Human Capital: Building on DOD's Reform Effort to Foster Governmentwide Improvements
Published: 2003-06-04T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: People are at the heart of an organization's ability to perform its mission. Yet a key challenge for the Department of Defense (DOD), as for many federal agencies, is to strategically manage its human capital. DOD's proposed National Security Personnel System would provide for wide-ranging changes in DOD's civilian personnel pay and performance management and other human capital areas. Given the massive size of DOD, the proposal has important precedent-setting implications for federal human capital management. This testimony provides GAO's observations on DOD human capital reform proposals and the need for governmentwide reform.
section_title: What GAO Found
paragraphs: GAO strongly supports the need for government transformation and the concept of modernizing federal human capital policies both within DOD and for the federal government at large. The federal personnel system is clearly broken in critical respects--designed for a time and workforce of an earlier era and not able to meet the needs and challenges of today's rapidly changing and knowledge-based environment. The human capital authorities being considered for DOD have far-reaching implications for the way DOD is managed as well as significant precedent-setting implications for the rest of the federal government. GAO is pleased that as the Congress has reviewed DOD's legislative proposal it has added a number of important safeguards, including many along the lines GAO has been suggesting, that will help DOD maximize its chances of success in addressing its human capital challenges and minimize the risk of failure. More generally, GAO believes that agency-specific human capital reforms should be enacted to the extent that the problems being addressed and the solutions offered are specific to a particular agency (e.g., military personnel reforms for DOD). Several of the proposed DOD reforms meet this test. In GAO's view, the relevant sections of the House's version of the National Defense Authorization Act for Fiscal Year 2004 and the proposal that is being considered as part of this hearing contain a number of important improvements over the initial DOD legislative proposal. Moving forward, GAO believes it would be preferable to employ a governmentwide approach to address human capital issues and the need for certain flexibilities that have broad-based application and serious potential implications for the civil service system, in general, and the Office of Personnel Management, in particular. GAO believes that several of the reforms that DOD is proposing fall into this category (e.g., broad banding, pay for performance, re-employment and pension offset waivers). In these situations, GAO believes it would be both prudent and preferable for the Congress to provide such authorities governmentwide and ensure that appropriate performance management systems and safeguards are in place before the new authorities are implemented by the respective agency. Importantly, employing this approach is not intended to delay action on DOD's or any other individual agency's efforts, but rather to accelerate needed human capital reform throughout the federal government in a manner that ensures reasonable consistency on key principles within the overall civilian workforce. This approach also would help to maintain a level playing field among federal agencies in competing for talent and would help avoid further fragmentation within the civil service.

section_title: Letter
paragraphs: I am pleased to be here today to discuss legislative proposals to help the  Department of Defense (DOD) address its current and emerging human  capital challenges. Over the past few weeks, I have been honored to  appear as a witness before the Congress on three other occasions to  discuss this important issue and related DOD human capital concerns.  As  the House of Representatives has reviewed DOD’s legislative proposal, it  has added a number of important safeguards, including many along the  lines we were suggesting, that will help DOD maximize its chances of  success in addressing its human capital challenges and minimize the risk  of failure. Furthermore, the proposed National Security Personnel System  Act that is the subject of this hearing also includes a significant number of  improvements over DOD’s initial proposal.  I understand that there are  important issues that will need to be resolved in conference that obviously  have implications for DOD’s reform efforts, and may have major  implications for governmentwide reform efforts.
We strongly support the need for government transformation and the  concept of modernizing federal human capital policies both within DOD  and for the federal government at large. The federal personnel system is  clearly broken in critical respects—designed for a time and workforce of  an earlier era and not able to meet the needs and challenges of our rapidly  changing and knowledge-based environment. Nonetheless, I believe that  we have made more progress in addressing the government’s long- standing human capital challenges in the last 2 years than in the previous  20, and I am confident that we will make more progress in the next 2 years  than we have made in the last 2 years.
The human capital authorities being considered for DOD have far-reaching  implications for the way DOD is managed as well as significant precedent- setting implications for the rest of the federal government. DOD has  almost 700,000 civilian employees. The Department of Homeland Security,  which also has broad human capital flexibilities, has about 140,000 civilian  employees. Other federal agencies that have been granted broad  authorities, such as the Federal Aviation Administration and the Internal  Revenue Service, have many thousands more federal employees. In  essence, we are fast approaching the point where “standard  governmentwide” human capital policies and procedures are neither  standard nor governmentwide. In this environment, we should pursue  governmentwide reforms and flexibilities that can be used by many  government agencies, subject to agencies having appropriate  infrastructures in place before such authorities are put in operation.  Considering certain proposed DOD reforms in the context of the need for  governmentwide reform could serve to accelerate progress across the  government while at the same time incorporating appropriate safeguards  to maximize the ultimate chances of success and minimize the potential  for abuse and prevent the further fragmentation of the civil service.
More directly, agency-specific human capital reforms should be enacted to  the extent that the problems being addressed and the solutions offered are  specific to a particular agency (e.g., military personnel reforms for DOD).  Several of the proposed DOD reforms meet this test. Importantly, the  relevant sections of the House of Representatives’ version of the National  Defense Authorization Act for Fiscal Year 2004 and Chairman Collins,  Senator Levin, Senator Voinovich, and Senator Sununu’s National Security  Personnel System Act, in our view, contain a number of important  improvements over the initial DOD legislative proposal.
Moving forward, we believe it would be preferable to employ a  governmentwide approach to address human capital issues and the need  for certain flexibilities that have broad-based application and serious  potential implications for the civil service system, in general, and the  Office of Personnel Management (OPM), in particular. We believe that  several of the reforms that DOD is proposing fall into this category (e.g.,  broad banding, pay for performance, re-employment, and pension offset  waivers). In these situations, we believe it would be both prudent and  preferable for the Congress to provide such authorities governmentwide  and ensure that appropriate performance management systems and  safeguards are in place before the new authorities are implemented by the  respective agencies.  This approach would help to maintain a level playing  field among federal agencies in competing for talent.  Importantly,  employing this approach is not intended to delay action on DOD’s or any  other individual agency’s efforts.
However, in all cases whether through a governmentwide authority or  agency-specific legislation, in our view, such additional authorities should  be put in operation only when an agency has the institutional  infrastructure in place to use the new authorities effectively. This  institutional infrastructure includes, at a minimum, a human capital  planning process that integrates the agency’s human capital policies,  strategies, and programs with its program goals and mission and desired  outcomes; the capabilities to develop and implement a new human capital  system effectively; and a modern, effective, and credible performance  management system that includes adequate safeguards, including  reasonable transparency and appropriate accountability mechanisms, to  ensure the fair, effective, and nondiscriminatory implementation of the  system.
My recent statements before the Congress have discussed DOD’s human  capital challenges and have provided comments and suggestions on the  initial DOD proposal to create a National Security Personnel System  (NSPS). Building on those statements, today I will comment on current  DOD human capital reform proposals, including the National Security  Personnel System Act, and how those proposals can be used to help  leverage governmentwide change.
subsections: section_title: Observations on Proposed DOD Reforms
paragraphs: As I observed when I first testified on the DOD proposal in April, many of  the basic principles underlying DOD’s civilian human capital proposals  have merit and deserve the serious consideration they are receiving.  Secretary Rumsfeld and the rest of DOD’s leadership are clearly  committed to transforming how DOD does business. Based on our  experience, while DOD’s leadership has the intent and the ability to  transform DOD, the needed institutional infrastructure is not in place  within a vast majority of DOD organizations. Our work looking at DOD’s  strategic human capital planning efforts and looking across the federal  government at the use of human capital flexibilities and related human  capital efforts underscores the critical steps that DOD needs to take to  properly develop and effectively implement any new personnel  authorities. In the absence of the right institutional infrastructure,  granting additional human capital authorities will provide little advantage  and could actually end up doing damage if the authorities are not  implemented properly.
The following provides some observations on key provisions of the  proposed National Security Personnel System Act in relation to the House  version of the National Defense Authorization Act for Fiscal Year 2004.  First, I offer some comments on the overall design for a new personnel  system at DOD. Second, I provide comments on selected aspects of the  proposed system.
subsections: section_title: DOD’s Overall Human Capital Program
paragraphs: The House version of DOD’s authorization bill would allow the Secretary  of Defense to develop regulations with the Director of OPM to establish a  human resources management system for DOD. The Secretary of Defense  could waive the requirement for the joint issuance of regulations if, in the  Secretary’s judgment and subject to the decision of the President, it is  “essential to the national security”—which was not defined in the  proposed bill.  As an improvement, the proposed National Security  Personnel System Act also requires that the new personnel system be  jointly developed by the Secretary of Defense and the Director of OPM,  but does not allow the joint issuance requirement to be waived. This  approach is consistent with the one the Congress took in creating the  Department of Homeland Security.
The proposed National Security Personnel System Act requires the  Secretary of Defense to phase in the implementation of NSPS beginning in  fiscal year 2004. Specifically, the new personnel authorities could be  implemented for a maximum of 120,000 of DOD’s civilian employees in  fiscal year 2004, up to 240,000 employees in fiscal year 2005, and more  than 240,000 employees in a fiscal year after fiscal year 2005, if the  Secretary of Defense determines that, in accordance with the bill’s  requirement that the Secretary and the Director of OPM jointly develop  regulations for DOD’s new human resources management system, the  Department has in place a performance management system and pay  formula that meets criteria specified in the bill.  We strongly support a  phased approach to implementing major management reforms, whether  with the human capital reforms at DOD or with change management  initiatives at other agencies or across the government.  We suggest that  OPM, in fulfilling its role under this section of the bill, certify that DOD has  a modern, effective, credible, and, as appropriate, validated performance  management system with adequate safeguards, including reasonable  transparency and appropriate accountability mechanisms, in place to  support performance-based pay and related personnel decisions.
subsections: section_title: Employee Appeals Procedures
paragraphs: The proposed National Security Personnel System Act states that the  Secretary of Defense may establish an employee appeals process that is  fair and ensures due process protections for employees.  The Secretary of  Defense is required to consult with the Merit Systems Protection Board  (MSPB) before issuing any regulations in this area.  The DOD appeals  process must be based on legal standards consistent with merit system  principles and may override legal standards and precedents previously  applied by MSPB and the courts in cases related to employee conduct and  performance that fails to meet expectations.  The bill would allow appeal  of any decision adversely affecting an employee and raising a substantial  question of law or fact under this process to the Merit Systems Protection  Board under specific standards of review, and the Board’s decision could  be subject to judicial review, as is the case with other MSPB decisions.   This proposal affords the employee review by an independent body and  the opportunity for judicial review along the lines that we have been  suggesting.
section_title: DOD Human Capital Reform Evaluation and Reporting
paragraphs: The proposed National Security Personnel System Act does not include an  evaluation or reporting requirement from DOD on the implementation of  its human capital reforms, although DOD has stated that it will continue its  evaluation of the science and technology reinvention laboratory  demonstration projects when they are integrated under a single human  capital framework. We believe an evaluation and reporting requirement  would facilitate congressional oversight of NSPS, allow for any midcourse  corrections in its implementation, and serve as a tool for documenting best  practices and sharing lessons learned with employees, stakeholders, other  federal agencies, and the public. Specifically, the Congress should  consider requiring that DOD fully track and periodically report on the  implementation and results of its new human capital program. Such  reporting could be on a specified timetable with sunset provisions. These  required evaluations could be broadly modeled on the evaluation  requirements of OPM’s personnel demonstration program. Under the  demonstration project authority, agencies must evaluate and periodically  report on results, implementation of the demonstration project, cost and  benefits, impacts on veterans and other Equal Employment Opportunity  groups, adherence to merit principles, and the extent to which the lessons  from the project can be applied elsewhere, including governmentwide. The  reports could be done in consultation with or subject to review of OPM.
section_title: Specific DOD Human Capital Policies and Practices
subsections: section_title: Performance Management and Pay Reform
paragraphs: There is widespread understanding that the basic approach to federal pay  is outdated and that we need to move to a more market- and performance- based approach. Doing so will be essential if we expect to maximize the  performance and assure the accountability of the federal government for  the benefit of the American people. DOD has said that broad banded  performance management and pay for performance systems will be the  cornerstone of its new system.
Reasonable people can and will debate and disagree about the merits of  individual reform proposals. However, all should be able to agree that a  modern, reliable, effective, and validated performance management  system with adequate safeguards, including reasonable transparency and  appropriate accountability mechanisms, must serve as the fundamental  underpinning of any successful results-oriented pay reform. We are  pleased that both the House version of DOD’s fiscal year 2004  authorization bill and the proposed National Security Personnel System  Act contain statutory safeguards and standards along the lines that we  have been suggesting to help ensure that DOD’s pay for performance  efforts are fair to employees and improve both individual and  organizational performance.
The statutory standards described in the National Security Personnel  System Act proposal are intended to help ensure a fair, credible, and  equitable system that results in meaningful distinctions in individual  employee performance; employee involvement in the design and  implementation of the system; and effective transparency and  accountability measures, including appropriate independent  reasonableness reviews, internal grievance procedures, internal  assessments, and employee surveys. In our reviews of agencies’  performance management systems—as in our own experience with  designing and implementing performance-based pay reform for ourselves  at GAO—we have found that these safeguards are key to maximizing the  chances of success and minimizing the risk of failure and abuse.
The proposed National Security Personnel System Act also takes the  essential first step in requiring DOD to link the performance management  system to the agency’s strategic plan. Building on this, we suggest that  DOD should also be required to link its performance management system  to program and performance goals and desired outcomes. Linking the  performance management system to related goals and desired outcomes  helps the organization ensure that its efforts are properly aligned and  reinforces the line of sight between individual performance and  organizational success so that an individual can see how her/his daily  responsibilities contribute to results and outcomes.
The proposed National Security Personnel System Act includes a detailed  list of elements that regulations for DOD’s broad band pay program must  cover.  These elements appear to be taken from DOD’s experience with its  civilian acquisition workforce personnel demonstration project as well as  the plan, as described in an April 2, 2003 Federal Register notice to  integrate all of DOD’s current science and technology reinvention  laboratory demonstration projects under a single human capital  framework.  Many of the required elements in the proposed National  Security Personnel System Act are entirely appropriate, such as a  communication and feedback requirement, a review process, and a  process for addressing performance that fails to meet expectations.  However, other required elements, such as “performance scores”, appear  to imply a particular approach to performance management that, going  forward, may or may not be appropriate for DOD, and therefore may have  the unintended consequence of reducing DOD’s flexibility to make  adjustments. Congress has an important and continuing role to play in the  design and implementation of the federal government’s personnel policies  and procedures.  Congress should consider how best to balance its  responsibilities with agencies’ needs for the flexibility to respond to  changing circumstances.
Finally, under the proposed act, for fiscal years 2004 through 2008, the  overall amount allocated for compensation for civilian employees of an  organizational or functional unit of DOD that is included in NSPS shall not  be less than the amount of civilian pay that would have been allocated to  such compensation under the General Schedule. After fiscal year 2008,  DOD’s regulations are to provide a formula for calculating an overall  amount, which is to ensure that employees in NSPS are not disadvantaged  in terms of the overall amount of pay available as a result of their  conversion into NSPS while providing DOD with flexibility to  accommodate changes in the function of the organization, the mix of  employees performing those functions, and other changes that might  affect pay levels.
Congress has had a longstanding and legitimate interest in federal  employee pay and compensation policies and, as a result, there are  provisions consistent with that interest in the National Security Personnel  System Act.  However, as currently constructed, the proposed bill may  have the unintended consequence of creating disincentives, until fiscal  year 2009, for DOD to ensure that it has the most effective and efficient  organizational structure in place. This is because, based on our  understanding of the bill’s language, if DOD were to reorganize, outsource,  or undertake other major change initiatives through 2008 in an  organizational or functional unit that is part of NSPS, DOD may still be  required to allocate an overall amount for compensation to the  reorganized unit based on the number and mix of employees in place prior  to conversion into NSPS. In other words, if priorities shift and DOD needs  to downsize a unit in NSPS significantly, it may still be required that the  downsized unit’s overall compensation level remain the same as it would  have been in the absence of the downsizing. While pay protections during  a transition period are generally appropriate to build employee support for  the changes, we believe that, should the Congress decide to require overall  organizational compensation protection, it should build in additional  flexibilities for DOD to make adjustments in response to changes in the  size of organizations, mix of employees, and other relevant factors.
section_title: DOD Senior Executive Service Performance and Pay Reforms
paragraphs: The current allowable total annual compensation limit for senior  executives would be increased up to the Vice President's total annual  compensation (base pay, locality pay, and awards and bonuses) in the  proposed National Security Personnel System Act and the House National  Defense Authorization Act for Fiscal Year 2004. In addition, the highest  rate of (base) pay for senior executives would be increased in the House  version of the authorization bill.
The Homeland Security Act provided that OPM, with the concurrence of  the Office of Management and Budget, certify that agencies have  performance appraisal systems that, as designed and applied, make  meaningful distinctions based on relative performance before an agency  could increase its total annual compensation limit for senior executives.   While the House version of DOD’s fiscal year 2004 authorization bill would  still require an OPM certification process to increase the highest rate of  pay for senior executives, neither the proposed National Security  Personnel System Act nor the House bill would require such a certification  for increasing the total annual compensation limit for senior executives.
To be generally consistent with the Homeland Security Act, we believe  that the Congress should require that OPM certify that the DOD senior  executive service (SES) performance management system makes  meaningful distinctions in performance and employs the other practices  used by leading organizations to develop effective performance  management systems, including establishing a clear, direct connection  between (1) SES performance ratings and rewards and (2) the degree to  which the organization achieved its goals.  DOD would be required to  receive the OPM certification before it could increase the total annual  compensation limit and/or the highest rate of pay for its senior executives.
section_title: Attracting Key Talent for DOD
paragraphs: The National Security Personnel System Act contains a number of  provisions designed to give DOD flexibility to help obtain key critical  talent. It allows DOD greater flexibility to (1) hire experts and pay them  special rates for temporary periods up to six years, and (2) define benefits  for certain specialized overseas employees. Specifically, the Secretary  would have the authority to establish a program to attract highly qualified  experts in needed occupations with the flexibility to establish the rate of  pay, eligibility for additional payments, and terms of the appointment.  These authorities give DOD considerable flexibility to obtain and  compensate individuals and exempt them from several provisions of  current law. Consistent with our earlier suggestions, the bill would limit  the number of experts employed at any one time to 300. The Congress  should also consider requiring that these provisions only be used to fill  critically needed skills identified in a DOD strategic human capital plan,  and that DOD report on the use of the authorities under these sections  periodically.
section_title: Governmentwide Human Capital Reforms
paragraphs: As I mentioned at the outset of my statement today, the consideration of  human capital reforms for DOD naturally suggests opportunities for  governmentwide reform as well. The following provides some suggestions  in that regard.
subsections: section_title: Governmentwide Performance-Based Pay and Other Human Capital Authorities
paragraphs: We believe that the Congress should consider providing governmentwide  authority to implement broad banding, other pay for performance systems,  and other personnel authorities whereby whole agencies are allowed to  use additional authorities after OPM has certified that they have the  institutional infrastructures in place to make effective and fair use of those  authorities. To obtain additional authority, an agency should be required  to have an OPM-approved human capital plan that is fully integrated with  the agency’s strategic plan. These plans need to describe the agency’s  critical human capital needs and how the new provisions will be used to  address the critical needs. The plan should also identify the safeguards or  other measures that will be applied to ensure that the authorities are  carried out fairly and in a manner consistent with merit system principles  and other national goals.
Furthermore, the Congress should establish statutory principles for the  standards that an agency must have in place before OPM can grant  additional pay flexibilities. The standards for DOD’s performance  management system contained in the National Security Personnel System  Act are the appropriate place to start. An agency would have to  demonstrate, and OPM would have to certify, that a modern, effective,  credible, and, as appropriate, validated performance management system  with adequate safeguards, including reasonable transparency and  appropriate accountability mechanisms, is in place to support more  performance-based pay and related personnel decisions before the agency  could put the new system in operation.  OPM should be required to act on  any individual certifications within prescribed time frames (e.g., 30–60  days).
Consistent with our suggestion to have DOD evaluate and report on its  efforts, agencies should also be required to evaluate the use of any new  pay or other human capital authorities periodically. Such evaluations, in  consultation with or subject to review of OPM, could be broadly modeled  on the evaluation requirements of OPM’s personnel demonstration  program.
section_title: Governmentwide SES Performance and Pay Reforms
paragraphs: Additional efforts should be undertaken to move the SES to an approach  where pay and rewards are more closely tied to performance. This is  consistent with the proposed Senior Executive Service Reform Act of  2003. Any effort to link pay to performance presupposes that effective,  results-oriented strategic and annual performance planning and reporting  systems are in place in an agency. That is, agencies must have a clear  understanding of the program results to be achieved and the progress that  is being made toward those intended results if they are to link pay to  performance. The SES needs to take the lead in matters related to pay for  performance.
section_title: Performance Management Improvement Funds
paragraphs: We believe it would be highly desirable for the Congress to establish a  governmentwide fund where agencies, based on a sound business case,  could apply to OPM for funds to be used to modernize their performance  management systems and ensure that those systems have adequate  safeguards to prevent abuse. Too often, agencies lack the performance  management systems needed to effectively and fairly make pay and other  personnel decisions.
The basic idea of a governmentwide fund would be to provide for targeted  investments needed to prepare agencies to use their performance  management systems as strategic tools to achieve organizational results  and drive cultural change. Building such systems and safeguards will likely  require making targeted investments in agencies’ human capital programs,  as our own experience has shown. (If successful, this approach to targeted  investments could be expanded to foster and support agencies’ related  transformation efforts, including other aspects of the High Performing  Organization concept recommended by the Commercial Activities Panel.)
section_title: Additional Targeted Governmentwide Reforms
paragraphs: Finally, we also believe that the Congress should enact additional targeted  and governmentwide human capital reforms for which there is a  reasonable degree of consensus. Many of the provisions in the proposed  Federal Workforce Flexibility Act of 2003 and the governmentwide human  capital provisions of the House version of DOD’s fiscal year 2004  authorization bill fall into this category.
section_title: Summary Observations
paragraphs: Since we designated strategic human capital management as a  governmentwide high-risk area in January 2001, the Congress, the  administration, and agencies have taken steps to address the federal  government’s human capital shortfalls. In a number of statements before  the Congress over the last 2 years, I have urged the government to seize on  the current momentum for change and enact lasting improvements.  Significant progress has been—and is being—made in addressing the  federal government’s pressing human capital challenges. But experience  has shown that in making major changes in the cultures of organizations,  how it is done, when it is done, and the basis on which it is done can make  all the difference in whether we are ultimately successful.
DOD and other agency-specific human capital reforms should be enacted  to the extent that the problems being addressed and the solutions offered  are specific to particular agencies. A governmentwide approach should be  used to address certain flexibilities that have broad-based application and  serious potential implications for the civil service system, in general, and  OPM, in particular. This approach will help to accelerate needed human  capital reform in DOD and throughout the rest of the federal government.
Chairman Collins and Members of the Committee, this concludes my  prepared statement. I would be pleased to respond to any questions that  you may have.
section_title: Contacts and Acknowledgments
paragraphs: For further information about this statement, please contact Derek B.  Stewart, Director, Defense Capabilities and Management, on (202) 512- 5140 or at stewartd@gao.gov. For further information on governmentwide  human capital issues, please contact J. Christopher Mihm, Director,  Strategic Issues, on (202) 512-6806 or at mihmj@gao.gov. Major  contributors to this testimony included William Doherty, Bruce Goddard,  Hilary Murrish, Lisa Shames, Edward H. Stephenson, Martha Tracy, and  Michael Volpe.
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