Human Capital: Preliminary Observations on Proposed Regulations  
for DOD's National Security Personnel System (14-APR-05,	 
GAO-05-559T).							 
                                                                 
The Department of Defense's (DOD) new human resources management 
system--the National Security Personnel System (NSPS)--will have 
far-reaching implications for civil service reform across the	 
federal government. The 2004 National Defense Authorization Act  
gave DOD significant flexibilities for managing more than 700,000
defense civilian employees. Given DOD's massive size, NSPS	 
represents a huge undertaking for DOD. DOD's initial process to  
design NSPS was problematic; however, DOD adjusted its approach  
to a more deliberative process that involved more stakeholders.  
NSPS could, if designed and implemented properly, serve as a	 
model for governmentwide transformation in human capital	 
management. However, if not properly designed and implemented, it
could severely impede progress toward a more performance- and	 
results-based system for the federal government as a whole. On	 
February 14, 2005, DOD and the Office of Personnel Management	 
(OPM) released for public comment the proposed NSPS regulations. 
This testimony provides GAO's preliminary observations on	 
selected provisions of the proposed regulations.		 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-05-559T					        
    ACCNO:   A21684						        
  TITLE:     Human Capital: Preliminary Observations on Proposed      
Regulations for DOD's National Security Personnel System	 
     DATE:   04/14/2005 
  SUBJECT:   Civil service					 
	     Civilian employees 				 
	     Federal employees					 
	     Federal regulations				 
	     Human capital					 
	     Human capital management				 
	     Human capital planning				 
	     Performance measures				 
	     Policy evaluation					 
	     Productivity in government 			 
	     Strategic planning 				 
	     Personnel management				 
	     Program goals or objectives			 
	     Stakeholder consultations				 
	     DOD National Security Personnel System		 

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GAO-05-559T

United States Government Accountability Office

                                 GAO Testimony

Before the Committee on Armed Services, U.S. Senate

For Release on Delivery Expected at 9:30 a.m., EDT Thursday, April 14,
2005

HUMAN CAPITAL

  Preliminary Observations on Proposed Regulations for DOD's National Security
                                Personnel System

Statement of Derek B. Stewart, Director Defense Capabilities and Management

                                       a

GAO-05-559T

[IMG]

April 14, 2005

HUMAN CAPITAL

Preliminary Observations on Proposed Regulations for DOD's National Security
Personnel System

  What GAO Found

Many of the principles underlying the proposed NSPS regulations are
generally consistent with proven approaches to strategic human capital
management. For instance, the proposed regulations provide for (1)
elements of a flexible and contemporary human resources management
system-such as pay bands and pay for performance; (2) DOD to rightsize its
workforce when implementing reduction-in-force orders by giving greater
priority to employee performance in its retention decisions; and (3)
continuing collaboration with employee representatives. The 30-day public
comment period on the proposed regulations ended March 16, 2005. DOD and
OPM have notified the Congress that they are preparing to begin the meet
and confer process with employee representatives who provided comments on
the proposed regulations. The meet and confer process is critically
important because there are many details of the proposed regulations that
have not been defined, especially in the areas of pay and performance
management, adverse actions and appeals, and labormanagement relations.
(It should be noted that 10 federal labor unions have filed suit alleging
that DOD failed to abide by the statutory requirements to include employee
representatives in the development of DOD's new labor relations system
authorized as part of NSPS.)

GAO has several areas of concern: the proposed regulations do not (1)
define the details of the implementation of the system, including such
issues as adequate safeguards to help ensure fairness and guard against
abuse; (2) require, as GAO believes they should, the use of core
competencies to communicate to employees what is expected of them on the
job; and (3) identify a process for the continuing involvement of
employees in the planning, development, and implementation of NSPS.

Also, GAO believes that DOD (1) would benefit if it develops a
comprehensive communications strategy that provides for ongoing,
meaningful two-way communication that creates shared expectations among
employees, employee representatives, and stakeholders and (2) should
complete a plan for implementing NSPS to include an information technology
plan and a training plan. Until such a plan is completed, the full extent
of the resources needed to implement NSPS may not be well understood.

                 United States Government Accountability Office

Chairman Warner and Members of the Committee:

I appreciate the opportunity to be here today to provide our preliminary
observations on the Department of Defense's (DOD) proposed National
Security Personnel System (NSPS) regulations, which the Secretary of
Defense and the Acting Director of the Office of Personnel Management
(OPM) jointly released for public comment on February 14, 2005.1 The
National Defense Authorization Act for Fiscal Year 20042 gave DOD
significant authorities to redesign the rules, regulations, and processes
that govern the way that defense civilian employees are hired,
compensated, promoted, and disciplined. The proposed regulations, which
according to DOD will ultimately affect more than 700,000 defense civilian
employees, are especially critical because of their implications for
governmentwide reform.

NSPS represents a huge undertaking for DOD, given its massive size and
geographically and culturally diverse workforce. In addition, DOD's new
human resources management system will have far-reaching implications for
the management of the department and for civil service reform across the
federal government. NSPS could, if designed and implemented properly,
serve as a model for governmentwide transformation in human capital
management. However, if not properly designed and implemented, NSPS could
impede progress toward a more performance-and results
based system for the federal government as a whole.

We raised several issues regarding DOD's civilian workforce in a recently
released report on the fiscal challenges the federal government faces in
the 21st century, including whether DOD is pursuing the design and
implementation of NSPS in a manner that maximizes the chance of success.3
In recent testimony on DOD's business transformation efforts, we indicated
that DOD is challenged in its efforts to effect fundamental business
management reform, such as NSPS, and indicated that our ongoing work
continues to raise questions about DOD's chances of

1 National Security Personnel System, 70 Fed. Reg. 7552 (Feb. 14, 2005).

2 Pub. L. No. 108-136 S: 1101 (Nov. 24, 2003).

3 GAO, 21st Century Challenges: Reexamining the Base of the Federal
Government, GAO-05-325SP (Washington, D.C.: February 2005).

success.4 There is general recognition that the government needs a
framework to guide the kind of large-scale human capital reform occurring
at DOD and the Department of Homeland Security (DHS), a framework that
Congress and the administration can implement to enhance performance,
ensure accountability, and position the nation for the future.
Implementing large-scale change management initiatives is a complex
endeavor, and failure to address a wide variety of personnel and cultural
issues, in particular, has been at the heart of unsuccessful
organizational transformations. Strategic human capital management, which
we continue to designate as a high-risk area governmentwide,5 can help
agencies marshal, manage, and maintain the workforce they need to
accomplish their missions.

SummaryLet me begin by summarizing three positive features and several
areas of concern. The first positive feature is that the proposed
regulations provide for many elements of a flexible and contemporary human
resources management system-such as pay bands and pay for performance. The
second positive feature is that the proposed regulations will allow DOD to
rightsize its workforce when implementing reduction-in-force (RIF) orders.
For example, DOD will be able to give greater priority to employee
performance in RIF decisions and take more factors into consideration when
defining the areas in which employees will compete for retention. The
third positive feature is that DOD has pledged to engage in a continuing
collaboration with employee representatives. On March 16, 2005, the 30-day
public comment period on the proposed regulations ended. On March 28,
2005, DOD and OPM notified the Congress that they are about to begin the
meet and confer process with employee representatives who provided
comments on the proposed regulations. (It should be noted that 10 federal
labor unions have filed suit alleging that DOD failed to abide by the
statutory requirements to include employee representatives in the
development of DOD's new labor relations system authorized as part of
NSPS.)

4 GAO, Department of Defense: Further Actions Are Needed to Effectively
Address Business Management Problems and Overcome Key Business
Transformation Challenges, GAO-05-140T (Washington, D.C.: Nov. 18, 2004).

5 GAO, High-Risk Series: An Update, GAO-05-207 (Washington, D.C.: January
2005).

However, in addition to the litigation referenced above, our initial work
indicates several areas of concern. First, DOD has considerable work ahead
to define the details of the implementation of its system, including such
issues as adequate safeguards to help ensure fairness and guard against
abuse. Second, in setting performance expectations, the proposed
regulations would allow the use of core competencies to communicate to
employees what is expected of them on the job, but the proposed
regulations do not require the use of these core competencies. Requiring
such use can help provide consistency and clarity in performance
management. Third, the proposed regulations do not identify a process for
the continuing involvement of employees in the planning, development, and
implementation of NSPS.

GAO believes that DOD would benefit if it develops a comprehensive
communications strategy that provides for ongoing, meaningful two-way
communication that creates shared expectations among employees, employee
representatives, managers, customers, and stakeholders. In addition, DOD
should complete an implementation plan for NSPS, including an information
technology plan and a training plan. Until DOD completes such a plan, the
full extent of the resources needed to implement NSPS may not be well
understood.

DOD's proposed regulations are intended to provide a broad outline of its
new human resources management system. While they are not, nor were they
intended to be, a detailed presentation of how the new system will be
implemented, the details of the proposed regulations do matter. Although
we continue to review the DOD's extensive regulations, today I will
provide some preliminary observations on selected provisions of the
proposed regulations.

  Preliminary Observations on Proposed Regulations for DOD's National Security
  Personnel System

DOD and OPM's proposed NSPS regulations would establish a new human
resources management system within DOD that governs basic pay, staffing,
classification, performance management, labor relations, adverse actions,
and employee appeals. We believe that many of the basic principles
underlying the proposed DOD regulations are generally consistent with
proven approaches to strategic human capital management. Today, I will
provide our preliminary observations on selected elements of the proposed
regulations in the areas of pay and performance management, staffing and
employment, workforce shaping, adverse actions and appeals, and
labor-management relations.

    Pay and Performance Management

In January 2004, we released a report on pay for performance for selected
OPM personnel demonstration projects that shows the variety of approaches
taken in these projects to design and implement pay-for-performance
systems.6 Many of these personnel demonstration projects were conducted
within DOD. The experiences of these demonstration projects provide
insights into how some organizations in the federal government are
implementing pay for performance, and thus can guide DOD 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 agencies
manage on a day-to-day basis and achieve external results.

When DOD first proposed its new civilian personnel reform, we strongly
supported the need to expand pay for performance in the federal
government.7 Establishing a clear link between individual pay and
performance is essential for maximizing performance and ensuring the
accountability of the federal government to the American people. As we
have stated before, how pay for performance 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.8 DOD's proposed regulations reflect a growing
understanding that the federal government needs to fundamentally rethink
its current approach to pay and better link pay to individual and
organizational performance. To this end, the DOD proposal takes another
valuable step toward a modern performance management system as well as a
market-based, results-oriented compensation system. My comments on
specific provisions of pay and performance management follow.

6 GAO, Human Capital: Implementing Pay for Performance at Selected
Personnel Demonstration Projects, GAO-04-83 (Washington, D.C.: Jan. 23,
2004).

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

8 GAO, Human Capital: Preliminary Observations on Proposed DHS Human
Capital Regulations, GAO-04-479T (Washington, D.C.: Feb. 25, 2004).

      Aligning Individual Performance to Organizational Goals