[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]



 
    COMPENSATION REFORM: HOW SHOULD THE FEDERAL GOVERNMENT PAY ITS 
                               EMPLOYEES?

=======================================================================

                                HEARING

                               before the

                     SUBCOMMITTEE ON CIVIL SERVICE
                        AND AGENCY ORGANIZATION

                                 of the

                              COMMITTEE ON
                           GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

                             APRIL 1, 2003

                               __________

                           Serial No. 108-46

                               __________

       Printed for the use of the Committee on Government Reform


  Available via the World Wide Web: http://www.gpo.gov/congress/house
                      http://www.house.gov/reform






                        U.S. GOVERNMENT PRINTING OFFICE
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                     COMMITTEE ON GOVERNMENT REFORM

                     TOM DAVIS, Virginia, Chairman
DAN BURTON, Indiana                  HENRY A. WAXMAN, California
CHRISTOPHER SHAYS, Connecticut       TOM LANTOS, California
ILEANA ROS-LEHTINEN, Florida         MAJOR R. OWENS, New York
JOHN M. McHUGH, New York             EDOLPHUS TOWNS, New York
JOHN L. MICA, Florida                PAUL E. KANJORSKI, Pennsylvania
MARK E. SOUDER, Indiana              CAROLYN B. MALONEY, New York
STEVEN C. LaTOURETTE, Ohio           ELIJAH E. CUMMINGS, Maryland
DOUG OSE, California                 DENNIS J. KUCINICH, Ohio
RON LEWIS, Kentucky                  DANNY K. DAVIS, Illinois
JO ANN DAVIS, Virginia               JOHN F. TIERNEY, Massachusetts
TODD RUSSELL PLATTS, Pennsylvania    WM. LACY CLAY, Missouri
CHRIS CANNON, Utah                   DIANE E. WATSON, California
ADAM H. PUTNAM, Florida              STEPHEN F. LYNCH, Massachusetts
EDWARD L. SCHROCK, Virginia          CHRIS VAN HOLLEN, Maryland
JOHN J. DUNCAN, Jr., Tennessee       LINDA T. SANCHEZ, California
JOHN SULLIVAN, Oklahoma              C.A. ``DUTCH'' RUPPERSBERGER, 
NATHAN DEAL, Georgia                     Maryland
CANDICE S. MILLER, Michigan          ELEANOR HOLMES NORTON, District of 
TIM MURPHY, Pennsylvania                 Columbia
MICHAEL R. TURNER, Ohio              JIM COOPER, Tennessee
JOHN R. CARTER, Texas                CHRIS BELL, Texas
WILLIAM J. JANKLOW, South Dakota                 ------
MARSHA BLACKBURN, Tennessee          BERNARD SANDERS, Vermont 
                                         (Independent)

                       Peter Sirh, Staff Director
                 Melissa Wojciak, Deputy Staff Director
                      Rob Borden, Parliamentarian
                       Teresa Austin, Chief Clerk
              Philip M. Schiliro, Minority Staff Director

         Subcommittee on Civil Service and Agency Organization

                   JO ANN DAVIS, Virginia, Chairwoman
TIM MURPHY, Pennsylvania             DANNY K. DAVIS, Illinois
JOHN L. MICA, Florida                MAJOR R. OWENS, New York
MARK E. SOUDER, Indiana              CHRIS VAN HOLLEN, Maryland
ADAH H. PUTNAM, Florida              ELEANOR HOLMES NORTON, District of 
NATHAN DEAL, Georgia                     Columbia
MARSHA BLACKBURN, Tennessee          JIM COOPER, Tennessee

                               Ex Officio

TOM DAVIS, Virginia                  HENRY A. WAXMAN, California
                  Ronald L. Martinson, Staff Director
                 B. Chad Bungard, Deputy Staff Director
                          Chris Barkley, Clerk
            Tania Shand, Minority Professional Staff Member





                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on April 1, 2003....................................     1
Statement of:
    Blair, Dan G., Deputy Director, Office of Personnel 
      Management; and Hannah S. Sistare, executive director, 
      National Commission on the Public Service..................    16
    Kelley, Colleen M., national president, National Treasury 
      Employees Union; Jacqueline Simon, public policy director, 
      American Federation of Government Employees, AFL-CIO; Bill 
      Bransford, counsel, Senior Executives Association; and 
      Karen Heiser, Federal Managers Association.................   105
    Mihm, Christopher J., Director, Strategic Issues, U.S. 
      General Accounting Office; Max Stier, president and CEO, 
      Partnership for Public Service; and George Nesterczuk, 
      president, Nesterczuk and Associates and consultant, 
      Heritage Foundation........................................    50
    Ruppersberger, Hon. C.A. Dutch, a Representative in Congress 
      from the State of Maryland.................................     6
Letters, statements, etc., submitted for the record by:
    Blair, Dan G., Deputy Director, Office of Personnel 
      Management:
        Information concerning group incentive program...........    46
        Prepared statement of....................................    19
    Davis, Hon. Jo Ann, a Representative in Congress from the 
      State of Virginia, prepared statement of...................     3
    Heiser, Karen, Federal Managers Association, prepared 
      statement of...............................................   175
    Kelley, Colleen M., national president, National Treasury 
      Employees Union, prepared statement of.....................   108
    Mihm, Christopher J., Director, Strategic Issues, U.S. 
      General Accounting Office, prepared statement of...........    53
    Nesterczuk, George, president, Nesterczuk and Associates and 
      consultant, Heritage Foundation, prepared statement of.....    93
    Ruppersberger, Hon. C.A. Dutch, a Representative in Congress 
      from the State of Maryland, prepared statement of..........    10
    Shaw, Jerry, general counsel, Senior Executives Association, 
      prepared statement of......................................   138
    Simon, Jacqueline, public policy director, American 
      Federation of Government Employees, AFL-CIO, prepared 
      statement of...............................................   122
    Sistare, Hannah S., executive director, National Commission 
      on the Public Service, prepared statement of...............    28
    Stier, Max, president and CEO, Partnership for Public 
      Service, prepared statement of.............................    72


    COMPENSATION REFORM: HOW SHOULD THE FEDERAL GOVERNMENT PAY ITS 
                               EMPLOYEES?

                              ----------                              


                         TUESDAY, APRIL 1, 2003

                  House of Representatives,
          Subcommittee on Civil Service and Agency 
                                      Organization,
                            Committee on Government Reform,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 1:08 p.m., in 
room 2247, Rayburn House Office Building, Hon. Jo Ann Davis 
(chairman of the subcommittee) presiding.
    Present: Representatives Jo Ann Davis of Virginia, Murphy, 
Blackburn, Danny Davis of Illinois, Norton, and Van Hollen.
    Staff present: Ronald L. Martinson, staff director; B. Chad 
Bungard, deputy staff director and senior counsel; John 
Landers, professional staff member; Heea Vazirani-Fales and 
Vaughn Murphy, legislative counsels; Robert White, director of 
communications; Christopher J. Barkley, clerk; Tania Shand, 
minority professional staff member; Jean Gosa, minority 
assistant clerk; and Cecelia Morton, minority office manager.
    Mrs. Davis of Virginia. The subcommittee will come to 
order.
    This is the first hearing of the Government Reform 
Subcommittee on Civil Service and Agency Organization in the 
108th Congress, and the topic is both important and timely. The 
subject of compensation reform gets right at the heart of many 
of the challenges facing the Civil Service, from recruitment 
and retention to improving the efficiency and performance of 
the government itself.
    Before I begin my own remarks, I would like to express my 
thanks to the witnesses who have agreed to join us today. We 
have brought together a broad and knowledgeable array of voices 
as we begin our exploration of this issue, and look forward to 
hearing all of your perspectives. I want you to know that I 
begin this hearing with an open mind. I see this session as a 
learning opportunity for the subcommittee.
    Just over 2 months ago, the National Commission on Public 
Service, known as the Volcker Commission, issued its report on 
how to revitalize the Federal Government. At about the same 
time, the President issued his fiscal 2004 budget proposal. 
Both documents contain bold recommendations to reshape the 
Civil Service: The Volcker Commission, for example, suggests 
abolishing the General Schedule and allowing managers to base 
employees' salaries on ``competence and performance.'' The 
White House's budget proposal includes a $500 million Human 
Capital Performance fund to reward top performing employees, as 
well as a proposed shift of the entire Senior Executive Service 
to a pay-banding system.
    More and more often, Federal agencies are seeking 
permission to develop a compensation system outside the General 
Schedule. More than 20 percent of non-postal civil servants now 
work under alternate personnel systems according to the Volcker 
report, including those developed at the Federal Aviation 
Administration, the Internal Revenue Service and the General 
Accounting Office. In all of those examples, change in the 
compensation system was designed not merely as an end to itself 
but as a way to improve agency performance.
    The GAO is here today and I am looking forward to hearing 
how the various pay for performance systems are working so far, 
including GAO's own.
    We are also fortunate in holding this hearing just 1 week 
after the Office of Personnel Management released its Federal 
Human Capital Survey. The results contain lots of good news. 
Ninety-one percent of employees believe they are doing 
important work and the overall percentages of Federal workers 
who are satisfied with their job is 68 percent or who believe 
the work they produce is high quality at 81 percent. It is 
consistent with findings in the private sector. Moreover, more 
than 60 percent of employees are satisfied with the basic pay 
and benefits.
    Not all the news was good, however. Fewer than half of the 
employees are satisfied with the recognition they get for doing 
a good job. Just 30 percent said the rewards program gives them 
an incentive to do their best. Only 27 percent of employees 
believe that steps are taken to deal with poor performers. On 
the surface, it appears that those results point to a work 
force that is generally satisfied with their pay, their 
benefits and their jobs but would like to see a work culture 
that better rewards performance and does not reward substandard 
work.
    I would like to hear the witnesses' perspective on this 
picture and what the Federal Government should be doing in the 
area of compensation reform. I thank you and I look forward to 
a lively and informative discussion.
    [The prepared statement of Hon. Jo Ann Davis follows:]
    [GRAPHIC] [TIFF OMITTED] 89241.001
    
    [GRAPHIC] [TIFF OMITTED] 89241.002
    
    Mrs. Davis of Virginia. I would now like to recognize our 
ranking member, Mr. Danny Davis, and see if he has an opening 
statement.
    Mr. Davis of Illinois. Thank you very much, Madam 
Chairwoman. I do indeed, and it is a pleasure, as it always is, 
to be here with you. I want to commend you for holding this 
hearing as we begin to explore in a very serious way some of 
the real issues and concerns with which we are going to be 
confronted, not only now but for years to come.
    There is a steady drumbeat to reform of the current Federal 
pay system. This hearing provides a forum for the members of 
the subcommittee and other stakeholders to discuss the pros and 
cons of various pay reform proposals and the process for 
implementing such reform. The current pay system has been 
described as being designed for the heavily clerical and low-
graded work force of the 1950's rather than today's knowledge-
based government and that it should be redesigned to be more 
performance oriented, flexible and market sensitive.
    Others have argued that the Civil Service Reform Act of 
1978 and the Federal Employees Pay Comparability Act of 1990 
were enacted to do just that. If the current system is not 
working, then the question becomes why not. If we do not 
understand why the current system is not working and address 
those concerns, how can we ensure that a new system will not be 
fraught with the same problems? Furthermore, if the current 
system is to be reformed to give managers more flexibility, how 
can we ensure that a new system will be fair and equitable and 
free from political influence?
    Efforts to reform the Civil Service based on the need for 
more flexibility may indeed be valid, but often more 
flexibility without accountability is simply something we 
cannot afford to do. This subcommittee should not consider any 
reform legislation unless it addresses this very important 
issue of holding decisionmakers in the Government accountable 
for their actions and the decisions they make.
    David Walker, the Comptroller General, has been a strong 
advocate for pay reform. Yet, in a letter dated March 26 to the 
Government Executive Committee, Mr. Walker wrote, ``As with all 
pay-for-performance efforts, appropriate safeguards and 
accountability procedures would need to be in place to ensure 
fairness, prevent politicization and prevent abuse.'' The 
bottom line is that in order to receive any additional 
performance-based flexibility, agencies should have to 
demonstrate they have the modern, effective, credible and 
validated performance management systems in place that are 
capable of supporting such decisions. Unfortunately, most 
Federal agencies are a long way from meeting this task.
    I agree with Mr. Walker and hope the witnesses before us 
today can address these concerns about accountability that he 
has raised.
    I thank you, Madam Chairwoman, and yield the balance of my 
time.
    Mrs. Davis of Virginia. Thank you, Mr. Davis.
    Are there any other Members who would like to be recognized 
for an opening statement? Ms. Norton.
    Ms. Norton. Thank you, Madam Chair.
    You have called a hearing on a most important subject. I 
would agree that we are at rather much of a watershed moment 
when it comes to Federal compensation but that is, in my 
judgment, because of structural changes in the way people 
approach Federal work today. They don't come to the Federal 
sector the way they used to and that is why your concern about 
hard to fill positions is well placed.
    I was chair of the subcommittee when locality pay was first 
put in place. That was a reform that was decades in the making 
and seems to have disappeared from the radar screen and from 
the pocketbooks of Federal workers. I would hate to see us 
engage in compensation reform on a piecemeal basis or have to 
repeat the history of reform. I couldn't agree more that there 
is not a lot to make an engineer or a nurse or a pharmacist 
come to work for the Federal Government and remain with the 
Federal Government. I am equally concerned with the 2-percent 
increase for Federal employees if we want to keep hard to 
retain and attract employees, what are we going to do about the 
fact that those we already have are piling out of this place, 
many of them trained with investment from the Federal 
Government because very frankly, by retiring early or on time, 
they can market their skills for better pay and better health 
care than they get in the Federal Government. So it is very 
hard for me to look at the ones we can't get anyway without 
looking at those we have when you consider that half the work 
force could retire within the next 3 years. That is a true 
example of a crisis. It makes the crisis we face in hard to 
attract and retain employees look like a small crisis. That is 
a crisis writ large.
    I hope in looking at compensation reform, we will bear in 
mind that we face a structural crisis with employees in the 
Federal Government and have our work cut out for us as we try 
to find a comprehensive approach in the need for reform.
    Thank you very much, Madam Chair.
    Mrs. Davis of Virginia. Thank you.
    I ask unanimous consent that all Members have 5 legislative 
days to submit written statements and questions for the hearing 
record and that any answers to written questions provided by 
the witnesses also be included in the record. Without 
objection, so ordered.
    I also ask unanimous consent that all exhibits, documents 
and other materials referred to by Members and the witnesses 
may be included in the hearing record and that all Members be 
permitted to revise and extend their remarks. Without 
objection, so ordered.
    Our first witness today is our colleague, Congressman Dutch 
Ruppersberger. I am delighted that you were able to accept our 
invitation to testify at the first hearing of the Subcommittee 
on Civil Service and Agency Organization. By tradition, we do 
not administer an oath to Members of Congress, so you are 
recognized for 5 minutes, Congressman.

STATEMENT OF HON. C.A. DUTCH RUPPERSBERGER, A REPRESENTATIVE IN 
              CONGRESS FROM THE STATE OF MARYLAND

    Mr. Ruppersberger. Thank you, Madam Chairman, and it is a 
pleasure to be here.
    I have two people here who are not going to testify, 
Attorney Sharborough, director of human resources for Baltimore 
County, and Melissa Boone, who is gainsharing program manager.
    I am here really based on the previous 8 years when I was 
Baltimore County executive and we implemented a gainsharing 
program which is really an employee group-incentive based on 
performance.
    First, what is gainsharing? Gainsharing is a group 
incentive program. Gainsharing rewards employees for making 
improvements that reduce costs without compromising quality and 
objectives. The concept is based on team work where 
participating employees improve performance and get to share in 
the savings. For example, if savings are generated, the group 
of employees receives half of the savings while the other half 
goes into the General Fund of the treasury of that government.
    Let me start by saying gainsharing is a program that works. 
It saves money but more importantly, it boosts morale and it 
makes government service more responsive and cost-effective. 
That is a very important element of gainsharing, the morale and 
making employees feel as if they are shareholders in the 
government.
    Programs like gainsharing will only succeed if everyone who 
is affected by the process is brought to the table. For 
example, in Baltimore County, we could not have done this 
without the cooperation of our employee unions. What we are 
talking about here today is using the Volcker Commission 
recommendations and changing the culture of government 
management and workers.
    Baltimore County has approximately 761,000 citizens which 
makes the county more populous than four States and larger in 
land than two States. There are 19,000 employees and it has an 
operating budget of $2 billion. Baltimore County is the only 
one of two counties in the country that has no municipalities 
which means the county provides all the services. Baltimore 
County has a strong executive rule. The county executive has 
the power to establish the budget. The county council approves 
the budget but they can only cut the budget. The county council 
cannot increase the budget or move funds from one area to 
another and the county's budget must be balanced each year. It 
is a challenging county with a diversity of incomes, a 
diversity of people, a diversity of education levels, a 
diversity of work force, and a diversity of geographic location 
which wraps around Baltimore City and is urban, suburban and 
two-thirds rural. Providing services to all these distinct and 
unique populations and areas is very challenging.
    When I took office as Baltimore County executive in January 
1995, county employees had not received pay raises in 4 of the 
previous 5 years. Layoffs in several departments had further 
damaged morale while demand for services had increased. By 
1996, Baltimore County was experiencing a narrow revenue stream 
and aging infrastructure. In the 4-years before 1996, the 
county work force had declined by 17 percent, there had been a 
job freeze, the first employee layoffs in county history and 
there were two early retirement programs enacted. There had 
only been one cost-of-living-adjustment in the 6-years before. 
Needless to say, county employees' morale was at an all time 
low.
    While serving on the Baltimore County council prior to 
becoming Baltimore County executive, I observed that the 
gradual decline in employee morale was affecting service 
quality to our citizens. As county executive, I wanted quality 
and productive improvements. I believe government is basically 
a service industry and we need to be more responsive to our 
constituents.
    The question was, how do we make working for the county 
rewarding and exciting? How do we get our employees to be 
vested in their government and how do we make them want to 
perform for the benefit of everyone? After researching the 
issue, I concluded that a gainsharing program would meet all 
those criteria with no added cost to the taxpayers. One of my 
first acts was to bring aboard a human resources consulting 
firm, a local consultant from the Regional Economic Studies 
Institute at Towson State University in Baltimore County. 
Development of the gainsharing program began in November 1995 
with a survey of employees across all departments to determine 
the readiness to participate. While initially hesitant about 
the program, the union leaders believed that the gainsharing 
program demonstrated that people in the field, the frontline 
employees, do know their job the best. The process enabled 
Baltimore County workers to prove they could deliver better 
service at lower costs with virtually no complaints.
    Baltimore County's gainsharing program brings together many 
old ideas in a new package. It uses total quality management 
principles and teambuilding strategies to transform frontline 
workers. The team goal is to improve performance and save money 
by bringing the insights and experience of frontline workers to 
bear on the problems. The program's emphasis on getting 
frontline employees to develop solutions empowers them to 
become shareholders in the government, much like in the private 
sector. The bottom line is Baltimore County's gainsharing 
program generates cost savings and increases employee morale 
while also improving the quality of service at the local 
government level.
    We have to remember that this program worked because we 
brought everyone into the tent. We talked to and gained the 
support of our employees, we brought together both mid-level 
and top level management and facilitated cooperation between 
them and our frontline employees and we retained outside 
consultants to get their insight to work on these solutions. 
The result was a highly motivated, effective and cost-efficient 
work force that delivers quality service to our constituents.
    Baltimore County's gainsharing program won a national award 
from Harvard University and the Ford Foundation for innovations 
in government. Since the program was implemented it has saved 
over $4.1 million. With the help of the gainsharing program, 
Baltimore County was 1 of only 20 counties out of 3,000 that 
were able to obtain an AAA bond ratings from the rating houses 
in New York. As a result of that, the governing magazine rated 
Baltimore County as one of the top four managed counties in the 
country.
    As a result of increased employee morale, increased 
government efficiency and a well managed county, our 
administration and as Baltimore County Executive, was able to 
attract over 40,000 new jobs which eclipsed the previous 
administration job creation of 800, going from 800 jobs to 
40,000 new jobs over the 7-year period. One of the reasons is 
employees and business want to be involved and went to a county 
they feel is well managed and where there are good services for 
their employees.
    Baltimore County is only one of a handful of governments 
that have implemented a gainsharing program. Because of that, 
Baltimore County is receiving inquiries from local, State and 
Federal Government from around the country. I am pleased to say 
the gainsharing program has gone international. Last year, the 
State Department made inquiries into the success of Baltimore 
County's gainsharing program. After a review of our successful 
program, the State Department asked for funding from Congress 
to implement a gainsharing program. Most recently, U.S. workers 
have looked to implement the gainsharing program abroad. 
Members of Baltimore County's gainsharing program have traveled 
to Belgium to train the State Department employees in that 
country.
    If we are looking to revitalize and change the culture of 
the Federal Government, we have to make sure that our frontline 
workers are vested in what is happening. We should encourage 
all Federal employees and managers to find ways to improve 
performance. Gainsharing is not just about employees getting 
additional money for performance. It is about the employees 
becoming shareholders in the government and as a result, we 
will have improved morale which leads to improved government 
performance.
    [The prepared statement of Hon. C.A. Dutch Ruppersberger 
follows:]
[GRAPHIC] [TIFF OMITTED] 89241.003

[GRAPHIC] [TIFF OMITTED] 89241.004

[GRAPHIC] [TIFF OMITTED] 89241.005

[GRAPHIC] [TIFF OMITTED] 89241.006

    Mrs. Davis of Virginia. Dutch, thank you so much for being 
willing to come and share that success story. I think you hit 
on some critical points there that you can't make changes 
without bringing all parties to the table. That includes the 
managers, the employees, the unions who are there for the 
workers and I appreciate your coming and testifying.
    Historically on the Hill, we don't question the Members 
when they come.
    Mr. Ruppersberger. If you would like to question me, you 
can.
    Mrs. Davis of Virginia. I think my ranking member would 
like to ask a question but I will tell you, we normally don't 
do it. We are not setting a precedent either.
    Mr. Davis of Illinois. I would just ask in terms of 
participation, was this done by divisions, departments or just 
areas of work and how did that get organized?
    Mr. Ruppersberger. What happened is we realized we had to 
get outside consultants to implement a program because there 
are always programs and new administrations are finding ways to 
do this. I studied this gainsharing for years when I was on the 
county council and read about it, how utility companies had 
been able to use it, so I realized we needed to get experts in 
the area and we hired national consultants. They came in and 
analyzed our government. They picked pilot programs to start 
the gainsharing program for Baltimore County.
    As an example, one area was food service in our detention 
center where individuals were making maybe $23,000-$24,000 a 
year. They came together as a group. They were frontline 
employees who said we can do this better if management would 
listen. They came together with management, had facilitators 
there to help them, made the changes and each and every 
employee, after the changes were made and the money was saved, 
took home about a $5,000 bonus that year. All of a sudden, the 
labor unions that were all upset about this new program said we 
want a piece of this action.
    Another example was in our grass cutting in Rec and Parks, 
as county executive I was getting ready to privatize it because 
they just weren't producing. We went to the frontline and 
worked with them. They said, if you give us the resources and 
the equipment, we could beat any private sector. They had 
facilitators, came as a group, discussed how they could cut the 
grass the best way, and they ended up improving performance. 
The whole concept is as performance is improved, costs go down. 
Then all of a sudden everyone wanted to be involved.
    It is a program that you just don't show up with a good 
idea. If you have an idea as a frontline employee, you come 
together, go to the facilitator, the facilitator will bring the 
group together as the frontline, almost like a group therapy 
session and talk about the program. Then they will put the 
program in writing and the program will go to the department 
head and eventually would come to me. If the program worked, 
all of a sudden frontline employees would just go punch the 
clock and say we are a part of this operation, we feel good 
about this, we are shareholders in this operation. Then it kept 
going from department to department.
    To give an example of how gainsharing works, you can't give 
police officers a bonus for the arrests they make. You have one 
vehicle used by three shifts and the same people drive the same 
car. If one group doesn't put their foot on the brakes and they 
don't have to change tires in 6 months where another group had 
to change it every 2 months, that would be a savings, a group 
incentive to improve performance which cuts costs. Part of that 
savings goes back to them.
    Let me say this because sometimes we get these programs 
confused. The main issue of gainsharing is not really the bonus 
or the extra money that goes back to employees because 
performance is improved, the main issue is the morale that in 
good times and bad times, the employees feel they have the 
ability on the frontline. How many times do we see in any 
government or bureaucracy that midlevel managers were good 
employees or they were not good managers, were never trained 
and interfere with frontline. All of a sudden this relationship 
between management and frontline improved and like 
teambuilding, you had morale. When morale changes, a lot of 
things change. So far this program has continued to work. We 
are still in a recession now. When I say ``we'' I mean 
Baltimore County, my previous job, and we still have employees 
who feel good about going to work.
    Mr. Davis of Illinois. Thank you very much. For many years, 
I have been an advocate of what I call the shared approach to 
management, so I see why you got elected to Congress.
    Mrs. Davis of Virginia. Ms. Blackburn, do you have a 
question?
    Ms. Blackburn. Yes, I do have one. This sounds absolutely 
fascinating and I thank you for your comments.
    Going back to the compensation, could your individual 
managers decide if they wanted to give an increase in salary or 
if it was going to be given as a bonus or a promotion or your 
incentivization program, what you would do to incentivize your 
employees, who made that decision?
    Mr. Ruppersberger. The incentive has to be the entire team, 
that is the team concept. We had other incentive programs that 
were in the county but basically this is a team concept, so the 
entire team will be compensated. What is really good about it 
is if you have people on the team that aren't working or 
carrying their weight, management doesn't even have to get 
involved in that. The team comes together and the team will 
say, look, you are hurting us, we have this program to improve 
performance. Because you are lazy or you are not doing the job, 
you are hurting us. So it is strictly a team concept, has 
nothing to do with our merit or compensation system, entirely 
different, a team concept.
    This is a program that you have to develop the program with 
a facilitator and it has to be approved but it comes from the 
frontline.
    Ms. Blackburn. You mentioned $4.1 million in savings. 
Overall, what percentage of your budget per year would you say 
you see as a savings?
    Mr. Ruppersberger. I don't know what that would be--less 
than 2 percent.
    Ms. Blackburn. Less than 2 percent, that is great.
    Mr. Ruppersberger. Remember, every department doesn't have 
a gainsharing program. It starts with the employees and the 
facilitators.
    Mrs. Blackburn. Were you able to reduce your overall budget 
because of the success of the program?
    Mr. Ruppersberger. Well, basically I would say that is why 
I talked about our AAA bond rating and how Governing Magazine 
rated Baltimore County. They write about counties and cities 
and evaluate them. So I think from a management perspective, 
yes, we were able to improve performance. As performance goes 
up, costs go down. Yes, clearly in the areas in which we were 
working, costs were going down in that regard and the 
performance was going up. The difference is the savings was 
going half to the group, the employees, and half back to our 
general fund.
    Ms. Blackburn. To the general fund. Thank you.
    Mrs. Davis of Virginia. We have started a trend here but we 
are not going to continue it next hearing.
    Ms. Norton, do you have any questions?
    Ms. Norton. No, but thank you for your graciousness.
    Mrs. Davis of Virginia. Mr. Van Hollen.
    Mr. Van Hollen. No, thank you.
    Mrs. Davis of Virginia. We have been joined by Mr. Murphy. 
I don't want to catch you off guard but would you happen to 
have any questions for Congressman Ruppersberger?
    Mr. Murphy. No. It is good to have him here.
    Mrs. Davis of Virginia. Dutch, I thank you so much for 
coming and appreciate your taking the time. I know how busy a 
Member's schedule is. It was very enlightening. Thank you.
    Mr. Ruppersberger. Thank you.
    Mrs. Davis of Virginia. If the second panel would come 
forward and remain standing, we do ask that each witness be 
administered an oath.
    [Witnesses sworn.]
    Mrs. Davis of Virginia. The witnesses will now be 
recognized for opening statements. We ask that you summarize 
your testimony in 5 minutes. We have your written testimony and 
I would hope all Members have had an opportunity to read it. 
Your written testimony will be made a part of the record.
    I would like to welcome OPM Deputy Director, Dan Blair and 
the Executive Director of the National Commission on the Public 
Service, Hannah Sistare. I thank you both for being with us 
today. Mr. Blair, we will start with you and recognize you for 
5 minutes.

    STATEMENTS OF DAN G. BLAIR, DEPUTY DIRECTOR, OFFICE OF 
    PERSONNEL MANAGEMENT; AND HANNAH S. SISTARE, EXECUTIVE 
      DIRECTOR, NATIONAL COMMISSION ON THE PUBLIC SERVICE

    Mr. Blair. Thank you very much, Madam Chair. It is indeed 
an honor and privilege to be here today to represent Director 
James. I appreciate this opportunity to appear before the 
subcommittee, particularly on this panel with Hannah Sistare. 
Hannah and I are longtime colleagues. She was a true mentor and 
friend. I am particularly pleased to be on this panel with her.
    I would also like to acknowledge the good work of OPM's 
Deputy Associate Director for Pay and Performance Policy, Don 
Winstead who is sitting in back of me.
    I ask that my entire written statement be adopted for the 
record.
    Mrs. Davis of Virginia. So ordered.
    Mr. Blair. On behalf of Director James, I am pleased to 
appear here today. I would like to talk about what we have been 
doing in terms of compensation reform for Federal employees.
    Following Director James' appointment as Director of OPM, 
she asked the staff to take an in-depth look at white collar 
Federal pay. The result was a White Paper entitled, ``A Fresh 
Start for Federal Pay: The Case for Modernization.'' The intent 
of the White Paper was not to lay out specific reform proposals 
or solutions. Rather, it was to expose the current problems 
with the Government's white collar pay system.
    The paper concluded the following points. The current 
General Schedule is an antiquated system best suited for the 
1950's work force but not for today's knowledgable work force. 
It has minimal ability to encourage and reward achievement and 
results. It does not adequately reflect market pay and it 
precludes agency's from tailoring pay programs to their 
specific mission and labor markets.
    Since the paper was released, the conversation about pay 
modernization has continued on a number of fronts. Last year, 
Congress enacted legislation creating the new Department of 
Homeland Security. It was significant that Congress recognized 
that the new department needed flexibility for a modernized 
approach for compensation by authorizing the Director of OPM 
and the Secretary for DHS to jointly develop and establish a 
new human resources system. We are in the initial stages of 
working with DHS managers and employees to identify those 
options for consideration.
    We also recognize the thought provoking work contained in 
the recent report of the National Commission on Public Service. 
The Commission concluded that the Federal Government must be 
reshaped and that the systems that support it must be rooted in 
a new personnel management system which has principles and 
ensure a much higher level as a government performance. Indeed, 
the President's budget for fiscal year 2004 includes two 
proposals intended to help create a pay for performance culture 
in the Federal Government.
    First, the administration proposes establishment of a Human 
Capital Performance Fund. Second, the administration proposes 
to raise the pay cap for the Senior Executive Service and 
implement an open pay range for senior executives.
    First, let me talk about the Human Capital Performance 
Fund. Under this proposal, $500 million would be appropriated 
in fiscal year 2004 for allocation by OPM to agencies that 
submit a plan to use their share of the fund for performance-
based increases in basic pay. The fund would represent an 
important tool for rewarding high performing employees and it 
points the way to a greater emphasis on employee performance 
and contributions to mission accomplishments by requiring 
robust performance management as a criterion for funding but 
also for providing incentive for agencies to improve their 
performance management systems and human capital strategies 
aligning them more closely with their mission and goals.
    The proposal would leave intact for now the General 
Schedule Pay System. Individual employees would remain at their 
existing grade and step levels. Annual across the board 
adjustments would continue as well as locality pay and within 
grade step increases, while leaving the General Schedule and 
job evaluation system basically intact, proposed as an 
important first step in our efforts to bring performance-based 
compensation to the Federal Government. With this proposal, we 
can begin distinguishing between high and low performers in a 
meaningful way.
    The second proposal to increase performance sensitivity of 
Federal pay system focuses on how we pay our senior executives. 
The administration recognizes that pay compression within the 
SES could result in serious recruitment and retention problems. 
More importantly, the current structure under which more than 
60 percent of all senior executives receive exactly the same 
salary despite varying degrees of responsibilities and duties 
fails to support the goal of developing a pay-for-performance 
culture.
    If we cannot demonstrate the value of a performance 
oriented pay system for our senior executives, how can we 
expect to foster development of performance oriented pay 
systems for the rest of the Federal Government?
    I believe the administration's Human Capital Performance 
Fund and SES pay reform proposals represent major steps toward 
the establishment of long-term goals and modernizing Federal 
pay systems. We are confident these proposals will keep the 
dialog moving in the right direction.
    Also, let me acknowledge the important work that effective 
performance management will play in any compensation program. 
OPM's White Paper announced how credible, reliable performance 
measures that make appropriate performance distinctions are 
critical to successfully increasing the link between pay and 
performance.
    Thank you very much for this opportunity. I would be 
pleased to answer any questions.
    [The prepared statement of Mr. Blair follows:]
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    Mrs. Davis of Virginia. Thank you, Mr. Blair.
    Ms. Sistare.
    Ms. Sistare. Chairwoman Davis, Congressman Davis and 
members of the subcommittee, on behalf of Paul Volcker and the 
members of the National Commission on the Public Service, I 
thank the subcommittee for asking the Commission to share its 
findings and recommendations on the issue of pay reform.
    Paul Volcker took up the cause of the public service again 
because of many of the same concerns that motivated the first 
National Commission on the Public Service. The commissioners 
who agreed to join him in this task are from all political 
persuasions in both major political parties. Each of them has a 
wealth of public service experience. Collectively they have 
served every Presidential administration beginning with 
President Harry Truman. From start to finish, the Commission 
was aided, challenged and encouraged by many organizations and 
individuals concerning the state of the public service.
    The Commission examined Federal pay in all three branches 
and at all levels. Three principles are suggested by the 
Commission in the report. First, government pay must reflect 
current market conditions if government is to attract and 
retain the work force it needs to perform its responsibilities.
    Second, the relevant market for most of the Federal work 
force should be comparable jobs and capabilities in the general 
work force. The relevant market for government senior 
leadership should be positions demanding comparable 
responsibility and capabilities in the nonprofit work force.
    Third, pay should be tied to performance. As noted, for the 
majority of the Federal work force, the private/non-profit 
sector was identified as the most appropriate market. The 
Commission recommended that Congress establish policies that 
permit agencies to determine the specific relevant market for 
their employees.
    Currently, the Commission recommended that the existing 
classification system and the General Schedule be terminated. 
The Commission recommended a broad band system be adopted as 
the government's default system. In the alternative, agencies 
would adopt systems which best suited their own missions.
    The Commission suggested a different compensation standard 
for senior government positions such as Federal judgeships, 
executives and Members of Congress. There they look to 
comparable positions in the private/nonprofit sector as a 
guide. We developed a comparison of executive pay for several 
categories of nongovernmental, nonprofit entities. In every 
case, the compensation of the nonprofit leadership was notably 
higher than that of the senior leadership of the Federal 
Government.
    Another area of particular concern is the Senior Executive 
Service. This cadre of senior executives was established to 
provide the government with a skilled leadership without all 
the traditional Civil Service protections but with the ability 
to be rewarded for excellent performance. As a result of the 
pay cap, nearly 70 percent of the SES earns the same 
compensation. This clearly rules out rewarding excellence in 
performance.
    The Commission recommends that Congress immediately 
increase the pay of capped senior government officials 
including Federal judges and Members of Congress themselves. 
Should Congress not wish to give itself this level of increase, 
the Commission asked it to decouple its own pay from that of 
Federal executives and judges.
    I will repeat for the record a statement the Commission 
included in the report, ``Few democracies in the world expect 
so much from their national legislators for so little in 
compensation.''
    Two additional areas addressed by the Commission bear on 
the issue of compensation flexibility. First is the importance 
of increased and careful oversight by Congress and responsible 
executive branch leadership to assure that the new system and 
personnel flexibility stay on track. Careful and ongoing 
oversight including statutory assurance of merit principles of 
government employment can ease concerns about abuse and prevent 
it from occurring.
    Second and related is the importance of ongoing training. 
The Commission believed that adequate and consistently funded 
training for all Federal employees was of great importance.
    The Commission focused to a greater extent in its report on 
pay of top governmental officials than it did on pay of the 
broad Federal work force first because of the clear challenge 
to effective governance when the leadership of government is 
significantly underpaid, and second, because the executive 
level pay caps are currently a barrier to pay reform, the 
entire work Federal work force.
    Finally, an important barrier to utilizing existing 
performance incentives is the government performance rating 
process itself. Like the residents of Lake Woebegone, everyone 
working for the Federal Government performs above average. In 
fact, most of the Federal work force is in the superior 
category. Of 700 employees rated in 2001 using the pass/fail 
system, 93 percent passed and just 0.06 percent failed. Of the 
800,000 who were rated that year using a 5 point system, 43 
percent were outstanding, 28 were exceeds fully successful and 
18 percent was fully successful.
    The system is in need of reform. Agencies must adopt and 
apply credible measures of performance with appropriate 
training and oversight.
    Thank you again.
    [The prepared statement of Ms. Sistare follows:]
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    Mrs. Davis of Virginia. Thank you, Ms. Sistare.
    Mr. Blair, I was very pleased to see the thoughtful 
discussion of the compensation issues in the White Paper that 
you talked about that OPM issued last April. The White Paper 
seemed to indict the General Schedule. However, during the 
debate on Homeland Security Act of 2002, the administration 
argued that the Department needed the flexibility to abolish 
the General Schedule. Given that, why does the Human Capital 
Performance Fund proposal continue to use the General Schedule 
as the base for Federal employee compensation?
    Mr. Blair. The Human Capital Performance Fund is really a 
downpayment on future reforms which we are still working on. 
The White Paper began this conversation and we are in the 
process of working with the stakeholders to identify and refine 
future solutions. The adoption of the proposal of the Human 
Capital Performance Fund will give incentives to our managers 
to begin making meaningful distinctions in employee 
performance. Further, Congress has shown tremendous interest in 
human capital issues including adoption of the Department of 
Homeland Security legislation, there was a recent CBO report on 
Federal compensation, the Volcker Commission recommendations 
and the like. So we are continuing the conversations and 
working to refine and propose solutions. Given that, we thought 
it was a good idea to put forth this idea of the Performance 
Fund as a meaningful downpayment on such reforms.
    Mrs. Davis of Virginia. I continue to be very concerned and 
I think my colleague alluded to it, that the administration is 
continuing to be unwilling to ensure parity between the 
civilian work force and the military. The Human Capital 
Performance Fund proposal would fall short of parity except 
presumably for top performers who would need the extra money 
from the fund just to get parity.
    How would OPM measure the results of the Human Capital 
Performance Fund approach to pay for performance? It seems to 
me without some clear, hardnosed criteria, we are unable to say 
one way or another whether the pay-for-performance has been a 
success. How are we going to do it?
    Mr. Blair. Under the President's proposal, each agency will 
apply for a pro rata portion of the fund that would be 
appropriated to OPM. They will have to come up with specific 
criteria showing what kind of performance management system 
they intend to have in place and how they intend to reward 
performance. So on the front end, you have continual monitoring 
and oversight by the Office of Personnel Management.
    In addition, the President's executive branch management 
scorecard rates and evaluate agencies on the way they handle 
the human capital performance. That is the scorecard reds, 
yellows and greens and OPM is the lead partner in scoring 
agencies on the human capital portion of that scorecard.
    One of the things we take into account is how effective are 
the agencies performance management systems. So you are going 
to have continual monitoring and oversight over these 
management performance systems.
    In addition, we expect visual oversight from Congress, GAO, 
the Inspectors General and a whole host of other bodies 
interested in good governance. I think an effective framework 
for oversight would be established. Agencies will have to apply 
for this fund each year, so if an agency doesn't meet its 
obligations and commitment 1 year, it would be unlikely it 
would be approved the next.
    In addition, agencies that would have particularly good 
incentive programs would be rewarded because approximately 10 
percent of this $500 million fund will be held in reserve by 
OPM to reward agencies that come up with particularly good 
plans. So we really think we have a strong infrastructure in 
place to ensure effective management of the fund.
    Mrs. Davis of Virginia. To qualify for the plan, would they 
have to have set specific guidelines so there wouldn't be what 
I think many of us are concerned about: bias toward an employee 
one way or the other by a manager?
    Mr. Blair. I would anticipate that. I think the merit 
system principles would be at the heart of what we want to do 
here. That would ensure that this fund is administered in a 
fair and even-handed manner. We have no intention of doing 
otherwise.
    Mrs. Davis of Virginia. Ms. Sistare, you recommended in 
your report eliminating the General Schedule for pay and 
creating six to eight broad bands with relatively wide salary 
ranges. Do you believe that pay banding without the presence of 
specific measurable performance standards would work as a 
concept and did the Commission, when they did the work, do any 
work on any performance measures?
    Ms. Sistare. The Commission would certainly say that it 
should be concurrent, that they would have to be done 
concurrently. If you are going to judge people on performance, 
you have to have adequate and reliable measures.
    Mrs. Davis of Virginia. So we can't just go out there and 
change the system without everything in place.
    Ms. Sistare. The Commission regarded its recommendations, 
in some cases, as with the reorganization proposals, as being 
the work of many years. But they felt the work should begin.
    Mrs. Davis of Virginia. Do you propose, and how do you 
propose, that we get Federal employees to buy into the pay 
banding because I know we have some that are very nervous about 
it and very concerned. How do we convince them it is a good 
idea?
    Ms. Sistare. There are concerns that have been raised about 
pay banding and performance measurements generally. The 
Commission felt that if you have adequate oversight both by 
Congress and the executive branch, training of the people 
making the judgments, and adequate funding for whatever reward 
system there is and the training, that should not only allay 
concerns but should deal with any problems.
    Mrs. Davis of Virginia. I see my time is up, so I am going 
to ask our ranking member, Mr. Davis, do you have questions?
    Mr. Davis of Illinois. Thank you very much, Madam 
Chairwoman.
    Let me thank both of you for your testimony.
    Mr. Blair, the GAO has stated that Federal agencies should 
demonstrate that they have modern, effective and credible 
performance management systems in place before additional pay 
reform flexibilities are implemented. In your opinion, do 
Federal agencies have credible performance management systems 
in place? If so, which agencies would you highlight?
    Mr. Blair. I would have to get back to you as to which 
agencies to highlight but we do have some that do have good 
performance management systems in place. That said, you bring a 
very salient point. We have to have good performance measures 
in place before this is effective and right now, there are no 
incentives for agencies to have those in place because our pay 
systems don't really recognize good performance. Until you have 
a system which provides agency managers and agencies the kinds 
of incentives it needs to reward your performance, it is going 
to be hard to get those in place.
    Mr. Davis of Illinois. You were here when Representative 
Ruppersberger testified. Would you see gainsharing having any 
place in that role in government?
    Mr. Blair. It is my understanding agencies have the 
authority now to do gainsharing, so I think what Representative 
Ruppersberger pointed out was an interesting system and I think 
there is a lot the government could learn from it.
    Mr. Davis of Illinois. Let me ask Ms. Sistare, you have 
indicated that the existing classification system should be 
changed, terminated actually, and that the Federal agencies 
should adopt pay systems that support their respective 
missions. What impact would this have on the ability of 
individuals to transfer say from one agency to another, and 
would it affect their compensation?
    Ms. Sistare. The Commission certainly believed that 
government could benefit if the path between agencies were more 
open to employees. I would see the transferring employee going 
into the new agency and being considered on the basis of that 
agency's system, just as people going between one business and 
another in the private sector are then dealing with whatever 
pay system exists with that new employer.
    Mr. Davis of Illinois. So then it would be possible that if 
one had an opportunity to transfer, they may also have to look 
at a change in compensation that would not necessarily be an 
upgrade for them?
    Ms. Sistare. That is true, although it could be the 
opposite. Maybe I should make one point, which is the 
Commission definitely felt there should be and would be always 
a core government work force that would most likely who were 
career employees, full career, and that people in that work 
force doing what Paul Volcker calls the core competencies of 
government would probably have the broadbanding system and 
would be in many ways alike. So it would be less of an issue 
there for somebody transferring from one to the other.
    Mr. Davis of Illinois. I gather from your testimony that 
you are really excited about the way we evaluate performance. 
What criteria would you suggest?
    Ms. Sistare. The results would indicate that it is not 
really an evaluation process. As you say, maybe the problem is 
that the criteria aren't there. If a manager or supervisor or 
an agency doesn't have reliable performance criteria, it is 
pretty hard to rate people on a spectrum. Also, the law 
prevents managers from rating on a curve and really doesn't 
support them when they do try to make distinctions.
    Mr. Davis of Illinois. So you are suggesting that it is 
fairly subjective. It appears to be fairly subjective right 
now?
    Ms. Sistare. I believe so.
    Mr. Davis of Illinois. Thank you.
    Mrs. Davis of Virginia. Thank you, Mr. Davis.
    Ms. Blackburn. If the gentlewoman would yield for a moment, 
I would like to take a second of her time.
    Tying into what Mr. Davis said when he was talking about 
someone transferring from one department to another, would you 
be suggesting that there be a one-size-fits-all compensation 
system throughout the Federal Government so that one could 
transfer or are you suggesting we do something different in 
each agency?
    Ms. Sistare. No, the Commission was clear they felt the 
agencies should adopt the systems that best fit their missions 
and needs but they did believe that many would adopt the pay-
banding system and that since they expected OPM would assist in 
setting up these systems, there would probably be a fair number 
of agencies that had similar pay systems.
    Mrs. Davis of Virginia. Thank you, and thank you, Ms. 
Blackburn, for yielding to me.
    Ms. Norton.
    Ms. Norton. Thank you, Madam Chair.
    I appreciate what you are trying to do because what we are 
dealing with here is the largest employer in the country and 
yet a mandate to make sure the merit system principles apply 
and if we didn't have that, we would be back to before the 
Civil Service system. We do need to study our history to 
understand how we got to this system in the first place with 
all of its rigidities as we try to modernize it.
    From both your testimonies, I got the impression that I was 
dealing with a pig in a poke because I couldn't put my finger 
on how it would work, in part because you obviously are in the 
beginning stages and I have some appreciation for what you are 
going through. I chaired the Equal Employment Opportunities 
Commission and at a time when it had to go through a wholesale 
reform of the entire agency, this is very difficult.
    Choosing one part of the system first does seem to me to be 
the way to go as opposed to throwing the stuff up and seeing 
what you can do with the whole system. Yet, you have chosen a 
part of the system, the SES, which I am left to wonder how much 
it has to teach up and down the line.
    For example, in your testimony, Mr. Blair, you say the 
administration's SES pay proposal would eliminate the fixed pay 
levels within the current SES system in favor of an open pay 
range with a higher pay gap, would be able to make meaningful 
distinctions in pay based on each individual executive's 
performance and contribution to the agency's mission and goals.
    One of the reasons we have a Civil Service system that is 
so clumsy is because that is so difficult, to distinguish 
between a whole bunch of people that may be doing the same or 
similar work. You said in response to the Chair's question that 
merit system principles would apply. It would help me a lot if 
you would give me at least an example. You would be more 
compelling in your testimony if you would say, and here is how 
it would work with respect to even the smallest example.
    Throughout this testimony and your testimony too, Ms. 
Sistare, I cannot find examples to inform my judgment. I am 
being asked, I guess, to trust you and the history of how we 
got to the Civil Service system makes me unwilling to trust 
anybody unless they are willing to lay out how the system would 
work. So you would help me a lot if you would give me an 
example of how this would work for somebody in SES with a broad 
range and yet merit system principles would apply.
    Mr. Blair. I always like to say trust us but verify, so we 
will help you on that verification process.
    First, with SES, keep in mind where we are coming from on 
this. We have pay compression of somewhere between 60 and 70 
percent SESers are all paid the same. The reason for that is it 
has been linked to congressional pay and Congress has denied 
itself pay raises over the course of the past decade and beyond 
a multitude of times.
    In order to justify moving up that pay cap, we want to say 
we are not going to be giving any across-the-board pay raises 
to Senior Executive Service members; that the pay raises that 
will be afforded them, if you are going to increase within the 
pay range, the pay range will now be, locality pay, Executive 
Level 2 which is a Cabinet level Secretary salary or Deputy of 
approximately $154,000, it is going to have to be based on 
performance.
    Right now, SESers are evaluated on a yearly basis and we 
need to do more on that evaluation. In 2001, 83 percent got the 
highest rating possible. Some argued that those ratings are a 
sign of agencies trying to get around the pay compression cap. 
That said, I think that we do already monitor SES performance. 
I know in OPM, a relatively small agency, the Director walks 
through with each and every Senior Executive Service member 
their performance evaluation.
    Ms. Norton. Is that an example of a merit principle? My 
question was how do merit principles apply to this 
individualized pay for performance system that you would put in 
place?
    Mr. Blair. We could identify the merit system principles 
that you are paying fairly, you are recognizing good work, that 
you are paying by work for equal work for equal value and also 
aligning the work with the performance of the agency. I think 
that meets the heart of the merit system principles.
    Ms. Norton. It may well. Let me conclude by saying it all 
sounds terribly subjective to me in the hands of an individual. 
Again, this is how we got the system in the first place because 
it produces all kinds of reactions from people who say how did 
you reach that conclusion. I think you have a lot of work to 
do. I think your work is easier, this I will grant you, much 
easier with SES, much easier the higher up you get.
    In your testimony, you say if we cannot demonstrate the 
value of a performance oriented pay system for our senior 
executives, how can we expect to foster development of 
performance oriented pay systems for the rest of the Federal 
work force and you suggest again, this is some kind of 
precedent for the rest of the Federal work force on page 6 when 
you say, the one-size-for-all pay system doesn't work for 
senior executives any better than it works for other employees 
and we are eager to show that a performance oriented pay system 
can work for senior executives.
    I would just like to ask you as you try to figure out how 
to do this for people at the very top for whom it seems a case 
can be made for at least the merit system principles being 
applied for some really open-ended way to pay, I would caution 
you against believing this is a model for how to deal with what 
is 2 million people who work in the Federal work force. I think 
that shows a lack of appreciation for how we got to this system 
in the first place.
    Mr. Ruppersberger talked about morale. The notion of saying 
to managers in the workplace, hey, we are going to do what we 
did in the SES, we are going to go to an individualized system, 
using your language, of judging every employee. All I can say 
to that, Mr. Blair, is good luck.
    Mrs. Davis of Virginia. I thank the gentlewoman. Your time 
has expired and we have several more panels, so I am going to 
go on to Mr. Murphy.
    Mr. Murphy. Thank you, Madam Chairman.
    I have been trying to go through these reports and figure 
out some sense and having been an employer myself, I know how 
difficult it is to evaluate performance. How do you do it? 
Forget all the jargon. I don't want to hear about performance 
standards. I want to hear exactly how you do it?
    Mr. Blair. We go through and evaluate employees.
    Mr. Murphy. Who fills that out?
    Mr. Blair. The manager or supervisor.
    Mr. Murphy. And where does that data come from?
    Mr. Blair. From an employee's performance plan on an annual 
basis.
    Mr. Murphy. So the employer and employee work out that 
performance plan?
    Mr. Blair. It is mainly done by the manager or supervisor 
but with input from the employee.
    Mr. Murphy. Who makes a determination if those things have 
been met? Is that discussed between the employer and employee, 
are there outside sources?
    Mr. Blair. It is done by the manager.
    Mr. Murphy. So it depends how closely the manager is 
monitoring that person's job. Are there any outside sources? A 
lot of Federal employees interface with the public. Is there 
any way of getting information from the public on their 
satisfaction?
    Mr. Blair. I believe that might be part of the individual's 
plan. It would be on an individual basis. I would have to get 
back to you as to what those look like. I think the point is 
for the individual employee, we do set up specific performance 
plans for them.
    Mr. Murphy. I am not closer to the truth of what is going 
on here. I don't think you are being difficult, I am just 
trying to understand because these things can be very, very 
difficult to do and if one doesn't do them right, the whole 
thing from top down ends up to be a mess.
    I know we are all in a performance rated every 2 years for 
better or worse, reality or fantasy. Whatever it is, we have 
that and we have to lay those things out. It is a matter that 
for employees, many times people talk in not very glowing terms 
about any government employees. They refer in negative terms to 
bureaucrats and so forth and many politicians say they are 
going to cut through red tape and deal with bureaucrats. We 
wouldn't say that, it would be challengers who would say those 
things.
    Many times we know the value of people working in these 
aspects but what I am concerning about is how we can get 
outside information that benefits that employee because I think 
they always do better if they know an accurate and fair 
information of how they are doing. How do we get that 
information? Is there any system set up to do that?
    Mr. Blair. I don't think we want to have a one-size-fits-
all for government. I think it is going to have to be tailor 
made for each individual agency and even subcomponents within 
the agency. We want to evaluate that plan and the agency needs 
to evaluate that plan and make sure they aligned with the 
mission goals and objectives. I am looking at it from kind of 
the 30,000 foot level at this point but we want to make sure 
employees know what is expected of them, know how they are 
being judged, that performance evaluation always carries with 
it an element of subjectivity. I think we need to recognize 
that and put it out on the table but subjective judgments are 
not inherently unreliable. They just have to be done openly and 
transparently and done with objective, definable results. That 
is what we want to make sure we have on the table for employees 
when we are going to be basing a system or part of their 
compensation system on performance based plans.
    Mr. Murphy. I would hope in pursuit of this, those 
guidelines would be fairly objective in terms of what employers 
are doing because even management needs help in understanding 
how to do those. Many times the problem occurs because a 
manager has not clearly stated guidelines. It is unfortunate if 
the only time that manager sits down with the employee to 
discuss problems is at the time of their annual review. That is 
a major flaw with management. They should have done so several 
times up to that point. I assume we are doing work on that too?
    Mr. Blair. I agree with you. I think when you do have a 
problem employee, it shows a failure not just on the part of 
the employee but on the part of management. This is something 
employees and managers and the supervisor and the managers' 
managers need to have constant interaction.
    Let us look at what we are up against. We have 
approximately a payroll of $133 billion a year. That includes 
paying benefits. Pay can be a very strategic tool in the 
management's arsenal so to speak but we have neutralized that 
tool because very little of our pay is performance based.
    We gave a 4.1 percent across the board increase last year, 
it cost well over $5 billion. We have longevity of what we call 
within-grade step increases of 3 percent a year which up to 
one-third to one-half employees are eligible for, with only a 
small component of performance as a part of that. You have to 
ask, ``is that an effective way to manage that much money?''
    What we are trying to do, and I think most people agree, 
that we need to do a better job of rewarding performance. The 
recent Federal Human Capital Survey results that OPM released 
last week, and I believe the Chair referenced this in her 
statement today, said that most employees, 63 percent, felt 
good about their pay, were satisfied with their pay.
    Interestingly, fewer than half said that pay rewards good 
performance. We need to do a better job on that. That is what 
the President's proposal attempts to do, introduce an element 
of pay-for-performance through the Human Capital Performance 
Fund.
    Mr. Murphy. I don't disagree with the concept. It can have 
some fine results provided it does that and provides a fair and 
clear mechanism for employees to do that. I think that is what 
employees want. When you have people not satisfied with their 
job, oftentimes they just want more pay to make up for their 
own problems with it. I hope these things continue to develop 
and you can clear it up.
    Mrs. Davis of Virginia. Thank you, Mr. Murphy.
    Mr. Van Hollen.
    Mr. Van Hollen. Thank you, Madam Chairman.
    First, a general comment. My colleagues may have already 
made this point which is, this may be received less 
suspiciously by many employee groups if you dealt with the pay 
parity issue. In other words, if people felt they were getting 
their fair pay increases like the civilian side of the work 
force with respect to comparison with the other side of the 
work force as opposed to this incentive pay being carved out of 
moneys that would otherwise be part of the general pay 
increase, I think obviously you would get a better reception.
    I have a couple questions to followup on what Congressman 
Murphy and others have asked which really gets to the nub of 
the issue which is people feeling comfortable that you have a 
performance plan in place that really measures the individual's 
performance on a merit basis as opposed to all these extraneous 
and subjective factors.
    I would be very interested and maybe you could supply the 
committee and you mentioned you have performance plans already 
in place to provide an analysis of employees. If you could 
provide the subcommittee with a sort of cross section across 
various departments, the Departments of State, Defense and the 
others of the type of performance plans currently there because 
on the one hand, you say they are already in place and on the 
other hand, they seem to be giving you results you are not 
happy with, a kind of bunching of results, so I would be 
curious if we could get some sense. It is hard to put your 
hands on this stuff, so if we could get our hands on some stuff 
you have been using, that would be helpful to me anyway.
    Mr. Blair. We would be happy to provide that.
    Mr. Van Hollen. Thank you. Second, Congressman 
Ruppersberger was here and talked about gainsharing. In that 
case, you could see measurable results. It obviously applies 
more clearly to things where the government is performing a 
service. He mentioned mowing the grass or providing a 
particular concrete service where you can measure the cost to 
the government and determine whether or not that service is 
being delivered at less or more cost.
    I wonder if that is not a better approach. What he is 
saying is we are going to identify a distinct area of 
government services, determine how much it is costing us today 
to provide those services, then we are going to say to the 
employees, if you provide those services at less cost, you will 
share somewhat in the benefits and the taxpayers will share in 
the benefits. It is much easier to identify, I actually think 
it may be harder to identify things in your Executive Service 
than things in other areas of government where you may be 
delivering specific services. I wonder if you could comment on 
that.
    Give us examples. You said gainsharing is allowed in the 
Federal Government. Give me some examples of where it is in use 
now and how it is working.
    Mr. Blair. I would have to get back with you on that. I 
didn't have the benefit of his statement before I came here, so 
we would be pleased to provide that for the record.
    [The information referred to follows:]
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    Mr. Blair. One of the instances you just described would 
really work well under the President's proposal for the 
Performance Fund. For instance, say you have an employee with 
no chance of promotion at this point but they are doing an 
outstanding job. Say they identify some procurement savings 
that can save an agency $2-$3 million a year. Under current 
rules, we can reward that employee a one-time bonus of $5,000 
for the identification and for that good work, but that is not 
built into his or her base salary and doesn't go toward 
retirement.
    Under the Human Capital Performance Fund, an agency 
presumably could submit a plan to recognize that kind of 
productivity and give that employee an award increasing his or 
her salary by $5,000 a year. That would be built into their 
base pay, be recognized for retirement purposes and that person 
would be able to keep it in future years rather than just see 
it as a one-time bonus or one-time shot.
    I am glad to see the committee members' interest in this 
because we really need to do a better job of honing our systems 
in order to encourage better performance. When we have a pay 
system that doesn't do that, it really puts us out of whack and 
pay is one of the most strategic tools we have. If we can't use 
that to spur better performance, I am not sure what else we 
have.
    Mr. Van Hollen. Briefly to followup, you are right. The 
procurement, that is an example where someone's creativity may 
be able to identify cost savings but there are so many areas in 
the Federal Government where there is not that kind of direct 
link to an easy measure of productivity, not like a salesman 
out there selling widgets.
    For example, someone at the State Department or the CIA who 
is analyzing the situation in Iraq or any other place in the 
world, coming up with a clear performance standard for how you 
measure success is what I am having trouble getting my hands on 
and what is the basic concern of employees with respect to the 
fairness. There are some things that lend themselves more 
easily to measuring success and maybe we should focus on those 
areas on a trial basis or pilot basis rather than trying to do 
it all at once.
    Thank you, Madam Chairman.
    Mrs. Davis of Virginia. Thank you, Mr. Van Hollen.
    If you all will bear with me, I have one more question 
because it has been brought up a couple of times. You alluded 
to it a moment ago, Mr. Blair. The OPM survey showed that 
nearly two-thirds of the Federal workers were very satisfied 
with their pay but also revealed that 35 percent were 
considering leaving their jobs. To me doesn't this indicate 
that maybe pay is not the source of job satisfaction and maybe 
we should not be looking at pay reform as reform right now?
    Mr. Blair. Let me take two stabs at that question. First, I 
think 35 percent that may be thinking about leaving their jobs 
may have also included those who are thinking about leaving for 
retirement purposes. Say even if everyone is satisfied with 
their job, I think we still need to take a look at how we pay 
employees.
    We have a 50-year-old system that has been amended over the 
years. The last time it was substantially amended was in 1993 
but we do not have performance as a key component in the way we 
reward our employees. That is the right thing to do. So even if 
everyone is satisfied with their pay, it still doesn't mean we 
shouldn't be looking at finetuning and reforming the ways we 
pay our employees.
    Mrs. Davis of Virginia. I think you can see that the 
members of the committee are possibly interested in this but 
also very cautious and wary because we don't want to, at least 
I as the Chair, am not real crazy about going into something 
and making more of a mess of the system than we might have at 
the moment.
    I look forward to hearing some things back from both of you 
and I agree, we do probably need to look at some type of change 
but we want to make sure it is the right change.
    Mr. Davis.
    Mr. Davis of Illinois. I would like to make sure we all get 
the information he is going to provide for Mr. Van Hollen.
    Mrs. Davis of Virginia. We will make sure when he gets it 
to the committee, Mr. Davis, that we get to all the members of 
the subcommittee.
    We thank you both for taking time to come and appreciate 
everything you had to share with us.
    If the third panel would come forward. We are going to 
administer the oath, if you will stand. It is the 
subcommittee's standard of practice to ask witnesses to testify 
under oath, so if you will raise your right hands.
    [Witnesses sworn.]
    Mrs. Davis of Virginia. The witnesses will be recognized 
for opening statements. We will ask you, as we did the previous 
panel, to summarize your testimony in 5 minutes and your 
written statement will be made a part of the record.
    I would like to welcome Christopher J. Mihm, Director, 
Strategic Issues, U.S. General Accounting Office; Max Stier, 
president and CEO, Partnership for Public Service; and George 
Nesterczuk, consultant to the Heritage Foundation. Thank you 
all for being with us today. Mr. Mihm, we will recognize you 
for 5 minutes.

STATEMENTS OF CHRISTOPHER J. MIHM, DIRECTOR, STRATEGIC ISSUES, 
 U.S. GENERAL ACCOUNTING OFFICE; MAX STIER, PRESIDENT AND CEO, 
    PARTNERSHIP FOR PUBLIC SERVICE; AND GEORGE NESTERCZUK, 
 PRESIDENT, NESTERCZUK AND ASSOCIATES AND CONSULTANT, HERITAGE 
                           FOUNDATION

    Mr. Mihm. Thank you very much, Chairwoman Davis and Mr. 
Davis. It is a great honor and pleasure to be here today to 
testify on results oriented pay reform.
    Mr. Davis, I think as you noted in quoting from the 
Controller General in your opening statement, my major point 
today is that in order to have effective pay for performance 
reforms, agencies must have modern, credible and validated 
performance management systems that are capable of supporting 
pay and other personnel decisions. Quite simply, pay for 
performance works only when adequate safeguards including 
reasonable transparency and appropriate accountability 
mechanisms are in place.
    I would agree with the spirit of what Mr. Blair and Ms. 
Sistare were saying that modern performance management systems 
are the centerpiece of those safeguards.
    Unfortunately, as you also noted, Mr. Davis, we have quite 
a way to go with many agencies. The chairwoman quoted in her 
opening statement from the OPM Governmentwide Survey that 
suggested the credibility is certainly a problem with the 
current Federal performance management system. Part of the 
problem is that executive agencies performance management 
systems are based on episodic and paper intensive exercises 
that are not linked to the strategic plans or program goals of 
the organization. They often have only a modest influence on 
the pay, use, deployment and promotions of Federal employees.
    Leading organizations, on the other hand, use their 
performance management systems to accelerate change, achieve 
desired results and to facilitate two-way communication 
throughout the year so that discussions about individual and 
organizational performance are integrated and ongoing.
    This gets to exactly the point Mr. Murphy raised in his 
questioning of the last panel. That is, these organizations use 
their performance management systems not so much as merely once 
or twice a year just individual expectation setting or rating 
processes but they are actually used as tools within the 
organization to manage it on a day to day basis and achieve 
results that citizens care about.
    Chairwoman Davis, today you are releasing a report that we 
prepared at your and Senator Voinovich's request that shows 
some of the specific practices that leading public sector 
organizations here in the United States as well as around the 
world have used in their performance management systems to 
create clear alignment between organizational goals and 
individual day to day activities. It is the so-called line of 
sight.
    Our suggestion would be that Federal agencies consider 
these practices as they modernize their performance management 
systems to better ensure that their daily activities are 
contributing to results. Our hope is that this report, and 
other work we will certainly make available to the 
subcommittee, will begin to provide some of the examples that 
Mr. Murphy and Ms. Norton were asking about, very concrete 
examples of where organizations are able to achieve this 
alignment while still adhering to merit principles.
    As all the conversation thus far has made clear, we need to 
continue to experiment with providing agencies with the 
flexibility to pilot approaches, to setting pay and linking pay 
to performance. We believe that agencies should be required to 
demonstrate they have modern performance management systems in 
place before they are allowed to implement the pay for 
performance initiatives. This is consistent with the approach 
Congress took with raising the total amount of annual 
compensation for senior executives as part of the Homeland 
Security Act.
    The Congress may also want to consider providing guidance 
on the criteria that OPM should use in making judgments about 
individual agencies' performance management systems if Congress 
decides to go forward with the performance fund or other pay 
for performance initiatives. We believe that the practice as 
detailed in the report being released today provides the 
starting point for that consideration.
    In summary, there is widespread agreement that the basic 
approach to setting Federal pay is broken and we need to move 
to more market and performance based approach. Doing so will be 
essential if we want to really maximize the performance of 
government. However, while reasonable people can and will 
debate and disagree about the merits of individual reform 
proposals, we believe that all people should be able to agree 
that a performance management system with appropriate 
safeguards must be in place and serve as the fundamental 
underpinning of any fair, effective and appropriate results 
oriented pay reform.
    The practices used by leading organizations in developing 
and using their performance management systems to link 
organizational goals to individual performance and create this 
vital line of sight between individual activities and 
organizational results, we believe show the way in how to 
implement performance management systems with the necessary 
attributes.
    Chairwoman Davis and Mr. Davis, this concludes my 
statement. I will be happy to take any questions you may have.
    [The prepared statement of Mr. Mihm follows:]
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    Mrs. Davis of Virginia. Thank you, Mr. Mihm.
    Mr. Stier.
    Mr. Stier. Thank you very much, Madam Chairwoman and 
Congressman Davis. It is a pleasure being here particularly 
with Chris who has done wonderful work at GAO and George 
Nesterczuk and the panel coming, including Colleen Kelley who 
is on our advisory board.
    It is great the committee is doing this. I think you are to 
be commended. When we talk about Civil Service reform, 
oftentimes the elephant in the room that goes unrecognized is 
the issue of compensation and compensation reform. It is a 
tricky set of issues but it is terrific that you are focusing 
on it today and bringing together so many people to share their 
experiences with you.
    It is particularly important to be focusing on it today 
given the challenges the Federal Government faces with respect 
to its human capital and I also think it is about time. There 
has been research, there has been 25 years of demo project 
experience. There are expected agencies that have been 
experimenting and in fact, there are answers to questions 
raised by members--other agencies that have been attempting 
gainsharing. PTO is an example and others. Clearly the GAO 
report is going to shed some interesting light on that. So this 
is terrific.
    I would begin by noting that the merit principles 
themselves talk about a form of recognizing excellence. The law 
requires, ``Appropriate incentives and recognition should be 
provided for excellence in performance.'' That is in the law 
today but unfortunately it has not, I think, been adequately 
implemented. I think much of the committee's attention should 
be focused on how do you get that to be a reality in today's 
workforce.
    I would make three very quick points. The first is that 
this issue is not easy but it is worth tackling, very much so. 
The present system I believe is very much broken. You have the 
White Paper from OPM which is very instructive. Very 
importantly, look at what the employee surveys are telling us. 
In the year 2000, the Merit Systems Protection Board did a 
survey asking ``If you perform better in your present job, how 
likely is it that you will receive more pay?'' Fifty-four 
percent said unlikely versus 35 percent saying likely. The most 
recent survey we have from OPM, the 2003 survey, again the 
chairwoman has raised some of these statistics, only 30 percent 
agree with the proposition that ``Our organization's awards 
program provides me with an incentive to do my best.'' Only 45 
percent of employees agreed with the statement that ``Arbitrary 
action, personal favoritism and coercion for partisan, 
political purposes are not tolerated.'' That is a real problem.
    I would note that number, according to the OPM report, was 
5 percent higher among the employees surveyed in the 
alternative personnel systems and demo projects. That may not 
be management nirvana but it is a statistically significant 
improvement and it says it is possible to do better even under 
the existing system with some of the experimentation that has 
taken place.
    Second, the potential gains here are absolutely enormous. 
If you believe that better performance will receive better 
rewards it increases employee commitment. That is something you 
see all over the private sector research. Watson and Wyatt did 
a survey in which they found an 82 percent level of commitment 
for employees who believe they will receive better pay for 
better performance versus a 35 percent level of employee 
commitment for those who did not.
    We also can see examples in the public sector, Bonneville 
Power Administration and GAO both talked about in great detail 
in the written testimony.
    The third point I would like to raise is that the issue of 
pay for performance really needs to be looked into in larger 
context. Many of the members of the committee have raised this 
already. We need to be reviewing this as performance 
management, a culture of results, and not simply a pay reform 
issue. It is really a comprehensive system we need to be 
talking about, not only the evaluation system raised here but 
really an ongoing dialog between managers and employees about 
the way contributions are made by individuals to meet the 
organizational needs of the agency.
    That means that ultimately you have to start with clear 
organizational goals and ongoing communication--something that 
oftentimes is not accomplished in agencies today--in order for 
employees to be able to fully commit to the process.
    Clearly, we need to be looking at individual agencies 
before we allow them to move forward to a system that is going 
to be more directed toward tying rewards to performance. It is 
something we really need to do. There are lots of ways to do 
it. We have good examples out there. Obviously the groups you 
have involved in the testimony today need to be involved in 
that process. We look forward to helping in whatever way we 
can.
    [The prepared statement of Mr. Stier follows:]
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    Mrs. Davis of Virginia. Thank you, Mr. Stier. We appreciate 
that.
    Mr. Nesterczuk.
    Mr. Nesterczuk. Thank you, Madam Chair and Mr. Davis. 
Thanks for this opportunity to address the committee on the 
question of compensation of Federal employees. It is a very 
timely issue. Although current surveys may indicate some 
satisfaction with current pay systems, historically it has 
always been an irritant in the work force, maybe a reflection 
of economic conditions outside.
    Let me summarize of the key points I made in my written 
testimony so that I can stay within the 5-minute time limit.
    There is no question in my mind that the pay system is, if 
not broken, certainly dysfunctional in many instances. If we 
look at the past 15 years and the experience of agencies coming 
to Congress seeking relief and getting relief for special 
circumstances, I think there is a message there for the Civil 
Service Subcommittee to seriously take to heart.
    FIRREA exempted the banking regulators of financial 
institutions from Title V pay restrictions way back in 1986-
1987. The FAA was taken out from under Title V and established 
its own separate pay system back in 1996. The IRS followed suit 
in 1998 and that is 100,000 employees in that case. The 
Transportation Safety Administration followed in 2001 with a 
separate pay system and the Department of Homeland Security. So 
you are looking at 300,000 to 400,000 employees that are going 
to be out from under the General Schedule.
    There is a clear message there which is agencies are 
focusing on their missions. They find the pay system is not 
supporting getting their job done. OPM has historically had 
special pay authority but clearly it is not adequate. That was 
intended to rifleshoot individual occupations in specialized 
locations where local labor market conditions dictated 
exemptions from the General Schedule. The agencies are clearly 
looking for much more sweeping reforms.
    Let me now address the question of performance management, 
performance recognition in the Federal Government, a whole 
separate issue. Pay for performance is not really a play these 
days in the Federal Government, except perhaps at the SES level 
where performance is more strictly adhered to.
    The two concepts are clearly divorced in the minds of most 
Federal employees. The culture just doesn't recognize pay and 
performance as being related. Pay adjustments annually are 
pretty much automatic. Twice a year adjustments for many 
employees, every 2 or 3 years for everybody else in 3 to 4 
percent increments, so a 6 to 7 percent pay increase, 
regardless of how well you do your job is a demotivator to go 
out and try harder if your cohort is not contributing to the 
process. So performance is used as an adjunct.
    We do have performance recognition systems or cash awards, 
bonuses for the SES, Presidential rank awards, but where is the 
fundamental underpinning for making those awards? If a 
performance management system results in 80 to 90 percent of 
employees being rated above average, then what are the criteria 
that are used to make decisions for those cash awards, those 
rank awards, the incentive awards for rank and file employees. 
There is a huge amount of cynicism in the work force because 
they clearly understand there is some other system at play here 
which is being relied on to support the bonus decisions.
    We need a very robust, transparent performance measuring 
system that makes meaningful distinction in relative 
performance among employees. Until that is on the table, you 
are not going to be able to marry pay and performance.
    There are a number of options that the committee is looking 
at today in realm of pay reforms. As I said, we go back to the 
basic problem and agencies are speaking up telling you they do 
need some kind of pay remedies. Pay banding is a credible 
alternative. It has been tested for 25 years now. Yes, there 
are some shortcomings with it. It tends to inflate the overall 
payroll but those are issues that can be managed.
    I think the notion of using OPM as a watchdog working with 
agencies to ensure they implement the right kinds of responsive 
performance management systems to go along with the pay banding 
reforms is probably a suitable approach.
    Moving to SES paybanding, the open pay system for the SES 
with a raise cap is very important. That is a key element in 
the chain of command from the President, Cabinet Secretaries to 
agency heads down at the career work force. They need to be 
motivated and rewarded for their efforts and the pay 
compressions that historically reoccur every few years which is 
not only a big demotivator for performance but tend to 
encourage people to leave the work force.
    Finally, the Human Capital Performance Fund I think is an 
excellent idea. It is a marginal in the overall picture of the 
overall payroll of $100-$120 billion and $500 million is a 
marginal increment in that but it is new money for the 
agencies. It is the kind of incentive they need to get their 
performance management systems up to snuff.
    Thank you.
    [The prepared statement of Mr. Nesterczuk follows:]
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    Mrs. Davis of Virginia. Thank you, Mr. Nesterczuk.
    Mr. Mihm, I will start with you. Do Government agencies 
have the capacity to measure individual and group performance 
well enough to make pay-for-performance more than a guessing 
game or worse, a matter of favoritism?
    Mr. Mihm. When we look across Federal agencies performance 
management system, we don't see the systems yet in place that 
will allow them to make those meaningful distinctions or to 
adequately measure individual performance. There are plenty of 
efforts underway in that regard. Some agencies are really 
making some enormous progress in that but we think there is 
plenty of work that virtually all agencies need to undertake in 
order to be able to these world class performance management 
systems in place.
    Mrs. Davis of Virginia. You at GAO have an internal pay for 
performance system and it is pretty new?
    Mr. Mihm. Yes. We started it as a result of legislation 
Congress granted us in 1980. In the year 2000-2001, we went 
through a rather fundamental change in updating that system. 
That is the new part, yes.
    Mrs. Davis of Virginia. Is it too early to tell if it is a 
success?
    Mr. Mihm. I am a homer for it, I like it, so yes, it is an 
overwhelming success.
    Mrs. Davis of Virginia. Would everybody in your agency say 
that?
    Mr. Mihm. In the true spirit of oversight, there are checks 
we have in place. There are employee attitude surveys that we 
take periodically to make sure that there is trust and 
confidence in the system.
    One of the things we did going into it to try and make sure 
we wouldn't have problems in implementation at the back end is 
really drill employee involvement. In every step in the 
process, it was deep, it was serious and it was across the 
agency that employees were involved. We went to a focus of 
paying for core competencies, our employees were deeply 
involved in identifying the competencies that we would need to 
be successful in the future, validating those competencies and 
were subsequently assessed on those competencies.
    While we are far from perfect and are always looking to 
update it and learn from others, we are quite confident and 
quite pleased with the progress we have made in the first year.
    Mrs. Davis of Virginia. Is that how you got the employees 
to gain ownership in it, by getting them involved and letting 
them be a part of the process and determining how the system 
would work?
    Mr. Mihm. Yes, ma'am. Fundamentally, that is what does it 
for you. You have to have employees involved. In fact, when we 
looked overseas at performance management systems and pay for 
performance, we saw instances where they crashed and burned 
because they did not get their employees and the unions, we are 
talking about the representatives of the employee unions, 
involved as well. They had to pull back and start all over 
again. There is simply no other way you can do it if employees 
don't feel a sense of ownership.
    Mrs. Davis of Virginia. Mr. Stier, what do you think would 
be a proper timeframe for implementation of pay-for-
performance?
    Mr. Stier. Enough time to make it work. I think you have to 
do this in pieces and I think that starting with the SES--I 
think you can parallel track this--is a very good idea for some 
of the major reforms you are talking about. That is the 
leadership group. It is a small group you are talking about, 
7,000 people total, governmentwide. If you can't get it right 
with your executives, then you are going to have a very 
difficult time doing it throughout the Government.
    That doesn't mean that if the same system that is applied 
to the SES either across Government or the same system applied 
to the SES as to the General Schedule. I really do believe that 
you start there.
    I also think you find your agencies that are ready. There 
are some agencies out there that have done significant work. 
GAO is a good source of information. I also think you need to 
provide an incentive to make this work. You need to incentivize 
the agencies to start focusing on their performance evaluation 
process and not only that, but the whole shebang, the 
objectives they have as an agency, how do they connect the 
overall agency objectives to the individual employee 
contribution. If you don't start that process now, it is going 
to be very difficult to ever get there.
    I don't mean to be ducking your question but I honestly 
believe this is going to be a long-term process but you can get 
pieces of it done here and now.
    Mrs. Davis of Virginia. It was a tough question.
    Mr. Nesterczuk, I have one section of NASA in my district. 
One of the things I have heard from them is being able to 
employ, retain, recruit good folks. They proposed legislation 
that would give it more hiring and pay flexibility to help 
recruit and retain a quality work force. The labor unions have 
countered that bonus pay is a poor substitute for across the 
board pay increases that would reward the loyal workers instead 
of those who threaten to leave to extort more pay. How do you 
respond to that?
    Mr. Nesterczuk. I don't think it is a question of loyalty, 
it is a question of performance. We are not talking about 100 
percent of the work force that needs to be rewarded and 
recognized. These recognition systems don't have to begin with 
the notion that gee, we have to make this work for 100 percent 
of the people. If you accept the notion that 70 to 80 percent 
of your work force is doing perfectly fine, needs a minimum 
amount of supervision, the work doesn't change drastically day 
to day, you can put them almost on automatic pilot. Clearly, 
interaction with a supervisor is called for to make sure 
everything is on track but it is that smaller number of 
employees that are essential to getting quick turnaround, 
critical jobs, some unknown circumstance drops into the middle 
of the workplace and not everyone is going to deal with it, 
just the handful of people. Those are the folks you need to 
incentivize. You need to focus your performance management 
systems on recognition of those key people.
    The same applies to recruitment and retention. It is not a 
matter of retaining 100 percent of the work force because most 
of them are perfectly happy working at their level of 
competence in the environment they are in. You don't have to 
make special considerations for them. It is the ones that are 
critical to getting your job done that you need to make sure 
you take care of.
    Mrs. Davis of Virginia. So do you think it is fair to pay 
people who are doing the same job different pay?
    Mr. Nesterczuk. If they are doing the same quality of work 
on the same job, they should be paid the same but there are 
other aspects. There is timeliness, quality, volume, doing 
extra work. Those are the differentiators within a group. Those 
are the people whose performance you recognize.
    My experience is that in a group in a cohort, everyone 
knows who the extra special employee is. They are the person 
the employees go to when they don't want to talk to their 
supervisor about resolving a problem. Their view of it is, if 
the supervisor doesn't know who the star is, then the 
supervisor is not worth a damn anyway.
    Mrs. Davis of Virginia. Thank you.
    Mr. Davis.
    Mr. Davis of Illinois. Thank you, Madam Chairman.
    Let me ask each of you how do we determine relative 
importance of missions? This notion that if you are doing a job 
in one place, it may not be comparable to doing a job in 
another place? How do we make that distinction?
    Mr. Mihm. I can start on that. As your question suggests, 
it is not easy to do at all. There are a number of ways we have 
seen organizations here and abroad have done it. One way is 
they try and tackle it directly, try and make judgments about 
those that are the more important or less important missions 
and success under those missions.
    We have an example in our report about the Province of 
Ontario which starts at the provincial level and then tries to 
cascade it down throughout the entire province in government.
    Here, what we often find is a focus on core competencies. 
That is, for each individual, normally an occupation group or 
grade, what are the particular competencies that would be 
needed that have been validated to be shown as leading to 
organizational results and then let us pay off those 
competencies, let us pay to the extent people exhibit those 
competencies and then let us pay to the extent that they 
achieve or contribute to the achievement of organizational 
goals.
    In other words, here in the United States we often don't 
deal with that question directly. We don't try and make 
judgments across missions. We just make judgments on did the 
person exhibit the core competencies we are looking for and did 
they contribute to organizational goals as specified in a 
performance contract at the beginning of the assessment year?
    Mr. Stier. Congressman Davis, I would like to add that I 
was moving away from the microphone out of respect for Chris, 
not out of fear of the question.
    I would say, and I am not sure I fully grasp the entire 
range of your question.
    Mr. Davis of Illinois. Let us say I am a physician and I am 
working for the Bureau of Primary Health Services and somebody 
else is working for the Center for Disease Control. Are we 
comparable physicians?
    Mr. Stier. I would say, Congressman Davis, that in some 
sense it is not dissimilar from the issues that face all 
organizations in this country or any market-based system. I 
think we have a situation with the Federal Government today 
that by and large is not sufficiently sensitive to the market. 
We need to have a pay system that is more market sensitive and 
more performance sensitive in order for the Government to be 
able to attract and keep the people it needs to get the job 
done.
    I think in the specific example you gave for CDC, for 
example, we would need to ensure that CDC has the ability to 
pay either existing talent it has to meet that job or talent it 
does not have to attract that talent in order to be able to get 
its mission done. As an organization, the Partnership for 
Public Service believes that the Government would be much 
better served if it had a system that both provided the 
necessary resources to get the talent it needs and also a 
system in place to allow that talent to maximize its capacity 
to perform. That system would be one that recognizes and 
rewards excellence.
    Mr. Nesterczuk. I think there are two elements to that 
question as I see it. One is the apportioning down, cascading 
down of an agency's mission to various components of that 
agency and making sure they understand how it is they 
contribute to the overall mission of the agency. That way in 
that context, you can do a performance evaluation and the 
employee understands what it is that is expected in the overall 
context of the agency. It is the cascading down process first 
from the top of the agency.
    The other aspect of that question I will take off from what 
Max responded, the question of market testing, the value of a 
physician in one context and one component versus another. That 
could change over time. In 1 year, the CDC could play a far 
more critical role in handling an epidemic or crisis than 
perhaps a local service physician in some remote community, 
public health service. So it is difficult to respond globally.
    However, I don't have any problems with the notion of 
agencies establishing compensation systems independent of each 
other. That serves as kind of an internal market within the 
Federal community. God knows there are enough jobs in the 
private sector that have no comparability to the Federal 
Government and vice versa. We are trying to establish market 
comparisons with the private sector when a lot of our own 
occupations don't fit over there, so creating a market within 
the Federal Government has perhaps a very salutary benefit.
    I would argue for you that to a certain extent we already 
have the beginnings of that in some of our occupations. For 
example, in law enforcement, there is a definite pecking order 
of agencies, with the FBI sitting on top and everyone who is in 
a law enforcement job series would love to wind up in the FBI 
but they might start at the Federal Building Service, perhaps 
move over to be a guard in the print shop in the Government 
Printing Office, then work their way up through the ranks 
through Customs or DEA or others.
    There is a drift from some agencies and there is a pay 
differential that goes along with that, greater opportunities 
for career advancement as you go into different agencies. So we 
have a market in the Federal workplace but we don't reflect 
that in the pay structure.
    Mr. Davis of Illinois. Am I understanding each of you to 
suggest that in order for pay-for-performance to work, 
employees must be intricately involved in devising the system?
    Mr. Nesterczuk. Yes, absolutely.
    Mr. Mihm. Yes, and where they are involved, it works or can 
work and where they are not involved, it does not work.
    Mr. Davis of Illinois. Thank you very much.
    Mrs. Davis of Virginia. I just have one question for you, 
Mr. Nesterczuk.
    We just went through the battle last year with the Homeland 
Security Act. Do you see that as a model for transitioning our 
Federal agencies into a more flexible personnel system? Do you 
believe that human resources is one of its successes or 
failures?
    Mr. Nesterczuk. I think there are better models. I think 
Chapter 47 of Title V, the demonstration project authority, 
sets out a number of rules of engagement so to speak, the parts 
of Title V Civil Service that you shouldn't touch that are kind 
of core and common to all versus the ones where perhaps there 
are better ways of getting the job done like pay or appeals 
processes, the classification system and a number of things 
where you are allowed to experiment.
    I think using a Chapter 47 model to try to bring agencies 
together or to permit an agency to engage in a demonstration 
project is far better. We have 25 years of experience with 
that, it has worked in the past, it has tested legislative 
language. The experiences that I have seen with the FAA in 
1996, the IRS in 1998 and TSA in 2001, where you basically tell 
the agencies start from scratch, although IRS wasn't quite 
scratch, the others were, can be very problematic for an 
agency.
    The first day the FAA was out from under Title V it 
administratively reimposed all of Title V, all of those hideous 
rules and regulations of the Civil Service Code right back on 
itself because it couldn't start from scratch, it couldn't 
start from zero. So the Title V rules are a good starting point 
and the Chapter 47 allows you to drop and substitute various 
components and pieces of it as you mature, as you go along, as 
you gain experience. I think that is probably a far better 
model for reform.
    Mrs. Davis of Virginia. Would you recommend that we do 
demonstration projects if we were to go more to reform?
    Mr. Nesterczuk. Yes. I would use Chapter 47 type language 
to allow OPM to extend pay reform authority to agency A once it 
submitted a plan, how it proposes to do it, why it wants to do 
it, etc., but this would be much broader. There would be 
restrictions, so you would need to lift some of those 
restrictions but the construct, that is what would propose. Let 
agencies come to OPM when they are ready to tackle it rather 
than go governmentwide because they all need to tailor it 
depending on the kinds of occupations they are dealing with, 
the kinds of turnover they got, recruiting problems, they need 
to tailor those things to their best needs.
    Mrs. Davis of Virginia. You gentlemen agree? You are both 
shaking your heads yes.
    Mr. Davis, do you have anything else for this panel?
    Mr. Davis of Illinois. No.
    Mrs. Davis of Virginia. Gentlemen, thank you very much for 
coming. I hope we didn't keep you here too long and I 
appreciate all the information you gave us.
    I do apologize that we have a long hearing today but this 
is an issue we wanted to hear from everyone. Now we get to hear 
from the workers themselves. If I could get panel four to come 
forth.
    For the fourth panel, we will go through the same drill, so 
if you will remain standing, we will administer the oath. Thank 
you all for being patient and waiting.
    It is the subcommittee practice to ask witnesses to testify 
under oath, so if you will raise your right hands.
    [Witnesses sworn.]
    Mrs. Davis of Virginia. The witnesses will now be 
recognized for opening statements. We will ask you to summarize 
your testimony in 5 minutes and your full written statements 
will be included in the record.
    I would like to welcome Colleen Kelley, national president, 
National Treasury Employees Union; Jacqueline Simon, public 
policy director, American Federation of Government Employees; 
Bill Bransford, counsel, Senior Executives Association; and 
Karen Heiser, Federal Managers Association. Thank you all again 
for being here today and for your patience.
    Ms. Kelley, we will start with you and you will be 
recognized for 5 minutes.

 STATEMENTS OF COLLEEN M. KELLEY, NATIONAL PRESIDENT, NATIONAL 
   TREASURY EMPLOYEES UNION; JACQUELINE SIMON, PUBLIC POLICY 
DIRECTOR, AMERICAN FEDERATION OF GOVERNMENT EMPLOYEES, AFL-CIO; 
  BILL BRANSFORD, COUNSEL, SENIOR EXECUTIVES ASSOCIATION; AND 
           KAREN HEISER, FEDERAL MANAGERS ASSOCIATION

    Ms. Kelley. Thank you very much, Chairwoman Davis and 
Ranking Member Davis.
    On behalf of the 150,000 Federal employees represented by 
NTEU, we very much appreciate the opportunity to be here today 
with you.
    The Federal Government has failed for many years now to 
invest in its most important resource, its employees. One of 
the original Volcker Commission conclusions in 1989 was that, 
``The gap between what government and the private sector pays 
has grown far beyond the point where government can hope to 
recruit and retain qualified staff.''
    Although the fiscal year 2003 Federal pay raise was 
recently settled, it did not come without a fight and the 
administration continues to show a lack of concern for what 
failure to properly compensate the Nation's public employees 
means for the future of public service by proposing a 2 percent 
pay increase sending the unmistakable message for 2004 that the 
work is not valued, vital and critical.
    NTEU was very disappointed that the recent Volcker 
Commission report did not adequately address the problems with 
rank and file pay and we have reservations concerning the 
recommendations for more flexibility in setting Federal pay.
    Pay for performance means something different to everyone. 
One thing is certain, however. Where pay-for-performance has 
been implemented, very complicated questions and concerns have 
been raised that have not yet been resolved.
    The GAO recently released its study of the Federal Aviation 
Administration's market-based pay for performance system. When 
the GAO interviewed FAA employees concerning the new system, 
nearly two-thirds of the employees interviewed either disagreed 
or strongly disagreed that the new pay system is fair to 
employees.
    Concerns about Federal supervisors and managers having more 
control in the pay-setting process are not unique to the FAA. A 
demonstration on pay banding at the Bureau of Alcohol, Tobacco 
and Firearms began in early 2000 with the first round of salary 
reviews set for that October. Managers received little or no 
training on writing pay for performance evaluations. Appraisals 
were then forwarded to a performance review board [PRB] which 
had the authority to downgrade evaluations. If the individual 
supervisor was unable to write a well documented appraisal, the 
employee suffered. The authority the PRB was given to downgrade 
evaluations led to the belief that the Bureau was operating 
with a fixed pool of money. Some employees had to have their 
evaluations lowered in order for others to receive pay raises. 
This perception of manipulation by management led to employee 
skepticism. A fair and unbiased performance appraisal system 
must be an underlying principle when judging employees.
    In 1996, the House debated legislation to give more weight 
to performance appraisals in down-sizing situations. Members 
raised serious concerns about the lack of formal performance 
appraisal guidance and questioned their tendency to be 
subjective, unfair, overinflated and biased against minorities. 
The proposal was defeated.
    Evidence also points to pay for performance schemes in the 
private sector producing poor results. Three years ago the Ford 
Motor Co. implemented a performance measurement program and 
unwittingly created a culture of backstabbing as employees 
tried to outdo one another instead of working together as a 
team. Instead of cooperation, the system fostered in-fighting 
and divisiveness.
    Similarly, the Fairfax County, VA School District was 
forced to terminate its merit pay system when it became clear 
that teachers were being pitted against each other and 
cooperation and team work were discouraged. Moreover the school 
district's commitment to its merit system plan waned as soon as 
the program began costing money.
    As I stated earlier, pay for performance means something 
different to everyone you ask. What is consistent, however, are 
the problems in designing a quality pay for performance system. 
Employees must be encouraged to work together rather than 
compete against one another. A system that promotes individual 
achievement over group effort is bound to create additional 
problems. A pay for performance system designed to be used only 
when budgets are flush will breed contempt.
    The performance evaluation system used to rate employees 
will fail absent employee feedback and commitment to the 
process and appropriate manager training in using the new 
system is key to ensuring the system will be perceived as 
valid.
    In summary, NTEU believes that proposals to more closely 
link pay with performance must embody several core principles. 
Employees and their unions must be full partners in the design 
and implementation. Pay for performance is not cost neutral. 
Agencies must have adequate resources to implement a pay for 
performance system.
    Proposed changes must be communicated effectively and 
clearly to employees. Development and implementation of a 
performance-based appraisal system must be subject to 
bargaining with employees and their unions and managers must be 
trained to provide fair and unbiased evaluations of employee 
performance.
    Thank you again for the opportunity to testify and I look 
forward to any questions you might have.
    [The prepared statement of Ms. Kelley follows:]
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    Mrs. Davis of Virginia. Thank you, Ms. Kelley.
    Ms. Simon.
    Ms. Simon. Madam Chair and Ranking Member Davis, I want to 
thank you very much for the invitation to testify today and 
specifically for your willingness to listen carefully to all 
points of view.
    I appear today on behalf of the more than 600,000 Federal 
employees represented by AFGE. I will focus my remarks on two 
items. The first is an attempt to provide an accurate 
description of the General Schedule which has been maligned and 
mischaracterized beyond recognition by some advocates of pay-
for-performance. The second will be to highlight many concerns 
AFGE has about individualized pay for performance systems.
    The version of the General Schedule I will describe is one 
that was established as the result of the enactment of the 
bipartisan FPCA in 1990. FPCA introduced numerous flexibilities 
into the allegedly rigid and never changing GS system: locality 
pay differentials, special pay rates for certain occupations, 
critical pay authority, recruitment and retention flexibilities 
that allow hiring above the minimum step of any grade, 
recruitment, retention and relocation bonuses, payment of 
travel and transportation expenses for job candidates and new 
hires, allowing up to 2 weeks advance pay as a recruitment 
incentive, allowing time off incentive rewards, allowing cash 
performance-awards, waiver of dual compensation restrictions, 
changes to law enforcement pay, special occupational pay 
systems, and flexibilities for Title V health care positions 
and many more. In addition, FPCA retained the GS allowance for 
quality step increases, salary increases awarded on the basis 
of extraordinary performance.
    The basic structure of the GS is a 15 grade matrix with 10 
steps per grade. Movement within a grade or between grades 
depends on the satisfactory performance of job duties over 
time. That is, whether a worker gets a step increase depends on 
performance. The GS classification system also supports 
performance by determining the standards against which a 
worker's performance will be measured when opportunities for 
movement arise. Most important, the GS system is based upon the 
merit system principle of equal pay for substantially equal 
work, which goes a very long way toward preventing pay 
discrimination on the basis of race, ethnicity or gender.
    Pay-for-performance is pushed by some on the basis of four 
unproven contentions: that it will improve productivity, 
recruitment, retention and will effectively punish poor 
performers. Even its proponents are reluctant to say that it 
will do anything at all to solve the real and longstanding fact 
that Federal salaries are too low across the board, the 
comparability problem that FPCA might have fixed over the past 
decade if it had been funded.
    Do the pay systems that set out to reward some individuals 
for productivity improvement and punish others who are judged 
to have made smaller or negative contributions to productivity 
actually work? The facts suggest they do not. Research from 
academics without a financial interest in the outcome of the 
debate show that individualized pay-for-performance systems 
don't deliver on their promises and are notorious for eating up 
enormous managerial resources and making everybody unhappy.
    More specifically, the research shows that pay-for-
performance undermines team work, encourages a focus on the 
short term and leads people to sharpen their political skills 
and personal ties to the supervisor rather than to improve the 
mission of the organization. Individual pay-for-performance 
gives workers the incentive to make themselves look good and 
their co-workers look bad. It dissuades people from sharing 
knowledge and working cooperatively.
    Since salary money always comes in a fixed pot, pay-for-
performance becomes a high stakes competition between workers 
within a unit with one worker's gain being another worker's 
loss.
    Pay consultants and personnelists love individual pay-for-
performance because if administered in a way that uses even a 
pretense of fairness, it requires an enormous managerial and 
supervisory hierarchy. The Navy's China Lake system which some 
consider a worthy successor to the GS is an incredibly complex 
system with pages and pages of evaluation documents that each 
manager must fill out for each individual under him on an 
almost continual basis. Pay-for-performance advocates and 
contractors realize all this will have to be checked and 
rechecked for accuracy and completion for every single 1 of the 
1.8 million Federal employees.
    I will close by mentioning OPM's recent poll. Although AFGE 
felt that some of the questions in the draft we saw were biased 
in a way that would lead respondents to send a message of 
support for pay-for-performance, what they seem to have gotten 
instead was a message that employees are relatively satisfied 
with the existing pay system and do not hold their managers in 
adequately high regard to trust them with vast new powers and 
discretion over pay.
    The only question that really needs to be asked of Federal 
employees is, are you willing to trade the annual pay 
adjustment passed by Congress which includes a locality 
adjustment and any step increases for which you are eligible 
for a unilateral decision by your supervisor every year on 
whether and by how much your salary will be adjusted.
    AFGE supports the congressional attention toward the 
inadequacy of Federal pay. We support those who seek to reward 
Federal employees for excellence but rewards for extraordinary 
performance must be supplements, not substitutes, for a fully 
funded regular pay system.
    Thank you very much and I would be happy to answer any 
questions.
    [The prepared statement of Ms. Simon follows:]
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    Mrs. Davis of Virginia. Thank you, Ms. Simon.
    Mr. Bransford.
    Mr. Bransford. Thank you, Madam Chair and Mr. Davis.
    On behalf of the Senior Executives Association, we 
appreciate the invitation to testify this afternoon on the 
subject of Federal pay. We also appreciate your allowing me to 
testify at the last minute in place of Jerry Shaw who was 
unable to be here.
    SEA is the only organization that represents the interests 
of career senior executives and I will comment today on matters 
of concern surrounding the executive pay system. The more 
detailed remarks of Jerry Shaw and supporting documentation 
have been submitted for the record.
    Pay compression, which you have already heard about this 
afternoon, is a longstanding problem in executive pay ranks 
that hopefully will be relieved this year. The problem has been 
caused by the existence of a pay cap on executive pay that has 
not increased in 5 of the last 10 years because Congress did 
not vote itself a pay raise. This caused salaries at the bottom 
of the executive corps to rise but the top stayed constant. 
Today, nearly 70 percent of senior executives are paid the 
same.
    The administration has proposed to lift the caps on base 
pay and locality pay one level for each. If enacted, this will 
result in an increase in the cap that limits locality pay from 
$142,500 to $154,700. We welcome this proposal from the 
administration and look forward to the bill Senator Voinovich 
is about to introduce that includes the administration's 
provisions.
    As I will explain in more detail, we do have some concerns 
about some parts of the administration's proposal and we do 
seek some adjustments.
    In addition to lifting the pay cap, the administration also 
proposes to eliminate SES pay levels of which there are now six 
and to replace them with one pay band with a minimum pay of 
$102,000. Agencies would only be able to pay salaries in excess 
of the old cap if they have a certified performance appraisal 
system. The administration's proposal contains no provision 
preventing reduction of SES pay.
    We have the following concerns about the administration's 
proposal. First, we support executive pay banding but we 
believe three bands would be better for management of the SES 
than one broad band. The nature of SES positions and the 
experience level of executives varies and we believe this 
justifies having distinguishing characteristics in the SES 
system other than simply the amount of salary.
    Second, we do not support lowering the minimum base pay 
from its current $116,500 to $102,000 as proposed by the 
administration. We believe this unnecessarily cheapens and 
degrades what should be a prestigious corps. We suggest that 
senior executives should make more than GS-15s and that someone 
who is appointed to the SES should be paid consistent with 
historical patterns. We also note that reducing the minimum SES 
pay at the same time that efforts are being made to recruit 
more minorities and women into the SES could be viewed as 
having a discriminatory effect.
    Third, OPM has announced its intention to allow SES 
salaries under the new cap only for those agencies that have a 
certified performance appraisal system under OPM and OMB 
regulations. This certification would be for 2 years but could 
be revoked at any time. We support a system that makes 
meaningful distinctions based on relative performance but we 
urge that it be administered only by OPM and that once 
certified, an agency could rely on the certification for 4 
years, not the up to 2 years as currently required. We seek to 
exclude OMB from the process to prevent undue politicization.
    Fourth, we ask that there be no pay cap on locality pay. We 
see no reason to artificially limit locality pay granted to 
every other Federal employee. A cap on locality pay will just 
create a new form of pay compression.
    Fifth, we propose a new method for adjusting the pay cap be 
implemented so that the cap on base pay is increased each year 
by the amount of the annual GS pay increase. This will not 
result in an automatic pay raise, just the authority to pay it 
and we note this is consistent with the Volcker Commission 
report that talks about executive pay and congressional pay 
being developed separately.
    Sixth and last, we ask that safeguards be implemented on 
reduction of SES pay. We propose that reductions of up to 3 
percent be allowed with a review by the agency performance 
review board as is current practice and that reductions greater 
than that be reviewed by the MSPB. Reductions in pay currently 
are simply not subject to any appeal by senior executives.
    These reforms we suggest are not difficult or cumbersome. 
They meet the administration's stated concerns of pay for 
performance and not granted an across the board pay increase. 
We urge the rapid consideration of the administration's 
executive pay proposal as modified by our proposals to provide 
appropriate safeguards and system adjustments to protect the 
integrity of the SES and to prevent it from being politicized.
    Thank you for the opportunity to present our views.
    [The prepared statement of Mr. Shaw follows:]
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    Mrs. Davis of Virginia. Thank you, Mr. Bransford.
    Ms. Heiser.
    Ms. Heiser. Madam Chair and Congressman Davis, my name is 
Karen Heiser. On behalf of the 200,000 managers and supervisors 
in the Federal Government whose interests are represented by 
the Federal Managers Association, I would like to thank you for 
inviting us to present our views before this committee 
regarding the important subject of compensation for Federal 
employees.
    I am currently the organizational development manager at 
Watervliet Arsenal in New York with the U.S. Department of the 
Army. My statements are my own and in my capacity as a member 
of FMA and do not represent the official views of the 
Department of the Army or Watervliet Arsenal.
    Established in 1913, the FMA is the largest and oldest 
association of managers and supervisors in the Federal 
Government. As those who are responsible for the daily 
management and supervision of government programs and 
personnel, our members possess a wide breadth of experience and 
expertise we hope will be helpful as we collectively seek to 
address the human capital crisis our Civil Service has been 
burdened with.
    While retaining our status as a world class manufacturer, 
Watervliet Arsenal has struggled for over a decade with 
decreasing workload and downsizing of personnel. To help offset 
attrition and related loss of skills, anticipated hiring of new 
engineers and manufacturing apprentices will rejuvenate the 
nucleus of our work force. Now is the time for us to revive 
development of essential skills for the future through 
initiatives such as a reactivated apprentice program at 
Watervliet Arsenal where program graduates since the 1800's 
have provided our critical manufacturing skills and grown into 
many of our supervisory positions from firstline to directorate 
level.
    At Watervliet Arsenal and beyond, this type of in-house 
training and mentoring is what our government must do more of 
as we continue to lose valuable expertise by way of retirements 
and mid-career departures.
    Compounding the myriad of problems associated with the 
recruitment and retention of Federal employees is the 
significant pay gap that we have discussed between public and 
private sectors. According to a 2001 survey of college 
graduates, current Federal and non-Federal workers conducted by 
the Partnership for Public Service, nearly 90 percent said that 
offering salaries more competitive with those paid by the 
private sector would be an effective way to improve Federal 
recruitment. Eighty-one percent of college graduates that same 
year said higher pay would be very effective in getting people 
to seek Federal employment.
    The public sector simply has not been able to compete with 
private companies to secure the talents of top notch workers 
because of cash strapped agency budgets and an unwillingness to 
address pay comparability issues.
    We have discussed FEPCA a bit today. The act was intended 
to close the gap between Federal employee salaries and those of 
their private sector counterparts. However, FEPCA has never 
been implemented as it was originally intended. Since the bill 
was enacted, administrations led by both political parties have 
used the capping feature designed to reduce pay increases in 
times of economic distress. This executive authority has been 
utilized despite record budget surpluses.
    More than a decade since the enactment of FEPCA, the Bureau 
of Labor Statistics shows the pay gap between Federal civilian 
employees and their private sector counterparts has grown to 33 
percent. If FEPCA is never to be adhered to, we must at a 
minimum reexamine the language and the intent of the act and 
determine how best to bring public sector salaries more in line 
with those of their private sector counterparts. For the time 
being, however, we must uphold the longstanding principle of 
linking annual pay increases between Federal civilian employees 
and military personnel.
    Since 1987 and 19 of the past 22 years, civilian and 
military personnel have received the same annual raises. 
President Bush recently proposed a 2 percent across the board 
average pay raise for Federal employees in 2004, while military 
personnel are slated to receive a 4.1 percent average pay raise 
next year. For the third straight year, the White House has 
attempted to delink civilian and military pay increases.
    In light of the well documented human capital concerns 
facing our Federal Government, we must maintain the tradition 
of providing equitable pay increases to Federal civilian 
employees and members of the uniformed services, all of whom 
work each day to ensure our Nation's security and make 
significant contributions to the general welfare of the United 
States.
    Legislation has been recently introduced in the Senate by 
Senator George Voinovich that would allow managers to use a 
variety of compensation tools such as recruitment, relocation 
and retention bonuses and give agencies streamlined critical 
pay authority to fill key positions. These are sensible reforms 
that would begin to address the work force problems that will 
only worsen with the forthcoming retirement wave of Federal 
employees.
    Beyond the normal retirement wave of a large portion of the 
aging Federal work force, there is a distinct retention problem 
in the Federal Government. The notion of the career civil 
servant is becoming more and more obsolete because there are 
few incentives for advancement in the Federal Government. When 
combined with better salary and benefit packages in the private 
sector, it is no wonder that many Federal employees are leaving 
the public sector after only a few years of service.
    In fact, there are oftentimes disincentives for moving up 
the career ladder. A perfect illustration is the current 
statute that caps overtime pay for Federal managers and 
supervisors. Between 1994 and 2001, the non-postal executive 
branch civilian work force was reduced by more than 452,000 
positions. As one of the effects of this downsizing, overtime 
is becoming increasingly common. Under current law, overtime 
pay for Federal managers, supervisors and FSLA exempt employees 
is limited to that of a General Schedule Level 10, Step 1 
employee. The first grade based overtime cap enacted in 1954 
set the base at GS-9, Step 1. Twelve years later in 1966, it 
was increased to GS-10, Step 1. In the 37 years since then, 
however, nothing has been done to keep pace with changing work 
force realities.
    We have discussed how the work force in the Federal 
Government has changed from a clerical work force to one of 
more professional or information knowledge related services. In 
1966, the average GS grade was 7.3 and in 2001, the average GS 
grade was 9.7, nearly three full grades higher since the 
implementation of the current pay cap.
    Overtime pay is premium pay and therefore does not count 
toward increasing an employee's future retirement benefit. That 
means that increasing overtime pay does not affect mandatory 
spending. The overtime cap causes two problems for Federal 
managers and supervisors. Managers and supervisors above a GS-
12, Step 6 can actually earn less on overtime than they do for 
work performed during the work week. Second, managers and 
supervisors may earn substantially less for overtime work than 
the employees they supervise.
    Raising the overtime cap would present an opportunity and 
provide an important move toward addressing overtime problems 
that serve as disincentives to hardworking civil servants 
contemplating accepting promotions to the ranks of management 
when they consider the various benefits of moving to those 
levels of higher responsibility.
    The Federal Wage System as we have only touched on briefly, 
is one of the most maligned and adversely affected sectors of 
the Federal Government. FMA is concerned about securing 
adequate pay raises for the 225,000 hardworking men and women 
covered by the FWS. This number represents a reduction of 53 
percent of the Federal wage system work force size in 1984 due 
to downsizing and significant pay disparities with similar 
positions in private industry.
    A major concern is the disparity in how pay raises are 
determined in the present system of wage grade surveying. In 
examining the pay setting features used for wage grade pay, a 
significant improvement would be the utilization of like 
industries in establishing pay scales, providing a standard 
wage grade survey and pay scale setting with appropriate 
locality adjustments would be a step in the right direction to 
resolve this longstanding inequity.
    We have talked much about pay for performance and 
performance management in general today. Currently, pay is 
based on internal equity that revolves around seniority, not 
performance. We certainly agree that pay for performance is as 
valid as pay for seniority.
    As a start, for agencies to perform at optimum levels, 
employees must have clearly defined performance standards on 
which to be appraised. These standards should be directly 
linked to the agency's mission, customer service goals and 
their annual performance plan or strategic plan. We at FMA 
support implementing a more comprehensive governmentwide 
appraisal system that includes a pay for performance component.
    We recommend an awards system for managers that adequately 
reflects the manager's level of responsibility, span of control 
and level of achievement. Of course any such system requires 
sufficient appropriations funds. We have too often seen over 
time new pay authorities without the necessary dollars to 
utilize these tools. The Bush administration has proposed a 
$500 million Human Capital Performance Fund for fiscal year 
2004 to allow managers to increase pay beyond annual raises for 
high performing employees and address other critical personnel 
needs. Although this is a step in the right direction, 
questions must still be answered in terms of the disbursement 
of funds. Who will decide which employees receive increases and 
who will determine the amount of such increases? Is $500 
million significant and sufficient for a work force of some 1.8 
million Federal employees? How much will be lost to 
administrative costs as the money filters down through various 
chains of command? Will this fund be renewed every year and 
appropriated accordingly?
    Furthermore, FMA does not believe any new performance fund 
should be used to undercut fair and appropriate annual pay 
adjustments for Federal employees. The question of an 
effective, consistent performance measurement system throughout 
the Government must be addressed.
    Our conclusion is, as we collectively grapple with the 
complex issue of compensation reform in the Federal Government, 
we must find where models such as the ones being used at the 
IRS and the FAA have succeeded and where they have failed. 
There have also been numerous instances where demonstration 
projects in the area of expanding personnel authority have 
brought success to some Federal agencies but rarely are these 
initiatives allowed to cross agency lines.
    The approach the Government takes to correct pay systems 
for civilian workers will decide how this Nation survives the 
human capital crisis before us. More importantly, Congress and 
the administration must shift the habitual focus from cutting 
the size of the Federal workforce to that of recruiting and 
retaining top talent.
    Some of the challenges facing the Federal work force will 
be difficult to overcome should a continued priority be placed 
on the conversion of critical Federal sector jobs to private 
sector activity. The loss of valuable and experienced employees 
and the institution of wisdom they provide is already taking 
place. No real succession planning, including managerial 
development and training, has been funded or implemented to 
ease the strain the system is facing as retirement eligible 
employees leave the public sector.
    At FMA we would like to propose several recommendations. 
One important priority is to work with both the administration 
and Congress to alter the image and perception of the Civil 
Service. Far too often civil servants have unfairly taken the 
brunt of the blame for ill-advised policies they have no 
control over. The public must recognize the important duties 
our Federal employees perform each and every day on their 
behalf.
    We would also like to see review of FEPCA to examine what 
adjustments need to be made to enable the legislation to work 
as intended. Any constructive dialog is better than the hollow 
act of preemptive designated pay increases each and every year.
    We also support ways to improve the hiring process for 
Federal employment and bring about policies that attract the 
best and brightest of our society to serve in public service. 
Correspondingly, managers should be afforded the means to 
continuously enhance their skills. Agencies and departments 
should increase opportunities for managers to receive training 
in their respective fields while on duty by specifically 
allocating funds for this training. Thus FMA supports 
establishing management succession programs to ensure we have 
the strongest possible pool of managers to lead tomorrow's 
Civil Service.
    Finally, we encourage a real and sincere look at Federal 
pay systems while encouraging structures that attract, retain 
and maintain the Federal workforce we need and desire. You 
asked if everyone was satisfied with pay, should we still look 
at the grade structure. I would put to you that the current 
grade structure not only determines pay but also is a 
determining factor in recruitment and internal movement of 
employees. Often a person's grade is more determining of their 
ability to be promoted than their resume. That is not good. 
That is not right.
    We would propose that any new system be fair and realistic 
in offering career ladder incentives and progressions.
    I would like to thank you again, Madam Chair, for allowing 
me to go beyond my 5 minutes and for providing FMA an 
opportunity to present our views. We look forward to working 
with you and other Members of Congress to deal with the human 
capital crisis. I would be delighted to answer any questions 
you have.
    [The prepared statement of Ms. Heiser follows:]
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    Mrs. Davis of Virginia. Thank you, Ms. Heiser.
    Once again, I would like to say thank you to all of you for 
having to wait so long to be able to be our witnesses today.
    Ms. Simon, you referred to the survey--and we have all 
referred to it a lot today--you referred to it and said the 
questions were in such a way to make it look like pay-for-
performance was something that the workers would be interested 
in. I believe it was only 27 percent who said they felt there 
was an adequate way to deal with poor performance. Can you 
speak to poor performers and how the folks in your union feel 
about the poor performers? It is tough to get rid of them now.
    Ms. Simon. The first thing I would like to say about poor 
performers is although in the context of today's discussion, we 
are talking about pay, pay is not the only tool in the toolbox 
for dealing with poor performance. We really don't think it is 
appropriate to have a discussion about pay be so focused on how 
to deal with the problem of poor performers.
    Poor performers are a discipline problem. There are 
certainly procedures on the books that allow managers to deal 
with poor performers through performance improvement plans, 
through various forms of discipline including demotion and 
termination. To suggest that the pay system be radically 
altered just to use pay as sort of a blunt instrument for 
punishing people who are judged to be poor performers seems to 
be inappropriate to us.
    Mrs. Davis of Virginia. Has the thought occurred that it 
might not be to punish the poor performers but to get them to 
perform better, that rather than punishment, be an incentive to 
get them to do their work?
    Ms. Simon. I think that is certainly a good idea and I 
think the procedures for allowing an employee to have an 
opportunity to improve through a performance improvement plan 
is already in existence and is not using pay as the exclusive 
tool for either encouraging someone to improve or punishing 
them if they haven't.
    Mrs. Davis of Virginia. As it stands now, how would an 
employee doing work over and above, in their opinion, feel that 
their pay is the same as the poor performer and their increases 
are the same because everybody's pay increase is the same when 
they are at the same grade, if I am not mistaken. Is that 
correct?
    Ms. Simon. If you have a situation like the one you just 
described, I would say it is really a case of poor management. 
It is a manager's responsibility to deal with the poor 
performer. It is a manager's responsibility to sit down with 
that employee and devise a plan for that employee's improvement 
and give that person the opportunity, the resources and the 
assistance he or she may need to improve.
    If, in spite of all that, the employee still fails to 
improve, then it is the manager's responsibility to deal with 
the poor performer. It is the manager's responsibility if he or 
she still thinks there is hope, to withhold a step increase 
when that employee becomes eligible. That is the existing 
system that does give a manager an opportunity to use the pay 
system as a performance management tool but then there are 
hopeless cases, let us face it. When it is the manager's 
unpleasant duty to either demote or ultimately terminate an 
employee who isn't pulling his weight.
    Mrs. Davis of Virginia. If I am not mistaken on one of the 
surveys someone reported earlier, 83 percent of the workers had 
a good performance rating. Yet, how do you justify that with 
the 27 percent of the folks in the survey who said they did not 
think the poor performers were being dealt with in a good way. 
Do you think there are just that few poor performers?
    Ms. Simon. I don't pretend to be an expert on exactly what 
the questions were in the final survey or the interpretation of 
the results. As I said in our testimony, we saw draft questions 
in that poll. We did not see the final poll questions and I 
haven't had the opportunity to do a really thorough examination 
of whether or not the way the poll results are being presented 
is necessarily an accurate way to present that data.
    One of the things we know is that this poll was undertaken 
during a very difficult period for Federal employees. They are 
facing relentless attacks in many forms but certainly a very 
aggressive privatization agenda, they are hearing about all 
kinds of what they consider to be threats to give their 
managers tremendous discretion over their pay system, and to 
the extent they express satisfaction with their pay, we believe 
they are expressing satisfaction with the existing system as 
compared to some of the alternatives they have heard about that 
certainly don't make them feel very comfortable given the sort 
of hostilities they have experienced in the last several 
months.
    Mrs. Davis of Virginia. We have three votes and I want to 
give my colleague a chance to ask some questions, but I have 
one quick question for all three of you. Do any of you agree 
that we need to move to a more market and performance pay based 
system for the Federal Government to maximize the performance 
of the Federal people? Do any of you agree with that?
    Ms. Simon. I would say that to the extent we need to move 
toward a more market based system, the market-based attribute 
we need to move toward is comparability, that which was 
promised but never realized through FEPCA.
    Mrs. Davis of Virginia. So the dollar figure versus 
changing the system?
    Ms. Kelley. I agree with the issue of comparability. On the 
issue of performance, NTEU supports anything that will help the 
employees to do a better job so they can be successful and so 
the agencies can be successful. I am not convinced that 
necessarily means a pay-for-performance as I envision what that 
means. I truly do believe if everyone in this room were asked 
to write down what pay-for-performance means on a blank piece 
of paper, we would have a lot of different definitions of what 
it is. Therein, I think, lies the problem, but anything to 
support and to improve the performance and the efficiency of 
the Federal Government, NTEU and the employees we represent 
would stand behind that.
    Mr. Bransford. SEA supports pay-for-performance. It 
believes that the SES, the Senior Executive Service has 
historically been a pay-for-performance system.
    When you talk about a market system, I am not sure what 
that means. If we are talking about the comparability increases 
and that kind of thing, I agree with my colleagues, but if you 
are talking about paying executives who do computer work 
differently from executives who do program work, I am not sure 
how you do that. I think that needs more study.
    Mrs. Davis of Virginia. Ms. Heiser.
    Ms. Heiser. FMA would support a pay-for-performance 
component without eliminating the annual increases and other 
types of opportunities available for employees to increase 
their salary. That aside, on the issue of comparability, we 
think we need to get away from the old ways of looking at 
classifications of jobs and how skills are determined to be 
comparable without regard to the mission of an agency, 
installation or whatever level those determinations are being 
made.
    Pay-for-performance, we have heard some stories of very 
negative effects and that does happen because you all made 
valid issues that managers have to be trained, employees have 
to buy in, there is no doubt about that. I designed and 
implemented a very, very successful pay-for-performance system 
in the private sector before I came into the Federal Government 
and I can tell you that you are always going to have some 
subjective component but overall, it was extremely successful. 
It was a hospital and was based on our mission, our strategic 
planning, customer service, involved the union and the 
employees and managers working together.
    Mrs. Davis of Virginia. Mr. Davis. I think we probably have 
another 5 minutes.
    Mr. Davis of Illinois. Thank you very much.
    I know some of you may have been here when Representative 
Ruppersberger testified. I don't think you were, Ms. Kelley. If 
you were, what do you think about gainsharing as a possible way 
of arriving at pay for performance?
    Mr. Bransford. Mr. Davis, I think it is a great idea if it 
can be quantified. I think that is the problem, quantifying the 
savings because there are a lot of different ways of counting 
and if you can figure that out with some level of objectivity 
so that there really is a taxpayer savings and then reward the 
employees, I think that is a great incentive.
    Ms. Simon. AFGE had some experience with gainsharing and in 
general, we support the idea of productivity gainsharing 
focusing on organizational success and group productivity 
awards, but there are two things to bear in mind. First of all, 
we believe even the gainsharing program should be as a 
supplement to a well funded regular pay system and second, the 
most successful demonstration project that involved 
gainsharing, the Pacer Share Program in the Department of 
Defense, was ended in spite of its success because it cost too 
much. It did have supplemental funding but the agency decided 
it was too costly.
    Mr. Davis of Illinois. And last, what do you think about 
privatization? How does privatization relate to what we are 
trying to accomplish in terms of creating and retaining the 
work force that we need for the Federal Government?
    Ms. Heiser. Privatization is a clear statement that Federal 
employees are not valued as a starting point.
    Ms. Kelley. I would say the Federal employees see 
privatization as an intent to move their jobs. It is not about 
competition and is not about giving them the resources to be 
able to find the efficiencies and be as successful as everyone 
talks about on the issue of privatization. If there were those 
resources, there is no question the Federal employees could do 
the job better than anyone else but they are not being given 
the resources and are expected to deliver on the efficiencies. 
So there is really no way for them to see the privatization 
effort other than as a threat to Federal employees doing the 
work of the Federal Government.
    Ms. Simon. We agree with our colleagues. The privatization 
quotas that have been imposed by the administration are 
certainly the worst scourge on the Federal work force right now 
and I think they, far more than the pay system or any failures 
of the pay system, explain agencies' difficulties in 
recruitment and retention.
    I think it was very telling that Representative 
Ruppersberger mentioned the fact that he considered 
privatization of the grass cutting prior to implementation of 
the gainsharing program. Unfortunately, with the 
administration's rewrite of the A-76 process, any kind of 
strategy or management tool that would try to reorganize or 
reengineer or do anything to improve productivity is explicitly 
precluded. The only tool that managers are allowed to use 
whether or not it saves money is privatization.
    Mr. Davis of Illinois. I thank you very much, Madam 
Chairman. I would just conclude that I guess there are people 
who would expect the Federal workforce to make bricks without 
any straw. I thank you very much and it has been a pleasure.
    Mrs. Davis of Virginia. Thank you, Mr. Davis.
    Unfortunately, we have three votes, not just one, and it is 
going to be 30 to 45 minutes before we could get back, so I 
want to say thank you all for coming and if it is OK with you, 
I have some more questions I would like to submit to you for 
the record. If I could get you to put them in writing, we will 
make sure they are distributed to the other members of the 
subcommittee.
    Thank you again for coming and I appreciate your time and 
patience.
    The meeting is adjourned.
    [Whereupon, at 3:32 p.m., the subcommittee was adjourned, 
to reconvene at the call of the Chair.]
    [Additional information submitted for the hearing record 
follows:]
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