Human Capital: Designing and Managing Market-Based and More Performance-Oriented Pay Systems
Published: 2005-09-27T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The federal government must have the capacity to plan more strategically, react more expeditiously, and focus on achieving results. Critical to the success of this transformation are the federal government's people--its human capital. Yet, in many cases the federal government has not transformed how it classifies, compensates, develops, and motivates its employees to achieve maximum results within available resources and existing authorities. A key question is how to update the federal government's compensation system to be market-based and more performance-oriented. To further the discussion of federal pay reform, GAO partnered with key human capital stakeholders to convene a symposium in March 2005 to discuss public, private, and nonprofit organizations' successes and challenges in designing and managing market-based and more performance-oriented pay systems. This testimony presents the strategies that organizations considered in designing and managing market-based and more performance-oriented pay systems and describes how they are implementing them.
section_title: What GAO Found
paragraphs: GAO strongly supports the need to expand pay reform in the federal government. While implementing market-based and more performance-oriented pay systems is both doable and desirable, organizations' experiences in designing and managing their pay systems underscored three key themes that can guide federal agencies' efforts. First, the shift to market-based and more performance-oriented pay must be part of a broader strategy of change management and performance improvement initiatives. Second, market-based and more performance-oriented pay cannot be simply overlaid on most organizations' existing performance management systems. Rather, as a precondition to effective pay reform, individual expectations must be clearly aligned with organizational results, communication on individual contributions to annual goals must be ongoing and two-way, meaningful distinctions in employee performance must be made, and cultural changes must be undertaken. Finally, organizations need to build up the basic management capacity of their organizations. Training and developing new and current staff to fill new roles and work in different ways will play a crucial part in building the capacity of the organizations. Organizations presenting at our symposium considered the following strategies in designing and managing their pay systems. (1) Focus on a set of values and objectives to guide the pay system; (2) Examine the value of employees' total compensation to remain competitive in the market; (3) Build in safeguards to enhance the transparency and help ensure the fairness of pay decisions; (4) Devolve decision making on pay to appropriate levels; (5) Provide training on leadership, management, and interpersonal skills to facilitate effective communication; (6) Build consensus to gain ownership and acceptance for pay reforms; and (7) Monitor and refine the implementation of the pay system. Moving forward, it is possible to enact broad-based reforms that would enable agencies to move to market-based and more performance-oriented pay systems. However, before implementing reform, each executive branch agency should demonstrate and the Office of Personnel Management should certify that the agency has the institutional infrastructure in place to help ensure that the pay reform is effectively and equally implemented. At a minimum, this infrastructure includes a modern, effective, credible, and validated performance management system in place that provides a clear linkage between institutional, unit, and individual performance-oriented outcomes; results in meaningful distinctions in ratings; and incorporates adequate safeguards.

section_title: Letter
paragraphs: I appreciate the opportunity to be here today to discuss what has been  learned from alternative personnel systems’ implementation of pay for  performance.  As the federal government transforms to be better  positioned to address 21st century challenges, a key question is “How  should the federal government update its compensation systems to be  more market-based and performance-oriented?”  The federal government  must have the institutional capacity to plan more strategically, react more  expeditiously, and focus on achieving results.  Critical to the success of this  transformation are the federal government’s people—its human capital.   Yet the government has not transformed, in many cases, how it classifies,  compensates, develops, and motivates its employees to achieve maximum  results within available resources and existing authorities.
Recognizing that the federal government’s pay system does not align well  with modern compensation principles, Congress has provided various  agencies exemptions from current statute in performance management and  pay administration.  Most recently, the Departments of Homeland Security  (DHS) and Defense (DOD) received the authority to establish “flexible and  contemporary” human capital and pay systems.  We at GAO have also  received human capital authorities and strive to lead by example,  especially in implementing more market-based and performance-oriented  classification and compensation systems.
GAO strongly supports the need to expand pay reform in the federal  government. To further the discussion of federal pay reform, GAO  partnered with the U.S. Office of Personnel Management (OPM), the U.S.  Merit Systems Protection Board, the National Academy of Public  Administration, and the Partnership for Public Service and convened a  symposium in March 2005 to discuss public, private, and nonprofit  organizations’ successes and challenges with designing and managing  market-based and more performance-oriented pay systems.
While we believe that implementing market-based and more performance- oriented pay systems is both doable and desirable, these organizations’  experiences in designing and managing their pay systems underscored  three key themes that can guide federal agencies’ efforts to better link pay  with performance.
First, the shift to market-based and more performance-oriented pay  must be part of a broader strategy of change management and  performance improvement initiatives.  Market-based and more  performance-oriented pay is only one part—albeit a critical one—of a  larger effort to improve the performance of an organization.
Second, market-based and more performance-oriented pay cannot be  simply overlaid on most organizations’ existing performance  management systems.  Rather, as a precondition to effective pay reform,  individual expectations must be clearly aligned with organizational  results, communication on individual contributions to annual goals must  be ongoing and two-way, meaningful distinctions in employee  performance must be made, and cultural changes must be undertaken.   Specifically, these organizations recognize that pay increases are no  longer an entitlement but should be based on employees’ contributions  to the organization’s mission and goals.
Third, organizations need to build up the basic management capacity of  their organizations.  Training and developing new and current staff to fill  new roles and work in different ways will play a crucial part in building  the capacity of the organizations.  In particular, there needs to be growth  and development at every level of the organization: top leaders with the  vision, commitment, capabilities, and persistence to lead and facilitate  the change; managers with the skills and abilities to fairly and honestly  assess employee performance; and individual employees who are  engaged and empowered to seek opportunities to enhance their careers.
Federal agencies have also been experimenting with pay for performance  through OPM’s personnel demonstration projects authorized under Title 5.   We reported that these demonstration projects show an understanding that  linking pay to performance is very much a work in progress and that  additional work is needed to strengthen efforts to ensure that performance  management systems are tools to help them manage on a day-to-day basis.   In particular, there are opportunities to translate employee performance so  that managers make meaningful distinctions between top and poor  performers with objective and fact-based information and provide  information to employees about the results of the performance appraisal  and pay decisions to ensure reasonable transparency and appropriate  accountability mechanisms are in place, among other things.
In addition, as agencies develop their pay for performance systems, they  will need to consider the appropriate mix between pay awarded as base  pay increases versus one-time cash increases while still maintaining fiscally  sustainable compensation systems that reward performance.  A key  question to consider is how the government can make an increasing  percentage of federal compensation dependent on achieving individual and  organizational results by, for example, providing more compensation as  one-time cash bonuses rather than as permanent salary increases.   However, agencies’ use of cash bonuses or other monetary incentives has  an impact on employees’ retirement calculations since they are not  included in calculating retirement benefits.  Congress should consider  potential legislative changes to allow cash bonuses to be calculated toward  retirement and thrift savings benefits by specifically factoring bonuses into  the employee’s basic pay for purposes of calculating the employee’s “high- 3” for retirement benefits and making contributions to the thrift savings  plan.
Nevertheless, we need to move forward with human capital reforms, but  how it is done, when it is done, and the basis on which it is done can make  all the difference in whether such efforts are successful.  Human capital  reforms to date recognize that the “one-size-fits-all” approach is not  appropriate to each agency’s demands, challenges, and missions.  However,  we have reported that a reasonable degree of consistency across the  government is still desirable and that broader reforms should be guided by  a framework consisting of a common set of principles, criteria, and  processes.
Before implementing any human capital reforms, executive branch  agencies should follow a phased approach that meets the “show me” test.   That is, each agency should be authorized to implement a reform only after  it has shown it has met certain requirements, including an assessment of its  demonstrated institutional infrastructure and an independent certification  by OPM of this infrastructure.  This institutional infrastructure includes  (1) a strategic human capital planning process linked to the agency’s  overall strategic plan; (2) capabilities to design and implement a new  human capital system effectively; (3) a modern, effective, credible, and  validated performance management system that provides a clear linkage  between institutional, unit, and individual performance-oriented outcomes,  and results in meaningful distinctions in ratings; and (4) adequate internal  and external safeguards to ensure the fair, effective, and nondiscriminatory  implementation of the system.
GAO will continue to work with Congress, OPM, and other key  stakeholders on future human capital reforms.  This morning I will  highlight the strategies that organizations considered in designing and  managing market-based and more performance-oriented pay systems and  how they are implementing them.  These organizations include selected  OPM demonstration projects, organizations presenting at the symposium,  and GAO.
subsections: section_title: Strategies for Designing and Managing Market- Based and More Performance-Oriented Pay Systems
paragraphs: Even though people are critical to an agency’s successful transformation, a  number of agencies still try to manage their people with a “one-size-fits-all”  approach to compensation.  For example, employees are compensated  through an outmoded system that (1) rewards length of service rather than  individual performance and contributions; (2) automatically provides  across-the-board annual pay increases, even to poor performers; and  (3) compensates employees living in various localities without adequately  considering the local labor market rates for these employees.  We have  observed that a competitive compensation system can help organizations  attract and retain a quality workforce. To develop such a system,  organizations assess the skills and knowledge they need; compare  compensation against other public, private, or nonprofit entities competing  for the same talent in a given locality; and classify positions along levels of  responsibility.
The strategies that the organizations at our symposium considered in  designing and managing market-based and more performance-oriented pay  systems and examples of how organizations are implementing them are as  follows. 1. Focus on a set of values and objectives to guide the pay system.   Organizations need to focus on a set of values and objectives when  designing and managing their market-based and more performance- oriented pay systems. Values are inherent and enduring principles that  represent the organization’s beliefs and boundaries.  For example, GAO’s  core values—accountability, integrity, and reliability—were a focus in  identifying and validating the competencies for our new performance  management system.  With authority from Congress, we have implemented  a market-based compensation system that places greater emphasis on a  person’s skills, knowledge, and job performance and not the passage of  time while, at a minimum, protecting the purchasing power of employees  who are performing acceptably and are paid within competitive  compensation ranges.  Under the new market-based pay system, which is in  the first phase of implementation, employee compensation now considers  current salary and allocates individual performance-based compensation  amounts between a merit increase (i.e., salary increase) and a performance  bonus (i.e., cash).  In addition, we received authority from Congress to  adjust the rates of basic pay on a separate basis from the annual  adjustments authorized for employees in the executive branch.  We also  recently finalized a performance-based compensation system with pay  banding for the remainder of GAO’s workforce, the administrative  professional and support staff.
While core values define the organization’s beliefs and boundaries,  objectives articulate the strategy the organization plans to take to  implement a market-based and more performance-oriented pay system to  help it recognize and reward employees and maintain a competitive  position in the market. For example, the Red Cross recognizes that salary is  its main lever to fulfill its mission and values, and thus one of its objectives  is to pay salaries that are externally competitive and internally equitable. To  meet this objective, the Red Cross sets its employees’ pay slightly higher  than the market in order to remain competitive and attract, motivate, and  retain its employees.  Similarly, a main objective of the Office of the  Comptroller of the Currency’s (OCC) pay system is to maintain  comparability regarding compensation and benefits with the other federal  financial regulatory agencies, such as the Federal Deposit Insurance  Corporation (FDIC) and the U.S. Securities and Exchange Commission.  To  maintain comparability in compensation and benefits, OCC participates in  an annual survey that gathers information and data on the financial  regulatory agencies’ total compensation packages.  This information helps  OCC set its pay increase budget for the next year based on the average pay  for its market.   2. Examine the value of employees’ total compensation to remain  competitive in the market.  The organizations at our symposium found  that it is important to be flexible in the mix of what constitutes total  compensation so they can remain competitive with the market.   Organizations should consider a mix of base pay plus other monetary  incentives, benefits, and deferred compensation, such as retirement pay, as  part of a competitive compensation system.  For example, to help it  compete in the market and retain its employees, IBM offers its employees a  “total rewards” package including work-life benefits such as tuition  reimbursement for employee development, along with retirement and  health care benefits.
At GAO, we believe that providing employees with individualized total  compensation summary statements each year helps provide clarity on the  employees’ total compensation packages and specifically, how employees’  pay increases received during the year fit into their total compensation.   The annual summary statements include GAO’s contributions to  employees’ benefits, incentives and other awards, and other GAO paid or  subsidized benefits.  The statements include items such as student loan  repayments and transit subsidies, as well as adjustments to employees’ pay,  such as across-the-board salary adjustments, performance-based pay  adjustments, and promotion-related increases.
Transparency is becoming an urgent matter today as federal agencies face  tough choices ahead managing the serious and growing long-term fiscal  challenges facing the nation.  We recently reported that DOD’s historical  piecemeal approach to military compensation has resulted in a lack of  transparency that creates an inability to, for example, assess the allocation  of total compensation investments to cash and benefits.  In order to help  improve the transparency over total compensation, we recommended that  DOD develop a comprehensive communication and education plan to  inform servicemembers of the value of their pay and benefits and the  competitiveness of their total compensation package when compared to  their civilian counterparts that could be used as a recruiting and retention  tool.  3. Build in safeguards to enhance the transparency and help ensure  the fairness of pay decisions.  Agencies need to have modern, effective,  credible, and as appropriate validated performance management systems  in place with adequate safeguards to ensure fairness and prevent  politicization and abuse.  These systems are the precondition to linking pay,  incentive, and reward systems with employee knowledge, skills, and  contributions to organizational results.
GAO’s performance management and pay system has built in numerous  safeguards, including multiple levels of review, to ensure consistency and  fairness in the process and resulting decisions.  Specifically, before  performance ratings are finalized, they receive second-level reviews,  typically by a senior executive within the employee’s team.  This reviewer  checks if raters have consistently and reasonably applied the performance  standards. Subsequently, the Human Capital Office and the Office of  Opportunity and Inclusiveness review the performance ratings and pay  decisions across all of GAO to determine whether there are any  irregularities or potential adverse impacts to be addressed.  To further help  ensure consistency in ratings and in applying performance standards  within and across GAO’s teams, we implemented standardized rating  scores (SRS) for employees for the first time in the fiscal year 2004  performance appraisal cycle.  The SRS indicates the employee’s position  relative to the average rating of that employee’s team.  Employees in  different teams with the same SRS have the same relative performance,  thus achieving better comparability in ratings across teams.  Employees’  SRS and the midpoint for their pay range are key factors in calculating their  performance-based compensation for that year.  We are continually  working with the employees to identify the best way to communicate the  SRS information as part of GAO’s ongoing commitment to employee  feedback on the new system and transparency about pay decisions.
IBM built in several accountability mechanisms to help achieve consistency  and equity in pay decisions across employee groups and teams.  For  example, to help ensure there is no discrimination in pay decisions, IBM  conducts a base pay equity analysis to review the pay of women or minority  employees if their proposed pay is one standard deviation away from the  mean of the majority of employees and looks for an explanation for these  pay differences, such as poor performance, a recent promotion into the pay  band, or an extended leave of absence.  In addition, IBM built in second- level reviews of pay decisions before employees receive any pay increases  to ensure consistency in the compensation process.  The first-line  managers discuss their proposed pay decisions with managers at the next  level—the up-line managers—to ensure the performance assessments and  justifications are consistent across groups.  Up-line managers can also shift  pay allocations across groups if necessary in order to ensure employees  who perform similarly are compensated the same regardless of their first- line managers.  As a final check, the senior managers sign off on the pay  decisions for each employee.
To help provide transparency on how employees’ performance compares to  the rest of the organization, we previously reported that the Naval Sea  Systems Command Warfare Center’s Newport division publishes the results  of its annual performance cycle.  Newport aggregates the data so that no  individual employee’s rating or payout can be determined to protect  confidentiality.  Employees can compare their performance rating category  against others in the same unit, other units, and the entire division.  4. Devolve decision making on pay to appropriate levels.  In  implementing market-based and more performance-oriented pay systems,  organizations need to determine what parts of their pay systems should be  maintained centrally and what parts can be devolved to “lower” levels of  the organization.  When devolving these types of decisions, organizations  have maintained overall core processes to help ensure reasonable  consistency in how the systems are implemented.
Virginia shifted the responsibility for administering pay from its central  office to the commonwealth’s agencies and their managers as part of its  compensation reforms and developed core processes outlining how  agencies should develop and implement their pay systems.  Specifically,  Virginia developed a salary plan that provides broad guidelines regarding  the commonwealth’s overall compensation philosophy, funding for pay  increases, and the pay ranges for the employees’ positions that reflect  market conditions.  Each agency is held accountable for developing its own  salary administration plan which is approved by the central office prior to  being implemented.  As part of this plan, the agency is to select from among  designated “pay practices” that it considers useful to best meet its specific  needs, such as promotions or in-band pay adjustments to recognize  employees for taking on additional duties. 5.  Provide training on leadership, management, and interpersonal  skills to facilitate effective communication.  We have reported that  training and developing new and current staff to fill new roles and work in  different ways will play a crucial part in the federal government’s  endeavors to meet its transformation challenges.  Agencies will need to  invest resources to ensure that employees have the information, skills, and  competencies they need to work effectively in a rapidly changing and  complex environment.
Organizations found that training employees and managers on performance  management skills, such as setting expectations, linking individual  performance to organizational results, and effectively giving and receiving  feedback, as well as placing an emphasis on communicating the content of  the pay reforms in a simple and clear format, are needed to make market- based and more performance-oriented pay succeed.  For example, FDIC  emphasized the importance of training its managers on how to make the  necessary distinctions in ratings and pay since it found that some managers  have trouble making the distinctions and would prefer to give all  employees the same pay increase.
Virginia found that employees needed the information on its compensation  reforms in as simple and clear a format as possible without using technical  compensation terms or “HR” terminology.  As a result, Virginia used its  Employee Advisory Committee to help develop training and supporting  materials on the compensation reform initiatives and communicate the  information to the other employees.  Virginia found that using the  committee was very effective and allowed employees to better understand  how the reforms would affect them directly.
Regarding the frequency of the training, we found that the OPM pay for  performance demonstration projects trained employees on the  performance management system prior to implementation to make  employees aware of the new approach, as well as periodically after  implementation to refresh employee familiarity with the system.  For  example, the Civilian Acquisition Workforce Personnel Demonstration  Project (AcqDemo) found that, in addition to training prior to  implementation, it needed more in-depth and varied training in later years  for current AcqDemo employees to refresh their proficiency in the system;  for new participants to familiarize them with appraisal and payout  processes; as well as for senior management, pay pool managers and  members, and human resources personnel to give them greater detail on  the process.  The training prior to implementation and throughout the  project was designed to help employees understand competencies and  performance standards; develop performance plans; write self-appraisals;  become familiar with how performance is evaluated and how pay increases  and awards decisions are made; and know the roles and responsibilities of  managers, supervisors, and employees in the appraisal and payout  processes.
Virginia defined a new role for its employees by holding them accountable  for identifying the training they need to enhance the skills necessary to  develop their careers.  For example, Virginia developed career guides to  inform employees on what they may personally need to do to develop,  advance, or change their careers.  The guides provide important  occupational information for employees interested in developing their  careers and improving opportunities for advancement in any work  environment.  Virginia found that an added benefit is that these career  guides help employees understand that they have knowledge, skills, and  abilities that cut across different occupations and are transferable across  the commonwealth’s government.   6.  Build consensus to gain ownership and acceptance for pay  reforms.  Involving employees and other stakeholders helps to improve  overall confidence and belief in the fairness of the system, enhance their  understanding of how the system works, and increase their understanding  and ownership of organizational goals and objectives.  Organizations have  found that the inclusion of employees and their representatives needs to be  meaningful, not just pro forma.
At GAO, to obtain direct feedback from employees, we created the elected  Employee Advisory Council (EAC) to serve as an advisory body to the  Comptroller General and other senior executives on management and  employee issues.  Comprising employees who represent a cross-section of  the agency, the EAC’s participation is an important source of front-end  input and feedback on our human capital and other major management  initiatives.  Specifically, EAC members convey the views and concerns of  the groups they represent, while remaining sensitive to the collective best  interest of all GAO employees; propose solutions to concerns raised by  employees; provide input to and comment on GAO policies, procedures,  plans, and practices; and help to communicate management’s issues and  concerns to employees.  Similarly, FDIC found that in its experience it was  better to have the union involved in the implementation of its pay reforms.   When negotiating compensation for its bargaining unit employees with  representatives of the National Treasury Employees Union, FDIC views  them as true partners instead of following an “us versus them” approach.   FDIC noted that both parties want to work together to reach an agreement  in terms of compensation levels that will satisfy them.
In designing its compensation reforms, Virginia involved stakeholders,  such as representatives from Virginia’s legislative and executive branches,  as well as human resource representatives from private sector  organizations.  Virginia also formed an Employee Advisory Committee of  nonsupervisory employees from diverse occupations, demographic groups,  and geographic locations to help the commonwealth as a whole improve its  compensation program, not just for their select interest groups.  Further, to  implement the compensation reforms, Virginia developed implementation  teams—composed of human resource staff across the agencies—to help  ensure the details of the compensation reforms were consistently  communicated to all the employees across the commonwealth.  The teams  represented various priority areas, such as funding, compensation  management, performance management, training, and communications.   7. Monitor and refine the implementation of the pay system.  High- performing organizations understand they need to continuously review and  revise their performance management systems to achieve results and  accelerate change.  These organizations continually review and revise their  human capital management systems based on data-driven lessons learned  and changing needs in the environment.  We have reported that agencies  seeking human capital reform should consider doing evaluations that are  broadly modeled on the evaluation requirements of the OPM  demonstration projects. Under the demonstration project authority,  agencies must evaluate and periodically report on results, implementation  of the demonstration project, cost and benefits, impacts on veterans and  other equal employment opportunity groups, adherence to merit system  principles, and the extent to which the lessons from the project can be  applied governmentwide.  Such an evaluation could facilitate congressional  oversight; allow for any midcourse corrections; assist the agency in  benchmarking its progress with other efforts; and provide for documenting  best practices and sharing lessons learned with employees, stakeholders,  other federal agencies, and the public.
For example, at GAO, we recently saw the need to restructure part of our  pay banding system to better reflect real differences in responsibilities and  competencies as well as respective pay within the pay band for our senior  analysts by creating two sub-band categories.  To begin the process of this  restructuring effort, GAO formed task teams to study and develop  proposals, and engaged employees by holding town hall meetings, focus  groups, meeting with employee representatives, and having a review and  comment period for each phase of the restructuring.
Organizations monitor their systems by listening to employees’ and  stakeholders’ views—informally and formally—on the pay systems. FDIC  found that listening to the “level of noise” among employees and  stakeholders, such as the union, is essential in evaluating whether a new  initiative is working or not.  To track employee views, IBM sends out a  pulse survey quarterly with only a few questions on the compensation  program to a sample of its 300,000 employees.  IBM believes it is doing well  in implementing the program if over 70 percent of the employees’  responses to these questions are “neutral” or “favorable.”  When  consolidating its classification structure, Virginia made some revisions as a  result of employee feedback so that employees could more easily see  where they fit into the structure.  Virginia plans to continually monitor the  structure and identify needed refinements by soliciting employee feedback  at least annually.
Organizations also use other metrics as an indicator of the employees’  acceptance of pay and performance management decisions to track the  effectiveness of their pay systems.  For example, IBM tracks its attrition  rates to determine why employees are leaving and compares them to its  competitors’ attrition rates.  Virginia tracks the number of employee  grievances and works with managers to educate them on what the metrics  mean and how they affect their agencies and employees.
Monitoring the implementation of new pay systems is important because  unintended consequences may arise.  Organizations have found they  should be open to refining their systems.  For example, in order to spread  the pay increases among as many employees as possible, FDIC found that  managers tended not to award merit pay increases to top-performing  employees when they were to be promoted in the career ladder and as a  result, these high-performing employees were not getting the merit pay  increases they deserved.  FDIC recognized that this unintended  consequence needed to be corrected in future iterations of the pay system  and managers needed help in learning how to make the necessary  distinctions in employees’ contributions.
While the need for refining the system is inevitable, organizations found  that there is value in stabilizing the pay system for a period of time to let  employees get accustomed to the new initiative and see how it works.  For  example, OCC plans to reassess its labor market pay differentials every 3  years rather than annually to provide continuity in implementing the  system.  This continuity benefits employees because they know how much  their geographic differential will be for a period of time and benefits OCC  because it makes managing the pay system more stable.
section_title: Next Steps for Results- Oriented Pay and Human Capital Reform
paragraphs: In summary, there is widespread agreement that the basic approach to  federal pay is broken and we need to move to a market-based and more  performance-oriented approach.  Doing so will be essential if we expect to  maximize the performance within available resources and assure the  accountability of the federal government for the benefit of the American  people.  While reasonable people can and will disagree about the merits of  individual reform proposals, there is widespread recognition that pay  increases are no longer an entitlement but should be based on employees’  contributions to the organization’s mission and goals.  Experience shows  that this shift to market-based and more performance-oriented pay must be  part of a broader strategy of change management and performance  improvement initiatives and cannot be simply overlaid on most  organizations’ existing performance management systems.  Before  implementing any pay reform, each executive branch agency should have  demonstrated and OPM should have certified that the agency has in place  the institutional infrastructure to help ensure that this reform is effectively  and equally implemented.
We need to move forward with human capital reforms.  In the short term,  such reforms could include select and targeted authorities, such as  prohibiting guaranteed pay increases for persons who do not perform at  acceptable levels; allowing agency heads to make a limited number of term  appointments awarded noncompetitively; and rightsizing and restructuring  that can place additional emphasis on factors such as knowledge, skills,  and performance. As momentum continues to accelerate to make strategic  human capital management the centerpiece of the government’s overall  management transformation effort, comprehensive reforms should be  guided by a framework consisting of a common set of principles, criteria,  and processes.
Chairman Voinovich, Senator Akaka, and Members of the Subcommittee,  this concludes my statement.  I would be pleased to respond to any  questions that you may have.
section_title: Contact and Acknowledgments
paragraphs: For further information regarding this statement, please contact Lisa  Shames, Acting Director, Strategic Issues, at (202) 512-6806 or  shamesl@gao.gov.  Individuals making key contributions to this statement  include Janice Latimer and Katherine H. Walker.
section_title: “Highlights” of Selected GAO Reports
paragraphs: Critical to the success of the  federal government’s  transformation are its people— human capital.  Yet the government  has not transformed, in many  cases, how it classifies,  compensates, develops, and  motivates its employees to achieve  maximum results within available  resources and existing authorities.   One of the questions being  addressed as the federal  government transforms is how to  update its compensation system to  be more market based and  performance oriented.
While implementing market-based and more performance-oriented pay  systems is both doable and desirable, organizations’ experiences show that  the shift to market-based and more performance-oriented pay must be part  of a broader strategy of change management and performance improvement  initiatives.  GAO identified the following key themes that highlight the  leadership and management strategies these organizations collectively  considered in designing and managing market-based and more performance- oriented pay systems.  1. Focus on a set of values and objectives to guide the pay system.  Values represent an organization’s beliefs and boundaries and objectives  articulate the strategy to implement the system.  2. Examine the value of employees’ total compensation to remain  competitive in the market.  Organizations consider a mix of base pay plus  other monetary incentives, benefits, and deferred compensation, such as  retirement pay, as part of a competitive compensation system.
To further the discussion of federal  pay reform, GAO, the U.S. Office of  Personnel Management, the U.S.  Merit Systems Protection Board,  the National Academy of Public  Administration, and the  Partnership for Public Service  convened a symposium on March 9,  2005, to discuss organizations’  experiences with market-based and  more performance-oriented pay  systems.  Representatives from  public, private, and nonprofit  organizations made presentations  on the successes and challenges  they experienced in designing and  managing their market-based and  more performance-oriented pay  systems.  A cross section of human  capital stakeholders was invited to  further explore these successes  and challenges and engage in open  discussion.  While participants  were asked to review the overall  substance and context of the draft  summary, GAO did not seek  consensus on the key themes and  supporting examples.
3. Build in safeguards to enhance the transparency and ensure the  fairness of pay decisions.  Safeguards are the precondition to linking pay  systems with employee knowledge, skills, and contributions to results.  4. Devolve decision making on pay to appropriate levels.  When devolving such decision making, overall core processes help ensure  reasonable consistency in how the system is implemented.  5. Provide training on leadership, management, and interpersonal  skills to facilitate effective communication.  Such skills as setting  expectations, linking individual performance to organizational results, and  giving and receiving feedback need renewed emphasis to make such systems  succeed.  6. Build consensus to gain ownership and acceptance for pay reforms.  Employee and stakeholder involvement needs to be meaningful and not pro  forma. 7. Monitor and refine the implementation of the pay system.  While  changes are usually inevitable, listening to employee views and using metrics helps identify and correct problems over time. www.gao.gov/cgi-bin/getrpt?GAO-05-832SP.
To view the full product, including the scope  and methodology, click on the link above.  For more information, contact J. Christopher  Mihm at (202) 512-6806 or mihmj@gao.gov.
These organizations found that the key challenge with implementing market- based and more performance-oriented pay is changing the culture.  To begin  to make this change, organizations need to build up their basic management  capacity at every level of the organization.  Transitioning to these pay  systems is a huge undertaking and will require constant monitoring and  refining in order to implement and sustain the reforms.
There is a growing understanding  that the federal government needs  to fundamentally rethink its current  approach to pay and to better link  pay to individual and organizational  performance.  Federal agencies  have been experimenting with pay  for performance through the Office  of Personnel Management’s (OPM)  personnel demonstration projects.
The demonstration projects took a variety of approaches to designing and  implementing their pay for performance systems to meet the unique needs of  their cultures and organizational structures, as shown in the table below.
Demonstration Project Approaches to Implementing Pay for Performance  Using competencies to evaluate employee performance.  High-performing organizations use validated core competencies as a key part of evaluating  individual contributions to organizational results.  To this end, AcqDemo and NRL use core  competencies for all positions.  Other demonstration projects, such as NIST, DOC, and China  Lake, use competencies based on the individual employee’s position.
Translating employee performance ratings into pay increases and awards.
subsections: section_title: Highlights
paragraphs: There is widespread agreement  that the federal government faces a  range of challenges in the 21st century that it must confront to  enhance performance, ensure  accountability, and position the  nation for the future.  Federal  agencies will need the most  effective human capital systems to  address these challenges and  succeed in their transformation  efforts during a period of likely  sustained budget constraints.
Forum participants discussed (1) Should there be a governmentwide  framework for human capital reform? and (2) If yes, what should a  governmentwide framework include?
There was widespread recognition that a “one size fits all” approach to  human capital management is not appropriate for the challenges and  demands government faces.  However, there was equally broad agreement  that there should be a governmentwide framework to guide human capital  reform built on a set of beliefs that entail fundamental principles and  boundaries that include criteria and processes that establish the checks and  limitations when agencies seek and implement their authorities.  While there  were divergent views among the participants, there was general agreement  that the following served as a starting point for further discussion in  developing a governmentwide framework to advance needed human capital  reform.
More progress in addressing human  capital challenges was made in the  last 3 years than in the last 20, and  significant changes in how the  federal workforce is managed are  underway.
On April 14, 2004, GAO and the  National Commission on the Public  Service Implementation Initiative  hosted a forum with selected  executive branch officials, key  stakeholders, and other experts to  help advance the discussion  concerning how governmentwide  human capital reform should  proceed.
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.  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. www.gao.gov/cgi-bin/getrpt?GAO-03-488.
To view the full report, including the scope  and methodology, click on the link above.  For more information, contact J. Christopher  Mihm at (202) 512-6806 or mihmj@gao.gov.
9. Maintain continuity during transitions.  Because cultural  transformations take time, performance management systems reinforce  accountability for change management and other organizational goals.
section_title: Highlights
subsections: section_title: What GAO Recommends
paragraphs: GAO is making a number of  recommendations to improve the  transparency, reasonableness,  appropriateness, affordability, and  sustainability of the military  compensation system.   DOD  generally concurred with GAO’s  recommendations.  www.gao.gov/cgi-bin/getrpt?GAO-05-798.
To view the full product, including the scope  and methodology, click on the link above.  For more information, contact Derek Stewart  at (202) 512-5559 or stewartd@gao.gov.
DOD survey results and analysis of GAO focus groups and survey data have  shown that servicemembers are dissatisfied and harbor misperceptions  about their pay and benefits in part because DOD does not effectively  educate them about the competitiveness of their total compensation  packages. About 80 percent of the 400 servicemembers that GAO surveyed  believed they would earn more as civilians; in contrast, a 2002 study showed  that servicemembers generally earn more cash compensation alone than 70  percent of like-educated civilians. Servicemembers also expressed confusion  over aspects of their compensation, like retirement, and many complained  that benefits were eroding despite recent efforts by Congress and DOD to  enhance pay and benefits. By not systematically educating servicemembers  about the value of their total compensation, DOD is essentially allowing a  culture of dissatisfaction and misunderstanding to perpetuate.
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