Human Capital: Preliminary Observations on Proposed DHS Human	 
Capital Regulations (25-FEB-04, GAO-04-479T).			 
                                                                 
The creation of the Department of Homeland Security (DHS) almost 
one year ago represents an historic moment for the federal	 
government to fundamentally transform how the nation will protect
itself from terrorism. DHS is continuing to transform and	 
integrate a disparate group of agencies with multiple missions,  
values, and cultures into a strong and effective cabinet	 
department. Together with this unique opportunity, however, also 
comes significant risk to the nation that could occur if this	 
transformation is not implemented successfully. In fact, GAO	 
designated this implementation and transformation as high risk in
January 2003. Congress provided DHS with significant flexibility 
to design a modern human capital management system. GAO reported 
in September 2003 that the design effort to develop the system	 
was collaborative and consistent with positive elements of	 
transformation. Last Friday, the Secretary of DHS and the	 
Director of the Office of Personnel Management (OPM) released for
public comment draft regulations for DHS's new human capital	 
system. This testimony provides preliminary observations on	 
selected major provisions of the proposed system.		 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-04-479T					        
    ACCNO:   A09362						        
  TITLE:     Human Capital: Preliminary Observations on Proposed DHS  
Human Capital Regulations					 
     DATE:   02/25/2004 
  SUBJECT:   Agency missions					 
	     Civil service					 
	     Compensation					 
	     Federal employees					 
	     Federal personnel law				 
	     Performance measures				 
	     Personnel evaluation				 
	     Personnel management				 
	     Program evaluation 				 
	     Human resources utilization			 
	     Strategic planning 				 
	     Appeals						 
	     Human capital					 

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GAO-04-479T

United States General Accounting Office

GAO Testimony

Before Subcommittees of the Senate Committee on Governmental Affairs and
the House Committee on Government Reform

For Release on Delivery Expected at 10:00 a.m. EST Wednesday, February 25,
2004

HUMAN CAPITAL

       Preliminary Observations on Proposed DHS Human Capital Regulations

Statement of David M. Walker Comptroller General of the United States

                                       A

GAO-04-479T

Highlights of GAO-04-479T, testimony before subcommittees of the Senate
Committee on Governmental Affairs and the House Committee on Government
Reform

The creation of the Department of Homeland Security (DHS) almost one year
ago represents an historic moment for the federal government to
fundamentally transform how the nation will protect itself from terrorism.
DHS is continuing to transform and integrate a disparate group of agencies
with multiple missions, values, and cultures into a strong and effective
cabinet department. Together with this unique opportunity, however, also
comes significant risk to the nation that could occur if this
transformation is not implemented successfully. In fact, GAO designated
this implementation and transformation as high risk in January 2003.

Congress provided DHS with significant flexibility to design a modern
human capital management system. GAO reported in September 2003 that the
design effort to develop the system was collaborative and consistent with
positive elements of transformation. Last Friday, the Secretary of DHS and
the Director of the Office of Personnel Management (OPM) released for
public comment draft regulations for DHS's new human capital system. This
testimony provides preliminary observations on selected major provisions
of the proposed system. The subcommittees are also releasing

Human Capital: Implementing Pay for Performance at Selected Personnel
Demonstration Projects

(GAO-04-83) at today's hearing.

www.gao.gov/cgi-bin/getrpt?GAO-04-479T.

To view the full testimony statement, click on the link above. For more
information, contact J. Christopher Mihm at (202) 512-6806 or
[email protected].

February 25, 2004

HUMAN CAPITAL

Preliminary Observations on Proposed DHS Human Capital Regulations

The proposed human capital system is designed to be aligned with the
department's mission requirements and is intended to protect the civil
service rights of DHS employees. Many of the basic principles underlying
the DHS regulations are consistent with proven approaches to strategic
human capital management, including several approaches pioneered by GAO,
and deserve serious consideration. However, some parts of the system raise
questions that DHS, OPM, and Congress should consider.

o  	Pay and performance management: The proposal takes another valuable
step towards results-oriented pay reform and modern performance
management. For effective performance management, DHS should use validated
core competencies as a key part of evaluating individual contributions to
departmental results and transformation efforts.

o  	Adverse actions and appeals: The proposal would retain an avenue for
employees to appeal adverse actions to an independent third party.
However, the process to identify mandatory removal offenses must be
collaborative and transparent. DHS needs to be cautious about defining
specific actions requiring employee removal and learn from the Internal
Revenue Service's implementation of its mandatory removal provisions.

o  	Labor relations: The regulations recognize employees' right to
organize and bargain collectively, but reduce areas subject to bargaining.
Continuing to involve employees in a meaningful manner is critical to the
successful operations of the department.

Once DHS issues final regulations for the human capital system, it will be
faced with multiple implementation challenges:

o  	DHS plans to implement the system using a phased approach, however,
nearly half of DHS civilian employees are not covered by these
regulations, including more than 50,000 Transportation Security
Administration screeners. To help build a unified culture, DHS should
consider moving all of its employees under a single performance management
system framework.

o  	DHS noted that it estimates that about $110 million will be needed to
implement the new system in its first year. While adequate resources for
program implementation are critical to program success, DHS is requesting
a substantial amount of funding that warrants close scrutiny by Congress.

o  	The proposed regulations call for comprehensive, ongoing evaluations.
Continued evaluation and adjustments will help to ensure an effective and
credible human capital system.

o  	DHS has begun to develop a strategic workforce plan. Such a plan can
be used as a tool for identifying core competencies for staff for
attracting, developing, evaluating, and rewarding contributions to mission
accomplishment.

The analysis of DHS's effort to develop a strategic human capital
management system can be instructive as other agencies request and
implement new strategic human capital management authorities.

Chairman Voinovich, Chairwoman Davis, and Members of the Subcommittees:

It is a pleasure to appear before you today to provide our preliminary
observations on the Department of Homeland Security's (DHS) proposed
regulations on its new human capital system.1 The creation of DHS almost
one year ago represents an historic moment for the federal government to
fundamentally transform how the nation will protect itself from terrorism.
DHS is continuing to transform and integrate a disparate group of agencies
with multiple missions, values, and cultures into a strong and effective
cabinet department. However, this unique opportunity also brings
significant risk to the nation if this transformation is not implemented
successfully. In fact, we designated this implementation and
transformation as high risk in January 2003.2

Last Friday, the Secretary of DHS and the Director of the Office of
Personnel Management (OPM) released for public comment proposed
regulations for DHS's new human capital system. The regulations are
intended to provide the broad outline of the DHS proposed system and are
not, nor were they intended to be, a comprehensive presentation of the
details of how the new system will be implemented. As the system evolves,
critical issues such as how DHS will link individual performance
expectations to DHS's mission and goals, how it will define performance
expectations to promote individual accountability, and how it will
continue to incorporate adequate safeguards to ensure fairness, will need
to be addressed. Such detailed implementation policies and procedures will
need to be developed in a transparent and inclusive manner as the system
evolves. Although we are still reviewing these extensive regulations
issued last week, this morning I will provide some preliminary
observations on selected provisions that in our view are most in need of
close scrutiny as Congress considers the DHS proposal.

The proposed DHS regulations have both significant precedent-setting
implications for the executive branch and far-reaching implications on how
the department is managed. In my view, many of the basic principles

1Senate Committee on Governmental Affairs, Subcommittee on Oversight of
Government Management, the Federal Workforce, and the District of Columbia
and House Committee on Government Reform, Subcommittee on Civil Service
and Agency Organization.

2U.S. General Accounting Office, Major Management Challenges and Program
Risks: Department of Homeland Security, GAO-03-102 (Washington, D.C.:
January 2003).

  Preliminary Observations on the Proposed Human Capital Regulations

underlying the proposed DHS regulations are consistent with proven
approaches to strategic human capital management, including several
approaches pioneered by GAO, and deserve serious consideration. In
designing the proposed system, DHS and OPM met with a wide range of
individuals and organizations with expertise in human capital. At the
request of DHS and OPM, we were pleased to share the results of our work
looking at leading human capital practices as well as our own experiences
with performance management at GAO. My statement today is based on our
ongoing review of DHS's design and implementation of its human capital
system, recent work on strategic human capital management, including
performance management, and our own experience.

DHS's and OPM's proposed regulations would establish a new human resources
management system within DHS that covers pay, classification, performance
management, labor relations, adverse action, and employee appeals. These
changes are designed to ensure that the system aligns individual
performance and pay with the department's critical mission requirements
and to protect the civil service rights of its employees. However, it is
important to note at the outset that the proposed regulations do not apply
to nearly half of all DHS civilian employees, including nearly 50,000
screeners in the Transportation Security Administration (TSA). DHS
officials have noted that additional employees can be included through
further administrative action, but that legislation would be needed to
include other employees such as the screeners and the uniformed division
of the Secret Service.3 We have found that having one performance
management system framework facilitates unifying an organizational culture
and is a key practice to a successful merger and transformation. Based on
the department's progress in implementing the system and any appropriate
modifications made based on their experience, DHS should consider moving
all of its employees under the new human capital system.

3The Homeland Security Act of 2002 gave DHS authority to waive or modify
parts of civil service law in Title 5 of the U.S. Code. However, not all
employees of DHS are covered under Title 5. According to DHS officials,
this impacts coverage of TSA, part of the Coast Guard, the Uniformed
Division of the Secret Service, and part of the Emergency Preparedness and
Response Directorate. These same DHS officials indicated that DHS can
administratively extend the new human capital system to many of these
employees. However, they said that legislation would be required to move
TSA screeners and Secret Service uniformed employees completely into the
new system.

Pay and Performance Management

Linking Organizational Goals to Individual Performance

Today, Mr. Chairman and Madam Chairwoman, you are releasing a report that
we prepared at your request that shows the variety of approaches that
OPM's personnel demonstration projects took to design and implement their
pay for performance systems.4 Their experiences provide insights into how
some organizations in the federal government are implementing pay for
performance and thus can guide DHS as it develops and implements its own
approach. These demonstration projects illustrate that understanding how
to link pay to performance is very much a work in progress in the federal
government and that additional work is needed to ensure that performance
management systems are tools to help them manage on a day-to-day basis and
achieve external results.

As we testified last spring when the Department of Defense (DOD) proposed
its civilian personnel reform, from a conceptual standpoint, we strongly
support the need to expand pay for performance in the federal government.5
Establishing a better link between individual pay and performance is
essential if we expect to maximize the performance and ensure the
accountability of the federal government for the benefit of the American
people. However, how it is done, when it is done, and the basis on which
it is done can make all the difference in whether such efforts are
successful. The DHS proposal reflects a growing understanding that the
federal government needs to fundamentally rethink its current approach to
pay and better link pay to individual and organization performance. To
this end, the DHS proposal takes another valuable step towards
resultsoriented pay reform and modern performance management. My comments
on specific provisions follow.

Under the proposed regulations, the DHS performance management system
must, among other things, align individual performance expectations with
the mission, strategic goals, or a range of other objectives of the
department or of the DHS components. The proposed guidelines do not detail
how such an alignment is to be achieved, a vital issue that will need to
be addressed as DHS's efforts move forward. Our work looking at public
sector performance management efforts here in the United States as well as
abroad have underscored the importance of

4U.S. General Accounting Office, Human Capital: Implementing Pay for
Performance at Selected Personnel Demonstration Projects, GAO-04-83
(Washington, D.C.: Jan. 23, 2004).

5U.S. General Accounting Office, Defense Transformation: Preliminary
Observations on DOD's Proposed Civilian Personnel Reforms, GAO-03-717T
(Washington, D.C.: Apr. 29, 2003).

                             Establishing Pay Bands

aligning daily operations and activities with organizational results. We
have found that organizations often struggle with clearly understanding
how what they do on a day-to-day basis contributes to overall
organizational results. High performing organizations, on the other hand,
understand how the products and services they deliver contribute to
results by aligning performance expectations of top leadership with
organizational goals and then cascading those expectations to lower
levels.

As an organization undergoing its own merger and transformation, DHS's
revised performance management system can be a vital tool for aligning the
organization with desired results and creating a "line of sight" showing
how team, unit, and individual performance can contribute to overall
organizational results. To help DHS merge its various originating
components into a unified department and transform its culture to be more
results oriented, customer focused, and collaborative in nature, we
reported at your request, Mr. Chairman and Madam Chairwoman, how a
performance management system that defines responsibility and assures
accountability for change can be key to a successful merger and
transformation.6 While aligning individual performance expectations with
DHS's mission and strategic goals will be key to DHS's effective
performance management, it is important to note that DHS has not yet
released its strategic plan which may hamper creating the formal linkage
to the performance management system and make it difficult to ensure that
the proposed regulations support and facilitate the accomplishment of the
department's strategic goals and objectives.

Under the proposed regulations, DHS would create broad pay bands for much
of the department in place of the fifteen-grade General Schedule (GS)
system now in place for much of the civil service. Specifically, DHS
officials have indicated that they will form ten to fifteen occupational
pay clusters of similar job types, such as a management or science and
technology cluster. Most of these occupational clusters would have four
pay bands ranging from entry level to supervisor. Within each occupational
cluster, promotion to another band (such as from full performance to
senior expert) would require an assessment and/or competition. Under the
proposed regulations, DHS is not to reduce

6U.S. General Accounting Office, Results-Oriented Cultures: Implementation
Steps to Assist Mergers and Organizational Transformations, GAO-03-669
(Washington, D.C.: July 2, 2003).

employees' basic rate of pay when converting to pay bands. In addition,
the proposed regulations would allow DHS to establish a "control point"
within a band, beyond which basic pay increases may be granted only for
meeting criteria established by DHS, such as an outstanding performance
rating.

The use of control points can be a valuable tool because managing
progression through the bands can help to ensure that employees'
performance coincides with their salaries and can help to prevent all
employees from eventually migrating to the top of the band and thus
increasing salary costs. Both demonstration projects at China Lake and the
Naval Sea Systems Command Warfare Center's (NAVSEA) Dahlgren Division have
checkpoints or "speed bumps" in their pay bands designed to ensure that
only the highest performers move into the upper half of the pay band. For
example, when employees' salaries at China Lake reach the midpoint of the
pay band, they must receive a performance rating equivalent to exceeding
expectations, before they can receive additional salary increases.

Pay banding and movement to broader occupational clusters can both
facilitate DHS's movement to a pay for performance system, and help DHS to
better define occupations, which can improve the hiring process. We have
reported that the current GS system as defined in the Classification Act
of 1949 is a key barrier to comprehensive human capital reform and the
creation of broader occupational job clusters and pay bands would aid
other agencies as they seek to modernize their personnel systems.7 The
standards and process of the current classification system is a key
problem in federal hiring efforts because they are outdated and not
applicable to the occupations and work of today. Many employees in
agencies that are now a part of DHS responding to OPM's 2002 Federal

7U.S. General Accounting Office, Human Capital: Opportunities to Improve
Executive Agencies' Hiring Processes, GAO-03-450 (Washington, D.C.: May
30, 2003).

Setting Employee Performance Expectations

Human Capital Survey (FHCS) believe that recruiting is a problem - only 36
percent believe their work unit is able to recruit people with the right
skills. 8

The DHS performance management system is intended to promote individual
accountability by communicating performance expectations and holding
employees responsible for accomplishing them and by holding supervisors
and managers responsible for effectively managing the performance of
employees under their supervision. While supervisors are to involve
employees as far as practicable in developing their performance
expectations and employees seek clarification if they do not understand
them, the final decision on an employee's expectations is the supervisor's
sole and exclusive discretion. Supervisors must monitor the performance of
their employees and provide periodic feedback, including one or more
formal interim performance reviews during the appraisal period.

The proposed regulations provide a general description of DHS's
performance management system with many important details to be
determined. Under the proposed regulations, performance expectations may
take the form of goals or objectives that set general or specific
performance targets at the individual, team, and/or organizational level;
a particular work assignment, including characteristics such as quality,
accuracy, or timeliness; or competencies an employee is expected to
demonstrate on the job; and/or the contributions an employee is expected
to make, among other things. As DHS's system design efforts move forward,
it will need to define in further detail than currently provided how
performance expectations will be established, including the degree to
which DHS components, managers, and supervisors will have flexibility in
setting those expectations.

Nevertheless, the range of expectations that DHS will consider in setting
individual employee performance expectations are generally consistent with
those we see used by leading organizations. In addition, DHS appropriately
recognizes that given the vast diversity of work done in the Department,
managers and employees need flexibility in crafting specific

8The DHS responses reported by the OPM FHCS approximate the views of some,
but not all, employees now at DHS. For example, TSA screeners were not
hired at the time of the survey. Also, though the Animal and Plant Health
Inspection Services (APHIS) employees were divided between DHS and the
U.S. Department of Agriculture (USDA), the APHIS respondents included
those remaining at USDA. Details on the objective, scope, and methodology
for the OPM FHCS are described in more detail in app I.

Translating Employee Performance Ratings into Pay Increases and Awards

expectations. However, the experiences of leading organizations suggest
that DHS should reconsider its position to merely allow, rather than
require the use of core employee competencies as a central feature of
DHS's performance management efforts.9 Based on our review of others'
efforts and our own experience at GAO, core competencies can help
reinforce employee behaviors and actions that support the department's
mission, goals, and values and can provide a consistent message to
employees about how they are expected to achieve results. For example, the
Civilian Acquisition Workforce Personnel Demonstration Project (AcqDemo),
which covers various organizational units of the Air Force, Army, Navy,
Marine Corps, and the Office of the Under Secretary of Defense, applies
organizationwide competencies for all employees such as
teamwork/cooperation, customer relations, leadership/supervision, and
communication.

More specifically and consistent with leading practices for successful
mergers and organizational transformation, DHS should use its performance
management system to serve as the basis for setting expectations for
individual roles in its transformation process.10 To be successful,
transformation efforts, such as the one underway at DHS, must have
leaders, managers, and employees who have the individual competencies to
integrate and create synergy among multiple organizations involved in the
transformation effort. Individual performance and contributions can be
evaluated on competencies such as change management, cultural sensitivity,
teamwork and collaboration, and information sharing. Leaders, managers,
and employees who demonstrate these competencies are rewarded for their
success in contributing to the achievement of the transformation process.
DHS, by including such competencies throughout its revised performance
management system, would create a shared responsibility for organizational
success and help assure accountability for change.

A stated purpose of DHS's performance management system is to provide for
meaningful distinctions in performance to support adjustments in pay,
awards, and promotions. All employees who meet organizational expectations
are to receive pay adjustments, generally to be made on an annual basis.
In coordination with OPM, the pay adjustment is to be based

9U.S. General Accounting Office, Creating a Clear Linkage between
Individual Performance and Organizational Success, GAO-03-488 (Washington,
D.C.: Mar. 14, 2003).

10GAO-03-669.

on considerations of mission requirements, labor market conditions,
availability of funds, pay adjustments received by other federal
employees, and other factors. The pay adjustment may vary by occupational
cluster or band. Employees that meet or exceed expectations are also
eligible to receive a performance-based pay increase, either as an
increase to base pay or a one-time award, depending on the employee's
performance rating. Employees with unacceptable ratings are not to receive
the pay adjustment or a performance-based pay increase. The proposed
regulations provide managers with a range of options for dealing with poor
performers, such as remedial training, reassignment, an improvement
period, among other things.

In coordination with OPM, DHS may additionally set the boundaries of
locality pay areas. Participants in the DHS focus groups expressed
concerns regarding the shortcomings of the current locality pay system,
including its impact on recruitment and retention.11

While the DHS proposal does not provide additional detail on how it would
consider labor market conditions, its proposed approach is broadly
consistent with the experiences of some of the demonstration projects that
considered the labor market or the fiscal condition of the organization in
determining how much to budget for pay increases. For example, NAVSEA's
Newport Division considers the labor market and uses regional and industry
salary information compiled by the American Association of Engineering
Societies when determining how much to set aside for pay increases and
awards. In addition, the Newport Division is financed in part through a
working capital fund and thus must take into account fiscal condition when
budgeting for pay increases and awards. Responding to higher salaries in
the labor market, the Newport Division funded pay increases at a higher
rate in fiscal year 2001 than in 2000. Conversely, in fiscal year 2002,
the performance pay increase and award pools were funded at lower levels
than in 2001 because of fiscal constraints.

Under the proposed regulations, DHS would establish performance pay pools
by occupational cluster and by band within each cluster, and may further
divide them by unit and/or location. Performance-based pay would be based
on "performance points" whereby points correspond to a rating level. In an
example used by DHS, for a four-level system, the point value

11Details on the objective, scope, and methodology for the DHS focus
groups are described in more detail in app. I.

pattern may be 4-2-1-0, where 4 points are assigned to the highest rating
and 0 points to an unacceptable rating. While each pay pool has the option
to use this point value pattern or another, DHS is to determine the value
of a performance point. The proposed regulations do not provide more
detailed information on how ratings will be used for pay and promotions.

Under the proposed regulations, DHS may not impose a quota on any rating
level or a mandatory distribution of ratings. DHS would create a
Performance Review Board (PRB) to review ratings in order to promote
consistency and provide general oversight of the performance management
system to ensure it is administered in a fair, credible, and transparent
manner. DHS may, in turn, appoint as many review boards within the
departmental components as it deems necessary to effectively carry out
these intended functions and, when practicable, may include employees
outside the organizational unit, occupation, and/or location of employees
subject to review by the PRB. The proposed regulations do not offer
additional details on other matters such as the selection process for the
members nor their qualifications. Where circumstances warrant, the PRB may
remand individual ratings for additional review and/or modify a rating.

While much remains to be determined about how the DHS PRB will operate, we
believe that the effective implementation of such a board is important to
assuring that predecisional internal safeguards exist to help achieve
consistency and equity, and assure nondiscrimination and nonpolitization
of the performance management process. The key will be to create a PRB
that is independent of line management and review such matters as the
establishment and implementation of the performance appraisal system and
later, performance rating decisions, pay determinations, and promotion
actions before they are finalized to ensure they are merit based.

Several of the demonstration projects consider an employee's current
salary when making decisions on permanent pay increases and one-time
awards - a procedure that is worth additional consideration in the
proposed DHS regulations. By considering salary in such decisions, the
projects intend to make a better match between an employee's compensation
and his or her contribution to the organization. Thus, two employees with
comparable contributions could receive different pay increases and awards
depending on their current salaries. For example, at AcqDemo, supervisors
recommend and pay pool managers approve employees' "contribution scores."
Pay pool managers then plot contribution scores against the employees'
current salaries and a

Providing Adequate Safeguards to Ensure Fairness and Guard Against Abuse

"standard pay line" to determine if employees are "appropriately
compensated," "under-compensated" or "over-compensated," given their
contributions.

As a result of this system, AcqDemo has reported that it has made progress
in matching employees' compensation to their contributions to the
organization. From 1999 to 2002, appropriately compensated employees
increased from about 63 percent to about 72 percent, under-compensated
employees decreased from about 30 percent to about 27 percent and
overcompensated employees decreased from nearly 7 percent to less than 2
percent. A recent evaluation of AcqDemo by Cubic Applications, Inc. found
that employees' perceptions of the link between pay and contribution
increased, from 20 percent reporting that pay raises depend on their
contribution to the organization's mission in 1998 to 59 percent in 2003.

According to the proposed regulations, the DHS performance management
system must comply with the merit system principles and avoid prohibited
personnel practices; provide a means for employee involvement in the
design and implementation of the system; and overall, be fair, credible,
and transparent. Last spring, when commenting on the DOD civilian
personnel reforms, we testified that Congress should consider establishing
statutory standards that an agency must have in place before it can
implement a more performance-based pay program and developed an initial
list of possible safeguards to help ensure that pay for performance
systems in the government are fair, effective, and credible.12

While much remains to be defined, DHS is proposing taking actions that are
generally consistent with these proposed safeguards. For example, as I
noted previously, DHS plans to align individual performance management
with organizational goals and provide for reasonableness reviews of
performance management decisions through its PRB. Moreover, employees and
their union representatives played a role in shaping the design of the
proposed systems, as we previously reported.13

12GAO-03-717T.

13U.S. General Accounting Office, Human Capital: DHS Personnel System
Design Effort Provides for Collaboration and Employee Participation,
GAO-03-1099 (Washington, D.C.: Sept. 30, 2003).

DHS should continue to build in safeguards into its revised performance
management system. For example, we noted that agencies need to assure
reasonable transparency and provide appropriate accountability mechanisms
in connection with the results of the performance management process. This
can include publishing overall results of performance management and
individual pay decisions while protecting individual confidentiality and
reporting periodically on internal assessments and employee survey results
relating to the performance management system. DHS should commit to
publishing the results of the performance management process. Publishing
the results in a manner that protects individual confidentiality can
provide employees with the information they need to better understand the
performance management system. Several of the demonstration projects
publish information for employees on internal Web sites about the results
of performance appraisal and pay decisions, such as the average
performance rating, the average pay increase, and the average award for
the organization and for each individual unit.

Adverse Actions and Appeals

The DHS proposal is intended to streamline the employee adverse action
process, while maintaining an independent third-party review of most
adverse actions. It is designed to create a single process for both
performance-based and conduct-based actions,14 and shortens the adverse
action process by removing the requirement for a performance improvement
plan and reducing other timeframes. The proposed regulations also adopt
the lower standard of proof for adverse actions in DHS, requiring the
agency to meet a standard of "substantial evidence" instead of a
"preponderance of the evidence." An independent review is to be retained
by allowing employees to appeal to the Merit Systems Protection Board
(MSPB). The appeals process at MSPB is, however, to be streamlined by
shortening the time for filing and processing appeals. The proposal also
encourages the use of Alternative Dispute Resolution (ADR).

14Title 5 has a process for performance-based actions in Chapter 43 and a
different process in Chapter 75 which can be used for conduct or
performance-based actions.

Retention of a qualified and independent third-party to address employee
appeals may be especially important in light of OPM's FHCS results.
Specifically,

o  	38 percent of DHS respondents believe that complaints, disputes, or
grievances are resolved fairly - lower than the governmentwide response of
44 percent;15 and

o  	38 percent of DHS respondents perceive that arbitrary action, personal
favoritism, and coercion for partisan political purposes are not tolerated
- lower than the governmentwide response of 45 percent.

Providing an avenue for an independent appeal can enhance employee trust
of the entire human capital system. The point was echoed during the DHS
focus groups, in which employees and managers believed it was important to
maintain a neutral third-party reviewer in the appeals process. In a
separate survey that we administered (GAO survey), members of the field
team identified the presence of a neutral third-party in the process as
the most critical challenge in terms of the discipline and appeals system,
while others identified options retaining a third-party reviewer as most
likely to address the department's challenges in discipline and appeals.16

DHS's commitment to use ADR is a very positive development. To resolve
disputes in a more efficient, timely, and less adversarial manner, federal
agencies have been expanding their human capital programs to include ADR
approaches. These approaches include mediation, dispute resolution boards
and ombudsmen. Ombudsmen are typically used to provide an informal
alternative to addressing conflicts. We reported on common approaches used
in ombudsmen offices, including (1) broad responsibility and authority to
address almost any workplace issue, (2) their ability to bring systemic
issues to management's attention, and (3) the manner in which they work
with other agency offices in providing assistance to

15In all instances comparing DHS's results to the OPM FHCS governmentwide
average, DHS results are lower by a statistically significant amount
according to OPM data.

16Field team participants served as a key source of information during the
design process. The field team consisted of DHS managers and staff.
Details on the objective, scope, and methodology for the GAO-administered
survey of the field team are described in more detail in app. I.

employees.17 The proposed regulations note that the department will use
ADR, including an ombudsman, where appropriate.

The proposal authorizes the Secretary of DHS to identify specific offenses
for which removal is mandatory. Employees alleged to have committed these
offenses will have the right to a review by an adjudicating official and a
further appeal to a newly created panel. Members of this threeperson panel
are to be appointed by the Secretary for three-year terms and
qualifications for these members are articulated in the proposed
regulations. Members of the panel may be removed by the Secretary "only
for inefficiency, neglect of duty, or malfeasance." Qualifications for the
adjudicating officials, who are designated by the panel, are not
specified.

One potential area of caution is the authority given to the Secretary to
identify specific offenses for which removal is mandatory. I believe that
the process for determining and communicating which types of offenses
require mandatory removal should be explicit and transparent and involve a
member of key players. Such a process should include an employee notice
and comment period before implementation, collaboration with relevant
Congressional stakeholders, and collaboration with employee
representatives.

We also would suggest that DHS exercise caution when identifying specific
removable offenses and the specific punishment. When developing these
proposed regulations, DHS should learn from the experience of the Internal
Revenue Service's (IRS) implementation of its mandatory removal
provisions.18 We reported that IRS officials believed this provision had a
negative impact on employee morale and effectiveness and had a "chilling"
effect on IRS frontline enforcement employees who are afraid to take
certain appropriate enforcement actions.19 Careful drafting of each
removable offense is critical to ensure that the provision does not have
unintended consequences.

17U.S. General Accounting Office, Human Capital: The Role of Ombudsmen in
Dispute Resolution, GAO-01-466 (Washington, D.C.: Apr. 13, 2001).

18Section 1203 of the IRS Restructuring and Reform Act of 1998 outlines
conditions for firing of IRS employees for any of ten acts of misconduct.
26 USC 7804 note.

19U.S. General Accounting Office, Tax Administration: IRS and TIGTA Should
Evaluate Their Processing of Employee Misconduct Under Section 1203,
GAO-03-394 (Washington, D.C.: Feb. 14, 2003).

Moreover, the independence of the panel that will hear appeals of
mandatory removal actions deserves further consideration. Removal of the
panel members by the Secretary may potentially compromise the real or
perceived independence of the panel's decisions. As an alternative, the
department should consider having members of the panel removed only by a
majority decision of the panel. DHS may also wish to consider staggering
the terms of the members to ensure a degree of continuity on the board.

Labor Management Relations

The DHS proposed regulations recognize the right for employees to organize
and bargain collectively.20 However, the proposal reduces the scope of
bargaining by removing the requirement to bargain on matters traditionally
referred to as "impact and implementation," which include the processes
used to deploy personnel, assign work, and use new technology, for
example, and redefining what are traditionally referred to as the
"conditions of employment." A DHS Labor Relations Board is proposed that
would be responsible for determining appropriate bargaining units,
resolving disagreements on the scope of bargaining and the obligation to
bargain, and resolving impasses, and would be separate and independent
from the Federal Labor Relations Authority (FLRA). The Labor Relations
Board would have three members selected by the Secretary. No member could
be a current DHS employee and one member would be from FLRA. The FLRA is
retained to resolve complaints concerning certain unfair labor practices
and to supervise or conduct union elections.

Regardless of whether it is as a part of collective bargaining, involving
employees in such important decisions as how they are deployed and how
work is assigned is critical to the successful operations of the
department. During the course of the design process, DHS has recognized
the importance of employee involvement and has been involving multiple
organizational components and its three major employee unions in designing
the new human capital system.21 This is consistent with our finding that
leading organizations involve unions and incorporate their input into
proposals before finalizing decisions.22 Engaging employee

20Under current law, the rights of employees to bargain may be suspended
for reasons of national security. 5 U.S.C. Sect. 7103(b), 7112(b)(6).

21GAO-03-1099.

22U.S. General Accounting Office, Human Capital: Practices that Empowered
and Involved Employees, GAO-01-1070 (Washington, D.C.: Sept. 14, 2001).

  DHS Faces Multiple Implementation Challenges

unions in major changes, such as redesigning work processes, changing work
rules, or developing new job descriptions, can help achieve consensus on
the planned changes, avoid misunderstandings, speed implementation, and
more expeditiously resolve problems that occur. These organizations
engaged employee unions by developing and maintaining an ongoing working
relationship with the unions, documenting formal agreements, building
trust over time, and participating jointly in making decisions.

DHS employees' comments can prove instructive when determining the balance
in labor management relations. In the DHS focus groups, employees
suggested having informal mechanisms in place to resolve issues before the
need to escalate them to the formal process and holding supervisors
accountable for upholding agreements. Supervisors and employees also
expressed a need for increased training in roles and responsibilities in
the labor process and an interest in training in ADR. Respondents to the
GAO survey said the most critical challenge in terms of labor relations
will be to maintain a balance between the mission of the agency and
bargaining rights.

Once DHS issues final regulations for the human capital system, the
department will be faced with multiple implementation challenges. While we
plan to provide further details to the Congress on some of these
challenges in the near future, they include the following.

Implementing the system using a phased approach. The DHS proposed
regulations note that the labor relations, adverse actions, and appeals
provisions will be effective 30 days after issuance of the interim final
regulations later this year. DHS plans to implement the job evaluation,
pay, and performance management system in phases to allow time for final
design, training, and careful implementation. We strongly support a phased
approach to implementing major management reforms. A phased implementation
approach recognizes that different organizations will have different
levels of readiness and different capabilities to implement new
authorities. Moreover, a phased approach allows for learning so that
appropriate adjustments and midcourse corrections can be made before the
regulations are fully implemented organizationwide.

Providing adequate resources for additional planning, implementation, and
evaluation. The administration recognizes the importance of funding this
major reform effort and has requested for fiscal year 2005 over $10
million for a performance pay fund in the first phase of

implementation (affecting about 8,000 employees) to recognize those who
meet or exceed expectations and about $100 million to fund training and
the development of the performance management and compensation system. In
particular, DHS is appropriately anticipating that its revised performance
management system will have costs related to both development and
implementation - a fact confirmed by the experience of the demonstration
projects. In fact, OPM reports that the increased costs of implementing
alternative personnel systems should be acknowledged and budgeted for up
front.

DHS is recognizing that there are up front costs and that its components
are starting from different places regarding the maturity and capabilities
of their performance management systems. At the same time, DHS is
requesting a substantial amount of funding that warrants close scrutiny by
Congress. In addition, certain costs are one-time in nature and therefore
should not be built into the base of DHS's budget for future years.
Furthermore, presumably most of any performance-based pay will be funded
from what otherwise would be used from automatic across the board
adjustments and step increases under the existing GS system.

The DHS proposal correctly recognizes that a substantial investment in
training is a key aspect of implementing a performance management system.
The demonstration projects' experiences show that while training costs are
generally higher in the year prior to implementation, the need for
in-depth and varied training continues as the system is implemented. We
have reported that agencies will need to invest resources, including time
and money, to ensure that employees have the information, skills, and
competencies they need to work effectively in a rapidly changing and
complex environment.23

Evaluating the impact of the system. High-performing organizations
continually review and revise their human capital management systems based
on data-driven lessons learned and changing needs in the environment. DHS
indicates that it is committed to an ongoing comprehensive evaluation of
the effectiveness of the human capital system, including the establishment
of human capital metrics and the use of employee surveys. Collecting and
analyzing data is the fundamental

23U.S. General Accounting Office, Human Capital: A Guide for Assessing
Strategic Training and Development Efforts in the Federal Government,
GAO-03-893G (Washington, D.C.: July 2003).

building block for measuring the effectiveness of these approaches in
support of the mission and goals of the agency.

DHS should consider doing evaluations that are broadly modeled on the
evaluation requirements of the OPM demonstration projects. Under the
demonstration project authority, agencies must evaluate and periodically
report on results, implementation of the demonstration project, cost and
benefits, impacts on veterans and other equal employment opportunity
groups, adherence to merit system principles, and the extent to which the
lessons from the project can be applied governmentwide. A set of balanced
measures addressing a range of results, customer, employee, and external
partner issues may also prove beneficial. An evaluation such as this would
facilitate congressional oversight; allow for any midcourse corrections;
assist DHS in benchmarking its progress with other efforts; and provide
for documenting best practices and sharing lessons learned with employees,
stakeholders, other federal agencies, and the public.

Building a DHS-wide workforce plan. DHS has recently begun drafting a
departmental workforce plan, using the draft strategic plan as a starting
point. Workforce plans of different levels of sophistication are used in
the five legacy agencies we studied. Despite their efforts, DHS
headquarters has not yet been systematic or consistent in gathering
relevant data on the successes or shortcomings of legacy human capital
approaches or current and future workforce challenges-a deficiency that
will make workforce planning more difficult. The strategic workforce plan
can be used, among other things, as a tool for identifying core
competencies for staff for attracting, developing, and rewarding
contributions to mission accomplishment.24

Involving employees and other stakeholders in designing the details of the
system. We reported last fall that DHS's and OPM's effort to design a new
human capital system were collaborative and facilitated participation of
employees from all levels of the department.25 We recommended that the
Secretary of DHS build on the progress that has been made and ensure that
the communication strategy used to support the human capital system
maximize opportunities for employee involvement through the completion of
the design process, the release of

24U.S. General Accounting Office, Human Capital: Key Principles for
Effective Strategic Workforce Planning, GAO-04-39 (Washington, D.C.: Dec.
11, 2003).

25GAO-03-1099.

the system options, and implementation, with special emphasis on seeking
the feedback and buy-in of frontline employees.

Moving forward, employee perspectives can provide insights on areas that
deserve particular attention while implementing the new performance
management system. For example, DHS employees responding to the OPM FHCS
reported that

o  	37 percent indicated that high-performing employees are recognized or
rewarded on a timely basis, which is lower than the governmentwide average
of 41 percent;

o  	60 percent believe that their appraisals are fair reflections of their
performance, which is lower than the governmentwide average of 65 percent;

o  	23 percent believe that steps are taken to deal with a poor performer
who cannot or will not improve, which is lower than the governmentwide
average of 27 percent; and

o  	28 percent perceive that selections for promotions in their work units
are based on merit, which is lower than the governmentwide average of 37
percent.

In the GAO survey, members of the field team said that the most critical
challenge in terms of performance management will be to create a system
that is fair. Such data underscore the continuing need to involve
employees in the design and implementation of the new system to obtain
their buy-in to the changes being made. More specifically, employee
involvement in the validation of core competencies is critical to ensure
that the competencies are both appropriate and accepted.

As we testified on the DOD civilian personnel reforms, the bottom line for
additional performance-based pay flexibility is that an agency should have
to demonstrate that it has a modern, effective, credible, and as
appropriate, validated performance management system in place with
adequate safeguards, including reasonable transparency and appropriate
accountability mechanisms, to ensure fairness and prevent politicalization
and abuse of employees. To this end, DHS's proposed regulations take
another valuable step towards results-oriented pay reform and modern
performance management. DHS's performance management system is intended to
align individual performance to DHS's success; hold

  Summary Observations

employees responsible for accomplishing performance expectations; provide
for meaningful distinctions in performance through performanceand
market-based payouts; and be fair, credible, and transparent. However, the
experiences of leading organizations suggest that DHS should require core,
and as appropriate, validated competencies in its performance management
system. The core competencies can serve to reinforce employee behaviors
and actions that support the DHS mission, goals, and values and to set
expectations for individuals' roles in DHS's transformation, creating a
shared responsibility for organizational success and ensuring
accountability for change. DHS should also continue to build safeguards
into its revised human capital system.

DHS's overall effort to design a strategic human capital management system
can be particularly instructive for future human capital management and
reorganization efforts within specific units of DHS. Its effort can also
prove instructive as other agencies design and implement new authorities
for human capital management.

Mr. Chairman, Madam Chairwoman, and Members of the Subcommittees, this
concludes my prepared statement. I would be pleased to respond to any
questions that you may have.

For further information, please contact J. Christopher Mihm, Managing
Director, Strategic Issues, at (202) 512-6806 or [email protected]. Major
contributors to this testimony include Edward H. Stephenson, Jr., Lisa
Shames, Ellen V. Rubin, Lou V. B. Smith, Tina Smith, Masha
Pasthhov-Pastein, Marti Tracy, Ron La Due Lake, Karin Fangman, Michael
Volpe, and Tonnye Conner-White.

  Contacts and Acknowledgments

                            Appendix I: Methodology

In presenting our preliminary observations on the Department of Homeland
Security's (DHS) regulations, we reviewed the proposed human capital
regulations issued jointly by DHS and the Office of Personnel Management
(OPM) on February 20, 2004, in the Federal Register. Additional documents
reviewed include relevant laws and regulations, the 52 DHS human capital
system options released in October 2003, and testimony presented by
leaders of DHS employee unions and the Merit Systems Protection Board
(MSPB). Interviews with experts in federal labor relations and the federal
adverse actions and appeals system provided additional insights. The
official transcripts and report summarizing the proceedings of the Senior
Review Advisory Committee meetings in October 2003 were also examined. A
draft of the report summarizing the proceedings of the Senior Review
Advisory Committee meetings in October 2003 was reviewed by members of the
committee to ensure its reliability. Additionally, we attended the
committee's October 2003 meetings. Relevant GAO reports on human capital
management were used as criteria against which the proposals were
evaluated.

To respond to your particular interest in seeking out and incorporating
employee perspectives on the human capital system, we gathered information
on employee perceptions from a variety of sources and presented these
findings throughout the statement. Insights to employee opinions were
gathered from the OPM Federal Human Capital Survey (FHCS), a
GAO-administered survey of the field team used to inform the human capital
system design effort (GAO survey), and a report summarizing findings from
the DHS focus groups held during the summer of 2003.

OPM Federal Human Capital Survey

To assess the strengths and weaknesses of selected provisions of DHS's
proposed human capital system, we reviewed the analysis of the DHS
component agencies' responses to relevant questions on OPM's FHCS of 2002
for those legacy components that are now within DHS: the Animal and Plant
Health Inspection Service (APHIS); the U.S. Coast Guard; the U.S. Customs
Service; the Federal Emergency Management Agency; the Immigration and
Naturalization Service; Federal Law Enforcement Training Center; U.S.
Secret Service; Office of Emergency Preparedness and National Disaster
Medical System; and the Federal Protective Service. This governmentwide
survey was conducted from May through August 2002. It was administered to
employees of 24 major agencies represented on the President's Management
Council, which constitute 93 percent of the executive branch civilian
workforce. There were 189 subelement/organizational components of the 24
agencies that

participated. The sample was stratified by employee work status:
supervisory, nonsupervisory, and executive. Of the more than 200,000
employees contacted, a little over 100,000 employees responded to the
survey, resulting in a 51 percent response rate. OPM reported that the
margin of error for the percentages of respondents governmentwide was plus
or minus 1 percent at a 95 percent confidence interval. Likewise, it
reported that the margin of error for the percentages of respondents for
individual agencies was somewhat higher but less than plus or minus 5
percent.

The OPM survey was conducted during the same time frame that the
administration proposed legislation to form DHS; thus, the opinions
expressed by the respondents to the survey were before the formation of
DHS. For reporting purposes, OPM compiled the DHS responses by combining
the various subentities cited above. The responses approximate the views
of some, but not all, employees now at DHS. For example, the
Transportation Security Administration (TSA) screeners were not hired at
the time of the survey. Also, APHIS employees were divided between DHS and
the Department of Agriculture (USDA), so the APHIS respondents included
some employees who remained at USDA.

Because OPM did not provide us with a copy of the full survey data set
that included all records or the strata weights for any of the records, we
could not perform our own analyses of the data or calculate the confidence
intervals that would be associated with such analyses. OPM did, however,
provide us with access to a Web site that provided reports with weighted
data analyses for the FHCS 2002. We addressed the reliability of the
survey analyses by (1) reviewing existing information about the survey
data collection and analysis processes and (2) interviewing OPM agency
officials who were knowledgeable about the data. We determined that the
data were sufficiently reliable for the purposes of this testimony. We
reviewed the analyses of the DHS component agencies presented on the Web
site in four areas (pay and performance management, classification, labor
relations, and adverse actions and appeals) that compared DHS-wide data to
governmentwide data.

GAO Field Team Survey 	We were interested in obtaining the views of the
field team participants who served as a key source of information for
DHS's Core Design Team. The field team consisted of DHS managers and
staff. Members were selected by departmental management or the three major
unions.

From October through December 2003, we surveyed the 31 members of the team
to obtain their insights into the DHS design process and proposed human
capital system options. The survey, administered by email and fax,
contained two parts. The first part addressed their views on how
effectively the field team was utilized throughout the design process. The
second part addressed their views about human capital challenges and the
proposed policy options in four areas: (1) pay and classification, (2)
performance management, (3) labor relations, and (4) discipline and
appeals. Prior to distribution, the questionnaire was reviewed by DHS and
OPM officials and pretested with a field team member to ensure clarity of
the questions and determine whether the respondent had the knowledge to
answer the questions. The questionnaire was revised based on their input.
We received completed questionnaires from 19 of 31 field team members. We
aggressively followed up with nonrespondents by telephone and e-mail.
Because many of the field team members were either not based in offices,
on extensive travel, or difficult to reach, we extended our survey through
December 2003. The views that we obtained are not representative of all
the participants.

                                DHS Focus Groups

DHS conducted multiple focus groups and Town Hall meetings from the end of
May through the beginning of July 2003 in 10 cities across the United
States.1 Six focus group sessions were held in each city to obtain
employee input and suggestions for the new human resource system. In most
cities, five of the six sessions were devoted to hearing employees' views
while the remaining sessions heard the views of supervisors and managers.
Each focus group was facilitated by a contractor. The contractor used a
standard focus group facilitation guide to manage each session.
Additionally, the contractor was responsible for recording the issues
identified during each focus group session and compiling a summative
report on the findings from all the focus groups. We did not attend any
focus group sessions and were not able to review any original notes from
the sessions to assess the accuracy of the summative report.

Participation in the focus groups was not random nor was it necessarily
representative of DHS employees. DHS reports that employee participation
generally reflected the population in that location. For

1The 10 cities were Atlanta, Georgia; Detroit, Michigan; El Paso, Texas;
Los Angeles, California; Miami, Florida; New York, New York; Norfolk,
Virginia; Seattle, Washington; Washington, D.C.; and Baltimore, Maryland.

example, the level of bargaining unit representation at the focus groups
was determined based on OPM data on bargaining unit membership. Bargaining
unit employees were selected by union representatives to participate in
the focus groups, while nonbargaining unit employees and supervisors were
selected by DHS management. Union representatives and DHS managers were
asked to select a diverse group of participants based on occupation, work
location, gender, ethnicity, and age.

This work was done in accordance with generally accepted government
auditing standards from March 2003 through February 2004.

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