High-performing organizations understand that they must have senior leaders who are held accountable for results, drive continuous improvement, and take a strategic approach to targeting available human capital tools and flexibilities that will help them achieve their organizational goals. Leaders who model effective performance management can help to institutionalize it throughout their agencies. As you know, we have advocated, and you have reinforced, that the federal government needs to fundamentally rethink its approach to performance management, better linking individual, unit, and organizational performance and rewarding individuals according to their relative performance and contributions. Effective performance management systems first align leadership’s performance expectations, appraisals, and pay with organizational goals and results achieved, then cascade this approach through all levels in the organization. In October 2000, the Office of Personnel Management (OPM) revised its Senior Executive Service (SES) regulations to require agencies to implement performance management systems that meet these criteria. More recently, Congress provided that agencies that have successfully implemented effective performance management systems for their senior executives can increase the compensation of their higher-performing senior executives beginning in January 2004. To qualify for this flexibility, OPM must certify, and the Office of Management and Budget (OMB) must concur, that the agency’s performance management system meets specified certification criteria, including demonstrating that its performance management system aligns individual performance expectations with the mission and goals of the organization and its appraisal system as designed and applied makes meaningful distinctions in performance. To receive full 2-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 one-year provisional certification and use the higher pay rates. Agencies with one-year provisional certification must reapply annually, but agencies with full certification must reapply every 2 years. In addition, SES members are no longer to receive annual across-the-board or locality pay adjustments but to receive pay and bonus increases based on contribution, skills, competencies, and other factors. The system also replaces the six SES pay levels with a single, open-range pay band. Currently, two agencies have received full certification—the General Services Administration and the Pension Benefit Guaranty Corporation (for its senior-level /scientific or professional positions). The Departments of Agriculture, Commerce (for its senior-level/scientific or professional positions), Education, Health and Human Services (HHS), Homeland Security (DHS), and Labor, as well as the National Aeronautics and Space Administration (NASA), and the Office of Government Ethics have received provisional certification for calendar year 2005. The criteria that OPM has developed to assess agencies’ performance management systems are consistent with our research wherein we identified a set of key practices for effective performance management: aligning individual performance expectations with organizational goals, connecting performance expectations to crosscutting goals, providing and routinely using performance information to track requiring follow-up actions to address organizational priorities, using competencies to provide a fuller assessment of performance, linking pay to individual and organizational performance, making meaningful distinctions in performance, involving employees and stakeholders to gain ownership of performance management systems, and maintaining continuity during transitions. In anticipation that senior executive performance management and pay systems were to be modernized, Chairman Voinovich, at your and former House Government Reform Civil Service Subcommittee Chairwoman Jo Ann Davis’ request, we used these practices as a guide to review how well selected agencies were creating linkages between senior executive performance and their organizations’ success. You recognized that information on these agencies’ experiences and knowledge could provide valuable insights to other agencies as they seek to use senior executive performance management as a tool to drive internal change and achieve external results. Last year, we reported that the agencies were implementing some of these practices, such as aligning individual and organizational goals. However, we also noted that their systems were inconsistent with other practices, such as making meaningful distinctions in performance. This is also the case governmentwide. For example, OPM data show that about 75 percent of executives received the highest performance ratings possible for fiscal year 2003 (the most current data available). OPM will need to carefully monitor the implementation of the agencies’ performance management systems, especially those that have provisional certification, to ensure that agencies are driving organizational performance by making meaningful distinctions in executive performance ratings and appropriately paying their senior executives at the higher level. A number of executive agencies will be challenged in the short term to provide the necessary performance data on their senior executives in order to receive full certification or maintain their certification. Agencies must provide 2 years of performance rating and bonus data showing that meaningful distinctions in SES performance were made to qualify. The recent data on SES ratings suggest that some agencies’ data will not comply. In addition, several agencies’ provisional certifications for calendar year 2004 expired and have not yet been renewed. The Acting Director of OPM noted in a March 2005 memorandum to agency heads that the SES performance results for fiscal year 2003 do not reflect the requirements of the new SES performance-based pay system and that OPM is analyzing the results of the 2004 rating cycle to determine the degree to which agencies have met the requirements. Depending on the outcome, some agencies may lose their certification, and others may not qualify for this new flexibility. The key, of course, is not just determining whether distinctions are made in ratings, but whether those distinctions are meaningful. That is, the distinctions should reflect real differences in individual executives’ contributions to results. The success agencies have in implementing new human capital flexibilities will depend in large measure on their agency leadership, the existence of high quality Chief Human Capital Officers (CHCOs), and a strategic and effective CHCO Council. The Homeland Security Act of 2002 established the roles and responsibilities for the CHCO position and the Council. We have reported that similar interagency councils, such as those of the Chief Financial Officers’ (CFO) and Chief Information Officers’, have emerged as important leadership strategies in both developing policies that are sensitive to implementation concerns and gaining consensus and consistent follow-through within the executive branch. The CHCO Council can fulfill an equally important role. As stated in its charter, the Council’s purposes include (1) advising OPM, OMB, and agency leaders on human capital strategies and policies, as well as on the assessment of human capital management in federal agencies; (2) informing and coordinating the activities of its member agencies on such matters as the modernization of human resources systems; and (3) providing leadership in identifying and addressing the needs of the government’s human capital community. To help fulfill this role, the Council has created subcommittees to address and recommend changes for key areas identified by the Council’s leadership as critical to the success of strategic human capital management, including the hiring process and performance management, as well as leadership development and succession planning. To date, the Council has continued to define its agenda and priorities and to establish itself. For example, the former OPM Director reported that the Council’s CHCO Academy was already proving to be a productive forum for discussing human resources issues among small groups of CHCOs. The Council established the Academy as a forum for Council members to discuss federal human resource issues, learn from one another in an informal setting, and share best practices in the strategic management of human capital. The Academy has considered topics such as (1) current workforce flexibilities and associated regulations, (2) human resources competitive sourcing, and (3) compensation reform. The subcommittees are also making some progress. For example, the leadership and succession planning subcommittee has made recommendations in a briefing to the full Council to set up a rotation program for senior executives among different agencies, among other things. It is critical for the CHCO Council to leverage its progress to achieve significant accomplishments and facilitate lasting change. As just one illustration of the importance of their leadership and coordination roles, OPM agreed with our May 2003 recommendation to work with and through the Council to (1) more thoroughly research, compile, and analyze information on the effective and innovative use of human capital flexibilities and (2) more fully serve as a clearinghouse in sharing and distributing information about when, where, and how the broad range of flexibilities are being used, and should be used, to help agencies meet their human capital management needs. Our ongoing work assessing select agencies’ succession planning, as well as their use of recruitment and retention tools, suggests that agencies continue to need an avenue for sharing ideas and best practices and the Council could provide that venue. We also observed that more strategically, the Council could focus on several other key crosscutting areas, such as developing the capabilities required for the successful implementation of human capital reform, promoting strategic human capital planning, and transforming the human capital office and its processes to more fully contribute to key agency decisions. For example, selected agencies are seeking to shift the focus of their human capital offices from primarily compliance activities to consulting activities. They are including human capital leaders in key agency strategic planning and decision making. In addition, their human capital leaders took actions to transform the agencies’ human capital organizations by establishing clear strategic visions, restructuring their organizations, and improving the use of technology to free organizational resources. As a result, the agencies engaged the human capital organization as a strategic partner in achieving desired outcomes relating to the agencies’ mission. To continue this shift to a more strategic role, human capital offices are also understanding that they need to think broadly about how specific services are delivered. Human capital offices have traditionally used alternative service delivery (ASD)—the use of other than internal staff to provide a service or to deliver a product—as a way to reduce costs for transaction-based services, such as payroll administration. Going forward, human capital offices are seeking to use this approach for more strategic functions, such as workforce planning. We continue to see a role for OPM to provide comprehensive information about how agencies can use ASD for their human capital activities and that the CHCO Council could be an excellent vehicle to assist in this area.