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89–241 PDF 2003

COMPENSATION REFORM: HOW SHOULD THE

FEDERAL GOVERNMENT PAY ITS EMPLOYEES?

HEARING

BEFORE THE

SUBCOMMITTEE ON CIVIL SERVICE

AND AGENCY ORGANIZATION

OF THE

COMMITTEE ON

GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED EIGHTH CONGRESS

FIRST SESSION

APRIL 1, 2003

Serial No. 108–46

Printed for the use of the Committee on Government Reform

(

Available via the World Wide Web: http://www.gpo.gov/congress/house

http://www.house.gov/reform

(II)

COMMITTEE ON GOVERNMENT REFORM

TOM DAVIS, Virginia, Chairman

DAN BURTON, Indiana

CHRISTOPHER SHAYS, Connecticut

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

JOHN L. MICA, Florida

MARK E. SOUDER, Indiana

STEVEN C. LATOURETTE, Ohio

DOUG OSE, California

RON LEWIS, Kentucky

JO ANN DAVIS, Virginia

TODD RUSSELL PLATTS, Pennsylvania

CHRIS CANNON, Utah

ADAM H. PUTNAM, Florida

EDWARD L. SCHROCK, Virginia

JOHN J. DUNCAN, JR., Tennessee

JOHN SULLIVAN, Oklahoma

NATHAN DEAL, Georgia

CANDICE S. MILLER, Michigan

TIM MURPHY, Pennsylvania

MICHAEL R. TURNER, Ohio

JOHN R. CARTER, Texas

WILLIAM J. JANKLOW, South Dakota

MARSHA BLACKBURN, Tennessee

HENRY A. WAXMAN, California

TOM LANTOS, California

MAJOR R. OWENS, New York

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

CAROLYN B. MALONEY, New York

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

DANNY K. DAVIS, Illinois

JOHN F. TIERNEY, Massachusetts

WM. LACY CLAY, Missouri

DIANE E. WATSON, California

STEPHEN F. LYNCH, Massachusetts

CHRIS VAN HOLLEN, Maryland

LINDA T. SANCHEZ, California

C.A. ‘‘DUTCH’’ RUPPERSBERGER, Maryland

ELEANOR HOLMES NORTON, District of

Columbia

JIM COOPER, Tennessee

CHRIS BELL, Texas

———

BERNARD SANDERS, Vermont

(Independent)

PETER SIRH, Staff Director

MELISSA WOJCIAK, Deputy Staff Director

ROB BORDEN, Parliamentarian

TERESA AUSTIN, Chief Clerk

PHILIP M. SCHILIRO, Minority Staff Director

SUBCOMMITTEE ON CIVIL SERVICE AND AGENCY ORGANIZATION

JO ANN DAVIS, Virginia, Chairwoman

TIM MURPHY, Pennsylvania

JOHN L. MICA, Florida

MARK E. SOUDER, Indiana

ADAH H. PUTNAM, Florida

NATHAN DEAL, Georgia

MARSHA BLACKBURN, Tennessee

DANNY K. DAVIS, Illinois

MAJOR R. OWENS, New York

CHRIS VAN HOLLEN, Maryland

ELEANOR HOLMES NORTON, District of

Columbia

JIM COOPER, Tennessee

EX OFFICIO

TOM DAVIS, Virginia HENRY A. WAXMAN, California

RONALD L. MARTINSON, Staff Director

B. CHAD BUNGARD, Deputy Staff Director

CHRIS BARKLEY, Clerk

TANIA SHAND, Minority Professional Staff Member

(III)

C O N T E N T S

Page

Hearing held on April 1, 2003 ................................................................................ 1

Statement of:

Blair, Dan G., Deputy Director, Office of Personnel Management; and

Hannah S. Sistare, executive director, National Commission on the

Public Service ................................................................................................ 16

Kelley, Colleen M., national president, National Treasury Employees

Union; Jacqueline Simon, public policy director, American Federation

of Government Employees, AFL–CIO; Bill Bransford, counsel, Senior

Executives Association; and Karen Heiser, Federal Managers Association ................................................................................................................. 105

Mihm, Christopher J., Director, Strategic Issues, U.S. General Accounting

Office; Max Stier, president and CEO, Partnership for Public Service;

and George Nesterczuk, president, Nesterczuk and Associates and consultant, Heritage Foundation ....................................................................... 50

Ruppersberger, Hon. C.A. Dutch, a Representative in Congress from the

State of Maryland ......................................................................................... 6

Letters, statements, etc., submitted for the record by:

Blair, Dan G., Deputy Director, Office of Personnel Management:

Information concerning group incentive program .................................. 46

Prepared statement of ............................................................................... 19

Davis, Hon. Jo Ann, a Representative in Congress from the State of

Virginia, prepared statement of ................................................................... 3

Heiser, Karen, Federal Managers Association, prepared statement of ....... 175

Kelley, Colleen M., national president, National Treasury Employees

Union, prepared statement of ...................................................................... 108

Mihm, Christopher J., Director, Strategic Issues, U.S. General Accounting

Office, prepared statement of ....................................................................... 53

Nesterczuk, George, president, Nesterczuk and Associates and consultant,

Heritage Foundation, prepared statement of ............................................. 93

Ruppersberger, Hon. C.A. Dutch, a Representative in Congress from the

State of Maryland, prepared statement of .................................................. 10

Shaw, Jerry, general counsel, Senior Executives Association, prepared

statement of ................................................................................................... 138

Simon, Jacqueline, public policy director, American Federation of Government Employees, AFL–CIO, prepared statement of .................................. 122

Sistare, Hannah S., executive director, National Commission on the Public Service, prepared statement of ............................................................... 28

Stier, Max, president and CEO, Partnership for Public Service, prepared

statement of ................................................................................................... 72

(1)

COMPENSATION REFORM: HOW SHOULD THE

FEDERAL GOVERNMENT PAY ITS EMPLOYEES?

TUESDAY, APRIL 1, 2003

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON CIVIL SERVICE AND AGENCY

ORGANIZATION,

COMMITTEE ON GOVERNMENT REFORM,

Washington, DC.

The subcommittee met, pursuant to notice, at 1:08 p.m., in room

2247, Rayburn House Office Building, Hon. Jo Ann Davis (chairman of the subcommittee) presiding.

Present: Representatives Jo Ann Davis of Virginia, Murphy,

Blackburn, Danny Davis of Illinois, Norton, and Van Hollen.

Staff present: Ronald L. Martinson, staff director; B. Chad

Bungard, deputy staff director and senior counsel; John Landers,

professional staff member; Heea Vazirani-Fales and Vaughn Murphy, legislative counsels; Robert White, director of communications;

Christopher J. Barkley, clerk; Tania Shand, minority professional

staff member; Jean Gosa, minority assistant clerk; and Cecelia

Morton, minority office manager.

Mrs. DAVIS OF VIRGINIA. The subcommittee will come to order.

This is the first hearing of the Government Reform Subcommittee on Civil Service and Agency Organization in the 108th Congress, and the topic is both important and timely. The subject of

compensation reform gets right at the heart of many of the challenges facing the Civil Service, from recruitment and retention to

improving the efficiency and performance of the government itself.

Before I begin my own remarks, I would like to express my

thanks to the witnesses who have agreed to join us today. We have

brought together a broad and knowledgeable array of voices as we

begin our exploration of this issue, and look forward to hearing all

of your perspectives. I want you to know that I begin this hearing

with an open mind. I see this session as a learning opportunity for

the subcommittee.

Just over 2 months ago, the National Commission on Public

Service, known as the Volcker Commission, issued its report on

how to revitalize the Federal Government. At about the same time,

the President issued his fiscal 2004 budget proposal. Both documents contain bold recommendations to reshape the Civil Service:

The Volcker Commission, for example, suggests abolishing the General Schedule and allowing managers to base employees’ salaries

on ‘‘competence and performance.’’ The White House’s budget proVerDate 11-MAY-2000 13:26 Oct 02, 2003 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 D:\DOCS\89241.TXT HGOVREF1 PsN: HGOVREF1
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posal includes a $500 million Human Capital Performance fund to

reward top performing employees, as well as a proposed shift of the

entire Senior Executive Service to a pay-banding system.

More and more often, Federal agencies are seeking permission to

develop a compensation system outside the General Schedule. More

than 20 percent of non-postal civil servants now work under alternate personnel systems according to the Volcker report, including

those developed at the Federal Aviation Administration, the Internal Revenue Service and the General Accounting Office. In all of

those examples, change in the compensation system was designed

not merely as an end to itself but as a way to improve agency performance.

The GAO is here today and I am looking forward to hearing how

the various pay for performance systems are working so far, including GAO’s own.

We are also fortunate in holding this hearing just 1 week after

the Office of Personnel Management released its Federal Human

Capital Survey. The results contain lots of good news. Ninety-one

percent of employees believe they are doing important work and

the overall percentages of Federal workers who are satisfied with

their job is 68 percent or who believe the work they produce is high

quality at 81 percent. It is consistent with findings in the private

sector. Moreover, more than 60 percent of employees are satisfied

with the basic pay and benefits.

Not all the news was good, however. Fewer than half of the employees are satisfied with the recognition they get for doing a good

job. Just 30 percent said the rewards program gives them an incentive to do their best. Only 27 percent of employees believe that

steps are taken to deal with poor performers. On the surface, it appears that those results point to a work force that is generally satisfied with their pay, their benefits and their jobs but would like

to see a work culture that better rewards performance and does not

reward substandard work.

I would like to hear the witnesses’ perspective on this picture

and what the Federal Government should be doing in the area of

compensation reform. I thank you and I look forward to a lively

and informative discussion.

[The prepared statement of Hon. Jo Ann Davis follows:]

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Mrs. DAVIS OF VIRGINIA. I would now like to recognize our ranking member, Mr. Danny Davis, and see if he has an opening statement.

Mr. DAVIS OF ILLINOIS. Thank you very much, Madam Chairwoman. I do indeed, and it is a pleasure, as it always is, to be here

with you. I want to commend you for holding this hearing as we

begin to explore in a very serious way some of the real issues and

concerns with which we are going to be confronted, not only now

but for years to come.

There is a steady drumbeat to reform of the current Federal pay

system. This hearing provides a forum for the members of the subcommittee and other stakeholders to discuss the pros and cons of

various pay reform proposals and the process for implementing

such reform. The current pay system has been described as being

designed for the heavily clerical and low-graded work force of the

1950’s rather than today’s knowledge-based government and that it

should be redesigned to be more performance oriented, flexible and

market sensitive.

Others have argued that the Civil Service Reform Act of 1978

and the Federal Employees Pay Comparability Act of 1990 were enacted to do just that. If the current system is not working, then the

question becomes why not. If we do not understand why the current system is not working and address those concerns, how can we

ensure that a new system will not be fraught with the same problems? Furthermore, if the current system is to be reformed to give

managers more flexibility, how can we ensure that a new system

will be fair and equitable and free from political influence?

Efforts to reform the Civil Service based on the need for more

flexibility may indeed be valid, but often more flexibility without

accountability is simply something we cannot afford to do. This

subcommittee should not consider any reform legislation unless it

addresses this very important issue of holding decisionmakers in

the Government accountable for their actions and the decisions

they make.

David Walker, the Comptroller General, has been a strong advocate for pay reform. Yet, in a letter dated March 26 to the Government Executive Committee, Mr. Walker wrote, ‘‘As with all pay-forperformance efforts, appropriate safeguards and accountability procedures would need to be in place to ensure fairness, prevent

politicization and prevent abuse.’’ The bottom line is that in order

to receive any additional performance-based flexibility, agencies

should have to demonstrate they have the modern, effective, credible and validated performance management systems in place that

are capable of supporting such decisions. Unfortunately, most Federal agencies are a long way from meeting this task.

I agree with Mr. Walker and hope the witnesses before us today

can address these concerns about accountability that he has raised.

I thank you, Madam Chairwoman, and yield the balance of my

time.

Mrs. DAVIS OF VIRGINIA. Thank you, Mr. Davis.

Are there any other Members who would like to be recognized for

an opening statement? Ms. Norton.

Ms. NORTON. Thank you, Madam Chair.

6

You have called a hearing on a most important subject. I would

agree that we are at rather much of a watershed moment when it

comes to Federal compensation but that is, in my judgment, because of structural changes in the way people approach Federal

work today. They don’t come to the Federal sector the way they

used to and that is why your concern about hard to fill positions

is well placed.

I was chair of the subcommittee when locality pay was first put

in place. That was a reform that was decades in the making and

seems to have disappeared from the radar screen and from the

pocketbooks of Federal workers. I would hate to see us engage in

compensation reform on a piecemeal basis or have to repeat the

history of reform. I couldn’t agree more that there is not a lot to

make an engineer or a nurse or a pharmacist come to work for the

Federal Government and remain with the Federal Government. I

am equally concerned with the 2-percent increase for Federal employees if we want to keep hard to retain and attract employees,

what are we going to do about the fact that those we already have

are piling out of this place, many of them trained with investment

from the Federal Government because very frankly, by retiring

early or on time, they can market their skills for better pay and

better health care than they get in the Federal Government. So it

is very hard for me to look at the ones we can’t get anyway without

looking at those we have when you consider that half the work

force could retire within the next 3 years. That is a true example

of a crisis. It makes the crisis we face in hard to attract and retain

employees look like a small crisis. That is a crisis writ large.

I hope in looking at compensation reform, we will bear in mind

that we face a structural crisis with employees in the Federal Government and have our work cut out for us as we try to find a comprehensive approach in the need for reform.

Thank you very much, Madam Chair.

Mrs. DAVIS OF VIRGINIA. Thank you.

I ask unanimous consent that all Members have 5 legislative

days to submit written statements and questions for the hearing

record and that any answers to written questions provided by the

witnesses also be included in the record. Without objection, so ordered.

I also ask unanimous consent that all exhibits, documents and

other materials referred to by Members and the witnesses may be

included in the hearing record and that all Members be permitted

to revise and extend their remarks. Without objection, so ordered.

Our first witness today is our colleague, Congressman Dutch

Ruppersberger. I am delighted that you were able to accept our invitation to testify at the first hearing of the Subcommittee on Civil

Service and Agency Organization. By tradition, we do not administer an oath to Members of Congress, so you are recognized for 5

minutes, Congressman.

STATEMENT OF HON. C.A. DUTCH RUPPERSBERGER, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF MARYLAND

Mr. RUPPERSBERGER. Thank you, Madam Chairman, and it is a

pleasure to be here.

7

I have two people here who are not going to testify, Attorney

Sharborough, director of human resources for Baltimore County,

and Melissa Boone, who is gainsharing program manager.

I am here really based on the previous 8 years when I was Baltimore County executive and we implemented a gainsharing program which is really an employee group-incentive based on performance.

First, what is gainsharing? Gainsharing is a group incentive program. Gainsharing rewards employees for making improvements

that reduce costs without compromising quality and objectives. The

concept is based on team work where participating employees improve performance and get to share in the savings. For example,

if savings are generated, the group of employees receives half of the

savings while the other half goes into the General Fund of the

treasury of that government.

Let me start by saying gainsharing is a program that works. It

saves money but more importantly, it boosts morale and it makes

government service more responsive and cost-effective. That is a

very important element of gainsharing, the morale and making employees feel as if they are shareholders in the government.

Programs like gainsharing will only succeed if everyone who is

affected by the process is brought to the table. For example, in Baltimore County, we could not have done this without the cooperation

of our employee unions. What we are talking about here today is

using the Volcker Commission recommendations and changing the

culture of government management and workers.

Baltimore County has approximately 761,000 citizens which

makes the county more populous than four States and larger in

land than two States. There are 19,000 employees and it has an

operating budget of $2 billion. Baltimore County is the only one of

two counties in the country that has no municipalities which

means the county provides all the services. Baltimore County has

a strong executive rule. The county executive has the power to establish the budget. The county council approves the budget but

they can only cut the budget. The county council cannot increase

the budget or move funds from one area to another and the county’s budget must be balanced each year. It is a challenging county

with a diversity of incomes, a diversity of people, a diversity of education levels, a diversity of work force, and a diversity of geographic location which wraps around Baltimore City and is urban,

suburban and two-thirds rural. Providing services to all these distinct and unique populations and areas is very challenging.

When I took office as Baltimore County executive in January

1995, county employees had not received pay raises in 4 of the previous 5 years. Layoffs in several departments had further damaged

morale while demand for services had increased. By 1996, Baltimore County was experiencing a narrow revenue stream and aging

infrastructure. In the 4-years before 1996, the county work force

had declined by 17 percent, there had been a job freeze, the first

employee layoffs in county history and there were two early retirement programs enacted. There had only been one cost-of-living-adjustment in the 6-years before. Needless to say, county employees’

morale was at an all time low.

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While serving on the Baltimore County council prior to becoming

Baltimore County executive, I observed that the gradual decline in

employee morale was affecting service quality to our citizens. As

county executive, I wanted quality and productive improvements. I

believe government is basically a service industry and we need to

be more responsive to our constituents.

The question was, how do we make working for the county rewarding and exciting? How do we get our employees to be vested

in their government and how do we make them want to perform

for the benefit of everyone? After researching the issue, I concluded

that a gainsharing program would meet all those criteria with no

added cost to the taxpayers. One of my first acts was to bring

aboard a human resources consulting firm, a local consultant from

the Regional Economic Studies Institute at Towson State University in Baltimore County. Development of the gainsharing program

began in November 1995 with a survey of employees across all departments to determine the readiness to participate. While initially

hesitant about the program, the union leaders believed that the

gainsharing program demonstrated that people in the field, the

frontline employees, do know their job the best. The process enabled Baltimore County workers to prove they could deliver better

service at lower costs with virtually no complaints.

Baltimore County’s gainsharing program brings together many

old ideas in a new package. It uses total quality management principles and teambuilding strategies to transform frontline workers.

The team goal is to improve performance and save money by bringing the insights and experience of frontline workers to bear on the

problems. The program’s emphasis on getting frontline employees

to develop solutions empowers them to become shareholders in the

government, much like in the private sector. The bottom line is

Baltimore County’s gainsharing program generates cost savings

and increases employee morale while also improving the quality of

service at the local government level.

We have to remember that this program worked because we

brought everyone into the tent. We talked to and gained the support of our employees, we brought together both mid-level and top

level management and facilitated cooperation between them and

our frontline employees and we retained outside consultants to get

their insight to work on these solutions. The result was a highly

motivated, effective and cost-efficient work force that delivers quality service to our constituents.

Baltimore County’s gainsharing program won a national award

from Harvard University and the Ford Foundation for innovations

in government. Since the program was implemented it has saved

over $4.1 million. With the help of the gainsharing program, Baltimore County was 1 of only 20 counties out of 3,000 that were able

to obtain an AAA bond ratings from the rating houses in New

York. As a result of that, the governing magazine rated Baltimore

County as one of the top four managed counties in the country.

As a result of increased employee morale, increased government

efficiency and a well managed county, our administration and as

Baltimore County Executive, was able to attract over 40,000 new

jobs which eclipsed the previous administration job creation of 800,

going from 800 jobs to 40,000 new jobs over the 7-year period. One

9

of the reasons is employees and business want to be involved and

went to a county they feel is well managed and where there are

good services for their employees.

Baltimore County is only one of a handful of governments that

have implemented a gainsharing program. Because of that, Baltimore County is receiving inquiries from local, State and Federal

Government from around the country. I am pleased to say the

gainsharing program has gone international. Last year, the State

Department made inquiries into the success of Baltimore County’s

gainsharing program. After a review of our successful program, the

State Department asked for funding from Congress to implement

a gainsharing program. Most recently, U.S. workers have looked to

implement the gainsharing program abroad. Members of Baltimore

County’s gainsharing program have traveled to Belgium to train

the State Department employees in that country.

If we are looking to revitalize and change the culture of the Federal Government, we have to make sure that our frontline workers

are vested in what is happening. We should encourage all Federal

employees and managers to find ways to improve performance.

Gainsharing is not just about employees getting additional money

for performance. It is about the employees becoming shareholders

in the government and as a result, we will have improved morale

which leads to improved government performance.

[The prepared statement of Hon. C.A. Dutch Ruppersberger follows:]

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Mrs. DAVIS OF VIRGINIA. Dutch, thank you so much for being

willing to come and share that success story. I think you hit on

some critical points there that you can’t make changes without

bringing all parties to the table. That includes the managers, the

employees, the unions who are there for the workers and I appreciate your coming and testifying.

Historically on the Hill, we don’t question the Members when

they come.

Mr. RUPPERSBERGER. If you would like to question me, you can.

Mrs. DAVIS OF VIRGINIA. I think my ranking member would like

to ask a question but I will tell you, we normally don’t do it. We

are not setting a precedent either.

Mr. DAVIS OF ILLINOIS. I would just ask in terms of participation,

was this done by divisions, departments or just areas of work and

how did that get organized?

Mr. RUPPERSBERGER. What happened is we realized we had to

get outside consultants to implement a program because there are

always programs and new administrations are finding ways to do

this. I studied this gainsharing for years when I was on the county

council and read about it, how utility companies had been able to

use it, so I realized we needed to get experts in the area and we

hired national consultants. They came in and analyzed our government. They picked pilot programs to start the gainsharing program

for Baltimore County.

As an example, one area was food service in our detention center

where individuals were making maybe $23,000-$24,000 a year.

They came together as a group. They were frontline employees who

said we can do this better if management would listen. They came

together with management, had facilitators there to help them,

made the changes and each and every employee, after the changes

were made and the money was saved, took home about a $5,000

bonus that year. All of a sudden, the labor unions that were all

upset about this new program said we want a piece of this action.

Another example was in our grass cutting in Rec and Parks, as

county executive I was getting ready to privatize it because they

just weren’t producing. We went to the frontline and worked with

them. They said, if you give us the resources and the equipment,

we could beat any private sector. They had facilitators, came as a

group, discussed how they could cut the grass the best way, and

they ended up improving performance. The whole concept is as performance is improved, costs go down. Then all of a sudden everyone

wanted to be involved.

It is a program that you just don’t show up with a good idea. If

you have an idea as a frontline employee, you come together, go to

the facilitator, the facilitator will bring the group together as the

frontline, almost like a group therapy session and talk about the

program. Then they will put the program in writing and the program will go to the department head and eventually would come

to me. If the program worked, all of a sudden frontline employees

would just go punch the clock and say we are a part of this operation, we feel good about this, we are shareholders in this operation. Then it kept going from department to department.

To give an example of how gainsharing works, you can’t give police officers a bonus for the arrests they make. You have one vehiVerDate 11-MAY-2000 13:26 Oct 02, 2003 Jkt 000000 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 D:\DOCS\89241.TXT HGOVREF1 PsN: HGOVREF1
15

cle used by three shifts and the same people drive the same car.

If one group doesn’t put their foot on the brakes and they don’t

have to change tires in 6 months where another group had to

change it every 2 months, that would be a savings, a group incentive to improve performance which cuts costs. Part of that savings

goes back to them.

Let me say this because sometimes we get these programs confused. The main issue of gainsharing is not really the bonus or the

extra money that goes back to employees because performance is

improved, the main issue is the morale that in good times and bad

times, the employees feel they have the ability on the frontline.

How many times do we see in any government or bureaucracy that

midlevel managers were good employees or they were not good

managers, were never trained and interfere with frontline. All of

a sudden this relationship between management and frontline improved and like teambuilding, you had morale. When morale

changes, a lot of things change. So far this program has continued

to work. We are still in a recession now. When I say ‘‘we’’ I mean

Baltimore County, my previous job, and we still have employees

who feel good about going to work.

Mr. DAVIS OF ILLINOIS. Thank you very much. For many years,

I have been an advocate of what I call the shared approach to management, so I see why you got elected to Congress.

Mrs. DAVIS OF VIRGINIA. Ms. Blackburn, do you have a question?

Ms. BLACKBURN. Yes, I do have one. This sounds absolutely fascinating and I thank you for your comments.

Going back to the compensation, could your individual managers

decide if they wanted to give an increase in salary or if it was going

to be given as a bonus or a promotion or your incentivization program, what you would do to incentivize your employees, who made

that decision?

Mr. RUPPERSBERGER. The incentive has to be the entire team,

that is the team concept. We had other incentive programs that

were in the county but basically this is a team concept, so the entire team will be compensated. What is really good about it is if

you have people on the team that aren’t working or carrying their

weight, management doesn’t even have to get involved in that. The

team comes together and the team will say, look, you are hurting

us, we have this program to improve performance. Because you are

lazy or you are not doing the job, you are hurting us. So it is strictly a team concept, has nothing to do with our merit or compensation system, entirely different, a team concept.

This is a program that you have to develop the program with a

facilitator and it has to be approved but it comes from the frontline.

Ms. BLACKBURN. You mentioned $4.1 million in savings. Overall,

what percentage of your budget per year would you say you see as

a savings?

Mr. RUPPERSBERGER. I don’t know what that would be—less than

2 percent.

Ms. BLACKBURN. Less than 2 percent, that is great.

Mr. RUPPERSBERGER. Remember, every department doesn’t have

a gainsharing program. It starts with the employees and the

facilitators.

16

Mrs. BLACKBURN. Were you able to reduce your overall budget

because of the success of the program?

Mr. RUPPERSBERGER. Well, basically I would say that is why I

talked about our AAA bond rating and how Governing Magazine

rated Baltimore County. They write about counties and cities and

evaluate them. So I think from a management perspective, yes, we

were able to improve performance. As performance goes up, costs

go down. Yes, clearly in the areas in which we were working, costs

were going down in that regard and the performance was going up.

The difference is the savings was going half to the group, the employees, and half back to our general fund.

Ms. BLACKBURN. To the general fund. Thank you.

Mrs. DAVIS OF VIRGINIA. We have started a trend here but we

are not going to continue it next hearing.

Ms. Norton, do you have any questions?

Ms. NORTON. No, but thank you for your graciousness.

Mrs. DAVIS OF VIRGINIA. Mr. Van Hollen.

Mr. VAN HOLLEN. No, thank you.

Mrs. DAVIS OF VIRGINIA. We have been joined by Mr. Murphy. I

don’t want to catch you off guard but would you happen to have

any questions for Congressman Ruppersberger?

Mr. MURPHY. No. It is good to have him here.

Mrs. DAVIS OF VIRGINIA. Dutch, I thank you so much for coming

and appreciate your taking the time. I know how busy a Member’s

schedule is. It was very enlightening. Thank you.

Mr. RUPPERSBERGER. Thank you.

Mrs. DAVIS OF VIRGINIA. If the second panel would come forward

and remain standing, we do ask that each witness be administered

an oath.

[Witnesses sworn.]

Mrs. DAVIS OF VIRGINIA. The witnesses will now be recognized

for opening statements. We ask that you summarize your testimony in 5 minutes. We have your written testimony and I would

hope all Members have had an opportunity to read it. Your written

testimony will be made a part of the record.

I would like to welcome OPM Deputy Director, Dan Blair and the

Executive Director of the National Commission on the Public Service, Hannah Sistare. I thank you both for being with us today. Mr.

Blair, we will start with you and recognize you for 5 minutes.

STATEMENTS OF DAN G. BLAIR, DEPUTY DIRECTOR, OFFICE

OF PERSONNEL MANAGEMENT; AND HANNAH S. SISTARE,

EXECUTIVE DIRECTOR, NATIONAL COMMISSION ON THE

PUBLIC SERVICE

Mr. BLAIR. Thank you very much, Madam Chair. It is indeed an

honor and privilege to be here today to represent Director James.

I appreciate this opportunity to appear before the subcommittee,

particularly on this panel with Hannah Sistare. Hannah and I are

longtime colleagues. She was a true mentor and friend. I am particularly pleased to be on this panel with her.

I would also like to acknowledge the good work of OPM’s Deputy

Associate Director for Pay and Performance Policy, Don Winstead

who is sitting in back of me.

I ask that my entire written statement be adopted for the record.

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Mrs. DAVIS OF VIRGINIA. So ordered.

Mr. BLAIR. On behalf of Director James, I am pleased to appear

here today. I would like to talk about what we have been doing in

terms of compensation reform for Federal employees.

Following Director James’ appointment as Director of OPM, she

asked the staff to take an in-depth look at white collar Federal pay.

The result was a White Paper entitled, ‘‘A Fresh Start for Federal

Pay: The Case for Modernization.’’ The intent of the White Paper

was not to lay out specific reform proposals or solutions. Rather,

it was to expose the current problems with the Government’s white

collar pay system.

The paper concluded the following points. The current General

Schedule is an antiquated system best suited for the 1950’s work

force but not for today’s knowledgable work force. It has minimal

ability to encourage and reward achievement and results. It does

not adequately reflect market pay and it precludes agency’s from

tailoring pay programs to their specific mission and labor markets.

Since the paper was released, the conversation about pay modernization has continued on a number of fronts. Last year, Congress enacted legislation creating the new Department of Homeland Security. It was significant that Congress recognized that the

new department needed flexibility for a modernized approach for

compensation by authorizing the Director of OPM and the Secretary for DHS to jointly develop and establish a new human resources system. We are in the initial stages of working with DHS

managers and employees to identify those options for consideration.

We also recognize the thought provoking work contained in the

recent report of the National Commission on Public Service. The

Commission concluded that the Federal Government must be reshaped and that the systems that support it must be rooted in a

new personnel management system which has principles and ensure a much higher level as a government performance. Indeed, the

President’s budget for fiscal year 2004 includes two proposals intended to help create a pay for performance culture in the Federal

Government.

First, the administration proposes establishment of a Human

Capital Performance Fund. Second, the administration proposes to

raise the pay cap for the Senior Executive Service and implement

an open pay range for senior executives.

First, let me talk about the Human Capital Performance Fund.

Under this proposal, $500 million would be appropriated in fiscal

year 2004 for allocation by OPM to agencies that submit a plan to

use their share of the fund for performance-based increases in basic

pay. The fund would represent an important tool for rewarding

high performing employees and it points the way to a greater emphasis on employee performance and contributions to mission accomplishments by requiring robust performance management as a

criterion for funding but also for providing incentive for agencies to

improve their performance management systems and human capital strategies aligning them more closely with their mission and

goals.

The proposal would leave intact for now the General Schedule

Pay System. Individual employees would remain at their existing

grade and step levels. Annual across the board adjustments would

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continue as well as locality pay and within grade step increases,

while leaving the General Schedule and job evaluation system basically intact, proposed as an important first step in our efforts to

bring performance-based compensation to the Federal Government.

With this proposal, we can begin distinguishing between high and

low performers in a meaningful way.

The second proposal to increase performance sensitivity of Federal pay system focuses on how we pay our senior executives. The

administration recognizes that pay compression within the SES

could result in serious recruitment and retention problems. More

importantly, the current structure under which more than 60 percent of all senior executives receive exactly the same salary despite

varying degrees of responsibilities and duties fails to support the

goal of developing a pay-for-performance culture.

If we cannot demonstrate the value of a performance oriented

pay system for our senior executives, how can we expect to foster

development of performance oriented pay systems for the rest of

the Federal Government?

I believe the administration’s Human Capital Performance Fund

and SES pay reform proposals represent major steps toward the establishment of long-term goals and modernizing Federal pay systems. We are confident these proposals will keep the dialog moving

in the right direction.

Also, let me acknowledge the important work that effective performance management will play in any compensation program.

OPM’s White Paper announced how credible, reliable performance

measures that make appropriate performance distinctions are critical to successfully increasing the link between pay and performance.

Thank you very much for this opportunity. I would be pleased to

answer any questions.

[The prepared statement of Mr. Blair follows:]

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Mrs. DAVIS OF VIRGINIA. Thank you, Mr. Blair.

Ms. Sistare.

Ms. SISTARE. Chairwoman Davis, Congressman Davis and members of the subcommittee, on behalf of Paul Volcker and the members of the National Commission on the Public Service, I thank the

subcommittee for asking the Commission to share its findings and

recommendations on the issue of pay reform.

Paul Volcker took up the cause of the public service again because of many of the same concerns that motivated the first National Commission on the Public Service. The commissioners who

agreed to join him in this task are from all political persuasions in

both major political parties. Each of them has a wealth of public

service experience. Collectively they have served every Presidential

administration beginning with President Harry Truman. From

start to finish, the Commission was aided, challenged and encouraged by many organizations and individuals concerning the state

of the public service.

The Commission examined Federal pay in all three branches and

at all levels. Three principles are suggested by the Commission in

the report. First, government pay must reflect current market conditions if government is to attract and retain the work force it

needs to perform its responsibilities.

Second, the relevant market for most of the Federal work force

should be comparable jobs and capabilities in the general work

force. The relevant market for government senior leadership should

be positions demanding comparable responsibility and capabilities

in the nonprofit work force.

Third, pay should be tied to performance. As noted, for the majority of the Federal work force, the private/non-profit sector was

identified as the most appropriate market. The Commission recommended that Congress establish policies that permit agencies to

determine the specific relevant market for their employees.

Currently, the Commission recommended that the existing classification system and the General Schedule be terminated. The Commission recommended a broad band system be adopted as the government’s default system. In the alternative, agencies would adopt

systems which best suited their own missions.

The Commission suggested a different compensation standard for

senior government positions such as Federal judgeships, executives

and Members of Congress. There they look to comparable positions

in the private/nonprofit sector as a guide. We developed a comparison of executive pay for several categories of nongovernmental,

nonprofit entities. In every case, the compensation of the nonprofit

leadership was notably higher than that of the senior leadership of

the Federal Government.

Another area of particular concern is the Senior Executive Service. This cadre of senior executives was established to provide the

government with a skilled leadership without all the traditional

Civil Service protections but with the ability to be rewarded for excellent performance. As a result of the pay cap, nearly 70 percent

of the SES earns the same compensation. This clearly rules out rewarding excellence in performance.

The Commission recommends that Congress immediately increase the pay of capped senior government officials including FedVerDate 11-MAY-2000 13:26 Oct 02, 2003 Jkt 000000 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 D:\DOCS\89241.TXT HGOVREF1 PsN: HGOVREF1
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eral judges and Members of Congress themselves. Should Congress

not wish to give itself this level of increase, the Commission asked

it to decouple its own pay from that of Federal executives and

judges.

I will repeat for the record a statement the Commission included

in the report, ‘‘Few democracies in the world expect so much from

their national legislators for so little in compensation.’’

Two additional areas addressed by the Commission bear on the

issue of compensation flexibility. First is the importance of increased and careful oversight by Congress and responsible executive branch leadership to assure that the new system and personnel flexibility stay on track. Careful and ongoing oversight including statutory assurance of merit principles of government employment can ease concerns about abuse and prevent it from occurring.

Second and related is the importance of ongoing training. The

Commission believed that adequate and consistently funded training for all Federal employees was of great importance.

The Commission focused to a greater extent in its report on pay

of top governmental officials than it did on pay of the broad Federal work force first because of the clear challenge to effective governance when the leadership of government is significantly underpaid, and second, because the executive level pay caps are currently a barrier to pay reform, the entire work Federal work force.

Finally, an important barrier to utilizing existing performance

incentives is the government performance rating process itself.

Like the residents of Lake Woebegone, everyone working for the

Federal Government performs above average. In fact, most of the

Federal work force is in the superior category. Of 700 employees

rated in 2001 using the pass/fail system, 93 percent passed and

just 0.06 percent failed. Of the 800,000 who were rated that year

using a 5 point system, 43 percent were outstanding, 28 were exceeds fully successful and 18 percent was fully successful.

The system is in need of reform. Agencies must adopt and apply

credible measures of performance with appropriate training and

oversight.

Thank you again.

[The prepared statement of Ms. Sistare follows:]

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Mrs. DAVIS OF VIRGINIA. Thank you, Ms. Sistare.

Mr. Blair, I was very pleased to see the thoughtful discussion of

the compensation issues in the White Paper that you talked about

that OPM issued last April. The White Paper seemed to indict the

General Schedule. However, during the debate on Homeland Security Act of 2002, the administration argued that the Department

needed the flexibility to abolish the General Schedule. Given that,

why does the Human Capital Performance Fund proposal continue

to use the General Schedule as the base for Federal employee compensation?

Mr. BLAIR. The Human Capital Performance Fund is really a

downpayment on future reforms which we are still working on. The

White Paper began this conversation and we are in the process of

working with the stakeholders to identify and refine future solutions. The adoption of the proposal of the Human Capital Performance Fund will give incentives to our managers to begin making

meaningful distinctions in employee performance. Further, Congress has shown tremendous interest in human capital issues including adoption of the Department of Homeland Security legislation, there was a recent CBO report on Federal compensation, the

Volcker Commission recommendations and the like. So we are continuing the conversations and working to refine and propose solutions. Given that, we thought it was a good idea to put forth this

idea of the Performance Fund as a meaningful downpayment on

such reforms.

Mrs. DAVIS OF VIRGINIA. I continue to be very concerned and I

think my colleague alluded to it, that the administration is continuing to be unwilling to ensure parity between the civilian work force

and the military. The Human Capital Performance Fund proposal

would fall short of parity except presumably for top performers who

would need the extra money from the fund just to get parity.

How would OPM measure the results of the Human Capital Performance Fund approach to pay for performance? It seems to me

without some clear, hardnosed criteria, we are unable to say one

way or another whether the pay-for-performance has been a success. How are we going to do it?

Mr. BLAIR. Under the President’s proposal, each agency will

apply for a pro rata portion of the fund that would be appropriated

to OPM. They will have to come up with specific criteria showing

what kind of performance management system they intend to have

in place and how they intend to reward performance. So on the

front end, you have continual monitoring and oversight by the Office of Personnel Management.

In addition, the President’s executive branch management scorecard rates and evaluate agencies on the way they handle the

human capital performance. That is the scorecard reds, yellows and

greens and OPM is the lead partner in scoring agencies on the

human capital portion of that scorecard.

One of the things we take into account is how effective are the

agencies performance management systems. So you are going to

have continual monitoring and oversight over these management

performance systems.

In addition, we expect visual oversight from Congress, GAO, the

Inspectors General and a whole host of other bodies interested in

38

good governance. I think an effective framework for oversight

would be established. Agencies will have to apply for this fund each

year, so if an agency doesn’t meet its obligations and commitment

1 year, it would be unlikely it would be approved the next.

In addition, agencies that would have particularly good incentive

programs would be rewarded because approximately 10 percent of

this $500 million fund will be held in reserve by OPM to reward

agencies that come up with particularly good plans. So we really

think we have a strong infrastructure in place to ensure effective

management of the fund.

Mrs. DAVIS OF VIRGINIA. To qualify for the plan, would they have

to have set specific guidelines so there wouldn’t be what I think

many of us are concerned about: bias toward an employee one way

or the other by a manager?

Mr. BLAIR. I would anticipate that. I think the merit system

principles would be at the heart of what we want to do here. That

would ensure that this fund is administered in a fair and evenhanded manner. We have no intention of doing otherwise.

Mrs. DAVIS OF VIRGINIA. Ms. Sistare, you recommended in your

report eliminating the General Schedule for pay and creating six

to eight broad bands with relatively wide salary ranges. Do you believe that pay banding without the presence of specific measurable

performance standards would work as a concept and did the Commission, when they did the work, do any work on any performance

measures?

Ms. SISTARE. The Commission would certainly say that it should

be concurrent, that they would have to be done concurrently. If you

are going to judge people on performance, you have to have adequate and reliable measures.

Mrs. DAVIS OF VIRGINIA. So we can’t just go out there and change

the system without everything in place.

Ms. SISTARE. The Commission regarded its recommendations, in

some cases, as with the reorganization proposals, as being the work

of many years. But they felt the work should begin.

Mrs. DAVIS OF VIRGINIA. Do you propose, and how do you propose, that we get Federal employees to buy into the pay banding

because I know we have some that are very nervous about it and

very concerned. How do we convince them it is a good idea?

Ms. SISTARE. There are concerns that have been raised about pay

banding and performance measurements generally. The Commission felt that if you have adequate oversight both by Congress and

the executive branch, training of the people making the judgments,

and adequate funding for whatever reward system there is and the

training, that should not only allay concerns but should deal with

any problems.

Mrs. DAVIS OF VIRGINIA. I see my time is up, so I am going to

ask our ranking member, Mr. Davis, do you have questions?

Mr. DAVIS OF ILLINOIS. Thank you very much, Madam Chairwoman.

Let me thank both of you for your testimony.

Mr. Blair, the GAO has stated that Federal agencies should demonstrate that they have modern, effective and credible performance

management systems in place before additional pay reform flexibilities are implemented. In your opinion, do Federal agencies have

39

credible performance management systems in place? If so, which

agencies would you highlight?

Mr. BLAIR. I would have to get back to you as to which agencies

to highlight but we do have some that do have good performance

management systems in place. That said, you bring a very salient

point. We have to have good performance measures in place before

this is effective and right now, there are no incentives for agencies

to have those in place because our pay systems don’t really recognize good performance. Until you have a system which provides

agency managers and agencies the kinds of incentives it needs to

reward your performance, it is going to be hard to get those in

place.

Mr. DAVIS OF ILLINOIS. You were here when Representative

Ruppersberger testified. Would you see gainsharing having any

place in that role in government?

Mr. BLAIR. It is my understanding agencies have the authority

now to do gainsharing, so I think what Representative

Ruppersberger pointed out was an interesting system and I think

there is a lot the government could learn from it.

Mr. DAVIS OF ILLINOIS. Let me ask Ms. Sistare, you have indicated that the existing classification system should be changed, terminated actually, and that the Federal agencies should adopt pay

systems that support their respective missions. What impact would

this have on the ability of individuals to transfer say from one

agency to another, and would it affect their compensation?

Ms. SISTARE. The Commission certainly believed that government could benefit if the path between agencies were more open to

employees. I would see the transferring employee going into the

new agency and being considered on the basis of that agency’s system, just as people going between one business and another in the

private sector are then dealing with whatever pay system exists

with that new employer.

Mr. DAVIS OF ILLINOIS. So then it would be possible that if one

had an opportunity to transfer, they may also have to look at a

change in compensation that would not necessarily be an upgrade

for them?

Ms. SISTARE. That is true, although it could be the opposite.

Maybe I should make one point, which is the Commission definitely

felt there should be and would be always a core government work

force that would most likely who were career employees, full career, and that people in that work force doing what Paul Volcker

calls the core competencies of government would probably have the

broadbanding system and would be in many ways alike. So it

would be less of an issue there for somebody transferring from one

to the other.

Mr. DAVIS OF ILLINOIS. I gather from your testimony that you are

really excited about the way we evaluate performance. What criteria would you suggest?

Ms. SISTARE. The results would indicate that it is not really an

evaluation process. As you say, maybe the problem is that the criteria aren’t there. If a manager or supervisor or an agency doesn’t

have reliable performance criteria, it is pretty hard to rate people

on a spectrum. Also, the law prevents managers from rating on a

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curve and really doesn’t support them when they do try to make

distinctions.

Mr. DAVIS OF ILLINOIS. So you are suggesting that it is fairly

subjective. It appears to be fairly subjective right now?

Ms. SISTARE. I believe so.

Mr. DAVIS OF ILLINOIS. Thank you.

Mrs. DAVIS OF VIRGINIA. Thank you, Mr. Davis.

Ms. Blackburn. If the gentlewoman would yield for a moment, I

would like to take a second of her time.

Tying into what Mr. Davis said when he was talking about someone transferring from one department to another, would you be

suggesting that there be a one-size-fits-all compensation system

throughout the Federal Government so that one could transfer or

are you suggesting we do something different in each agency?

Ms. SISTARE. No, the Commission was clear they felt the agencies

should adopt the systems that best fit their missions and needs but

they did believe that many would adopt the pay-banding system

and that since they expected OPM would assist in setting up these

systems, there would probably be a fair number of agencies that

had similar pay systems.

Mrs. DAVIS OF VIRGINIA. Thank you, and thank you, Ms.

Blackburn, for yielding to me.

Ms. Norton.

Ms. NORTON. Thank you, Madam Chair.

I appreciate what you are trying to do because what we are dealing with here is the largest employer in the country and yet a mandate to make sure the merit system principles apply and if we

didn’t have that, we would be back to before the Civil Service system. We do need to study our history to understand how we got

to this system in the first place with all of its rigidities as we try

to modernize it.

From both your testimonies, I got the impression that I was dealing with a pig in a poke because I couldn’t put my finger on how

it would work, in part because you obviously are in the beginning

stages and I have some appreciation for what you are going

through. I chaired the Equal Employment Opportunities Commission and at a time when it had to go through a wholesale reform

of the entire agency, this is very difficult.

Choosing one part of the system first does seem to me to be the

way to go as opposed to throwing the stuff up and seeing what you

can do with the whole system. Yet, you have chosen a part of the

system, the SES, which I am left to wonder how much it has to

teach up and down the line.

For example, in your testimony, Mr. Blair, you say the administration’s SES pay proposal would eliminate the fixed pay levels

within the current SES system in favor of an open pay range with

a higher pay gap, would be able to make meaningful distinctions

in pay based on each individual executive’s performance and contribution to the agency’s mission and goals.

One of the reasons we have a Civil Service system that is so

clumsy is because that is so difficult, to distinguish between a

whole bunch of people that may be doing the same or similar work.

You said in response to the Chair’s question that merit system

principles would apply. It would help me a lot if you would give me

41

at least an example. You would be more compelling in your testimony if you would say, and here is how it would work with respect

to even the smallest example.

Throughout this testimony and your testimony too, Ms. Sistare,

I cannot find examples to inform my judgment. I am being asked,

I guess, to trust you and the history of how we got to the Civil

Service system makes me unwilling to trust anybody unless they

are willing to lay out how the system would work. So you would

help me a lot if you would give me an example of how this would

work for somebody in SES with a broad range and yet merit system principles would apply.

Mr. BLAIR. I always like to say trust us but verify, so we will

help you on that verification process.

First, with SES, keep in mind where we are coming from on this.

We have pay compression of somewhere between 60 and 70 percent

SESers are all paid the same. The reason for that is it has been

linked to congressional pay and Congress has denied itself pay

raises over the course of the past decade and beyond a multitude

of times.

In order to justify moving up that pay cap, we want to say we

are not going to be giving any across-the-board pay raises to Senior

Executive Service members; that the pay raises that will be afforded them, if you are going to increase within the pay range, the

pay range will now be, locality pay, Executive Level 2 which is a

Cabinet level Secretary salary or Deputy of approximately

$154,000, it is going to have to be based on performance.

Right now, SESers are evaluated on a yearly basis and we need

to do more on that evaluation. In 2001, 83 percent got the highest

rating possible. Some argued that those ratings are a sign of agencies trying to get around the pay compression cap. That said, I

think that we do already monitor SES performance. I know in

OPM, a relatively small agency, the Director walks through with

each and every Senior Executive Service member their performance

evaluation.

Ms. NORTON. Is that an example of a merit principle? My question was how do merit principles apply to this individualized pay

for performance system that you would put in place?

Mr. BLAIR. We could identify the merit system principles that

you are paying fairly, you are recognizing good work, that you are

paying by work for equal work for equal value and also aligning

the work with the performance of the agency. I think that meets

the heart of the merit system principles.

Ms. NORTON. It may well. Let me conclude by saying it all

sounds terribly subjective to me in the hands of an individual.

Again, this is how we got the system in the first place because it

produces all kinds of reactions from people who say how did you

reach that conclusion. I think you have a lot of work to do. I think

your work is easier, this I will grant you, much easier with SES,

much easier the higher up you get.

In your testimony, you say if we cannot demonstrate the value

of a performance oriented pay system for our senior executives,

how can we expect to foster development of performance oriented

pay systems for the rest of the Federal work force and you suggest

again, this is some kind of precedent for the rest of the Federal

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work force on page 6 when you say, the one-size-for-all pay system

doesn’t work for senior executives any better than it works for

other employees and we are eager to show that a performance oriented pay system can work for senior executives.

I would just like to ask you as you try to figure out how to do

this for people at the very top for whom it seems a case can be

made for at least the merit system principles being applied for

some really open-ended way to pay, I would caution you against believing this is a model for how to deal with what is 2 million people

who work in the Federal work force. I think that shows a lack of

appreciation for how we got to this system in the first place.

Mr. Ruppersberger talked about morale. The notion of saying to

managers in the workplace, hey, we are going to do what we did

in the SES, we are going to go to an individualized system, using

your language, of judging every employee. All I can say to that, Mr.

Blair, is good luck.

Mrs. DAVIS OF VIRGINIA. I thank the gentlewoman. Your time

has expired and we have several more panels, so I am going to go

on to Mr. Murphy.

Mr. MURPHY. Thank you, Madam Chairman.

I have been trying to go through these reports and figure out

some sense and having been an employer myself, I know how difficult it is to evaluate performance. How do you do it? Forget all

the jargon. I don’t want to hear about performance standards. I

want to hear exactly how you do it?

Mr. BLAIR. We go through and evaluate employees.

Mr. MURPHY. Who fills that out?

Mr. BLAIR. The manager or supervisor.

Mr. MURPHY. And where does that data come from?

Mr. BLAIR. From an employee’s performance plan on an annual

basis.

Mr. MURPHY. So the employer and employee work out that performance plan?

Mr. BLAIR. It is mainly done by the manager or supervisor but

with input from the employee.

Mr. MURPHY. Who makes a determination if those things have

been met? Is that discussed between the employer and employee,

are there outside sources?

Mr. BLAIR. It is done by the manager.

Mr. MURPHY. So it depends how closely the manager is monitoring that person’s job. Are there any outside sources? A lot of Federal employees interface with the public. Is there any way of getting information from the public on their satisfaction?

Mr. BLAIR. I believe that might be part of the individual’s plan.

It would be on an individual basis. I would have to get back to you

as to what those look like. I think the point is for the individual

employee, we do set up specific performance plans for them.

Mr. MURPHY. I am not closer to the truth of what is going on

here. I don’t think you are being difficult, I am just trying to understand because these things can be very, very difficult to do and if

one doesn’t do them right, the whole thing from top down ends up

to be a mess.

I know we are all in a performance rated every 2 years for better

or worse, reality or fantasy. Whatever it is, we have that and we

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have to lay those things out. It is a matter that for employees,

many times people talk in not very glowing terms about any government employees. They refer in negative terms to bureaucrats

and so forth and many politicians say they are going to cut through

red tape and deal with bureaucrats. We wouldn’t say that, it would

be challengers who would say those things.

Many times we know the value of people working in these aspects but what I am concerning about is how we can get outside

information that benefits that employee because I think they always do better if they know an accurate and fair information of

how they are doing. How do we get that information? Is there any

system set up to do that?

Mr. BLAIR. I don’t think we want to have a one-size-fits-all for

government. I think it is going to have to be tailor made for each

individual agency and even subcomponents within the agency. We

want to evaluate that plan and the agency needs to evaluate that

plan and make sure they aligned with the mission goals and objectives. I am looking at it from kind of the 30,000 foot level at this

point but we want to make sure employees know what is expected

of them, know how they are being judged, that performance evaluation always carries with it an element of subjectivity. I think we

need to recognize that and put it out on the table but subjective

judgments are not inherently unreliable. They just have to be done

openly and transparently and done with objective, definable results. That is what we want to make sure we have on the table for

employees when we are going to be basing a system or part of their

compensation system on performance based plans.

Mr. MURPHY. I would hope in pursuit of this, those guidelines

would be fairly objective in terms of what employers are doing because even management needs help in understanding how to do

those. Many times the problem occurs because a manager has not

clearly stated guidelines. It is unfortunate if the only time that

manager sits down with the employee to discuss problems is at the

time of their annual review. That is a major flaw with management. They should have done so several times up to that point. I

assume we are doing work on that too?

Mr. BLAIR. I agree with you. I think when you do have a problem

employee, it shows a failure not just on the part of the employee

but on the part of management. This is something employees and

managers and the supervisor and the managers’ managers need to

have constant interaction.

Let us look at what we are up against. We have approximately a payroll of $133 billion a year. That includes paying benefits. Pay

can be a very strategic tool in the management’s arsenal so to

speak but we have neutralized that tool because very little of our

pay is performance based.

We gave a 4.1 percent across the board increase last year, it cost well over $5 billion. We have longevity of what we call within-grade

step increases of 3 percent a year which up to one-third to one-half

employees are eligible for, with only a small component of performance as a part of that. You have to ask, ‘‘is that an effective way

to manage that much money?’’

What we are trying to do, and I think most people agree, that

we need to do a better job of rewarding performance. The recent

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Federal Human Capital Survey results that OPM released last

week, and I believe the Chair referenced this in her statement

today, said that most employees, 63 percent, felt good about their

pay, were satisfied with their pay.

Interestingly, fewer than half said that pay rewards good performance. We need to do a better job on that. That is what the

President’s proposal attempts to do, introduce an element of payfor-performance through the Human Capital Performance Fund.

Mr. MURPHY. I don’t disagree with the concept. It can have some

fine results provided it does that and provides a fair and clear

mechanism for employees to do that. I think that is what employees want. When you have people not satisfied with their job, oftentimes they just want more pay to make up for their own problems

with it. I hope these things continue to develop and you can clear

it up.

Mrs. DAVIS OF VIRGINIA. Thank you, Mr. Murphy.

Mr. Van Hollen.

Mr. VAN HOLLEN. Thank you, Madam Chairman.

First, a general comment. My colleagues may have already made

this point which is, this may be received less suspiciously by many

employee groups if you dealt with the pay parity issue. In other

words, if people felt they were getting their fair pay increases like

the civilian side of the work force with respect to comparison with

the other side of the work force as opposed to this incentive pay

being carved out of moneys that would otherwise be part of the

general pay increase, I think obviously you would get a better reception.

I have a couple questions to followup on what Congressman Murphy and others have asked which really gets to the nub of the issue

which is people feeling comfortable that you have a performance

plan in place that really measures the individual’s performance on

a merit basis as opposed to all these extraneous and subjective factors.

I would be very interested and maybe you could supply the committee and you mentioned you have performance plans already in

place to provide an analysis of employees. If you could provide the

subcommittee with a sort of cross section across various departments, the Departments of State, Defense and the others of the

type of performance plans currently there because on the one hand,

you say they are already in place and on the other hand, they seem

to be giving you results you are not happy with, a kind of bunching

of results, so I would be curious if we could get some sense. It is

hard to put your hands on this stuff, so if we could get our hands

on some stuff you have been using, that would be helpful to me

anyway.

Mr. BLAIR. We would be happy to provide that.

Mr. VAN HOLLEN. Thank you. Second, Congressman

Ruppersberger was here and talked about gainsharing. In that

case, you could see measurable results. It obviously applies more

clearly to things where the government is performing a service. He

mentioned mowing the grass or providing a particular concrete

service where you can measure the cost to the government and determine whether or not that service is being delivered at less or

more cost.

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I wonder if that is not a better approach. What he is saying is

we are going to identify a distinct area of government services, determine how much it is costing us today to provide those services,

then we are going to say to the employees, if you provide those

services at less cost, you will share somewhat in the benefits and

the taxpayers will share in the benefits. It is much easier to identify, I actually think it may be harder to identify things in your Executive Service than things in other areas of government where you

may be delivering specific services. I wonder if you could comment

on that.

Give us examples. You said gainsharing is allowed in the Federal

Government. Give me some examples of where it is in use now and

how it is working.

Mr. BLAIR. I would have to get back with you on that. I didn’t

have the benefit of his statement before I came here, so we would

be pleased to provide that for the record.

[The information referred to follows:]

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Mr. BLAIR. One of the instances you just described would really

work well under the President’s proposal for the Performance

Fund. For instance, say you have an employee with no chance of

promotion at this point but they are doing an outstanding job. Say

they identify some procurement savings that can save an agency

$2-$3 million a year. Under current rules, we can reward that employee a one-time bonus of $5,000 for the identification and for that

good work, but that is not built into his or her base salary and

doesn’t go toward retirement.

Under the Human Capital Performance Fund, an agency presumably could submit a plan to recognize that kind of productivity and

give that employee an award increasing his or her salary by $5,000

a year. That would be built into their base pay, be recognized for

retirement purposes and that person would be able to keep it in future years rather than just see it as a one-time bonus or one-time

shot.

I am glad to see the committee members’ interest in this because

we really need to do a better job of honing our systems in order

to encourage better performance. When we have a pay system that

doesn’t do that, it really puts us out of whack and pay is one of

the most strategic tools we have. If we can’t use that to spur better

performance, I am not sure what else we have.

Mr. VAN HOLLEN. Briefly to followup, you are right. The procurement, that is an example where someone’s creativity may be able

to identify cost savings but there are so many areas in the Federal

Government where there is not that kind of direct link to an easy

measure of productivity, not like a salesman out there selling widgets.

For example, someone at the State Department or the CIA who

is analyzing the situation in Iraq or any other place in the world,

coming up with a clear performance standard for how you measure

success is what I am having trouble getting my hands on and what

is the basic concern of employees with respect to the fairness.

There are some things that lend themselves more easily to measuring success and maybe we should focus on those areas on a trial

basis or pilot basis rather than trying to do it all at once.

Thank you, Madam Chairman.

Mrs. DAVIS OF VIRGINIA. Thank you, Mr. Van Hollen.

If you all will bear with me, I have one more question because

it has been brought up a couple of times. You alluded to it a moment ago, Mr. Blair. The OPM survey showed that nearly twothirds of the Federal workers were very satisfied with their pay but

also revealed that 35 percent were considering leaving their jobs.

To me doesn’t this indicate that maybe pay is not the source of job

satisfaction and maybe we should not be looking at pay reform as

reform right now?

Mr. BLAIR. Let me take two stabs at that question. First, I think

35 percent that may be thinking about leaving their jobs may have

also included those who are thinking about leaving for retirement

purposes. Say even if everyone is satisfied with their job, I think

we still need to take a look at how we pay employees.

We have a 50-year-old system that has been amended over the

years. The last time it was substantially amended was in 1993 but

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ward our employees. That is the right thing to do. So even if everyone is satisfied with their pay, it still doesn’t mean we shouldn’t

be looking at finetuning and reforming the ways we pay our employees.

Mrs. DAVIS OF VIRGINIA. I think you can see that the members

of the committee are possibly interested in this but also very cautious and wary because we don’t want to, at least I as the Chair,

am not real crazy about going into something and making more of

a mess of the system than we might have at the moment.

I look forward to hearing some things back from both of you and

I agree, we do probably need to look at some type of change but

we want to make sure it is the right change.

Mr. Davis.

Mr. DAVIS OF ILLINOIS. I would like to make sure we all get the

information he is going to provide for Mr. Van Hollen.

Mrs. DAVIS OF VIRGINIA. We will make sure when he gets it to

the committee, Mr. Davis, that we get to all the members of the

subcommittee.

We thank you both for taking time to come and appreciate everything you had to share with us.

If the third panel would come forward. We are going to administer the oath, if you will stand. It is the subcommittee’s standard

of practice to ask witnesses to testify under oath, so if you will

raise your right hands.

[Witnesses sworn.]

Mrs. DAVIS OF VIRGINIA. The witnesses will be recognized for

opening statements. We will ask you, as we did the previous panel,

to summarize your testimony in 5 minutes and your written statement will be made a part of the record.

I would like to welcome Christopher J. Mihm, Director, Strategic

Issues, U.S. General Accounting Office; Max Stier, president and

CEO, Partnership for Public Service; and George Nesterczuk, consultant to the Heritage Foundation. Thank you all for being with

us today. Mr. Mihm, we will recognize you for 5 minutes.

STATEMENTS OF CHRISTOPHER J. MIHM, DIRECTOR, STRATEGIC ISSUES, U.S. GENERAL ACCOUNTING OFFICE; MAX

STIER, PRESIDENT AND CEO, PARTNERSHIP FOR PUBLIC

SERVICE; AND GEORGE NESTERCZUK, PRESIDENT,

NESTERCZUK AND ASSOCIATES AND CONSULTANT, HERITAGE FOUNDATION

Mr. MIHM. Thank you very much, Chairwoman Davis and Mr.

Davis. It is a great honor and pleasure to be here today to testify

on results oriented pay reform.

Mr. Davis, I think as you noted in quoting from the Controller

General in your opening statement, my major point today is that

in order to have effective pay for performance reforms, agencies

must have modern, credible and validated performance management systems that are capable of supporting pay and other personnel decisions. Quite simply, pay for performance works only when

adequate safeguards including reasonable transparency and appropriate accountability mechanisms are in place.

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I would agree with the spirit of what Mr. Blair and Ms. Sistare

were saying that modern performance management systems are

the centerpiece of those safeguards.

Unfortunately, as you also noted, Mr. Davis, we have quite a way

to go with many agencies. The chairwoman quoted in her opening

statement from the OPM Governmentwide Survey that suggested

the credibility is certainly a problem with the current Federal performance management system. Part of the problem is that executive agencies performance management systems are based on episodic and paper intensive exercises that are not linked to the strategic plans or program goals of the organization. They often have

only a modest influence on the pay, use, deployment and promotions of Federal employees.

Leading organizations, on the other hand, use their performance

management systems to accelerate change, achieve desired results

and to facilitate two-way communication throughout the year so

that discussions about individual and organizational performance

are integrated and ongoing.

This gets to exactly the point Mr. Murphy raised in his questioning of the last panel. That is, these organizations use their performance management systems not so much as merely once or

twice a year just individual expectation setting or rating processes

but they are actually used as tools within the organization to manage it on a day to day basis and achieve results that citizens care

about.

Chairwoman Davis, today you are releasing a report that we prepared at your and Senator Voinovich’s request that shows some of

the specific practices that leading public sector organizations here

in the United States as well as around the world have used in their

performance management systems to create clear alignment between organizational goals and individual day to day activities. It

is the so-called line of sight.

Our suggestion would be that Federal agencies consider these

practices as they modernize their performance management systems to better ensure that their daily activities are contributing to

results. Our hope is that this report, and other work we will certainly make available to the subcommittee, will begin to provide

some of the examples that Mr. Murphy and Ms. Norton were asking about, very concrete examples of where organizations are able

to achieve this alignment while still adhering to merit principles.

As all the conversation thus far has made clear, we need to continue to experiment with providing agencies with the flexibility to

pilot approaches, to setting pay and linking pay to performance. We

believe that agencies should be required to demonstrate they have

modern performance management systems in place before they are

allowed to implement the pay for performance initiatives. This is

consistent with the approach Congress took with raising the total

amount of annual compensation for senior executives as part of the

Homeland Security Act.

The Congress may also want to consider providing guidance on

the criteria that OPM should use in making judgments about individual agencies’ performance management systems if Congress decides to go forward with the performance fund or other pay for performance initiatives. We believe that the practice as detailed in the

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report being released today provides the starting point for that consideration.

In summary, there is widespread agreement that the basic approach to setting Federal pay is broken and we need to move to

more market and performance based approach. Doing so will be essential if we want to really maximize the performance of government. However, while reasonable people can and will debate and

disagree about the merits of individual reform proposals, we believe

that all people should be able to agree that a performance management system with appropriate safeguards must be in place and

serve as the fundamental underpinning of any fair, effective and

appropriate results oriented pay reform.

The practices used by leading organizations in developing and

using their performance management systems to link organizational goals to individual performance and create this vital line of

sight between individual activities and organizational results, we

believe show the way in how to implement performance management systems with the necessary attributes.

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

I will be happy to take any questions you may have.

[The prepared statement of Mr. Mihm follows:]

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Mrs. DAVIS OF VIRGINIA. Thank you, Mr. Mihm.

Mr. Stier.

Mr. STIER. Thank you very much, Madam Chairwoman and Congressman Davis. It is a pleasure being here particularly with Chris

who has done wonderful work at GAO and George Nesterczuk and

the panel coming, including Colleen Kelley who is on our advisory

board.

It is great the committee is doing this. I think you are to be commended. When we talk about Civil Service reform, oftentimes the

elephant in the room that goes unrecognized is the issue of compensation and compensation reform. It is a tricky set of issues but

it is terrific that you are focusing on it today and bringing together

so many people to share their experiences with you.

It is particularly important to be focusing on it today given the

challenges the Federal Government faces with respect to its human

capital and I also think it is about time. There has been research,

there has been 25 years of demo project experience. There are expected agencies that have been experimenting and in fact, there

are answers to questions raised by members—other agencies that

have been attempting gainsharing. PTO is an example and others.

Clearly the GAO report is going to shed some interesting light on

that. So this is terrific.

I would begin by noting that the merit principles themselves talk

about a form of recognizing excellence. The law requires, ‘‘Appropriate incentives and recognition should be provided for excellence

in performance.’’ That is in the law today but unfortunately it has

not, I think, been adequately implemented. I think much of the

committee’s attention should be focused on how do you get that to

be a reality in today’s workforce.

I would make three very quick points. The first is that this issue

is not easy but it is worth tackling, very much so. The present system I believe is very much broken. You have the White Paper from

OPM which is very instructive. Very importantly, look at what the

employee surveys are telling us. In the year 2000, the Merit Systems Protection Board did a survey asking ‘‘If you perform better

in your present job, how likely is it that you will receive more pay?’’

Fifty-four percent said unlikely versus 35 percent saying likely.

The most recent survey we have from OPM, the 2003 survey, again

the chairwoman has raised some of these statistics, only 30 percent

agree with the proposition that ‘‘Our organization’s awards program provides me with an incentive to do my best.’’ Only 45 percent of employees agreed with the statement that ‘‘Arbitrary action,

personal favoritism and coercion for partisan, political purposes are

not tolerated.’’ That is a real problem.

I would note that number, according to the OPM report, was 5

percent higher among the employees surveyed in the alternative

personnel systems and demo projects. That may not be management nirvana but it is a statistically significant improvement and

it says it is possible to do better even under the existing system

with some of the experimentation that has taken place.

Second, the potential gains here are absolutely enormous. If you

believe that better performance will receive better rewards it increases employee commitment. That is something you see all over

the private sector research. Watson and Wyatt did a survey in

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which they found an 82 percent level of commitment for employees

who believe they will receive better pay for better performance versus a 35 percent level of employee commitment for those who did

not.

We also can see examples in the public sector, Bonneville Power

Administration and GAO both talked about in great detail in the

written testimony.

The third point I would like to raise is that the issue of pay for

performance really needs to be looked into in larger context. Many

of the members of the committee have raised this already. We need

to be reviewing this as performance management, a culture of results, and not simply a pay reform issue. It is really a comprehensive system we need to be talking about, not only the evaluation

system raised here but really an ongoing dialog between managers

and employees about the way contributions are made by individuals to meet the organizational needs of the agency.

That means that ultimately you have to start with clear organizational goals and ongoing communication—something that oftentimes is not accomplished in agencies today—in order for employees to be able to fully commit to the process.

Clearly, we need to be looking at individual agencies before we

allow them to move forward to a system that is going to be more

directed toward tying rewards to performance. It is something we

really need to do. There are lots of ways to do it. We have good examples out there. Obviously the groups you have involved in the

testimony today need to be involved in that process. We look forward to helping in whatever way we can.

[The prepared statement of Mr. Stier follows:]

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Mrs. DAVIS OF VIRGINIA. Thank you, Mr. Stier. We appreciate

that.

Mr. Nesterczuk.

Mr. NESTERCZUK. Thank you, Madam Chair and Mr. Davis.

Thanks for this opportunity to address the committee on the question of compensation of Federal employees. It is a very timely issue.

Although current surveys may indicate some satisfaction with current pay systems, historically it has always been an irritant in the

work force, maybe a reflection of economic conditions outside.

Let me summarize of the key points I made in my written testimony so that I can stay within the 5-minute time limit.

There is no question in my mind that the pay system is, if not

broken, certainly dysfunctional in many instances. If we look at the

past 15 years and the experience of agencies coming to Congress

seeking relief and getting relief for special circumstances, I think

there is a message there for the Civil Service Subcommittee to seriously take to heart.

FIRREA exempted the banking regulators of financial institutions from Title V pay restrictions way back in 1986–1987. The

FAA was taken out from under Title V and established its own separate pay system back in 1996. The IRS followed suit in 1998 and

that is 100,000 employees in that case. The Transportation Safety

Administration followed in 2001 with a separate pay system and

the Department of Homeland Security. So you are looking at

300,000 to 400,000 employees that are going to be out from under

the General Schedule.

There is a clear message there which is agencies are focusing on

their missions. They find the pay system is not supporting getting

their job done. OPM has historically had special pay authority but

clearly it is not adequate. That was intended to rifleshoot individual occupations in specialized locations where local labor market

conditions dictated exemptions from the General Schedule. The

agencies are clearly looking for much more sweeping reforms.

Let me now address the question of performance management,

performance recognition in the Federal Government, a whole separate issue. Pay for performance is not really a play these days in

the Federal Government, except perhaps at the SES level where

performance is more strictly adhered to.

The two concepts are clearly divorced in the minds of most Federal employees. The culture just doesn’t recognize pay and performance as being related. Pay adjustments annually are pretty much

automatic. Twice a year adjustments for many employees, every 2

or 3 years for everybody else in 3 to 4 percent increments, so a 6

to 7 percent pay increase, regardless of how well you do your job

is a demotivator to go out and try harder if your cohort is not contributing to the process. So performance is used as an adjunct.

We do have performance recognition systems or cash awards, bonuses for the SES, Presidential rank awards, but where is the fundamental underpinning for making those awards? If a performance

management system results in 80 to 90 percent of employees being

rated above average, then what are the criteria that are used to

make decisions for those cash awards, those rank awards, the incentive awards for rank and file employees. There is a huge

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stand there is some other system at play here which is being relied

on to support the bonus decisions.

We need a very robust, transparent performance measuring system that makes meaningful distinction in relative performance

among employees. Until that is on the table, you are not going to

be able to marry pay and performance.

There are a number of options that the committee is looking at

today in realm of pay reforms. As I said, we go back to the basic

problem and agencies are speaking up telling you they do need

some kind of pay remedies. Pay banding is a credible alternative.

It has been tested for 25 years now. Yes, there are some shortcomings with it. It tends to inflate the overall payroll but those are

issues that can be managed.

I think the notion of using OPM as a watchdog working with

agencies to ensure they implement the right kinds of responsive

performance management systems to go along with the pay banding reforms is probably a suitable approach.

Moving to SES paybanding, the open pay system for the SES

with a raise cap is very important. That is a key element in the

chain of command from the President, Cabinet Secretaries to agency heads down at the career work force. They need to be motivated

and rewarded for their efforts and the pay compressions that historically reoccur every few years which is not only a big

demotivator for performance but tend to encourage people to leave

the work force.

Finally, the Human Capital Performance Fund I think is an excellent idea. It is a marginal in the overall picture of the overall

payroll of $100-$120 billion and $500 million is a marginal increment in that but it is new money for the agencies. It is the kind

of incentive they need to get their performance management systems up to snuff.

Thank you.

[The prepared statement of Mr. Nesterczuk follows:]

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Mrs. DAVIS OF VIRGINIA. Thank you, Mr. Nesterczuk.

Mr. Mihm, I will start with you. Do Government agencies have

the capacity to measure individual and group performance well

enough to make pay-for-performance more than a guessing game or

worse, a matter of favoritism?

Mr. MIHM. When we look across Federal agencies performance

management system, we don’t see the systems yet in place that

will allow them to make those meaningful distinctions or to adequately measure individual performance. There are plenty of efforts underway in that regard. Some agencies are really making

some enormous progress in that but we think there is plenty of

work that virtually all agencies need to undertake in order to be

able to these world class performance management systems in

place.

Mrs. DAVIS OF VIRGINIA. You at GAO have an internal pay for

performance system and it is pretty new?

Mr. MIHM. Yes. We started it as a result of legislation Congress

granted us in 1980. In the year 2000–2001, we went through a

rather fundamental change in updating that system. That is the

new part, yes.

Mrs. DAVIS OF VIRGINIA. Is it too early to tell if it is a success?

Mr. MIHM. I am a homer for it, I like it, so yes, it is an overwhelming success.

Mrs. DAVIS OF VIRGINIA. Would everybody in your agency say

that?

Mr. MIHM. In the true spirit of oversight, there are checks we

have in place. There are employee attitude surveys that we take

periodically to make sure that there is trust and confidence in the

system.

One of the things we did going into it to try and make sure we

wouldn’t have problems in implementation at the back end is really

drill employee involvement. In every step in the process, it was

deep, it was serious and it was across the agency that employees

were involved. We went to a focus of paying for core competencies,

our employees were deeply involved in identifying the competencies

that we would need to be successful in the future, validating those

competencies and were subsequently assessed on those competencies.

While we are far from perfect and are always looking to update

it and learn from others, we are quite confident and quite pleased

with the progress we have made in the first year.

Mrs. DAVIS OF VIRGINIA. Is that how you got the employees to

gain ownership in it, by getting them involved and letting them be

a part of the process and determining how the system would work?

Mr. MIHM. Yes, ma’am. Fundamentally, that is what does it for

you. You have to have employees involved. In fact, when we looked

overseas at performance management systems and pay for performance, we saw instances where they crashed and burned because

they did not get their employees and the unions, we are talking

about the representatives of the employee unions, involved as well.

They had to pull back and start all over again. There is simply no

other way you can do it if employees don’t feel a sense of ownership.

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Mrs. DAVIS OF VIRGINIA. Mr. Stier, what do you think would be

a proper timeframe for implementation of pay-for-performance?

Mr. STIER. Enough time to make it work. I think you have to do

this in pieces and I think that starting with the SES—I think you

can parallel track this—is a very good idea for some of the major

reforms you are talking about. That is the leadership group. It is

a small group you are talking about, 7,000 people total, governmentwide. If you can’t get it right with your executives, then you

are going to have a very difficult time doing it throughout the Government.

That doesn’t mean that if the same system that is applied to the

SES either across Government or the same system applied to the

SES as to the General Schedule. I really do believe that you start

there.

I also think you find your agencies that are ready. There are

some agencies out there that have done significant work. GAO is

a good source of information. I also think you need to provide an

incentive to make this work. You need to incentivize the agencies

to start focusing on their performance evaluation process and not

only that, but the whole shebang, the objectives they have as an

agency, how do they connect the overall agency objectives to the individual employee contribution. If you don’t start that process now,

it is going to be very difficult to ever get there.

I don’t mean to be ducking your question but I honestly believe

this is going to be a long-term process but you can get pieces of it

done here and now.

Mrs. DAVIS OF VIRGINIA. It was a tough question.

Mr. Nesterczuk, I have one section of NASA in my district. One

of the things I have heard from them is being able to employ, retain, recruit good folks. They proposed legislation that would give

it more hiring and pay flexibility to help recruit and retain a quality work force. The labor unions have countered that bonus pay is

a poor substitute for across the board pay increases that would reward the loyal workers instead of those who threaten to leave to

extort more pay. How do you respond to that?

Mr. NESTERCZUK. I don’t think it is a question of loyalty, it is a

question of performance. We are not talking about 100 percent of

the work force that needs to be rewarded and recognized. These

recognition systems don’t have to begin with the notion that gee,

we have to make this work for 100 percent of the people. If you accept the notion that 70 to 80 percent of your work force is doing

perfectly fine, needs a minimum amount of supervision, the work

doesn’t change drastically day to day, you can put them almost on

automatic pilot. Clearly, interaction with a supervisor is called for

to make sure everything is on track but it is that smaller number

of employees that are essential to getting quick turnaround, critical

jobs, some unknown circumstance drops into the middle of the

workplace and not everyone is going to deal with it, just the handful of people. Those are the folks you need to incentivize. You need

to focus your performance management systems on recognition of

those key people.

The same applies to recruitment and retention. It is not a matter

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ment they are in. You don’t have to make special considerations for

them. It is the ones that are critical to getting your job done that

you need to make sure you take care of.

Mrs. DAVIS OF VIRGINIA. So do you think it is fair to pay people

who are doing the same job different pay?

Mr. NESTERCZUK. If they are doing the same quality of work on

the same job, they should be paid the same but there are other aspects. There is timeliness, quality, volume, doing extra work. Those

are the differentiators within a group. Those are the people whose

performance you recognize.

My experience is that in a group in a cohort, everyone knows

who the extra special employee is. They are the person the employees go to when they don’t want to talk to their supervisor about

resolving a problem. Their view of it is, if the supervisor doesn’t

know who the star is, then the supervisor is not worth a damn anyway.

Mrs. DAVIS OF VIRGINIA. Thank you.

Mr. Davis.

Mr. DAVIS OF ILLINOIS. Thank you, Madam Chairman.

Let me ask each of you how do we determine relative importance

of missions? This notion that if you are doing a job in one place,

it may not be comparable to doing a job in another place? How do

we make that distinction?

Mr. MIHM. I can start on that. As your question suggests, it is

not easy to do at all. There are a number of ways we have seen

organizations here and abroad have done it. One way is they try

and tackle it directly, try and make judgments about those that are

the more important or less important missions and success under

those missions.

We have an example in our report about the Province of Ontario

which starts at the provincial level and then tries to cascade it

down throughout the entire province in government.

Here, what we often find is a focus on core competencies. That

is, for each individual, normally an occupation group or grade,

what are the particular competencies that would be needed that

have been validated to be shown as leading to organizational results and then let us pay off those competencies, let us pay to the

extent people exhibit those competencies and then let us pay to the

extent that they achieve or contribute to the achievement of organizational goals.

In other words, here in the United States we often don’t deal

with that question directly. We don’t try and make judgments

across missions. We just make judgments on did the person exhibit

the core competencies we are looking for and did they contribute

to organizational goals as specified in a performance contract at the

beginning of the assessment year?

Mr. STIER. Congressman Davis, I would like to add that I was

moving away from the microphone out of respect for Chris, not out

of fear of the question.

I would say, and I am not sure I fully grasp the entire range of

your question.

Mr. DAVIS OF ILLINOIS. Let us say I am a physician and I am

working for the Bureau of Primary Health Services and somebody

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else is working for the Center for Disease Control. Are we comparable physicians?

Mr. STIER. I would say, Congressman Davis, that in some sense

it is not dissimilar from the issues that face all organizations in

this country or any market-based system. I think we have a situation with the Federal Government today that by and large is not

sufficiently sensitive to the market. We need to have a pay system

that is more market sensitive and more performance sensitive in

order for the Government to be able to attract and keep the people

it needs to get the job done.

I think in the specific example you gave for CDC, for example,

we would need to ensure that CDC has the ability to pay either existing talent it has to meet that job or talent it does not have to

attract that talent in order to be able to get its mission done. As

an organization, the Partnership for Public Service believes that

the Government would be much better served if it had a system

that both provided the necessary resources to get the talent it

needs and also a system in place to allow that talent to maximize

its capacity to perform. That system would be one that recognizes

and rewards excellence.

Mr. NESTERCZUK. I think there are two elements to that question

as I see it. One is the apportioning down, cascading down of an

agency’s mission to various components of that agency and making

sure they understand how it is they contribute to the overall mission of the agency. That way in that context, you can do a performance evaluation and the employee understands what it is that is

expected in the overall context of the agency. It is the cascading

down process first from the top of the agency.

The other aspect of that question I will take off from what Max

responded, the question of market testing, the value of a physician

in one context and one component versus another. That could

change over time. In 1 year, the CDC could play a far more critical

role in handling an epidemic or crisis than perhaps a local service

physician in some remote community, public health service. So it

is difficult to respond globally.

However, I don’t have any problems with the notion of agencies

establishing compensation systems independent of each other. That

serves as kind of an internal market within the Federal community. God knows there are enough jobs in the private sector that

have no comparability to the Federal Government and vice versa.

We are trying to establish market comparisons with the private

sector when a lot of our own occupations don’t fit over there, so creating a market within the Federal Government has perhaps a very

salutary benefit.

I would argue for you that to a certain extent we already have

the beginnings of that in some of our occupations. For example, in

law enforcement, there is a definite pecking order of agencies, with

the FBI sitting on top and everyone who is in a law enforcement

job series would love to wind up in the FBI but they might start

at the Federal Building Service, perhaps move over to be a guard

in the print shop in the Government Printing Office, then work

their way up through the ranks through Customs or DEA or others.

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There is a drift from some agencies and there is a pay differential that goes along with that, greater opportunities for career advancement as you go into different agencies. So we have a market

in the Federal workplace but we don’t reflect that in the pay structure.

Mr. DAVIS OF ILLINOIS. Am I understanding each of you to suggest that in order for pay-for-performance to work, employees must

be intricately involved in devising the system?

Mr. NESTERCZUK. Yes, absolutely.

Mr. MIHM. Yes, and where they are involved, it works or can

work and where they are not involved, it does not work.

Mr. DAVIS OF ILLINOIS. Thank you very much.

Mrs. DAVIS OF VIRGINIA. I just have one question for you, Mr.

Nesterczuk.

We just went through the battle last year with the Homeland Security Act. Do you see that as a model for transitioning our Federal

agencies into a more flexible personnel system? Do you believe that

human resources is one of its successes or failures?

Mr. NESTERCZUK. I think there are better models. I think Chapter 47 of Title V, the demonstration project authority, sets out a

number of rules of engagement so to speak, the parts of Title V

Civil Service that you shouldn’t touch that are kind of core and

common to all versus the ones where perhaps there are better ways

of getting the job done like pay or appeals processes, the classification system and a number of things where you are allowed to experiment.

I think using a Chapter 47 model to try to bring agencies together or to permit an agency to engage in a demonstration project

is far better. We have 25 years of experience with that, it has

worked in the past, it has tested legislative language. The experiences that I have seen with the FAA in 1996, the IRS in 1998 and

TSA in 2001, where you basically tell the agencies start from

scratch, although IRS wasn’t quite scratch, the others were, can be

very problematic for an agency.

The first day the FAA was out from under Title V it administratively reimposed all of Title V, all of those hideous rules and regulations of the Civil Service Code right back on itself because it

couldn’t start from scratch, it couldn’t start from zero. So the Title

V rules are a good starting point and the Chapter 47 allows you

to drop and substitute various components and pieces of it as you

mature, as you go along, as you gain experience. I think that is

probably a far better model for reform.

Mrs. DAVIS OF VIRGINIA. Would you recommend that we do demonstration projects if we were to go more to reform?

Mr. NESTERCZUK. Yes. I would use Chapter 47 type language to

allow OPM to extend pay reform authority to agency A once it submitted a plan, how it proposes to do it, why it wants to do it, etc.,

but this would be much broader. There would be restrictions, so

you would need to lift some of those restrictions but the construct,

that is what would propose. Let agencies come to OPM when they

are ready to tackle it rather than go governmentwide because they

all need to tailor it depending on the kinds of occupations they are

dealing with, the kinds of turnover they got, recruiting problems,

they need to tailor those things to their best needs.

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Mrs. DAVIS OF VIRGINIA. You gentlemen agree? You are both

shaking your heads yes.

Mr. Davis, do you have anything else for this panel?

Mr. DAVIS OF ILLINOIS. No.

Mrs. DAVIS OF VIRGINIA. Gentlemen, thank you very much for

coming. I hope we didn’t keep you here too long and I appreciate

all the information you gave us.

I do apologize that we have a long hearing today but this is an

issue we wanted to hear from everyone. Now we get to hear from

the workers themselves. If I could get panel four to come forth.

For the fourth panel, we will go through the same drill, so if you

will remain standing, we will administer the oath. Thank you all

for being patient and waiting.

It is the subcommittee practice to ask witnesses to testify under

oath, so if you will raise your right hands.

[Witnesses sworn.]

Mrs. DAVIS OF VIRGINIA. The witnesses will now be recognized

for opening statements. We will ask you to summarize your testimony in 5 minutes and your full written statements will be included in the record.

I would like to welcome Colleen Kelley, national president, National Treasury Employees Union; Jacqueline Simon, public policy

director, American Federation of Government Employees; Bill

Bransford, counsel, Senior Executives Association; and Karen

Heiser, Federal Managers Association. Thank you all again for

being here today and for your patience.

Ms. Kelley, we will start with you and you will be recognized for

5 minutes.

STATEMENTS OF COLLEEN M. KELLEY, NATIONAL PRESIDENT,

NATIONAL TREASURY EMPLOYEES UNION; JACQUELINE

SIMON, PUBLIC POLICY DIRECTOR, AMERICAN FEDERATION

OF GOVERNMENT EMPLOYEES, AFL–CIO; BILL BRANSFORD,

COUNSEL, SENIOR EXECUTIVES ASSOCIATION; AND KAREN

HEISER, FEDERAL MANAGERS ASSOCIATION

Ms. KELLEY. Thank you very much, Chairwoman Davis and

Ranking Member Davis.

On behalf of the 150,000 Federal employees represented by

NTEU, we very much appreciate the opportunity to be here today

with you.

The Federal Government has failed for many years now to invest

in its most important resource, its employees. One of the original

Volcker Commission conclusions in 1989 was that, ‘‘The gap between what government and the private sector pays has grown far

beyond the point where government can hope to recruit and retain

qualified staff.’’

Although the fiscal year 2003 Federal pay raise was recently settled, it did not come without a fight and the administration continues to show a lack of concern for what failure to properly compensate the Nation’s public employees means for the future of public service by proposing a 2 percent pay increase sending the unmistakable message for 2004 that the work is not valued, vital and

critical.

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NTEU was very disappointed that the recent Volcker Commission report did not adequately address the problems with rank and

file pay and we have reservations concerning the recommendations

for more flexibility in setting Federal pay.

Pay for performance means something different to everyone. One

thing is certain, however. Where pay-for-performance has been implemented, very complicated questions and concerns have been

raised that have not yet been resolved.

The GAO recently released its study of the Federal Aviation Administration’s market-based pay for performance system. When the

GAO interviewed FAA employees concerning the new system, nearly two-thirds of the employees interviewed either disagreed or

strongly disagreed that the new pay system is fair to employees.

Concerns about Federal supervisors and managers having more

control in the pay-setting process are not unique to the FAA. A

demonstration on pay banding at the Bureau of Alcohol, Tobacco

and Firearms began in early 2000 with the first round of salary reviews set for that October. Managers received little or no training

on writing pay for performance evaluations. Appraisals were then

forwarded to a performance review board [PRB] which had the authority to downgrade evaluations. If the individual supervisor was

unable to write a well documented appraisal, the employee suffered. The authority the PRB was given to downgrade evaluations

led to the belief that the Bureau was operating with a fixed pool

of money. Some employees had to have their evaluations lowered

in order for others to receive pay raises. This perception of manipulation by management led to employee skepticism. A fair and unbiased performance appraisal system must be an underlying principle when judging employees.

In 1996, the House debated legislation to give more weight to

performance appraisals in down-sizing situations. Members raised

serious concerns about the lack of formal performance appraisal

guidance and questioned their tendency to be subjective, unfair,

overinflated and biased against minorities. The proposal was defeated.

Evidence also points to pay for performance schemes in the private sector producing poor results. Three years ago the Ford Motor

Co. implemented a performance measurement program and unwittingly created a culture of backstabbing as employees tried to outdo

one another instead of working together as a team. Instead of cooperation, the system fostered in-fighting and divisiveness.

Similarly, the Fairfax County, VA School District was forced to

terminate its merit pay system when it became clear that teachers

were being pitted against each other and cooperation and team

work were discouraged. Moreover the school district’s commitment

to its merit system plan waned as soon as the program began costing money.

As I stated earlier, pay for performance means something different to everyone you ask. What is consistent, however, are the

problems in designing a quality pay for performance system. Employees must be encouraged to work together rather than compete

against one another. A system that promotes individual achievement over group effort is bound to create additional problems. A

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pay for performance system designed to be used only when budgets

are flush will breed contempt.

The performance evaluation system used to rate employees will

fail absent employee feedback and commitment to the process and

appropriate manager training in using the new system is key to ensuring the system will be perceived as valid.

In summary, NTEU believes that proposals to more closely link

pay with performance must embody several core principles. Employees and their unions must be full partners in the design and

implementation. Pay for performance is not cost neutral. Agencies

must have adequate resources to implement a pay for performance

system.

Proposed changes must be communicated effectively and clearly

to employees. Development and implementation of a performancebased appraisal system must be subject to bargaining with employees and their unions and managers must be trained to provide fair

and unbiased evaluations of employee performance.

Thank you again for the opportunity to testify and I look forward

to any questions you might have.

[The prepared statement of Ms. Kelley follows:]

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Mrs. DAVIS OF VIRGINIA. Thank you, Ms. Kelley.

Ms. Simon.

Ms. SIMON. Madam Chair and Ranking Member Davis, I want to

thank you very much for the invitation to testify today and specifically for your willingness to listen carefully to all points of view.

I appear today on behalf of the more than 600,000 Federal employees represented by AFGE. I will focus my remarks on two

items. The first is an attempt to provide an accurate description of

the General Schedule which has been maligned and

mischaracterized beyond recognition by some advocates of pay-forperformance. The second will be to highlight many concerns AFGE

has about individualized pay for performance systems.

The version of the General Schedule I will describe is one that

was established as the result of the enactment of the bipartisan

FPCA in 1990. FPCA introduced numerous flexibilities into the allegedly rigid and never changing GS system: locality pay differentials, special pay rates for certain occupations, critical pay authority, recruitment and retention flexibilities that allow hiring above

the minimum step of any grade, recruitment, retention and relocation bonuses, payment of travel and transportation expenses for job

candidates and new hires, allowing up to 2 weeks advance pay as

a recruitment incentive, allowing time off incentive rewards, allowing cash performance-awards, waiver of dual compensation restrictions, changes to law enforcement pay, special occupational pay

systems, and flexibilities for Title V health care positions and many

more. In addition, FPCA retained the GS allowance for quality step

increases, salary increases awarded on the basis of extraordinary

performance.

The basic structure of the GS is a 15 grade matrix with 10 steps

per grade. Movement within a grade or between grades depends on

the satisfactory performance of job duties over time. That is,

whether a worker gets a step increase depends on performance.

The GS classification system also supports performance by determining the standards against which a worker’s performance will be

measured when opportunities for movement arise. Most important,

the GS system is based upon the merit system principle of equal

pay for substantially equal work, which goes a very long way toward preventing pay discrimination on the basis of race, ethnicity

or gender.

Pay-for-performance is pushed by some on the basis of four

unproven contentions: that it will improve productivity, recruitment, retention and will effectively punish poor performers. Even

its proponents are reluctant to say that it will do anything at all

to solve the real and longstanding fact that Federal salaries are too

low across the board, the comparability problem that FPCA might

have fixed over the past decade if it had been funded.

Do the pay systems that set out to reward some individuals for

productivity improvement and punish others who are judged to

have made smaller or negative contributions to productivity actually work? The facts suggest they do not. Research from academics

without a financial interest in the outcome of the debate show that

individualized pay-for-performance systems don’t deliver on their

promises and are notorious for eating up enormous managerial resources and making everybody unhappy.

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More specifically, the research shows that pay-for-performance

undermines team work, encourages a focus on the short term and

leads people to sharpen their political skills and personal ties to

the supervisor rather than to improve the mission of the organization. Individual pay-for-performance gives workers the incentive to

make themselves look good and their co-workers look bad. It dissuades people from sharing knowledge and working cooperatively.

Since salary money always comes in a fixed pot, pay-for-performance becomes a high stakes competition between workers within a

unit with one worker’s gain being another worker’s loss.

Pay consultants and personnelists love individual pay-for-performance because if administered in a way that uses even a pretense of fairness, it requires an enormous managerial and supervisory hierarchy. The Navy’s China Lake system which some consider a worthy successor to the GS is an incredibly complex system

with pages and pages of evaluation documents that each manager

must fill out for each individual under him on an almost continual

basis. Pay-for-performance advocates and contractors realize all

this will have to be checked and rechecked for accuracy and completion for every single 1 of the 1.8 million Federal employees.

I will close by mentioning OPM’s recent poll. Although AFGE felt

that some of the questions in the draft we saw were biased in a

way that would lead respondents to send a message of support for

pay-for-performance, what they seem to have gotten instead was a

message that employees are relatively satisfied with the existing

pay system and do not hold their managers in adequately high regard to trust them with vast new powers and discretion over pay.

The only question that really needs to be asked of Federal employees is, are you willing to trade the annual pay adjustment

passed by Congress which includes a locality adjustment and any

step increases for which you are eligible for a unilateral decision

by your supervisor every year on whether and by how much your

salary will be adjusted.

AFGE supports the congressional attention toward the inadequacy of Federal pay. We support those who seek to reward Federal employees for excellence but rewards for extraordinary performance must be supplements, not substitutes, for a fully funded

regular pay system.

Thank you very much and I would be happy to answer any questions.

[The prepared statement of Ms. Simon follows:]

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Mrs. DAVIS OF VIRGINIA. Thank you, Ms. Simon.

Mr. Bransford.

Mr. BRANSFORD. Thank you, Madam Chair and Mr. Davis.

On behalf of the Senior Executives Association, we appreciate the

invitation to testify this afternoon on the subject of Federal pay.

We also appreciate your allowing me to testify at the last minute

in place of Jerry Shaw who was unable to be here.

SEA is the only organization that represents the interests of career senior executives and I will comment today on matters of concern surrounding the executive pay system. The more detailed remarks of Jerry Shaw and supporting documentation have been submitted for the record.

Pay compression, which you have already heard about this afternoon, is a longstanding problem in executive pay ranks that hopefully will be relieved this year. The problem has been caused by the

existence of a pay cap on executive pay that has not increased in

5 of the last 10 years because Congress did not vote itself a pay

raise. This caused salaries at the bottom of the executive corps to

rise but the top stayed constant. Today, nearly 70 percent of senior

executives are paid the same.

The administration has proposed to lift the caps on base pay and

locality pay one level for each. If enacted, this will result in an increase in the cap that limits locality pay from $142,500 to

$154,700. We welcome this proposal from the administration and

look forward to the bill Senator Voinovich is about to introduce

that includes the administration’s provisions.

As I will explain in more detail, we do have some concerns about

some parts of the administration’s proposal and we do seek some

adjustments.

In addition to lifting the pay cap, the administration also proposes to eliminate SES pay levels of which there are now six and

to replace them with one pay band with a minimum pay of

$102,000. Agencies would only be able to pay salaries in excess of

the old cap if they have a certified performance appraisal system.

The administration’s proposal contains no provision preventing reduction of SES pay.

We have the following concerns about the administration’s proposal. First, we support executive pay banding but we believe three

bands would be better for management of the SES than one broad

band. The nature of SES positions and the experience level of executives varies and we believe this justifies having distinguishing

characteristics in the SES system other than simply the amount of

salary.

Second, we do not support lowering the minimum base pay from

its current $116,500 to $102,000 as proposed by the administration.

We believe this unnecessarily cheapens and degrades what should

be a prestigious corps. We suggest that senior executives should

make more than GS–15s and that someone who is appointed to the

SES should be paid consistent with historical patterns. We also

note that reducing the minimum SES pay at the same time that

efforts are being made to recruit more minorities and women into

the SES could be viewed as having a discriminatory effect.

Third, OPM has announced its intention to allow SES salaries

under the new cap only for those agencies that have a certified perVerDate 11-MAY-2000 13:26 Oct 02, 2003 Jkt 000000 PO 00000 Frm 00140 Fmt 6633 Sfmt 6633 D:\DOCS\89241.TXT HGOVREF1 PsN: HGOVREF1
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formance appraisal system under OPM and OMB regulations. This

certification would be for 2 years but could be revoked at any time.

We support a system that makes meaningful distinctions based on

relative performance but we urge that it be administered only by

OPM and that once certified, an agency could rely on the certification for 4 years, not the up to 2 years as currently required. We

seek to exclude OMB from the process to prevent undue

politicization.

Fourth, we ask that there be no pay cap on locality pay. We see

no reason to artificially limit locality pay granted to every other

Federal employee. A cap on locality pay will just create a new form

of pay compression.

Fifth, we propose a new method for adjusting the pay cap be implemented so that the cap on base pay is increased each year by

the amount of the annual GS pay increase. This will not result in

an automatic pay raise, just the authority to pay it and we note

this is consistent with the Volcker Commission report that talks

about executive pay and congressional pay being developed separately.

Sixth and last, we ask that safeguards be implemented on reduction of SES pay. We propose that reductions of up to 3 percent be

allowed with a review by the agency performance review board as

is current practice and that reductions greater than that be reviewed by the MSPB. Reductions in pay currently are simply not

subject to any appeal by senior executives.

These reforms we suggest are not difficult or cumbersome. They

meet the administration’s stated concerns of pay for performance

and not granted an across the board pay increase. We urge the

rapid consideration of the administration’s executive pay proposal

as modified by our proposals to provide appropriate safeguards and

system adjustments to protect the integrity of the SES and to prevent it from being politicized.

Thank you for the opportunity to present our views.

[The prepared statement of Mr. Shaw follows:]

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Mrs. DAVIS OF VIRGINIA. Thank you, Mr. Bransford.

Ms. Heiser.

Ms. HEISER. Madam Chair and Congressman Davis, my name is

Karen Heiser. On behalf of the 200,000 managers and supervisors

in the Federal Government whose interests are represented by the

Federal Managers Association, I would like to thank you for inviting us to present our views before this committee regarding the important subject of compensation for Federal employees.

I am currently the organizational development manager at

Watervliet Arsenal in New York with the U.S. Department of the

Army. My statements are my own and in my capacity as a member

of FMA and do not represent the official views of the Department

of the Army or Watervliet Arsenal.

Established in 1913, the FMA is the largest and oldest association of managers and supervisors in the Federal Government. As

those who are responsible for the daily management and supervision of government programs and personnel, our members possess a wide breadth of experience and expertise we hope will be

helpful as we collectively seek to address the human capital crisis

our Civil Service has been burdened with.

While retaining our status as a world class manufacturer,

Watervliet Arsenal has struggled for over a decade with decreasing

workload and downsizing of personnel. To help offset attrition and

related loss of skills, anticipated hiring of new engineers and manufacturing apprentices will rejuvenate the nucleus of our work

force. Now is the time for us to revive development of essential

skills for the future through initiatives such as a reactivated apprentice program at Watervliet Arsenal where program graduates

since the 1800’s have provided our critical manufacturing skills and

grown into many of our supervisory positions from firstline to directorate level.

At Watervliet Arsenal and beyond, this type of in-house training

and mentoring is what our government must do more of as we continue to lose valuable expertise by way of retirements and mid-career departures.

Compounding the myriad of problems associated with the recruitment and retention of Federal employees is the significant pay

gap that we have discussed between public and private sectors. According to a 2001 survey of college graduates, current Federal and

non-Federal workers conducted by the Partnership for Public Service, nearly 90 percent said that offering salaries more competitive

with those paid by the private sector would be an effective way to

improve Federal recruitment. Eighty-one percent of college graduates that same year said higher pay would be very effective in

getting people to seek Federal employment.

The public sector simply has not been able to compete with private companies to secure the talents of top notch workers because

of cash strapped agency budgets and an unwillingness to address

pay comparability issues.

We have discussed FEPCA a bit today. The act was intended to

close the gap between Federal employee salaries and those of their

private sector counterparts. However, FEPCA has never been implemented as it was originally intended. Since the bill was enacted,

administrations led by both political parties have used the capping

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feature designed to reduce pay increases in times of economic distress. This executive authority has been utilized despite record

budget surpluses.

More than a decade since the enactment of FEPCA, the Bureau

of Labor Statistics shows the pay gap between Federal civilian employees and their private sector counterparts has grown to 33 percent. If FEPCA is never to be adhered to, we must at a minimum

reexamine the language and the intent of the act and determine

how best to bring public sector salaries more in line with those of

their private sector counterparts. For the time being, however, we

must uphold the longstanding principle of linking annual pay increases between Federal civilian employees and military personnel.

Since 1987 and 19 of the past 22 years, civilian and military personnel have received the same annual raises. President Bush recently proposed a 2 percent across the board average pay raise for

Federal employees in 2004, while military personnel are slated to

receive a 4.1 percent average pay raise next year. For the third

straight year, the White House has attempted to delink civilian

and military pay increases.

In light of the well documented human capital concerns facing

our Federal Government, we must maintain the tradition of providing equitable pay increases to Federal civilian employees and members of the uniformed services, all of whom work each day to ensure our Nation’s security and make significant contributions to the

general welfare of the United States.

Legislation has been recently introduced in the Senate by Senator George Voinovich that would allow managers to use a variety

of compensation tools such as recruitment, relocation and retention

bonuses and give agencies streamlined critical pay authority to fill

key positions. These are sensible reforms that would begin to address the work force problems that will only worsen with the forthcoming retirement wave of Federal employees.

Beyond the normal retirement wave of a large portion of the

aging Federal work force, there is a distinct retention problem in

the Federal Government. The notion of the career civil servant is

becoming more and more obsolete because there are few incentives

for advancement in the Federal Government. When combined with

better salary and benefit packages in the private sector, it is no

wonder that many Federal employees are leaving the public sector

after only a few years of service.

In fact, there are oftentimes disincentives for moving up the career ladder. A perfect illustration is the current statute that caps

overtime pay for Federal managers and supervisors. Between 1994

and 2001, the non-postal executive branch civilian work force was

reduced by more than 452,000 positions. As one of the effects of

this downsizing, overtime is becoming increasingly common. Under

current law, overtime pay for Federal managers, supervisors and

FSLA exempt employees is limited to that of a General Schedule

Level 10, Step 1 employee. The first grade based overtime cap enacted in 1954 set the base at GS–9, Step 1. Twelve years later in

1966, it was increased to GS–10, Step 1. In the 37 years since then,

however, nothing has been done to keep pace with changing work

force realities.

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We have discussed how the work force in the Federal Government has changed from a clerical work force to one of more professional or information knowledge related services. In 1966, the average GS grade was 7.3 and in 2001, the average GS grade was 9.7,

nearly three full grades higher since the implementation of the current pay cap.

Overtime pay is premium pay and therefore does not count toward increasing an employee’s future retirement benefit. That

means that increasing overtime pay does not affect mandatory

spending. The overtime cap causes two problems for Federal managers and supervisors. Managers and supervisors above a GS–12,

Step 6 can actually earn less on overtime than they do for work

performed during the work week. Second, managers and supervisors may earn substantially less for overtime work than the employees they supervise.

Raising the overtime cap would present an opportunity and provide an important move toward addressing overtime problems that

serve as disincentives to hardworking civil servants contemplating

accepting promotions to the ranks of management when they consider the various benefits of moving to those levels of higher responsibility.

The Federal Wage System as we have only touched on briefly, is

one of the most maligned and adversely affected sectors of the Federal Government. FMA is concerned about securing adequate pay

raises for the 225,000 hardworking men and women covered by the

FWS. This number represents a reduction of 53 percent of the Federal wage system work force size in 1984 due to downsizing and

significant pay disparities with similar positions in private industry.

A major concern is the disparity in how pay raises are determined in the present system of wage grade surveying. In examining the pay setting features used for wage grade pay, a significant

improvement would be the utilization of like industries in establishing pay scales, providing a standard wage grade survey and pay

scale setting with appropriate locality adjustments would be a step

in the right direction to resolve this longstanding inequity.

We have talked much about pay for performance and performance management in general today. Currently, pay is based on internal equity that revolves around seniority, not performance. We

certainly agree that pay for performance is as valid as pay for seniority.

As a start, for agencies to perform at optimum levels, employees

must have clearly defined performance standards on which to be

appraised. These standards should be directly linked to the agency’s mission, customer service goals and their annual performance

plan or strategic plan. We at FMA support implementing a more

comprehensive governmentwide appraisal system that includes a

pay for performance component.

We recommend an awards system for managers that adequately

reflects the manager’s level of responsibility, span of control and

level of achievement. Of course any such system requires sufficient

appropriations funds. We have too often seen over time new pay

authorities without the necessary dollars to utilize these tools. The

Bush administration has proposed a $500 million Human Capital

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Performance Fund for fiscal year 2004 to allow managers to increase pay beyond annual raises for high performing employees

and address other critical personnel needs. Although this is a step

in the right direction, questions must still be answered in terms of

the disbursement of funds. Who will decide which employees receive increases and who will determine the amount of such increases? Is $500 million significant and sufficient for a work force

of some 1.8 million Federal employees? How much will be lost to

administrative costs as the money filters down through various

chains of command? Will this fund be renewed every year and appropriated accordingly?

Furthermore, FMA does not believe any new performance fund

should be used to undercut fair and appropriate annual pay adjustments for Federal employees. The question of an effective, consistent performance measurement system throughout the Government

must be addressed.

Our conclusion is, as we collectively grapple with the complex

issue of compensation reform in the Federal Government, we must

find where models such as the ones being used at the IRS and the

FAA have succeeded and where they have failed. There have also

been numerous instances where demonstration projects in the area

of expanding personnel authority have brought success to some

Federal agencies but rarely are these initiatives allowed to cross

agency lines.

The approach the Government takes to correct pay systems for

civilian workers will decide how this Nation survives the human

capital crisis before us. More importantly, Congress and the administration must shift the habitual focus from cutting the size of the

Federal workforce to that of recruiting and retaining top talent.

Some of the challenges facing the Federal work force will be difficult to overcome should a continued priority be placed on the conversion of critical Federal sector jobs to private sector activity. The

loss of valuable and experienced employees and the institution of

wisdom they provide is already taking place. No real succession

planning, including managerial development and training, has

been funded or implemented to ease the strain the system is facing

as retirement eligible employees leave the public sector.

At FMA we would like to propose several recommendations. One

important priority is to work with both the administration and

Congress to alter the image and perception of the Civil Service. Far

too often civil servants have unfairly taken the brunt of the blame

for ill-advised policies they have no control over. The public must

recognize the important duties our Federal employees perform each

and every day on their behalf.

We would also like to see review of FEPCA to examine what adjustments need to be made to enable the legislation to work as intended. Any constructive dialog is better than the hollow act of preemptive designated pay increases each and every year.

We also support ways to improve the hiring process for Federal

employment and bring about policies that attract the best and

brightest of our society to serve in public service. Correspondingly,

managers should be afforded the means to continuously enhance

their skills. Agencies and departments should increase opportunities for managers to receive training in their respective fields while

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on duty by specifically allocating funds for this training. Thus FMA

supports establishing management succession programs to ensure

we have the strongest possible pool of managers to lead tomorrow’s

Civil Service.

Finally, we encourage a real and sincere look at Federal pay systems while encouraging structures that attract, retain and maintain the Federal workforce we need and desire. You asked if everyone was satisfied with pay, should we still look at the grade structure. I would put to you that the current grade structure not only

determines pay but also is a determining factor in recruitment and

internal movement of employees. Often a person’s grade is more determining of their ability to be promoted than their resume. That

is not good. That is not right.

We would propose that any new system be fair and realistic in

offering career ladder incentives and progressions.

I would like to thank you again, Madam Chair, for allowing me

to go beyond my 5 minutes and for providing FMA an opportunity

to present our views. We look forward to working with you and

other Members of Congress to deal with the human capital crisis.

I would be delighted to answer any questions you have.

[The prepared statement of Ms. Heiser follows:]

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Mrs. DAVIS OF VIRGINIA. Thank you, Ms. Heiser.

Once again, I would like to say thank you to all of you for having

to wait so long to be able to be our witnesses today.

Ms. Simon, you referred to the survey—and we have all referred

to it a lot today—you referred to it and said the questions were in

such a way to make it look like pay-for-performance was something

that the workers would be interested in. I believe it was only 27

percent who said they felt there was an adequate way to deal with

poor performance. Can you speak to poor performers and how the

folks in your union feel about the poor performers? It is tough to

get rid of them now.

Ms. SIMON. The first thing I would like to say about poor performers is although in the context of today’s discussion, we are

talking about pay, pay is not the only tool in the toolbox for dealing

with poor performance. We really don’t think it is appropriate to

have a discussion about pay be so focused on how to deal with the

problem of poor performers.

Poor performers are a discipline problem. There are certainly

procedures on the books that allow managers to deal with poor performers through performance improvement plans, through various

forms of discipline including demotion and termination. To suggest

that the pay system be radically altered just to use pay as sort of

a blunt instrument for punishing people who are judged to be poor

performers seems to be inappropriate to us.

Mrs. DAVIS OF VIRGINIA. Has the thought occurred that it might

not be to punish the poor performers but to get them to perform

better, that rather than punishment, be an incentive to get them

to do their work?

Ms. SIMON. I think that is certainly a good idea and I think the

procedures for allowing an employee to have an opportunity to improve through a performance improvement plan is already in existence and is not using pay as the exclusive tool for either encouraging someone to improve or punishing them if they haven’t.

Mrs. DAVIS OF VIRGINIA. As it stands now, how would an employee doing work over and above, in their opinion, feel that their

pay is the same as the poor performer and their increases are the

same because everybody’s pay increase is the same when they are

at the same grade, if I am not mistaken. Is that correct?

Ms. SIMON. If you have a situation like the one you just described, I would say it is really a case of poor management. It is

a manager’s responsibility to deal with the poor performer. It is a

manager’s responsibility to sit down with that employee and devise

a plan for that employee’s improvement and give that person the

opportunity, the resources and the assistance he or she may need

to improve.

If, in spite of all that, the employee still fails to improve, then

it is the manager’s responsibility to deal with the poor performer.

It is the manager’s responsibility if he or she still thinks there is

hope, to withhold a step increase when that employee becomes eligible. That is the existing system that does give a manager an opportunity to use the pay system as a performance management tool

but then there are hopeless cases, let us face it. When it is the

manager’s unpleasant duty to either demote or ultimately terminate an employee who isn’t pulling his weight.

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Mrs. DAVIS OF VIRGINIA. If I am not mistaken on one of the surveys someone reported earlier, 83 percent of the workers had a

good performance rating. Yet, how do you justify that with the 27

percent of the folks in the survey who said they did not think the

poor performers were being dealt with in a good way. Do you think

there are just that few poor performers?

Ms. SIMON. I don’t pretend to be an expert on exactly what the

questions were in the final survey or the interpretation of the results. As I said in our testimony, we saw draft questions in that

poll. We did not see the final poll questions and I haven’t had the

opportunity to do a really thorough examination of whether or not

the way the poll results are being presented is necessarily an accurate way to present that data.

One of the things we know is that this poll was undertaken during a very difficult period for Federal employees. They are facing

relentless attacks in many forms but certainly a very aggressive

privatization agenda, they are hearing about all kinds of what they

consider to be threats to give their managers tremendous discretion

over their pay system, and to the extent they express satisfaction

with their pay, we believe they are expressing satisfaction with the

existing system as compared to some of the alternatives they have

heard about that certainly don’t make them feel very comfortable

given the sort of hostilities they have experienced in the last several months.

Mrs. DAVIS OF VIRGINIA. We have three votes and I want to give

my colleague a chance to ask some questions, but I have one quick

question for all three of you. Do any of you agree that we need to

move to a more market and performance pay based system for the

Federal Government to maximize the performance of the Federal

people? Do any of you agree with that?

Ms. SIMON. I would say that to the extent we need to move toward a more market based system, the market-based attribute we

need to move toward is comparability, that which was promised but

never realized through FEPCA.

Mrs. DAVIS OF VIRGINIA. So the dollar figure versus changing the

system?

Ms. KELLEY. I agree with the issue of comparability. On the issue

of performance, NTEU supports anything that will help the employees to do a better job so they can be successful and so the agencies can be successful. I am not convinced that necessarily means

a pay-for-performance as I envision what that means. I truly do believe if everyone in this room were asked to write down what payfor-performance means on a blank piece of paper, we would have

a lot of different definitions of what it is. Therein, I think, lies the

problem, but anything to support and to improve the performance

and the efficiency of the Federal Government, NTEU and the employees we represent would stand behind that.

Mr. BRANSFORD. SEA supports pay-for-performance. It believes

that the SES, the Senior Executive Service has historically been a

pay-for-performance system.

When you talk about a market system, I am not sure what that

means. If we are talking about the comparability increases and

that kind of thing, I agree with my colleagues, but if you are talking about paying executives who do computer work differently from

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executives who do program work, I am not sure how you do that.

I think that needs more study.

Mrs. DAVIS OF VIRGINIA. Ms. Heiser.

Ms. HEISER. FMA would support a pay-for-performance component without eliminating the annual increases and other types of

opportunities available for employees to increase their salary. That

aside, on the issue of comparability, we think we need to get away

from the old ways of looking at classifications of jobs and how skills

are determined to be comparable without regard to the mission of

an agency, installation or whatever level those determinations are

being made.

Pay-for-performance, we have heard some stories of very negative

effects and that does happen because you all made valid issues that

managers have to be trained, employees have to buy in, there is

no doubt about that. I designed and implemented a very, very successful pay-for-performance system in the private sector before I

came into the Federal Government and I can tell you that you are

always going to have some subjective component but overall, it was

extremely successful. It was a hospital and was based on our mission, our strategic planning, customer service, involved the union

and the employees and managers working together.

Mrs. DAVIS OF VIRGINIA. Mr. Davis. I think we probably have another 5 minutes.

Mr. DAVIS OF ILLINOIS. Thank you very much.

I know some of you may have been here when Representative

Ruppersberger testified. I don’t think you were, Ms. Kelley. If you

were, what do you think about gainsharing as a possible way of arriving at pay for performance?

Mr. BRANSFORD. Mr. Davis, I think it is a great idea if it can be

quantified. I think that is the problem, quantifying the savings because there are a lot of different ways of counting and if you can

figure that out with some level of objectivity so that there really

is a taxpayer savings and then reward the employees, I think that

is a great incentive.

Ms. SIMON. AFGE had some experience with gainsharing and in

general, we support the idea of productivity gainsharing focusing

on organizational success and group productivity awards, but there

are two things to bear in mind. First of all, we believe even the

gainsharing program should be as a supplement to a well funded

regular pay system and second, the most successful demonstration

project that involved gainsharing, the Pacer Share Program in the

Department of Defense, was ended in spite of its success because

it cost too much. It did have supplemental funding but the agency

decided it was too costly.

Mr. DAVIS OF ILLINOIS. And last, what do you think about privatization? How does privatization relate to what we are trying to accomplish in terms of creating and retaining the work force that we

need for the Federal Government?

Ms. HEISER. Privatization is a clear statement that Federal employees are not valued as a starting point.

Ms. KELLEY. I would say the Federal employees see privatization

as an intent to move their jobs. It is not about competition and is

not about giving them the resources to be able to find the efficiencies and be as successful as everyone talks about on the issue

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of privatization. If there were those resources, there is no question

the Federal employees could do the job better than anyone else but

they are not being given the resources and are expected to deliver

on the efficiencies. So there is really no way for them to see the

privatization effort other than as a threat to Federal employees

doing the work of the Federal Government.

Ms. SIMON. We agree with our colleagues. The privatization

quotas that have been imposed by the administration are certainly

the worst scourge on the Federal work force right now and I think

they, far more than the pay system or any failures of the pay system, explain agencies’ difficulties in recruitment and retention.

I think it was very telling that Representative Ruppersberger

mentioned the fact that he considered privatization of the grass

cutting prior to implementation of the gainsharing program. Unfortunately, with the administration’s rewrite of the A–76 process,

any kind of strategy or management tool that would try to reorganize or reengineer or do anything to improve productivity is explicitly precluded. The only tool that managers are allowed to use

whether or not it saves money is privatization.

Mr. DAVIS OF ILLINOIS. I thank you very much, Madam Chairman. I would just conclude that I guess there are people who would

expect the Federal workforce to make bricks without any straw. I

thank you very much and it has been a pleasure.

Mrs. DAVIS OF VIRGINIA. Thank you, Mr. Davis.

Unfortunately, we have three votes, not just one, and it is going

to be 30 to 45 minutes before we could get back, so I want to say

thank you all for coming and if it is OK with you, I have some

more questions I would like to submit to you for the record. If I

could get you to put them in writing, we will make sure they are

distributed to the other members of the subcommittee.

Thank you again for coming and I appreciate your time and patience.

The meeting is adjourned.

[Whereupon, at 3:32 p.m., the subcommittee was adjourned, to

reconvene at the call of the Chair.]

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