature of the federal 

workforce has changed, so too should its pay system if we are to effectively 

compete for top talent and create incentives for both individual and 

institutional success. 

The Congress and the administration are working on initial steps to 

implement result-oriented pay reform and modern performance 

management systems across the executive branch. 

• The Homeland Security Act of 2002, passed by the Congress in 

November, provides for the increase of the total annual compensation 

limit for senior executives (from $171,900 to $198,600 for 2003) in those 

agencies that OPM and the Office of Management and Budget certify as 

having performance appraisal systems that, as designed and applied, 

make meaningful distinctions based on relative performance. 

2

Office of Personnel Management, A White Paper: A Fresh Start for Federal Pay: The Case 

for Modernization (Washington, D.C.: April 2002).
Page 3 GAO-03-612T 

• The administration proposed for the fiscal year 2004 budget to allow 

managers to increase pay beyond annual raises for high-performing 

employees. OPM would administer a $500 million Human Capital 

Performance Fund for the purpose of allowing agencies to deliver 

additional pay to certain employees based on individual performance or 

other human capital needs, in accordance with plans submitted to and 

approved by OPM. 

• In addition, in the fiscal year 2004 budget proposal, the administration 

proposed the creation of a wider, more open pay range for senior 

executive compensation, thus allowing for pay to be more directly tied 

to performance. This is consistent with the proposals you and Senator 

Voinovich are considering. 

Today, I will highlight the key practices for effective performance 

management that federal agencies should consider as they revise their 

performance management systems to be more results-oriented, customerfocused, and collaborative in nature. These practices are fully discussed in 

the report that you are releasing today. Next, I will discuss what selected 

federal agencies have done to implement results-oriented pay reforms, 

including how we in GAO are implementing a broadbanded pay for 

performance system as part of our performance management system. Last, 

I will suggest next steps for results-oriented pay reform for all interested 

parties as they work together to better link pay to performance.

Key Practices for 

Effective Performance 

Management 

We identified specific practices that leading public sector organizations 

both here in the United States and abroad have used in their performance 

management systems to create a clear linkage—“line of sight”—between 

individual performance and organizational success. Federal agencies 

should consider these practices as they develop and implement the 

modern, effective, and credible performance management systems with the 

adequate safeguards, including reasonable transparency and appropriate 

accountability mechanisms in place, needed to effectively link pay to 

performance. The key practices include the following.3

3

We included the agency examples supporting the key practices primarily from previously 

issued GAO reports. We did not update the examples, and as a result, the information in the 

examples may, or may not, have changed since the issuance of these reports. 
Page 4 GAO-03-612T 

1. Align individual performance expectations with organizational 

goals. An explicit alignment of daily activities with broader results helps 

individuals see the connection between their daily activities and 

organizational goals and encourages individuals to focus on their roles and 

responsibilities to help achieve those goals. To this end, for example, the 

Federal Aviation Administration (FAA) was able to show in fiscal year 2000 

how the Department of Transportation’s strategic goal to promote public 

health and safety was cascaded through the FAA Administrator’s 

performance expectation to reduce the commercial air carrier fatal 

accident rate to a program director’s performance expectation to develop 

software to help aircraft maintain safe altitudes in their approach paths. 

2. Connect performance expectations to crosscutting goals. As 

public sector organizations shift their focus of accountability from outputs 

to results, they have recognized that the activities needed to achieve those 

results often transcend specific organizational boundaries. Highperforming organizations use their performance management systems to 

strengthen accountability for results, specifically by placing greater 

emphasis on fostering the necessary collaboration, interaction, and 

teamwork across organizational boundaries to achieve these results. In this 

regard, the Veterans Health Administration’s Veterans Integrated Service 

Network (VISN) headquartered in Cincinnati implemented performance 

agreements in 2000 for the “care line” directors, such as primary care or 

mental health directors, that included improvement goals related to that 

care line for the entire VISN. To make progress towards these goals, the 

mental health care line director had to work collaboratively with the 

corresponding mental health care line managers at each of the four medical 

centers to establish consensus among VISN officials and external 

stakeholders on the strategic direction for the services provided by the 

mental health care line across the VISN, among other things. 

3. Provide and routinely use performance information to track 

organizational priorities. High-performing organizations provide 

objective performance information to individuals to show progress in 

achieving organizational results and other priorities and help them to 

manage during the year, identify performance gaps, and pinpoint 

improvement opportunities. Having this performance information in a 

useful format also helps individuals track their performance against 

organizational goals and compare their performance to that of other 

individuals. For example, the Bureau of Land Management’s (BLM) Webbased data system, called the Director’s Tracking System, collects and 

makes available on a real-time basis data on each senior executive’s 
Page 5 GAO-03-612T 

progress in his or her state office towards BLM’s organizational priorities, 

such as the wild horse and burro program, and the resources expended on 

each priority. 

4. Require follow-up actions to address organizational priorities. 

High-performing organizations require individuals to take follow-up actions 

based on performance information available to them. By requiring and 

tracking such follow-up actions on performance gaps, these organizations 

underscore the importance of holding individuals accountable for making 

progress on their priorities. For example, the Federal Highway 

Administration required senior executives to use 360-degree feedback 

instruments to solicit employees’ views on their leadership skills in 2001. 

The senior executives were to identify action items based on the feedback 

and incorporate them into their individual performance plans for the next 

fiscal year. While the 360-degree feedback instrument was intended for 

developmental purposes to help senior executives identify areas for 

improvement and is not included in the executives’ performance 

evaluations, executives were held accountable for taking some action on 

the 360-degree feedback results and responding to the concerns of their 

peers, customers, and subordinates. 

5. Use competencies to provide a fuller assessment of performance.

High-performing organizations use competencies, which define the skills 

and supporting behaviors that individuals need to effectively contribute to 

organizational results, and are based on valid, reliable, and transparent 

performance management systems. To this end, the Internal Revenue 

Service (IRS) implemented a performance management system in fiscal 

year 2000 that requires executives and managers to include critical job 

responsibilities with supporting behaviors (broad actions and 

competencies) in their performance agreements each year. The critical job 

responsibilities and supporting behaviors are intended to provide 

executives and managers with a consistent message about how their daily 

activities are to reflect the organization’s core values. 

6. Link pay to individual and organizational performance. Highperforming organizations seek to create pay, incentive, and reward systems 

that clearly link employee knowledge, skills, and contributions to 

organizational results. At the same time, these organizations recognize that 

valid, reliable, and transparent performance management systems with 

adequate safeguards for employees are the precondition to such an 

approach. In the Canadian Province of Ontario, an individual executive’s 

performance pay is based on the performance of the provincial government 
Page 6 GAO-03-612T 

as a whole, the executive’s home ministry, the ministry’s contribution to 

governmentwide results, as well as the individual’s own performance. The 

amount of the award can range up to 20 percent of base salary. 

7. Make meaningful distinctions in performance. Effective 

performance management systems seek to achieve three key objectives to 

help make meaningful distinctions in performance: (1) they strive to 

provide candid and constructive feedback to help individuals maximize 

their contribution and potential in understanding and realizing the goals 

and objectives of the organization, (2) they seek to provide management 

with the objective and fact-based information it needs to reward top 

performers, and (3) they provide the necessary information and 

documentation to deal with poor performers. For example, IRS established 

an executive compensation plan for determining base salary, performance 

bonuses, and other awards for its senior executives that is intended to 

explicitly link individual performance to organizational performance. As 

part of this plan, IRS converts senior executive performance appraisal 

ratings into points to help ensure realistic and consistent performance 

ratings. Each IRS business unit has a “point budget” for assigning 

performance ratings, which is the total of four points for each senior 

executive in the unit. For fiscal year 2001, an “outstanding” rating 

converted to six points; an “exceeded” rating to four points, which is the 

baseline; a “met” rating to two points; and a “not met” rating to zero points. 

If the business unit exceeded its point budget, it had the opportunity to 

request additional points from the Deputy Commissioner. IRS officials 

indicated that none of the business units requested additional points for the 

fiscal year 2001 ratings. 

The senior executive performance appraisal ratings and bonuses for fiscal 

year 2001 show that IRS is beginning to make distinctions in pay related to 

performance. For fiscal year 2001, 31 percent of the senior executives 

received a rating of outstanding compared to 42 percent for fiscal year 

2000, 49 percent received a rating of exceeded expectations compared to 

55 percent, and 20 percent received a rating of met expectations compared 

to 3 percent. In fiscal year 2001, 52 percent of senior executives received a 

bonus, compared to 56 percent in fiscal year 2000. IRS officials said that 

IRS is still gaining experience using the new compensation plan and will 

wait to establish trend data before it evaluates the link between 

performance and bonus decisions. 
Page 7 GAO-03-612T 

8. Involve employees and stakeholders to gain ownership of 

performance management systems. High-performing organizations have 

found that actively involving employees and stakeholders in developing 

performance management systems and providing ongoing training on the 

systems helps increase their understanding and ownership of the 

organizational goals and objectives. As one of the single most important 

safeguards that they can put in place, these leading organizations consulted 

a wide range of employees and stakeholders early in the process, obtained 

direct feedback from them, and engaged employee unions or associations. 

For example, in New Zealand, an agreement between government and the 

primary public service union created a “Partnership for Quality” framework 

that provides for ongoing, mutual consultation on issues such as 

performance management. Specifically, the Department of Child, Youth, 

and Family Services and the Public Service Association entered into a joint 

partnership agreement that emphasizes the importance of mutual 

consideration of each other’s organizational needs and constraints. 

9. Maintain continuity during transitions. The experience of 

successful cultural transformations and change management initiatives in 

large public and private organizations suggests that it can often take 5 to 7 

years until such initiatives are fully implemented and cultures are 

transformed in a substantial manner. Because this time frame can easily 

outlast the tenures of top political appointees, high-performing 

organizations recognize that they need to reinforce accountability for 

organizational goals during times of leadership transitions through the use 

of performance agreements as part of their performance management 

systems. For example, the Ontario Public Service institutionalized the use 

of performance agreements in its performance management system to 

withstand organizational changes and cascaded the performance 

agreements from top leadership to front line employees. 

Creating a ResultsOriented Approach to 

Federal Pay 

With the performance management practices of leading organizations in 

mind, we need to fundamentally rethink our approach to federal pay and 

develop an approach that places a greater emphasis on a person’s 

knowledge, skills, position, and performance rather than the passage of 

time, the rate of inflation, and geographic location. Under the current 

federal pay system, the overwhelming majority of each year’s increase in 

federal employee pay is largely unrelated to an employee’s knowledge, 

skills, position, or performance. In fact, over 80 percent of the cost 

associated with the annual increases in federal salaries is due to longevity 

and the annual pay increase. In addition, current federal pay gaps vary by 
Page 8 GAO-03-612T 

the nature of the person’s position; yet the current method for addressing 

the pay gap assumes that it is the same throughout government. We must 

move beyond this outdated, “one size fits all approach” to paying federal 

employees. Under authorities granted by the Congress, a number of 

agencies are at various stages in using approaches in their pay and award 

systems that are designed to be more flexible and results-oriented.

U.S. General Accounting Office. We at GAO believe it is our 

responsibility to lead by example. Our people are our most valuable asset, 

and it is only through their combined efforts that we can effectively serve 

our clients and country. By managing our workforce strategically and 

focusing on results, we are helping to maximize our own performance and 

ensure our own accountability. By doing so, we also hope to demonstrate 

to other federal agencies that they can make similar improvements in the 

way they manage their people.

We have identified and made use of a variety of tools and flexibilities, some 

of which were made available to us through the GAO Personnel Act of 1980 

and our human capital legislation enacted in 2000, but most of which are 

available to federal agencies. The most prominent change in human capital 

management that we implemented as a result of the GAO Personnel Act of 

1980 was a broadbanded pay-for-performance system. The primary goal of 

this system is to base employee compensation primarily on the knowledge, 

skills, and performance of individual employees. It provides managers 

flexibility to assign and use employees in a manner that is more suitable to 

multi-tasking and the full use of staff. Importantly, careful design and 

effective implementation is crucial to obtaining the benefits of 

broadbanding in an equitable and cost-effective manner. Under our current 

broadbanded system, analyst and analyst-related staff in grades 7 through 

15 were placed in three bands. High-performing organizations continually 

review and revise their performance management systems to support their 

strategic goals. In that spirit, we expect to modify our banded system in the 

future based on our experience to date. 

In January 2002, we implemented a new competency-based performance 

management system that is intended to create a clear linkage between 

employee performance and our strategic plan and core values. It includes 

12 competencies that our employees overwhelmingly validated as the keys 

to meaningful performance at GAO. The competencies are
Page 9 GAO-03-612T 

• achieving results,

• maintaining client and customer focus,

• developing people,

• thinking critically,

• improving professional competence,

• collaborating with others,

• presenting information orally,

• presenting information in writing,

• facilitating and implementing change,

• representing GAO,

• investing resources, and

• leading others.

These competencies are the centerpiece of our other human capital 

programs, such as promotions, pay decisions, and recognition and rewards. 

Under our revised system, pay-banded employees are placed in one of five 

pay categories based on their demonstrated competencies, performance, 

and contributions to organizational goals. Merit pay increases across these 

five categories range from up to about $5,700 for some of those in the top 

pay category to no merit increases for those in the lowest category. In 

addition, those in the top two categories receive bonuses, referred to as 

“Dividend Performance Awards,” of $1,000 and $500, respectively. 

As a result of GAO's implementation of its new competency-based 

performance management system and other changes to key human capital 

programs, GAO has been able to achieve greater dispersion in its 

performance appraisals and merit pay decisions. For example, for fiscal 

year 2002, the GAO-wide average performance appraisal rating was 2.19 

(out of 5) compared with 4.26 (out of 5) for fiscal year 2001. Similarly, 

under the new system, no employees received a score of 4.7 or higher, 
Page 10 GAO-03-612T 

while 19 percent of employees received a score of 4.7 or higher for fiscal 

year 2001. 

Federal Aviation Administration. The Congress granted FAA wideranging personnel authorities in 1996 by exempting the agency from key 

parts of Title 5. Among the initiatives FAA subsequently introduced were a 

pay system in which compensation levels are set within pay bands and a 

performance management system intended to improve employees’ 

performance through more frequent feedback with no summary rating. 

The pay band system includes plans tailored to specific employee 

segments: a core compensation plan for the majority of nonunion 

employees and negotiated versions of the core compensation plan for 

employees represented by unions; a unique pay plan for air traffic 

controllers and air traffic managers; and an executive pay plan for 

nonpolitical executives, managers, and some senior professionals. 

Under its core compensation plan, all eligible employees can receive 

permanent pay increases, called organizational success increases, based on 

the FAA Administrator’s assessment of the extent to which the entire 

agency has achieved its annual goals. In addition, notably high-performing 

individuals may receive additional permanent pay increases, called 

superior contribution increases, based on supervisory recommendation.4

The criteria for awarding a superior contribution increase include 

collaboration, customer service, and impact on organizational success. 

At the end of the performance evaluation cycle, employees receive a 

narrative performance summary instead of a year end rating that defines 

employees’ performance in specific categories. That is, FAA's performance 

management system does not use a multi-tiered rating system to rate 

individual employee performance. We have previously raised concerns that 

such approaches may not provide enough meaningful information and 

dispersion in ratings to recognize and reward top performers, help 

everyone attain their maximum potential, and deal with poor performers. 

Moreover, FAA employee performance summaries reflect an assessment of 

achievements based on outcomes and expectations, while professional 

competencies such as collaboration and customer service are elements of 

the compensation system. As a result, the performance management 

4

Under the core compensation plan, employees who do not meet minimum requirements do 

not receive either of the permanent pay increases.
Page 11 GAO-03-612T 

system is not directly linked to pay elements in FAA’s compensation 

systems. 

In February 2003, we reported that FAA’s human capital reform efforts 

were still in progress.5

 While FAA has established preliminary linkages 

between its reform goals and the agency’s program goals, we found that the 

lack of explicit linkage will make it difficult to assess the effects of the 

reform initiatives on the program goals of the organization even after data, 

measurable goals, and performance measures for human capital 

management efforts are established. FAA has acknowledged the 

importance of establishing these elements and has repeatedly said that it is 

working to collect and analyze data and develop performance goals and 

measures. However, it has not completed these critical tasks, nor has it 

established specific steps and time frames by which it will do so.

Internal Revenue Service. IRS was granted broad authority related to its 

human capital management through the IRS Restructuring and Reform Act 

of 1998. The Restructuring and Reform Act gave the Secretary of the 

Treasury various pay and hiring flexibilities not otherwise available under 

Title 5, such as the authority to establish new systems for hiring and 

staffing, compensation, and performance management.6

 Some of these 

flexibilities are intended to allow IRS managers more discretion in 

rewarding good performers and in making employees accountable for their 

performance.

5

U.S. General Accounting Office, Human Capital Management: FAA’s Reform Effort 

Requires a More Strategic Approach, GAO-03-156 (Washington, D.C.: Feb. 3, 2003).

6

U.S. General Accounting Office, Human Capital: Effective Use of Flexibilities Can Assist 

Agencies in Managing Their Workforces, GAO-03-2 (Washington, D.C.: Dec. 6, 2002). 
Page 12 GAO-03-612T 

IRS implemented new performance management systems for executives 

and managers for fiscal year 2000 and for the front line employees for fiscal 

year 2001. As an initial step, IRS implemented a pay for performance 

system for senior executives beginning in fiscal year 2001, which 

emphasizes performance in determining compensation and makes 

meaningful distinctions in senior executive performance.7

 In July 2002, we 

reported that IRS had not completed all the elements of the redesign that it 

envisioned.8

 IRS said that it expects to integrate the new systems with its 

overall human resources systems linking evaluations to decisions about 

developmental needs, rewards and recognition, and compensation. IRS 

anticipates that the complete redesign and implementation of the 

performance management systems will take about 5 years. 

OPM Personnel Demonstration Projects. Personnel demonstration 

projects, authorized by OPM under the authority provided by the Civil 

Service Reform Act of 1978, provide a means for testing and introducing 

beneficial change in governmentwide human resources management 

systems. Over the past 25 years, 17 demonstration projects have been 

implemented across the federal government. Twelve of these 

demonstration projects have implemented some form of pay for 

performance compensation system. OPM reports that demonstration 

projects that have implemented pay for performance have shown increased 

retention of high performers.9

To become a demonstration project, a federal agency obtains authority 

from OPM to waive existing federal human resources management law and 

regulations in Title 5 and propose, develop, test, and evaluate interventions 

for its own human resources management system that shape the future of 

federal human resource management.10 Under the demonstration project 

authority, OPM approves project plans and regulations, approves project 

7

U.S. General Accounting Office, Results-Oriented Cultures: Using Balanced Expectations 

to Manage Senior Executive Performance, GAO-02-966 (Washington, D.C.: Sept. 27, 2002).

8

U.S. General Accounting Office, Performance Management Systems: IRS’s Systems for 

Frontline Employees and Managers Align with Strategic Goals but Improvements Can Be 

Made, GAO-02-804 (Washington, D.C.: July 12, 2002). 

9

U.S. Office of Personnel Management, Demonstration Projects and Alternative Personnel 

Systems: HR Flexibilities and Lessons Learned (Washington, D.C.: September 2001).

10No waivers of law are permitted in areas of employee leave, employee benefits, equal 

employment opportunity, political activity, merit system principles, or prohibited personnel 

practices.
Page 13 GAO-03-612T 

evaluation plans, provides technical assistance to agencies, publishes 

plans, and disseminates results. The agencies are responsible for designing 

and implementing project plans and regulations; consulting with unions 

and employees about project design; and designing, conducting, and 

funding evaluations.

For example, the Department of Defense (DOD) implemented a personnel 

demonstration project covering members of its civilian acquisition, 

technology, and logistics workforce in 1999. Recognizing the need to 

reform and modernize its acquisition performance management system in 

order to perform efficiently and effectively, DOD designed the project to 

provide incentives and rewards to multi-skilled personnel, allow managers 

to compete with the private sector for the best talent and make timely job 

offers, and provide an environment that promotes employee growth and 

improves local managers’ ability and authority to manage their workforces. 

The project replaced 22 occupational families with 3 career paths; reduced 

the 15 General Schedule grades to 3 to 5 pay bands; and implemented a 

contribution-based compensation and appraisal system, which measures 

an employee’s contribution to the mission and goals of the organization. 

This compensation system is designed to enable the organization to 

motivate and equitably compensate employees based on their contribution 

to the mission. Salary adjustments and contribution awards are to be based 

on an individual’s overall annual contribution when compared to all other 

employees and their current level of compensation. Contribution is to be 

measured using a standard set of competencies that apply to all career 

paths. These competencies are (1) problem solving, (2) teamwork/ 

cooperation, (3) customer relations, (4) leadership/supervision, 

(5) communication, and (6) resource management. 

A detailed evaluation of project results is due to OPM in May of this year 

that is to assess such fundamental issues as the extent to which the 

demonstration project improved the link between pay and contribution to 

organizational goals and objectives. Preliminary data indicate that the 

attrition rate for high contributors is declining while the attrition rate for 

low contributors is increasing. DOD officials we spoke with told us that 

increased pay setting flexibility has allowed organizations to offer more 

competitive salaries, which in turn has improved recruiting.
Page 14 GAO-03-612T 

Next Steps for ResultsOriented Pay Reform 

We believe that as part of the exploration now under way of using more 

market- and performance-based approaches to federal pay, we need to 

continue to experiment with providing agencies with the flexibility to pilot 

alternative approaches to setting pay and linking pay to performance. 

In the short term, the Congress may wish to explore the benefits of 

broadbanding by (1) giving OPM additional flexibility that would enable it 

to grant governmentwide authority for all agencies (i.e., class exemptions) 

to use broadbanding for certain critical occupations and/or (2) allowing 

agencies to apply to OPM (i.e., case exemptions) for broadbanding 

authority for their specific entities or occupations. However, agencies 

should be required to demonstrate to OPM’s satisfaction that they have 

modern, effective, credible, and validated performance management 

systems in place before they are allowed to use broadbanding or related 

pay for performance initiatives. This is consistent with the approach that 

the Congress took with raising the increase of the total annual 

compensation limit for senior executives as part of the Homeland Security 

Act. The Congress may also want to consider providing guidance on the 

criteria that OPM should use in making judgments about individual 

agencies’ performance management systems. We believe that the practices 

we described today could serve as a starting point for that consideration. 

In summary, there is widespread agreement that the basic approach to 

federal pay is broken and we need to move to a more market- and 

performance-based approach. Doing so will be essential if we expect to 

maximize the performance and assure the accountability of the federal 

government for the benefit of the American people. Reasonable people can 

and will debate and disagree about the merits of individual reform 

proposals. However, all should be able to agree that a performance 

management system with adequate safeguards, including reasonable 

transparency and appropriate accountability mechanisms in place, must 

serve as the fundamental underpinning of any fair, effective, and 

appropriate results-oriented pay reform. The practices that have been used 

by leading organizations in developing and using their performance 

management systems to link organizational goals to individual 

performance and create a line of sight between an individual’s activities 

and organizational results show the way in how to implement performance 

management systems with the necessary attributes. 
Page 15 GAO-03-612T 

Chairwoman Davis and Members of the Subcommittee, this concludes my 

statement. I would be pleased to respond to any questions that you may 

have.

Contact and 

Acknowledgments 

For further information regarding this statement, please contact 

J. Christopher Mihm, Director, Strategic Issues, on (202) 512-6806 or at 

mihmj@gao.gov. Individuals making key contributions to this testimony 

included Anne Kidd, Janice Lichty, Lisa Shames, Marti Tracy, and Andrew 

White.

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