Human Capital: Preliminary Observations on the Administration's Draft Proposed "Working for America Act"
Published: 2005-10-05T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The federal government must have the capacity to plan more strategically, react more expeditiously, and focus on achieving results. Critical to the success of this transformation are the federal government's people--its human capital. We have commended the progress that has been made in addressing human capital challenges in the last few years. Still, significant opportunities exist to improve strategic human capital management to respond to current and emerging 21st century challenges. A key question, for example, is how to update the federal government's classification and compensation systems to be more market-based and performance-oriented. The Administration's draft proposed "Working for America Act" is intended to ensure that agencies are equipped to better manage, develop, and reward their employees. Under this proposal, the Office of Personnel Management (OPM) is to design a new core classification and pay system, among other things. In addition, the draft proposal amends some provisions of Title 5 covering labor management relations and adverse actions and appeals. This testimony presents preliminary observations on the draft proposal; presents the principles, criteria, and processes for human capital reform; and suggests next steps for selected and targeted actions.
section_title: What GAO Found
paragraphs: GAO supports moving forward with appropriate human capital reforms and believes that implementing more market-based and performance-oriented pay systems is both doable and desirable. Importantly, broad-based human capital reform must be part of a broader strategy of change management and performance improvement initiatives and cannot be simply overlaid on existing ineffective performance management systems. In addition, organizations need to build up their basic management capacity and must have adequate resources to properly design and effectively implement more market-based and performance-oriented systems. Before implementing dramatic human capital reforms, executive branch agencies should follow a phased approach that meets a "show me" test. That is, each agency should be authorized to implement a reform only after it has shown it has met certain conditions, including an assessment of its related institutional infrastructure and an independent certification by OPM that such infrastructure meets specified statutory standards. In any event, OPM's and agencies' related efforts should be monitored by Congress. Given the above, GAO has the following observations on the draft proposal. Congress should make pay and performance management reforms the first step in government-wide reforms. The draft proposal incorporates many of the key principles of more market-based and performance-oriented pay systems and requires that OPM certify that each agency's pay for performance system meets prescribed criteria. Going forward, OPM should define in regulation what it will take in terms of fact-based and data-driven analyses for agencies to demonstrate that they are ready to receive this certification and implement new authorities. OPM should play a key leadership and oversight role in helping individual agencies and the government as a whole work towards overcoming a broad range of human capital challenges. OPM's role would be expanded in several areas under the draft proposal. It is unclear whether OPM has the current capacity to discharge these new responsibilities. Congress should move more cautiously in connection with labor management relations and adverse actions and appeals reforms. Selected federal agencies have been implementing more market-based and performance-oriented pay systems for some time and thus they have built a body of experience and knowledge about what works well and what does not that allows the sharing of lessons learned. On the other hand, the federal government has had far less experience in changes regarding labor management relations and adverse actions and appeals. Congress may wish to monitor the Departments of Homeland Security's and Defense's implementation of related authorities, including lessons learned, before moving forward in these areas for the rest of the federal government.

section_title: Letter
paragraphs: I appreciate the opportunity to be here today to discuss human capital  reform and to offer preliminary observations on the Administration’s draft  proposed “Working for America Act,” which is intended to ensure that  agencies are equipped to better manage, develop, and reward their  employees.  In order to respond to a daunting array of governance and  fiscal challenges in the 21st century, the federal government must have the  institutional capacity to plan more strategically, react more expeditiously,  and focus on achieving results.  Critical to the success of this  transformation are the federal government’s people—its human capital.   We have commended the progress that has been made in addressing human  capital challenges in the last few years.  Still, significant opportunities exist  to improve strategic human capital management to respond to current and  emerging 21st century challenges.  For example, the government has not  transformed, in many cases, how it classifies, compensates, develops, and  motivates its employees to achieve maximum results within available  resources and existing authorities.  Thus, a key question for the 21st century  is “How should the federal government update its compensation systems to  be more market-based and performance-oriented?”
Congress has recognized that federal agencies will need the most effective  human capital systems to succeed in their transformations and has given  selected agencies statutory authorities intended to help them manage their  people strategically to achieve results.  Most recently, the Departments of  Homeland Security (DHS) and Defense (DOD) received the authority to establish “flexible and contemporary” human capital and pay systems.   GAO has also received human capital authorities that have given our  agency  the tools to more effectively support Congress in meeting its  constitutional responsibilities.  We strive to lead by example and  understand that effective implementation of any new policies and  procedures is of critical importance.
Before discussing the Administration’s draft proposal as we understand it, I  would like to emphasize the following three themes that I believe are  critical to considering any governmentwide approach to civil service  reform.
First and foremost, we need to move forward with appropriate human  capital reforms, but how it is done, when it is done, and the basis on  which it is done can make all the difference in whether such efforts are  successful.  Human capital reforms to date recognize that the “one-size- fits-all” approach is not appropriate to all agencies’ demands,  challenges, and missions.  However, we have reported that a reasonable  degree of consistency across the government is still desirable and that  broader reforms should be guided by a common framework consisting  of principles, criteria, and processes.
Before implementing dramatic human capital reforms, executive branch  agencies should follow a phased approach that meets a “show me” test.   That is, each agency should be authorized to implement a reform only  after it has shown it has met certain conditions, including an assessment  of its institutional infrastructure to effectively, efficiently, economically,  and fairly implement any new authorities. The Office of Personnel  Management (OPM) should also independently certify that such  infrastructure meets specified statutory standards before the agency  could implement such reforms.  In any event, OPM’s and agencies’  related efforts should be monitored by Congress.
GAO strongly supports the need to expand pay reform in the federal  government and believes that implementing more market-based and  performance-oriented pay systems is both doable and desirable.   Specifically, pay increases should no longer be treated as an entitlement  but should be based on employees’ contributions to the organizations’  missions and goals.  However, GAO’s and other organizations’  experiences demonstrate that the shift to more market-based and  performance-oriented pay must be part of a broader strategy of change  management and performance improvement initiatives and cannot be  simply overlaid on existing ineffective performance management  systems.
Hearings such as this one today offer opportunities for stakeholders to  express their views as we move forward with human capital reforms.  As I  have testified on other occasions, reasonable people can and will disagree  about the merits of an individual proposal.  This morning I would like to  speak broadly about the Administration’s draft proposal and highlight three  preliminary observations based on our understanding of it.
Congress should make pay and performance management reforms the  first step in governmentwide reforms.  The draft proposal incorporates  many of the key principles of more market-based and performance- oriented pay systems and requires that OPM certify that each agency’s  pay for performance system meets prescribed criteria.  Going forward,  OPM should define in regulation what it will take in terms of fact-based  and data-driven analyses for agencies to demonstrate that they are ready  to receive this certification and implement new authorities.
Second, OPM should play a key leadership and oversight role in helping  individual agencies and the government as a whole work towards  overcoming a broad range of human capital challenges.  OPM’s role  would be expanded in several areas under the draft proposal.  It is  unclear whether OPM has the current capacity to discharge these new  responsibilities.
Third, Congress should move more cautiously in connection with labor  management relations and adverse actions and appeals reforms.  Selected federal agencies have been implementing more market-based  and performance-oriented pay for some time—some organizations for  well over a decade—and thus they have built a body of experience and  knowledge about what works well and what does not that allows the  sharing of lessons learned.  On the other hand, the federal government  has had far less experience in changes regarding labor management  relations and adverse actions and appeals.  Congress granted DHS and  DOD related new authorities in these areas and may wish to monitor the  implementation of those authorities, including lessons learned, before  moving forward for the rest of the federal government.
I will now provide some more specific comments on the Administration’s  draft proposal.  I will then suggest next steps for human capital reform,  including selected and targeted authorities and a framework comprised of  principles, criteria, and processes for governmentwide reform.
subsections: section_title: The Administration’s Draft Proposed “Working for America Act”
paragraphs: The draft proposed “Working for America Act” is intended to ensure that  agencies are equipped to better manage, develop, and reward employees to  better serve the American people.  Its purpose is to establish a federal  human capital system under which employees have clear performance  goals and opportunities for professional growth; managers who help them  succeed; and pay increases based on performance rather than the passage  of time.  In addition, any new flexibilities are to be exercised in accordance  with the merit system principles; related core values; and protections, such  as against discrimination, political influence, and personal favoritism, of  the civil service.  Today I will provide observations on three central areas of  the draft proposal as we understand it: pay and performance management;  OPM’s new responsibilities to implement the proposed pay reform; and  labor management relations and adverse actions and appeals.
subsections: section_title: Pay and Performance Management
paragraphs: As I stated earlier, GAO strongly supports the need to expand pay reform in  the federal government and believes that implementing more market-based  and performance-oriented pay systems is both doable and desirable.  The  federal government’s current pay system is weighted toward rewarding  length of service rather than individual performance and contributions;  automatically providing across-the-board annual pay increases, even to  poor performers.  It also compensates employees living in various localities  without adequately considering the local labor market rates applicable to  the diverse types of occupations in the area.  Importantly, the draft  proposal, as we understand it, incorporates many of the key practices of  more market-based and performance-oriented pay systems and requires  that OPM certify that each agency’s pay for performance system meet  prescribed criteria. Going forward, OPM should define in regulation what  fact-based and data-driven analyses agencies will need to provide to OPM  to receive certification.
subsections: section_title: More Market-Based and Performance-Oriented Pay
paragraphs: Clearly, a competitive compensation system can help organizations attract  and retain a quality workforce.  To begin to develop such a system,  organizations assess the skills and knowledge they need; compare  compensation against other public, private, or nonprofit entities competing  for the same talent in a given locality; and classify positions along various  levels of responsibility.  In addition, organizations generally structure their  competitive compensation systems to separate base salary from bonuses  and other incentives and awards.
Under the draft proposal, OPM is to design a new core classification and  pay system and agencies, in coordination with OPM, are to establish  performance appraisal systems to promote high performance.  Specifically,  the General Schedule is to be repealed and to replace it, OPM is to establish  pay bands for occupational groups based on factors such as mission,  competencies, or relevant labor market features.  For each pay band, OPM  is to establish ranges of basic pay rates that apply in all locations. There are  to be market-oriented pay adjustments.  The governmentwide national  market adjustment is to vary by occupational group and band with the  flexibility to make additional local market adjustments.  Going forward,  more information is needed on what compensation studies are to be  conducted in setting these market-based pay rates.
Effective performance management systems 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. Such systems work to achieve three key objectives:  (1) they strive to provide candid and constructive feedback to help  individuals maximize their contribution and potential in understanding and  realizing the goals and objectives of the organization, (2) they seek to  provide management with the objective and fact-based information it needs  to reward top performers, and (3) they provide the necessary information  and documentation to deal with poor performers.
The draft proposal incorporates many of the key practices that we have  reported have helped agencies implement effective performance  management systems.  These practices include: Linking Organizational Goals to Individual Performance. Under  the draft proposal, agencies are to set performance expectations that  support and align with the agencies’ mission and strategic goals,  organizational program and policy objectives, annual performance plans,  results, and other measures of performance.  Further, agencies are to  communicate the performance expectations in writing at the beginning of  the appraisal period.
Making Meaningful Distinctions in Performance. Supervisors and  managers are to be held accountable for making meaningful distinctions  among employees based on performance, fostering and rewarding  excellent performance, and addressing poor performance, among other  things.  Agencies are not to impose a forced distribution of performance  ratings in terms of fixed numeric or percentage limitations on any summary  rating levels.  Performance appraisal systems are to include at least two  summary rating levels, essentially a “pass/fail” system, for employees in an  “Entry/Developmental” band and at least three summary rating levels for  other employee groups.
Pass/fail systems by definition will not provide meaningful distinctions in  performance ratings.  In addition, while a three-level system might be  workable, using four or five summary rating levels is preferable since it  naturally allows for greater performance rating and pay differentiation.   Moreover, this approach is consistent with the new governmentwide  performance-based pay system for the members of the Senior Executive  Service (SES), which requires agencies to use at least four summary rating  levels to provide a clear and direct link between SES performance and pay  as well as to make meaningful distinctions based on relative performance.   Cascading this approach to other levels of employees can help agencies  recognize and reward employee contributions and achieve the highest  levels of individual performance.
Linking Pay to Performance. Employees must receive at least a “fully  successful” rating to receive any pay increase.  Those employees who  receive less than a fully successful rating are not to receive an increase,  including the national and local market adjustments discussed above.   Performance pay increases for employees are to be allocated by the  “performance shares” of a pay pool.  Agencies are to determine the value of  one performance share, expressed as a percentage of the employee’s basic  pay or as a fixed dollar amount. There are to be a set number of  performance shares for each pay pool so that the employees with higher  performance ratings are to receive a greater number of shares and thus, a  greater payout.  At the agency’s discretion, any portion of the employee’s  performance pay increase not converted to a basic pay increase may be  paid out as a lump-sum payment.
Providing Adequate Safeguards to Ensure Fairness and Guard  Against Abuse. Agencies are to incorporate effective safeguards to  ensure that the management of systems is fair and equitable and based on  employee performance in order to receive certification of their pay for  performance systems.  We have found that a common concern that  employees express about any pay for performance system is whether their  supervisors have the ability and willingness to assess employees’  performance fairly.  Using safeguards, such as having independent  reasonableness reviews of performance management decisions before  such decisions are final, can help to allay these concerns and build a fair  and credible system.  This has been our approach at GAO and we have  found it works extremely well.
In addition, 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  internally the overall results of performance management and individual  pay decisions while protecting individual confidentiality.  For example, we  found that several of OPM’s demonstration projects publish information for  employees on internal Web sites that include the overall results of  performance appraisal and pay decisions, such as the average performance  rating, the average pay increase, and the average award for the organization  and for each individual unit.  GAO is also publishing aggregate data for all  of our pay, promotion, and other important agency-wide human capital  actions.
section_title: OPM Certification
paragraphs: As I noted, before implementing any human capital reforms, executive  branch agencies should follow a phased approach that meets a “show me”  test.  That is, each agency should be authorized to implement a reform only  after it has shown it has met certain requirements, including an assessment  of its institutional infrastructure and an independent certification by OPM  of the existence of this infrastructure. This institutional infrastructure  includes (1) a strategic human capital planning process linked to the  agency’s overall strategic plan; (2) capabilities to design and implement a  new human capital system effectively; (3) a modern, effective, credible, and  validated performance management system that provides a clear linkage  between institutional, unit, and individual performance-oriented outcomes,  and results in meaningful distinctions in ratings; and (4) adequate internal  and external safeguards to ensure the fair, effective, and nondiscriminatory  implementation of the system.
A positive feature of the draft proposal is that agencies are to show that  their pay for performance systems have met prescribed criteria in order to  receive certification from OPM to implement their new systems.  Among  these criteria are having the means for ensuring employee involvement in  the design and implementation of the pay for performance system;  adequate training and retraining for supervisors, managers, and employees  in the implementation and operation of the pay for performance system; a  process for ensuring periodic performance feedback and dialogue between  supervisors, managers, and employees throughout the appraisal period;  and the means for ensuring that adequate agency resources are allocated  for the design, implementation, and administration of the pay for  performance system.  Further, OPM may review an agency’s pay for  performance systems periodically to assess whether they continue to meet  the certification criteria.  If they do not, OPM may rescind the agency’s  certification and direct the agency to take actions to implement an  appropriate system, which the agency must follow.
Going forward, I believe that OPM should define in regulation what it will  take in terms of fact-based and data-driven analyses for agencies to  demonstrate that they are ready to receive this certification.  Clearly, the  President’s Management Agenda, and its standards for the strategic  management of human capital, can inform the certification process.  Also,  as an example of the analyses that have been required, OPM has outlined in  regulations for the SES performance-based pay system the necessary data  and information agencies need to provide in order to receive certification  and thus raise the pay cap and total compensation limit for their senior  executives.  Specifically, agencies must provide, among other things, the  data on senior executives’ performance ratings, pay, and awards for the last  2 years to demonstrate that their systems, as designed and applied, make  meaningful distinctions based on relative performance.  Under the SES  regulations, agencies that cannot provide these data can request  provisional certification of their systems.  In our view such provisional  certifications should not be an option under any broad-based classification  and compensation reform proposal.
section_title: OPM’s Roles and Responsibilities
paragraphs: OPM should play a key leadership and oversight role in helping individual  agencies and the government as a whole work towards overcoming a broad  range of human capital challenges.  Our understanding of the  Administration’s draft proposal is that OPM’s leadership and oversight role  is to expand in several areas, such as establishing a more market-based and  performance-oriented pay system governmentwide and implementing a  new core classification system.  At the request of Chairman Collins and  Ranking Member Lieberman, Senate Committee on Homeland Security and  Governmental Affairs, along with Chairman Voinovich and Ranking  Member Akaka, Subcommittee on Oversight of Government Management,  the Federal Workforce, and the District of Columbia, and to assist Congress  as it considers OPM’s additional responsibilities as outlined in this draft  proposal, we are assessing OPM’s current capacity to lead a broad-based  governmentwide human capital reform effort, including providing  appropriate  assistance to federal agencies as they revise their human  capital systems and conducting effective  monitoring of any related reform  implementation efforts.
OPM is in the process of its own transformation—from being a rulemaker,  enforcer, and independent agent to being more of a consultant, toolmaker,  and strategic partner in leading and supporting executive agencies’ human  capital reform efforts and management systems.  However, it is unclear  whether OPM has the current capacity to discharge its new responsibilities.   Specifically, OPM reported in its June 2001 workforce analysis that 4.2  percent of its employees (about 123 per year), on average, were projected  to retire each year over the next 10 years, and the largest percentage of  projected retirements, about 8 percent each year, would come from  members of its SES.  OPM’s expected retirement rate for its workforce  overall is more than the annual retirement rate of 2 percent  governmentwide that we identified in a report issued in 2001.
Our prior work has shown that when required to implement new  legislation, OPM could have done more to accomplish its leadership and  oversight mission in a decentralized human capital environment.  For  example, Congress passed a law in 1990 authorizing agencies to repay, at  their discretion, their employees’ student loans as a means to recruit and  retain a talented workforce.  In 2001, OPM issued final regulations to  implement the program.  The regulations were subsequently changed in  2004 to reflect legislative amendments that increased the ceiling on annual  and total loan repayments.  In our review of the federal student loan  repayment program, we found that while human capital officials  recognized OPM’s efforts, they felt they could use more assistance on the  technical aspects of operating the program, more coordination in sharing  lessons learned in implementing it, and help consolidating some of the  program processes.
Similarly, we found that while OPM had several initiatives underway to  assist federal agencies in using personnel flexibilities currently available to  them in managing their workforces, OPM could more fully meet its  leadership role to assist agencies in identifying, developing, and applying  human capital flexibilities across the federal government.   In addition, we  reported that in its ongoing internal review of its existing regulations and  guidance, OPM could more directly focus on determining the continued  relevance and utility of its regulations and guidance by asking whether they  provide the flexibility that agencies need in managing their workforces  while also incorporating protections for employees.
section_title: Labor Management Relations and Adverse Actions and Appeals
paragraphs: The Administration’s draft proposal would amend some provisions of Title  5 of the U.S. Code covering labor management relations and adverse  actions and appeals. Selected federal agencies have been implementing  more market-based and performance-oriented pay for some time—some  organizations for well over a decade—and thus they have built a body of  experience and knowledge about what works well and what does not that  allows the sharing of lessons learned.  On the other hand, the federal  government has had far less experience in changes regarding labor  management relations and adverse actions and appeals.  Congress granted  DHS and DOD related new authorities in these areas and may wish to  monitor the implementation of those authorities, including lessons learned,  before moving forward for the rest of the federal government.  Discussion  of selected proposed amendments follows.
subsections: section_title: Labor Management Relations
paragraphs: Under Title 5, agencies now have a duty to bargain over conditions of  employment, other than those covered by a federal statute; a  governmentwide rule or regulation; or an agency rule or regulation for  which the agency can demonstrate a compelling need.  Under the draft  proposal, agencies are to be obligated to bargain with employees only if the  effect of the change in policy on the bargaining unit (or the affected part of  the unit) is “foreseeable, substantial, and significant in terms of impact and  duration.”
In addition, an agency now has the right to take any action to carry out the  agency’s mission in an emergency, without a duty to bargain.  However,  what constitutes an emergency can be defined through a collective  bargaining agreement.  Under the draft proposal, an agency is to have the  right to take any action to prepare for, practice for, or prevent an  emergency, or to carry out the agency’s mission in an emergency.  The draft  proposal also adds a new definition of “emergency” as requiring immediate  action to carry out critical agency functions, including situations involving  an (1) adverse effect on agency resources, (2) increase in workload  because of unforeseeable events, (3) externally imposed change in mission  requirements, or (4) externally imposed budget exigency.   By broadly  defining “emergency” without time limits and adding to management’s right  an explicit authority to take action to prepare for, practice for, or prevent  any emergency, the proposed change as we understand it, could serve to  significantly restrict the scope of issues subject to collective bargaining.
section_title: Adverse Actions and Appeals
paragraphs: Under Title 5, conduct-based adverse actions are reviewed by the Merit  Systems Protection Board (MSPB) under the preponderance of the  evidence standard (there is more evidence than not to support the action).   Performance-based adverse actions are reviewed under the lower standard  of substantial evidence (evidence that a reasonable person would find  sufficient to support a conclusion), but agencies must first give employees  a reasonable opportunity to demonstrate acceptable performance under a  performance improvement plan.  Under the draft proposal, MSPB is to  apply a single standard of proof—the higher standard of preponderance of  the evidence—to review adverse actions taken for either performance or  conduct.  On the other hand, while due process features, such as advance  written notice of a proposed adverse action are still required, performance  improvement plans are no longer required.  As we understand the draft  proposal, applying the same standard to both types of adverse actions  could add more consistency to the appeals process.
Also under Title 5, MSPB now reviews penalties during the course of a  disciplinary action against an employee to ensure that the agency  considered relevant prescribed factors and exercised management  discretion within tolerable limits of reasonableness.  MSPB may mitigate or  modify a penalty if the agency did not consider prescribed factors.  Under  the draft proposal, MSPB will be able to mitigate a penalty only if it is  totally unwarranted in light of all pertinent circumstances.  This change  would restrict MSPB’s ability to mitigate penalties.
section_title: Framework for Governmentwide Human Capital Reform
paragraphs: To help advance the discussion concerning how governmentwide human  capital reform should proceed, GAO and the National Commission on the  Public Service Implementation Initiative co-hosted a forum on whether  there should be a governmentwide framework for human capital reform  and, if so, what this framework should include.  While there was  widespread recognition among the forum participants that a one-size-fits- all approach to human capital management is not appropriate for the  challenges and demands government faces, there was equally broad  agreement that there should be a governmentwide framework to guide  human capital reform.  Further, a governmentwide framework should  balance the need for consistency across the federal government with the  desire for flexibility so that individual agencies can tailor human capital  systems to best meet their needs.  Striking this balance would not be easy  to achieve, but is necessary to maintain a governmentwide system that is  responsive enough to adapt to agencies’ diverse missions, cultures, and  workforces.
While there were divergent views among the forum participants, there was  general agreement on a set of principles, criteria, and processes that would  serve as a starting point for further discussion in developing a  governmentwide framework in advancing human capital reform, as shown  in figure 1.  We believe that these principles, criteria, and processes provide  an effective framework for Congress and other decision makers to use as  they consider and craft governmentwide civil service reform proposals.
section_title: Next Steps for Human Capital Reform
paragraphs: Moving forward with human capital reform, in the short term, Congress  should consider selected and targeted actions to continue to accelerate the  momentum to make strategic human capital management the centerpiece  of the government’s overall transformation effort.  One option may be to  provide agencies one-time, targeted investments that are not built into  agencies’ bases for future year budget requests.  For example, Congress  established the Human Capital Performance Fund to reward agencies’  highest performing and most valuable employees. However, the draft  proposal proposes to repeal the Human Capital Performance Fund.   According to OPM, the provision was never implemented, due to lack of  sufficient funding.  We believe that a central fund has merit and can help  agencies build the infrastructure that is necessary in order to implement a  more market-based and performance-oriented pay system.  To be eligible,  agencies would submit plans for approval by OPM that incorporated  features such as a link between pay for performance and the agency’s  strategic plan, employee involvement, ongoing performance feedback, and  effective safeguards to ensure fair management of the system.  In the first  year of implementation, up to 10 percent of the amount appropriated would  be available to train those involved in making meaningful distinctions in  performance.  These features are similar to those cited in the draft proposal  as the basis for OPM’s certification for agencies to implement their new pay  and performance management systems.
In addition, as agencies develop their pay for performance systems, they  will need to consider the appropriate mix between pay awarded as base  pay increases versus one-time cash increases, while still maintaining  fiscally sustainable compensation systems that reward performance.  A key  question to consider is how the government can make an increasing  percentage of federal compensation dependent on achieving individual and  organizational results by, for example, providing more compensation as  one-time cash bonuses rather than as permanent salary increases.   However, agencies’ use of cash bonuses or other monetary incentives has  an impact on employees’ retirement calculations since they are not  included in calculating retirement benefits.  Congress should consider  potential legislative changes to allow cash bonuses that would otherwise  be included as base pay increases to be calculated toward retirement and  thrift savings benefits by specifically factoring bonuses into the employee’s  basic pay for purposes of calculating the employee’s “high-3” for retirement  benefits and making contributions to the thrift savings plan.
As we continue to move forward with broader human capital reforms, they  should be guided by a framework consisting of principles, criteria, and  processes.  While the reforms to date have recognized that the “one-size- fits-all” approach is not appropriate to all agencies’ demands, challenges,  and missions, a reasonable degree of consistency across the government is  still desirable.  Striking this balance is not easy to achieve, but is necessary  to maximize the federal government’s performance within available  resources and assure accountability for the benefit of the American people.
Chairman Porter, Representative Davis, and Members of the  Subcommittee, this concludes my statement.  I would be pleased to  respond to any questions that you may have.
section_title: Contact and Acknowledgments
paragraphs: For further information regarding this statement, please contact Lisa  Shames, Acting Director, Strategic Issues, at (202) 512-6806 or  shamesl@gao.gov.  Individuals making key contributions to this statement  include Anne Inserra, Carole Cimitile, Janice Latimer, Belva Martin, Jeffrey  McDermott, and Katherine H. Walker.
section_title: Highlights of Selected GAO Reports
paragraphs: The federal government must have  the capacity to plan more  strategically, react more  expeditiously, and focus on  achieving results.  Critical to the  success of this transformation are  the federal government’s people— its human capital. Yet, in many  cases the federal government has  not transformed how it classifies,  compensates, develops, and  motivates its employees to achieve  maximum results within available  resources and existing authorities.   A key question is how to update the  federal government’s compensation  system to be market-based and  more performance-oriented.
GAO strongly supports the need to expand pay reform in the federal  government.  While implementing market-based and more performance- oriented pay systems is both doable and desirable, organizations’  experiences in designing and managing their pay systems underscored three  key themes that can guide federal agencies’ efforts.
The shift to market-based and more performance-oriented pay must be  part of a broader strategy of change management and performance  improvement initiatives.
Market-based and more performance-oriented pay cannot be simply  overlaid on most organizations’ existing performance management  systems. Rather, as a precondition to effective pay reform, individual  expectations must be clearly aligned with organizational results,  communication on individual contributions to annual goals must be  ongoing and two-way, meaningful distinctions in employee performance  must be made, and cultural changes must be undertaken.
To further the discussion of federal  pay reform, GAO partnered with  key human capital stakeholders to  convene a symposium in March  2005 to discuss public, private, and  nonprofit organizations’ successes  and challenges in designing and  managing market-based and more  performance-oriented pay systems. organizations.  Training and developing new and current staff to fill new  roles and work in different ways will play a crucial part in building the  capacity of the organizations.
Organizations presenting at our symposium considered the following  strategies in designing and managing their pay systems.    1.  Focus on a set of values and objectives to guide the pay system.  2.  Examine the value of employees’ total compensation to remain  competitive in the market.
This testimony presents the  strategies that organizations  considered in designing and  managing market-based and more  performance-oriented pay systems  and describes how they are  implementing them.
3.  Build in safeguards to enhance the transparency and help ensure the  fairness of pay decisions.    4.  Devolve decision making on pay to appropriate levels.    5.  Provide training on leadership, management, and interpersonal skills to  facilitate effective communication.    6.  Build consensus to gain ownership and acceptance for pay reforms.    7.  Monitor and refine the implementation of the pay system. www.gao.gov/cgi-bin/getrpt?GAO-05-1048T.
To view the full product, including the scope  and methodology, click on the link above.  For more information, contact Lisa Shames at  (202) 512-6806 or shamesl@gao.gov.
Moving forward, it is possible to enact broad-based reforms that would  enable agencies to move to market-based and more performance-oriented  pay systems.  However, before implementing reform, each executive branch  agency should demonstrate and the Office of Personnel Management should  certify that the agency has the institutional infrastructure in place to help  ensure that the pay reform is effectively and equally implemented.  At a  minimum, this infrastructure includes a modern, effective, credible, and  validated performance management system in place that provides a clear  linkage between institutional, unit, and individual performance-oriented  outcomes; results in meaningful distinctions in ratings; and incorporates  adequate safeguards.
Critical to the success of the  federal government’s  transformation are its people— human capital.  Yet the government  has not transformed, in many  cases, how it classifies,  compensates, develops, and  motivates its employees to achieve  maximum results within available  resources and existing authorities.   One of the questions being  addressed as the federal  government transforms is how to  update its compensation system to  be more market based and  performance oriented.
While implementing market-based and more performance-oriented pay  systems is both doable and desirable, organizations’ experiences show that  the shift to market-based and more performance-oriented pay must be part  of a broader strategy of change management and performance improvement  initiatives.  GAO identified the following key themes that highlight the  leadership and management strategies these organizations collectively  considered in designing and managing market-based and more performance- oriented pay systems.  1. Focus on a set of values and objectives to guide the pay system.  Values represent an organization’s beliefs and boundaries and objectives  articulate the strategy to implement the system.  2. Examine the value of employees’ total compensation to remain  competitive in the market.  Organizations consider a mix of base pay plus  other monetary incentives, benefits, and deferred compensation, such as  retirement pay, as part of a competitive compensation system.
To further the discussion of federal  pay reform, GAO, the U.S. Office of  Personnel Management, the U.S.  Merit Systems Protection Board,  the National Academy of Public  Administration, and the  Partnership for Public Service  convened a symposium on March 9,  2005, to discuss organizations’  experiences with market-based and  more performance-oriented pay  systems.  Representatives from  public, private, and nonprofit  organizations made presentations  on the successes and challenges  they experienced in designing and  managing their market-based and  more performance-oriented pay  systems.  A cross section of human  capital stakeholders was invited to  further explore these successes  and challenges and engage in open  discussion.  While participants  were asked to review the overall  substance and context of the draft  summary, GAO did not seek  consensus on the key themes and  supporting examples.
3. Build in safeguards to enhance the transparency and ensure the  fairness of pay decisions.  Safeguards are the precondition to linking pay  systems with employee knowledge, skills, and contributions to results.  4. Devolve decision making on pay to appropriate levels.  When devolving such decision making, overall core processes help ensure  reasonable consistency in how the system is implemented.  5. Provide training on leadership, management, and interpersonal  skills to facilitate effective communication.  Such skills as setting  expectations, linking individual performance to organizational results, and  giving and receiving feedback need renewed emphasis to make such systems  succeed.  6. Build consensus to gain ownership and acceptance for pay reforms.  Employee and stakeholder involvement needs to be meaningful and not pro  forma. 7. Monitor and refine the implementation of the pay system.  While  changes are usually inevitable, listening to employee views and using metrics helps identify and correct problems over time. www.gao.gov/cgi-bin/getrpt?GAO-05-832SP.
To view the full product, including the scope  and methodology, click on the link above.  For more information, contact J. Christopher  Mihm at (202) 512-6806 or mihmj@gao.gov.
These organizations found that the key challenge with implementing market- based and more performance-oriented pay is changing the culture.  To begin  to make this change, organizations need to build up their basic management  capacity at every level of the organization.  Transitioning to these pay  systems is a huge undertaking and will require constant monitoring and  refining in order to implement and sustain the reforms.
There is a growing understanding  that the federal government needs  to fundamentally rethink its current  approach to pay and to better link  pay to individual and organizational  performance.  Federal agencies  have been experimenting with pay  for performance through the Office  of Personnel Management’s (OPM)  personnel demonstration projects.
The demonstration projects took a variety of approaches to designing and  implementing their pay for performance systems to meet the unique needs of  their cultures and organizational structures, as shown in the table below.
Demonstration Project Approaches to Implementing Pay for Performance  Using competencies to evaluate employee performance.  High-performing organizations use validated core competencies as a key part of evaluating  individual contributions to organizational results.  To this end, AcqDemo and NRL use core  competencies for all positions.  Other demonstration projects, such as NIST, DOC, and China  Lake, use competencies based on the individual employee’s position.
Translating employee performance ratings into pay increases and awards.
subsections: section_title: GAO identified the approaches that selected personnel demonstration projects have taken to implement their pay for performance systems. These projects include: the Navy Demonstration Project at China Lake (China Lake), the National Institute of Standards and Technology (NIST), the Department of Commerce (DOC), the Naval Research Laboratory (NRL), the Naval Sea Systems Command Warfare Centers (NAVSEA) at Dahlgren and Newport, and the Civilian Acquisition Workforce Personnel Demonstration Project (AcqDemo). We selected these demonstration projects based on factors such as status of the project and makeup of employee groups covered.
paragraphs: Some projects, such as China Lake and  NAVSEA’s Newport division, established predetermined  pay increases, awards, or both depending on a given performance rating, while others, such as  DOC and NIST, delegated the flexibility to individual pay pools to determine how ratings would  translate into performance pay increases, awards, or both. The demonstration projects made  some distinctions among employees’ performance.
Considering current salary in making performance-based pay decisions.
Several of the demonstration projects, such as AcqDemo and NRL, consider an employee’s  current salary when making performance pay increases and award decisions to make a better  match between an employee’s compensation and contribution to the organization.
Managing costs of the pay for performance system.
According to officials, salaries, training, and automation and data systems were the major cost  drivers of implementing their pay for performance systems.  The demonstration projects used a  number of approaches to manage the costs.
Providing information to employees about the results of performance appraisal and pay  decisions.
To ensure fairness and safeguard against abuse, performance-based pay programs should have  adequate safeguards, including reasonable transparency in connection with the results of the  performance management process.  To this end, several of the demonstration projects publish  information, such as the average performance rating, performance pay increase, and award.
section_title: We provided drafts of this report to officials in the Department of Defense (DOD) and DOC for their review and comment. DOD provided written comments concurring with our report. DOC provided minor technical clarifications and updated information. We provided a draft of the report to the Director of OPM for her information.
paragraphs: www.gao.gov/cgi-bin/getrpt?GAO-04-83.
To view the full product, including the scope  and methodology, click on the link above.  For more information, contact J. Christopher  Mihm at (202) 512-6806 or mihmj@gao.gov.
GAO strongly supports the need to expand pay for performance in the  federal government. How it is done, when it is done, and the basis on which  it is done can make all the difference in whether such efforts are successful.   High-performing organizations continuously review and revise their  performance management systems.  These demonstration projects show an  understanding that how to better link pay to performance is very much a  work in progress at the federal level.  Additional work is needed to  strengthen efforts to ensure that performance management systems are tools  to help them manage on a day-to-day basis.  In particular, there are  opportunities to use organizationwide competencies to evaluate employee  performance that reinforce behaviors and actions that support the  organization's mission, translate employee performance so that managers  make meaningful distinctions between top and poor performers with  objective and fact-based information, and provide information to employees  about the results of the performance appraisals and pay decisions to ensure  reasonable transparency and appropriate accountability mechanisms are in  place.
The federal government is in a  period of profound transition and  faces an array of challenges and  opportunities to enhance  performance, ensure  accountability, and position the  nation for the future.  High- performing organizations have  found that to successfully  transform themselves, they must  often fundamentally change their  cultures so that they are more  results-oriented, customer-focused,  and collaborative in nature.  To  foster such cultures, these  organizations recognize that an  effective performance management  system can be a strategic tool to  drive internal change and achieve  desired results.
Public sector organizations both in the United States and abroad have  implemented a selected, generally consistent set of key practices for  effective performance management that collectively create a clear linkage— “line of sight”—between individual performance and organizational success.   These key practices include the following.     1. Align individual performance expectations with organizational  goals.  An explicit alignment helps individuals see the connection between  their daily activities and organizational goals.     2. Connect performance expectations to crosscutting goals.  Placing  an emphasis on collaboration, interaction, and teamwork across  organizational boundaries helps strengthen accountability for results.   3. Provide and routinely use performance information to track  organizational priorities.  Individuals use performance information to  manage during the year, identify performance gaps, and pinpoint  improvement opportunities.
Based on previously issued reports  on public sector organizations’  approaches to reinforce individual  accountability for results, GAO  identified key practices that federal  agencies can consider as they  develop modern, effective, and  credible performance management  systems.
4. Require follow-up actions to address organizational priorities.  By  requiring and tracking follow-up actions on performance gaps, organizations  underscore the importance of holding individuals accountable for making  progress on their priorities.  5. Use competencies to provide a fuller assessment of performance. Competencies define the skills and supporting behaviors that individuals  need to effectively contribute to organizational results.     6. Link pay to individual and organizational performance.  Pay,  incentive, and reward systems that link employee knowledge, skills, and  contributions to organizational results are based on valid, reliable, and  transparent performance management systems with adequate safeguards.    7. Make meaningful distinctions in performance.  Effective  performance management systems strive to provide candid and constructive  feedback and the necessary objective information and documentation to  reward top performers and deal with poor performers.  8. Involve employees and stakeholders to gain ownership of  performance management systems.  Early and direct involvement helps  increase employees’ and stakeholders’ understanding and ownership of the  system and belief in its fairness. www.gao.gov/cgi-bin/getrpt?GAO-03-488.
To view the full report, including the scope  and methodology, click on the link above.  For more information, contact J. Christopher  Mihm at (202) 512-6806 or mihmj@gao.gov.
9. Maintain continuity during transitions.  Because cultural  transformations take time, performance management systems reinforce  accountability for change management and other organizational goals.
This is a work of the U.S. government and is not subject to copyright protection in the  United States. It may be reproduced and distributed in its entirety without further  permission from GAO. However, because this work may contain copyrighted images or  other material, permission from the copyright holder may be necessary if you wish to  reproduce this material separately.