Posthearing Questions Related to Pay for Performance (19-MAY-03, 
GAO-03-793R).							 
                                                                 
On April 1, we testified before the Subcommittee on Civil Service
and Agency Organization, House Committee on Government Reform at 
a hearing on "Compensation Reform: How Should the Federal	 
Government Pay Its Employees?" This letter responds to a request 
that we provide answers to follow-up questions from the hearing. 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-03-793R					        
    ACCNO:   A06935						        
  TITLE:     Posthearing Questions Related to Pay for Performance     
     DATE:   05/19/2003 
  SUBJECT:   Data collection					 
	     Internal controls					 
	     Program evaluation 				 
	     Strategic planning 				 
	     Federal employees					 
	     Compensation					 

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GAO-03-793R

GAO- 03- 793R Pay for Performance

United States General Accounting Office Washington, DC 20548

May 19, 2003 The Honorable Jo Ann Davis Chairwoman Subcommittee on Civil
Service and Agency Organization Committee on Government Reform House of
Representatives

Subject: Posthearing Questions Related to Pay for Performance Dear Madam
Chairwoman: On April 1, I testified before your Subcommittee at a hearing
on *Compensation Reform: How Should the Federal Government Pay Its
Employees?* 1 This letter responds to your request that I provide answers
to follow- up questions from the hearing. Your questions, along with my
responses, follow.

1. What standards must an agency implement to safeguard against a pay-
forperformance system that might be abused by managers playing favorites?

At the request of Representative Danny Davis, we developed an initial list
of possible safeguards for Congress to consider to help ensure that pay
for performance systems in the government are fair, effective, and
credible. We believe that the following could provide a starting point for
developing a set of statutory safeguards in connection with any additional
efforts to expand pay for performance systems. Assure that the agency*s
performance management systems (1) link to the

agency*s strategic plan, related goals, and desired outcomes and (2)
result in meaningful distinctions in individual employee performance. This
should include consideration of critical competencies and achievement of
concrete results.

Involve employees, their representatives, and other stakeholders in the
design of the system, including having employees directly involved in
validating any related competencies, as appropriate.

Assure that certain predecisional internal safeguards exist to help
achieve the consistency, equity, nondiscrimination, and nonpoliticization
of the performance management process (e. g., independent reasonableness
reviews by Human

1 U. S. General Accounting Office, Results- Oriented Cultures: Modern
Performance Management Systems Are Needed to Effectively Support Pay for
Performance, GAO- 03- 612T (Washington, D. C.: Apr. 1, 2003).

GAO- 03- 793R Pay for Performance Page 2 Capital Offices and/ or Offices
of Opportunity and Inclusiveness or their equivalent

in connection with the establishment and implementation of a performance
appraisal system, as well as reviews of performance rating decisions, pay
determinations, and promotion actions before they are finalized to ensure
that they are merit- based; internal grievance processes to address
employee complaints; and pay panels whose membership is predominately made
up of career officials who would consider the results of the performance
appraisal process and other information in connection with final pay
decisions).

Assure reasonable transparency and appropriate accountability mechanisms
in connection with the results of the performance management process (e.
g., publish overall results of performance management and pay decisions
while protecting individual confidentiality, and report periodically on
internal assessments and employee survey results).

2. I understand a large percentage of employees now under the General
Schedule are rated on a simple pass/ fail basis. How can meaningful
distinctions in performance be made under such a system? Should the
Administration rule out that kind of a system for an agency to participate
in the Human Capital Performance Fund?

A pass/ fail system does not provide enough meaningful information and
dispersion in ratings to recognize and reward top performance, help
everyone attain their maximum potential, and deal with poor performers. At
your request, and at the request of Senator Voinovich, we identified the
key practices leading public sector organizations both here and abroad
have used for effective performance management. 2 Among these practices is
to make meaningful distinctions in performance. We believe that this set
of practices can serve as the basis for an agency to demonstrate that it
has a performance management system in place that can support pay and
other personnel decisions before it would be eligible to participate in
the Human Capital Performance Fund.

3. If pay and performance management systems are handed over to individual
agencies so they can tailor their systems to their particular needs and
objectives, what role in setting compensation policy would you foresee for
the Office of Personnel Management (OPM) and the Office of Management and
Budget (OMB)?

We have reported that OPM leadership is critical to accomplish its mission
in a decentralized human capital environment in which direct
accountability for strategic human capital management continues to shift
to agencies. 3 In particular, as noted above, OPM should certify that an
agency has in place an effective performance management system before the
agency is granted the authority to better link pay to performance for
broad- based employee groups. In addition, OPM should gather, assess, and
disseminate leading practices from federal organizations on a full range
of

2 U. S. General Accounting Office, Results- Oriented Cultures: Creating a
Clear Linkage between Individual Performance and Organizational Success,
GAO- 03- 488 (Washington, D. C.: Mar. 14, 2003). 3 U. S. General
Accounting Office, Major Management Challenges and Program Risks: Office
of

Personnel Management, GAO- 03- 115 (Washington, D. C.: January 2003).

GAO- 03- 793R Pay for Performance Page 3 innovative human capital policies
and procedures, such as pay for performance.

Further, OPM should build on its White Paper to design and lead a broad
research agenda to develop a more market- based approach to federal pay.

First and foremost, OMB can help to obtain funding for agencies to make
the targeted investments that often are needed to develop and implement
performance management and related human capital systems. OMB also can
continue to help sustain attention on human capital management. For
example, in October 2001, OMB notified agencies that they would be
assessed against standards for success for each part of the President*s
Management Agenda, including the strategic management of human capital.
The first agency assessment was made public in February 2002 as part of
the President*s proposed fiscal year 2003 budget. Subsequent assessments
were later released on both the status and progress of agency efforts. In
October 2002, OMB and OPM approved revised standards for success in the
human capital area of the President*s Management Agenda, reflecting
language that was developed in collaboration with GAO.

4. The General Accounting Office (GAO) report discusses *line of sight* as
the overarching principle for effective performance management. What is it
and why is it important? Can you highlight the practices that public
sector organizations used in their performance management systems to drive
internal change and achieve results?

Leading public sector organizations used the key practices I referenced
above to create a clear linkage** line of sight** between individual
performance and organizational success. 4 These organizations have found
that to successfully transform themselves, they must often fundamentally
change their cultures so that they are more results- oriented, customer-
focused, and collaborative in nature. To transform their cultures, high-
performing organizations have recognized that an effective performance
management system can be a strategic tool to drive internal change and
achieve desired results.

5. Things seem to move awfully slowly in the government sometimes. I
understand the China Lake pay system experiment is over 20 years old and
other experimental systems have also been used for years now. How many
tests of pay- for- performance do we need before we decide to go for it
across the entire government?

Additional testing of the concept of pay for performance at the federal
level is not what is needed at this point. Our experience at GAO and the
experiences of others have shown that it is possible to better link
employee pay to performance. However, experience also has shown that how
it is done, when it is done, and the basis on which it is done can make
all the difference in whether or not such efforts are

successful. In our view, one key need is to modernize performance
management systems in executive agencies so that they are capable of
adequately supporting more performance- based pay and other personnel
decisions. Unfortunately, based on GAO*s past work, most existing federal
performance appraisal systems are not designed to support a meaningful
performance- based pay system.

4 GAO- 03- 488.

GAO- 03- 793R Pay for Performance Page 4 We believe that Congress should
consider granting governmentwide pay banding

authority in a manner that assures that appropriate performance management
systems and safeguards are in place before the new authorities are
implemented in any respective agency. This approach would accelerate
needed human capital reform throughout the government in a manner that
assures reasonable consistency on key principles within the overall
civilian workforce. It also would provide agencies with reasonable
flexibility while incorporating key safeguards to help maximize the
chances of success and minimize the chances of abuse and failure. This
approach would also help to maintain a level playing field among federal
agencies in competing for talent.

6. GAO*s internal pay for performance system is relatively new. How long
do you think it will take before we can tell whether it is a success? How
did GAO develop its competency- based performance management system? What
lessons learned did GAO experience in developing, implementing, and using
its new performance management system?

The most prominent change in human capital management that we implemented
as a result of the GAO Personnel Act of 1980 was a broadbanded pay for
performance system. It should be noted that we had over a decade of
experience in the use of pay banding before we undertook our recent
changes, so much of the needed organizational infrastructure was already
in place. In January 2002, we implemented a new competency- based
performance management system that is intended to create a clear linkage
between employee performance and our strategic plan and core values.

In designing the new system, GAO involved employees at key points through
a variety of channels. Senior management and a diverse cross section of
staff selected from across all employee populations reviewed a preliminary
competency model. Once developed, all analyst and analyst- related staff
across GAO validated the model to ensure the activities and associated
behaviors were indeed relevant and important for analyst work. The new
policies were put on the GAO intranet for employee comments and
appropriate changes were made. We see early results of GAO's
implementation of its new competency- based performance management system
and

other changes to key human capital programs. For example, GAO has achieved
greater dispersion in its performance appraisals and merit pay decisions,
thus making meaningful distinctions in performance that were not always
made in the past.

We realize our approach is not perfect and never will be. High- performing
organizations continually review and revise their performance management
systems to support their strategic goals. In that spirit, we expect to
modify our banded system in the future based on our experience to date.

7. Has GAO found pay for performance efforts that failed?

Yes. Experience from the U. S. and abroad shows pay for performance does
not work when modern, effective, credible, and validated performance
management systems, with appropriate safeguards, are not in place to
support pay decisions and

GAO- 03- 793R Pay for Performance Page 5 consequently, employees and
managers lose confidence in the fairness of the

decisions that are made. At your request, and the request of Senator
Voinovich, we are reviewing OPM*s personnel demonstration projects where
pay for performance systems have been established to identify lessons
learned from their experiences. These demonstration projects are required
to prepare project designs, conduct employee feedback, and complete
evaluations of their results. Of the 17 demonstration projects that have
been implemented, 12 have implemented a pay for performance system. The
projects have taken a variety of approaches to linking pay to performance
and have also made determinations about how much of an employee*s pay
increase should be *at risk** that is, the amount of the pay increase that
is tied to performance as opposed to provided as an entitlement.

8. When the GAO undertook an assessment of the Federal Aviation
Administration*s (FAA) pay for performance policy, what was the percentage
of employees interviewed by the GAO that stated that the pay system was
unfair? What did the employees think was unfair about it?

In February 2003, we reported that FAA*s human capital reform efforts were
still in progress. 5 Many of the FAA managers and employees we interviewed
were critical of the new compensation system. Nearly two- thirds of those
responding to our structured interview (110 of 176) disagreed or strongly
disagreed that the new pay system is fair to all employees. While we did
not attempt to evaluate the concerns raised during the interviews, we did
find some evidence that helps explain these perceptions of unfairness. For
example, concerns about air traffic controller pay disparities were
supported by a Department of Transportation Inspector General report. FAA
has since corrected its air traffic control pay policies to clarify
differences in pay scales between those controllers in air traffic control
facilities and those in regional or headquarters offices. In addition,
according to both FAA and external stakeholders, a general perception of
unfairness regarding FAA*s new compensation system has led to increased
unionization among both air traffic service employees as well as those in
other FAA business lines.

9. In your research, what performance management system do you find more
effective* an individually based reward system or a group based reward
system? If rewards are given to individuals as opposed to groups, couldn*t
this create teamwork problems in situations where collaboration and
information sharing are essential to good performance? How do you protect
against that kind of behavior? Conversely, if rewards are group- based
rather than individual- based, couldn*t there be problems in which
individuals slack off and hope to benefit from the efforts of others? How
do you protect against that kind of behavior? Leading organizations reward
individuals based on their contribution to team, unit,

and organizational goals. Among the key practices I referenced above is
the practice to connect performance expectations to crosscutting
organizational goals. 6 That is, if individuals are to be successful in
achieving results, they must work collaboratively

5 U. S. General Accounting Office, Human Capital Management: FAA*s Reform
Effort Requires a More Strategic Approach, GAO- 03- 156 (Washington, D.
C.: Feb. 3, 2003). 6 GAO- 03- 488.

GAO- 03- 793R Pay for Performance Page 6 with colleagues in other
organizational units. To further underscore the importance

of teamwork, leading organizations also set individual performance
expectations for collaboration, interaction, and teamwork. Finally,
leading organizations recognize and celebrate successful teamwork. In our
own case at GAO, we are implementing a new awards program to recognize
high- impact work that is produced by matrixed teams formed across the
organization.

For additional information on our work on federal agency transformation
efforts and strategic human capital management, please contact me on 512-
6806 or at mihmj@ gao. gov.

Sincerely yours, J. Christopher Mihm Director, Strategic Issues

(450221)

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