Human Capital: Building on the Current Momentum to Address High-Risk Issues
Published: 2003-04-08T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Federal employees represent the government's knowledge base, drive its capacity to perform, and define its character, and as such, are its greatest asset. The early years of the 21st century are proving to be a period of profound transition for our world, our country, and our government. In response, the federal government needs to engage in a comprehensive review, reassessment, reprioritization, and as appropriate, reengineering of what the government does, how it does business, and in some cases, who does the government's business. Leading public organizations here and abroad have found that strategic human capital management must be the centerpiece of any serious change management initiative and effort to transform the cultures of government agencies. In response to a Congressional request, GAO discussed the status of the federal government's efforts to address high-risk human capital weaknesses, possible short- and longer-term legislative solutions to those weaknesses, and other human capital actions that need to be taken to ensure that federal agencies are successfully transformed to meet current and emerging challenges.
section_title: What GAO Found
paragraphs: Since GAO designated strategic human capital management as a governmentwide high-risk area in January 2001, Congress, the administration, and agencies have taken a number of steps to address the federal government's human capital shortfalls. In fact, more progress in addressing the government's long-standing human capital challenges was made in the last 2 years than in the last 20, and GAO is confident that more progress will be made in the next 2 years than the last 2 years. Despite the building momentum for comprehensive and systematic reforms, it remains clear that today's federal human capital strategies are not yet appropriately constituted to meet current and emerging challenges or to drive the needed transformation across the federal government. The basic problem is the long-standing lack of a consistent strategic approach to marshaling, managing, and maintaining the human capital needed to maximize government performance and assure its accountability. Committed and sustained leadership and persistent attention on behalf of all interested parties will continue to be essential to building on the progress that has been and is being made. Congress has had and will need to continue to have a central role in improving agencies' human capital approaches. The basic principles underlying the legislative proposals Congress is considering have merit. Collectively, these proposals would make a positive contribution to addressing high-risk human capital issues and advancing the needed cultural transformation across the federal government. At the same time, additional safeguards should be considered by Congress in order to prevent potential abuse. Moreover, certain additional proposals should be considered as part of this legislative package. Looking forward, the time has come to seriously explore more market- and performance-based approaches to federal pay. As part of this exploration, we need to continue to experiment with providing agencies with the flexibility to pilot alternative approaches to setting pay and linking pay to performance. A more performance-based approach to Senior Executive Service pay would be a good place to start. The bottom line, however, is that in order to receive any additional performance-based pay flexibility for broad-based employee groups, agencies should have to demonstrate that they have modern, effective, credible, and validated performance management systems, with adequate safeguards, including reasonable transparency and appropriate accountability mechanisms in place, that are capable of supporting such decisions. Unfortunately, most federal agencies are a long way from meeting this requirement. GAO, on the other hand, has taken numerous steps to meet this requirement and is well positioned to experiment with additional pay for performance flexibility.

section_title: Letter
paragraphs: It is a great pleasure to appear before you today to discuss the federal  government’s greatest asset—its people. Federal employees represent the  government’s knowledge base, drive its capacity to perform, and define its  character. The early years of the 21st century are proving to be a period of  profound transition for our world, our country, and our government. This  transition is being driven by a number of key trends, including global  interdependence; diverse, diffuse, and asymmetrical security threats;  changes in the nature of the economy; rapidly evolving science and  technologies; dramatic shifts in the age and composition of our population;  important quality of life issues; and evolving governance structures and  concepts. As the nation and government policymakers grapple with the  challenges presented by these evolving trends, they do so in a time when  increasing fiscal pressures created by the retirement of the baby boom  generation and rising health care costs threaten to overwhelm the nation’s  fiscal future.
In response to the emerging trends and long-term fiscal challenges the  government faces in the coming years, we have an opportunity—and a  responsibility—to create highly effective, performance-based organizations  that can strengthen the nation’s ability to meet the challenges of the 21st  century and reach beyond our current level of achievement. Leading public  sector organizations here and abroad have found that strategic human  capital management must be the centerpiece of any serious government  transformation effort. Contrary to the assertions of some public officials  and other parties, federal workers can be an important part of the solution  to our overall transformation effort. Federal workers are not the problem.  They are trapped in and encumbered by outdated and ineffective policies  and procedures that must be changed. In addition, they need more  consistent and enlightened leadership to show the way forward. They also  need help from Congress.
Since we designated strategic human capital management as a  governmentwide high-risk area in January 2001, Congress, the  administration, and agencies have taken a number of steps to address the  federal government’s human capital shortfalls. In fact, and this is my major  point today, I believe that we have made more progress in addressing the  government’s long-standing human capital challenges in the last 2 years  than in the last 20, and I am confident that we will make more progress in  the next 2 years than we have made in the last 2 years.
subsections: section_title: Key Actions Have Been Taken over the Last 2 Years to Address Human Capital Weaknesses
paragraphs: When we placed strategic human capital management on our high-risk list  back in January 2001, as a governmentwide high-risk challenge, we noted  that after a decade of government downsizing and curtailed investments of  human capital, it had become increasingly clear that federal human capital  strategies were not appropriately constituted to adequately meet the  current and emerging needs of the government and its citizens. We  provided many examples of where human capital shortfalls were eroding  the ability of agencies—and threatening the ability of other agencies—to  effectively, efficiently, and economically perform their missions. In short,  strategic human capital management was a pervasive challenge across the  federal government.
We noted that while legislation and other actions have been put in place  since 1990 to address most major management areas, human capital was  the critical missing link in reforming and modernizing the federal  government’s management practices. Our high-risk report pointed to  actions that federal leaders and their agencies, the Office of Personnel  Management (OPM), the Office of Management and Budget (OMB), and  Congress needed to take to address high-risk human capital issues.
Since then, a real and growing momentum for change has become evident.
In August 2001, President Bush placed the strategic management of  human capital at the top of the administration’s management agenda.
In October 2001, OMB notified agencies that they would be assessed  against standards for success for each part of the President’s  Management Agenda (PMA), including the strategic management of  human capital. The first agency assessment was made public in  February 2002 as part of the President’s proposed fiscal year 2003  budget. Subsequent assessments were later released in June and  September 2002 and in January 2003, reporting on both the status and  progress of agency efforts.
In December 2001, OPM released a human capital scorecard to assist  agencies in responding to the human capital standards for success in the  PMA.
In March 2002, we released A Model of Strategic Human Capital  Management, designed to help agency leaders determine how well they  integrate human capital considerations into daily decision making and  planning for the program results they seek to achieve.
In April 2002, the Commercial Activities Panel, which I was honored to  chair, sought to elevate attention to human capital considerations in  making sourcing decisions.
In October 2002, OMB and OPM approved revised standards for success  in the human capital area of the PMA, reflecting language that was  developed in collaboration with GAO. To assist agencies in responding  to the revised PMA standards, OPM released the Human Capital  Assessment and Accountability Framework.
In the fall of 2002, OPM began realigning its organizational structure and  appointed four new associate directors with proven human capital  expertise to lead federal efforts as part of a larger OPM effort to be more  customer-focused.
In November 2002, Congress passed the Homeland Security Act of 2002,  which created the Department of Homeland Security (DHS) and  provided the department with significant flexibilities to design a modern  human capital management system. The effective development and  implementation of these flexibilities will prove essential to the  performance and accountability of DHS, as well as provide a potential  model for Congress to consider for wider application governmentwide.
The Homeland Security Act of 2002 also included additional significant  provisions relating to governmentwide human capital management,  such as direct hire authority, the ability to use categorical ranking in the  hiring of applicants instead of the “rule of three,” the creation of chief  human capital officer (CHCO) positions and a CHCO Council, an  expanded voluntary early retirement and “buy-out” authority, a  requirement to discuss human capital approaches in Government  Performance and Results Act plans and reports, and a provision  allowing executives to receive their total performance bonus in the year  in which it is awarded.
Congress has further underscored the consequences of human capital  weaknesses in federal agencies and pinpointed potential solutions  through its oversight process and a range of hearings.
section_title: Strategic Human Capital Management Remains at High Risk
paragraphs: Despite the building momentum for comprehensive and systematic  reforms, it remains clear that today’s federal human capital strategies are  not yet appropriately constituted to meet current and emerging challenges  or to drive the needed transformation across the federal government. The  basic problem is the long-standing lack of a consistent strategic approach  to marshaling, managing, and maintaining the human capital needed to  maximize government performance and assure its accountability.  Specifically, as detailed in our January 2003 high-risk volume on human  capital, agencies continue to face challenges in four overarching areas: Leadership: Top leadership in agencies must provide the committed  and inspired attention needed to address human capital and related  organization transformation issues.
Strategic human capital planning: Agencies’ human capital planning  efforts need to be more fully and demonstrably integrated with mission  and critical program goals.
Acquiring, developing, and retaining talent: Additional efforts are  needed to improve recruiting, hiring, professional development, and  retention strategies to ensure that agencies have the needed talent.
Results-oriented organizational cultures: Agencies continue to lack  organizational cultures that promote high performance and  accountability and empower and include employees in setting and  accomplishing programmatic goals.
section_title: Building on the Current Momentum Can Create Lasting Change
paragraphs: Committed and sustained leadership and persistent attention on behalf of  all interested parties will continue to be essential to building on the  progress that has been and is being made, if lasting reforms are to be  successfully implemented. First and foremost, individual federal agencies  need to more consistently adopt a strategic approach to the use of their  people. This requires persistent leadership and a long-term commitment;  aligning human capital approaches with the accomplishment of agency  goals; implementing recruiting, hiring, training, professional development,  performance reward, and retention approaches that foster mission  accomplishment; and instilling a results-oriented organizational culture.  Agencies’ CHCOs will need to play a particularly important role in this  regard. The careful and strategic selection of these officials is therefore  critical. The CHCO is not fundamentally an “HR” or personnel  administration position, although knowledge in those areas is important.  Rather, agency CHCOs should have the ability, experience, vision,  attributes, and credibility needed to successfully integrate human capital  considerations with program goals and to play a major leadership role in  driving agency transformation efforts. Agencies also must make effective  use of the tools and flexibilities that Congress has provided. To assist  agencies in this regard, and at the request of Chairman Voinovich, Ranking  Minority Member Durbin, and other Members of Congress, we issued a  report last December detailing the practices that agencies need to employ  to effectively use human capital flexibilities. These practices are shown in  figure 1.
The central management agencies—OPM and OMB—also have continuing  vital roles to play. As the agency responsible for leading human capital  management governmentwide, OPM plays a central role in helping  agencies tackle the broad range of human capital challenges that are at the  root of transforming what agencies do, how they do it, and with whom they  partner. As detailed in our Performance and Accountability Series volume  on OPM, our work and the work of others continues to show that agencies  need and want greater leadership from OPM in helping them to address  their human capital challenges, especially in identifying new human capital  flexibilities, removing obstacles from the federal hiring process, and  assisting agency workforce planning efforts. Opportunities exist for OPM  to be more vigorous in responding to a number of critical program  challenges, such as applicant examination, staffing, and compensation  approaches. In addition, OPM shares responsibility with agencies for  ensuring that human capital practices are carried out in accordance with  merit system principles and other national goals. Effective and strategic  oversight of agencies’ systems is even more critical today because an  increasing number of agencies are seeking and obtaining exemptions from  traditional civil service rules at the same time that human capital staffs  responsible for overseeing these activities have dwindled.
In response to these ongoing challenges, OPM has taken a number of  important actions. First, OPM realigned its organizational structure and  workforce to create a new, flexible structure that seeks to “de-stovepipe”  the agency; enable it to be more responsive to its primary customers,  federal departments and agencies; and focus on the agency’s core mission.  In November 2002, OPM’s Director appointed four new associate directors  with proven human capital expertise to lead the organization. OPM also has  the key role in leading the administration’s efforts to address strategic  human capital management, a critical part of the PMA. OPM also published  two reports in 2001 to increase agencies’ awareness of available human  capital flexibilities, and released a report on federal compensation  practices in April 2002. A major initiative begun in the spring of 2002 is  designed to improve the hiring process. Furthermore, OPM is addressing its  oversight challenge in part by encouraging agencies to develop and  maintain internal accountability systems in line with its HRM  Accountability Standards. OPM recently released the results of its 2002  Federal Human Capital Survey. This survey is providing a wealth of  important information on the views and attitudes of federal employees. The  results demonstrate the importance of routinely surveying employees  across the federal government through the Federal Human Capital Survey  or a similar survey. Consideration should be given to exploring ways to  assure that these surveys will be conducted on a periodic basis. Finally,  OPM is at the center of the DHS’s efforts to create a modern personnel  system that serves the needs of the department and could serve as a  potential model for others.
The designation of human capital as the first item on the PMA and the  supporting standards for success have raised the profile of human capital  issues on OMB’s agenda. As OMB and the agencies learn to evaluate  themselves against the standards and implement policies to make  improvements, OMB will need to ensure that the standards are consistently  and appropriately applied while assessing agencies’ progress in managing  their human capital. Perhaps most important, OMB support will be needed  as agencies identify targeted investment opportunities to address human  capital shortfalls.
subsections: section_title: Congressional Leadership Continues to Be Critical
paragraphs: Congress has had and will need to continue to have a central role in  improving agencies’ human capital approaches. Traditionally, Congress has  been an institutional champion in improving management of executive  agencies across the government. Support and pressure from Congress has  been indispensable to instituting and sustaining management reforms at  specific agencies. Its confirmation, oversight, appropriations, and  legislative responsibilities provide Congress with continuing opportunities  to ensure that agencies recognize their responsibilities to manage people  for results. For example, as Chairman Voinovich has often stressed, the  Senate has the opportunity during the confirmation process to articulate its  commitment to sound federal management by exploring how prospective  nominees plan to make a link between mission accomplishment and human  capital policies. As part of the oversight and appropriations process,  Congress can continue to examine whether agencies are managing their  human capital to improve programmatic effectiveness and to encourage  agencies to use the range of appropriate flexibilities available under  current law.
subsections: section_title: Targeted Human Capital Reforms
paragraphs: Congress will also play a critical role in determining the nature and scope  of any additional human capital flexibilities that will be made available to  agencies, while assuring that adequate safeguards are incorporated to  prevent abuse. Congress also has the responsibility to ensure the  reasonableness and adequacy of financial resources that are made  available to agencies.
Congress is currently considering several pieces of legislation to help  agencies address their current and emerging human capital challenges. I  believe that the basic principles underlying these legislative proposals have  merit and collectively they would make a positive contribution to  addressing high-risk human capital issues and advancing the needed  cultural transformation across the federal government. I also believe that  certain additional safeguards and provisions should be considered by  Congress. We look forward to working with the subcommittees as you  consider these and related legislative initiatives. Today, I will provide  observations on selected provisions of the various proposals.
The Senior Executive Service Reform Act of 2003 The proposed Senior Executive Service Reform Act of 2003 includes a  number of important reforms. For example, the legislation would move to a  single Senior Executive Service (SES) pay range, increase the pay cap, and  link SES pay more closely to performance. I strongly believe that these are  worthwhile reforms that must be considered together, as they are in this  proposed legislation. The legislation seeks to link pay and performance of  senior executives by replacing the current system of six grades with a  single pay band. Agencies would have flexibility to set basic pay for SES  members at any amount within the range plus locality pay, to a total annual  salary that may not exceed level II of the Executive Schedule. In addition,  agencies could employ a broadbanding approach to SES pay should they so  desire. This important change would provide agencies with needed  flexibility to set SES pay in a way that reflects the reality of the great  diversity in the work that members of the SES do rather than using a set of  rigid SES pay grades. In fact, I have the authority to adopt such an  approach in setting the pay for the SES in the GAO, and we plan to do so.
The legislation would raise the highest basic pay rate for an SES member  from the current maximum of $134,000 (level IV of the Executive Schedule)  to $142,500 (level III of the Executive Schedule). SES basic pay currently  ranges from $116,500 to $134,000, before locality pay is included. The  problems of SES pay compression are real and must be addressed, with  over 60 percent of SES members being at the current cap.
The SES needs to lead the way in the federal government’s effort to better  link pay to performance. The legislation would require that agencies base  their SES pay decisions on “individual performance, contribution to the  agency’s performance, or both.” We have reported that there are significant  opportunities to strengthen efforts to hold senior executives accountable  for results. In particular, more progress is needed in explicitly linking  senior executive expectations for performance to results-oriented  organizational goals, fostering the necessary collaboration both within and  across organizational boundaries to achieve results, and demonstrating a  commitment to lead and facilitate change. These expectations for senior  executives will be critical to keep agencies focused on transforming their  cultures to be more results-oriented, less hierarchical, more integrated, and  externally focused and thereby be better positioned to respond to emerging  internal and external challenges, improve their performance, and assure  their accountability.
Agencies should be required to have modern, effective, credible, and  validated performance management systems in place before they are  granted authority to better link pay to performance for broad-based  employee groups. In this regard, Congress should consider providing  specific statutory standards that agencies’ performance management  systems would be required to meet before OPM could approve any such  pay for performance effort. Our own experience in implementing such  reforms in GAO and the practices of other leading organizations that I will  discuss shortly could serve as a starting point for that consideration.
Finally, the legislation’s provision to allow agencies to credit nonfederal  work experience for purposes of providing annual leave recognizes that the  federal government must effectively recruit in a larger labor market. The  increasing number of retirement-eligible federal employees is most  concentrated in mid- and senior- level positions. To attract top talent, both  at the entry and at midcareer levels, it is important to offer applicants an  attractive compensation and benefits package that is not structured  entirely on a model that assumes a 30-year career of federal service. Simply  stated, this provision recognizes the reality of increased mobility in the  workforce and the need to modernize our annual leave provisions to attract  and retain experienced people with critical skills.
The Federal Workforce Flexibility Act of 2003 The Federal Workforce Flexibility Act of 2003 would expand the authority  to use and increase the amount of recruitment and retention bonuses. For  example, the legislation would allow the payment of a recruitment bonus of  up to 100 percent of an employee’s annual salary for critical, hard-to-fill  positions, subject to approval by the agency. The legislation also expands  the use of recruitment bonuses to employees currently employed in  another federal agency and retention bonuses to employees who might  leave to go to another federal agency. Previously, recruitment bonuses  could only be paid to employees coming from outside the federal  government and retention bonuses could only be paid to employees likely  to leave federal employment altogether. We support providing agencies  with these types of additional tools and flexibilities to attract and retain  needed staff as long as such payments are targeted, based on a business  need, and are implemented with adequate safeguards. In that regard,  Congress should consider capping the number or percentage of employees  in an agency who would be eligible for such payments.
As you know, the federal government faces a looming wave of employees  who will be eligible for retirement. Agencies need succession planning  programs to ensure that knowledge is transferred from one generation of  employees to another. An approach that should be explored would be to  allow “phased retirements.” There are a number of ways that a phased  retirement program could work; the legislation seeks to provide one option  for employees who would like to work part time as they end their federal  careers by prorating retirement annuities for the period of service that was  performed on a part-time basis, thus removing a current disincentive to  such part-time work.
The Federal Workforce Flexibility Act of 2003 would also expand the  authority to conduct personnel demonstration projects. Such projects,  authorized by OPM under the Civil Service Reform Act of 1978, provide a  means for testing and introducing improvements in governmentwide  human resources management systems.  To become a demonstration  project, a federal agency obtains authority from OPM to waive existing  federal human resources management laws and regulations in Title 5 and  propose, develop, test, and evaluate interventions for its own human  resources management system that can help shape the future of federal  human resource management.
As a general rule, current law limits the size of a demonstration project to  5,000 employees and the life of a project to a 5-year time limit. The  legislation would eliminate the cap on the number of employees who could  participate in a demonstration project and allow the projects to have up to  a 10-year life span. This more flexible approach to demonstration projects  is consistent with the approach Congress took in 1996 in authorizing the  Department of Defense civilian acquisition workforce demonstration  project to expand the number of personnel eligible to participate from the  statutory cap of 5,000 to a maximum of 95,000 and extend the project's  length from a 5-year time limit to 13 years.
Demonstration projects’ testing, evaluation, and reporting requirements  have provided invaluable lessons learned to other federal organizations.  Much of the federal government’s knowledge and real-world experience  with performance-based pay reform has been obtained through  demonstration projects. In fact, of the 17 demonstration projects that have  been implemented over the past 25 years, 12 have tested some form of  linking compensation to performance. In addition, a demonstration project  done at the Department of Agriculture provided an important test of using  categorical ranking as part of the applicant selection process and was  therefore useful to the Congress in deciding to expand such authorities  governmentwide as part of the Homeland Security Act of 2002.
The Federal Workforce Flexibility Act of 2003’s reforms to enhance  agencies’ training and career development programs are also positive steps  that should help improve human capital management. The legislation calls  for agencies to evaluate their training programs and plans to ensure that  they are linked to strategic and performance goals and contribute to  achieving the agency’s mission. Such evaluations of training and  development efforts are important in demonstrating how these efforts help  develop employees and improve the agency’s performance. As part of a  balanced approach, training and development evaluations should consider  organizational results and feedback from customers and employees. The  strategic evaluation requirement in this legislation should help move  agencies away from an orientation on activities or processes (such as the  number of participants, courses offered, and hours of training provided),  and instead use information on how training and development efforts  (1) contribute to improved performance, (2) strengthen capacity to meet  new and emerging challenges, and (3) reduce the cost of poor performance.
The legislation focuses agencies on several specific areas of importance,  including developing succession programs and informing managers about  effective strategies to address performance problems, mentor employees,  and improve performance and productivity. We have noted that linking an  executive development program and comprehensive succession planning  to agency goals and objectives can help foster a committed leadership  team. Further, calling for agencies to identify and share effective human  capital strategies can help improve individual and organizational  performance and further efforts to transform the cultures of government  agencies. At Chairman Voinovich’s request, this fall we will report on  selected agencies’ efforts to design effective training and development  programs.
Generating Opportunity by Forgiving Educational Debt Service Act  of 2003  Congress previously passed legislation that allows agencies to set up  programs to repay the student loans of federal employees in order to  attract or keep highly qualified individuals. Several agencies, including  GAO, have begun such programs and have found them to be valuable in  attracting and retaining high-quality talent. These payments are currently  included in gross income for federal tax purposes. However, the Generating  Opportunity by Forgiving Educational Debt Service Act of 2003 (GOFEDS)  would make these payments nontaxable. GOFEDS would therefore make  payments by the federal government generally comparable to loan  forgiveness programs in use by some educational institutions and nonprofit  organizations. We believe that this provision has great merit. It would help  to further leverage existing student loan repayment program dollars and  would help agencies in their efforts to attract and retain top talent.  Obviously, Congress will need to balance the federal human capital benefits  of this provision as a tax expenditure with overall federal tax policy.  Moreover, Congress should consider how GOFEDS could be implemented  in such a way that the tax forgiveness provisions do not obscure the true  costs of agency operations.
The Presidential Appointments Improvement Act of 2003 The Presidential Appointments Improvement Act of 2003 would, among  other things, require each executive agency to identify the number of  presidentially appointed, Senate-confirmed positions and the layers of  those positions. Related to this provision, last September I convened a  roundtable to discuss the Chief Operating Officer (COO) concept and how  it might apply within selected federal departments and agencies as one  strategy to address certain systemic federal governance and management  challenges. There was considerable discussion on whether the senior  management official in an agency should be presidentially appointed,  requiring Senate confirmation, while Senate confirmation would not be  required for those officials who lead specific management functions (e.g.,  financial management, information technology, human capital) and who  report to that senior management official. While there was interest in  considering such an arrangement, it was also acknowledged that it would  likely require amending existing legislation, for example the Chief  Financial Officers Act, and, therefore, would need careful analysis to  ensure that any legislative changes result in augmented attention to  management issues and do not inadvertently lead to a reduction in the  authority of key management officials and/or the prominence afforded a  particular management function.
An additional suggestion made at the roundtable that Congress may wish to  consider would be to allow senior management officials in each agency to  assume full authorities and responsibilities up to or for a specified period  of time once they were formally nominated but before their confirmation.  However, it was widely recognized that such an approach would be viable  only if the senior management position was restricted to the professional  and nonpartisan “good government” responsibilities that are fundamental  to effectively executing any administration’s program agenda and did not  entail program policy-setting authority. Furthermore, should Congress  decide to adopt the COO concept noted above and not make subject certain  management officials to the confirmation process (e.g., the Chief Financial  Officer and the Chief Information Officer), the need for this flexibility  would be greatly reduced.
More generally, the roundtable’s overall purpose was to discuss the COO  concept and how it might apply within selected federal departments and  agencies. The roundtable discussion neither sought nor achieved a  consensus on the COO concept. However, it does appear that there was  general agreement on a number of important overall themes that can serve  as a basis for subsequent analysis, discussion, and consideration. These  generally agreed-upon themes provide a course for action.
Elevate attention on management issues and transformational change.  The nature and scope of the changes needed in many agencies require  the sustained and inspired commitment of the top political and career  leadership. There is no substitute for top leadership involvement,  including that of the President, through for example, the establishment  of a governmentwide management agenda. Top leadership attention is  essential to overcome organizations’ natural resistance to change,  marshal the resources needed to implement change, and build and  maintain the organizationwide commitment to new ways of doing  business.
Integrate various key management and transformation efforts. By their  very nature, the problems and challenges facing agencies are  crosscutting and thus require coordinated and integrated solutions.  However, the federal government too often places management  responsibilities (for example, information technology, human capital, or  financial management) into various “stovepipes” and fails to implement  transformational change management initiatives in a comprehensive,  ongoing, and integrated manner. While officials with management  responsibilities often have successfully worked together, there needs to  be a single point within agencies with the perspective and  responsibility—as well as authority—to ensure the successful  implementation of functional management and, if appropriate,  transformational change efforts. At the same time, it is not practical to  expect that the deputy secretaries, given the competing demands on  their time in helping the secretaries execute the President’s policy and  program agendas, will be able to consistently undertake this vital  integrating responsibility. Moreover, while many deputy secretaries may  be nominated based in part on their managerial experience, it has not  always been the case and, not surprisingly, the management skills,  expertise, and interests of the deputy secretaries have always varied and  will continue to vary.
Institutionalize accountability for addressing management issues and  leading transformational change. The management weaknesses in some  agencies are deeply entrenched and long-standing and will take years of  sustained attention and continuity to resolve. In addition, making  fundamental changes in agencies’ cultures will require a long-term  effort. The experiences of successful major change management  initiatives in large private and public sector organizations suggest that it  can often take at least 5 to 7 years until such initiatives are fully  implemented and the related cultures are transformed in a sustainable  manner. In the federal government, the frequent turnover of the political  leadership has often made it difficult to obtain the sustained and  inspired attention required to make needed changes.
section_title: Implementing Market-Based and Results-Oriented Pay Reforms
paragraphs: Looking forward, Congress should consider making comprehensive  legislative reforms to existing civil service laws, taking into account the  extent to which traditional approaches make sense in the current and  future operating environments. In that regard, there is a growing  understanding that we need to fundamentally rethink our approach to  federal pay and develop an approach that places a greater emphasis on a  person’s knowledge, skills, position, and performance rather than the  passage of time, the rate of inflation, and geographic location. The OPM  Director’s White Paper on modernizing federal pay, issued last April, amply  demonstrated that the current federal pay system was designed for the  heavily clerical and low graded workforce of the 1950s rather than today’s  knowledge-based government. Similarly, the National Commission on the  Public Service, chaired by Paul Volcker, observed that agencies need  greater freedom to connect pay both to the market and to performance. In  short, as the nature of the federal workforce has changed, so too must our  pay system if we are to effectively compete for top talent and create  incentives for both individual and institutional success.
Under the current federal pay system, the overwhelming majority of each  year’s increase in federal employee pay is largely unrelated to an  employee’s knowledge, skills, position, or performance. In fact, over 80  percent of the cost associated with the annual increases in federal salaries  is due to longevity and the annual pay increase. One approach that has  been tested and that I believe deserves wider consideration is to reserve  the annual pay adjustment for only those employees who receive an  acceptable performance rating. This would send a clear message to the  overwhelming majority of federal employees that their contributions are  valued, and those few who are not contributing will not be rewarded for  their lack of effort. More generally, current federal pay gaps vary by the  nature of the person’s position and yet the current method for addressing  the pay gap assumes that it is the same throughout government.
We must move beyond this outdated, “one-size-fits-all” approach to paying  federal employees and seriously explore more market- and performance- based approaches to federal pay. As part of this exploration, we need to  continue to experiment with providing agencies with the flexibility to pilot  alternative approaches to setting pay and linking pay to performance. The  greater use of “broadbanding” is one of the options that should be  considered as part of a broader discussion of pay reform. In the short term,  Congress should explore the benefits of (1) providing OPM with additional  flexibility that would enable it to grant governmentwide authority for all  agencies (i.e., class exemptions) to use broadbanding for certain critical  occupations and/or (2) allowing agencies to apply to OPM (i.e., case  exemptions) for broadbanding authority for their specific critical  occupations. However, agencies should be required to demonstrate to  OPM’s satisfaction that they have modern, effective, credible, and validated  performance management systems before being able to adopt broader pay  for performance systems for non-SES personnel. In this regard, Congress  should consider providing specific statutory standards that agencies must  meet before OPM would be able to grant an exemption from existing Title 5  requirements.
As with all pay for performance efforts, adequate safeguards, including  reasonable transparency and appropriate accountability mechanisms,  would need to be in place to ensure fairness, prevent politicalization, and  prevent abuse. Such safeguards would include ensuring that an agency’s  career leadership and managers have significant roles in performance- related pay decisions and that employees have central roles in the design  and implementation of the system to build their sense of ownership for the  system. In our work looking at leading performance management efforts  here and abroad, we have found that the involvement of employees is  critical to the success of such initiatives. Leading organizations consulted  a wide range of stakeholders early in the process, obtained feedback  directly from employees, and engaged employees’ unions or associations.
The bottom line is that in order to receive any additional performance- based pay flexibility for broad-based employee groups, agencies should  have to demonstrate that they have the modern, effective, credible, and  validated performance management systems in place that are capable of  supporting such decisions. Unfortunately, most federal agencies are a long  way from meeting this requirement. As I noted earlier, the SES needs to  lead the way in the federal government’s effort to better link pay to  performance. Given the state of agencies’ performance management  systems, Congress should consider starting federal results-oriented pay  reform with the SES. Agencies should be granted the authority to  implement additional pay for performance programs only after they have  demonstrated that they have appropriate performance management  systems and adequate safeguards in place. Building such systems and  safeguards will likely require making targeted investments in agencies’  human capital programs, as GAO’s own experience has shown. In that  regard, Congress and the Administration should consider how incentives  can be provided to encourage agencies to modernize their performance  management systems. This could include a potential governmentwide fund  for such purposes, which could be allocated based on specific business  case proposals by individual agencies. This approach could also help to  facilitate implementation of the high-performing organization (HPO)  concept recommended by the Commercial Activities Panel that I chaired.
A report we prepared at the request of Chairman Voinovich and  Chairwoman Davis that was released last month shows specific practices  that leading public sector organizations both here in the United States and  abroad have used in their performance management systems to link  individual performance and organizational success. These 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. 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. 9. Maintain continuity during transitions. Because cultural  transformations take time, performance management systems  reinforce accountability for change management and other  organizational goals.
section_title: GAO’s Commitment to Lead by Example
paragraphs: We in GAO believe it is our responsibility to lead by example. We seek to be  in the vanguard of the federal government’s overall transformation efforts,  including in the critically important human capital area. We are clearly in  the lead at the present time, and we are committed to staying in the lead.  We fully recognize that our people are our most valuable asset, and it is  only through their combined efforts that we can effectively serve our  clients and our country. By managing our workforce strategically and  focusing on achieving positive and measurable results, we are helping to  maximize our own performance and ensure our own accountability. By  doing so, we also hope to demonstrate to other federal agencies that they  can make similar improvements in the way they manage their people.
We have identified and made use of a variety of tools and flexibilities, some  of which were made available to us through the GAO Personnel Act of 1980  and our calendar year 2000 human capital legislation, but most of which are  available to all federal agencies. The most prominent change in human  capital management that we implemented as a result of the GAO Personnel  Act of 1980 was a broadbanded pay-for-performance system. The primary  goal of this system is to base employee compensation primarily on the  knowledge, skills, and performance of individual employees. It also  provides managers flexibility to assign employees in a manner that is more  suitable to multi-tasking and the full use of staff. Under our current  broadbanded system, analyst and analyst-related staff in Grades 7 through  15 were placed in three bands. While our general experience has been  positive, we expect to modify our banded system in the future based on our  experience to date.
In January 2002, we implemented a new competency-based performance  management system that is intended to link employee performance and our  strategic plan and agency core values. It includes 12 competencies that our  employees overwhelmingly validated as the keys to meaningful  performance at GAO. (See fig. 2.) Modernizing performance management  systems in the federal government is essential to the overall government  transformation effort. Importantly, doing so can be accomplished without  any additional legislation.
Our October 2000 legislation gave us additional tools to realign our  workforce in light of mission needs and overall budgetary constraints;  correct skills imbalances; and reduce high-grade, managerial, or  supervisory positions without reducing the overall number of GAO  employees. This legislation allowed us to create a technical and scientific  career track at a compensation level consistent to the SES. It also allowed  us to give greater consideration to performance and employee skills and  knowledge in any reduction-in-force actions.
Since the legislation was enacted, we have established agency regulations  and offered voluntary early retirement opportunities. Once employees  registered their interest in participating in the program, we considered a  number of factors, including employee knowledge, skills, performance, and  competencies; the organizational unit or subunit in which an employee  worked; an employee’s occupational series, grade, or band level, as  appropriate; and the geographic location of the employee. As authorized by  the 2000 legislation, employee performance was just one of many factors  we considered when deciding which employees would be allowed to  receive the incentives. However, let me assure you, we did not use  performance to target certain individuals. Early retirement was granted to  52 employees in fiscal year 2002 and 24 employees in fiscal year 2003. Our  annual performance and accountability reports have provided additional  information on our use of this authority. As required by the 2000 legislation,  we will shortly be providing Congress a more comprehensive assessment  of our use of the authorities granted to us under the act.
We are also using many recruiting flexibilities that are available to most  agencies, including an extensive campaign to increase our competitiveness  on college campuses and extending offers of employment during the fall  semester to prospective employees who will come on board the following  spring and summer. We are also using our internship program in a strategic  fashion, and we often offer permanent positions to GAO interns with at  least 10 weeks of highly successful work experience. Moreover, we are  building and maintaining a strong presence of both senior executives and  recent graduates on targeted college campuses. We have also taken steps to  streamline and expedite our hiring process. Even after we hire good  people, we need to take steps to retain them. We have taken a number of  steps to empower and invest in our employees. For example, we have  active employee feedback and suggestion programs. In addition, we  implemented a student loan repayment assistance program for employees  who have indicated interest and are willing to make a 3-year commitment  to staying with the agency.
Overall, we have implemented a number of human capital initiatives,  including the following, some of which are relatively recent and some of  which are long-standing: Prepared a human capital profile and needs assessment to understand  employee demographics and distribution.
Conducted agencywide, confidential, and web-based employee surveys  in 1999 and 2002 to understand the status and progress of the agency  and the areas in which we need to improve.
Completed a knowledge and skills inventory for all employees.
Achieved a democratically elected Employee Advisory Council to  facilitate open communication and direct input from line employees to  the Comptroller General and other GAO senior leaders on matters of  mutual interest and concern.
Conducted an employee preference survey so that employees could be  given the opportunity to work in the areas that interest and energize  them in light of our institutional needs.
Implemented an Executive Candidate Development Program to prepare  candidates for assignments in the SES.
Developed and implemented a strategy to place more emphasis on  diversity in campus recruiting.
Initiated a Professional Development Program for newly hired GAO  analysts to help them transition and progress.
Began developing a core training curriculum to directly link and support  our validated core competencies.
Provided an on-site child care center called “Tiny Findings” and a  wellness and fitness center.
Implemented additional employee-friendly benefits such as business  casual dress, flextime, and public transportation subsidies.
Implemented a program to reimburse GAO employees for the cost  incurred in pursuit of relevant professional certifications.
Used recruitment bonuses, retention allowances, and student loan  repayment assistance to attract and retain employees with specialized  skills.
Implemented a new “state of the art” performance appraisal system that  is linked to our strategic plan and based on key competencies, which  have been validated by our employees. This new system has been  implemented for analysts. This system is being adapted for our  attorneys, and we have begun modifying the system for our  administrative professional and support staff.
Many of the above initiatives required one-time investments to make them  a reality. We worked with the Congress to present a business case for  funding a number of these initiatives. Fortunately, the Congress has  supported these and other GAO transformation efforts. The result is a  stronger, better positioned, more effective, results-oriented, and respected  GAO. As we engage in these changes, we also know that we are not perfect  and we never will be. This is a work-in-progress for us as it is for others. In  fact, we are constantly evaluating our internal efforts, seeking to learn from  others, and making refinements as we go along. In that regard and as you  know, we expect in the coming weeks to be formally approaching Congress  with recommendations to provide us with additional statutory authorities  to enable us to better manage our people. The legislation we plan to  recommend would, among other things, facilitate GAO’s continuing efforts  to recruit and retain top talent, develop a more performance-based  compensation system, help realign our workforce, and facilitate our  succession planning and knowledge transfer efforts. We believe that these  authorities will strengthen our efforts to serve Congress and provide  benefits to the American people. As has been the case in the past, we also  expect that our use of these authorities will provide valuable lessons to  Congress and agencies on how human capital flexibilities can be used in a  context that helps an organization achieve its missions while still ensuring  that adequate safeguards, including reasonable transparency and  appropriate accountability mechanisms, are in place to prevent abuse.
section_title: Contacts and Acknowledgments
paragraphs: For further information regarding this testimony, please contact  J. Christopher Mihm, Director, Strategic Issues, on (202) 512-6806 or at  mihmj@gao.gov. Individuals making key contributions to this testimony  included William Doherty, Bruce Goddard, Judith Kordahl, Janice Lichty,  Michael O’Donnell, Susan Ragland, Lisa Shames, Edward H. Stephenson,  Jr., and Michael Volpe.