We identified specific practices that leading public sector organizations both here in the United States and abroad have used in their performance management systems to create a clear linkage—“line of sight”—between individual performance and organizational success. Federal agencies should consider these practices as they develop and implement the modern, effective, and credible performance management systems with the adequate safeguards, including reasonable transparency and appropriate accountability mechanisms in place, needed to effectively link pay to performance. The key practices include the following. 1. Align individual performance expectations with organizational goals. An explicit alignment of daily activities with broader results helps individuals see the connection between their daily activities and organizational goals and encourages individuals to focus on their roles and responsibilities to help achieve those goals. To this end, for example, the Federal Aviation Administration (FAA) was able to show in fiscal year 2000 how the Department of Transportation’s strategic goal to promote public health and safety was cascaded through the FAA Administrator’s performance expectation to reduce the commercial air carrier fatal accident rate to a program director’s performance expectation to develop software to help aircraft maintain safe altitudes in their approach paths. 2. Connect performance expectations to crosscutting goals. As public sector organizations shift their focus of accountability from outputs to results, they have recognized that the activities needed to achieve those results often transcend specific organizational boundaries. High- performing organizations use their performance management systems to strengthen accountability for results, specifically by placing greater emphasis on fostering the necessary collaboration, interaction, and teamwork across organizational boundaries to achieve these results. In this regard, the Veterans Health Administration’s Veterans Integrated Service Network (VISN) headquartered in Cincinnati implemented performance agreements in 2000 for the “care line” directors, such as primary care or mental health directors, that included improvement goals related to that care line for the entire VISN. To make progress towards these goals, the mental health care line director had to work collaboratively with the corresponding mental health care line managers at each of the four medical centers to establish consensus among VISN officials and external stakeholders on the strategic direction for the services provided by the mental health care line across the VISN, among other things. 3. Provide and routinely use performance information to track organizational priorities. High-performing organizations provide objective performance information to individuals to show progress in achieving organizational results and other priorities and help them to manage during the year, identify performance gaps, and pinpoint improvement opportunities. Having this performance information in a useful format also helps individuals track their performance against organizational goals and compare their performance to that of other individuals. For example, the Bureau of Land Management’s (BLM) Web- based data system, called the Director’s Tracking System, collects and makes available on a real-time basis data on each senior executive’s progress in his or her state office towards BLM’s organizational priorities, such as the wild horse and burro program, and the resources expended on each priority. 4. Require follow-up actions to address organizational priorities. High-performing organizations require individuals to take follow-up actions based on performance information available to them. By requiring and tracking such follow-up actions on performance gaps, these organizations underscore the importance of holding individuals accountable for making progress on their priorities. For example, the Federal Highway Administration required senior executives to use 360-degree feedback instruments to solicit employees’ views on their leadership skills in 2001. The senior executives were to identify action items based on the feedback and incorporate them into their individual performance plans for the next fiscal year. While the 360-degree feedback instrument was intended for developmental purposes to help senior executives identify areas for improvement and is not included in the executives’ performance evaluations, executives were held accountable for taking some action on the 360-degree feedback results and responding to the concerns of their peers, customers, and subordinates. 5. Use competencies to provide a fuller assessment of performance. High-performing organizations use competencies, which define the skills and supporting behaviors that individuals need to effectively contribute to organizational results, and are based on valid, reliable, and transparent performance management systems. To this end, the Internal Revenue Service (IRS) implemented a performance management system in fiscal year 2000 that requires executives and managers to include critical job responsibilities with supporting behaviors (broad actions and competencies) in their performance agreements each year. The critical job responsibilities and supporting behaviors are intended to provide executives and managers with a consistent message about how their daily activities are to reflect the organization’s core values. 6. Link pay to individual and organizational performance. High- performing organizations seek to create pay, incentive, and reward systems that clearly link employee knowledge, skills, and contributions to organizational results. At the same time, these organizations recognize that valid, reliable, and transparent performance management systems with adequate safeguards for employees are the precondition to such an approach. In the Canadian Province of Ontario, an individual executive’s performance pay is based on the performance of the provincial government as a whole, the executive’s home ministry, the ministry’s contribution to governmentwide results, as well as the individual’s own performance. The amount of the award can range up to 20 percent of base salary. 7. Make meaningful distinctions in performance. Effective performance management systems seek to achieve three key objectives to help make meaningful distinctions in performance: (1) they strive to provide candid and constructive feedback to help individuals maximize their contribution and potential in understanding and realizing the goals and objectives of the organization, (2) they seek to provide management with the objective and fact-based information it needs to reward top performers, and (3) they provide the necessary information and documentation to deal with poor performers. For example, IRS established an executive compensation plan for determining base salary, performance bonuses, and other awards for its senior executives that is intended to explicitly link individual performance to organizational performance. As part of this plan, IRS converts senior executive performance appraisal ratings into points to help ensure realistic and consistent performance ratings. Each IRS business unit has a “point budget” for assigning performance ratings, which is the total of four points for each senior executive in the unit. For fiscal year 2001, an “outstanding” rating converted to six points; an “exceeded” rating to four points, which is the baseline; a “met” rating to two points; and a “not met” rating to zero points. If the business unit exceeded its point budget, it had the opportunity to request additional points from the Deputy Commissioner. IRS officials indicated that none of the business units requested additional points for the fiscal year 2001 ratings. The senior executive performance appraisal ratings and bonuses for fiscal year 2001 show that IRS is beginning to make distinctions in pay related to performance. For fiscal year 2001, 31 percent of the senior executives received a rating of outstanding compared to 42 percent for fiscal year 2000, 49 percent received a rating of exceeded expectations compared to 55 percent, and 20 percent received a rating of met expectations compared to 3 percent. In fiscal year 2001, 52 percent of senior executives received a bonus, compared to 56 percent in fiscal year 2000. IRS officials said that IRS is still gaining experience using the new compensation plan and will wait to establish trend data before it evaluates the link between performance and bonus decisions. 8. Involve employees and stakeholders to gain ownership of performance management systems. High-performing organizations have found that actively involving employees and stakeholders in developing performance management systems and providing ongoing training on the systems helps increase their understanding and ownership of the organizational goals and objectives. As one of the single most important safeguards that they can put in place, these leading organizations consulted a wide range of employees and stakeholders early in the process, obtained direct feedback from them, and engaged employee unions or associations. For example, in New Zealand, an agreement between government and the primary public service union created a “Partnership for Quality” framework that provides for ongoing, mutual consultation on issues such as performance management. Specifically, the Department of Child, Youth, and Family Services and the Public Service Association entered into a joint partnership agreement that emphasizes the importance of mutual consideration of each other’s organizational needs and constraints. 9. Maintain continuity during transitions. The experience of successful cultural transformations and change management initiatives in large public and private organizations suggests that it can often take 5 to 7 years until such initiatives are fully implemented and cultures are transformed in a substantial manner. Because this time frame can easily outlast the tenures of top political appointees, high-performing organizations recognize that they need to reinforce accountability for organizational goals during times of leadership transitions through the use of performance agreements as part of their performance management systems. For example, the Ontario Public Service institutionalized the use of performance agreements in its performance management system to withstand organizational changes and cascaded the performance agreements from top leadership to front line employees. With the performance management practices of leading organizations in mind, we need to fundamentally rethink our approach to federal pay and develop an approach that places a greater emphasis on a person’s knowledge, skills, position, and performance rather than the passage of time, the rate of inflation, and geographic location. Under the current federal pay system, the overwhelming majority of each year’s increase in federal employee pay is largely unrelated to an employee’s knowledge, skills, position, or performance. In fact, over 80 percent of the cost associated with the annual increases in federal salaries is due to longevity and the annual pay increase. In addition, current federal pay gaps vary by the nature of the person’s position; yet the current method for addressing the pay gap assumes that it is the same throughout government. We must move beyond this outdated, “one size fits all approach” to paying federal employees. Under authorities granted by the Congress, a number of agencies are at various stages in using approaches in their pay and award systems that are designed to be more flexible and results-oriented. U.S. General Accounting Office. We at GAO believe it is our responsibility to lead by example. Our people are our most valuable asset, and it is only through their combined efforts that we can effectively serve our clients and country.