Mr. Chairman and Members of the Committee: I am pleased to be here today to discuss some of the possible implications of legislative proposals that would give new personnel flexibility to the Internal Revenue Service (IRS). With federal agencies now called upon to improve customer service and deliver better results to the American people while limiting costs, the need for a well-managed, well-qualified, and highly motivated workforce has never been greater. Therefore, it is not surprising that recent discussions have centered on the amount of flexibility federal agencies should have in hiring and managing their employees. With regard to the personnel flexibility proposals for IRS, I would like to make three points on the basis of our prior body of work in the human resource management area: First, because the proposals generally provide a broad outline for managing IRS employees, but not the details, it is difficult to predict to what extent the new provisions will help IRS improve its performance and overcome past problems. Second, the proposals, focusing as they do on customer service and on aligning employees’ performance with the agency’s mission, goals, and objectives, are in keeping with broad trends in the public and private sector that we have identified in our previous work. At IRS or any federal agency, the degree of commitment by top management will determine whether this new focus can be sustained. Third, federal agencies such as IRS need the flexibility to tailor their personnel approaches to best meet the demands of their missions. Along with this need for flexibility, there is a need to maintain oversight and accountability mechanisms that will ensure that agencies adhere to the statutorily required merit principles, such as maintaining high standards of integrity, conduct, and concern for the public interest and other national goals, such as veterans’ preference. limited period of time. This would give IRS the opportunity to include effective planning and evaluative mechanisms in the test and would allow Congress to consider the effects of IRS’ personnel changes before deciding whether they should be made permanent. We have examined two bills that would give IRS new flexibilities in managing its workforce: H.R. 2676, which passed the House of Representatives in November 1997, and S. 1174, which has been referred to the Senate Committee on Finance. The bills are similar in that both would give IRS additional flexibilities relating to performance management, staffing, and the development of demonstration projects. The Senate bill also includes classification and pay flexibilities (“broad-banding”) and a provision for “critical pay authority” to help recruit and retain employees in highly skilled, high level technical and professional positions. The new flexibilities in performance management, staffing, and pay would be granted permanently, while those initiatives IRS might develop under the bills’ demonstration authorities would be subject to testing before being made permanent. The legislative proposals in H.R. 2676 outline a performance management approach for IRS that would include all IRS employees, with the exception of the IRS Oversight Board, the IRS Commissioner, and the IRS Chief Counsel. The new performance management system would appear to cover Senior Executive Service (SES) members and non-SES employees alike, require that goals and objectives established through IRS organizational performance planning be linked to individual or group performance and used to make performance distinctions among employees or groups of employees, require performance appraisals to have at least two performance rating levels at fully successful or above, allow awards of up to 50 percent of salary for a small number of employees who report directly to the IRS Commissioner, and allow for employee awards based on documented financial savings. It would also require periodic performance evaluations to determine whether employees are meeting all applicable retention standards, and would use the results of employees’ performance evaluations as a basis for adjustments in pay and other appropriate personnel actions. opportunity to address some of its long-standing challenges, which include attracting and retaining the talent necessary to modernize its management practices and bring its technology and administrative systems up-to-date. The provisions may also help IRS focus its employees on the agency’s fundamental responsibility for collecting the proper amount of taxes while, at the same time, providing courteous service to those who must pay the taxes. The details of the new performance management approach are left to the Commissioner, who is charged with developing a plan for the new system within 1 year. Leaving the details to the Commissioner is of course entirely consistent with the bills’ approach of granting IRS somewhat greater flexibility to tailor its personnel management to the agency’s particular needs. Until the Commissioner develops that plan, acting in accordance with both the new legislation and those provisions of Title 5 to which IRS would remain subject, and has some experience in implementing the new flexibilities, there is no way to predict just how helpful the new flexibilities may be in improving IRS’ actual performance. To the extent that the performance management, staffing, and pay flexibility provisions, as implemented, contribute to improved IRS performance, they not only will be worth retaining in IRS, but also may be worthy of emulation elsewhere in the federal government. If certain provisions do not improve performance, or perhaps unexpectedly detract from performance or have other undesirable consequences, it may be useful to have a means of identifying these problems and pulling the plug if necessary. Under these circumstances, one useful alternative to permanently authorizing the performance management, staffing, and pay flexibility provisions might be found in the legislation itself. H.R. 2676 would allow the Commissioner to carry out demonstration projects without the screening and approval currently required under the Office of Personnel Management’s (OPM) demonstration project authority. The time-limited projects as currently authorized in the bill could be conducted for such purposes as improving personnel management, providing increased individual accountability, and eliminating obstacles to dealing with poor performers. An alternative might be to add the performance management, staffing, and pay flexibility provisions to authorized activities included in the proposed demonstration authority. Including all of the authorized flexibilities under the demonstration authority would give IRS a chance to see just how well its new approaches work when put into action. IRS would have the opportunity to shape personnel approaches outside those currently available and to develop an evaluative mechanism to gather data on how well they work. Congress would have the opportunity to consider the effects of the new approaches before deciding if they should be made permanent. This option would also provide information that other agencies could use to assess whether similar changes might improve their personnel systems. In our contacts with human resource management experts from public- and private-sector organizations both here and abroad, we have found that successful organizations recognize the importance of organizational mission, vision, and culture as a means of focusing their workforce on the job at hand. At IRS, that job includes more than simply collecting taxes. For example, as Congress is now emphasizing to IRS, it includes fair treatment of the taxpayers as well. According to the House Ways and Means Committee report on H.R. 2676, the new proposals for personnel management at IRS would be aimed at establishing a balanced system of measures that would ensure that taxpayer satisfaction—i.e., customer service—is paramount throughout all IRS functions. For example, while giving IRS greater flexibility in distributing cash awards to employees, H.R. 2676 specifies that awards will not be based solely on tax enforcement results. This is consistent with our belief that IRS employees’ performance should be assessed using a balanced set of indicators. Therefore, we believe H.R. 2676 appropriately gives IRS the opportunity to factor in other measures, such as customer service results and employee behavior. The Committee report also said that the proposed legislation would refocus the IRS personnel system on the agency’s overall mission and on how each employee’s performance relates to that mission. Across government, some of the agencies now implementing the Government Performance and Results Act (known as GPRA or the Results Act) are engaged in similar efforts, aligning the performance expectations of each level of their organizations, and ultimately of each employee, with the agencies’ missions and strategic goals. The Results Act itself was based on principles and best practices established by successful private-sector organizations and by governments at the state and local level and abroad. The challenge for federal agencies such as IRS is to make these principles work for the federal government as well. Some federal agencies that have tried to align employee performance with agency missions and goals have noted the conceptual challenges involved in becoming more results-oriented. For example, when we reviewed the experiences of five regulatory agencies affected by the President’s March 1995 directive to measure agency and employee performance in terms of results, we found that some of the agencies were further along than others. Officials at the five agencies cited some barriers, mostly involving the need to clarify their missions and establish results-oriented goals and measures, that made creating results-oriented performance standards for employees more difficult. For example, at IRS, one of the five agencies we reviewed, officials said it was difficult to measure the impact that IRS taxpayer education and outreach efforts would have on the agency’s goal of increasing voluntary tax compliance rates. To a significant extent, meeting the challenge of more effectively aligning employees’ performance with organizational missions and goals will be an effort that succeeds or fails through its implementation. Nothing in current personnel law or regulation prohibits agencies from establishing goals or objectives for employees that are based on organizational goals, communicating these goals and objectives to the employees, and using these goals or objectives to make performance distinctions for purposes of adjustments in pay and other personnel actions. Still, while many agencies implementing the Results Act have tried to do these things, others have not. Some that have tried have found that the challenges involved are not so much a matter of restrictive personnel rules as of instilling in their managers and other employees a new understanding of their agencies’ missions and goals and of what, for each employee, constitutes successful performance. to changing IRS’ organizational culture to support it, and to holding all employees accountable for fulfilling IRS’ commitment to the taxpayers. Both H.R. 2676 and S. 1174 also require that before any flexibilities are exercised, management and the employee unions need to enter into a written agreement.