As I observed when I first testified on the DOD proposal in April, many of the basic principles underlying DOD’s civilian human capital proposals have merit and deserve the serious consideration they are receiving. Secretary Rumsfeld and the rest of DOD’s leadership are clearly committed to transforming how DOD does business. Based on our experience, while DOD’s leadership has the intent and the ability to transform DOD, the needed institutional infrastructure is not in place within a vast majority of DOD organizations. Our work looking at DOD’s strategic human capital planning efforts and looking across the federal government at the use of human capital flexibilities and related human capital efforts underscores the critical steps that DOD needs to take to properly develop and effectively implement any new personnel authorities. In the absence of the right institutional infrastructure, granting additional human capital authorities will provide little advantage and could actually end up doing damage if the authorities are not implemented properly. The following provides some observations on key provisions of the proposed National Security Personnel System Act in relation to the House version of the National Defense Authorization Act for Fiscal Year 2004. First, I offer some comments on the overall design for a new personnel system at DOD. Second, I provide comments on selected aspects of the proposed system. The House version of DOD’s authorization bill would allow the Secretary of Defense to develop regulations with the Director of OPM to establish a human resources management system for DOD. The Secretary of Defense could waive the requirement for the joint issuance of regulations if, in the Secretary’s judgment and subject to the decision of the President, it is “essential to the national security”—which was not defined in the proposed bill. As an improvement, the proposed National Security Personnel System Act also requires that the new personnel system be jointly developed by the Secretary of Defense and the Director of OPM, but does not allow the joint issuance requirement to be waived. This approach is consistent with the one the Congress took in creating the Department of Homeland Security. The proposed National Security Personnel System Act requires the Secretary of Defense to phase in the implementation of NSPS beginning in fiscal year 2004. Specifically, the new personnel authorities could be implemented for a maximum of 120,000 of DOD’s civilian employees in fiscal year 2004, up to 240,000 employees in fiscal year 2005, and more than 240,000 employees in a fiscal year after fiscal year 2005, if the Secretary of Defense determines that, in accordance with the bill’s requirement that the Secretary and the Director of OPM jointly develop regulations for DOD’s new human resources management system, the Department has in place a performance management system and pay formula that meets criteria specified in the bill. We strongly support a phased approach to implementing major management reforms, whether with the human capital reforms at DOD or with change management initiatives at other agencies or across the government. We suggest that OPM, in fulfilling its role under this section of the bill, certify that DOD has a modern, effective, credible, and, as appropriate, validated performance management system with adequate safeguards, including reasonable transparency and appropriate accountability mechanisms, in place to support performance-based pay and related personnel decisions. The proposed National Security Personnel System Act states that the Secretary of Defense may establish an employee appeals process that is fair and ensures due process protections for employees. The Secretary of Defense is required to consult with the Merit Systems Protection Board (MSPB) before issuing any regulations in this area. The DOD appeals process must be based on legal standards consistent with merit system principles and may override legal standards and precedents previously applied by MSPB and the courts in cases related to employee conduct and performance that fails to meet expectations. The bill would allow appeal of any decision adversely affecting an employee and raising a substantial question of law or fact under this process to the Merit Systems Protection Board under specific standards of review, and the Board’s decision could be subject to judicial review, as is the case with other MSPB decisions. This proposal affords the employee review by an independent body and the opportunity for judicial review along the lines that we have been suggesting. The proposed National Security Personnel System Act does not include an evaluation or reporting requirement from DOD on the implementation of its human capital reforms, although DOD has stated that it will continue its evaluation of the science and technology reinvention laboratory demonstration projects when they are integrated under a single human capital framework. We believe an evaluation and reporting requirement would facilitate congressional oversight of NSPS, allow for any midcourse corrections in its implementation, and serve as a tool for documenting best practices and sharing lessons learned with employees, stakeholders, other federal agencies, and the public. Specifically, the Congress should consider requiring that DOD fully track and periodically report on the implementation and results of its new human capital program. Such reporting could be on a specified timetable with sunset provisions. These required evaluations could be broadly modeled on the evaluation requirements of OPM’s personnel demonstration program. Under the demonstration project authority, agencies must evaluate and periodically report on results, implementation of the demonstration project, cost and benefits, impacts on veterans and other Equal Employment Opportunity groups, adherence to merit principles, and the extent to which the lessons from the project can be applied elsewhere, including governmentwide. The reports could be done in consultation with or subject to review of OPM. There is widespread understanding that the basic approach to federal pay is outdated and that we need to move to a more market- and performance- based approach. Doing so will be essential if we expect to maximize the performance and assure the accountability of the federal government for the benefit of the American people. DOD has said that broad banded performance management and pay for performance systems will be the cornerstone of its new system. Reasonable people can and will debate and disagree about the merits of individual reform proposals. However, all should be able to agree that a modern, reliable, effective, and validated performance management system with adequate safeguards, including reasonable transparency and appropriate accountability mechanisms, must serve as the fundamental underpinning of any successful results-oriented pay reform. We are pleased that both the House version of DOD’s fiscal year 2004 authorization bill and the proposed National Security Personnel System Act contain statutory safeguards and standards along the lines that we have been suggesting to help ensure that DOD’s pay for performance efforts are fair to employees and improve both individual and organizational performance. The statutory standards described in the National Security Personnel System Act proposal are intended to help ensure a fair, credible, and equitable system that results in meaningful distinctions in individual employee performance; employee involvement in the design and implementation of the system; and effective transparency and accountability measures, including appropriate independent reasonableness reviews, internal grievance procedures, internal assessments, and employee surveys. In our reviews of agencies’ performance management systems—as in our own experience with designing and implementing performance-based pay reform for ourselves at GAO—we have found that these safeguards are key to maximizing the chances of success and minimizing the risk of failure and abuse. The proposed National Security Personnel System Act also takes the essential first step in requiring DOD to link the performance management system to the agency’s strategic plan. Building on this, we suggest that DOD should also be required to link its performance management system to program and performance goals and desired outcomes. Linking the performance management system to related goals and desired outcomes helps the organization ensure that its efforts are properly aligned and reinforces the line of sight between individual performance and organizational success so that an individual can see how her/his daily responsibilities contribute to results and outcomes. The proposed National Security Personnel System Act includes a detailed list of elements that regulations for DOD’s broad band pay program must cover. These elements appear to be taken from DOD’s experience with its civilian acquisition workforce personnel demonstration project as well as the plan, as described in an April 2, 2003 Federal Register notice to integrate all of DOD’s current science and technology reinvention laboratory demonstration projects under a single human capital framework. Many of the required elements in the proposed National Security Personnel System Act are entirely appropriate, such as a communication and feedback requirement, a review process, and a process for addressing performance that fails to meet expectations. However, other required elements, such as “performance scores”, appear to imply a particular approach to performance management that, going forward, may or may not be appropriate for DOD, and therefore may have the unintended consequence of reducing DOD’s flexibility to make adjustments. Congress has an important and continuing role to play in the design and implementation of the federal government’s personnel policies and procedures. Congress should consider how best to balance its responsibilities with agencies’ needs for the flexibility to respond to changing circumstances. Finally, under the proposed act, for fiscal years 2004 through 2008, the overall amount allocated for compensation for civilian employees of an organizational or functional unit of DOD that is included in NSPS shall not be less than the amount of civilian pay that would have been allocated to such compensation under the General Schedule. After fiscal year 2008, DOD’s regulations are to provide a formula for calculating an overall amount, which is to ensure that employees in NSPS are not disadvantaged in terms of the overall amount of pay available as a result of their conversion into NSPS while providing DOD with flexibility to accommodate changes in the function of the organization, the mix of employees performing those functions, and other changes that might affect pay levels. Congress has had a longstanding and legitimate interest in federal employee pay and compensation policies and, as a result, there are provisions consistent with that interest in the National Security Personnel System Act. However, as currently constructed, the proposed bill may have the unintended consequence of creating disincentives, until fiscal year 2009, for DOD to ensure that it has the most effective and efficient organizational structure in place.