GAO

United States Government Accountability Office

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

For Release on Delivery

Expected at 10:00 a.m. EDT

Tuesday, September 27, 2005

HUMAN CAPITAL

Designing and Managing 

Market-Based and More 

Performance-Oriented Pay 

Systems

Statement of David M. Walker

Comptroller General of the United States

GAO-05-1048T
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. 
Page 1 GAO-05-1048T 

Chairman Voinovich, Senator Akaka, and Members of the Subcommittee:

I appreciate the opportunity to be here today to discuss what has been 

learned from alternative personnel systems’ implementation of pay for 

performance. As the federal government transforms to be better 

positioned to address 21st century challenges, a key question is “How 

should the federal government update its compensation systems to be 

more market-based and performance-oriented?”1

 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. 

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. 

Recognizing that the federal government’s pay system does not align well 

with modern compensation principles, Congress has provided various 

agencies exemptions from current statute in performance management and 

pay administration.2

 Most recently, the Departments of Homeland Security 

(DHS) and Defense (DOD) received the authority to establish “flexible and 

contemporary” human capital and pay systems.3

 We at GAO have also 

received human capital authorities and strive to lead by example, 

especially in implementing more market-based and performance-oriented 

classification and compensation systems. 

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

government. To further the discussion of federal pay reform, GAO 

partnered with the U.S. Office of Personnel Management (OPM), the U.S. 

Merit Systems Protection Board, the National Academy of Public 

Administration, and the Partnership for Public Service and convened a 

1

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

2

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).

3

For more information on DHS’s and DOD’s human capital authorities, see 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).
Page 2 GAO-05-1048T 

symposium in March 2005 to discuss public, private, and nonprofit 

organizations’ successes and challenges with designing and managing 

market-based and more performance-oriented pay systems.4

 

While we believe that implementing market-based and more performanceoriented pay systems is both doable and desirable, these organizations’ 

experiences in designing and managing their pay systems underscored 

three key themes that can guide federal agencies’ efforts to better link pay 

with performance. 

• First, 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 is only one part—albeit a critical one—of a 

larger effort to improve the performance of an organization. 

• Second, 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. 

Specifically, these organizations recognize that pay increases are no 

longer an entitlement but should be based on employees’ contributions 

to the organization’s mission and goals. 

• Third, 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. In particular, there needs to be growth 

and development at every level of the organization: top leaders with the 

vision, commitment, capabilities, and persistence to lead and facilitate 

the change; managers with the skills and abilities to fairly and honestly 

assess employee performance; and individual employees who are 

engaged and empowered to seek opportunities to enhance their careers. 

4

The organizations included the Federal Deposit Insurance Corporation, Office of the 

Comptroller of the Currency, Commonwealth of Virginia, IBM Corporation, and American 

Red Cross. For more information, see 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 3 GAO-05-1048T 

Federal agencies have also been experimenting with pay for performance 

through OPM’s personnel demonstration projects authorized under Title 5. 

We reported that these demonstration projects show an understanding that 

linking pay to performance is very much a work in progress and that 

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.5

 

In particular, there are opportunities to 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 appraisal 

and pay decisions to ensure reasonable transparency and appropriate 

accountability mechanisms are in place, among other things.6

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 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 “high3” for retirement benefits and making contributions to the thrift savings 

plan. 

Nevertheless, we need to move forward with 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-size-fits-all” approach is not 

appropriate to each agency’s demands, challenges, and missions. However, 

we have reported that a reasonable degree of consistency across the 

5

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

Demonstration Projects, GAO-04-83 (Washington, D.C.: Jan. 23, 2004).

6

For more information on our review of OPM’s demonstration projects and other GAO 

human capital reports, see app. I.
Page 4 GAO-05-1048T 

government is still desirable and that broader reforms should be guided by 

a framework consisting of a common set of principles, criteria, and 

processes.7

 

Before implementing any human capital reforms, executive branch 

agencies should follow a phased approach that meets the “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 

demonstrated institutional infrastructure and an independent certification 

by OPM 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.

GAO will continue to work with Congress, OPM, and other key 

stakeholders on future human capital reforms. This morning I will 

highlight the strategies that organizations considered in designing and 

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

how they are implementing them. These organizations include selected 

OPM demonstration projects, organizations presenting at the symposium, 

and GAO.

Strategies for 

Designing and 

Managing MarketBased and More 

Performance-Oriented 

Pay Systems

Even though people are critical to an agency’s successful transformation, a 

number of agencies still try to manage their people with a “one-size-fits-all” 

approach to compensation. For example, employees are compensated 

through an outmoded system that (1) rewards length of service rather than 

individual performance and contributions; (2) automatically provides 

across-the-board annual pay increases, even to poor performers; and 

(3) compensates employees living in various localities without adequately 

considering the local labor market rates for these employees. We have 

7

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 5 GAO-05-1048T 

observed that a competitive compensation system can help organizations 

attract and retain a quality workforce. To develop such a system, 

organizations assess the skills and knowledge they need; compare 

compensation against other public, private, or nonprofit entities competing 

for the same talent in a given locality; and classify positions along levels of 

responsibility. 

The strategies that the organizations at our symposium considered in 

designing and managing market-based and more performance-oriented pay 

systems and examples of how organizations are implementing them are as 

follows.

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

Organizations need to focus on a set of values and objectives when 

designing and managing their market-based and more performanceoriented pay systems. Values are inherent and enduring principles that 

represent the organization’s beliefs and boundaries. For example, GAO’s 

core values—accountability, integrity, and reliability—were a focus in 

identifying and validating the competencies for our new performance 

management system. With authority from Congress, we have implemented 

a market-based compensation system that places greater emphasis on a 

person’s skills, knowledge, and job performance and not the passage of 

time while, at a minimum, protecting the purchasing power of employees 

who are performing acceptably and are paid within competitive 

compensation ranges. Under the new market-based pay system, which is in 

the first phase of implementation, employee compensation now considers 

current salary and allocates individual performance-based compensation 

amounts between a merit increase (i.e., salary increase) and a performance 

bonus (i.e., cash). In addition, we received authority from Congress to 

adjust the rates of basic pay on a separate basis from the annual 

adjustments authorized for employees in the executive branch. We also 

recently finalized a performance-based compensation system with pay 

banding for the remainder of GAO’s workforce, the administrative 

professional and support staff. 

While core values define the organization’s beliefs and boundaries, 

objectives articulate the strategy the organization plans to take to 

implement a market-based and more performance-oriented pay system to 

help it recognize and reward employees and maintain a competitive 

position in the market. For example, the Red Cross recognizes that salary is 

its main lever to fulfill its mission and values, and thus one of its objectives 

is to pay salaries that are externally competitive and internally equitable. To 
Page 6 GAO-05-1048T 

meet this objective, the Red Cross sets its employees’ pay slightly higher 

than the market in order to remain competitive and attract, motivate, and 

retain its employees. Similarly, a main objective of the Office of the 

Comptroller of the Currency’s (OCC) pay system is to maintain 

comparability regarding compensation and benefits with the other federal 

financial regulatory agencies, such as the Federal Deposit Insurance 

Corporation (FDIC) and the U.S. Securities and Exchange Commission. To 

maintain comparability in compensation and benefits, OCC participates in 

an annual survey that gathers information and data on the financial 

regulatory agencies’ total compensation packages. This information helps 

OCC set its pay increase budget for the next year based on the average pay 

for its market. 

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

competitive in the market. The organizations at our symposium found 

that it is important to be flexible in the mix of what constitutes total 

compensation so they can remain competitive with the market. 

Organizations should 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. For example, to help it 

compete in the market and retain its employees, IBM offers its employees a 

“total rewards” package including work-life benefits such as tuition 

reimbursement for employee development, along with retirement and 

health care benefits. 

At GAO, we believe that providing employees with individualized total 

compensation summary statements each year helps provide clarity on the 

employees’ total compensation packages and specifically, how employees’ 

pay increases received during the year fit into their total compensation. 

The annual summary statements include GAO’s contributions to 

employees’ benefits, incentives and other awards, and other GAO paid or 

subsidized benefits. The statements include items such as student loan 

repayments and transit subsidies, as well as adjustments to employees’ pay, 

such as across-the-board salary adjustments, performance-based pay 

adjustments, and promotion-related increases. 

Transparency is becoming an urgent matter today as federal agencies face 

tough choices ahead managing the serious and growing long-term fiscal 

challenges facing the nation. We recently reported that DOD’s historical 

piecemeal approach to military compensation has resulted in a lack of 

transparency that creates an inability to, for example, assess the allocation 
Page 7 GAO-05-1048T 

of total compensation investments to cash and benefits.8 In order to help 

improve the transparency over total compensation, we recommended that 

DOD develop a comprehensive communication and education plan to 

inform servicemembers of the value of their pay and benefits and the 

competitiveness of their total compensation package when compared to 

their civilian counterparts that could be used as a recruiting and retention 

tool. 

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

the fairness of pay decisions. Agencies need to have modern, effective, 

credible, and as appropriate validated performance management systems 

in place with adequate safeguards to ensure fairness and prevent 

politicization and abuse. These systems are the precondition to linking pay, 

incentive, and reward systems with employee knowledge, skills, and 

contributions to organizational results. 

GAO’s performance management and pay system has built in numerous 

safeguards, including multiple levels of review, to ensure consistency and 

fairness in the process and resulting decisions. Specifically, before 

performance ratings are finalized, they receive second-level reviews, 

typically by a senior executive within the employee’s team. This reviewer 

checks if raters have consistently and reasonably applied the performance 

standards. Subsequently, the Human Capital Office and the Office of 

Opportunity and Inclusiveness review the performance ratings and pay 

decisions across all of GAO to determine whether there are any 

irregularities or potential adverse impacts to be addressed. To further help 

ensure consistency in ratings and in applying performance standards 

within and across GAO’s teams, we implemented standardized rating 

scores (SRS) for employees for the first time in the fiscal year 2004 

performance appraisal cycle. The SRS indicates the employee’s position 

relative to the average rating of that employee’s team. Employees in 

different teams with the same SRS have the same relative performance, 

thus achieving better comparability in ratings across teams. Employees’ 

SRS and the midpoint for their pay range are key factors in calculating their 

performance-based compensation for that year. We are continually 

working with the employees to identify the best way to communicate the 

8

GAO, Military Personnel: DOD Needs to Improve the Transparency and Reassess the 

Reasonableness, Appropriateness, Affordability, and Sustainability of Its Military 

Compensation System, GAO-05-798 (Washington, D.C.: July 19, 2005).
Page 8 GAO-05-1048T 

SRS information as part of GAO’s ongoing commitment to employee 

feedback on the new system and transparency about pay decisions. 

IBM built in several accountability mechanisms to help achieve consistency 

and equity in pay decisions across employee groups and teams. For 

example, to help ensure there is no discrimination in pay decisions, IBM 

conducts a base pay equity analysis to review the pay of women or minority 

employees if their proposed pay is one standard deviation away from the 

mean of the majority of employees and looks for an explanation for these 

pay differences, such as poor performance, a recent promotion into the pay 

band, or an extended leave of absence. In addition, IBM built in secondlevel reviews of pay decisions before employees receive any pay increases 

to ensure consistency in the compensation process. The first-line 

managers discuss their proposed pay decisions with managers at the next 

level—the up-line managers—to ensure the performance assessments and 

justifications are consistent across groups. Up-line managers can also shift 

pay allocations across groups if necessary in order to ensure employees 

who perform similarly are compensated the same regardless of their firstline managers. As a final check, the senior managers sign off on the pay 

decisions for each employee. 

To help provide transparency on how employees’ performance compares to 

the rest of the organization, we previously reported that the Naval Sea 

Systems Command Warfare Center’s Newport division publishes the results 

of its annual performance cycle. Newport aggregates the data so that no 

individual employee’s rating or payout can be determined to protect 

confidentiality. Employees can compare their performance rating category 

against others in the same unit, other units, and the entire division. 

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

implementing market-based and more performance-oriented pay systems, 

organizations need to determine what parts of their pay systems should be 

maintained centrally and what parts can be devolved to “lower” levels of 

the organization. When devolving these types of decisions, organizations 

have maintained overall core processes to help ensure reasonable 

consistency in how the systems are implemented. 

Virginia shifted the responsibility for administering pay from its central 

office to the commonwealth’s agencies and their managers as part of its 

compensation reforms and developed core processes outlining how 

agencies should develop and implement their pay systems. Specifically, 

Virginia developed a salary plan that provides broad guidelines regarding 
Page 9 GAO-05-1048T 

the commonwealth’s overall compensation philosophy, funding for pay 

increases, and the pay ranges for the employees’ positions that reflect 

market conditions. Each agency is held accountable for developing its own 

salary administration plan which is approved by the central office prior to 

being implemented. As part of this plan, the agency is to select from among 

designated “pay practices” that it considers useful to best meet its specific 

needs, such as promotions or in-band pay adjustments to recognize 

employees for taking on additional duties.

5. Provide training on leadership, management, and interpersonal 

skills to facilitate effective communication. We have reported that 

training and developing new and current staff to fill new roles and work in 

different ways will play a crucial part in the federal government’s 

endeavors to meet its transformation challenges.9

 Agencies will need to 

invest resources to ensure that employees have the information, skills, and 

competencies they need to work effectively in a rapidly changing and 

complex environment. 

Organizations found that training employees and managers on performance 

management skills, such as setting expectations, linking individual 

performance to organizational results, and effectively giving and receiving 

feedback, as well as placing an emphasis on communicating the content of 

the pay reforms in a simple and clear format, are needed to make marketbased and more performance-oriented pay succeed. For example, FDIC 

emphasized the importance of training its managers on how to make the 

necessary distinctions in ratings and pay since it found that some managers 

have trouble making the distinctions and would prefer to give all 

employees the same pay increase. 

Virginia found that employees needed the information on its compensation 

reforms in as simple and clear a format as possible without using technical 

compensation terms or “HR” terminology. As a result, Virginia used its 

Employee Advisory Committee to help develop training and supporting 

materials on the compensation reform initiatives and communicate the 

information to the other employees. Virginia found that using the 

committee was very effective and allowed employees to better understand 

how the reforms would affect them directly. 

9

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

in the Federal Government, GAO-04-546G (Washington, D.C.: March 2004). 
Page 10 GAO-05-1048T 

Regarding the frequency of the training, we found that the OPM pay for 

performance demonstration projects trained employees on the 

performance management system prior to implementation to make 

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

implementation to refresh employee familiarity with the system. For 

example, the Civilian Acquisition Workforce Personnel Demonstration 

Project (AcqDemo) found that, in addition to training prior to 

implementation, it needed more in-depth and varied training in later years 

for current AcqDemo employees to refresh their proficiency in the system; 

for new participants to familiarize them with appraisal and payout 

processes; as well as for senior management, pay pool managers and 

members, and human resources personnel to give them greater detail on 

the process. The training prior to implementation and throughout the 

project was designed to help employees understand competencies and 

performance standards; develop performance plans; write self-appraisals; 

become familiar with how performance is evaluated and how pay increases 

and awards decisions are made; and know the roles and responsibilities of 

managers, supervisors, and employees in the appraisal and payout 

processes. 

Virginia defined a new role for its employees by holding them accountable 

for identifying the training they need to enhance the skills necessary to 

develop their careers. For example, Virginia developed career guides to 

inform employees on what they may personally need to do to develop, 

advance, or change their careers. The guides provide important 

occupational information for employees interested in developing their 

careers and improving opportunities for advancement in any work 

environment. Virginia found that an added benefit is that these career 

guides help employees understand that they have knowledge, skills, and 

abilities that cut across different occupations and are transferable across 

the commonwealth’s government. 

6. Build consensus to gain ownership and acceptance for pay 

reforms. Involving employees and other stakeholders helps to improve 

overall confidence and belief in the fairness of the system, enhance their 

understanding of how the system works, and increase their understanding 

and ownership of organizational goals and objectives. Organizations have 

found that the inclusion of employees and their representatives needs to be 

meaningful, not just pro forma. 

At GAO, to obtain direct feedback from employees, we created the elected 

Employee Advisory Council (EAC) to serve as an advisory body to the 
Page 11 GAO-05-1048T 

Comptroller General and other senior executives on management and 

employee issues. Comprising employees who represent a cross-section of 

the agency, the EAC’s participation is an important source of front-end 

input and feedback on our human capital and other major management 

initiatives. Specifically, EAC members convey the views and concerns of 

the groups they represent, while remaining sensitive to the collective best 

interest of all GAO employees; propose solutions to concerns raised by 

employees; provide input to and comment on GAO policies, procedures, 

plans, and practices; and help to communicate management’s issues and 

concerns to employees. Similarly, FDIC found that in its experience it was 

better to have the union involved in the implementation of its pay reforms. 

When negotiating compensation for its bargaining unit employees with 

representatives of the National Treasury Employees Union, FDIC views 

them as true partners instead of following an “us versus them” approach. 

FDIC noted that both parties want to work together to reach an agreement 

in terms of compensation levels that will satisfy them.

In designing its compensation reforms, Virginia involved stakeholders, 

such as representatives from Virginia’s legislative and executive branches, 

as well as human resource representatives from private sector 

organizations. Virginia also formed an Employee Advisory Committee of 

nonsupervisory employees from diverse occupations, demographic groups, 

and geographic locations to help the commonwealth as a whole improve its 

compensation program, not just for their select interest groups. Further, to 

implement the compensation reforms, Virginia developed implementation 

teams—composed of human resource staff across the agencies—to help 

ensure the details of the compensation reforms were consistently 

communicated to all the employees across the commonwealth. The teams 

represented various priority areas, such as funding, compensation 

management, performance management, training, and communications. 

7. Monitor and refine the implementation of the pay system. Highperforming organizations understand they need to continuously review and 

revise their performance management systems to achieve results and 

accelerate change. These organizations continually review and revise their 

human capital management systems based on data-driven lessons learned 

and changing needs in the environment. We have reported that agencies 

seeking human capital reform should consider doing evaluations that are 

broadly modeled on the evaluation requirements of the OPM 
Page 12 GAO-05-1048T 

demonstration projects.10 Under the demonstration project authority, 

agencies must evaluate and periodically report on results, implementation 

of the demonstration project, cost and benefits, impacts on veterans and 

other equal employment opportunity groups, adherence to merit system 

principles, and the extent to which the lessons from the project can be 

applied governmentwide. Such an evaluation could facilitate congressional 

oversight; allow for any midcourse corrections; assist the agency in 

benchmarking its progress with other efforts; and provide for documenting 

best practices and sharing lessons learned with employees, stakeholders, 

other federal agencies, and the public.

For example, at GAO, we recently saw the need to restructure part of our 

pay banding system to better reflect real differences in responsibilities and 

competencies as well as respective pay within the pay band for our senior 

analysts by creating two sub-band categories. To begin the process of this 

restructuring effort, GAO formed task teams to study and develop 

proposals, and engaged employees by holding town hall meetings, focus 

groups, meeting with employee representatives, and having a review and 

comment period for each phase of the restructuring. 

Organizations monitor their systems by listening to employees’ and 

stakeholders’ views—informally and formally—on the pay systems. FDIC 

found that listening to the “level of noise” among employees and 

stakeholders, such as the union, is essential in evaluating whether a new 

initiative is working or not. To track employee views, IBM sends out a 

pulse survey quarterly with only a few questions on the compensation 

program to a sample of its 300,000 employees. IBM believes it is doing well 

in implementing the program if over 70 percent of the employees’ 

responses to these questions are “neutral” or “favorable.” When 

consolidating its classification structure, Virginia made some revisions as a 

result of employee feedback so that employees could more easily see 

where they fit into the structure. Virginia plans to continually monitor the 

structure and identify needed refinements by soliciting employee feedback 

at least annually. 

Organizations also use other metrics as an indicator of the employees’ 

acceptance of pay and performance management decisions to track the 

effectiveness of their pay systems. For example, IBM tracks its attrition 

rates to determine why employees are leaving and compares them to its 

10GAO-05-69SP.
Page 13 GAO-05-1048T 

competitors’ attrition rates. Virginia tracks the number of employee 

grievances and works with managers to educate them on what the metrics 

mean and how they affect their agencies and employees. 

Monitoring the implementation of new pay systems is important because 

unintended consequences may arise. Organizations have found they 

should be open to refining their systems. For example, in order to spread 

the pay increases among as many employees as possible, FDIC found that 

managers tended not to award merit pay increases to top-performing 

employees when they were to be promoted in the career ladder and as a 

result, these high-performing employees were not getting the merit pay 

increases they deserved. FDIC recognized that this unintended 

consequence needed to be corrected in future iterations of the pay system 

and managers needed help in learning how to make the necessary 

distinctions in employees’ contributions. 

While the need for refining the system is inevitable, organizations found 

that there is value in stabilizing the pay system for a period of time to let 

employees get accustomed to the new initiative and see how it works. For 

example, OCC plans to reassess its labor market pay differentials every 3 

years rather than annually to provide continuity in implementing the 

system. This continuity benefits employees because they know how much 

their geographic differential will be for a period of time and benefits OCC 

because it makes managing the pay system more stable. 

Next Steps for ResultsOriented Pay and 

Human Capital Reform

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

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

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

maximize the performance within available resources and assure the 

accountability of the federal government for the benefit of the American 

people. While reasonable people can and will disagree about the merits of 

individual reform proposals, there is widespread recognition that pay 

increases are no longer an entitlement but should be based on employees’ 

contributions to the organization’s mission and goals. Experience shows 

that this shift to market-based and more performance-oriented pay must be 

part of a broader strategy of change management and performance 

improvement initiatives and cannot be simply overlaid on most 

organizations’ existing performance management systems. Before 

implementing any pay reform, each executive branch agency should have 

demonstrated and OPM should have certified that the agency has in place 
Page 14 GAO-05-1048T 

the institutional infrastructure to help ensure that this reform is effectively 

and equally implemented. 

We need to move forward with human capital reforms. In the short term, 

such reforms could include select and targeted authorities, such as 

prohibiting guaranteed pay increases for persons who do not perform at 

acceptable levels; allowing agency heads to make a limited number of term 

appointments awarded noncompetitively; and rightsizing and restructuring 

that can place additional emphasis on factors such as knowledge, skills, 

and performance. As momentum continues to accelerate to make strategic 

human capital management the centerpiece of the government’s overall 

management transformation effort, comprehensive reforms should be 

guided by a framework consisting of a common set of principles, criteria, 

and processes.

Chairman Voinovich, Senator Akaka, 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 Janice Latimer and Katherine H. Walker.
Page 15 GAO-05-1048T 

Appendix I

“Highlights” of Selected GAO Reports ApendxiI

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 16 GAO-05-1048T 

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 17 GAO-05-1048T 

What Participants Said

United States Government Accountability Office

Why GAO Convened This 

Forum

Highlights

Accountability Integrity Reliability

www.gao.gov/cgi-bin/getrpt?GAO-05-69SP 

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-05-69SP

December 2004

HIGHLIGHTS OF A FORUM 

Human Capital: Principles, Criteria, and 

Processes for Governmentwide Federal 

Human Capital Reform 

Forum participants discussed (1) Should there be a governmentwide 

framework for human capital reform? and (2) If yes, what should a 

governmentwide framework include? 

There was widespread recognition that a “one size fits all” approach to 

human capital management is not appropriate for the challenges and 

demands government faces. However, there was equally broad agreement 

that there should be a governmentwide framework to guide human capital 

reform built on a set of beliefs that entail fundamental principles and 

boundaries that include criteria and processes that establish the checks and 

limitations when agencies seek and implement their authorities. While there 

were divergent views among the participants, there was general agreement 

that the following served as a starting point for further discussion in 

developing a governmentwide framework to advance needed human capital 

reform.

Principles 

• 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 

• 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 ensure equity and prevent 

discrimination 

Processes 

• 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

There is widespread agreement 

that the federal government faces a 

range of challenges in the 21st

century that it must confront to 

enhance performance, ensure 

accountability, and position the 

nation for the future. Federal 

agencies will need the most 

effective human capital systems to 

address these challenges and 

succeed in their transformation 

efforts during a period of likely 

sustained budget constraints. 

More progress in addressing human 

capital challenges was made in the 

last 3 years than in the last 20, and 

significant changes in how the 

federal workforce is managed are 

underway. 

On April 14, 2004, GAO and the 

National Commission on the Public 

Service Implementation Initiative 

hosted a forum with selected 

executive branch officials, key 

stakeholders, and other experts to 

help advance the discussion 

concerning how governmentwide 

human capital reform should 

proceed. 
Appendix I

“Highlights” of Selected GAO Reports

Page 18 GAO-05-1048T 

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. 
Appendix I

“Highlights” of Selected GAO Reports

Page 19 GAO-05-1048T 

What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

www.gao.gov/cgi-bin/getrpt?GAO-05-798.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Derek Stewart 

at (202) 512-5559 or stewartd@gao.gov. 

Highlights of GAO-05-798, a report to 

congressional committees 

July 2005

MILITARY PERSONNEL

DOD Needs to Improve the Transparency 

and Reassess the Reasonableness, 

Appropriateness, Affordability, and 

Sustainability of Its Military 

Compensation System

DOD’s historical piecemeal approach to military compensation has resulted 

in a lack of transparency that creates an inability to (1) identify the total cost 

of military compensation to the U.S. government and (2) assess the 

allocation of total compensation investments to cash and benefits. No single 

source exists to show the total cost of military compensation, and tallying 

the full cost requires synthesizing about a dozen information sources from 

four federal departments and the Office of Management and Budget. Without 

adequate transparency, decision makers do not have a true picture of what it 

costs to compensate servicemembers. They also lack sufficient information 

to identify long-term trends, determine how best to allocate available 

resources to ensure the optimum return on compensation investments, and 

better assess the efficiency and effectiveness of DOD’s current 

compensation system in meeting recruiting and retention goals. To address 

this and other major business transformation challenges in a more strategic 

and integrated fashion, GAO recently recommended the creation of a chief 

management official at DOD. 

Transparency over military compensation is critical because costs to provide 

compensation are substantial and rising, with over half of the costs allocated 

to noncash and deferred benefits. In fiscal year 2004, it cost the federal 

government about $112,000, on average, to provide annual compensation to 

active duty enlisted and officer personnel. Adjusted for inflation, the total 

cost of providing active duty compensation increased about 29 percent from 

fiscal year 2000 to fiscal year 2004, from about $123 to $158 billion. During 

this time, health care was one of the major cost drivers, increasing 69 

percent to about $23 billion in fiscal year 2004. In addition, military 

compensation is weighted more toward benefits compared with other 

government and private sector civilian compensation systems. Furthermore, 

less than one in five service members will serve 20 years of active duty 

service to become eligible for retirement benefits. Increasing compensation 

costs make the need to address the appropriateness and reasonableness of 

the compensation mix and the long-term affordability and sustainability of 

the system more urgent. 

DOD survey results and analysis of GAO focus groups and survey data have 

shown that servicemembers are dissatisfied and harbor misperceptions 

about their pay and benefits in part because DOD does not effectively 

educate them about the competitiveness of their total compensation 

packages. About 80 percent of the 400 servicemembers that GAO surveyed 

believed they would earn more as civilians; in contrast, a 2002 study showed 

that servicemembers generally earn more cash compensation alone than 70 

percent of like-educated civilians. Servicemembers also expressed confusion 

over aspects of their compensation, like retirement, and many complained 

that benefits were eroding despite recent efforts by Congress and DOD to 

enhance pay and benefits. By not systematically educating servicemembers 

about the value of their total compensation, DOD is essentially allowing a 

culture of dissatisfaction and misunderstanding to perpetuate.

Over the years, the Department of 

Defense’s (DOD) military 

compensation system has become 

an increasingly complex and 

piecemeal accretion of pays, 

allowances, benefits, and special 

tax preferences. DOD leaders have 

expressed concern that rising 

compensation costs may not be 

sustainable in the future and could 

crowd out other important 

investments needed to recapitalize 

equipment and infrastructure. 

Given the looming fiscal challenges 

facing the nation in the 21st century, 

GAO believes it is time for a 

baseline review of all federal 

programs to ensure that they are 

efficiently meeting their objectives. 

Under the Comptroller General’s 

authority, GAO (1) assessed 

whether DOD’s approach to 

compensation provides adequate 

transparency over costs; (2) 

identified recent trends in active 

duty compensation, and how costs 

have been allocated to cash and 

benefits; and (3) reviewed how 

active duty servicemembers 

perceive their compensation and 

whether DOD has effectively 

explained the value of the military 

compensation package to its 

members. 

What GAO Recommends

GAO is making a number of 

recommendations to improve the 

transparency, reasonableness, 

appropriateness, affordability, and 

sustainability of the military 

compensation system. DOD 

generally concurred with GAO’s 

recommendations. 

(450447)
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