Human Capital: Aligning Senior Executives' Performance with Organizational Results Is an Important Step Toward Governmentwide Transformation
Published: 2006-09-26T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The government's senior executives need to lead the way in transforming their agencies' cultures. Credible performance management systems--those that align individual, team, and unit performance with organizational results--can help manage and direct this process. In past work, GAO found that the performance management systems for senior executives fell short in this regard. In November 2003, recognizing that reforms were needed, Congress authorized a new performance-based pay system that ended the practice of giving annual pay adjustments to senior executives. Instead, agencies are to consider such factors as individual results and contributions to agency performance. If the Office of Personnel Management (OPM) certifies an agency's new performance system and the Office of Management and Budget (OMB) concurs, the agency has the flexibility to raise the pay of its highest performing senior executives above certain pay caps. This testimony addresses (1) the performance management system's regulatory structure, (2) OPM's certification process and agencies' views of it, and (3) OPM's role in monitoring the system, and the number of agencies that have been certified to date. This statement is based on GAO's issued work, which included interviews with senior OPM officials, agency Chief Human Capital Officers and Human Resource officers, and reviews of agency documents.
section_title: What GAO Found
paragraphs: Overall, the regulations that OPM and OMB developed to administer a performance-based pay system for executives serve as an important step for agencies in creating an alignment or "line of sight" between executives' performance and organizational results. To qualify for the pay flexibilities included in the statute, OPM must certify and OMB must concur that an agency's performance management system meets nine certification criteria, including demonstrating that its performance management system aligns individual performance expectations with the mission and goals of the organization and that its system as designed and applied makes meaningful distinctions in performance. The certification criteria are generally consistent with key practices for effective performance management systems GAO identified that collectively create a line of sight between an individual's performance and an organization's success. To receive a full 2-calendar-year certification, an agency must document that its senior executive performance management system meets all nine of the criteria. Agencies can meet four of nine criteria and demonstrate that their system in design meets the remaining certification criteria to receive 1-year provisional certification and use the higher pay rates. Two divisions in OPM, as well as OMB, independently review agencies' certification submissions. A number of agencies GAO contacted expressed concern over OPM's ability to communicate expectations, guidance, and deadlines to agencies in a clear and consistent manner. OPM officials agreed that agencies need better guidance and were working on improvements. In monitoring agencies' performance management systems, OPM can suspend an agency's certification at any time with OMB concurrence if an agency is not complying with the certification criteria. According to OPM data, performance management systems at 24 agencies were certified during calendar year 2006. Of these, only the Department of Labor's system received full certification; the remaining systems received only provisional certification. These findings are not surprising. As GAO has noted in its past work, agencies could find it initially difficult to provide the necessary performance data to receive full certification. Going forward, it will be important for OPM to continue to monitor the certification process to help ensure that provisional certifications do not become the norm, and agencies develop performance management systems for their senior executives that meet all of OPM's requirements. The new performance management system for the government's senior executives will help agencies align individual, team, and unit performance with organizational results. Although there have been some implementation challenges, what will be important is how OPM works with agencies to meet the certification criteria. Moreover, the lessons learned in implementing the senior executive performance management system can be applied to modernizing the performance management systems of employees at other levels.

section_title: Letter
paragraphs: Thank you for the opportunity to be here today to discuss the federal  government’s implementation of pay-for-performance systems for the  approximately 7,000 members of the Senior Executive Service (SES) and  those in other senior positions. As we have consistently testified, and as  the Subcommittee has recognized, an agency’s human capital is its most  important catalyst for transforming government to meet the current and  emerging challenges of the 21st century. We have also highlighted how  federal human capital systems designed in the past are outmoded and, in  some cases, barriers to an agency’s transformation.
In our earlier work on senior executive performance management, we  noted how high-performing organizations have recognized that a critical  success factor in fostering a results-oriented culture is a performance  management system that creates a “line of sight” showing how unit and  individual performance can contribute to overall organizational goals and  helping them understand the connection between their daily activities and  the organization’s success. We also discussed how high-performing  organizations understand that they need senior leaders who are  accountable for results, drive continuous improvement, and stimulate and  support efforts to integrate human capital approaches with organizational  goals and related transformation issues.
In 2002, we reported that significant opportunities existed to strengthen  agencies’ efforts to hold senior executives accountable for results through  their performance management systems. In particular, we reported that  more progress was needed in explicitly linking senior executives’  performance expectations to the achievement of 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.
Over the past few years, Congress and the administration have sought to  modernize senior executive performance management systems. In  November 2003, Congress established a new performance-based pay  system as part of the National Defense Authorization Act for Fiscal Year  2004 that is designed to provide a clear and direct linkage between  performance and pay for the government’s senior executives. Additionally,  aspects of the legislation can help address two shortcomings with the  previous pay system: pay compression, and the failure of agencies to make  meaningful distinctions among senior executives’ job performances. Pay  compression occurred in part because the previous system had six pay  levels. Because of pay caps and other factors, senior executives at the top  three levels received essentially the same amount of base pay in a given  year. For example, we reported that about 70 percent of SES members  received the same basic pay due to compression in 2003. At the same  time, the administration believed that agencies’ performance management  systems were not making meaningful distinctions in senior executives’  performance as demonstrated by the large percentage that consistently  received the highest ratings possible.
The new pay system ended the practice of giving annual across-the-board  or locality pay adjustments to senior executives. Instead, agencies are to  base pay adjustments for senior executives on individual results and  contributions to the agency’s performance by considering the individual’s  accomplishments and such things as unique skills, qualifications, or  competencies of the individual and the individual’s significance to the  agency’s mission and performance. The system also replaced the six SES  pay levels with a single, open-range pay band. Further, agencies can apply  for certification of their performance appraisal systems by the Office of  Personnel Management (OPM), with Office of Management and Budget  (OMB) concurrence. Once an agency is certified, it has the flexibility to  raise the pay of its highest performing SES members above certain pay  caps. As an example, those agencies with certified performance  management systems can increase base pay to $165,200 for 2006. This  compares to a cap of $152,000 for base pay for those agencies without  certified systems. OPM and OMB jointly issued regulations establishing the  criteria for obtaining this certification in July 2004.
In addition to SES employees, many agencies use senior employees with  scientific, technical, and professional expertise, commonly known as  senior-level (SL) and scientific or professional (ST) positions.  SL/ST  positions have a lower maximum rate of basic pay than SES employees,  and unlike the SES, their individual rate of pay does not necessarily have  to be based on individual or agency performance.  However, an agency  may apply to OPM and OMB for certification of its SL/ST performance  management system, and if the system is certified as making meaningful  distinctions in relative performance, an agency may raise the total annual  compensation maximum for SL/ST employees to the salary of the Vice  President.  However, certification does not affect the maximum rate of  basic pay of SL/ST employees.
We believe the new senior executive pay-for-performance system is an  important step in aligning individual, team, and unit performance with  organizational results. Indeed, high-performing organizations have  recognized that their performance management systems are strategic tools  to help them manage on a day-to-day basis and achieve organizational  goals in part by linking their senior executive performance management  systems to their organizations’ success. Moreover, the lessons learned  from implementing the new senior executive pay system can inform  efforts to modernize the pay systems under which other federal employees  are compensated. Indeed, cascading aspects of this approach to other  levels of employees can help agencies recognize and reward employee  contributions and achieve the highest levels of individual performance.
In my remarks today, I will discuss (1) the regulatory structure of the  senior executive pay system and the importance of achieving a line of sight  between executives’ performance and organizational success by linking  pay with performance, (2) the agency certification process and agencies’  views of it, and (3) OPM’s role in evaluating and monitoring the system,  and the number of agencies that have been certified to date.
Mr. Chairman, as you know, the Senate Committee on Homeland Security  and Governmental Affairs and your Oversight of Government  Management, the Federal Workforce, and the District of Columbia  Subcommittee requested that we conduct a review of OPM to identify  management challenges that could affect its ability to lead human capital  reform efforts. As part of our review, we have interviewed or obtained  written responses from all 23 members of the Chief Human Capital  Officers Council (CHCO) and/or their corresponding agency human  resource (HR) directors to gain a customer perspective of OPM’s products  and services and their views of OPM management challenges. We obtained  agencies’ views on their experiences with OPM’s certification of SES pay- for-performance systems. Our forthcoming report on this work will be  issued in November 2006 and will include the agencies’ experiences with  the certification process, as well as recommended actions to enhance  OPM’s capacity to lead and implement human capital reform overall. My  statement today is based on our issued products which were conducted in  accordance with generally accepted government auditing standards.
subsections: section_title: The Regulatory Structure of the Senior Executive Performance Management System Helps Link Executives’ Performance to Organizational Results
paragraphs: Overall, the regulations that OPM developed to administer a performance- based pay system for senior executives serve as a substantive and positive  step for agencies in holding senior executives accountable for their  performance and contributions to organizational success. The new senior  executive pay system raises the cap on base pay and total compensation.  For 2006, the caps are $152,000 for base pay (Level III of the Executive  Schedule) with a senior executive’s total compensation not to exceed  $183,500 (Level I of the Executive Schedule). If an agency’s senior  executive performance management system is certified by OPM and OMB  concurs, the caps are increased to $165,200 for base pay (Level II of the  Executive Schedule) and $212,100 for total compensation (the total annual  compensation payable to the Vice President).
To qualify for these flexibilities, agencies’ performance management  systems need to meet nine specified certification criteria, including  demonstrating that the systems align individual performance expectations  with the mission and goals of the organization and that its appraisal  system as designed and applied makes meaningful distinctions in  performance.
To receive a full 2-calendar-year certification, an agency must provide  documentation that its senior executive performance management system  meets all nine of the criteria. Otherwise, agencies can meet four of nine  criteria and demonstrate that their system in design meets the remaining  certification criteria to receive 1-year provisional certification and use the  higher pay rates. Agencies with 1-year provisional certification must  reapply annually, and agencies with full certification must reapply every 2  years. Those agencies with more than one performance management  system for their senior executive employees are to certify each system  separately.
The certification criteria are framed as broad principles designed to serve  as guidelines to position agencies to use their performance management  system(s) strategically to support the development of a strong  performance culture and the attainment of the agency’s mission, goals, and  objectives. The certification criteria are generally consistent with our body  of work identifying key practices for effective performance management.  Specifically, we identified key practices, including aligning individual  performance expectations with organizational goals, linking pay to  individual performance, and making meaningful distinctions in  performance, that collectively create a line of sight between an individual’s  performance and an organization’s success. These practices are reflected  in the final certification criteria.
Key aspects of the OPM certification criteria, as outlined in the  regulations, are as follows:  (1) Alignment: Individual performance expectations must be linked to or  derived from the agency’s mission, strategic goals, program/policy  objectives, and/or annual performance plan.  (2) Consultation: Individual performance expectations are developed with  senior employee involvement and must be communicated at the beginning  of the appraisal cycle.  (3) Results: Individual expectations describe performance that is  measurable, demonstrable, or observable, focusing on organizational  outputs and outcomes, policy/program objectives, milestones, etc.  (4) Balance: Individual performance expectations must include measures  of results, employee and customer/stakeholder satisfaction, and/or  competencies or behaviors that contribute to outstanding performance.  (5) Assessments and Guidelines: The agency head or a designee provides  assessments of the performance of the agency overall, as well as each of  its major program and functional areas.  (6) Oversight: The agency head or designee must certify that (1) the  appraisal process makes meaningful distinctions based on relative  performance; (2) results take into account, as appropriate, the agency’s  performance; and (3) pay adjustments and awards recognize  individual/organizational performance.  (7) Accountability: Senior employee ratings (as well as subordinate  employees’ performance expectations and ratings for those with  supervisor responsibilities) appropriately reflect employees’ performance  expectations, relevant program performance measures, and other relevant  factors.  (8) Performance Differentiation: Among other provisions, the agency must  provide for at least one rating level above Fully Successful (must include  an Outstanding level), and in the application of those ratings, make  meaningful distinctions among executives based on their relative  performance.  (9) Pay Differentiation: The agency should be able to demonstrate that the  largest pay adjustments and/or highest pay levels (base and performance  awards) are provided to its highest performers, and that, overall, the  distribution of pay rates in the SES rate range and pay adjustments reflects  meaningful distinctions among executives based on their relative  performance.
In commenting on OPM’s draft regulations, we included suggestions  intended to help agencies broaden the criteria to reinforce cultures that  are results oriented, customer focused, and collaborative in nature. For  example, we suggested that OPM require agencies to have their senior  executives identify specific programmatic crosscutting, external, and  partnership-oriented goals or objectives in their individual performance  plans to help foster the necessary collaboration, interaction, and  teamwork to achieve results.
Further, based on our previous testimony that performance management  processes need to assure reasonable transparency, we noted the new  performance management system should have adequate safeguards to  ensure fairness and guard against abuse. Specifically, we suggested that  OPM require agencies to build in safeguards as part of their senior  executive performance management systems when linking pay to  performance. For example, communicating the overall results of the  performance management decisions to the senior executives, while  protecting individual confidentiality, could help enhance the transparency  of the performance management process. We also recognized that  scalability needs to be considered, and that small agencies might face  difficulties communicating overall results of the performance management  process while protecting the confidentiality of the fewer numbers of  senior executives. In response, OPM changed some aspects of its criteria  by incorporating these suggestions into the interim final regulations.
section_title: The Process for Certifying Agencies’ Submissions
paragraphs: Agencies can submit their applications to OPM for certification anytime  during the year.  If fully certified, the certification is good for the  remainder of the calendar year in which the agency applied, as well as all  of the following calendar year.  If provisionally certified, an agency’s  certification is only good for the calendar year in which it applied. For  example, if an agency is provisionally certified in October 2005, its  certification would expire in December 2005. To ensure the agency’s  submission is complete, the agency’s OPM contact—the Human Capital  Officer (HCO)—first verifies that the application contains the required  materials and documents. If complete, the HCO sends copies to the two  OPM divisions responsible for reviewing the application, the Human  Capital Leadership and Merit System Accountability (HCLMSA) division  and the Strategic Human Resources Policy (SHRP) division, and an  additional copy to OMB. An agency’s submission is reviewed  independently by representatives within HCLMSA and SHRP in an attempt  to bring different organizational perspectives to the review.
A submission is reviewed against the nine certification criteria, but each  review team has its own method for analyzing the application. After an  initial examination, the reviewers from HCLMSA and SHRP hold an  informal meeting to discuss the submission. The reviewers meet again in a  formal panel after a more thorough review, and this time they are joined  by the HCO. This panel decides whether they have enough information to  reach a certification decision about the agency. If the panel concludes  there is not enough information to reach a decision, the HCO will request  that the agency provide any missing or additional supporting information.  If the panel decides there is sufficient information to reach a decision, it  will either certify or reject the application.
When an application is rejected, the HCO works with the agency to help  modify its appraisal system so that it meets the criteria. If the application  is approved, the HCO contacts OMB for concurrence. OMB uses the same  nine criteria to evaluate agency applications, but primarily focuses on  measures of agency performance. If OMB concurrence is not achieved, the  HCO works with the agency to address OMB’s concerns until resolution is  reached. Once OMB concurs, the Director of OPM certifies the agency’s  appraisal system and the HCO provides additional comments to the agency  on their system and identifies any improvement needs. For example, these  comments may direct the agency to focus more on making meaningful  distinctions in performance.
subsections: section_title: Agencies’ Experience in Implementing the Senior Executive Pay System Highlights Areas Where Improvements Might be Needed
paragraphs: In our ongoing work on OPM’s capacity to lead and implement human  capital reform, we asked agency chief human capital officers (CHCO) and  human resource (HR) directors to describe their experiences with OPM’s  administration of the senior executive pay-for-performance certification  process. As the Comptroller General testified before this Subcommittee in  June 2006, we heard a number of concerns from agencies regarding  OPM’s ability to communicate expectations, guidance, and deadlines to  agencies in a clear and consistent manner. When the senior executive  certification process began in 2004, OPM provided agencies with limited  guidance for implementing the new regulations. OPM’s initial guidance  consisted of a list of documents required for provisional and full  certification and a sample cover letter to accompany each application. The  lack of more specific guidance created confusion as agencies attempted to  interpret the broadly defined regulatory criteria and adjust to the  requirements for certification. Officials at a majority of the CHCO Council  agencies told us they did not have enough guidance to properly prepare  for certification. As a result, agencies did not fully understand what was  required in the regulations to receive certification.
For example, one official noted that while OPM tries to point agencies in  the right direction, it will not give agencies discrete requirements. This  leads to uncertainty about what agencies must and should demonstrate to  OPM. Some CHCOs and HR directors also told us that, in some cases, OPM  changed expectations and requirements midstream with little notice or  explanation. However, OPM explains that it intentionally allowed some  ambiguity in the regulations for the new senior executive appraisal system,  in an attempt to provide agencies with management flexibilities. A senior  OPM official said OPM did not provide agencies with “best practices”  examples because OPM did not want agencies to think there was only one  “right” way to get certified.
Agencies also indicated that because OPM did not issue guidance for  calendar year 2006 submissions until January 5, 2006, some were unable to  deliver their submissions to OPM before the beginning of the calendar  year. Further, OPM clarified this guidance in a January 30, 2006,  memorandum to agencies, telling agencies that senior executive  performance appraisal systems would not be certified for calendar year  2006 if the performance plans did not hold senior executives accountable  for achieving measurable business outcomes. As a result, agencies had to  revise their submissions, where necessary, to meet OPM’s additional  requirements.
Some agencies indicated that OPM’s late issuance of guidance also created  an uneven playing field among agencies, as those that chose to wait until  OPM issued guidance before applying for certification were unable to give  their senior executives higher pay, while those who did not wait got  certified sooner. OPM officials we spoke with about this agreed that they  need to be able to provide clear and consistent guidance to agencies and  said they are working to improve this. Further, they said their evaluation  of agencies’ submissions is evolving as their understanding of the senior  executive certification criteria is increasing.
section_title: OPM’s Role in Evaluating and Monitoring the Pay- for-Performance System
paragraphs: The regulations include several positive internal checks and balances that  should help maintain the rigorous application of the new senior executive  pay system. As I noted earlier, agencies granted full certification are to  have their systems renewed for an additional 2 calendar years and  agencies granted provisional certification are to reapply for certification  after 1 calendar year in order to continue setting the rate of basic pay for  senior executives at the higher level. In addition, OPM can suspend  certification at any time during the certification period if it determines,  with OMB concurrence, that the agency’s system is not in compliance with  the certification criteria. OPM’s regulations also require review of each  senior executive’s rating by a performance review board appointed by the  agency head. As noted above, the regulations also require oversight of the  performance appraisal system by the agency head who must certify that  the system makes meaningful distinctions in relative performance.
According to OPM data, 26 performance management systems at 24  agencies were certified during calendar year 2006. Of these 26, only the  Department of Labor’s system received full certification. As of September  19, 2006, the remaining 25 systems received only provisional certification.  These findings are not surprising. In our April 2005 testimony before this  Subcommittee, we stated that a number of agencies would be challenged  in the short term to provide the necessary performance data on their  senior executives in order to receive full certification or to maintain their  certification (agencies must provide 2 years of performance rating and  bonus data showing that meaningful distinctions in senior executive  performance were made to qualify). Other factors might also be at work.  For example, a number of agencies have told us that the certification  process is burdensome. One agency said that OPM’s requirements for the  certification of a submission are time intensive, laborious, and can disrupt  an agency’s recruitment and retention efforts.
As we also noted at the April 2005 hearing, OPM will need to carefully  monitor the implementation of agencies’ performance management  systems, especially those that have provisional certification. This is  because, as I have stated earlier, agencies with provisional certification  can still receive the flexibilities of the new pay system, even though they  do not meet all of OPM’s certification requirements. In other words,  agencies can receive the benefits of the new pay-for-performance system  without meeting all of its requirements and safeguards. We believe that,  going forward, it will be important for OPM to continue to monitor the  certification process, determine whether any obstacles are impeding  agencies from receiving full certification, and take appropriate measures  to address them. These actions will help ensure that agencies continue to  make substantive progress toward modernized performance management  systems, and that provisional certifications do not become the norm.
Once agencies have provisional or full certification, OPM monitors senior  executive performance appraisal systems by measuring the distributions  of agencies’ performance ratings and pay. This information helps OPM  determine if agencies are making meaningful distinctions among the  performance of their senior executives. Such distinctions are important  because effective performance management requires the organization’s  leadership to make meaningful distinctions between acceptable and  outstanding performance and appropriately reward those who perform at  the highest level.
In its Report on Senior Executive Pay for Performance for Fiscal Year  2005, OPM stated that the data indicate that federal agencies are taking  seriously the requirement to develop rigorous appraisal systems and to  make meaningful distinctions in performance ratings and pay. All  reporting agencies have moved away from pass/fail appraisal systems and  now have at least one performance level above “fully successful.” In 2005,  43 percent of career SES governmentwide were rated at the highest  performance level, compared to 75 percent in 2003 prior to the  implementation of the SES pay-for-performance system. Further, OPM  reported for fiscal year 2005 that the percentage of SES rated at the  highest performance level declined 16 percent from the prior year. OPM  also reported that the largest increases in salary went to SES rated at the  highest performance level. Although SES pay and performance award  amounts vary by agency based on factors such as compensation strategy,  funding, and agency performance levels, OPM believes these general  trends suggest a further refinement may be occurring in the process of  distinguishing outstanding performers.
section_title: Concluding Remarks
paragraphs: As we have said in our prior reports and testimonies, senior executives  need to lead the way in transforming their agencies’ cultures to be more  results oriented, customer focused, and collaborative in nature. Credible  performance management systems, specifically those that (1) align  individual, team, and unit performance to organizational results; (2)  contain built-in safeguards; and (3) are effectively implemented, can help  manage and direct this process.
The pay-for-performance system for the government’s senior executives  that I have discussed today is an important milestone on the march toward  modern compensation systems that are more market based and  performance oriented. Although OPM and agencies have encountered  various challenges in implementing the system, such challenges are not  surprising given the cultural shift that the new system represents.  Moreover, just 2 years have passed since OPM issued its regulations for  certifying agencies’ pay-for-performance systems, and some growing pains  are to be expected given agencies’ lack of experience with performance  management systems that meet OPM’s requirements. Moving forward,  what will be important is how OPM works with agencies to provide the  tools and resources they need to design and implement performance  management systems that meet the certification criteria in as streamlined  a fashion as possible.
The lessons learned in implementing the senior executive pay-for- performance system will be critical to modernizing the performance  management systems under which other federal employees are  compensated. In particular, establishing an explicit line of sight between  individual, team, and unit performance and organizational success, as well  highlighting opportunities to improve guidance, communications,  transparency, and safeguards, will serve the government well moving  forward. We stand ready to assist OPM and Congress in exploring and  implementing these critical human capital reforms.
Chairman Voinovich, Senator Akaka, and Members of the Subcommittee,  this completes my prepared 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 Brenda S.  Farrell, Acting Director, Strategic Issues, at (202) 512-6806 or  farrellb@gao.gov. Individuals making key contributions to this statement  include Carole J. Cimitile, William Colvin, Laura Miller Craig, William  Doherty, Robert Goldenkoff, Janice Latimer, Trina Lewis, Jeffrey  McDermott, and Michael Volpe.
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