Questions for the Record Regarding the Department of Defense's	 
National Security Personnel System (31-MAY-05, GAO-05-770R).	 
                                                                 
GAO appeared before the Senate Committee on Armed Services on	 
April 14, 2005, to discuss the Department of Defense's (DOD)	 
implementation of the National Security Personnel System (NSPS). 
This letter responds to questions for the record.		 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-05-770R					        
    ACCNO:   A25519						        
  TITLE:     Questions for the Record Regarding the Department of     
Defense's National Security Personnel System			 
     DATE:   05/31/2005 
  SUBJECT:   Appeals process					 
	     Civilian employees 				 
	     Collective bargaining				 
	     Compensation					 
	     Disciplinary actions				 
	     Dispute settlement 				 
	     Employee grievances				 
	     Employee relations 				 
	     Employee training					 
	     Federal employees					 
	     Grievance procedures				 
	     Human capital					 
	     National security personnel system 		 
	     Pay for performance				 
	     Pay rates						 
	     Performance appraisal				 
	     Performance management				 
	     Performance measures				 
	     Personnel management				 
	     Policy evaluation					 
	     Reductions in force				 
	     Safeguards 					 
	     Standards and standardization			 
	     Policies and procedures				 
	     DOD National Security Personnel System		 

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GAO-05-770R

United States Government Accountability Office Washington, DC 20548

May 31, 2005

The Honorable John Warner
Chairman
The Honorable Carl Levin
Ranking Member
Committee on Armed Services
United States Senate

Subject: Questions for the Record Regarding the Department of Defense's
National Security Personnel System

It was a pleasure to appear before the Committee on April 14, 2005, to
discuss the Department of Defense's (DOD) implementation of the National
Security Personnel System (NSPS).1 This letter responds to your request
for my views on the following questions for the record.

Questions from Senator Inhofe

American Federation of Government Employees

Please comment on each of the "flashpoints" that the AFGE has raised
through Mr. Gage's written statement:

Q. "DOD has proposed radically reducing the scope of collective bargaining
in the proposed regulations. . . . The proposed regulations do not follow
the law with respect to its instructions to maintain collective bargaining
rights for affected DOD employees."

Our previous work on individual agencies' human capital systems has not
directly addressed the scope of specific issues that should or should not
be subject to collective bargaining and negotiations.

Q. "The board that hears labor-management disputes arising from NSPS must
be independent of DOD management. . . . In the proposed NSPS regulations,
DOD would establish an internal board made up entirely of individuals
appointed by the Secretary."

1 GAO, Human Capital: Preliminary Observations on Proposed Regulations for
DOD's National Security Personnel System, GAO-05-559T (Washington, D.C.:
Apr. 14, 2005).

In our previous testimonies on the proposed and final Department of
Homeland Security (DHS) regulations, we stressed the importance of the
actual and perceived

                                       2

independence and impartiality of such boards. Members of these types of
boards should be, and appear to be, free from interference in the
legitimate performance of their duties and should adjudicate cases in an
impartial manner, free from initial bias and conflicts of interest.

Consistent with fostering board independence and impartiality, DOD's
proposed NSPS regulations provide for staggered-term appointments for
members of the proposed National Security Labor Relations Board and place
some limited conditions on the removal of a member. For example, members
of the Board would be appointed for terms of 3 years, except that the
appointments of the initial Board members will be for terms of 1, 2, and 3
years. The Secretary of Defense may extend the term of any member beyond 3
years when necessary to provide for an orderly transition and/or appoint
the member for up to two additional 1-year terms. DOD could further
enhance the independence and impartiality of the Board through the
appointment and removal process of Board members. This could include such
areas as (1) a nomination panel that reflects input from appropriate
parties and a reasonable degree of balance among differing views and
interests in the composition of the Board to ensure credibility and (2)
appropriate notification to interested parties in the event that a Board
member is removed.

The proposed regulations allow the Secretary of Defense to appoint and
remove individual Board members; however, this raises the question of the
independence of the Board. If the proposed regulations were modified to
allow the Secretary of Defense to appoint but not remove members, then
this may help the credibility and independence of the Board.

Q. "The standard for mitigation by the Merit System Protection Board
(MSPB) of discipline and penalties imposed on employees under NSPS in the
proposed regulations is virtually impossible to meet and effectively
removes the possibility of mitigation."

The U.S. Merit Systems Protection Board will not know the actual impact
until a number of cases are adjudicated.

Q. ". . . under the proposed regulations, not only is there no requirement
for management to present written standards against which performance will
be measured, but employees are also denied the right. . .to use negotiated
grievance and arbitration system. . . ."

2 GAO, Human Capital: Preliminary Observations on Proposed DHS Human
Capital Regulations, GAO-04-479T (Washington, D.C.: Feb. 25, 2004) and
Human Capital: Preliminary Observations on Final Department of Homeland
Security Human Capital Regulations, GAO-05-320T (Washington, D.C.: Feb.
10, 2005).

                        Page 2 GAO-05-770R Human Capital

On the basis of our previous work, we believe that performance standards
should be written. We also advocate the use of competencies-the skills,
knowledge, and abilities staff need to accomplish the work. We have found
that 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. These core competencies must be in writing to assure that
managers, supervisors, and employees see and understand the criteria that
will be used to manage and assess employee performance.

Regarding grievance and arbitration systems, during testimony in April
2005, we reaffirmed our position that that there should be both informal
and formal appeal mechanisms within and outside of the organization if
individuals feel that there has been abuse or a violation of the policies,
procedures, and protected rights of the individual. Internal mechanisms
could include independent Human Capital Office and Office of Opportunity
and Inclusiveness reviews that provide reasonable assurances that there
would be consistency and nondiscrimination.3 Furthermore, it is of
critical importance that the external appeal process be independent,
efficient, effective, and credible. As DOD's human resources management
system efforts move forward, DOD will need to define, in more detail than
is currently provided, how it plans to review such matters as the
establishment and implementation of the performance appraisal system-and,
subsequently, performance rating decisions, pay determinations, and
promotion actions-before these actions are finalized to ensure they are
merit based.

Q. "Strong and unambiguous safeguards must be in place to prevent a
general lowering of pay for DOD civilian workforce. The proposed
regulations permit a general reduction in salaries for all DOD personnel
compared to rates they would have been paid under statutory systems."

Under the proposed regulations, DOD could not reduce employees' basic
rates of pay when converting to pay bands. However, employees'
compensation may increase at a rate higher or lower than under the current
compensation system because under NSPS compensation is designed to be (1)
market sensitive, with consideration of local market conditions to set pay
rates, and (2) performance based.

Q. "Procedures for deciding who will be affected by a reduction in force
must be based on more than a worker's most recent performance appraisal.
The proposed NSPS regulation would allow an employee with 1 year of
service and an outstanding rating to have superior retention rights to an
employee with 30 years of outstanding appraisals and 1 year of having been
rated merely "above average."

3 GAO, Human Capital: Preliminary Observations on Proposed Department of
Defense National Security Personnel System Regulations, GAO-05-517T
(Washington, D.C.: Apr. 12, 2005).

Under DOD's proposed regulations, greater emphasis will be given to job
performance in the reduction-in-force process by placing performance ahead
of length of service. Under the proposed regulations, employees will be
placed on a competitive group's retention list in the following order of
precedence: (1) tenure group, (2) veterans' preference, (3) individual
performance rating, and (4) length of service. DOD may also establish a
minimum reduction-in-force competitive area on the basis of one or more of
the following factors: geographic location(s), line(s) of business,
product line(s), organizational unit(s), and funding line(s). The proposed
regulations provide DOD with the flexibility to define competitive groups
on the basis of career group, pay schedule, occupational series or
specialty, pay band, and/or trainee status.

Questions from Senator Lieberman

Civilian Pay

Q. John Gage in his testimony expressed concern that the NSPS will create
downward pressure on DOD civilian pay. Are there mechanisms that you could
suggest to assure that pay levels are adequate for employee recruitment
and retention and to truly reward good performance?

We have observed that a competitive compensation system can help
organizations attract and retain a quality workforce.4 To begin to develop
such a system, organizations assess the skills and knowledge they need;
compare compensation against other public, private, or nonprofit entities
competing for the same talent in a given locality; and classify positions
along levels of responsibility. While one size does not fit all,
organizations generally structure their competitive compensation systems
to separate base salary-which all employees receive-from other special
incentives, such as merit increases, performance awards, or bonuses, which
are provided based on performance and contributions to organizational
results.

We have reported that direct costs associated with salaries were one of
the major cost drivers of implementing pay for performance systems, based
on the data

5

provided us by selected Office of Personnel Management demonstration
projects. We found that some of the demonstration projects intended to
manage costs by providing a mix of one-time awards and permanent pay
increases. Rewarding an employee's performance with an award instead of an
equivalent increase to base pay can help contain salary costs in the long
run because the agency only has to pay the amount of the award one time,
rather than annually.

4 GAO, Additional Posthearing Questions Related to Proposed Department of
Homeland Security (DHS) Human Capital Regulations, GAO-04-617R
(Washington, D.C.: Apr. 30, 2004).

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

                        Page 4 GAO-05-770R Human Capital

This practice is consistent with modern compensation systems, which
typically include a mix of base pay increases plus other compensation
incentives, such as onetime performance awards or bonuses. In developing
pay for performance systems, agencies must consider what percentage of
performance-based pay should be awarded as base pay increases versus
one-time cash increases while still maintaining fiscally sustainable
compensation systems that reward performance. In addition, to the costs
associated with base pay increases, modern compensation systems typically
consider an employee's salary in relation to a competitive range when
determining the amount of performance pay that should be provided as a
base pay adjustment versus a cash bonus amount. This base versus bonus
concept differs from the largely longevity driven base pay adjustments
provided to employees under the General Schedule. This new direction
concerns employees, especially those who are close to retirement, who see
these regular base pay increases as the foundation of future retirement
benefits.

Safeguards Against Abuse

Q. In your testimony you expressed concern that the proposed regulations
do not contain adequate safeguards to help ensure fairness and guard
against abuse. Could you elaborate on what kinds of safeguards you believe
should be considered in this context?

As we noted in our statement, although DOD's proposed regulations provide
for some safeguards to ensure fairness and guard against abuse, additional
safeguards should be developed. We have developed an initial list of
possible safeguards to help ensure that pay-for-performance systems in the
government are fair, effective, and credible.6 The safeguards include,
among other things, the following.

o  	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 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).

o  	Assure that there are reasonable transparency and appropriate
accountability mechanisms in connection with the results of the
performance management

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

process. This includes reporting periodically on internal assessments and
employee survey results relating to the performance management system and
publishing overall results of performance management and individual pay
decisions while protecting individual confidentiality.

o  	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.

o  	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.

Q. Do you know of agencies where such mechanisms have proven effective to
guard against unfairness and abuse in a pay-for-performance system?

The list of safeguards mentioned above are based on our extensive body of
work looking at the performance management practices used by leading
public sector organizations both in the United States and in other
countries. However, we previously reported that DHS created a Homeland
Security Compensation Committee that is to provide oversight and
transparency to the compensation process. The committee-consisting of 14
members, including 4 officials of labor organizations-is to develop
recommendations and options for the Secretary's consideration on
compensation and performance management matters, including the annual
allocation of funds between market and performance pay adjustments. We
also reported that high performing organizations seek to create pay,
incentive, and reward systems based on valid, reliable, and transparent
performance management systems with adequate safeguards and link employee
knowledge, skills, and contributions to

7

organizational results. To that end, we found that the demonstration
projects took a variety of approaches to designing and implementing their
pay for performance systems to meet the unique needs of their cultures and
organizational structures. For example, the Department of Commerce uses a
second-level review process as a safeguard. In this review process, the
pay pool manager is to review recommended scores from subordinate
supervisors and select a payout for each employee. The pay pool manager is
to present the decisions to the next higher official for review if the pay
pool manager is also a supervisor. In addition, the department had a
grievance procedure that allowed employees to request reconsideration of
performance decisions, excluding awards, by the pay pool manager through
the department's Administrative Grievance Procedure or appropriate
negotiated grievance procedures.

7 GAO-04-83.

                        Page 6 GAO-05-770R Human Capital

Questions from Senator Akaka

Employee Training

Q. An issue raised repeatedly in discussions over the personnel changes at
DOD and DHS is the need for adequate training for all employees on the new
personnel system. Have you looked into this issue, and if so, what
recommendations do you have regarding the amount, type, or regularity of
personnel training that is needed to launch and sustain a new personnel
system?

As we noted in our report, Human Capital: A Guide for Assessing Strategic
Training and Development Efforts in the Federal Government,8 training and
developing new and current staff to fill new roles and work in different
ways will be a crucial part of the federal government's endeavors to meet
its transformation challenges. DOD and DHS are significant components of
this transformation.

In April 2004, GAO and the National Commission on the Public Service
Implementation Initiative hosted a forum on whether there should be a
governmentwide framework for human capital reform and, if so, what this
framework should include. As part of the criteria that agencies should
have in place as they plan for and manage their new human capital
authorities, participants generally agreed that adequate resources for
planning, implementation, training, and evaluation were needed.
Additionally, they noted that agencies should ensure adequate training as
they implement new human capital authorities.

Selected Office of Personnel Management personnel demonstration projects
trained employees on the performance management system prior to
implementation to make employees aware of the new approach, as well as
periodically after implementation to refresh employee familiarity with the
system. The training was designed to help employees understand their
applicable competencies and performance standards; develop performance
plans; write self-appraisals; become familiar with how performance is
evaluated and how pay increases and awards decisions are made; and know
the roles and responsibilities of managers, supervisors, and employees in
the appraisal and payout processes. According to the DHS regulations, its
performance management system is designed to incorporate adequate training
and retraining for supervisors, managers, and employees in the
implementation and operation of the system.

GAO currently is reviewing training and development issues at DHS. Our
work includes a review of DHS's training efforts on its new personnel
system, maxHR. Our report is scheduled to be released this fall.

8 GAO, Human Capital: A Guide for Assessing Strategic Training and
Development Efforts in the Federal Government, GAO-04-546G (Washington,
D.C.: March 2004).

Employee Performance

Q. Both the DHS and DOD personnel systems permit managers to convey
performance expectations to employees orally. I think this can put
employees at a disadvantage, especially as their pay will be more closely
tied to their performance. How can employees be held accountable for
performance expectations provided orally?

To help enhance credibility and fairness and avoid any problems, some sort
of written documentation of performance expectations is appropriate, in
addition to orally communicating performance expectations. However, the
means can vary.

Guard Against Abuse

Q. You testified as to the lack of details in the NSPS proposed
regulations, including the absence of adequate safeguards to ensure
fairness and guard against abuse in measuring performance and paying
employees. What sort of oversight do you believe is needed to promote
consistency of the performance management system and do you believe
external review of pay and performance decisions is necessary?

In April 2003, when commenting on 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 we developed an initial list of
possible safeguards to help ensure that pay-forperformance systems in the
government are fair, effective, and credible.9 One of the safeguards we
identified is to assure that certain predecisional internal safeguards
exist to help achieve the consistency, equity, nondiscrimination, and
nonpoliticization of the performance management process. For example,
independent reasonableness reviews by Human 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.

Q. What kind of external review would you propose?

We reported that independent reasonableness reviews by Human Capital
Offices and/or Offices of Opportunity and Inclusiveness or their
equivalent in connection with the establishment and implementation of a
performance appraisal system and

9 GAO-03-717T.

                        Page 8 GAO-05-770R Human Capital

the effective implementation of a compensation committee similar to the
Homeland Security Compensation Committee are important to assuring that
predecisional internal safeguards exist to help achieve consistency and
equity and assure

10

nondiscrimination and nonpoliticization of the performance management
process.

In our report on implementing pay for performance at selected personnel
demonstration projects, we mentioned that some of the demonstration
projects implemented as safeguards a second-level review and grievance
process, as these examples illustrate.

Second-level review process:

o  Second-level supervisors are to review all assessments. In addition, an
overall assessment of "highly successful" is to be sent to the appropriate
department's Performance Review Board for the assignment of an official
rating of "1" or "2". The supervisor and reviewer are to assign a "4" or
"5" rating based on a problem-solving team's findings and a personnel
advisor's input.

o  Pay pool managers review recommended scores from supervisors and select
a payout for each employee. The pay pool manager is to present the
decisions to the next higher official for review if the pay pool manager
is also a supervisor.

Grievance process:

o  Employees may request reconsideration of their ratings in writing to
the thirdlevel supervisor and indicate why a higher rating is warranted
and what rating is desired. The third-level supervisor can either grant
the request or request that a recommending official outside of the
immediate organization or chain of authority be appointed. The employee is
to receive a final decision in writing within 21 calendar days.

o  Employees may grieve their ratings and actions affecting the general
pay increase or performance pay increases. An employee covered by a
negotiated grievance procedure is to use that procedure to grieve his or
her score. An employee not under a negotiated grievance procedure is to
submit the grievance first to the rating official, who will submit a
recommendation to the pay pool panel. The pay pool panel may accept the
rating official's recommendation or reach an independent decision. The pay
pool panel's decision is final unless the employee requests
reconsideration by the next higher official to the pay pool manager. The
official would then render the final decision on the grievance.

10 GAO-04-320T.

Employee Appeals Process

Q. The proposed regulations provide for an accelerated MSPB adjudication
process for employee appeals. I have long been concerned about the impact
a shortened processing time for one agency may have on employees at other
agencies with cases pending before the MSPB. Do you believe the NSPS
regulations will have an adverse effect on employee appeals both at DOD
and at other federal agencies?

The U.S. Merit Systems Protection Board will not know the actual impact
until a number of cases are adjudicated.

Question from Senator Nelson

Performance-Based Pay System

Q. What do you recommend to minimize or mitigate risks?

The key to a successful organizational transformation is to implement
strategies to help individuals maximize their full potential in the new
organization, while simultaneously managing the risk of reduced
productivity and effectiveness that often occurs as a result of the
changes. While there is no one right way to manage a successful merger,
acquisition, or transformation, the experiences of both successful and
unsuccessful efforts suggest that there are practices that are key to
their success. These key practices include the following.

1. 	Ensure top leadership drives the transformation. Leadership must set
the direction, pace, and tone and provide a clear, consistent rationale
that brings everyone together behind a single mission.

2. 	Focus on a key set of principles and priorities at the outset of the
transformation. A clear set of principles and priorities serves as a
framework to help the organization create a new culture and drive employee
behaviors.

3. 	Set implementation goals and a timeline to build momentum and show
progress from day one. Goals and a timeline are essential because the
transformation could take years to complete.

4. 	Dedicate an implementation team to manage the transformation process.
A strong and stable team is important to ensure that the transformation
receives the needed attention to be sustained and successful.

5. 	Establish a communication strategy to create shared expectations and
report related progress. The strategy must reach out to employees,
customers, and stakeholders and engage them in a two-way exchange.11

11 GAO, Results-Oriented Cultures: Implementation Steps to Assist Mergers
and Organizational Transformations, GAO-03-669 (Washington, D.C.: July 2,
2003).

                       Page 10 GAO-05-770R Human Capital

For additional information on our work on human capital issues at DOD,
please contact me on 512-5559 or [email protected], or Eileen Larence,
Director, Strategic Issues, on governmentwide human capital issues at
512-6510 or [email protected].

Derek B. Stewart
Director, Defense Capabilities and
Management

(350713)
*** End of document. ***