Human Capital: Observations on Final DHS Human Capital Regulations
Published: 2005-03-02T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: People are critical to any agency transformation, such as the one envisioned for the Department of Homeland Security (DHS). They define an agency's culture, develop its knowledge base, and are its most important asset. Thus, strategic human capital management at DHS can help it marshal, manage, and maintain the people and skills needed to meet its critical mission. Congress provided DHS with significant flexibility to design a modern human capital management system. DHS and the Office of Personnel Management (OPM) have now jointly released the final regulations on DHS's new human capital system. Last year, with the release of the proposed regulations, GAO observed that many of the basic principles underlying the regulations were consistent with proven approaches to strategic human capital management and deserved serious consideration. However, some parts of the human capital system raised questions for DHS, OPM, and Congress to consider in the areas of pay and performance management, adverse actions and appeals, and labor management relations. GAO also identified multiple implementation challenges for DHS once the final regulations for the new system were issued. This testimony provides overall observations on DHS's intended human capital system and selected provisions of the final regulations.
section_title: What GAO Found
paragraphs: GAO believes that DHS's regulations contain many of the basic principles that are consistent with proven approaches to strategic human capital management. Positively, the final regulations provide for (1) a flexible, contemporary, performance-oriented, and market-based compensation system, including occupational clusters and pay bands; (2) continued involvement of employees and union officials throughout the implementation process, such as by participating in the development of the implementing directives and holding membership on the Homeland Security Compensation Committee; and (3) evaluations of the implementation of DHS's system. On the other hand, GAO has three areas of concern that deserve attention from DHS senior leadership. First, DHS has considerable work ahead to define the details of the implementation of its system and getting those details right will be critical to the success of the overall system. Second, the performance management system merely allows, rather than requires, the use of core competencies that can help to provide reasonable consistency and clearly communicate to employees what is expected of them. Third, the pass/fail ratings or three summary rating levels for certain employee groups do not provide the meaningful differentiation in performance needed for transparency to employees and for making the most informed pay decisions. Going forward, GAO believes that especially for this multiyear transformation, the Chief Operating Officer/Chief Management Officer concept could help to elevate, integrate, and institutionalize responsibility for the success of DHS's new human capital system and related implementation and transformation efforts. Second, a key implementation step for DHS is to assure an effective and on-going two-way communication effort that creates shared expectations among managers, employees, customers, and stakeholders. Last, DHS must ensure that it has the institutional infrastructure in place to make effective use of its new authorities. At a minimum, this infrastructure includes a human capital planning process that integrates human capital policies, strategies, and programs with its program goals, mission, and desired outcomes; the capabilities to effectively develop and implement a new human capital system; and importantly, the existence of a modern, effective, and credible performance management system that includes adequate safeguards to help assure consistency and prevent abuse. While GAO strongly supports federal human capital reform, how it is done, when it is done, and the basis on which it is done can be the difference between success and failure. Thus, the DHS regulations are especially critical because of their potential implications for related governmentwide reform.

section_title: Letter
paragraphs: I appreciate the opportunity to be here today to provide our observations  on the Department of Homeland Security’s (DHS) final regulations on its  new human capital system, which were published last month jointly by the  Secretary of DHS and the Director of the Office of Personnel Management  (OPM). As you know, I recently testified on these regulations before the  Senate’s Committee on Homeland Security and Governmental Affairs,  Subcommittee on Oversight of Government Management, the Federal  Workforce, and the District of Columbia. Since then, GAO issued its report  on 21st century challenges, which is intended to help the Congress address  a range of 21st century trends and challenges, including our current  unsustainable fiscal path, by providing a series of illustrative questions that  could help support a fundamental and broad-based reexamination  initiative. Among the questions relevant to this hearing is one that asks:  “How should the federal government update its compensation systems to  be more market-based and performance-oriented?”
As the title of this hearing suggests—“The Countdown to Completion:  Implementing the New Department of Homeland Security Personnel  System”—DHS, and in many cases the federal government, must transform  how it classifies, develops, motivates, and compensates its employees to  achieve maximum results within available resources. People are critical to  any agency’s transformation, such as the one envisioned for DHS. They  define an agency’s culture, develop its knowledge, and are its most  important asset. Thus, strategic human capital management at DHS can  help it marshal, manage, and maintain the people and skills needed to meet  its critical mission.
As we recently reported in our High-Risk Series, significant changes in how  the federal workforce is managed, such as DHS’s new human capital  system, are underway. Consequently, there is general recognition that the  government needs a framework to guide this human capital reform, one  that Congress and the administration can implement to enhance  performance, ensure accountability, and position the nation for the future.  These final regulations, which according to DHS will affect about 110,000  federal employees, are especially critical because of their implications for  governmentwide reforms.
Today, I will discuss some of the major features of the DHS regulations. In  doing so, I will touch on several key themes. Specifically, I will highlight  three positive features, three areas of concern, and three comments going  forward that are suggested in my statement today. Let me start by  summarizing three positive features of the proposed DHS human capital  system. First, we believe that, consistent with the observations we made a  year ago, the proposed regulations provide for a flexible, contemporary,  performance-oriented, and market-based compensation system. Under the  regulations, DHS is to establish occupational clusters and pay bands and  may, after coordination with OPM, set and adjust pay ranges taking into  account mission requirements, labor market conditions, availability of  funds, and other relevant factors. Second, DHS appears to be committed to  continue to involve employees and union officials throughout the  implementation process, including participating in the development of the  implementing directives, holding membership on the Homeland Security  Compensation Committee, and helping in the design and review of the  evaluations of the new system. Third, high-performing organizations  continually review and revise their human capital systems. To this end, the  final regulations state that DHS is to establish procedures for evaluating the  implementation of its system.
On the other hand, I have three areas of concern that I believe need to be  addressed to maximize DHS’s chance of success. First, DHS has  considerable work ahead to define the details of the implementation of its  system and understanding these details is important in assessing the  overall system. Second, the performance management system merely  allows, rather than requires, the use of core competencies that can help to  provide reasonable consistency and clearly communicate to employees  what is expected of them. Employees validating these competencies would  help to gain their acceptance and credibility and minimize adverse actions.  This has certainly been our experience with our own internal efforts at  GAO. Third, pass/fail ratings for employees in the “Entry/Developmental”  band or three summary rating levels for other employee groups do not  provide the meaningful differentiation in performance needed for  transparency to employees and for making the most informed pay  decisions.
Going forward, we believe that especially for this multiyear transformation,  the Chief Operating Officer/Chief Management Officer concept could help  to elevate, integrate, and institutionalize responsibility for the success of  DHS’s new human capital system. Second, a key implementation step for  DHS is to assure an effective and on-going two-way communication effort  that creates shared expectations among managers, employees, customers,  and stakeholders. Last, we are very concerned that DHS must ensure that it  has the institutional infrastructure in place to make effective use of its new  authorities. At a minimum, this infrastructure includes a human capital  planning process that integrates human capital policies, strategies, and  programs with its program goals, mission, and desired outcomes; the  capabilities to effectively develop and implement a new human capital  system; and importantly, the existence of a modern, effective, and credible  performance management system that includes adequate safeguards to  help assure consistency and prevent abuse.
This morning I would like to provide some observations on the final DHS  regulations, discuss the multiple challenges that DHS confronts as it moves  towards implementation of its new human capital system, and then suggest  a governmentwide framework that can serve as a starting point to advance  human capital reform.
subsections: section_title: Observations on Final DHS Human Capital Regulations
paragraphs: The final regulations establish a new human capital system for DHS that is  intended to assure its ability to attract, retain, and reward a workforce that  is able to meet its critical mission. Further, the human capital system is to  provide for greater flexibility and accountability in the way employees are  to be paid, developed, evaluated, afforded due process, and represented by  labor organizations while reflecting the principles of merit and fairness  embodied in the statutory merit systems principles.
Predictable with any change management initiative, the DHS regulations  have raised some concerns among employee groups, unions, and other  stakeholders because they do not have all the details of how the system will  be implemented and impact them. We have reported that individuals  inevitably worry during any change management initiative because of  uncertainty over new policies and procedures. A key practice to address  this worry is to involve employees and their representatives to obtain their  ideas and gain their ownership for the initiative. Thus, a significant  improvement from the proposed regulations is that now employee  representatives are to be provided with an opportunity to remain involved.  Specifically, they can discuss their views with DHS officials and/or submit  written comments as implementing directives are developed, as outlined  under the “continuing collaboration” provisions. This collaboration is  consistent with DHS’s statutory authority to establish a new human capital  system, which requires such continuing collaboration. Under the  regulations, nothing in the continuing collaboration process is to affect the  right of the Secretary to determine the content of implementing directives  and to make them effective at any time.
In addition, the final regulations state that DHS is to establish procedures  for evaluating the implementation of its human capital system. High- performing organizations continually review and revise their human capital  management systems based on data-driven lessons learned and changing  needs in the environment. Collecting and analyzing data is the fundamental  building block for measuring the effectiveness of these systems in support  of the mission and goals of the agency.
We continue to believe that many of the basic principles underlying the  DHS regulations are generally consistent with proven approaches to  strategic human capital management. Today, I will provide our  observations on the following elements of DHS’s human capital system as  outlined in the final regulations—pay and performance management,  adverse actions and appeals, and labor-management relations.
subsections: section_title: Pay and Performance Management
paragraphs: Last year, we testified that the DHS proposal reflects a growing  understanding that the federal government needs to fundamentally rethink  its current approach to pay and better link pay to individual and  organizational performance. To this end, the DHS proposal takes another  valuable step towards modern performance management. Among the key  provisions is a performance-oriented and market-based pay system.
We have observed that a competitive compensation system can help  organizations attract and retain a quality workforce. To begin to develop  such a system, organizations assess the skills and knowledge they need;  compare compensation against other public, private, or nonprofit entities  competing for the same talent in a given locality; and classify positions  along levels of responsibility. While one size does not fit all, organizations  generally structure their competitive compensation systems to separate  base salary—which all employees receive—from other special incentives,  such as merit increases, performance awards, or bonuses, which are  provided based on performance and contributions to organizational  results.
According to the final regulations, DHS is to establish occupational clusters  and pay bands that replace the current General Schedule (GS) system now  in place for much of the civil service. DHS may, after coordination with  OPM, establish occupational clusters based on factors such as mission or  function, nature of work, qualifications or competencies, career or pay  progression patterns, relevant labor-market features, and other  characteristics of those occupations or positions. DHS is to document in  implementing directives the criteria and rationale for grouping occupations  or positions into clusters as well as the definitions for each band’s range of  difficulty and responsibility, qualifications, competencies, or other  characteristics of the work.
As we testified last year, pay banding and movement to broader  occupational clusters can both facilitate DHS’s movement to a pay for  performance system and help DHS to better define occupations, which can  improve the hiring process. We have reported that the current GS system as  defined in the Classification Act of 1949 is a key barrier to comprehensive  human capital reform and the creation of broader occupational job clusters  and pay bands would aid other agencies as they seek to modernize their  personnel systems.Today’s jobs in knowledge-based organizations require  a much broader array of tasks that may cross over the narrow and rigid  boundaries of job classifications of the GS system.
Under the final regulations, DHS is to convert employees from the GS  system to the new system without a reduction in their current pay.  According to DHS, when employees are converted from the GS system to a  pay band, their base pay is to be adjusted to include a percentage of their  next within-grade increase, based on the time spent in their current step  and the waiting period for the next step. DHS stated that most employees  would receive a slight increase in salary upon conversion to a pay band.  This approach is consistent with how several of OPM’s personnel  demonstration projects converted employees from the GS system.
The final DHS regulations include other elements of a modern  compensation system. For example, the regulations provide that DHS may,  after coordination with OPM, set and adjust the pay ranges for each pay  band taking into account mission requirements, labor market conditions,  availability of funds, pay adjustments received by other federal employees,  and any other relevant factors. In addition, DHS may, after coordination  with OPM, establish locality rate supplements for different occupational  clusters or for different bands within the same cluster in the same locality  pay area. According to DHS, these locality rates would be based on the cost  of labor rather than cost of living factors. The regulations state that DHS  would use recruitment or retention bonuses if it experiences such  problems due to living costs in a particular geographic area.
Especially when developing a new performance management system, high- performing organizations have found that actively involving employees and  key stakeholders, such as unions or other employee associations, helps  gain ownership of the system and improves employees’ confidence and  belief in the fairness of the system. DHS recognized that the system must  be designed and implemented in a transparent and credible manner that  involves employees and employee representatives. A new and positive  addition to the final regulations is a Homeland Security Compensation  Committee that is to provide oversight and transparency to the  compensation process. The committee—consisting of 14 members,  including four officials of labor organizations—is to develop  recommendations and options for the Secretary’s consideration on  compensation and performance management matters, including the annual  allocation of funds between market and performance pay adjustments.
While the DHS regulations contain many elements of a performance-based  and market-oriented pay system, there are several issues that we identified  last year that DHS will need to continue to address as it moves forward  with the implementation of the system. These issues include linking  organizational goals to individual performance, using competencies to  provide a fuller assessment of performance, making meaningful  distinctions in employee performance, and continuing to incorporate  adequate safeguards to ensure fairness and guard against abuse.
subsections: section_title: Linking Organizational Goals to Individual Performance
paragraphs: Consistent with leading practice, the DHS performance management  system is to align individual performance expectations with the mission,  strategic goals, organizational program and policy objectives, annual  performance plans, and other measures of performance. DHS’s  performance management system can be a vital tool for aligning the  organization with desired results and creating a “line of sight” showing how  team, unit, and individual performance can contribute to overall  organizational results. However, as we testified last year, agencies  struggle to create this line of sight.
section_title: Using Competencies to Provide a Fuller Assessment of Performance
paragraphs: DHS appropriately recognizes that given its vast diversity of work,  managers and employees need flexibility in crafting specific performance  expectations for their employees. These expectations may take the form of  competencies an employee is expected to demonstrate on the job, among  other things. However, as DHS develops its implementing directives, the  experiences of leading organizations suggest that DHS should reconsider  its position to merely allow, rather than require, the use of core  competencies that employees must demonstrate as a central feature of its  performance management system. Based on our review of others’ efforts  and our own experience at GAO, core competencies can help reinforce  employee behaviors and actions that support the department’s mission,  goals, and values and can provide a consistent message to employees about  how they are expected to achieve results. For example, an OPM personnel  demonstration project—the Civilian Acquisition Workforce Personnel  Demonstration Project—covers various organizational units within the  Department of Defense and applies core competencies for all employees,  such as teamwork/cooperation, customer relations, leadership/supervision,  and communication.
Similarly, as we testified last year, DHS could use competencies—such as  achieving results, change management, cultural sensitivity, teamwork and  collaboration, and information sharing—to reinforce employee behaviors  and actions that support its mission, goals, and values and to set  expectations for individuals’ roles in DHS’s transformation. By including  such competencies throughout its performance management system, DHS  could create a shared responsibility for organizational success and help  assure accountability for change.
section_title: Making Meaningful Distinctions in Employee Performance
paragraphs: High-performing organizations seek to create pay, incentive, and reward  systems that clearly link employee knowledge, skills, and contributions to  organizational results. These organizations make meaningful distinctions  between acceptable and outstanding performance of individuals and  appropriately reward those who perform at the highest level. The final  regulations state that DHS supervisors and managers are to be held  accountable for making meaningful distinctions among employees based  on performance, fostering and rewarding excellent performance, and  addressing poor performance. While DHS states that as a general matter,  pass/fail ratings are incompatible with pay for performance, it is to permit  use of pass/fail ratings for employees in the “Entry/Developmental” band or  in other pay bands under extraordinary circumstances as determined by  the Secretary.
DHS is to require the use of a least three summary rating levels for other  employee groups. We urge DHS to consider using at least four summary  rating levels to allow for greater performance rating and pay  differentiation. This approach is in the spirit of the new governmentwide  performance-based pay system for the Senior Executive Service (SES),  which requires at least four levels to provide a clear and direct link  between SES performance and pay as well as to make meaningful distinctions based on relative performance. Cascading this approach to  other levels of employees can help DHS recognize and reward employee  contributions and achieve the highest levels of individual performance.
section_title: Providing Adequate Safeguards to Ensure Fairness and Guard Against Abuse
paragraphs: As DHS develops its implementing directives, it also needs to continue to  build safeguards into its performance management system. A concern that  employees often express about any pay for performance system is  supervisors’ ability to assess performance fairly. Using safeguards, such as  having an independent body to conduct reasonableness reviews of  performance management decisions, can help to allay these concerns and  build a fair, credible, and transparent system.
It should be noted that the final regulations no longer provide for a  Performance Review Board (PRB) to review ratings in order to promote  consistency, provide general oversight of the performance management  system, and ensure it is administered in a fair, credible, and transparent  manner. According to the final regulations, participating labor  organizations expressed concern that the PRBs could delay pay decisions  and give the appearance of unwarranted interference in the performance  rating process. However, in the final regulations, DHS states that it  continues to believe that an oversight mechanism is important to the  credibility of the department’s pay for performance system and that the  Compensation Committee, in place of PRBs, is to conduct an annual review  of performance payout summary data. While much remains to be  determined about how the Compensation Committee is to operate, we  believe that the effective implementation of such a committee is important  to assuring that predecisional internal safeguards exist to help achieve  consistency and equity, and assure non-discrimination and non- politicization of the performance management process.
We have also reported that agencies need to assure reasonable  transparency and provide appropriate accountability mechanisms in  connection with the results of the performance management process. For  DHS, this can include publishing internally the overall results of  performance management and individual pay decisions while protecting  individual confidentiality and reporting periodically on internal  assessments and employee survey results relating to the performance  management system. Publishing this information can provide employees  with the information they need to better understand the performance  management system and to generally compare their individual  performance with their peers. We found that several of OPM’s personnel  demonstration projects publish information for employees on internal Web  sites that include the overall results of performance appraisal and pay  decisions, such as the average performance rating, the average pay  increase, and the average award for the organization and for each  individual unit.
section_title: Adverse Actions and Appeals
paragraphs: DHS’s final regulations are intended to simplify and streamline the  employee adverse action process to provide greater flexibility for the  department and to minimize delays, while also ensuring due process  protections. It is too early to tell what impact, if any, these regulations  would have on DHS’s operations and employees or other entities, such as  the Merit Systems Protection Board (MSPB). Close monitoring of any  unintended consequences, such as on MSPB and its ability to manage cases  from DHS and other federal agencies, is warranted.
In terms of adverse actions, the regulations modify the current federal  system in that the DHS Secretary will have the authority to identify specific  offenses for which removal is mandatory. In our previous testimony on the  proposed regulations, we expressed some caution about this new authority  and pointed out that the process for determining and communicating which  types of offenses require mandatory removal should be explicit and  transparent. We noted that such a process should include an employee  notice and comment period before implementation and collaboration with  relevant congressional stakeholders and employee representatives. The  final DHS regulations explicitly provide for publishing a list of the  mandatory removal offenses in the Federal Register and in DHS’s  implementing directives and making these offenses known to employees  annually.
In last year’s testimony, we also suggested that DHS exercise caution when  identifying specific removable offenses and the specific punishment. When  developing and implementing the regulations, DHS might learn from the  experience of the Internal Revenue Service’s (IRS) implementation of its mandatory removal provisions. We reported that IRS officials believed  this provision had a negative impact on employee morale and effectiveness  and had a “chilling effect” on IRS frontline enforcement employees who  were afraid to take certain appropriate enforcement actions. Careful  drafting of each removable offense is critical to ensure that the provision  does not have unintended consequences.
Under the DHS regulations, employees alleged to have committed these  mandatory removal offenses are to have the right to a review by a newly  created panel. DHS regulations provide for judicial review of the panel’s  decisions. Members of this three-person panel are to be appointed by the  Secretary for three-year terms. In last year’s testimony, we noted that the  independence of the panel that is to hear appeals of mandatory removal  actions deserved further consideration. The final regulations address the  issue of independence by prescribing additional qualification requirements  which emphasize integrity and impartiality and requiring the Secretary to  consider any lists of candidates submitted by union representatives for  panel positions other than the chair. Employee perception concerning the  independence of this panel is critical to the mandatory removal process.
Regarding the appeal of adverse actions other than mandatory removals,  the DHS regulations generally preserve the employee’s basic right to appeal  decisions to an independent body—MSPB—but with procedures different  from those applicable to other federal employees. However, in a change  from the proposed regulations in taking actions against employees for  performance or conduct issues, DHS is to meet a higher standard of  evidence—a “preponderance of evidence” instead of “substantial  evidence.” For performance issues, while this higher standard of evidence  means that DHS would face a greater burden of proof than most agencies  to pursue these actions, DHS managers are not required to provide  employees performance improvement periods, as is the case for other  federal employees. For conduct issues, DHS would face the same burden of  proof as most agencies.
The regulations shorten the notification period before an adverse action  can become effective and provide an accelerated MSPB adjudication  process. In addition, MSPB may no longer modify a penalty for a conduct- based adverse action that is imposed on an employee by DHS unless such  penalty was “wholly without justification.” The DHS regulations also  stipulate that MSPB can no longer require that parties enter into settlement  discussions, although either party may propose doing so. DHS expressed  concerns that settlement should be a completely voluntary decision made  by parties on their own. However, settling cases has been an important tool  in the past at MSPB, and promotion of settlement at this stage should be  encouraged.
The final regulations continue to support a commitment to the use of  Alternative Dispute Resolution (ADR), which we previously noted was a  positive development. To resolve disputes in a more efficient, timely, and  less adversarial manner, federal agencies have been expanding their human  capital programs to include ADR approaches, including the use of ombudsmen as an informal alternative to addressing conflicts. ADR is a  tool for supervisors and employees alike to facilitate communication and  resolve conflicts. As we have reported, ADR helps lessen the time and the  cost burdens associated with the federal redress system and has the  advantage of employing techniques that focus on understanding the  disputants’ underlying interests over techniques that focus on the validity  of their positions. For these and other reasons, we believe that it is  important to continue to promote ADR throughout the process.
section_title: Labor-Management Relations
paragraphs: Under the DHS regulations, the scope and method of labor union  involvement in human capital issues are to change. DHS management is no  longer required to engage in collective bargaining and negotiations on as  many human capital policies and processes as in the past. For example,  certain actions that DHS has determined are critical to the mission and  operations of the department, such as deploying staff and introducing new  technologies, are now considered management rights and are not subject  to collective bargaining and negotiation. DHS, however, is to confer with  employees and unions in developing the procedures it will use to take these  actions. Other human capital policies and processes that DHS  characterizes as “non-operational,” such as selecting, promoting, and  disciplining employees, are also not subject to collective bargaining, but  DHS must negotiate the procedures it will use to take these actions. Finally,  certain other policies and processes, such as how DHS will reimburse  employees for any “significant and substantial” adverse impacts resulting  from an action, such as a rapid change in deployment, must be negotiated.
In addition, DHS is to establish its own internal labor relations board—the  Homeland Security Labor Relations Board—to deal with most agencywide  labor relations policies and disputes rather than submit them to the Federal  Labor Relations Authority. DHS stated that the unique nature of its  mission—homeland protection—demands that management have the  flexibility to make quick resource decisions without having to negotiate  them, and that its own internal board would better understand its mission  and, therefore, be better able to address disputes. Labor organizations are  to nominate names of individuals to serve on the Board and the regulations  established some general qualifications for the board members. However,  the Secretary is to retain the authority to both appoint and remove any  member. Similar to the mandatory removal panel, employee perception  concerning the independence of this board is critical to the resolution of  the issues raised over labor relations policies and disputes. These changes  have not been without controversy, and four federal employee unions have  filed suit alleging that DHS has exceeded its authority under the statute  establishing the DHS human capital system. The suit discusses bargaining  and negotiability practices, adverse action procedures, and the roles of the  Federal Labor Relations Authority and MSPB under the DHS regulations.
Our previous work on individual agencies’ human capital systems has not  directly addressed the scope of specific issues that should or should not be  subject to collective bargaining and negotiations. At a forum we co-hosted  exploring the concept of a governmentwide framework for human capital  reform, which I will discuss later, participants generally agreed that the  ability to organize, bargain collectively, and participate in labor  organizations is an important principle to be retained in any framework for  reform. It was also suggested at the forum that unions must be both willing  and able to actively collaborate and coordinate with management if unions  are to be effective representatives of their members and real participants in  any human capital reform.
section_title: DHS Confronts Many Challenges to Successful Implementation
paragraphs: With the issuance of the final regulations, DHS faces multiple challenges to  the successful implementation of its new human capital system. We  identified multiple implementation challenges at last year’s hearing.  Subsequently, we reported that DHS’s actions to date in designing its  human capital system and its stated plans for future work on its system are  helping to position the department for successful implementation.Nevertheless, DHS was in the early stages of developing the infrastructure  needed for implementing its new system. For more information on these  challenges, as well as on related human capital topics, see the “Highlights”  pages attached to this statement.
We believe that these challenges are still critical to the success of the new  human capital system. In many cases, DHS has acknowledged these  challenges and made a commitment to address them in regulations. Today I  would like to focus on two additional implementation challenges—  ensuring sustained and committed leadership and establishing an overall  consultation and communication strategy—and then reiterate challenges  we previously identified, including providing adequate resources for  implementing the new system and involving employees and other  stakeholders in implementing the system.
subsections: section_title: Ensuring Sustained and Committed Leadership
paragraphs: As DHS and other agencies across the federal government embark on large- scale organizational change initiatives, such as the new human capital  system DHS is implementing, there is a compelling need to elevate,  integrate, and institutionalize responsibility for such key functional  management initiatives to help ensure their success. A Chief Operating  Officer/Chief Management Officer (COO/CMO) or similar position can  effectively provide the continuing, focused attention essential to  successfully completing these multiyear transformations.
Especially for such an endeavor as critical as DHS’s new human capital  system, such a position would serve to   elevate attention that is essential to overcome an organization’s natural  resistance to change, marshal the resources needed to implement  change, and build and maintain the organizationwide commitment to  new ways of doing business;   integrate this new system with various management responsibilities so  they are no longer “stovepiped” and fit it into other organizational  transformation efforts in a comprehensive, ongoing, and integrated  manner; and   institutionalize accountability for the system so that the implementation  of this critical human capital initiative can be sustained.
We have work underway at the request of Congress to assess DHS’s  management integration efforts, including the role of existing senior  leadership positions as compared to a COO/CMO position, and expect to  issue a report on this work in the coming weeks.
section_title: Establishing an Overall Communication Strategy
paragraphs: Another significant challenge for DHS is to assure an effective and ongoing  two-way consultation and communication strategy that creates shared  expectations about, and reports related progress on, the implementation of  the new system. We have reported this is a key practice of a change  management initiative. DHS’s final regulations recognize that all parties  will need to make a significant investment in communication in order to  achieve successful implementation of its new human capital system.  According to DHS, its communication strategy will include global e-mails,  satellite broadcasts, Web pages, and an internal DHS weekly newsletter.  DHS stated that its leaders will be provided tool kits and other aids to  facilitate discussions and interactions between management and  employees on program changes.
Given the attention over the regulations, a critical implementation step is  for DHS to assure a communication strategy. Communication is not about  just “pushing the message out.” Rather, it should facilitate a two-way  honest exchange with, and allow for feedback from, employees, customers,  and key stakeholders. This communication is central to forming the  effective internal and external partnerships that are vital to the success of  any organization. Creating opportunities for employees to communicate  concerns and experiences about any change management initiative allows  employees to feel that their experiences are acknowledged and important  to management during the implementation of any change management  initiative. Once this feedback is received, it is important to consider and  use this solicited employee feedback to make any appropriate changes to  its implementation. In addition, closing the loop by providing information  on why key recommendations were not adopted is also important.
section_title: Providing Adequate Resources for Implementing the New System
paragraphs: OPM reports that the increased costs of implementing alternative  personnel systems should be acknowledged and budgeted for up front.  DHS estimates the overall costs associated with implementing the new  DHS system—including the development and implementation of a new pay  and performance system, the conversion of current employees to that  system, and the creation of its new labor relations board—will be  approximately $130 million through fiscal year 2007 (i.e., over a 4-year  period) and less than $100 million will be spent in any 12-month period.
We found that based on the data provided by selected OPM personnel  demonstration projects, direct costs associated with salaries and training  were among the major cost drivers of implementing their pay for  performance systems. Certain costs, such as those for initial training on the  new system, are one-time in nature and should not be built into the base of  DHS’s budget. Other costs, such as employees’ salaries, are recurring and  thus would be built into the base of DHS’s budget for future years.
We found that approaches the demonstration projects used to manage  salary costs were to consider fiscal conditions and the labor market and to  provide a mix of one-time awards and permanent pay increases. For  example, rewarding an employee’s performance with an award instead of  an equivalent increase to base pay can reduce salary costs in the long run  because the agency only has to pay the amount of the award one time,  rather than annually. However, one approach that the demonstration  projects used to manage costs that is not included in the final regulations is  the use of “control points.” We found that the demonstration projects used  such a mechanism—sometimes called speed bumps—to manage  progression through the bands to help ensure that employees’ performance  coincides with their salaries and prevent all employees from eventually  migrating to the top of the band and thus increase costs.
According to the DHS regulations, its performance management system is  designed to incorporate adequate training and retraining for supervisors,  managers, and employees in the implementation and operation of the  system. Each of OPM’s personnel demonstration projects trained  employees on the performance management system prior to  implementation to make employees aware of the new approach, as well as  periodically after implementation to refresh employee familiarity with the  system. The training was designed to help employees understand their  applicable competencies and performance standards; develop performance  plans; write self-appraisals; become familiar with how performance is  evaluated and how pay increases and awards decisions are made; and  know the roles and responsibilities of managers, supervisors, and  employees in the appraisal and payout processes.
section_title: Involving Employees and Other Stakeholders in Implementing the System
paragraphs: We reported in September 2003 that DHS’s and OPM’s effort to design a  new human capital system was collaborative and facilitated participation  of employees from all levels of the department.We recommended that the  Secretary of DHS build on the progress that had been made and ensure that  the communication strategy used to support the human capital system  maximize opportunities for employee and key stakeholder involvement  through the completion of design and implementation of the new system,  with special emphasis on seeking the feedback and buy-in of frontline  employees. In implementing this system, DHS should continue to recognize  the importance of employee and key stakeholder involvement. Leading  organizations involve employee unions, as well as involve employees  directly, and consider their input in formulating proposals and before  finalizing any related decisions.
To this end, DHS’s revised regulations have attempted to recognize the  importance of employee involvement in implementing the new personnel  system. As we discussed earlier, the final DHS regulations provide for  continuing collaboration in further development of the implementing  directives and participation on the Compensation Committee. The  regulations also provide that DHS is to involve employees in evaluations of  the human capital system. Specifically, DHS is to provide designated  employee representatives with the opportunity to be briefed and a  specified timeframe to provide comments on the design and results of  program evaluation. Further, employee representatives are to be involved  at the identification of the scope, objectives, and methodology to be used in  the program evaluation and in the review of draft findings and  recommendations.
section_title: Framework for Governmentwide Human Capital Reform
paragraphs: DHS has recently joined some other federal departments and agencies,  such as the Department of Defense, GAO, National Aeronautics and Space  Administration, and the Federal Aviation Administration, in receiving  authorities intended to help them manage their human capital strategically  to achieve results. To help advance the discussion concerning how  governmentwide human capital reform should proceed, GAO and the  National Commission on the Public Service Implementation Initiative  hosted a forum in April 2004 on whether there should be a governmentwide  framework for human capital reform and, if so, what this framework  should include. While there was widespread recognition among the forum  participants that a one-size-fits-all approach to human capital management  is not appropriate for the challenges and demands government faces, there  was equally broad agreement that there should be a governmentwide  framework to guide human capital reform. Further, a governmentwide  framework should balance the need for consistency across the federal  government with the desire for flexibility so that individual agencies can  tailor human capital systems to best meet their needs. Striking this balance  is not easy to achieve, but is necessary to maintain a governmentwide  system that is responsive enough to adapt to agencies’ diverse missions,  cultures, and workforces.
While there were divergent views among the forum participants, there was  general agreement on a set of principles, criteria, and processes that would  serve as a starting point for further discussion in developing a  governmentwide framework in advancing human capital reform, as shown  in figure 1.
As the momentum accelerates for human capital reform, GAO is continuing  to work with others to address issues of mutual interest and concern. For  example, to follow up on the April forum, the National Academy of Public  Administration and the National Commission on the Public Service  Implementation Initiative convened a group of human capital stakeholders  to continue the discussion of a governmentwide framework.
Summary Observations  The final regulations that DHS has issued represent a positive step towards  a more strategic human capital management approach for both DHS and  the overall government, a step we have called for in our recent High-Risk  Series. Consistent with our observations last year, DHS’s regulations make  progress towards a modern classification and compensation system. DHS’s  overall efforts in designing and implementing its human capital system can  be particularly instructive for future human capital reform. Nevertheless,  regarding the implementation of the DHS system, how it is done, when it is  done, and the basis on which it is done can make all the difference in  whether it will be successful. That is why it is important to recognize that  DHS still has to fill in many of the details on how it will implement these  reforms. These details do matter and they need to be disclosed and  analyzed in order to fully assess DHS’s proposed reforms. We have made a  number of suggestions for improvements the agency should consider in  this process. It is equally important for the agency to ensure it has the  necessary infrastructure in place to implement the system, not only an  effective performance management system, but also the capabilities to  effectively use the new human capital authorities and a strategic human  capital planning process. This infrastructure should be in place before any  new flexibilities are operationalized.
DHS appears to be committed to continue to involve employees, including  unions, throughout the implementation process, another critical ingredient  for success. Specifically, under DHS’s final regulations, employee  representatives or union officials are to have opportunities to participate in  developing the implementing directives, as outlined under the “continuing  collaboration” provisions; hold four membership seats on the Homeland  Security Compensation Committee; and help in evaluations of the human  capital system. A continued commitment to a meaningful and ongoing two- way consultation and communication strategy that allows for ongoing  feedback from employees, customers, and key stakeholders is central to  forming the effective internal and external partnerships that are vital to the  success of DHS’s human capital system. It is critically important that these  consultation and communication processes be meaningful in order to be  both credible and effective. Finally, to help ensure the quality of that  involvement, sustained leadership in a position such as a COO/CMO could  help to elevate, integrate, and institutionalize responsibility for the success  of DHS’s human capital system and other key business transformation  initiatives.
Mr. Chairman and Members of the Subcommittee, this concludes my  prepared statement. I would be pleased to respond to any questions that  you may have.
section_title: Contacts and Acknowledgements
paragraphs: For further information, please contact Eileen Larence, Acting Director,  Strategic Issues, at (202) 512-6806 or larencee@gao.gov. Major contributors  to this testimony include Michelle Bracy, K. Scott Derrick, Karin Fangman,  Janice Latimer, Jeffrey McDermott, Naved Qureshi, Lisa Shames, and  Michael Volpe.
section_title: “Highlights” from Selected GAO Human Capital Reports
paragraphs: At the center of any agency  transformation, such as the one  envisioned for the Department of  Homeland Security (DHS), are the  people who will make it happen.  Thus, strategic human capital  management at DHS can help it  marshal, manage, and maintain the  people and skills needed to meet its critical mission. Congress provided  DHS with significant flexibility to  design a modern human capital  management system. DHS and the  Office of Personnel Management  (OPM) have now jointly released  the final regulations on DHS’s new  human capital system.
GAO believes that the regulations contain many of the basic principles that  are consistent with proven approaches to strategic human capital  management. For example, many elements for a modern compensation  system—such as occupational clusters, pay bands, and pay ranges that take  into account factors such as labor market conditions—are to be  incorporated into DHS’s new system. However, these final regulations are  intended to provide an outline and not a detailed, comprehensive  presentation of how the new system will be implemented. Thus, DHS has  considerable work ahead to define the details of the implementation of its  system and understanding these details is important in assessing the overall  system.
Last year, with the release of the  proposed regulations, GAO  observed that many of the basic  principles underlying the  regulations were consistent with  proven approaches to strategic  human capital management and  deserved serious consideration.  However, some parts of the human  capital system raised questions for  DHS, OPM, and Congress to  consider in the areas of pay and  performance management, adverse  actions and appeals, and labor  management relations. GAO also  identified multiple implementation  challenges for DHS once the final  regulations for the new system  were issued.
The implementation challenges we identified last year are still critical to the  success of the new system. Also, DHS appears to be committed to continue  to involve employees, including unions, throughout the implementation  process. Specifically, according to the regulations, employee representatives  or union officials are to have opportunities to participate in developing the  implementing directives, hold four membership seats on the Homeland  Security Compensation Committee, and help in the design and review the  results of evaluations of the new system. Further, GAO believes that to help  ensure the quality of that involvement, DHS will need to    Ensure sustained and committed leadership. A Chief Operating  Officer/Chief Management Officer or similar position at DHS would  serve to elevate, integrate, and institutionalize responsibility for this  critical endeavor and help ensure its success by providing the  continuing, focused attention needed to successfully complete the  multiyear conversion to the new human capital system.
Establish an overall communication strategy. According to DHS, its  planned communication strategy for its new human capital system will  include global e-mails, satellite broadcasts, Web pages, and an internal  DHS weekly newsletter. A key implementation step for DHS is to assure  an effective and on-going two-way communication effort that creates  shared expectations among managers, employees, customers, and  stakeholders.
This testimony provides  preliminary observations on  selected provisions of the final  regulations.  www.gao.gov/cgi-bin/getrpt?GAO-05-320T.
To view the full product, including the scope  and methodology, click on the link above.  For more information, contact Eileen Larence  at (202) 512-6806 or larencee@gao.gov.
While GAO strongly supports human capital reform in the federal  government, how it is done, when it is done, and the basis on which it is  done can make all the difference in whether such efforts are successful.  GAO’s implementation of its own human capital authorities, such as pay  bands and pay for performance, could help inform other organizations as  they design systems to address their human capital needs. The final  regulations for DHS’s new system are especially critical because of the  potential implications for related governmentwide reforms.
The creation of the Department of  Homeland Security (DHS) almost  one year ago represents an historic  moment for the federal government  to fundamentally transform how  the nation will protect itself from  terrorism.  DHS is continuing to  transform and integrate a disparate  group of agencies with multiple  missions, values, and cultures into  a strong and effective cabinet  department.  Together with this  unique opportunity, however, also  comes significant risk to the nation  that could occur if this  transformation is not implemented  successfully.  In fact, GAO  designated this implementation and  transformation as high risk in  January 2003.
The proposed human capital system is designed to be aligned with the  department’s mission requirements and is intended to protect the civil  service rights of DHS employees.  Many of the basic principles underlying  the DHS regulations are consistent with proven approaches to strategic  human capital management, including several approaches pioneered by  GAO, and deserve serious consideration. However, some parts of the system  raise questions that DHS, OPM, and Congress should consider.
Pay and performance management: The proposal takes another valuable  step towards results-oriented pay reform and modern performance  management.  For effective performance management, DHS should use  validated core competencies as a key part of evaluating individual  contributions to departmental results and transformation efforts.
Adverse actions and appeals: The proposal would retain an avenue for  employees to appeal adverse actions to an independent third party.   However, the process to identify mandatory removal offenses must be  collaborative and transparent.  DHS needs to be cautious about defining  specific actions requiring employee removal and learn from the Internal  Revenue Service’s implementation of its mandatory removal provisions.  Labor relations: The regulations recognize employees’ right to organize  and bargain collectively, but reduce areas subject to bargaining.   Continuing to involve employees in a meaningful manner is critical to the  successful operations of the department.
Congress provided DHS with  significant flexibility to design a  modern human capital  management system.  GAO  reported in September 2003 that  the design effort to develop the  system was collaborative and  consistent with positive elements  of transformation.  Last Friday, the  Secretary of DHS and the Director  of the Office of Personnel  Management (OPM) released for  public comment draft regulations  for DHS’s new human capital  system.  This testimony provides  preliminary observations on  selected major provisions of the  proposed system.  The  subcommittees are also releasing  Human Capital: Implementing  Pay for Performance at Selected  Personnel Demonstration Projects  (GAO-04-83) at today’s hearing.
Once DHS issues final regulations for the human capital system, it will be  faced with multiple implementation challenges:    DHS plans to implement the system using a phased approach, however,  nearly half of DHS civilian employees are not covered by these  regulations, including more than 50,000 Transportation Security  Administration screeners.  To help build a unified culture, DHS should  consider moving all of its employees under a single performance  management system framework.
DHS noted that it estimates that about $110 million will be needed to  implement the new system in its first year.  While adequate resources for  program implementation are critical to program success, DHS is  requesting a substantial amount of funding that warrants close scrutiny  by Congress.
The proposed regulations call for comprehensive, ongoing evaluations.
Continued evaluation and adjustments will help to ensure an effective  and credible human capital system. www.gao.gov/cgi-bin/getrpt?GAO-04-479T. be used as a tool for identifying core competencies for staff for  attracting, developing, evaluating, and rewarding contributions to  mission accomplishment.
To view the full testimony statement, click on  the link above.  For more information, contact  J. Christopher Mihm at (202) 512-6806 or  mihmj@gao.gov.
The analysis of DHS’s effort to develop a strategic human capital  management system can be instructive as other agencies request and  implement new strategic human capital management authorities.
DHS was provided with significant  flexibility to design a modern  human capital management system. Its proposed system has both  precedent-setting implications for  the executive branch and far- reaching implications on how the  department is managed.  GAO  reported in September 2003 that  the effort to design the system was  collaborative and consistent with  positive elements of  transformation.  In February,  March, and April 2004 we provided  preliminary observations on the  proposed human capital  regulations.
To date, DHS’s actions in designing its human capital management system  and its stated plans for future work on the system are helping to position the  department for successful implementation.  Nonetheless, the department is  in the early stages of developing the infrastructure needed for implementing  its new human capital management system.
DHS has begun strategic human capital planning efforts at the  headquarters level since the release of the department’s overall strategic  plan and the publication of proposed regulations for its new human  capital management system.  Strategic human capital planning efforts  can enable DHS to remain aware of and be prepared for current and  future needs as an organization.  However, this will be more difficult  because DHS has not yet been systematic or consistent in gathering  relevant data on the successes or shortcomings of legacy component  human capital approaches or current and future workforce challenges.   Efforts are now under way to collect detailed human capital information  and design a centralized information system so that such data can be  gathered and reported at the departmentwide level.
Congressional requesters asked  GAO to describe the infrastructure  necessary for strategic human  capital management and to assess  the degree to which DHS has that  infrastructure in place, which  includes an analysis of the progress  DHS has made in implementing the  recommendations from our  September 2003 report.
DHS and Office of Personnel Management leaders have consistently  underscored their personal commitment to the design process.   Continued leadership is necessary to marshal the capabilities required  for the successful implementation of the department’s new human  capital management system.  Sustained and committed leadership is  required on multiple levels: securing appropriate resources for the  design, implementation, and evaluation of the human capital  management system; communicating with employees and their  representatives about the new system and providing opportunities for  feedback; training employees on the details of the new system; and  continuing opportunities for employees and their representatives to  participate in the design and implementation of the system.
DHS generally agreed with the  findings of our report and provided  more current information that we  incorporated.   However, DHS was  concerned about our use of results  from a governmentwide survey  gathered prior to the formation of  the department.  We use this data  because it is the most current  information available on the  perceptions of employees currently  in DHS and helps to illustrate the  challenges facing DHS.
In its proposed regulations, DHS outlines its intention to implement key  safeguards.  For example, the DHS performance management system  must comply with the merit system principles and avoid prohibited  personnel practices; provide a means for employee involvement in the  design and implementation of the system; and overall, be fair, credible,  and transparent.  The department also plans to align individual  performance management with organizational goals and provide for  reasonableness reviews of performance management decisions through  its Performance Review Boards. www.gao.gov/cgi-bin/getrpt?GAO-04-790.
To view the full product, including the scope  and methodology, click on the link above.  For more information, contact J. Christopher  Mihm at (202) 512-6806 or mihmj@gao.gov.
The federal government is in a  period of profound transition and  faces an array of challenges and  opportunities to enhance  performance, ensure  accountability, and position the  nation for the future.  High- performing organizations have  found that to successfully  transform themselves, they must  often fundamentally change their  cultures so that they are more  results-oriented, customer-focused,  and collaborative in nature.  To  foster such cultures, these  organizations recognize that an  effective performance management  system can be a strategic tool to  drive internal change and achieve  desired results.
Public sector organizations both in the United States and abroad have  implemented a selected, generally consistent set of key practices for  effective performance management that collectively create a clear linkage— “line of sight”—between individual performance and organizational success.   These key practices include the following.    1. Align individual performance expectations with organizational  goals.  An explicit alignment helps individuals see the connection between  their daily activities and organizational goals.    2. Connect performance expectations to crosscutting goals.  Placing  an emphasis on collaboration, interaction, and teamwork across  organizational boundaries helps strengthen accountability for results.  3. Provide and routinely use performance information to track  organizational priorities.  Individuals use performance information to  manage during the year, identify performance gaps, and pinpoint  improvement opportunities.
Based on previously issued reports  on public sector organizations’  approaches to reinforce individual  accountability for results, GAO  identified key practices that federal  agencies can consider as they  develop modern, effective, and  credible performance management  systems.
4. Require follow-up actions to address organizational priorities.  By  requiring and tracking follow-up actions on performance gaps, organizations  underscore the importance of holding individuals accountable for making  progress on their priorities. 5. Use competencies to provide a fuller assessment of performance.  Competencies define the skills and supporting behaviors that individuals  need to effectively contribute to organizational results.    6. Link pay to individual and organizational performance.  Pay,  incentive, and reward systems that link employee knowledge, skills, and  contributions to organizational results are based on valid, reliable, and  transparent performance management systems with adequate safeguards.    7. Make meaningful distinctions in performance.  Effective  performance management systems strive to provide candid and constructive  feedback and the necessary objective information and documentation to  reward top performers and deal with poor performers. www.gao.gov/cgi-bin/getrpt?GAO-03-488.
8. Involve employees and stakeholders to gain ownership of  performance management systems.  Early and direct involvement helps  increase employees’ and stakeholders’ understanding and ownership of the  system and belief in its fairness.
To view the full report, including the scope  and methodology, click on the link above.  For more information, contact J. Christopher  Mihm at (202) 512-6806 or mihmj@gao.gov.
9. Maintain continuity during transitions.  Because cultural  transformations take time, performance management systems reinforce  accountability for change management and other organizational goals.
subsections: section_title: Highlights
paragraphs: There is widespread agreement  that the federal government faces a  range of challenges in the 21  century that it must confront to  enhance performance, ensure  accountability, and position the  nation for the future.  Federal  agencies will need the most  effective human capital systems to  address these challenges and  succeed in their transformation  efforts during a period of likely  sustained budget constraints.
Forum participants discussed (1) Should there be a governmentwide  framework for human capital reform? and (2) If yes, what should a  governmentwide framework include?
More progress in addressing human  capital challenges was made in the  last 3 years than in the last 20, and  significant changes in how the  federal workforce is managed are  underway.
There was widespread recognition that a “one size fits all” approach to  human capital management is not appropriate for the challenges and  demands government faces.  However, there was equally broad agreement  that there should be a governmentwide framework to guide human capital  reform built on a set of beliefs that entail fundamental principles and  boundaries that include criteria and processes that establish the checks and  limitations when agencies seek and implement their authorities.  While there  were divergent views among the participants, there was general agreement  that the following served as a starting point for further discussion in  developing a governmentwide framework to advance needed human capital  reform.
On April 14, 2004, GAO and the  National Commission on the Public  Service Implementation Initiative  hosted a forum with selected  executive branch officials, key  stakeholders, and other experts to  help advance the discussion  concerning how governmentwide  human capital reform should  proceed.
To view the full product, including the scope  and methodology, click on the link above.  For more information, contact J. Christopher  Mihm at (202) 512-6806 or mihmj@gao.gov.
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