Federal Workforce: Sustained Attention to Human Capital Leading Practices Can Help Improve Agency Performance
Published: 2017-05-18T00:00:00

Fast Facts:
As shown below, many federal employees are eligible to retire. As they do, agencies need to hire people with the right skills—not just replace those who leave. To recruit and retain a skilled workforce, the federal pay system may need to be reexamined.
In this testimony, we discussed strategies high-performing organizations use to design pay systems, such as ensuring pay decisions are transparent.
We also talked about existing management tools agencies can use to close skills gaps, including adopting human capital management best practices and strengthening human resource offices.

Highlights:
section_title: Why GAO Did This Study
paragraphs: A careful consideration of federal pay is an essential part of fiscal stewardship and is necessary to support the recruitment and retention of a talented, agile, and high-performing federal workforce. High-performing organizations have found that the life-cycle of human capital management activities—including workforce planning, recruitment, on-boarding, compensation, engagement, succession planning, and retirement programs—need to be aligned for the cost-effective achievement of an organization's mission. However, despite some improvements, strategic human capital management—and more specifically, skills gaps in mission critical occupations—continues to be a GAO high-risk area.
This testimony is based on a body of GAO work primarily issued between June 2012 and March 2017. It focuses on (1) lessons learned in creating a more market driven, results-oriented approach to federal pay, and (2) opportunities, in addition to pay and benefits, that OPM and agencies could use to be more competitive in the labor market and address skills gaps.
section_title: What GAO Found
paragraphs: GAO's prior work has shown that implementing a market-based and more performance-oriented federal pay system is both doable and desirable, and should be part of a broader strategy of change management and performance improvement initiatives. In 2005, GAO identified the following key themes that highlight the leadership and management strategies high-performing organizations collectively considered in designing and managing a pay system that is performance oriented, affordable, and sustainable. Specifically, they:
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 labor market.
3. Build in safeguards to enhance the transparency and ensure the fairness of pay decisions.
4. Devolve decision-making on pay to appropriate levels.
5. Provide clear and consistent communication so that employees at all levels can understand how compensation reforms are implemented.
6. Build consensus to gain ownership and acceptance for pay reforms.
7. Monitor and refine the implementation of the pay system.
While the federal compensation system may need to be re-examined, Congress has already provided agencies with tools and flexibilities to build and maintain a high-performing workforce. They include, for example:
Hiring process
GAO reported in 2016 that the Office of Personnel Management (OPM) and selected agencies had not evaluated the effectiveness of hiring authorities. By evaluating them, of which over 100 were used in 2014, OPM and agencies could identify ways to expand access to those found to be more effective, and eliminate those found to be less effective.
General Schedule (GS) classification system
The federal government has become more highly skilled and specialized than the GS classification system was designed to address at its inception in 1949. OPM and stakeholders should examine ways to make the classification system consistent with attributes GAO identified of a modern, effective classification system, such as internal and external equity.
Performance management
Credible and effective performance management systems are a strategic tool to achieve organizational results. These systems should emphasize “a line a sight” between individual performance and organizational success, and use core competencies to reinforce organizational objectives, among other things.
Human resources capacity
The human resources specialist occupation is a mission critical skills gap area. Chief Human Capital Officers have reported that human resources specialists do not have the skills to lead strategic human capital management activities. Strengthening this capacity could help agencies better meet their missions.
section_title: What GAO Recommends
paragraphs: Over the years, GAO has made recommendations to agencies and OPM to improve their strategic human capital management efforts. OPM and agencies generally concurred. This testimony discusses actions taken to implement key recommendations to improve federal hiring and classification.

section_title: Letter
paragraphs: I am pleased to be here today to discuss the federal compensation  system and how to modernize it, as well as additional steps beyond pay  and benefits that agencies can take to better compete in the labor market.  Our work has shown that a careful consideration of federal pay is  essential to fiscal stewardship and is necessary to support the recruitment  and retention of a talented, agile, and high-performing federal workforce.  It is Congress’s policy that pay for federal workers in the General  Schedule (GS), the pay system covering the majority of federal workers,  be in line with pay for comparable nonfederal workers.
High-performing organizations have found that the full life-cycle of human  capital management activities—including workforce planning, recruitment,  on-boarding, compensation, engagement, succession planning, and  retirement programs—need to be fully aligned and focused on the cost- effective achievement of an organization’s mission. However, despite  some improvements in the federal government’s management of its  personnel in recent years, strategic human capital management—and  more specifically, the need for the Office of Personnel Management  (OPM) and agencies to address skills gaps in mission critical  occupations—continues to be a GAO high risk area.
Importantly, the impact of skills gaps goes beyond the occupations  themselves and can adversely affect the performance of an entire  organization. For example, of the 34 areas on our 2017 High-Risk list  (excluding strategic human capital management), skills gaps played a  role in making 15 areas high-risk, and included information technology  management, and acquisitions, and veterans’ health care, among others.
In my remarks today, I will discuss (1) lessons learned in creating a more  market-driven, results-oriented approach to federal pay, and (2)  opportunities in addition to pay and benefits that OPM and agencies could  use to be more competitive in the labor market and address skills gaps.
The bottom line is that, while the federal compensation system may need  to be re-examined, it will also be important for agencies to make better  use of the management tools already available to them. Indeed, more  effective use of hiring flexibilities, adopting leading human capital  management practices, and strengthening the capacity of agencies’  human resource offices could significantly improve executive branch  personnel management, and thus help agencies to better carry out their  missions in an era of highly constrained resources.
My testimony is based on our large body of work on federal human capital  management issued primarily between June 2012 and March 2017. In  addition, we conducted follow-up on recommendations made in prior  reports through interviews with agency officials. More detailed information  on our objectives, scope, and methodology for that work can be found in  the issued report. We conducted the work on which this statement is  based in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: As we reported earlier this year, mission-critical skills gaps within the  federal workforce pose a high risk to the nation. Regardless of whether  the shortfalls are in such government-wide occupations as cybersecurity  and acquisitions, or in agency-specific occupations such as nurses at the  Veterans Health Administration, skills gaps impede the federal  government from cost-effectively serving the public and achieving results.
Agencies can have skills gaps for different reasons: they may have an  insufficient number of people or their people may not have the  appropriate skills or abilities to accomplish mission-critical work.  Moreover, current budget and long-term fiscal pressures, the changing  nature of federal work, and a potential wave of employee retirements that  could produce gaps in leadership and institutional knowledge, threaten to  aggravate the problems created by existing skills gaps.
According to our analysis of OPM data, government-wide more than 34  percent of federal employees on-board by the end of fiscal year 2015 will  be eligible to retire by 2020 (see figure 1). Some agencies, such as the  Department of Housing and Urban Development, will have particularly  high eligibility levels by 2020. Various factors can affect when individuals  actually retire, and some amount of retirement and other forms of attrition  can be beneficial because it creates opportunities to bring fresh skills on  board and it allows organizations to restructure themselves to better meet  program goals and fiscal realities. But if turnover is not strategically  monitored and managed, gaps can develop in an organization’s  institutional knowledge and leadership.
While numerous tools are available to help agencies address their talent  needs, our past work has identified problems across a range of personnel  systems and functions. For example:
Classification system: The GS system has not kept pace with the  government’s evolving requirements.
Recruiting and hiring: Federal agencies need a hiring process that is  applicant friendly, flexible, and meets policy requirements.
Pay system: Employees are compensated through an outmoded  system that (1) rewards length of service rather than individual  performance and contributions, and (2) automatically provides across- the-board annual pay increases, even to poor performers.
Performance management: Developing modern, credible, and  effective employee performance management systems and dealing  with poor performers have been long-standing challenges for federal  agencies.
Employee engagement: Additional analysis and sharing of promising  practices could improve employee engagement and performance.
section_title: Lessons Learned in Creating a Results- Oriented Approach to Federal Pay
subsections: section_title: Key Elements of General Schedule Pay System
paragraphs: As we reported in 2012, Congress’s policy calls for federal workers’ pay  under the GS system to be aligned with comparable nonfederal workers’  pay. Across-the-board pay adjustments are to be based on private  sector salary growth. Locality adjustments are designed to reduce the  gap between federal and nonfederal pay in each locality to no more than  5 percent. The President’s Pay Agent is the entity charged with  determining the disparities between federal and nonfederal pay in each  locality; it measures federal pay based on OPM records that identify GS  employees by occupation and grade level, and nonfederal pay based on  U.S. Bureau of Labor Statistics data (BLS). In 2012, the Pay Agent has  recommended that the underlying model and methodology for estimating  pay gaps be reexamined to ensure that private sector and federal sector  pay comparisons are as accurate as possible. As of December 2016, no  such reexamination has taken place.
The across-the-board and locality pay increases may be made every  year, and are not linked to performance. Pay increases and monetary  awards that are linked to performance ratings as determined by the  agencies’ performance appraisal systems include within-grade increases,  ratings-based cash awards, and quality step increases, and are available  to GS employees. Within-grade increases are the least strongly linked to  performance, ratings-based cash awards are more strongly linked to  performance depending on the rating system the agency uses, and  quality step increases are also more strongly linked to performance.
The composition of the federal workforce has changed over the past 30  years, with the need for clerical and blue collar roles diminishing and  professional, administrative, and technical roles increasing. As a result,  today’s federal jobs require more advanced skills at higher grade levels  than in years past. Additionally, we have found that federal jobs, on  average, require more advanced skills and degrees than private sector  jobs. This is because a higher proportion of federal jobs than nonfederal  are in skilled occupations such as science, engineering, and program  management, while a lower proportion of federal jobs than nonfederal are  in occupations such as manufacturing, construction, and service work.  The result is that the federal workforce is on average more highly  educated than the private sector workforce.
As we reported in 2014, a key federal human capital management  challenge is how best to balance the size and composition of the federal  workforce so that it is able to deliver the high quality services that  taxpayers demand, within the budgetary realities of what the nation can  afford. Recognizing that the federal government’s pay system does not  align well with modern compensation principles (where pay decisions are  based on the skills, knowledge, and performance of employees as well as  the local labor market), Congress has provided various agencies with  exemptions from the current system to give them more flexibility in setting  pay. Thus, a long-standing federal human capital management question  is how to update the entire federal compensation system to be more  market based and performance oriented. This type of system is a critical  component of a larger effort to improve organizational performance.
section_title: Lessons Learned in Creating a Market-Driven, Results-Oriented Pay System
paragraphs: Our 2005 work showed that implementing a more market-based and  more performance-oriented pay system is both doable and desirable.  However, we also found that it is not easy. For one thing, agencies should  have effective performance management systems that link individual  expectations to organizational results. Moreover, representatives of  public, private, and nonprofit organizations, in discussing the successes  and challenges they have experienced in designing and implementing  their own results-oriented pay systems, told us at the time they had to  shift from a culture where compensation is based on position and  longevity to one that is performance-oriented, affordable and sustainable.
As we have reported in the past, these organizations’ experiences with  their own market-based and performance-oriented pay systems provide  useful lessons learned that will be important to consider to the extent the  federal government moves toward a more results-oriented pay system.  Lessons learned identified in our 2005 report include the following:  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 labor 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.  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.
section_title: Additional Steps Agencies Can Take to Be Competitive in the Labor Market and Address Skills Gaps
subsections: section_title: Agency Actions Can Help Transform Personnel Management
paragraphs: Our prior work has found that across a range of human capital functions,  while in some cases statutory changes may be needed to advance  reforms, in many instances improvements are within the control of federal  agencies. These improvements include such actions as improving the  coordination of hiring specialists and hiring managers on developing  recruitment strategies and up-to-date position descriptions in vacancy  announcements. Indeed, Congress has already provided agencies with a  number of tools and flexibilities to help them build and maintain a high- performing workforce. Going forward, it will be important for agencies to  make effective use of those tools and for Congress to hold agencies  accountable for doing so.
Among other things, our work has shown that the tone starts at the top.  Agency leaders and managers should set an example that human capital  is important and is directly linked to performance—it is not a transactional  function. As we noted in our 2017 high-risk update, agencies can drive  improvements to their high risk areas—including strategic human capital  management—through such steps as:
Sustained leadership commitment, including developing long-term  priorities and goals, and providing continuing oversight and  accountability;
Ensuring agencies have adequate capacity to address their personnel  issues, including collaborating with other agencies and stakeholders  as appropriate;   Identifying root causes of problems and developing action plans to  address them, including establishing goals and performance  measures;
Monitoring actions by, for example, tracking performance measures  and progress against goals; and
Demonstrating progress by showing issues are being effectively  managed and root causes are being addressed.
Our list of leading human capital management practices may be helpful  as well. Covering such activities as strategic workforce planning,  recruitment and hiring, workforce development, and employee  engagement, among others, agencies can use this information to  strengthen how they recruit, retain, and develop their employees and  Congress can hold agencies accountable for using them.
OPM has taken some important steps as well. For example, in December  2016, OPM finalized revisions to its strategic human capital management  regulation that include the new Human Capital Framework. This  framework is to be used in 2017 by agencies to plan, implement,  evaluate, and improve human capital policies and programs.
Our recent work on federal hiring, classification, addressing poor  performance, and the capacity of federal human resource functions are  illustrative of some of the areas in need of attention.
section_title: Hiring Process Could Be Improved by Refining, Consolidating, or Eliminating Less Effective Authorities
paragraphs: To help ensure agencies have the talent they need to meet their  missions, we have found that federal agencies should have a hiring  process that is simultaneously applicant friendly, sufficiently flexible to  enable agencies to meet their needs, and consistent with statutory  requirements, such as hiring on the basis of merit. Key to achieving this  is the hiring authority used to bring applicants onboard.
Congress and the President have created a number of hiring authorities  to expedite the hiring process or to achieve certain public policy goals,  such as facilitating the entrance of certain groups into the civil service. As  we reported in 2016, we found that of the 105 hiring authorities used in  fiscal year 2014, agencies relied on 20 of those authorities for 91 percent  of the 196,226 new appointments made that year. OPM officials said at  the time they did not know if agencies relied on a small number of  authorities because agencies are unfamiliar with other authorities, or if  they have found other authorities to be less effective.
Although OPM tracks such data as agency time-to-hire, we found this  information was not used by OPM or agencies to analyze the  effectiveness of hiring authorities. As a result, OPM and agencies did not  know if authorities were meeting their intended purposes. By analyzing  hiring authorities, OPM and agencies could identify opportunities to refine  authorities, expand access to specific authorities found to be highly  efficient and effective, and eliminate those found to be less effective.
We recommended that OPM, working with agencies, strengthen hiring  efforts by (1) analyzing the extent to which federal hiring authorities are  meeting agencies’ needs, and (2) using this information to explore  opportunities to refine, eliminate, or expand authorities as needed, among  other recommendations. OPM concurred with our recommendations,  and reported it had reviewed hiring authorities related to the entry-level  Pathways Program and for hiring seasonal employees.
section_title: The GS System Could Better Balance Attributes of a Modern, Effective Classification System
paragraphs: The GS classification system is a mechanism for organizing federal white- collar work—notably for the purpose of determining pay—based on a  position’s duties, responsibilities, and difficulty, among other things. A  guiding principle of the GS classification system is that employees should  earn equal pay for substantially equal work.
We and others have found that the work of the federal government has  become more highly skilled and specialized than the GS classification  system was designed to address when it was created in 1949 when most  of the federal workforce was engaged in clerical work. While there is no  one right way to design a classification system, in 2014, we identified  eight key attributes that are important for a modern, effective classification  system. Collectively, these attributes provide a useful framework for  considering refinements or reforms to the current system. These key  attributes are described in table 1.
We concluded in 2014 that the inherent tension between some of these  attributes, and the values policymakers and stakeholders emphasize  could have large implications for pay, the ability to recruit and retain  mission critical employees, and other aspects of personnel management.  This is one reason why—despite past proposals—changes to the current  system have been few, as finding the optimal mix of attributes that is  acceptable to all stakeholders is difficult.
In 2014, we recommended that OPM (1) work with stakeholders to  examine ways to modernize the classification system, (2) develop a  strategy to track and prioritize occupations for review and updates, and  (3) develop cost-effective methods to ensure agencies are classifying  correctly. OPM partially concurred with the first and third  recommendation but did not concur with the second recommendation.  Instead, OPM officials said they already tracked and prioritized  occupations for updates. However, they were unable to provide  documentation of their actions. In April 2017, OPM officials said they  meet regularly with the interagency classification policy forum to inform  classification implementation and had reviewed and canceled 21  occupational series that were minimally used by agencies.
section_title: Opportunities Exist to Strengthen Performance Management and Deal with Poor Performers
paragraphs: In our 2015 report, we noted how federal agencies’ ability to address poor  performance has been a long-standing issue. Employees and agency  leaders share a perception that more needs to be done to address poor  performance, as even a small number of poor performers can affect  agencies’ capacity to meet their missions. More generally, without  effective performance management, agencies risk losing (or failing to  utilize) the skills of top talent. They also may miss the opportunity to  observe and correct poor performance.
Among other things, we found effective performance management helps  agencies establish a clear “line of sight” between individual performance  and organizational success and using core competencies helps to  reinforce organizational objectives. Agencies should also make  meaningful distinctions in employee performance levels. However, we  found that 99 percent of permanent, non-senior executive service  employees in 2013 received a rating at or above fully successful, with  around 61 percent rated as “outstanding” or “exceeds fully successful.”
Importantly, in 2015 we found that good supervisors are key to the  success of any performance management system. Supervisors provide  the day-to-day performance management activities that can help sustain  and improve the performance of more talented staff and can help marginal performers to become better. As a result, agencies should  promote people into supervisory positions because of their supervisory  skills (in addition to their technical skills) and ensure that new supervisors  receive sufficient training in performance management. Likewise, a  cultural shift might be needed among agencies and employees to  acknowledge that a rating of “fully successful” is already a high bar and  should be valued and rewarded and that “outstanding” is a difficult level to  achieve.
Further, in 2015 we found that probationary periods for new employees  provide supervisors with an opportunity to evaluate an individual’s  performance to determine if an appointment to the civil service should  become final. However, some Chief Human Capital Officers (CHCO) said  supervisors often do not use this time to make performance-related  decisions about an employee’s performance because they may not know  that the probationary period is ending or they have not had time to  observe performance in all critical areas. In our prior work, we  recommended that OPM educate agencies on ways to notify supervisors  that an individual’s probationary period is ending and that the supervisor  needs to make a decision about the individual’s performance and also to  determine whether there are occupations in which the probationary period  should extend beyond 1-year to provide supervisors with sufficient time to  assess an individual’s performance. OPM concurred with the first  recommendation and partially concurred with the second. In January  2017, OPM issued guidance to agency about supervisors notification of a  probationary period ending, but officials said OPM had not taken action  on extending the probationary period.
section_title: Opportunities Exist to Address Human Resources Capacity Challenges
paragraphs: In 2014, we found that many agency CHCO said their offices did not have  the capacity to lead strategic human capital management activities such  as talent management, workforce planning, and promoting high  performance and a results-oriented culture. Instead, these offices  remained focused on transactional human resource activities like benefits  and processing personnel actions. As a result, officials said agency  decision makers often did not seek out and draw upon the expertise of  human capital experts to inform their deliberations. Perhaps further  reflecting the varying capabilities of agency human capital offices across  government, some CHCOs at the time said that agency leaders did not  fully understand the potential for strategic human capital management  and had not elevated the role of the human capital office to better support  an agency’s operations and mission.
The human resources specialist occupation continues to be one of six  government-wide, mission-critical skills gap areas identified by OPM. Our  recent work on the Veterans Health Administration (VHA) demonstrates  how capacity shortfalls in an agency’s personnel office can adversely  impact an organization’s mission. Among other things, we found that the  recruitment and retention challenges VHA is experiencing with its clinical  workforce are due, in part to attrition among its human resource  employees and unmet staffing targets within medical center personnel  offices. We concluded that until VHA strengthens its human resource  capacity, it will not be positioned to effectively support its mission to serve  veterans’ healthcare needs. We made 12 recommendations to Veterans  Affairs (VA) to improve the human resource capacity and oversight of  human resource functions at its medical centers; develop a modern,  credible employee performance management system; and establish clear  accountability for efforts to improve employee engagement. VA concurred  with nine recommendations and partially concurred with three  recommendations to improve VHA’s performance management system.
Under OPM’s leadership, several steps have been taken as part of a  cross agency group focused on improving the capacity of human  resource specialists. For example, OPM reported that it increased  registration in its Human Resources University and validated career path  guides for classification, recruitment and hiring policy, and employee  relations. As part of our ongoing oversight of OPM’s and agencies’ efforts  to close government-wide mission critical skill gaps, we will continue to  assess the progress being made in improving the human capital  infrastructure within agencies needed to better support agencies’ planning  and programmatic functions.
In conclusion, given the long-term fiscal challenges facing the nation and  ongoing operational and accountability issues across government,  agencies must identify options to meet their missions with fewer  resources. The federal compensation system should allow the  government to cost-effectively attract, motivate, and retain a high- performing, agile workforce necessary to meet those missions. At the  same time, our work has shown that agencies already have a number of  tools and flexibilities available to them that can significantly improve  executive branch personnel management and do so sooner, rather than  later. Going forward, it will be important to hold agencies accountable for  fully leveraging those resources.
Chairman Chaffetz, Ranking Member Cummings, and Members of the  Committee, this completes my prepared statement. I would be pleased to  respond to any questions you may have at this time.
section_title: GAO Contacts and Staff Acknowledgments
paragraphs: If you or your staff have any questions about this statement, please  contact Robert Goldenkoff at (202) 512-2757 or e-mail at  goldenkoffr@gao.gov. Contact points for our Offices of Congressional  Relations and Public Affairs may be found on the last page of this  statement.
GAO staff who made key contributions to this testimony include Chelsa  Gurkin, Assistant Director; Dewi Djunaidy, Analyst-in-Charge; Ann  Czapiewski; Karin Fangman; Krista Loose; Susan Sato; Cynthia  Saunders; and Stewart W. Small.
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