DOD’s final NSPS regulations establish a new human resources management system within the department that is intended to ensure its ability to attract, retain, and reward a workforce that is able to meet its critical mission. Further, the human resources management system is to provide DOD with greater flexibility in the way employees are to be paid, developed, evaluated, afforded due process, and represented by employee representatives while reflecting the principles of merit and fairness embodied in the statutory merit systems principles. As with any major change management initiative, the final regulations have raised a number of concerns among employees, employee representatives, and other stakeholders because they do not contain many of the important details of how the system will be implemented. We have reported that individuals inevitably worry during any change management initiative because of uncertainty over new policies and procedures. A key practice to help address this worry is to involve employees and their representatives to obtain their ideas and gain their ownership for the initiative throughout the development process and related implementation effort. We continue to believe that many of the basic principles underlying DOD’s final regulations are generally consistent with proven approaches to strategic human capital management. Today, I will provide our observations on the following elements of DOD’s human resources management system as outlined in the final regulations—pay and performance management, staffing and employment, workforce shaping, adverse actions and appeals, and labor management relations. Earlier this year, we testified that DOD’s proposed NSPS regulations reflected a growing understanding that the federal government needs to fundamentally rethink its current approach to pay and better link pay to individual and organizational performance. To this end, DOD’s final regulations take another valuable step toward a modern performance management system that provides for elements of a more market-based and performance-oriented pay system. For instance, the final regulations provide for the creation of pay bands for most of DOD’s civilian workforce that would replace the 15-grade General Schedule (GS) system now in place for most civil service employees. Specifically, DOD, after coordination with OPM, may define occupational career groups and levels of work within each career group that are tailored to the department’s missions and components. The final regulations also give DOD considerable discretion, after coordination with OPM, to set and annually adjust the minimum and maximum rates of pay for each of those career groups or bands, based on national and local labor market factors and other conditions such as availability of funds. In addition, the regulations provide that DOD may, after coordination with OPM, set and annually adjust local market supplements for different career groups or for different bands within the same career group. We strongly support the need to expand pay reform in the federal government and believe that implementing more market-based and performance-oriented pay systems is both doable and desirable. The federal government’s current pay system is heavily weighted toward rewarding length of service rather than individual performance and contributions, including requiring across-the- board annual pay increases, even to poor performers. It also compensates employees living in various localities without adequately considering the local labor market rates applicable to the diverse types of occupations in the area. Regarding performance management issues, we identified several issues in earlier testimonies that DOD will need to continue to address as it moves forward with the implementation of the system. These include aligning individual performance to organizational goals, using competencies to provide a fuller assessment of employee performance, making meaningful distinctions in employee performance, and continuing to incorporate adequate safeguards to ensure fairness and guard against abuse. Consistent with leading practices, the DOD final regulations stipulate that the performance management system will, among other things, align individual performance expectations with the department’s overall mission and strategic goals, organizational program and policy objectives, annual performance plans, and other measures of performance. DOD’s performance management system can be a vital tool for aligning the organization with desired results and creating a “line of sight” showing how team, unit, and individual performance can contribute to overall organizational results. To this end, an explicit alignment of daily activities with broader results is one of the defining features of effective performance management systems in high-performing organizations. In our previous testimony on DOD proposed NSPS regulations, we testified that the regulations did not detail how DOD was to achieve such an alignment. The final regulations were not modified to provide such details. These details do matter and are critical issues that will need to be addressed as DOD’s efforts in implementing a new personnel system move forward. In the final regulations, performance expectations may take several different forms. These include, among others, goals or objectives that set general or specific performance targets at the individual, team, or organizational level; a particular work assignment, including characteristics such as quality, quantity, accuracy, or timeliness; core competencies that an employee is expected to demonstrate on the job; or the contributions that an employee is expected to make. In a previous testimony, we reported that DOD needed to define, in more detail than was provided in the proposed regulations, how performance expectations will be set. In addition, public comments to the proposed regulations expressed concerns about the variety of forms that performance expectations could take. In response to public comments to its proposed regulations and feedback obtained during the meet and confer process with employee representatives, DOD modified the proposed regulations, so that the final regulations state that the basic performance expectations should be provided to employees in writing. As DOD develops its implementing issuances, the experiences of leading organizations suggest that DOD should reconsider its position of merely allowing, rather than requiring, the use of core competencies as a central feature of its performance management system. Based on our review of others’ efforts and our own experience at GAO, core competencies can help reinforce employee behaviors and actions that support the department’s mission, goals, and values and can provide a consistent message to employees about how they are expected to achieve results. By including competencies such as change management, achieving results, teamwork and collaboration, cultural sensitivity, and information sharing, DOD could create a shared responsibility for organizational success and help ensure accountability for the transformation process. High-performing organizations make meaningful distinctions between acceptable and outstanding performance of individuals and appropriately reward those who perform at the highest level. These organizations seek to create pay, incentive, and reward systems that clearly link employee knowledge, skills, and contributions to organizational results. As in the proposed regulations, DOD’s final regulations stated that DOD supervisors and managers are to be held accountable for making meaningful distinctions among employees based on performance and contribution, fostering and rewarding excellent performance, and addressing poor performance. Consistent with the proposed regulations, the final regulations provide for a multilevel rating system for evaluating employee performance. However, the final regulations do not specify exactly how many rating levels will be used. We urge DOD to consider using at least four summary rating levels to allow for greater performance-rating and pay differentiation. This approach is in the spirit of the new governmentwide performance-based pay system for the Senior Executive Service (SES), which requires at least four rating levels to provide a clear and direct link between SES performance and pay as well as to make meaningful distinctions based on relative performance. Cascading this approach to other levels of employees can help DOD recognize and reward employee contributions and achieve the highest levels of individual performance. As DOD develops its implementing issuances, it needs to continue building safeguards into its performance management system to ensure fairness and guard against abuse. A concern that employees often express about any pay for performance system is supervisors’ ability and willingness to assess performance fairly. Using safeguards, such as having an independent body to conduct reasonableness reviews of performance management decisions, can help allay these concerns and build a fair, credible, and transparent system. In our previous testimonies, we noted that although DOD’s proposed regulations provided for some safeguards, additional safeguards should be developed. However, the final regulations do not offer details on how DOD would, among other things, (1) promote consistency and provide general oversight of the performance management system to ensure it is administered in a fair, credible, and transparent manner; and (2) incorporate predecisional internal safeguards to achieve consistency and equity, and ensure nondiscrimination and nonpoliticization of the performance management process. As DOD moves forward, it will need to commit itself to define, in more detail than is currently provided, how it plans to review such matters as the establishment and implementation of the performance appraisal system— and, subsequently, performance rating decisions, pay determinations, and promotion actions—before these actions are finalized, to ensure they are merit based. The authorizing legislation allows DOD to implement additional hiring flexibilities that would allow it to (1) determine that there is a severe shortage of candidates or a critical hiring need and (2) use direct-hire procedures for these positions. Under current law, OPM, rather than the agency, determines whether there is a severe shortage of candidates or a critical hiring need. Direct-hire authority allows an agency to appoint candidates to positions without adherence to certain competitive examining requirements (such as veterans’ preference or numerically rating candidates based on experience, training, and education) when there is a severe shortage of qualified candidates or a critical hiring need. In our previous testimonies, we noted that while we strongly endorse providing agencies with additional tools and flexibilities to attract and retain needed talent, additional analysis may be needed to ensure that any new hiring authorities are consistent with a focus on merit principles, the protection of employee rights, and results. Hiring flexibilities alone will not enable federal agencies to acquire the personnel necessary to accomplish their missions. Agencies must first conduct gap analyses of the critical skills and competencies needed in their workforces now and in the future, or they may not be able to effectively design strategies to hire, develop, and retain the best possible workforces.