Testimony 

Before the Subcommittee on Civil Service and 

Agency Organization, Committee on Government 

Reform, House of Representatives 

United States General Accounting Office 

GAO

For Release on Delivery 

Expected at 10:00 a.m. EDT 

Tuesday, April 29, 2003 DEFENSE 

TRANSFORMATION 

Preliminary Observations 

on DOD’s Proposed Civilian 

Personnel Reforms 

Statement of David M. Walker, 

Comptroller General of the United States 

GAO-03-717T 
Many of the basic principles underlying DOD’s civilian human capital proposals 

have merit and deserve serious consideration. The federal personnel system is 

clearly broken in critical respects—designed for a time and workforce of an 

earlier era and not able to meet the needs and challenges of our current rapidly 

changing and knowledge-based environment. DOD’s proposal recognizes that, 

as GAO has stated and the experiences of leading public sector organizations 

here and abroad have found strategic human capital management must be the 

centerpiece of any serious government transformation effort. 

More generally, from a conceptual standpoint, GAO strongly supports the need 

to expand broad banding and pay for performance-based systems in the federal 

government. However, moving too quickly or prematurely at DOD or elsewhere, 

can significantly raise the risk of doing it wrong. This could also serve to 

severely set back the legitimate need to move to a more performance and 

results- based system for the federal government as a whole. Thus, while it is 

imperative that we take steps to better link employee pay and other personnel 

decisions to performance across 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 

or not we are successful. In our view, one key need is to modernize 

performance management systems in executive agencies so that they are 

capable of supporting more performance-based pay and other personnel 

decisions. Unfortunately, based on GAO’s past work, most existing federal 

performance appraisal systems, including a vast majority of DOD’s systems, are 

not currently designed to support a meaningful performance-based pay system. 

The critical questions to consider are: should DOD and/or other agencies be 

granted broad-based exemptions from existing law, and if so, on what basis; and 

whether they have the institutional infrastructure in place to make effective use 

of the new authorities. This institutional infrastructure includes, at a minimum, 

a human capital planning process that integrates the agency’s human capital 

policies, strategies, and programs with its program goals and mission, and 

desired outcomes; the capabilities to effectively develop and implement a new 

human capital system; and, importantly, a set of adequate safeguards, including 

reasonable transparency and appropriate accountability mechanisms to ensure 

the fair, effective, and credible implementation of a new system. 

In our view, Congress should consider providing governmentwide broad banding 

and pay for performance authorities that DOD and other federal agencies can 

use provided they can demonstrate that they have a performance management 

system in place that meets certain statutory standards, which can be certified to 

by a qualified and independent party, such as OPM, within prescribed 

timeframes. Congress should also consider establishing a governmentwide fund 

whereby agencies, based on a sound business case, could apply for funding to 

modernize their performance management systems and ensure that those 

systems have adequate safeguards to prevent abuse. This approach would serve 

as a positive step to promote high-performing organizations throughout the 

federal government while avoiding fragmentation within the executive branch in 

the critical human capital area. 

 

DEFENSE TRANSFORMATION 

Preliminary Observations on DOD’s 

Proposed Civilian Personnel Reforms 

www.gao.gov/cgi-bin/getrpt?GAO-03-717T.

To view the full report, 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-03-717T, testimony 

before the Subcommittee on Civil Service 

and Agency Organization, Committee on 

Government Reform, House of 

Representatives 

April 29, 2003

DOD is in the midst of a major 

transformation effort including a 

number of initiatives to transform 

its forces and improve its business 

operations. DOD’s legislative 

initiative would provide for major 

changes in the civilian and military 

human capital management, make 

major adjustments in the DOD 

acquisition process, affect DOD’s 

organization structure, and change 

DOD’s reporting requirements to 

Congress, among other things. 

DOD’s proposed National Security 

Personnel System (NSPS) would 

provide for wide-ranging changes 

in DOD’s civilian personnel pay and 

performance management, 

collective bargaining, rightsizing, 

and a variety of other human 

capital areas. The NSPS would 

enable DOD to develop and 

implement a consistent DOD-wide 

civilian personnel system. 

This testimony provides GAO’s 

preliminary observations on 

aspects of DOD’s legislative 

proposal to make changes to its 

civilian personnel system and 

poses critical questions that need 

to be considered. 
Page 1 GAO-03-717T 

Chairwoman Davis, Mr. Davis, and Members of the Subcommittee: 

It is a pleasure to appear before you today to provide our preliminary 

observations on the Department of Defense’s (DOD) proposed National 

Security Personnel System (NSPS) included as part of the Defense 

Transformation for the 21st Century Act of 2003. As you know, DOD is in 

the midst of a major transformation and it has undertaken a number of 

related initiatives to transform its forces and fundamentally improve its 

business operations. As part of DOD’s transformation process, the 

Secretary of Defense and senior civilian and military leaders have 

committed to adopt a capabilities-based approach to acquisition planning 

and to improve the linkage between overall strategy and individual 

investments. At the same time, DOD has embarked on a series of efforts to 

achieve strategic savings and improve its business processes, including 

financial management, support infrastructure reforms to include base 

closures, information technology modernization, logistics reengineering, 

and strategic human capital management. In that regard, I am pleased to 

serve as an observer to the Defense Business Practice Implementation 

Board. Notwithstanding these ongoing efforts, GAO has reported a range 

of DOD challenges for many years. In addition, DOD also is covered by 

several of GAO’s governmentwide high-risk areas, including the area of 

strategic human capital management. 

The proposed Defense Transformation for the 21st Century Act of 2003 

represents a substantive legislative proposal that has both significant 

precedent-setting implications for the government and far-reaching 

implications on the way DOD is managed. Specifically, the critical 

questions are whether DOD and/or other agencies should be granted 

broad-based exemptions from existing law, and if so, on what basis; and 

do agencies have the institutional infrastructure in place to make effective 

use of the new authorities they are seeking. DOD’s legislative initiative 

would, among other things, provide for major changes in civilian and 

military human capital management, make important adjustments to the 

DOD acquisition process, affect DOD’s organization structure, and change 

DOD’s reporting requirements to Congress. 

As a starting point, and as agreed with the Subcommittee, today I will 

provide our preliminary observations on DOD’s legislative proposal to 

make changes to its civilian personnel system. The proposed NSPS would 

provide for wide-ranging changes in DOD’s civilian personnel pay and 

performance management, collective bargaining, rightsizing, and a variety 

of other human capital areas. The NSPS would enable DOD to develop and 

implement a consistent, DOD-wide civilian personnel system bringing 
Page 2 GAO-03-717T 

together the many disparate systems that exist today. The proposal, while 

providing a section-by-section analysis, does not provide an adequate 

justification given the significance of the proposed changes. In addition, it 

is my understanding that a document containing a fully developed 

justification for the proposed changes is not available. At the same time, it 

our understanding that DOD’s current thinking is that NSPS will be based 

on the work done by DOD’s Human Resources Best Practices Task Force. 

The Task Force reviewed federal personnel demonstration projects and 

selected alternative personnel systems to identify practices that it 

considered promising for a DOD civilian human resources strategy. These 

practices were outlined in a April 2, 2003, Federal Register notice asking 

for comment on DOD’s plan to integrate all of its current science and 

technology reinvention laboratory demonstration projects under a single 

human capital framework consistent with the best practices DOD 

identified.1

Many of the basic principles underlying DOD’s civilian human capital 

proposals have merit and deserve serious consideration. The federal 

personnel system is clearly broken in critical respects—designed for a 

time and workforce of an earlier era and not able to meet the needs and 

challenges of our current rapidly changing and knowledge-based 

environment. DOD’s proposal recognizes that, as GAO has stated and the 

experiences of leading public sector organizations here and abroad have 

found, strategic human capital management must be the centerpiece of 

any serious government transformation effort. 

Human capital reforms at DOD obviously have important implications for 

national security. However, given the massive size of DOD and the nature 

and scope of the changes that are being considered, DOD’s proposal also 

has important precedent-setting implications for federal human capital 

management generally and should also be considered in that context. The 

critical questions raised are should DOD and/or other agencies be granted 

broad-based exemptions from existing law, and if so, on what basis; and 

whether they have the institutional infrastructure in place to make 

effective use of the new authorities. This institutional infrastructure 

includes, at a minimum, a human capital planning process that integrates 

the agency’s human capital policies, strategies, and programs with its 

program goals and mission, and desired outcomes; the capabilities to 

effectively develop and implement a new human capital system; and 

 1

68 Fed. Reg. 16,119-16,142 (2003). 
Page 3 GAO-03-717T 

importantly a set of adequate safeguards, including reasonable 

transparency and appropriate accountability mechanisms, to ensure the 

fair, effective, and credible implementation and application of a new 

system. 

Consistent with this view, we have long held that the first step toward 

meeting the government’s human capital challenges is for agency leaders 

to identify and make use of all the appropriate administrative authorities 

available to them to manage their people for results, undertaken as part of 

and consistent with proven change management practices. Much of the 

authority agency leaders need to manage human capital strategically is 

already available under current laws and regulations. This includes the 

ability to develop modern, effective, and credible performance 

management systems that would support more performance-based pay 

decisions. The second step is for policymakers to pursue incremental 

legislative reforms to give agencies additional tools and flexibilities to hire, 

manage, and retain the human capital they need, particularly in critical 

occupations. The third step is for all interested parties to work together to 

identify, based in part on the experiences of the incremental reforms and 

demonstration projects, the kinds of comprehensive legislative reforms in 

the human capital area that should be enacted over time, taking into 

account the extent to which existing approaches make sense in the 

current and future operating environment. 2

With almost 700,000 civilian employees on its payroll, DOD is the second 

largest federal employer of civilians in the nation, after the Postal Service. 

Defense civilian personnel, among other things, develop policy, provide 

intelligence, manage finances, and acquire and maintain weapon systems. 

Given the current global war on terrorism, the role of DOD’s civilian 

workforce is expanding, such as participation in combat support functions 

that free military personnel to focus on warfighting duties for which they 

are uniquely qualified. Civilian personnel are also key to maintaining 

DOD’s institutional knowledge because of frequent rotations of military 

personnel. However, since the end of the Cold War, the civilian workforce 

has undergone substantial change, due primarily to downsizing, base 

realignments and closures, competitive sourcing initiatives, and DOD’s 

changing missions. For example, between fiscal years 1989 and 2002, DOD 

 2

U.S. General Accounting Office, Human Capital: Building on the Current Momentum to 

Address High-Risk Issues, GAO-03-637T (Washington, D.C.: April 8, 2003). 

Observations on 

Selected Provisions of 

the Proposed NSPS 
Page 4 GAO-03-717T 

reduced its civilian workforce by about 38 percent, with an additional 

reduction of about 55,000 personnel proposed through fiscal year 2007. 

Some DOD officials have expressed concern about a possible shortfall of 

critical skills because downsizing has resulted in a significant imbalance in 

the shape, skills, and experience of its civilian workforce while more than 

50 percent of the civilian workforce will become eligible to retire in the 

next 5 years. As a result, the orderly transfer of DOD’s institutional 

knowledge is at risk. 

These factors, coupled with the Secretary of Defense’s significant 

transformation initiatives, make it imperative for DOD to strategically 

manage its civilian workforce based on a total force perspective which 

includes civilian personnel as well as active duty and reserve military 

personnel and contractor personnel. This strategic management approach 

will enable DOD to accomplish its mission by putting the right people in 

the right place at the right time and at a reasonable cost. 

NSPS is intended to be a major component of DOD’s efforts to more 

strategically manage its workforce and respond to current and emerging 

challenges. This morning I will highlight several of the key provisions of 

NSPS that in our view are most in need of close scrutiny as Congress 

considers the DOD proposal. 

The DOD proposal would allow the Secretary of Defense to jointly 

prescribe regulations with the Director of the Office of Personnel 

Management (OPM) to establish a flexible and contemporary human 

resources management system for DOD—NSPS. The joint issuance of 

regulations is similar to that set forth in the Homeland Security Act of 

20023

 between the Secretary of Homeland Security and the Director of 

OPM for the development of the Department of Homeland Security (DHS) 

human resources management system. However, unlike the legislation 

creating DHS, the Defense Transformation for the 21st Century Act would 

allow the Secretary of Defense to waive the requirement for joint issuance 

of regulations if, in his or her judgment, it is “essential to the national 

security”—which is not defined in the act. While the act specifies a 

number of key provisions of Title 5 that shall not be altered or waived, 

including those concerning veterans’ preference, merit protections, and 

safeguards against discrimination and prohibited personnel practices, the 

 3

Pub. L. No. 107-296, Nov. 25, 2002. 

Providing the WideRanging Authority to 

Design a New Civilian 

Personnel System 
Page 5 GAO-03-717T 

act nonetheless would, in substance, provide the Secretary of Defense 

with significant independent authority to develop a separate and largely 

autonomous human capital system for DOD. 

The DOD proposal also has significant potential implications for 

governmentwide human capital policies and procedures and for OPM as 

the President’s agent and advisor for human capital matters and overseer 

of federal human capital management activities.4

 In essence, the act would 

allow for the development of a personnel system for the second largest 

segment of the federal workforce that is not necessarily within the control 

or even direct influence of OPM. To strike a better balance between 

reasonable management flexibility and the need for a reasonable degree of 

consistency and adequate safeguards to prevent abuse throughout the 

government, Congress should consider making these provisions of the 

Defense Transformation for the 21st Century Act consistent with the 

Homeland Security Act of 2002, or at a minimum, providing some statutory 

guidance on what would constitute a situation “essential to the national 

security” that would warrant the Secretary of Defense to act independently 

of the Director of OPM. 

DOD states that it needs a human capital management system that 

provides new and increased flexibility in the way it assesses and 

compensates its employees, and toward that end, we understand that in 

implementing NSPS DOD plans to strengthen its performance appraisal 

systems and implement pay banding approaches as core components of 

any new DOD human capital system. We have a long and successful 

experience in using pay banding with our analyst staff as a result of the 

GAO Personnel Act of 1980. Certain DOD components have had a number 

of years of experience with pay banding through OPM’s personnel 

demonstration projects, authorized by the Civil Service Reform Act of 

1978, to test and introduce beneficial change in governmentwide human 

resources management systems. For example, in 1980, the Navy personnel 

demonstration project, commonly referred to as the China Lake 

demonstration project, implemented a number of reforms including pay 

banding and a pay for performance system. More recently, the Civilian 

Acquisition Workforce personnel demonstration project (AcqDemo) was 

 4

We discuss OPM’s human capital leadership role in our report: Major Management 

Challenges and Program Risks: Office of Personnel Management, GAO-03-115

(Washington, D.C.: January 2003). 

Implementing Pay Reform 

and Performance 

Management 
Page 6 GAO-03-717T 

implemented in 1999 and created a pay banding system that covers part of 

its civilian acquisition, technology, and logistics workforce.5

 The expected 

results of AcqDemo’s pay banding system include increased flexibility to 

assign employees as well as increased pay potential and satisfaction with 

advancement for employees. According to agency officials, an evaluation 

to OPM on AcqDemo’s progress is scheduled to be available this June. 

Lastly, DOD’s science and technology reinvention laboratory 

demonstration projects all implemented some form of pay banding and 

pay for performance. OPM reports that these reinvention laboratory 

demonstration projects have been able to offer more competitive starting 

salaries. Additionally some labs’ turnover experience was significantly 

lower among highly-rated employees and higher among employees with 

lower ratings.6

 DOD’s demonstration projects clearly provide helpful 

insights and valuable lessons learned in connection with broad banding 

and pay for performance efforts. At the same time these projects and 

related DOD efforts involve less than 10 percent of DOD’s civilian 

workforce and expanding these concepts to the entire department will 

require significant effort and likely need to be implemented in phases over 

several years. 

As you know, there is growing agreement on the need to better link 

individual pay to performance. Establishing such linkages is essential if we 

expect to maximize the performance and assure the accountability of the 

federal government for the benefit of the American people. As a result, 

from a conceptual standpoint, we strongly support the need to expand 

broad banding approaches and pay for performance-based systems in the 

federal government. However, moving too quickly or prematurely at DOD 

or elsewhere can significantly raise the risk of doing it wrong. This could 

also serve to severely set back the legitimate need to move to a more 

performance and results-based system for the federal government as a 

whole. Thus, while it is imperative that we take steps to better link 

employee pay to performance across 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 or not such efforts are successful. In our view, one 

key need is to modernize performance management systems in executive 

agencies so that they are capable of adequately supporting more 

 5

U.S. General Accounting Office, Acquisition Workforce: Status of Agency Efforts to 

Address Future Needs, GAO-03-55 (Washington, D.C.: Dec. 18, 2002). 

6

U.S. Office of Personnel Management, 2002 Summative Evaluation: DOD S&T 

Reinvention Laboratory Demonstration Program (Washington, D.C.: August 2002). 
Page 7 GAO-03-717T 

performance-based pay and other personnel decisions. Unfortunately, 

based on GAO’s past work, most existing federal performance appraisal 

systems, including a vast majority of DOD’s systems, are not designed to 

support a meaningful performance-based pay system. 

The bottom line is that in order to receive any additional performancebased pay flexibility for broad based employee groups, agencies should 

have to demonstrate that they have modern, effective, credible, and, as 

appropriate, validated performance management systems in place with 

adequate safeguards, including reasonable transparency and appropriate 

accountability mechanisms, to ensure fairness and prevent politicalization 

and abuse. 

At your request Madam Chairwoman, and that of Senator Voinovich, we 

identified key practices leading public sector organizations both here in 

the United States and abroad have used in their performance management 

systems to link organizational goals to individual performance and create 

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

results.7

 These practices can help agencies develop and implement 

performance management systems with the attributes necessary to 

effectively support pay for performance. 

More specifically, Congress should consider establishing statutory 

standards that an agency must have in place before it can implement broad 

banding or a more performanced-based pay program. As the request of 

Congressman Danny Davis, we developed an initial list of possible 

safeguards to help ensure that any additional flexibility Congress may 

grant for expanding pay for performance management systems in the 

government are fair, effective, and credible. We provided an initial list to 

Congressman Davis late last week. This initial list of safeguards was 

developed based on our extensive body of work looking at the 

performance management practices used by leading public sector 

organizations both in the United States and in other countries as well as 

our own experiences at GAO in implementing a modern performance 

management system for our own staff. We believe that the following could 

provide a starting point for developing a set of statutory safeguards in 

 7

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

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

D.C.: Mar. 14, 2003). 
Page 8 GAO-03-717T 

connection with any additional efforts to expand pay for performance 

systems. 

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

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

in meaningful distinctions in individual employee performance. This 

should include consideration of critical competencies and achievement of 

concrete results. 

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

design of the system, including having employees directly involved in 

validating any related competencies, as appropriate. 

• Assure that certain predecisional internal safeguards exist to help achieve 

the consistency, equity, nondiscrimination, and nonpoliticization of the 

performance management process (e.g., independent reasonableness 

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

Inclusiveness or their equivalent in connection with the establishment and 

implementation of a performance appraisal system, as well as reviews of 

performance rating decisions, pay determinations, and promotion actions 

before they are finalized to ensure that they are merit-based; internal 

grievance processes to address employee complaints; and pay panels 

whose membership is predominately made up of career officials who 

would consider the results of the performance appraisal process and other 

information in connection with final pay decisions). 

• Assure reasonable transparency and appropriate accountability 

mechanisms in connection with the results of the performance 

management process (e.g., publish overall results of performance 

management and pay decisions while protecting individual confidentiality, 

and report periodically on internal assessments and employee survey 

results). 

The above items should help serve as a starting point for Congress to 

consider in crafting possible statutory safeguards for executive agencies’ 

performance management systems. OPM would then issue guidance 

implementing the legislatively defined safeguards. The effort to develop 

such safeguards could be part of a broad-based expanded pay for 

performance authority under which whole agencies and/or employee 

groups could adopt broad-banding and move to more pay for performance 

oriented systems if certain conditions are met. Specifically, the agency 

would have to demonstrate, and OPM would have to certify, that a 

modern, effective, credible, and, as appropriate, validated performance 

management system with adequate safeguards, including reasonable 

transparency and appropriate accountability mechanisms, is in place to 

support more performance-based pay and related personnel decisions 

before the agency could implement a new system. In this regard OPM 
Page 9 GAO-03-717T 

should consider adopting class exemption approaches and OPM should be 

required to act on any individual certifications within prescribed time 

frames (e.g., 30-60 days). This approach would allow for a broader-based 

yet more conceptually consistent approach in this critical area. It would 

also facilitate a phased-implementation approach throughout government. 

The list is not intended to cover all the attributes of a modern, resultsoriented performance management system. Rather, the items on the list 

cover possible safeguards for performance management systems to help 

ensure those systems are fair, effective, and credible. 

Congress should also consider establishing a governmentwide fund 

whereby agencies, based on a sound business case, could apply for funds 

to modernize their performance management systems and ensure those 

systems have adequate safeguards to prevent abuse. This approach would 

serve as a positive step to promote high-performing organizations 

throughout the federal government while avoiding fragmentation within 

the executive branch in the critical human capital area. 

The Senior Executive Service (SES) needs to lead the way in the federal 

government’s effort to better link pay to performance. We have reported 

that there are significant opportunities to strengthen efforts to hold senior 

executives accountable for results.8

 In particular, more progress is needed 

in explicitly linking senior executive expectations for performance to 

results-oriented organizational goals and desired outcomes, fostering the 

necessary collaboration both within and across organizational boundaries 

to achieve results, and demonstrating a commitment to lead and facilitate 

change. These expectations for senior executives will be critical to keep 

agencies focused on transforming their cultures to be more resultsoriented, less hierarchical, more integrated, and externally focused and 

thereby be better positioned to respond to emerging internal and external 

challenges, improve their performance, and assure their accountability. 

Given the state of agencies’ performance management systems, Congress 

should consider starting federal results-oriented pay reform with the SES. 

In that regard and similar to the Homeland Security Act, the proposed 

NSPS would increase the current total allowable annual compensation 

limit for senior executives up to the Vice President’s total annual 

 8

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

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

Establishing Senior 

Executive Service Pay and 

Performance Management 
Page 10 GAO-03-717T 

compensation. However, the Homeland Security Act provides that OPM, 

with the concurrence of the Office of Management and Budget, certify that 

agencies have performance appraisal systems that, as designed and 

applied, make meaningful distinctions based on relative performance. 

NSPS does not include such a certification provision. Congress should 

consider requiring OPM to certify that the DOD SES performance 

management system makes meaningful distinctions in performance and 

employs the other practices used by leading organizations to develop 

effective performance management systems that I mentioned earlier, 

before DOD could increase the annual compensation limit for senior 

executives.9

The proposed Defense Transformation for the 21st Century Act includes 

provisions intended to ensure collaboration with employee representatives 

in the planning, development, and implementation of a human resources 

management system. For example, employee representatives are to be 

given the opportunity to review and make recommendations on the 

proposed NSPS. The Secretary of Defense and the Director of OPM are to 

provide employee representatives with a written description of the 

proposed system, give these representatives at least 30 calendar days to 

review and make recommendations on the proposal, and fully and fairly 

consider each recommendation. DOD may immediately implement the 

parts of the proposed system that did not receive recommendations or 

those recommendations they chose to accept from the employee 

representatives. While these provisions are designed to help assure that 

employees and their authorized representatives play a meaningful role on 

the design and implementation of any new human capital system, DOD 

does not have a good track record in reaching out to key stakeholders. In 

fact, it is my understanding that neither DOD employees nor their 

authorized representatives played a meaningful role in connection with the 

design of the legislative proposal that is the subject of this hearing. 

For the recommendations from the employee representatives that the 

Secretary and the Director do not accept, the Secretary and the Director 

are to notify Congress and meet and confer with employee representatives 

in an attempt to reach agreement on how to proceed with these 

recommendations. If an agreement has not been reached after 30 days, and 

the Secretary determines that further consultation with employee 

 9

GAO-03-488. 

Employees and Employee 

Organizations Involvement 

in Creating NSPS 
Page 11 GAO-03-717T 

representatives will not produce agreement, the Secretary may implement 

any or all parts of the proposal, including any modifications made in 

response to the recommendations. The Secretary is to notify Congress of 

the implementation of any part of the proposal, any changes made to the 

proposal as a result of recommendations from the employee 

representatives, and the reasons why implementation is appropriate. 

Although the procedures called for in the DOD proposal are similar to 

those enacted in the Homeland Security Act, the latter states explicitly the 

intent of Congress on the importance for employees to be allowed to 

participate in a meaningful way in the creation of any human resources 

management system affecting them. To underscore the importance that 

Congress places on employee involvement in the development and 

implementation of NSPS, Congress should consider including similar 

language as that found in the Homeland Security Act. 

More generally, and aside from the specific statutory provisions on 

consultation, the active involvement of employees will be critical to the 

success of NSPS. We have reported that the involvement of employees 

both directly and indirectly is crucial to the success of new initiatives, 

including implementing a pay for performance system.10 High-performing 

organizations have found that actively involving employees and 

stakeholders, such as unions or other employee associations when 

developing results-oriented performance management systems helps 

improve employees’ confidence and belief in the fairness of the system 

and increases their understanding and ownership of organizational goals 

and objectives. This involvement must be early, active, and continuing if 

employees are to gain a sense of understanding and ownership for the 

changes that are being made. 

The legislation has a number of provisions designed to give DOD flexibility 

to help obtain key critical talent. Specifically, it allows DOD greater 

flexibility to (1) augment the use of temporary appointment authorities, 

(2) hire experts and consultants and pay them special rates, (3) define 

benefits for overseas employees, and (4) enter into personal services 

contracts for experts and consultants for national security missions, 

 10U.S. General Accounting Office, Insights for U.S. Agencies from Other Countries’ 

Performance Management Initiatives, GAO-02-862 (Washington, D.C.: Aug. 2, 2002) and 

Human Capital: Practices That Empowered and Involved Employees, GAO-01-1070

(Washington, D.C.: Sept. 14, 2001). 

Attracting Key Talent 
Page 12 GAO-03-717T 

including for service outside of the United States. Specifically, the 

Secretary would have the authority to establish a program to attract highly 

qualified experts in needed occupations with the flexibility to establish the 

rate of pay, eligibility for additional payments, and terms of the 

appointment. These authorities give DOD considerable flexibility to obtain 

and compensate individuals and exempt them from several provisions of 

current law. While we have strongly endorsed providing agencies with 

additional tools and flexibilities to attract and retain needed talent, the 

broad exemption from some existing ethics and other personnel 

authorities without prescribed limits on their use raises some concern. 

Accordingly, Congress should consider placing numerical or percentage 

limitations on the use of these provisions or otherwise specifically outline 

basic safeguards to ensure such provisions are used appropriately. 

The proposed Defense Transformation for the 21st Century Act would 

provide the Secretary with a number of broad authorities related to 

rightsizing and organizational alignment. These include authorizing the 

Secretary to restructure or reduce the workforce by establishing programs 

using voluntary early retirement eligibility and separation payments, or 

both. In addition, the Secretary would be allowed to appoint U.S. citizens 

who are at least 55 years of age to the excepted service for a period of 2 

years, with a possible 2-year extension, subject only to certain provisions 

preventing displacement of current employees. The proposal also provides 

that annuitants who receive an annuity from the Civil Service Retirement 

and Disability Fund and become employed in a position within the 

Department of Defense shall continue to receive their unreduced annuity. 

This and selected other NSPS provisions will clearly have incremental 

budget implications for which we have not seen any related cost estimate. 

Furthermore, this and other selected NSPS provisions would create an 

unlevel playing field for experienced talent within the civilian workforce. 

Authorities such as voluntary early retirements have proven to be effective 

tools in strategically managing the shape of the workforce. I have 

exercised the authority that Congress granted me to offer voluntary early 

retirements in GAO in both fiscal years 2002 and 2003 as one element of 

our strategy to shape the GAO workforce. However, given DOD’s past 

efforts in using existing rightsizing tools, there is reason to be concerned 

that DOD may struggle to effectively manage additional authorities that 

may be provided. While DOD has used existing authorities in the past to 

mitigate the adverse effects of force reductions, the approach to 

reductions was not oriented toward strategically shaping the makeup of 

the workforce. We have previously reported that the net effect of lack of 

Rightsizing and 

Organizational Alignment 
Page 13 GAO-03-717T 

attention to workforce shaping is a civilian workforce that is not balanced 

by age or experience, which risks the orderly transfer of institutional 

knowledge.11 DOD thus may be challenged in using new authorities in a 

cohesive, integrated way that supports achieving mission results, absent a 

comprehensive and integrated human capital strategy and workforce plan. 

In the past, OPM has managed its authority to reemploy an annuitant with 

no reduction in annuity on a case-by-case basis. The NSPS proposal, which 

broadly grants such treatment, raises basic questions about the intent and 

design of the federal benefits or total compensation of federal employees 

and obviates the importance of establishing an effective DOD partnership 

with OPM in prescribing the use of this authority. As noted previously, 

providing such authority only to DOD would provide DOD a competitive 

advantage in the market place that would place other agencies at a 

disadvantage. It would also involve incremental costs that have yet to be 

estimated. Flexible approaches to shaping the workforce, such as 2-year 

excepted service appointments, may be helpful in avoiding long-term 

commitments for short-term requirements, addressing transition gaps, and 

smoothing outsourcing strategies. At the same time, these authorities 

represent tools that are not effective on their own, rather they are 

elements that need to be developed into an effective strategy and aligned 

with program goals and missions. 

The legislation could also allow DOD to revise Reduction-in-Force (RIF) 

rules to place greater emphasis on an employee’s performance. DOD has 

indicated that it will be considering for application DOD-wide, personnel 

practices that were identified in the April 2, 2003, Federal Register notice. 

This notice describes revised RIF procedures that change the order in 

which employees would be retained under a RIF order. Specifically, 

employees could be placed on a retention list in the following order: type 

of employment (i.e., permanent, temporary), level of performance, and 

veterans’ preference eligibility (disabled veterans will be given additional 

priority), which we note would reduce the order in which veterans’ 

preference is currently provided. While we conceptually support revised 

RIF procedures that involve much greater consideration of an employee’s 

performance, as I pointed out above, agencies must have modern, effective 

and credible performance management systems in place to properly 

implement such authorities. 

 11U.S. General Accounting Office, Strategic Approach Should Guide DOD Civilian 

Workforce Management, GAO/T-GGD/NSIAD-00-120 (Washington, D.C.: Mar. 9, 2000). 
Page 14 GAO-03-717T 

The proposed NSPS would allow the Secretary, after consultation with the 

Merit Systems Protection Board (MSPB), to prescribe regulations 

providing fair treatment in any appeals brought by DOD employees 

relating to their employment. The proposal states that the appeals 

procedures shall ensure due process protections and expeditious handling, 

to the maximum extent possible. In this regard, the proposal provides that 

presently applicable appeals procedures should only be modified insofar 

as such modifications are designed to further the fair, efficient, and 

expeditious resolution of matters involving DOD employees. This 

provision is substantially the same as a similar provision in the Homeland 

Security Act of 2002 allowing DHS to prescribe regulations for employee 

appeals related to their employment. As required of the Secretary of DHS, 

the Secretary of Defense would be required to consult with MSPB prior to 

issuing regulations. However, neither the Homeland Security Act nor the 

proposed legislation expressly requires that employee appeals be heard 

and decided by the MSPB. There is also no express provision for judicial 

review of decisions regarding employee appeals decisions. 

Given the transparency of the federal system dispute resolution and its 

attendant case law, the rights and obligations of the various parties 

involved is well developed. It is critical that any due process changes that 

are implemented after consultation with MSPB result in dispute resolution 

processes that are not only fair and efficient but, as importantly, minimize 

any possible perception of unfairness. 

The critical need for an institutional infrastructure to develop and support 

change has been a consistent theme raised throughout the observations I 

have been providing on some of the specific aspects of the proposed 

NSPS. This institutional infrastructure includes, at a minimum, a human 

capital planning process that integrates the department’s human capital 

policies, strategies, and programs with DOD’s mission, goals, and desired 

outcomes; the capabilities to effectively develop and implement a new 

human capital system; and a set of adequate safeguards, including 

reasonable transparency and appropriate accountability mechanisms to 

ensure the fair and merit-based implementation and application of a new 

system. Quite simply, in the absence of the right institutional 

infrastructure, granting additional human capital authorities will provide 

little advantage and could actually end up doing damage if the new 

flexibilities are not implemented properly. Our work looking at DOD’s 

strategic human capital planning efforts and our work looking across the 

federal government at the use of human capital flexibilities and related 

Establishing Employee 

Appeals Procedures 

Building the 

Institutional 

Infrastructure Needed 

to Support NSPS 
Page 15 GAO-03-717T 

human capital efforts underscores the critical steps that DOD needs to 

take to properly develop and effectively implement any new personnel 

authorities. 

Our work here and abroad has consistently demonstrated that leading 

organizations align their human capital approaches, policies, strategies, 

and programs with their mission and programmatic goals. Human capital 

plans that are aligned with mission and program goals integrate the 

achievement of human capital objectives with the agency’s strategic and 

program goals. Careful and thoughtful human capital planning efforts are 

critical to making intelligent competitive sourcing decisions. The 

Commercial Activities Panel, which I was privileged to chair, called for 

federal sourcing policy to be “consistent with human capital practices 

designed to attract, motivate, retain, and reward a high performing 

workforce” and highlighted a number of human capital approaches to help 

achieve that objective.12

In April 2002, DOD published a strategic plan for civilian personnel.13

However, as we reported in March 2003,14 top-level leadership at the 

department and the component levels has not until recently been 

extensively involved in strategic planning for civilian personnel; however, 

civilian personnel issues appear to be a higher priority for top-level leaders 

today than in the past. Although DOD began downsizing its civilian 

workforce more than a decade ago, top-level leadership has not, until 

recently, developed and directed reforms to improve planning for civilian 

personnel. With the exception of the Army and the Air Force, neither the 

department nor the components in our March review had developed 

 12Commercial Activities Panel, Improving the Sourcing Decisions of the Government 

(Washington, D.C.: April 2002). 

13Civilian Human Resources Strategic Plan 2002-2008. At this time, DOD also published 

two strategic plans for military personnel (one addressing military personnel priorities and 

one addressing quality of life issues for service members and their families). In a December 

2002 report (Military Personnel: Oversight Process Needed to Help Maintain Momentum 

of DOD’s Strategic Human Capital Planning, GAO-03-237), we addressed aspects of the 

two plans concerning benefits for active duty military personnel, noting that the plans were 

incomplete and that DOD needed a process to oversee the plans’ implementation. 

14U.S. General Accounting Office, DOD Personnel: DOD Actions Needed to Strengthen 

Civilian Human Capital Strategic Planning and Integration with Military Personnel 

and Sourcing Decisions, GAO-03-475 (Washington, D C.: Mar. 28, 2003) and DOD 

Personnel: DOD Comments on GAO’s Report on DOD’s Civilian Human Capital Strategic 

Planning, GAO-03-690R (Washington, D.C.: Apr. 18, 2003). 

Strategic Human Capital 

Planning at DOD 
Page 16 GAO-03-717T 

strategic plans to address challenges affecting the civilian workforce until 

2001 or 2002, which is indicative of civilian personnel issues being an 

emerging priority. 

In addition, we reported that top-level leaders in the Air Force, the Marine 

Corps, the Defense Contract Management Agency, and the Defense 

Finance and Accounting Service have been or are working in partnership 

with their civilian human capital professionals to develop and implement 

civilian strategic plans; such partnership is increasing in the Army and not 

as evident in the Navy. Moreover, DOD’s issuance of its departmentwide 

civilian human capital plan begins to lay a foundation for strategically 

addressing civilian human capital issues; however, DOD has not provided 

guidance on aligning the component-level plans with the department-level 

plan to obtain a coordinated focus to carry out the Secretary of Defense’s 

transformation initiatives in an effective manner. High-level leadership 

attention is critical to developing and directing reforms because, without 

the overarching perspective of such leaders as Chief Operating Officers 

and the Chief Human Capital Officers, reforms may not be sufficiently 

focused on mission accomplishment, and without their support, reforms 

may not receive the resources needed for successful implementation. We 

have previously reported that the concept of a Chief Operating Officer 

(COO) could offer the leadership to help elevate attention on key 

management issues and transformational change, integrate these various 

efforts, and institutionalize accountability for addressing management 

issues and leading transformational change both within and between 

administrations.15 In our view, DOD is a prime candidate to adopt this COO 

concept. In addition, if Congress provides DOD with many of the 

flexibilities it is seeking under the NSPS, the basis for adding a COO 

position at DOD would be even stronger. 

Despite the progress that has been made recently, the DOD human capital 

strategic plans we reviewed, for the most part, were not fully aligned with 

the overall mission of the department or respective components, results 

oriented, or based on data about the future civilian workforce. For 

example, the goals and objectives contained in strategic plans for civilian 

personnel were not explicitly aligned with the overarching missions of the 

respective organizations. Consequently, it is difficult to determine whether 

 15U.S. General Accounting Office, Highlights of a GAO Roundtable: The Chief Operating 

Officer Concept: A Potential Strategy To Address Federal Governance Challenges, 

GAO-03-192SP (Washington, D.C.: Oct. 4, 2002). 
Page 17 GAO-03-717T 

DOD’s and the components’ strategic goals are properly focused on 

mission achievement. In addition, none of the plans contained resultsoriented performance measures that could provide meaningful data 

critical to measuring the results of their civilian human capital initiatives 

(i.e., programs, policies, and processes). Thus, DOD and the components 

cannot gauge the extent to which their human capital initiatives contribute 

to achieving their organizations’ mission. Also, for the most part, the 

civilian human capital plans in our review did not contain detailed 

information on the skills and competencies needed to successfully 

accomplish future missions. Without information about what is needed in 

the future workforce, it is unclear if DOD and its components are 

designing and funding initiatives that are efficient and effective in 

accomplishing the mission, and ultimately contributing to force readiness. 

Lastly, the DOD civilian strategic plans we reviewed did not address how 

the civilian workforce will be integrated with their military counterparts or 

with sourcing initiatives. At the department level, the strategic plan for 

civilian personnel was prepared separately from corresponding plans for 

military personnel and not integrated to form a seamless and 

comprehensive strategy and did not address how DOD plans to link its 

human capital initiatives with its sourcing plans, such as efforts to 

outsource non-core responsibilities. For the most part, at the component 

level, the plans set goals to integrate planning for the total workforce, to 

include civilian, military, and contractor personnel. The Air Force and the 

Army, in particular, have begun to integrate their strategic planning efforts 

for civilian and military personnel, also taking contractor responsibilities 

into consideration. Without integrated planning, goals for shaping and 

deploying civilian, military, and contractor personnel may not be 

consistent with and support each other. Consequently, DOD and its 

components may not have the workforce with the skills and competencies 

needed to accomplish tasks critical to assuring readiness and achieving 

mission success. 

In our March report we recommended, among other things, that DOD 

improve future revisions and updates to the departmentwide strategic 

human capital plan by more explicitly aligning its elements with DOD’s 

overarching mission, including performance measures, and focusing on 

future workforce needs. DOD only partially concurred with our 

recommendation, and, as explanation, stated that the recommendation did 

not recognize the involvement in and impact of DOD’s Quadrennial 

Defense Review on the development of the departmentwide plan. We also 

recommended that DOD develop a departmentwide human capital 

strategic plan that integrates both military and civilian workforces and 
Page 18 GAO-03-717T 

takes into account contractor roles and sourcing initiatives. DOD did not 

concur with this recommendation stating that it has both a military and 

civilian plan, and the use of contractors is just another tool to accomplish 

the mission, not a separate workforce with separate needs to manage. The 

intent of our recommendation is not to say that DOD has a direct 

responsibility to manage contractor employees, but rather to recognize 

that strategic planning for the civilian workforce should be undertaken in 

the context of the total force—civilian, military, and contractors—since 

the three workforces need to perform their responsibilities in a seamless 

manner to accomplish DOD’s mission. In commenting on our 

recommendations, the Under Secretary of Defense for Personnel and 

Readiness stated that DOD is in the early stages of its strategic planning 

efforts. We recognize this and believe that our recommendations represent 

opportunities that exist to strengthen its developing planning efforts. 

Our work has identified a set of key practices that appear to be central to 

the effective use of human capital authorities. These practices, which are 

shown in figure 1, center on effective planning and targeted investments, 

involvement and training, and accountability and cultural change.16

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

Assist Agencies in Managing Their Workforces, GAO-03-2 (Washington, D.C.: Dec. 6, 

2002). 

The Capabilities Needed to 

Effectively Develop and 

Implement Human Capital 

Flexibilities 
Page 19 GAO-03-717T 

Figure 1: Key Practices for Effective Use of Human Capital Flexibilities 

Congress should consider the extent to which an agency is capable of 

employing these practices before additional human capital flexibilities are 

implemented. In the context of NSPS, Congress should consider whether 

and to what extent DOD is using those practices. 

I have discussed throughout my statement today the importance of moving 

to a new human capital system which provides reasonable management 

flexibility along with adequate safeguards, reasonable transparency, and 

appropriate accountability mechanisms to prevent abuse of employees. In 

addition to the suggestions made above, Congress should consider 

requiring DOD to fully track and periodically report on its performance. 

This requirement would be fully consistent with those contained in our 

Adequate Safeguards, 

Reasonable Transparency, 

and Appropriate 

Accountability 
Page 20 GAO-03-717T 

calendar year 2000 human capital legislation, which required us to 

comprehensively assess our use of the authorities granted to us under the 

act.17 More generally, Congress should consider requiring DOD to 

undertake evaluations that are broadly modeled on the evaluation 

requirements of OPM’s personnel demonstration program. 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 EEO groups, adherence to merit 

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

elsewhere, including governmentwide. This evaluation and reporting 

requirement would facilitate congressional oversight of NSPS, allow for 

any mid-course corrections in its implementation, and serve as a tool for 

documenting best practices and sharing lessons learned with employees, 

stakeholders, other federal agencies, and the public. DOD has stated that it 

would continue its evaluation of the science and technology reinvention 

laboratory demonstration projects when they are integrated under a single 

human capital framework. 

In summary, DOD’s civilian human capital proposals raise several critical 

questions. Should DOD and/or other federal agencies be granted broadbased exemptions from existing law, and if so, on what basis? Does DOD 

have the institutional infrastructure in place to make effective use of the 

new authorities? This institutional infrastructure includes, at a minimum, a 

human capital planning process that integrates the agency’s human capital 

policies, strategies, and programs with its program goals and mission, and 

desired outcomes; the capabilities to effectively develop and implement a 

new human capital system; and a set of adequate safeguards, including 

reasonable transparency and appropriate accountability mechanisms to 

ensure the fair, effective, and credible implementation and application of a 

new system. 

Many of the basic principles underlying DOD’s civilian human capital 

proposals have merit and deserve the serious consideration they are 

receiving here today and will no doubt be received by others in the coming 

 17Our October 2000 legislation gave us tools to realign our workforce in light of mission 

needs and overall budgetary constraints; correct skills imbalances; and reduce high-grade, 

managerial, or supervisory positions without reducing the overall number of GAO 

employees. This legislation allowed us to create a technical and scientific career track at a 

compensation level consistent to the SES. It also allowed us to give greater consideration 

to performance and employee skills and knowledge in any RIF actions. 

Concluding 

Observations 
Page 21 GAO-03-717T 

weeks and months. However, the same critical questions should be posed 

to the DOD proposal. Should DOD and/or other federal agencies be 

granted broad-based exemptions from existing law, and if so, on what 

basis? In addition, Congress and DOD should carefully assess the degree 

to which DOD has the institutional infrastructure in place to make 

effective use the new authorities it is seeking. Our work has shown that 

while progress has been and is being made, additional efforts are needed 

by DOD to integrate its human capital planning process with the 

department’s program goals and mission. The practices that have been 

shown to be critical to the effective use of flexibilities provide a validated 

roadmap for DOD and Congress to consider. Finally, as I have pointed out 

in several key areas, Congress should consider, if the authorities are 

granted, establishing additional safeguards to ensure the fair, merit-based, 

transparent, and accountable implementation and application of NSPS. 

In our view, Congress should consider providing governmentwide broad 

banding and pay for performance authorities that DOD and other federal 

agencies can use provided they can demonstrate that they have a 

performance management system in place that meets certain statutory 

standards, which can be certified to by a qualified and independent party, 

such as OPM. Congress should also consider establishing a 

governmentwide fund whereby agencies, based on a sound business case, 

could apply for funds to modernize their performance management 

systems and ensure that those systems have adequate safeguards to 

prevent abuse. This would serve as a positive step to promote highperforming organizations throughout the federal government while 

avoiding further fragmentation within the executive branch in the critical 

human capital area. 

This morning, I have offered some preliminary observations on some 

aspects of the proposal. However, these preliminary observations have not 

included some serious concerns I have with other sections of the proposed 

legislation that go beyond the civilian personnel proposal. My observations 

have included suggestions for how Congress can help DOD effectively 

address its human capital challenges and ensure that NSPS is designed and 

implemented in an effective, efficient, and fair manner that meets the 

current and future needs of DOD, its employees, and the American people. 

Human capital reforms at DOD obviously have important implications for 

national security and precedent-setting implications for governmentwide 

human capital management. Given the massive size of DOD and the 

magnitude of the nature and scope of the changes that are being 

considered, such reform at DOD also has important precedent-setting 
Page 22 GAO-03-717T 

implications for federal human capital management generally and should 

be considered in that context. 

We look forward to continuing to support Congress and work with DOD in 

addressing the vital transformation challenges it faces. Madam 

Chairwoman and Mr. Davis, this concludes my prepared statement. I 

would be pleased to respond to any questions that you may have. 

For further information on human capital issues at DOD, please contact 

Derek Stewart, Director, Defense Capabilities and Management on (202) 

512-5559 or at stewartd@gao.gov. For further information on 

governmentwide human capital issues, please contact J. Christopher 

Mihm, Director, Strategic Issues, on (202) 512-6806 or at mihmj@gao.gov. 

Individuals making key contributions to this testimony included William 

Doherty, Clifton G. Douglas, Jr., Christine Fossett, Bruce Goddard, Judith 

Kordahl, Janice Lichty, Bob Lilly, Lisa Shames, Ellen Rubin, Edward H. 

Stephenson, Jr., Tiffany Tanner, Marti Tracy, and Michael Volpe. 

Contacts and 

Acknowledgments 

(450212) 
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