a

GAO

United States Government Accountability Office

Testimony

Before the Subcommittee on the Federal Workforce and 

Agency Organization, Committee on Government Reform, 

U.S. House of Representatives

For Release on Delivery

Expected at 10:00 a.m., EDT

Wednesday, October 5, 2005

HUMAN CAPITAL

Preliminary Observations 

on the Administration’s 

Draft Proposed “Working 

for America Act”

Statement of David M. Walker

Comptroller General of the United States

GAO-06-142T
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

www.gao.gov/cgi-bin/getrpt?GAO-06-142T.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Lisa Shames at 

(202) 512-6806 or shamesl@gao.gov. 

Highlights of GAO-06-142T, a testimony 

before the Subcommittee on the Federal 

Workforce and Agency Organization, 

Committee on Government Reform, U.S. 

House of Representatives 

October 5, 2005

HUMAN CAPITAL

Preliminary Observations on the 

Administration’s Draft Proposed 

“Working for America Act” 

GAO supports moving forward with appropriate human capital reforms and 

believes that implementing more market-based and performance-oriented 

pay systems is both doable and desirable. Importantly, broad-based human 

capital reform must be part of a broader strategy of change management and 

performance improvement initiatives and cannot be simply overlaid on 

existing ineffective performance management systems. In addition, 

organizations need to build up their basic management capacity and must 

have adequate resources to properly design and effectively implement more 

market-based and performance-oriented systems. 

Before implementing dramatic human capital reforms, executive branch 

agencies should follow a phased approach that meets a “show me” test. That 

is, each agency should be authorized to implement a reform only after it has 

shown it has met certain conditions, including an assessment of its related 

institutional infrastructure and an independent certification by OPM that 

such infrastructure meets specified statutory standards. In any event, OPM’s 

and agencies’ related efforts should be monitored by Congress. 

Given the above, GAO has the following observations on the draft proposal. 

• Congress should make pay and performance management reforms the 

first step in governmentwide reforms. The draft proposal incorporates 

many of the key principles of more market-based and performanceoriented pay systems and requires that OPM certify that each agency’s 

pay for performance system meets prescribed criteria. Going forward, 

OPM should define in regulation what it will take in terms of fact-based 

and data-driven analyses for agencies to demonstrate that they are ready 

to receive this certification and implement new authorities. 

• OPM should play a key leadership and oversight role in helping 

individual agencies and the government as a whole work towards 

overcoming a broad range of human capital challenges. OPM’s role 

would be expanded in several areas under the draft proposal. It is 

unclear whether OPM has the current capacity to discharge these new 

responsibilities. 

• Congress should move more cautiously in connection with labor 

management relations and adverse actions and appeals reforms. 

Selected federal agencies have been implementing more market-based 

and performance-oriented pay systems for some time and thus they have 

built a body of experience and knowledge about what works well and 

what does not that allows the sharing of lessons learned. On the other 

hand, the federal government has had far less experience in changes 

regarding labor management relations and adverse actions and appeals. 

Congress may wish to monitor the Departments of Homeland Security’s 

and Defense’s implementation of related authorities, including lessons 

learned, before moving forward in these areas for the rest of the federal 

government. 

The federal government must have 

the capacity to plan more 

strategically, react more 

expeditiously, and focus on 

achieving results. Critical to the 

success of this transformation are 

the federal government’s people—

its human capital. We have 

commended the progress that has 

been made in addressing human 

capital challenges in the last few 

years. Still, significant 

opportunities exist to improve 

strategic human capital 

management to respond to current 

and emerging 21st century 

challenges. A key question, for 

example, is how to update the 

federal government’s classification 

and compensation systems to be 

more market-based and 

performance-oriented. 

The Administration’s draft 

proposed “Working for America 

Act” is intended to ensure that 

agencies are equipped to better 

manage, develop, and reward their 

employees. Under this proposal, 

the Office of Personnel 

Management (OPM) is to design a 

new core classification and pay 

system, among other things. In 

addition, the draft proposal amends 

some provisions of Title 5 covering 

labor management relations and 

adverse actions and appeals. 

This testimony presents 

preliminary observations on the 

draft proposal; presents the 

principles, criteria, and processes 

for human capital reform; and 

suggests next steps for selected 

and targeted actions. 
Page 1 GAO-06-142T 

Chairman Porter, Representative Davis, and Members of the 

Subcommittee:

I appreciate the opportunity to be here today to discuss human capital 

reform and to offer preliminary observations on the Administration’s draft 

proposed “Working for America Act,” which is intended to ensure that 

agencies are equipped to better manage, develop, and reward their 

employees. In order to respond to a daunting array of governance and 

fiscal challenges in the 21st century, the federal government must have the 

institutional capacity to plan more strategically, react more expeditiously, 

and focus on achieving results. Critical to the success of this 

transformation are the federal government’s people—its human capital. 

We have commended the progress that has been made in addressing human 

capital challenges in the last few years. Still, significant opportunities exist 

to improve strategic human capital management to respond to current and 

emerging 21st century challenges.1

 For example, the government has not 

transformed, in many cases, how it classifies, compensates, develops, and 

motivates its employees to achieve maximum results within available 

resources and existing authorities. Thus, a key question for the 21st century 

is “How should the federal government update its compensation systems to 

be more market-based and performance-oriented?”2

 

Congress has recognized that federal agencies will need the most effective 

human capital systems to succeed in their transformations and has given 

selected agencies statutory authorities intended to help them manage their 

people strategically to achieve results.3

 Most recently, the Departments of 

Homeland Security (DHS) and Defense (DOD) received the authority to

1

GAO, High-Risk Series: An Update, GAO-05-207 (Washington, D.C.: January 2005) and 

GAO, High-Risk Series: Strategic Human Capital Management, GAO-03-120 (Washington, 

D.C.: January 2003).

2

GAO, 21st Century Challenges: Reexamining the Base of the Federal Government, GAO05-325SP (Washington, D.C.: February 2005).

3

GAO, Human Capital: Selected Agencies’ Statutory Authorities Could Offer Options in 

Developing a Framework for Governmentwide Reform, GAO-05-398R (Washington, D.C.: 

Apr. 21, 2005).
Page 2 GAO-06-142T 

establish “flexible and contemporary” human capital and pay systems.4 

GAO has also received human capital authorities that have given our 

agency the tools to more effectively support Congress in meeting its 

constitutional responsibilities. We strive to lead by example and 

understand that effective implementation of any new policies and 

procedures is of critical importance. 

Before discussing the Administration’s draft proposal as we understand it, I 

would like to emphasize the following three themes that I believe are 

critical to considering any governmentwide approach to civil service 

reform. 

• First and foremost, we need to move forward with appropriate human 

capital reforms, but how it is done, when it is done, and the basis on 

which it is done can make all the difference in whether such efforts are 

successful. Human capital reforms to date recognize that the “one-sizefits-all” approach is not appropriate to all agencies’ demands, 

challenges, and missions. However, we have reported that a reasonable 

degree of consistency across the government is still desirable and that 

broader reforms should be guided by a common framework consisting 

of principles, criteria, and processes.5

 

• Before implementing dramatic human capital reforms, executive branch 

agencies should follow a phased approach that meets a “show me” test. 

That is, each agency should be authorized to implement a reform only 

after it has shown it has met certain conditions, including an assessment 

of its institutional infrastructure to effectively, efficiently, economically, 

and fairly implement any new authorities. The Office of Personnel 

Management (OPM) should also independently certify that such 

infrastructure meets specified statutory standards before the agency 

could implement such reforms. In any event, OPM’s and agencies’ 

related efforts should be monitored by Congress.

4

For more information on DHS’s and DOD’s human capital authorities, see for example, 

GAO, Human Capital: Preliminary Observations on Final Department of Homeland 

Security Human Capital Regulations, GAO-05-320T (Washington, D.C.: Feb. 10, 2005) and 

GAO, Human Capital: Preliminary Observations on Proposed DOD National Security 

Personnel System Regulations, GAO-05-432T (Washington, D.C.: Mar. 15, 2005).

5

GAO and the National Commission on the Public Service Implementation Initiative, 

Highlights of a Forum: Human Capital: Principles, Criteria, and Processes for 

Governmentwide Federal Human Capital Reform, GAO-05-69SP (Washington, D.C.: Dec. 1, 

2004).
Page 3 GAO-06-142T 

• GAO strongly supports the need to expand pay reform in the federal 

government and believes that implementing more market-based and 

performance-oriented pay systems is both doable and desirable. 

Specifically, pay increases should no longer be treated as an entitlement 

but should be based on employees’ contributions to the organizations’ 

missions and goals. However, GAO’s and other organizations’ 

experiences demonstrate that the shift to more market-based and 

performance-oriented pay must be part of a broader strategy of change 

management and performance improvement initiatives and cannot be 

simply overlaid on existing ineffective performance management 

systems6

. 

Hearings such as this one today offer opportunities for stakeholders to 

express their views as we move forward with human capital reforms. As I 

have testified on other occasions, reasonable people can and will disagree 

about the merits of an individual proposal. This morning I would like to 

speak broadly about the Administration’s draft proposal and highlight three 

preliminary observations based on our understanding of it. 

• Congress should make pay and performance management reforms the 

first step in governmentwide reforms. The draft proposal incorporates 

many of the key principles of more market-based and performanceoriented pay systems and requires that OPM certify that each agency’s 

pay for performance system meets prescribed criteria. Going forward, 

OPM should define in regulation what it will take in terms of fact-based 

and data-driven analyses for agencies to demonstrate that they are ready 

to receive this certification and implement new authorities. 

• Second, OPM should play a key leadership and oversight role in helping 

individual agencies and the government as a whole work towards 

overcoming a broad range of human capital challenges. OPM’s role 

would be expanded in several areas under the draft proposal. It is 

unclear whether OPM has the current capacity to discharge these new 

responsibilities.

• Third, Congress should move more cautiously in connection with labor 

management relations and adverse actions and appeals reforms. 

Selected federal agencies have been implementing more market-based 

6

GAO, Human Capital: Symposium on Designing and Managing Market-Based and More 

Performance-Oriented Pay Systems, GAO-05-832SP (Washington, D.C.: July 27, 2005).
Page 4 GAO-06-142T 

and performance-oriented pay for some time—some organizations for 

well over a decade—and thus they have built a body of experience and 

knowledge about what works well and what does not that allows the 

sharing of lessons learned. On the other hand, the federal government 

has had far less experience in changes regarding labor management 

relations and adverse actions and appeals. Congress granted DHS and 

DOD related new authorities in these areas and may wish to monitor the 

implementation of those authorities, including lessons learned, before 

moving forward for the rest of the federal government.

I will now provide some more specific comments on the Administration’s 

draft proposal. I will then suggest next steps for human capital reform, 

including selected and targeted authorities and a framework comprised of 

principles, criteria, and processes for governmentwide reform.

The Administration’s 

Draft Proposed 

“Working for America 

Act”

The draft proposed “Working for America Act” is intended to ensure that 

agencies are equipped to better manage, develop, and reward employees to 

better serve the American people.7

 Its purpose is to establish a federal 

human capital system under which employees have clear performance 

goals and opportunities for professional growth; managers who help them 

succeed; and pay increases based on performance rather than the passage 

of time. In addition, any new flexibilities are to be exercised in accordance 

with the merit system principles; related core values; and protections, such 

as against discrimination, political influence, and personal favoritism, of 

the civil service. Today I will provide observations on three central areas of 

the draft proposal as we understand it: pay and performance management; 

OPM’s new responsibilities to implement the proposed pay reform; and 

labor management relations and adverse actions and appeals.

Pay and Performance 

Management

As I stated earlier, GAO strongly supports the need to expand pay reform in 

the federal government and believes that implementing more market-based 

and performance-oriented pay systems is both doable and desirable. The 

federal government’s current pay system is weighted toward rewarding 

length of service rather than individual performance and contributions; 

automatically providing across-the-board annual pay increases, even to 

7

The observations made today are based on the draft version given to GAO dated July 18, 

2005.
Page 5 GAO-06-142T 

poor performers. It also compensates employees living in various localities 

without adequately considering the local labor market rates applicable to 

the diverse types of occupations in the area. Importantly, the draft 

proposal, as we understand it, incorporates many of the key practices of 

more market-based and performance-oriented pay systems and requires 

that OPM certify that each agency’s pay for performance system meet 

prescribed criteria. Going forward, OPM should define in regulation what 

fact-based and data-driven analyses agencies will need to provide to OPM 

to receive certification.

More Market-Based and 

Performance-Oriented Pay

Clearly, a competitive compensation system can help organizations attract 

and retain a quality workforce. 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 various 

levels of responsibility. In addition, organizations generally structure their 

competitive compensation systems to separate base salary from bonuses 

and other incentives and awards.

Under the draft proposal, OPM is to design a new core classification and 

pay system and agencies, in coordination with OPM, are to establish 

performance appraisal systems to promote high performance. Specifically, 

the General Schedule is to be repealed and to replace it, OPM is to establish 

pay bands for occupational groups based on factors such as mission, 

competencies, or relevant labor market features. For each pay band, OPM 

is to establish ranges of basic pay rates that apply in all locations. There are 

to be market-oriented pay adjustments. The governmentwide national 

market adjustment is to vary by occupational group and band with the 

flexibility to make additional local market adjustments. Going forward, 

more information is needed on what compensation studies are to be 

conducted in setting these market-based pay rates.

Effective performance management systems can be a vital tool for aligning 

the organization with desired results and creating a “line of sight” showing 

how team, unit, and individual performance can contribute to overall 

organizational results. Such systems work to achieve three key objectives: 

(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. 
Page 6 GAO-06-142T 

The draft proposal incorporates many of the key practices that we have 

reported have helped agencies implement effective performance 

management systems.8

 These practices include:

Linking Organizational Goals to Individual Performance. Under 

the draft proposal, agencies are to set performance expectations that 

support and align with the agencies’ mission and strategic goals, 

organizational program and policy objectives, annual performance plans, 

results, and other measures of performance. Further, agencies are to 

communicate the performance expectations in writing at the beginning of 

the appraisal period. 

Making Meaningful Distinctions in Performance. Supervisors and 

managers are to be held accountable for making meaningful distinctions 

among employees based on performance, fostering and rewarding 

excellent performance, and addressing poor performance, among other 

things. Agencies are not to impose a forced distribution of performance 

ratings in terms of fixed numeric or percentage limitations on any summary 

rating levels. Performance appraisal systems are to include at least two 

summary rating levels, essentially a “pass/fail” system, for employees in an 

“Entry/Developmental” band and at least three summary rating levels for 

other employee groups. 

Pass/fail systems by definition will not provide meaningful distinctions in 

performance ratings. In addition, while a three-level system might be 

workable, using four or five summary rating levels is preferable since it 

naturally allows for greater performance rating and pay differentiation. 

Moreover, this approach is consistent with the new governmentwide 

performance-based pay system for the members of the Senior Executive 

Service (SES), which requires agencies to use at least four summary rating 

levels to provide a clear and direct link between SES performance and pay 

as well as to make meaningful distinctions based on relative performance.9

 

Cascading this approach to other levels of employees can help agencies 

recognize and reward employee contributions and achieve the highest 

levels of individual performance. 

8

GAO, Results-Oriented Cultures: Creating a Clear Linkage between Individual 

Performance and Organizational Success, GAO-03-488 (Washington, D.C.: Mar. 14, 2003).

9

For more information, see GAO, Human Capital: Senior Executive Performance 

Management Can Be Significantly Strengthened to Achieve Results, GAO-04-614

(Washington, D.C.: May 26, 2004).
Page 7 GAO-06-142T 

Linking Pay to Performance. Employees must receive at least a “fully 

successful” rating to receive any pay increase. Those employees who 

receive less than a fully successful rating are not to receive an increase, 

including the national and local market adjustments discussed above. 

Performance pay increases for employees are to be allocated by the 

“performance shares” of a pay pool. Agencies are to determine the value of 

one performance share, expressed as a percentage of the employee’s basic 

pay or as a fixed dollar amount. There are to be a set number of 

performance shares for each pay pool so that the employees with higher 

performance ratings are to receive a greater number of shares and thus, a 

greater payout. At the agency’s discretion, any portion of the employee’s 

performance pay increase not converted to a basic pay increase may be 

paid out as a lump-sum payment.

Providing Adequate Safeguards to Ensure Fairness and Guard 

Against Abuse. Agencies are to incorporate effective safeguards to 

ensure that the management of systems is fair and equitable and based on 

employee performance in order to receive certification of their pay for 

performance systems. We have found that a common concern that 

employees express about any pay for performance system is whether their 

supervisors have the ability and willingness to assess employees’ 

performance fairly. Using safeguards, such as having independent 

reasonableness reviews of performance management decisions before 

such decisions are final, can help to allay these concerns and build a fair 

and credible system. This has been our approach at GAO and we have 

found it works extremely well.

In addition, agencies need to assure reasonable transparency and provide 

appropriate accountability mechanisms in connection with the results of 

the performance management process. This can include publishing 

internally the overall results of performance management and individual 

pay decisions while protecting individual confidentiality. For example, we 

found that several of OPM’s demonstration projects publish information for 

employees on internal Web sites that include the overall results of 

performance appraisal and pay decisions, such as the average performance 

rating, the average pay increase, and the average award for the organization 

and for each individual unit.10 GAO is also publishing aggregate data for all 

10GAO, Human Capital: Implementing Pay for Performance at Selected Personnel 

Demonstration Projects, GAO-04-83 (Washington, D.C.: Jan. 23, 2004).
Page 8 GAO-06-142T 

of our pay, promotion, and other important agency-wide human capital 

actions.

OPM Certification As I noted, before implementing any human capital reforms, executive 

branch agencies should follow a phased approach that meets a “show me” 

test. That is, each agency should be authorized to implement a reform only 

after it has shown it has met certain requirements, including an assessment 

of its institutional infrastructure and an independent certification by OPM 

of the existence of this infrastructure. This institutional infrastructure 

includes (1) a strategic human capital planning process linked to the 

agency’s overall strategic plan; (2) capabilities to design and implement a 

new human capital system effectively; (3) a modern, effective, credible, and 

validated performance management system that provides a clear linkage 

between institutional, unit, and individual performance-oriented outcomes, 

and results in meaningful distinctions in ratings; and (4) adequate internal 

and external safeguards to ensure the fair, effective, and nondiscriminatory 

implementation of the system.

A positive feature of the draft proposal is that agencies are to show that 

their pay for performance systems have met prescribed criteria in order to 

receive certification from OPM to implement their new systems. Among 

these criteria are having the means for ensuring employee involvement in 

the design and implementation of the pay for performance system; 

adequate training and retraining for supervisors, managers, and employees 

in the implementation and operation of the pay for performance system; a 

process for ensuring periodic performance feedback and dialogue between 

supervisors, managers, and employees throughout the appraisal period; 

and the means for ensuring that adequate agency resources are allocated 

for the design, implementation, and administration of the pay for 

performance system. Further, OPM may review an agency’s pay for 

performance systems periodically to assess whether they continue to meet 

the certification criteria. If they do not, OPM may rescind the agency’s 

certification and direct the agency to take actions to implement an 

appropriate system, which the agency must follow.

Going forward, I believe that OPM should define in regulation what it will 

take in terms of fact-based and data-driven analyses for agencies to 

demonstrate that they are ready to receive this certification. Clearly, the 

President’s Management Agenda, and its standards for the strategic 

management of human capital, can inform the certification process. Also, 

as an example of the analyses that have been required, OPM has outlined in 

regulations for the SES performance-based pay system the necessary data 
Page 9 GAO-06-142T 

and information agencies need to provide in order to receive certification 

and thus raise the pay cap and total compensation limit for their senior 

executives. Specifically, agencies must provide, among other things, the 

data on senior executives’ performance ratings, pay, and awards for the last 

2 years to demonstrate that their systems, as designed and applied, make 

meaningful distinctions based on relative performance. Under the SES 

regulations, agencies that cannot provide these data can request 

provisional certification of their systems. In our view such provisional 

certifications should not be an option under any broad-based classification 

and compensation reform proposal. 

OPM’s Roles and 

Responsibilities

OPM should play a key leadership and oversight role in helping individual 

agencies and the government as a whole work towards overcoming a broad 

range of human capital challenges. Our understanding of the 

Administration’s draft proposal is that OPM’s leadership and oversight role 

is to expand in several areas, such as establishing a more market-based and 

performance-oriented pay system governmentwide and implementing a 

new core classification system. At the request of Chairman Collins and 

Ranking Member Lieberman, Senate Committee on Homeland Security and 

Governmental Affairs, along with Chairman Voinovich and Ranking 

Member Akaka, Subcommittee on Oversight of Government Management, 

the Federal Workforce, and the District of Columbia, and to assist Congress 

as it considers OPM’s additional responsibilities as outlined in this draft 

proposal, we are assessing OPM’s current capacity to lead a broad-based 

governmentwide human capital reform effort, including providing 

appropriate assistance to federal agencies as they revise their human 

capital systems and conducting effective monitoring of any related reform 

implementation efforts. 

OPM is in the process of its own transformation—from being a rulemaker, 

enforcer, and independent agent to being more of a consultant, toolmaker, 

and strategic partner in leading and supporting executive agencies’ human 

capital reform efforts and management systems. However, it is unclear 

whether OPM has the current capacity to discharge its new responsibilities. 

Specifically, OPM reported in its June 2001 workforce analysis that 4.2 

percent of its employees (about 123 per year), on average, were projected 

to retire each year over the next 10 years, and the largest percentage of 

projected retirements, about 8 percent each year, would come from 

members of its SES. OPM’s expected retirement rate for its workforce 

overall is more than the annual retirement rate of 2 percent 

governmentwide that we identified in a report issued in 2001.11 
Page 10 GAO-06-142T 

Our prior work has shown that when required to implement new 

legislation, OPM could have done more to accomplish its leadership and 

oversight mission in a decentralized human capital environment. For 

example, Congress passed a law in 1990 authorizing agencies to repay, at 

their discretion, their employees’ student loans as a means to recruit and 

retain a talented workforce. In 2001, OPM issued final regulations to 

implement the program. The regulations were subsequently changed in 

2004 to reflect legislative amendments that increased the ceiling on annual 

and total loan repayments. In our review of the federal student loan 

repayment program, we found that while human capital officials 

recognized OPM’s efforts, they felt they could use more assistance on the 

technical aspects of operating the program, more coordination in sharing 

lessons learned in implementing it, and help consolidating some of the 

program processes.12 

Similarly, we found that while OPM had several initiatives underway to 

assist federal agencies in using personnel flexibilities currently available to 

them in managing their workforces, OPM could more fully meet its 

leadership role to assist agencies in identifying, developing, and applying 

human capital flexibilities across the federal government.13 In addition, we 

reported that in its ongoing internal review of its existing regulations and 

guidance, OPM could more directly focus on determining the continued 

relevance and utility of its regulations and guidance by asking whether they 

provide the flexibility that agencies need in managing their workforces 

while also incorporating protections for employees. 

Labor Management 

Relations and Adverse 

Actions and Appeals

The Administration’s draft proposal would amend some provisions of Title 

5 of the U.S. Code covering labor management relations and adverse 

actions and appeals. Selected federal agencies have been implementing 

more market-based and performance-oriented pay for some time—some 

organizations for well over a decade—and thus they have built a body of 

11GAO, Federal Employee Retirements: Expected Increase Over the Next 5 Years Illustrates 

Need for Workforce Planning, GAO-01-509 (Washington, D.C.: Apr. 27, 2001).

12GAO, Federal Student Loan Repayment Program: OPM Could Build on Its Efforts to 

Help Agencies Administer the Program and Measure Results, GAO-05-762 (Washington, 

D.C.: July 22, 2005).

13GAO, Human Capital: OPM Can Better Assist Agencies in Using Personnel 

Flexibilities, GAO-03-428 (Washington, D.C.: May 9, 2003).
Page 11 GAO-06-142T 

experience and knowledge about what works well and what does not that 

allows the sharing of lessons learned. On the other hand, the federal 

government has had far less experience in changes regarding labor 

management relations and adverse actions and appeals. Congress granted 

DHS and DOD related new authorities in these areas and may wish to 

monitor the implementation of those authorities, including lessons learned, 

before moving forward for the rest of the federal government. Discussion 

of selected proposed amendments follows.

Labor Management Relations Under Title 5, agencies now have a duty to bargain over conditions of 

employment, other than those covered by a federal statute; a 

governmentwide rule or regulation; or an agency rule or regulation for 

which the agency can demonstrate a compelling need. Under the draft 

proposal, agencies are to be obligated to bargain with employees only if the 

effect of the change in policy on the bargaining unit (or the affected part of 

the unit) is “foreseeable, substantial, and significant in terms of impact and 

duration.” 

In addition, an agency now has the right to take any action to carry out the 

agency’s mission in an emergency, without a duty to bargain. However, 

what constitutes an emergency can be defined through a collective 

bargaining agreement. Under the draft proposal, an agency is to have the 

right to take any action to prepare for, practice for, or prevent an 

emergency, or to carry out the agency’s mission in an emergency. The draft 

proposal also adds a new definition of “emergency” as requiring immediate 

action to carry out critical agency functions, including situations involving 

an (1) adverse effect on agency resources, (2) increase in workload 

because of unforeseeable events, (3) externally imposed change in mission 

requirements, or (4) externally imposed budget exigency. By broadly 

defining “emergency” without time limits and adding to management’s right 

an explicit authority to take action to prepare for, practice for, or prevent 

any emergency, the proposed change as we understand it, could serve to 

significantly restrict the scope of issues subject to collective bargaining.

Adverse Actions and Appeals Under Title 5, conduct-based adverse actions are reviewed by the Merit 

Systems Protection Board (MSPB) under the preponderance of the 

evidence standard (there is more evidence than not to support the action). 

Performance-based adverse actions are reviewed under the lower standard 

of substantial evidence (evidence that a reasonable person would find 

sufficient to support a conclusion), but agencies must first give employees 

a reasonable opportunity to demonstrate acceptable performance under a 

performance improvement plan. Under the draft proposal, MSPB is to 
Page 12 GAO-06-142T 

apply a single standard of proof—the higher standard of preponderance of 

the evidence—to review adverse actions taken for either performance or 

conduct. On the other hand, while due process features, such as advance 

written notice of a proposed adverse action are still required, performance 

improvement plans are no longer required. As we understand the draft 

proposal, applying the same standard to both types of adverse actions 

could add more consistency to the appeals process.

Also under Title 5, MSPB now reviews penalties during the course of a 

disciplinary action against an employee to ensure that the agency 

considered relevant prescribed factors and exercised management 

discretion within tolerable limits of reasonableness. MSPB may mitigate or 

modify a penalty if the agency did not consider prescribed factors. Under 

the draft proposal, MSPB will be able to mitigate a penalty only if it is 

totally unwarranted in light of all pertinent circumstances. This change 

would restrict MSPB’s ability to mitigate penalties. 

Framework for 

Governmentwide 

Human Capital Reform

To help advance the discussion concerning how governmentwide human 

capital reform should proceed, GAO and the National Commission on the 

Public Service Implementation Initiative co-hosted a forum on whether 

there should be a governmentwide framework for human capital reform 

and, if so, what this framework should include.14 While there was 

widespread recognition among the forum participants that a one-size-fitsall approach to human capital management is not appropriate for the 

challenges and demands government faces, there was equally broad 

agreement that there should be a governmentwide framework to guide 

human capital reform. Further, a governmentwide framework should 

balance the need for consistency across the federal government with the 

desire for flexibility so that individual agencies can tailor human capital 

systems to best meet their needs. Striking this balance would not be easy 

to achieve, but is necessary to maintain a governmentwide system that is 

responsive enough to adapt to agencies’ diverse missions, cultures, and 

workforces. 

While there were divergent views among the forum participants, there was 

general agreement on a set of principles, criteria, and processes that would 

serve as a starting point for further discussion in developing a 

14GAO-05-69SP.
Page 13 GAO-06-142T 

governmentwide framework in advancing human capital reform, as shown 

in figure 1. We believe that these principles, criteria, and processes provide 

an effective framework for Congress and other decision makers to use as 

they consider and craft governmentwide civil service reform proposals.

Figure 1: Principles, Criteria, and Processes

Source: GAO.

Next Steps for Human 

Capital Reform

Moving forward with human capital reform, in the short term, Congress 

should consider selected and targeted actions to continue to accelerate the 

momentum to make strategic human capital management the centerpiece 

of the government’s overall transformation effort. One option may be to 

provide agencies one-time, targeted investments that are not built into 

Principles that the government should retain in a framework for reform because of 

their inherent, enduring qualities:

• Merit principles that balance organizational mission, goals, and performance objectives 

with individual rights and responsibilities

• Ability to organize, bargain collectively, and participate through labor organizations

• Certain prohibited personnel practices

• Guaranteed due process that is fair, fast, and final

Criteria that agencies should have in place as they plan for and manage their new 

human capital authorities: 

• Demonstrated business case or readiness for use of targeted authorities

• An integrated approach to results-oriented strategic planning and human capital 

planning and management

• Adequate resources for planning, implementation, training, and evaluation

• A modern, effective, credible, and integrated performance management system that 

includes adequate safeguards to help ensure equity and prevent discrimination

Processes that agencies should follow as they implement new human capital 

authorities: 

• Prescribing regulations in consultation or jointly with the Office of Personnel 

Management

• Establishing appeals processes in consultation with the Merit Systems Protection 

Board

• Involving employees and stakeholders in the design and implementation of new human 

capital systems

• Phasing in implementation of new human capital systems

• Committing to transparency, reporting, and evaluation

• Establishing a communications strategy

• Assuring adequate training
Page 14 GAO-06-142T 

agencies’ bases for future year budget requests. For example, Congress 

established the Human Capital Performance Fund to reward agencies’ 

highest performing and most valuable employees. However, the draft 

proposal proposes to repeal the Human Capital Performance Fund. 

According to OPM, the provision was never implemented, due to lack of 

sufficient funding. We believe that a central fund has merit and can help 

agencies build the infrastructure that is necessary in order to implement a 

more market-based and performance-oriented pay system. To be eligible, 

agencies would submit plans for approval by OPM that incorporated 

features such as a link between pay for performance and the agency’s 

strategic plan, employee involvement, ongoing performance feedback, and 

effective safeguards to ensure fair management of the system. In the first 

year of implementation, up to 10 percent of the amount appropriated would 

be available to train those involved in making meaningful distinctions in 

performance. These features are similar to those cited in the draft proposal 

as the basis for OPM’s certification for agencies to implement their new pay 

and performance management systems. 

In addition, as agencies develop their pay for performance systems, they 

will need to consider the appropriate mix between pay awarded as base 

pay increases versus one-time cash increases, while still maintaining 

fiscally sustainable compensation systems that reward performance. A key 

question to consider is how the government can make an increasing 

percentage of federal compensation dependent on achieving individual and 

organizational results by, for example, providing more compensation as 

one-time cash bonuses rather than as permanent salary increases. 

However, agencies’ use of cash bonuses or other monetary incentives has 

an impact on employees’ retirement calculations since they are not 

included in calculating retirement benefits. Congress should consider 

potential legislative changes to allow cash bonuses that would otherwise 

be included as base pay increases to be calculated toward retirement and 

thrift savings benefits by specifically factoring bonuses into the employee’s 

basic pay for purposes of calculating the employee’s “high-3” for retirement 

benefits and making contributions to the thrift savings plan.

As we continue to move forward with broader human capital reforms, they 

should be guided by a framework consisting of principles, criteria, and 

processes. While the reforms to date have recognized that the “one-sizefits-all” approach is not appropriate to all agencies’ demands, challenges, 

and missions, a reasonable degree of consistency across the government is 

still desirable. Striking this balance is not easy to achieve, but is necessary 
Page 15 GAO-06-142T 

to maximize the federal government’s performance within available 

resources and assure accountability for the benefit of the American people.

Chairman Porter, Representative 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 Lisa 

Shames, Acting Director, Strategic Issues, at (202) 512-6806 or 

shamesl@gao.gov. Individuals making key contributions to this statement 

include Anne Inserra, Carole Cimitile, Janice Latimer, Belva Martin, Jeffrey 

McDermott, and Katherine H. Walker.
Page 16 GAO-06-142T 

Appendix I

Highlights of Selected GAO Reports ApendxiI

What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

www.gao.gov/cgi-bin/getrpt?GAO-05-1048T.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Lisa Shames at 

(202) 512-6806 or shamesl@gao.gov. 

Highlights of GAO-05-1048T, a testimony 

before the Subcommittee on Oversight of 

Government Management, the Federal 

Workforce, and the District of Columbia, 

Committee on Homeland Security and 

Governmental Affairs, U.S. Senate 

September 27, 2005

HUMAN CAPITAL

Designing and Managing Market-Based 

and More Performance-Oriented Pay 

Systems 

GAO strongly supports the need to expand pay reform in the federal 

government. While implementing market-based and more performanceoriented pay systems is both doable and desirable, organizations’ 

experiences in designing and managing their pay systems underscored three 

key themes that can guide federal agencies’ efforts. 

• The shift to market-based and more performance-oriented pay must be 

part of a broader strategy of change management and performance 

improvement initiatives. 

• Market-based and more performance-oriented pay cannot be simply 

overlaid on most organizations’ existing performance management 

systems. Rather, as a precondition to effective pay reform, individual 

expectations must be clearly aligned with organizational results, 

communication on individual contributions to annual goals must be 

ongoing and two-way, meaningful distinctions in employee performance 

must be made, and cultural changes must be undertaken. 

• Organizations need to build up the basic management capacity of their 

organizations. Training and developing new and current staff to fill new 

roles and work in different ways will play a crucial part in building the 

capacity of the organizations. 

Organizations presenting at our symposium considered the following 

strategies in designing and managing their pay systems. 

1. Focus on a set of values and objectives to guide the pay system. 

2. Examine the value of employees’ total compensation to remain 

competitive in the market. 

3. Build in safeguards to enhance the transparency and help ensure the 

fairness of pay decisions. 

4. Devolve decision making on pay to appropriate levels. 

5. Provide training on leadership, management, and interpersonal skills to 

facilitate effective communication. 

6. Build consensus to gain ownership and acceptance for pay reforms. 

7. Monitor and refine the implementation of the pay system. 

Moving forward, it is possible to enact broad-based reforms that would 

enable agencies to move to market-based and more performance-oriented 

pay systems. However, before implementing reform, each executive branch 

agency should demonstrate and the Office of Personnel Management should 

certify that the agency has the institutional infrastructure in place to help 

ensure that the pay reform is effectively and equally implemented. At a 

minimum, this infrastructure includes a modern, effective, credible, and 

validated performance management system in place that provides a clear 

linkage between institutional, unit, and individual performance-oriented 

outcomes; results in meaningful distinctions in ratings; and incorporates 

adequate safeguards. 

The federal government must have 

the capacity to plan more 

strategically, react more 

expeditiously, and focus on 

achieving results. Critical to the 

success of this transformation are 

the federal government’s people—

its human capital. Yet, in many 

cases the federal government has 

not transformed how it classifies, 

compensates, develops, and 

motivates its employees to achieve 

maximum results within available 

resources and existing authorities. 

A key question is how to update the 

federal government’s compensation 

system to be market-based and 

more performance-oriented. 

To further the discussion of federal 

pay reform, GAO partnered with 

key human capital stakeholders to 

convene a symposium in March 

2005 to discuss public, private, and 

nonprofit organizations’ successes 

and challenges in designing and 

managing market-based and more 

performance-oriented pay systems. 

This testimony presents the 

strategies that organizations 

considered in designing and 

managing market-based and more 

performance-oriented pay systems 

and describes how they are 

implementing them. 
Appendix I

Highlights of Selected GAO Reports

Page 17 GAO-06-142T 

www.gao.gov/cgi-bin/getrpt?GAO-05-832SP.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact J. Christopher 

Mihm at (202) 512-6806 or mihmj@gao.gov. 

Highlights of GAO-05-832SP

July 2005

HUMAN CAPITAL

Symposium on Designing and Managing 

Market-Based and More PerformanceOriented Pay Systems 

While implementing market-based and more performance-oriented pay 

systems is both doable and desirable, organizations’ experiences show that 

the shift to market-based and more performance-oriented pay must be part 

of a broader strategy of change management and performance improvement 

initiatives. GAO identified the following key themes that highlight the 

leadership and management strategies these organizations collectively 

considered in designing and managing market-based and more performanceoriented pay systems. 

1. Focus on a set of values and objectives to guide the pay system. 

Values represent an organization’s beliefs and boundaries and objectives 

articulate the strategy to implement the system. 

2. Examine the value of employees’ total compensation to remain 

competitive in the market. Organizations consider a mix of base pay plus 

other monetary incentives, benefits, and deferred compensation, such as 

retirement pay, as part of a competitive compensation system. 

3. Build in safeguards to enhance the transparency and ensure the 

fairness of pay decisions. Safeguards are the precondition to linking pay 

systems with employee knowledge, skills, and contributions to results. 

4. Devolve decision making on pay to appropriate levels. When

devolving such decision making, overall core processes help ensure 

reasonable consistency in how the system is implemented. 

5. Provide training on leadership, management, and interpersonal 

skills to facilitate effective communication. Such skills as setting 

expectations, linking individual performance to organizational results, and 

giving and receiving feedback need renewed emphasis to make such systems 

succeed. 

6. Build consensus to gain ownership and acceptance for pay reforms. 

Employee and stakeholder involvement needs to be meaningful and not pro 

forma.

7. Monitor and refine the implementation of the pay system. While 

changes are usually inevitable, listening to employee views and using metrics

helps identify and correct problems over time. 

These organizations found that the key challenge with implementing marketbased and more performance-oriented pay is changing the culture. To begin 

to make this change, organizations need to build up their basic management 

capacity at every level of the organization. Transitioning to these pay 

systems is a huge undertaking and will require constant monitoring and 

refining in order to implement and sustain the reforms. 

Critical to the success of the 

federal government’s 

transformation are its people—

human capital. Yet the government 

has not transformed, in many 

cases, how it classifies, 

compensates, develops, and 

motivates its employees to achieve 

maximum results within available 

resources and existing authorities. 

One of the questions being 

addressed as the federal 

government transforms is how to 

update its compensation system to 

be more market based and 

performance oriented. 

To further the discussion of federal 

pay reform, GAO, the U.S. Office of 

Personnel Management, the U.S. 

Merit Systems Protection Board, 

the National Academy of Public 

Administration, and the 

Partnership for Public Service 

convened a symposium on March 9, 

2005, to discuss organizations’ 

experiences with market-based and 

more performance-oriented pay 

systems. Representatives from 

public, private, and nonprofit 

organizations made presentations 

on the successes and challenges 

they experienced in designing and 

managing their market-based and 

more performance-oriented pay 

systems. A cross section of human 

capital stakeholders was invited to 

further explore these successes 

and challenges and engage in open 

discussion. While participants 

were asked to review the overall 

substance and context of the draft 

summary, GAO did not seek 

consensus on the key themes and 

supporting examples. 
Appendix I

Highlights of Selected GAO Reports

Page 18 GAO-06-142T 

www.gao.gov/cgi-bin/getrpt?GAO-04-83.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact J. Christopher 

Mihm at (202) 512-6806 or mihmj@gao.gov. 

Highlights of GAO-04-83, a report to 

congressional requesters 

January 2004

HUMAN CAPITAL

Implementing Pay for Performance at 

Selected Personnel Demonstration 

Projects

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, as shown in the table below. 

Demonstration Project Approaches to Implementing Pay for Performance 

Using competencies to evaluate employee performance. 

High-performing organizations use validated core competencies as a key part of evaluating 

individual contributions to organizational results. To this end, AcqDemo and NRL use core 

competencies for all positions. Other demonstration projects, such as NIST, DOC, and China 

Lake, use competencies based on the individual employee’s position. 

Translating employee performance ratings into pay increases and awards. 

Some projects, such as China Lake and NAVSEA’s Newport division, established predetermined 

pay increases, awards, or both depending on a given performance rating, while others, such as 

DOC and NIST, delegated the flexibility to individual pay pools to determine how ratings would 

translate into performance pay increases, awards, or both. The demonstration projects made 

some distinctions among employees’ performance. 

Considering current salary in making performance-based pay decisions. 

Several of the demonstration projects, such as AcqDemo and NRL, consider an employee’s 

current salary when making performance pay increases and award decisions to make a better 

match between an employee’s compensation and contribution to the organization. 

Managing costs of the pay for performance system. 

According to officials, salaries, training, and automation and data systems were the major cost 

drivers of implementing their pay for performance systems. The demonstration projects used a 

number of approaches to manage the costs. 

Providing information to employees about the results of performance appraisal and pay 

decisions. 

To ensure fairness and safeguard against abuse, performance-based pay programs should have 

adequate safeguards, including reasonable transparency in connection with the results of the 

performance management process. To this end, several of the demonstration projects publish 

information, such as the average performance rating, performance pay increase, and award. 

 Source: GAO. 

GAO strongly supports the need to expand pay for performance in the 

federal government. How it is done, when it is done, and the basis on which 

it is done can make all the difference in whether such efforts are successful. 

High-performing organizations continuously review and revise their 

performance management systems. These demonstration projects show an 

understanding that how to better link pay to performance is very much a 

work in progress at the federal level. Additional work is needed to 

strengthen efforts to ensure that performance management systems are tools 

to help them manage on a day-to-day basis. In particular, there are 

opportunities to use organizationwide competencies to evaluate employee 

performance that reinforce behaviors and actions that support the 

organization's mission, translate employee performance so that managers 

make meaningful distinctions between top and poor performers with 

objective and fact-based information, and provide information to employees 

about the results of the performance appraisals and pay decisions to ensure 

reasonable transparency and appropriate accountability mechanisms are in 

place. 

There is a growing understanding 

that the federal government needs 

to fundamentally rethink its current 

approach to pay and to better link 

pay to individual and organizational 

performance. Federal agencies 

have been experimenting with pay 

for performance through the Office 

of Personnel Management’s (OPM) 

personnel demonstration projects. 

GAO identified the approaches that 

selected personnel demonstration 

projects have taken to implement 

their pay for performance systems. 

These projects include: the Navy 

Demonstration Project at China 

Lake (China Lake), the National 

Institute of Standards and 

Technology (NIST), the 

Department of Commerce (DOC), 

the Naval Research Laboratory 

(NRL), the Naval Sea Systems 

Command Warfare Centers 

(NAVSEA) at Dahlgren and 

Newport, and the Civilian 

Acquisition Workforce Personnel 

Demonstration Project (AcqDemo). 

We selected these demonstration 

projects based on factors such as 

status of the project and makeup of 

employee groups covered. 

We provided drafts of this report to 

officials in the Department of 

Defense (DOD) and DOC for their 

review and comment. DOD 

provided written comments 

concurring with our report. DOC 

provided minor technical 

clarifications and updated 

information. We provided a draft 

of the report to the Director of 

OPM for her information. 
Appendix I

Highlights of Selected GAO Reports

Page 19 GAO-06-142T 

Public sector organizations both in the United States and abroad have 

implemented a selected, generally consistent set of key practices for 

effective performance management that collectively create a clear linkage—

“line of sight”—between individual performance and organizational success. 

These key practices include the following. 

1. Align individual performance expectations with organizational 

goals. An explicit alignment helps individuals see the connection between 

their daily activities and organizational goals. 

2. Connect performance expectations to crosscutting goals. Placing 

an emphasis on collaboration, interaction, and teamwork across 

organizational boundaries helps strengthen accountability for results. 

3. Provide and routinely use performance information to track 

organizational priorities. Individuals use performance information to 

manage during the year, identify performance gaps, and pinpoint 

improvement opportunities. 

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

requiring and tracking follow-up actions on performance gaps, organizations 

underscore the importance of holding individuals accountable for making 

progress on their priorities. 

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

Competencies define the skills and supporting behaviors that individuals 

need to effectively contribute to organizational results. 

6. Link pay to individual and organizational performance. Pay, 

incentive, and reward systems that link employee knowledge, skills, and 

contributions to organizational results are based on valid, reliable, and 

transparent performance management systems with adequate safeguards. 

7. Make meaningful distinctions in performance. Effective 

performance management systems strive to provide candid and constructive 

feedback and the necessary objective information and documentation to 

reward top performers and deal with poor performers. 

8. Involve employees and stakeholders to gain ownership of 

performance management systems. Early and direct involvement helps 

increase employees’ and stakeholders’ understanding and ownership of the 

system and belief in its fairness. 

9. Maintain continuity during transitions. Because cultural 

transformations take time, performance management systems reinforce 

accountability for change management and other organizational goals.

RESULTS-ORIENTED CULTURES

Creating a Clear Linkage between 

Individual Performance and 

Organizational Success 

www.gao.gov/cgi-bin/getrpt?GAO-03-488.

To view the full report, including the scope 

and methodology, click on the link above. 

For more information, contact J. Christopher 

Mihm at (202) 512-6806 or mihmj@gao.gov. 

Highlights of GAO-03-488, a report to 

congressional requesters 

March 2003

The federal government is in a 

period of profound transition and 

faces an array of challenges and 

opportunities to enhance 

performance, ensure 

accountability, and position the 

nation for the future. Highperforming organizations have 

found that to successfully 

transform themselves, they must 

often fundamentally change their 

cultures so that they are more 

results-oriented, customer-focused, 

and collaborative in nature. To 

foster such cultures, these 

organizations recognize that an 

effective performance management 

system can be a strategic tool to 

drive internal change and achieve 

desired results. 

Based on previously issued reports 

on public sector organizations’ 

approaches to reinforce individual 

accountability for results, GAO 

identified key practices that federal 

agencies can consider as they 

develop modern, effective, and 

credible performance management 

systems. 

(450448)
This is a work of the U.S. government and is not subject to copyright protection in the 

United States. It may be reproduced and distributed in its entirety without further 

permission from GAO. However, because this work may contain copyrighted images or 

other material, permission from the copyright holder may be necessary if you wish to 

reproduce this material separately. 
The Government Accountability Office, the audit, evaluation and 

investigative arm of Congress, exists to support Congress in meeting its 

constitutional responsibilities and to help improve the performance and 

accountability of the federal government for the American people. GAO 

examines the use of public funds; evaluates federal programs and policies; 

and provides analyses, recommendations, and other assistance to help 

Congress make informed oversight, policy, and funding decisions. GAO’s 

commitment to good government is reflected in its core values of 

accountability, integrity, and reliability. 

The fastest and easiest way to obtain copies of GAO documents at no cost 

is through GAO’s Web site (www.gao.gov). Each weekday, GAO posts 

newly released reports, testimony, and correspondence on its Web site. To 

have GAO e-mail you a list of newly posted products every afternoon, go 

to www.gao.gov and select “Subscribe to Updates.” 

The first copy of each printed report is free. Additional copies are $2 each. 

A check or money order should be made out to the Superintendent of 

Documents. GAO also accepts VISA and Mastercard. Orders for 100 or 

more copies mailed to a single address are discounted 25 percent. Orders 

should be sent to: 

U.S. Government Accountability Office 

441 G Street NW, Room LM 

Washington, D.C. 20548 

To order by Phone: Voice: (202) 512-6000 

TDD: (202) 512-2537 

Fax: (202) 512-6061 

Contact: 

Web site: www.gao.gov/fraudnet/fraudnet.htm 

E-mail: fraudnet@gao.gov

Automated answering system: (800) 424-5454 or (202) 512-7470 

Gloria Jarmon, Managing Director, JarmonG@gao.gov (202) 512-4400 

U.S. Government Accountability Office, 441 G Street NW, Room 7125 

Washington, D.C. 20548 

Paul Anderson, Managing Director, AndersonP1@gao.gov (202) 512-4800 

U.S. Government Accountability Office, 441 G Street NW, Room 7149 

Washington, D.C. 20548 

GAO’s Mission 

Obtaining Copies of 

GAO Reports and 

Testimony 

Order by Mail or Phone 

To Report Fraud, 

Waste, and Abuse in 

Federal Programs 

Congressional 

Relations 

Public Affairs 

PRINTED ON RECYCLED PAPER