Human Capital: Preliminary Observations on Proposed DHS Human Capital Regulations
Published: 2004-02-25T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: 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. 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.
section_title: What GAO Found
paragraphs: 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. 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. DHS has begun to develop a strategic workforce plan. Such a plan can be used as a tool for identifying core competencies for staff for attracting, developing, evaluating, and rewarding contributions to mission accomplishment. 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.

section_title: Letter
paragraphs: It is a pleasure to appear before you today to provide our preliminary  observations on the Department of Homeland Security’s (DHS) proposed  regulations on its new human capital system. The creation of 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. However, this unique opportunity also brings  significant risk to the nation if this transformation is not implemented  successfully. In fact, we designated this implementation and  transformation as high risk in January 2003.
Last Friday, the Secretary of DHS and the Director of the Office of  Personnel Management (OPM) released for public comment proposed  regulations for DHS’s new human capital system. The regulations are  intended to provide the broad outline of the DHS proposed system and are  not, nor were they intended to be, a comprehensive presentation of the  details of how the new system will be implemented. As the system evolves,  critical issues such as how DHS will link individual performance  expectations to DHS’s mission and goals, how it will define performance  expectations to promote individual accountability, and how it will  continue to incorporate adequate safeguards to ensure fairness, will need  to be addressed. Such detailed implementation policies and procedures  will need to be developed in a transparent and inclusive manner as the  system evolves. Although we are still reviewing these extensive  regulations issued last week, this morning I will provide some preliminary  observations on selected provisions that in our view are most in need of  close scrutiny as Congress considers the DHS proposal.
The proposed DHS regulations have both significant precedent-setting  implications for the executive branch and far-reaching implications on  how the department is managed. In my view, many of the basic principles  underlying the proposed DHS regulations are consistent with proven  approaches to strategic human capital management, including several  approaches pioneered by GAO, and deserve serious consideration. In  designing the proposed system, DHS and OPM met with a wide range of  individuals and organizations with expertise in human capital. At the  request of DHS and OPM, we were pleased to share the results of our work  looking at leading human capital practices as well as our own experiences  with performance management at GAO. My statement today is based on  our ongoing review of DHS’s design and implementation of its human  capital system, recent work on strategic human capital management,  including performance management, and our own experience.
subsections: section_title: Preliminary Observations on the Proposed Human Capital Regulations
paragraphs: DHS’s and OPM’s proposed regulations would establish a new human  resources management system within DHS that covers pay, classification,  performance management, labor relations, adverse action, and employee  appeals. These changes are designed to ensure that the system aligns  individual performance and pay with the department’s critical mission  requirements and to protect the civil service rights of its employees.  However, it is important to note at the outset that the proposed  regulations do not apply to nearly half of all DHS civilian employees,  including nearly 50,000 screeners in the Transportation Security  Administration (TSA). DHS officials have noted that additional employees  can be included through further administrative action, but that legislation  would be needed to include other employees such as the screeners and the  uniformed division of the Secret Service. We have found that having one  performance management system framework facilitates unifying an  organizational culture and is a key practice to a successful merger and  transformation. Based on the department’s progress in implementing the  system and any appropriate modifications made based on their  experience, DHS should consider moving all of its employees under the  new human capital system.
subsections: section_title: Pay and Performance Management
paragraphs: Today, Mr. Chairman and Madam Chairwoman, you are releasing a report  that we prepared at your request that shows the variety of approaches that  OPM’s personnel demonstration projects took to design and implement  their pay for performance systems. Their experiences provide insights  into how some organizations in the federal government are implementing  pay for performance and thus can guide DHS as it develops and  implements its own approach. These demonstration projects illustrate that  understanding how to link pay to performance is very much a work in  progress in the federal government and that additional work is needed to  ensure that performance management systems are tools to help them  manage on a day-to-day basis and achieve external results.
As we testified last spring when the Department of Defense (DOD)  proposed its civilian personnel reform, from a conceptual standpoint, we  strongly support the need to expand pay for performance in the federal  government. Establishing a better link between individual pay and  performance is essential if we expect to maximize the performance and  ensure the accountability of the federal government for the benefit of the  American people. However, 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. 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 organization performance. To this  end, the DHS proposal takes another valuable step towards results- oriented pay reform and modern performance management. My comments  on specific provisions follow.
subsections: section_title: Linking Organizational Goals to Individual Performance
paragraphs: Under the proposed regulations, the DHS performance management  system must, among other things, align individual performance  expectations with the mission, strategic goals, or a range of other  objectives of the department or of the DHS components. The proposed  guidelines do not detail how such an alignment is to be achieved, a vital  issue that will need to be addressed as DHS’s efforts move forward. Our  work looking at public sector performance management efforts here in the  United States as well as abroad have underscored the importance of  aligning daily operations and activities with organizational results. We  have found that organizations often struggle with clearly understanding  how what they do on a day-to-day basis contributes to overall  organizational results. High performing organizations, on the other hand,  understand how the products and services they deliver contribute to  results by aligning performance expectations of top leadership with  organizational goals and then cascading those expectations to lower  levels.
As an organization undergoing its own merger and transformation, DHS’s  revised 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. To help DHS merge its various originating  components into a unified department and transform its culture to be  more results oriented, customer focused, and collaborative in nature, we  reported at your request, Mr. Chairman and Madam Chairwoman, how a  performance management system that defines responsibility and assures  accountability for change can be key to a successful merger and  transformation. While aligning individual performance expectations with  DHS’s mission and strategic goals will be key to DHS’s effective  performance management, it is important to note that DHS has not yet  released its strategic plan which may hamper creating the formal linkage  to the performance management system and make it difficult to ensure  that the proposed regulations support and facilitate the accomplishment of  the department’s strategic goals and objectives.
section_title: Establishing Pay Bands
paragraphs: Under the proposed regulations, DHS would create broad pay bands for  much of the department in place of the fifteen-grade General Schedule  (GS) system now in place for much of the civil service. Specifically, DHS  officials have indicated that they will form ten to fifteen occupational pay  clusters of similar job types, such as a management or science and  technology cluster. Most of these occupational clusters would have four  pay bands ranging from entry level to supervisor. Within each  occupational cluster, promotion to another band (such as from full  performance to senior expert) would require an assessment and/or  competition. Under the proposed regulations, DHS is not to reduce  employees’ basic rate of pay when converting to pay bands. In addition,  the proposed regulations would allow DHS to establish a “control point”  within a band, beyond which basic pay increases may be granted only for  meeting criteria established by DHS, such as an outstanding performance  rating.
The use of control points can be a valuable tool because managing  progression through the bands can help to ensure that employees’  performance coincides with their salaries and can help to prevent all  employees from eventually migrating to the top of the band and thus  increasing salary costs. Both demonstration projects at China Lake and the  Naval Sea Systems Command Warfare Center’s (NAVSEA) Dahlgren  Division have checkpoints or “speed bumps” in their pay bands designed  to ensure that only the highest performers move into the upper half of the  pay band. For example, when employees’ salaries at China Lake reach the  midpoint of the pay band, they must receive a performance rating  equivalent to exceeding expectations, before they can receive additional  salary increases.
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. The  standards and process of the current classification system is a key  problem in federal hiring efforts because they are outdated and not  applicable to the occupations and work of today. Many employees in  agencies that are now a part of DHS responding to OPM’s 2002 Federal   Human Capital Survey (FHCS) believe that recruiting is a problem – only  36 percent believe their work unit is able to recruit people with the right  skills.
section_title: Setting Employee Performance Expectations
paragraphs: The DHS performance management system is intended to promote  individual accountability by communicating performance expectations  and holding employees responsible for accomplishing them and by holding  supervisors and managers responsible for effectively managing the  performance of employees under their supervision. While supervisors are  to involve employees as far as practicable in developing their performance  expectations and employees seek clarification if they do not understand  them, the final decision on an employee’s expectations is the supervisor’s  sole and exclusive discretion. Supervisors must monitor the performance  of their employees and provide periodic feedback, including one or more  formal interim performance reviews during the appraisal period.
The proposed regulations provide a general description of DHS’s  performance management system with many important details to be  determined. Under the proposed regulations, performance expectations  may take the form of goals or objectives that set general or specific  performance targets at the individual, team, and/or organizational level; a  particular work assignment, including characteristics such as quality,  accuracy, or timeliness; or competencies an employee is expected to  demonstrate on the job; and/or the contributions an employee is expected  to make, among other things. As DHS’s system design efforts move  forward, it will need to define in further detail than currently provided  how performance expectations will be established, including the degree to  which DHS components, managers, and supervisors will have flexibility in  setting those expectations.
Nevertheless, the range of expectations that DHS will consider in setting  individual employee performance expectations are generally consistent  with those we see used by leading organizations. In addition, DHS  appropriately recognizes that given the vast diversity of work done in the  Department, managers and employees need flexibility in crafting specific  expectations. However, the experiences of leading organizations suggest  that DHS should reconsider its position to merely allow, rather than  require the use of core employee competencies as a central feature of  DHS’s performance management efforts. 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,  the Civilian Acquisition Workforce Personnel Demonstration Project  (AcqDemo), which covers various organizational units of the Air Force,  Army, Navy, Marine Corps, and the Office of the Under Secretary of  Defense, applies organizationwide competencies for all employees such as  teamwork/cooperation, customer relations, leadership/supervision, and  communication.
More specifically and consistent with leading practices for successful  mergers and organizational transformation, DHS should use its  performance management system to serve as the basis for setting  expectations for individual roles in its transformation process. To be  successful, transformation efforts, such as the one underway at DHS, must  have leaders, managers, and employees who have the individual  competencies to integrate and create synergy among multiple  organizations involved in the transformation effort. Individual  performance and contributions can be evaluated on competencies such as  change management, cultural sensitivity, teamwork and collaboration, and  information sharing. Leaders, managers, and employees who demonstrate  these competencies are rewarded for their success in contributing to the  achievement of the transformation process. DHS, by including such  competencies throughout its revised performance management system,  would create a shared responsibility for organizational success and help  assure accountability for change.
section_title: Translating Employee Performance Ratings into Pay Increases and Awards
paragraphs: A stated purpose of DHS’s performance management system is to provide  for meaningful distinctions in performance to support adjustments in pay,  awards, and promotions. All employees who meet organizational  expectations are to receive pay adjustments, generally to be made on an  annual basis. In coordination with OPM, the pay adjustment is to be based  on considerations of mission requirements, labor market conditions,  availability of funds, pay adjustments received by other federal employees,  and other factors. The pay adjustment may vary by occupational cluster or  band. Employees that meet or exceed expectations are also eligible to  receive a performance-based pay increase, either as an increase to base  pay or a one-time award, depending on the employee’s performance rating.  Employees with unacceptable ratings are not to receive the pay  adjustment or a performance-based pay increase. The proposed  regulations provide managers with a range of options for dealing with poor  performers, such as remedial training, reassignment, an improvement  period, among other things.
In coordination with OPM, DHS may additionally set the boundaries of  locality pay areas. Participants in the DHS focus groups expressed  concerns regarding the shortcomings of the current locality pay system,  including its impact on recruitment and retention.
While the DHS proposal does not provide additional detail on how it  would consider labor market conditions, its proposed approach is broadly  consistent with the experiences of some of the demonstration projects  that considered the labor market or the fiscal condition of the organization  in determining how much to budget for pay increases. For example,  NAVSEA’s Newport Division considers the labor market and uses regional  and industry salary information compiled by the American Association of  Engineering Societies when determining how much to set aside for pay  increases and awards. In addition, the Newport Division is financed in part  through a working capital fund and thus must take into account fiscal  condition when budgeting for pay increases and awards. Responding to  higher salaries in the labor market, the Newport Division funded pay  increases at a higher rate in fiscal year 2001 than in 2000. Conversely, in  fiscal year 2002, the performance pay increase and award pools were  funded at lower levels than in 2001 because of fiscal constraints.
Under the proposed regulations, DHS would establish performance pay  pools by occupational cluster and by band within each cluster, and may  further divide them by unit and/or location. Performance-based pay would  be based on “performance points” whereby points correspond to a rating  level. In an example used by DHS, for a four-level system, the point value  pattern may be 4-2-1-0, where 4 points are assigned to the highest rating  and 0 points to an unacceptable rating. While each pay pool has the option  to use this point value pattern or another, DHS is to determine the value of  a performance point. The proposed regulations do not provide more  detailed information on how ratings will be used for pay and promotions.
Under the proposed regulations, DHS may not impose a quota on any  rating level or a mandatory distribution of ratings. DHS would create a  Performance Review Board (PRB) to review ratings in order to promote  consistency and provide general oversight of the performance  management system to ensure it is administered in a fair, credible, and  transparent manner. DHS may, in turn, appoint as many review boards  within the departmental components as it deems necessary to effectively  carry out these intended functions and, when practicable, may include  employees outside the organizational unit, occupation, and/or location of  employees subject to review by the PRB. The proposed regulations do not  offer additional details on other matters such as the selection process for  the members nor their qualifications. Where circumstances warrant, the  PRB may remand individual ratings for additional review and/or modify a  rating.
While much remains to be determined about how the DHS PRB will  operate, we believe that the effective implementation of such a board is  important to assuring that predecisional internal safeguards exist to help  achieve consistency and equity, and assure nondiscrimination and  nonpolitization of the performance management process. The key will be  to create a PRB that is independent of line management and review such  matters as the establishment and implementation of the performance  appraisal system and later, performance rating decisions, pay  determinations, and promotion actions before they are finalized to ensure  they are merit based.
Several of the demonstration projects consider an employee’s current  salary when making decisions on permanent pay increases and one-time  awards – a procedure that is worth additional consideration in the  proposed DHS regulations. By considering salary in such decisions, the  projects intend to make a better match between an employee’s  compensation and his or her contribution to the organization. Thus, two  employees with comparable contributions could receive different pay  increases and awards depending on their current salaries. For example, at  AcqDemo, supervisors recommend and pay pool managers approve  employees’ “contribution scores.” Pay pool managers then plot  contribution scores against the employees’ current salaries and a  “standard pay line” to determine if employees are “appropriately  compensated,” “under-compensated” or “over-compensated,” given their  contributions.
As a result of this system, AcqDemo has reported that it has made progress  in matching employees’ compensation to their contributions to the  organization. From 1999 to 2002, appropriately compensated employees  increased from about 63 percent to about 72 percent, under-compensated  employees decreased from about 30 percent to about 27 percent and over- compensated employees decreased from nearly 7 percent to less than 2  percent. A recent evaluation of AcqDemo by Cubic Applications, Inc.  found that employees’ perceptions of the link between pay and  contribution increased, from 20 percent reporting that pay raises depend  on their contribution to the organization’s mission in 1998 to 59 percent in  2003.
section_title: Providing Adequate Safeguards to Ensure Fairness and Guard Against Abuse
paragraphs: According to the proposed regulations, 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. Last spring, when commenting on the DOD civilian  personnel reforms, we testified that Congress should consider establishing  statutory standards that an agency must have in place before it can  implement a more performance-based pay program and developed an  initial list of possible safeguards to help ensure that pay for performance  systems in the government are fair, effective, and credible.
While much remains to be defined, DHS is proposing taking actions that  are generally consistent with these proposed safeguards. For example, as I  noted previously, DHS plans to align individual performance management  with organizational goals and provide for reasonableness reviews of  performance management decisions through its PRB. Moreover,  employees and their union representatives played a role in shaping the  design of the proposed systems, as we previously reported.
DHS should continue to build in safeguards into its revised performance  management system. For example, we noted that agencies need to assure  reasonable transparency and provide appropriate accountability  mechanisms in connection with the results of the performance  management process. This can include publishing 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. DHS should commit to publishing the results of the  performance management process. Publishing the results in a manner that  protects individual confidentiality can provide employees with the  information they need to better understand the performance management  system. Several of the demonstration projects publish information for  employees on internal Web sites about the 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: The DHS proposal is intended to streamline the employee adverse action  process, while maintaining an independent third-party review of most  adverse actions. It is designed to create a single process for both  performance-based and conduct-based actions, and shortens the adverse  action process by removing the requirement for a performance  improvement plan and reducing other timeframes. The proposed  regulations also adopt the lower standard of proof for adverse actions in  DHS, requiring the agency to meet a standard of “substantial evidence”  instead of a “preponderance of the evidence.” An independent review is to  be retained by allowing employees to appeal to the Merit Systems  Protection Board (MSPB).  The appeals process at MSPB is, however, to  be streamlined by shortening the time for filing and processing appeals.  The proposal also encourages the use of Alternative Dispute Resolution  (ADR).
Retention of a qualified and independent third-party to address employee  appeals may be especially important in light of OPM’s FHCS results.  Specifically,    38 percent of DHS respondents believe that complaints, disputes, or  grievances are resolved fairly – lower than the governmentwide  response of 44 percent; and    38 percent of DHS respondents perceive that arbitrary action, personal  favoritism, and coercion for partisan political purposes are not  tolerated – lower than the governmentwide response of 45 percent.
Providing an avenue for an independent appeal can enhance employee  trust of the entire human capital system. The point was echoed during the  DHS focus groups, in which employees and managers believed it was  important to maintain a neutral third-party reviewer in the appeals  process. In a separate survey that we administered (GAO survey),  members of the field team identified the presence of a neutral third-party  in the process as the most critical challenge in terms of the discipline and  appeals system, while others identified options retaining a third-party  reviewer as most likely to address the department’s challenges in  discipline and appeals.
DHS’s commitment to use ADR is a very 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. These approaches include mediation, dispute resolution  boards and ombudsmen. Ombudsmen are typically used to provide an  informal alternative to addressing conflicts. We reported on common  approaches used in ombudsmen offices, including (1) broad responsibility  and authority to address almost any workplace issue, (2) their ability to  bring systemic issues to management’s attention, and (3) the manner in  which they work with other agency offices in providing assistance to  employees.  The proposed regulations note that the department will use  ADR, including an ombudsman, where appropriate.
The proposal authorizes the Secretary of DHS to identify specific offenses  for which removal is mandatory. Employees alleged to have committed  these offenses will have the right to a review by an adjudicating official  and a further appeal to a newly created panel.  Members of this three- person panel are to be appointed by the Secretary for three-year terms and  qualifications for these members are articulated in the proposed  regulations. Members of the panel may be removed by the Secretary “only  for inefficiency, neglect of duty, or malfeasance.” Qualifications for the  adjudicating officials, who are designated by the panel, are not specified.
One potential area of caution is the authority given to the Secretary to  identify specific offenses for which removal is mandatory. I believe that  the process for determining and communicating which types of offenses  require mandatory removal should be explicit and transparent and involve  a member of key players. Such a process should include an employee  notice and comment period before implementation, collaboration with  relevant Congressional stakeholders, and collaboration with employee  representatives.
We also would suggest that DHS exercise caution when identifying  specific removable offenses and the specific punishment. When  developing these proposed regulations, DHS should 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  are 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.
Moreover, the independence of the panel that will hear appeals of  mandatory removal actions deserves further consideration. Removal of the  panel members by the Secretary may potentially compromise the real or  perceived independence of the panel’s decisions. As an alternative, the  department should consider having members of the panel removed only by  a majority decision of the panel.  DHS may also wish to consider  staggering the terms of the members to ensure a degree of continuity on  the board.
section_title: Labor Management Relations
paragraphs: The DHS proposed regulations recognize the right for employees to  organize and bargain collectively. However, the proposal reduces the  scope of bargaining by removing the requirement to bargain on matters  traditionally referred to as “impact and implementation,” which include  the processes used to deploy personnel, assign work, and use new  technology, for example, and redefining what are traditionally referred to  as the “conditions of employment.” A DHS Labor Relations Board is  proposed that would be responsible for determining appropriate  bargaining units, resolving disagreements on the scope of bargaining and  the obligation to bargain, and resolving impasses, and would be separate  and independent from the Federal Labor Relations Authority (FLRA). The  Labor Relations Board would have three members selected by the  Secretary. No member could be a current DHS employee and one member  would be from FLRA. The FLRA is retained to resolve complaints  concerning certain unfair labor practices and to supervise or conduct  union elections.
Regardless of whether it is as a part of collective bargaining, involving  employees in such important decisions as how they are deployed and how  work is assigned is critical to the successful operations of the department.  During the course of the design process, DHS has recognized the  importance of employee involvement and has been involving multiple  organizational components and its three major employee unions in  designing the new human capital system. This is consistent with our  finding that leading organizations involve unions and incorporate their  input into proposals before finalizing decisions. Engaging employee  unions in major changes, such as redesigning work processes, changing  work rules, or developing new job descriptions, can help achieve  consensus on the planned changes, avoid misunderstandings, speed  implementation, and more expeditiously resolve problems that occur.  These organizations engaged employee unions by developing and  maintaining an ongoing working relationship with the unions,  documenting formal agreements, building trust over time, and  participating jointly in making decisions.
DHS employees’ comments can prove instructive when determining the  balance in labor management relations. In the DHS focus groups,  employees suggested having informal mechanisms in place to resolve  issues before the need to escalate them to the formal process and holding  supervisors accountable for upholding agreements. Supervisors and  employees also expressed a need for increased training in roles and  responsibilities in the labor process and an interest in training in ADR.  Respondents to the GAO survey said the most critical challenge in terms of  labor relations will be to maintain a balance between the mission of the  agency and bargaining rights.
section_title: DHS Faces Multiple Implementation Challenges
paragraphs: Once DHS issues final regulations for the human capital system, the  department will be faced with multiple implementation challenges. While  we plan to provide further details to the Congress on some of these  challenges in the near future, they include the following.
Implementing the system using a phased approach. The DHS  proposed regulations note that the labor relations, adverse actions, and  appeals provisions will be effective 30 days after issuance of the interim  final regulations later this year. DHS plans to implement the job  evaluation, pay, and performance management system in phases to allow  time for final design, training, and careful implementation. We strongly  support a phased approach to implementing major management reforms.  A phased implementation approach recognizes that different organizations  will have different levels of readiness and different capabilities to  implement new authorities. Moreover, a phased approach allows for  learning so that appropriate adjustments and midcourse corrections can  be made before the regulations are fully implemented organizationwide.
Providing adequate resources for additional planning,  implementation, and evaluation. The administration recognizes the  importance of funding this major reform effort and has requested for fiscal  year 2005 over $10 million for a performance pay fund in the first phase of  implementation (affecting about 8,000 employees) to recognize those who  meet or exceed expectations and about $100 million to fund training and  the development of the performance management and compensation  system. In particular, DHS is appropriately anticipating that its revised  performance management system will have costs related to both  development and implementation – a fact confirmed by the experience of  the demonstration projects. In fact, OPM reports that the increased costs  of implementing alternative personnel systems should be acknowledged  and budgeted for up front.
DHS is recognizing that there are up front costs and that its components  are starting from different places regarding the maturity and capabilities of  their performance management systems. At the same time, DHS is  requesting a substantial amount of funding that warrants close scrutiny by  Congress. In addition, certain costs are one-time in nature and therefore  should not be built into the base of DHS’s budget for future years.  Furthermore, presumably most of any performance-based pay will be  funded from what otherwise would be used from automatic across the  board adjustments and step increases under the existing GS system.
The DHS proposal correctly recognizes that a substantial investment in  training is a key aspect of implementing a performance management  system. The demonstration projects’ experiences show that while training  costs are generally higher in the year prior to implementation, the need for  in-depth and varied training continues as the system is implemented. We  have reported that agencies will need to invest resources, including time  and money, to ensure that employees have the information, skills, and  competencies they need to work effectively in a rapidly changing and  complex environment.
Evaluating the impact of the 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. DHS indicates that it is committed to an ongoing  comprehensive evaluation of the effectiveness of the human capital  system, including the establishment of human capital metrics and the use  of employee surveys. Collecting and analyzing data is the fundamental  building block for measuring the effectiveness of these approaches in  support of the mission and goals of the agency.
DHS 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. A set of  balanced measures addressing a range of results, customer, employee, and  external partner issues may also prove beneficial. An evaluation such as  this would facilitate congressional oversight; allow for any midcourse  corrections; assist DHS 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.
Building a DHS-wide workforce plan. DHS has recently begun drafting  a departmental workforce plan, using the draft strategic plan as a starting  point. Workforce plans of different levels of sophistication are used in the  five legacy agencies we studied. Despite their efforts, DHS headquarters  has not yet been systematic or consistent in gathering relevant data on the  successes or shortcomings of legacy human capital approaches or current  and future workforce challenges—a deficiency that will make workforce  planning more difficult. The strategic workforce plan can be used, among  other things, as a tool for identifying core competencies for staff for  attracting, developing, and rewarding contributions to mission  accomplishment.
Involving employees and other stakeholders in designing the  details of the system.  We reported last fall that DHS’s and OPM’s effort  to design a new human capital system were collaborative and facilitated  participation of employees from all levels of the department.  We  recommended that the Secretary of DHS build on the progress that has  been made and ensure that the communication strategy used to support  the human capital system maximize opportunities for employee  involvement through the completion of the design process, the release of  the system options, and implementation, with special emphasis on seeking  the feedback and buy-in of frontline employees.
Moving forward, employee perspectives can provide insights on areas that  deserve particular attention while implementing the new performance  management system. For example, DHS employees responding to the OPM  FHCS reported that    37 percent indicated that high-performing employees are recognized or  rewarded on a timely basis, which is lower than the governmentwide  average of 41 percent;    60 percent believe that their appraisals are fair reflections of their  performance, which is lower than the governmentwide average of 65  percent;    23 percent believe that steps are taken to deal with a poor performer  who cannot or will not improve, which is lower than the  governmentwide average of 27 percent; and    28 percent perceive that selections for promotions in their work units  are based on merit, which is lower than the governmentwide average of  37 percent.
In the GAO survey, members of the field team said that the most critical  challenge in terms of performance management will be to create a system  that is fair. Such data underscore the continuing need to involve  employees in the design and implementation of the new system to obtain  their buy-in to the changes being made. More specifically, employee  involvement in the validation of core competencies is critical to ensure  that the competencies are both appropriate and accepted.
section_title: Summary Observations
paragraphs: As we testified on the DOD civilian personnel reforms, the bottom line for  additional performance-based pay flexibility is that an agency should have  to demonstrate that it has a modern, effective, credible, and as  appropriate, validated performance management system in place with  adequate safeguards, including reasonable transparency and appropriate  accountability mechanisms, to ensure fairness and prevent politicalization  and abuse of employees. To this end, DHS’s proposed regulations take  another valuable step towards results-oriented pay reform and modern  performance management. DHS’s performance management system is  intended to align individual performance to DHS’s success; hold  employees responsible for accomplishing performance expectations;  provide for meaningful distinctions in performance through performance-  and market-based payouts; and be fair, credible, and transparent.  However, the experiences of leading organizations suggest that DHS  should require core, and as appropriate, validated competencies in its  performance management system. The core competencies can serve to  reinforce employee behaviors and actions that support the DHS mission,  goals, and values and to set expectations for individuals’ roles in DHS’s  transformation, creating a shared responsibility for organizational success  and ensuring accountability for change. DHS should also continue to build  safeguards into its revised human capital system.
DHS’s overall effort to design a strategic human capital management  system can be particularly instructive for future human capital  management and reorganization efforts within specific units of DHS. Its  effort can also prove instructive as other agencies design and implement  new authorities for human capital management.
Mr. Chairman, Madam Chairwoman, and Members of the Subcommittees,  this concludes my prepared statement. I would be pleased to respond to  any questions that you may have.
section_title: Contacts and Acknowledgments
paragraphs: For further information, please contact J. Christopher Mihm, Managing  Director, Strategic Issues, at (202) 512-6806 or mihmj@gao.gov. Major  contributors to this testimony include Edward H. Stephenson, Jr., Lisa  Shames, Ellen V. Rubin, Lou V. B. Smith, Tina Smith, Masha Pasthhov- Pastein, Marti Tracy, Ron La Due Lake, Karin Fangman, Michael Volpe,  and Tonnye Conner-White.
section_title: Appendix I: Methodology
paragraphs: In presenting our preliminary observations on the Department of  Homeland Security’s (DHS) regulations, we reviewed the proposed human  capital regulations issued jointly by DHS and the Office of Personnel  Management (OPM) on February 20, 2004, in the Federal Register.  Additional documents reviewed include relevant laws and regulations, the  52 DHS human capital system options released in October 2003, and  testimony presented by leaders of DHS employee unions and the Merit  Systems Protection Board (MSPB). Interviews with experts in federal  labor relations and the federal adverse actions and appeals system  provided additional insights. The official transcripts and report  summarizing the proceedings of the Senior Review Advisory Committee  meetings in October 2003 were also examined. A draft of the report  summarizing the proceedings of the Senior Review Advisory Committee  meetings in October 2003 was reviewed by members of the committee to  ensure its reliability. Additionally, we attended the committee’s October  2003 meetings. Relevant GAO reports on human capital management were  used as criteria against which the proposals were evaluated.
To respond to your particular interest in seeking out and incorporating  employee perspectives on the human capital system, we gathered  information on employee perceptions from a variety of sources and  presented these findings throughout the statement. Insights to employee  opinions were gathered from the OPM Federal Human Capital Survey  (FHCS), a GAO-administered survey of the field team used to inform the  human capital system design effort (GAO survey), and a report  summarizing findings from the DHS focus groups held during the summer  of 2003.
subsections: section_title: OPM Federal Human Capital Survey
paragraphs: To assess the strengths and weaknesses of selected provisions of DHS’s  proposed human capital system, we reviewed the analysis of the DHS  component agencies’ responses to relevant questions on OPM’s FHCS of  2002 for those legacy components that are now within DHS: the Animal  and Plant Health Inspection Service (APHIS); the U.S. Coast Guard; the  U.S. Customs Service; the Federal Emergency Management Agency; the  Immigration and Naturalization Service; Federal Law Enforcement  Training Center; U.S. Secret Service; Office of Emergency Preparedness  and National Disaster Medical System; and the Federal Protective Service.  This governmentwide survey was conducted from May through August  2002. It was administered to employees of 24 major agencies represented  on the President’s Management Council, which constitute 93 percent of  the executive branch civilian workforce. There were 189  subelement/organizational components of the 24 agencies that  participated. The sample was stratified by employee work status:  supervisory, nonsupervisory, and executive. Of the more than 200,000  employees contacted, a little over 100,000 employees responded to the  survey, resulting in a 51 percent response rate. OPM reported that the  margin of error for the percentages of respondents governmentwide was  plus or minus 1 percent at a 95 percent confidence interval. Likewise, it  reported that the margin of error for the percentages of respondents for  individual agencies was somewhat higher but less than plus or minus 5  percent.
The OPM survey was conducted during the same time frame that the  administration proposed legislation to form DHS; thus, the opinions  expressed by the respondents to the survey were before the formation of  DHS. For reporting purposes, OPM compiled the DHS responses by  combining the various subentities cited above. The responses approximate  the views of some, but not all, employees now at DHS. For example, the  Transportation Security Administration (TSA) screeners were not hired at  the time of the survey. Also, APHIS employees were divided between DHS  and the Department of Agriculture (USDA), so the APHIS respondents  included some employees who remained at USDA.
Because OPM did not provide us with a copy of the full survey data set  that included all records or the strata weights for any of the records, we  could not perform our own analyses of the data or calculate the  confidence intervals that would be associated with such analyses. OPM  did, however, provide us with access to a Web site that provided reports  with weighted data analyses for the FHCS 2002. We addressed the  reliability of the survey analyses by (1) reviewing existing information  about the survey data collection and analysis processes and (2)  interviewing OPM agency officials who were knowledgeable about the  data. We determined that the data were sufficiently reliable for the  purposes of this testimony. We reviewed the analyses of the DHS  component agencies presented on the Web site in four areas (pay and  performance management, classification, labor relations, and adverse  actions and appeals) that compared DHS-wide data to governmentwide  data.
section_title: GAO Field Team Survey
paragraphs: We were interested in obtaining the views of the field team participants  who served as a key source of information for DHS’s Core Design Team.  The field team consisted of DHS managers and staff. Members were  selected by departmental management or the three major unions.
From October through December 2003, we surveyed the 31 members of  the team to obtain their insights into the DHS design process and  proposed human capital system options. The survey, administered by e- mail and fax, contained two parts. The first part addressed their views on  how effectively the field team was utilized throughout the design process.  The second part addressed their views about human capital challenges  and the proposed policy options in four areas: (1) pay and classification,  (2) performance management, (3) labor relations, and (4) discipline and  appeals. Prior to distribution, the questionnaire was reviewed by DHS and  OPM officials and pretested with a field team member to ensure clarity of  the questions and determine whether the respondent had the knowledge  to answer the questions. The questionnaire was revised based on their  input. We received completed questionnaires from 19 of 31 field team  members. We aggressively followed up with nonrespondents by telephone  and e-mail. Because many of the field team members were either not  based in offices, on extensive travel, or difficult to reach, we extended our  survey through December 2003. The views that we obtained are not  representative of all the participants.
section_title: DHS Focus Groups
paragraphs: DHS conducted multiple focus groups and Town Hall meetings from the  end of May through the beginning of July 2003 in 10 cities across the  United States. Six focus group sessions were held in each city to obtain  employee input and suggestions for the new human resource system. In  most cities, five of the six sessions were devoted to hearing employees’  views while the remaining sessions heard the views of supervisors and  managers. Each focus group was facilitated by a contractor. The  contractor used a standard focus group facilitation guide to manage each  session. Additionally, the contractor was responsible for recording the  issues identified during each focus group session and compiling a  summative report on the findings from all the focus groups. We did not  attend any focus group sessions and were not able to review any original  notes from the sessions to assess the accuracy of the summative report.
Participation in the focus groups was not random nor was it necessarily  representative of DHS employees. DHS reports that employee  participation generally reflected the population in that location. For  example, the level of bargaining unit representation at the focus groups  was determined based on OPM data on bargaining unit membership.  Bargaining unit employees were selected by union representatives to  participate in the focus groups, while nonbargaining unit employees and  supervisors were selected by DHS management. Union representatives  and DHS managers were asked to select a diverse group of participants  based on occupation, work location, gender, ethnicity, and age.
This work was done in accordance with generally accepted government  auditing standards from March 2003 through February 2004.
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