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. 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. 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. 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. 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.