Human Capital: Aligning Senior Executives' Performance with	 
Organizational Results Is an Important Step Toward Governmentwide
Transformation (26-SEP-06, GAO-06-1125T).			 
                                                                 
The government's senior executives need to lead the way in	 
transforming their agencies' cultures. Credible performance	 
management systems--those that align individual, team, and unit  
performance with organizational results--can help manage and	 
direct this process. In past work, GAO found that the performance
management systems for senior executives fell short in this	 
regard. In November 2003, recognizing that reforms were needed,  
Congress authorized a new performance-based pay system that ended
the practice of giving annual pay adjustments to senior 	 
executives. Instead, agencies are to consider such factors as	 
individual results and contributions to agency performance. If	 
the Office of Personnel Management (OPM) certifies an agency's	 
new performance system and the Office of Management and Budget	 
(OMB) concurs, the agency has the flexibility to raise the pay of
its highest performing senior executives above certain pay caps. 
This testimony addresses (1) the performance management system's 
regulatory structure, (2) OPM's certification process and	 
agencies' views of it, and (3) OPM's role in monitoring the	 
system, and the number of agencies that have been certified to	 
date. This statement is based on GAO's issued work, which	 
included interviews with senior OPM officials, agency Chief Human
Capital Officers and Human Resource officers, and reviews of	 
agency documents.						 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-06-1125T					        
    ACCNO:   A61424						        
  TITLE:     Human Capital: Aligning Senior Executives' Performance   
with Organizational Results Is an Important Step Toward 	 
Governmentwide Transformation					 
     DATE:   09/26/2006 
  SUBJECT:   Agency protocols					 
	     Certification and accreditation			 
	     Evaluation criteria				 
	     Federal agencies					 
	     Government employees				 
	     Human capital					 
	     Pay for performance				 
	     Performance management				 
	     Performance measures				 
	     Performance-based pay				 
	     Senior Executive Service				 

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GAO-06-1125T

     

     * The Regulatory Structure of the Senior Executive Performance
     * The Process for Certifying Agencies' Submissions
          * Agencies' Experience in Implementing the Senior Executive Pa
     * OPM's Role in Evaluating and Monitoring the Pay-for-Performa
     * Concluding Remarks
     * Contact and Acknowledgments
          * Order by Mail or Phone

Testimony

Before the Subcommittee on Oversight of Government Management, the Federal
Workforce and the District of Columbia, Committee on Homeland Security and
Government Affairs, U.S. Senate

United States Government Accountability Office

GAO

For Release on Delivery Expected at 10:45 a.m. EDT

Tuesday, September 26, 2006

HUMAN CAPITAL

Aligning Senior Executives' Performance with Organizational Results Is an
Important Step Toward Governmentwide Transformation

Statement of Brenda S. Farrell Acting Director Strategic Issues

GAO-06-1125T

Chairman Voinovich, Senator Akaka, and Members of the Subcommittee:

Thank you for the opportunity to be here today to discuss the federal
government's implementation of pay-for-performance systems for the
approximately 7,000 members of the Senior Executive Service (SES) and
those in other senior positions. As we have consistently testified, and as
the Subcommittee has recognized, an agency's human capital is its most
important catalyst for transforming government to meet the current and
emerging challenges of the 21st century. We have also highlighted how
federal human capital systems designed in the past are outmoded and, in
some cases, barriers to an agency's transformation.

In our earlier work on senior executive performance management, we noted
how high-performing organizations have recognized that a critical success
factor in fostering a results-oriented culture is a performance management
system that creates a "line of sight" showing how unit and individual
performance can contribute to overall organizational goals and helping
them understand the connection between their daily activities and the
organization's success. We also discussed how high-performing
organizations understand that they need senior leaders who are accountable
for results, drive continuous improvement, and stimulate and support
efforts to integrate human capital approaches with organizational goals
and related transformation issues.1

In 2002, we reported that significant opportunities existed to strengthen
agencies' efforts to hold senior executives accountable for results
through their performance management systems.2 In particular, we reported
that more progress was needed in explicitly linking senior executives'
performance expectations to the achievement of results-oriented
organizational goals, fostering the necessary collaboration both within
and across organizational boundaries to achieve results, and demonstrating
a commitment to lead and facilitate change.

Over the past few years, Congress and the administration have sought to
modernize senior executive performance management systems. In November
2003, Congress established a new performance-based pay system as part of
the National Defense Authorization Act for Fiscal Year 20043 that is
designed to provide a clear and direct linkage between performance and pay
for the government's senior executives. Additionally, aspects of the
legislation can help address two shortcomings with the previous pay
system: pay compression, and the failure of agencies to make meaningful
distinctions among senior executives' job performances. Pay compression
occurred in part because the previous system had six pay levels. Because
of pay caps and other factors, senior executives at the top three levels
received essentially the same amount of base pay in a given year. For
example, we reported that about 70 percent of SES members received the
same basic pay due to compression in 2003.4 At the same time, the
administration believed that agencies' performance management systems were
not making meaningful distinctions in senior executives' performance as
demonstrated by the large percentage that consistently received the
highest ratings possible.

1GAO, Human Capital: Senior Executive Performance Management Can Be
Significantly Strengthened to Achieve Results, GAO-04-614 (Washington,
D.C.: May 26, 2004).

2 GAO, Results-Oriented Cultures: Using Balanced Expectations to Manage
Senior Executive Performance, GAO-02-966 (Washington, D.C.: Sept. 27,
2002).

The new pay system ended the practice of giving annual across-the-board or
locality pay adjustments to senior executives. Instead, agencies are to
base pay adjustments for senior executives on individual results and
contributions to the agency's performance by considering the individual's
accomplishments and such things as unique skills, qualifications, or
competencies of the individual and the individual's significance to the
agency's mission and performance. The system also replaced the six SES pay
levels with a single, open-range pay band. Further, agencies can apply for
certification of their performance appraisal systems by the Office of
Personnel Management (OPM), with Office of Management and Budget (OMB)
concurrence. Once an agency is certified, it has the flexibility to raise
the pay of its highest performing SES members above certain pay caps. As
an example, those agencies with certified performance management systems
can increase base pay to $165,200 for 2006. This compares to a cap of
$152,000 for base pay for those agencies without certified systems. OPM
and OMB jointly issued regulations establishing the criteria for obtaining
this certification in July 2004.

In addition to SES employees, many agencies use senior employees with
scientific, technical, and professional expertise, commonly known as
senior-level (SL) and scientific or professional (ST) positions. SL/ST
positions have a lower maximum rate of basic pay than SES employees, and
unlike the SES, their individual rate of pay does not necessarily have to
be based on individual or agency performance. However, an agency may apply
to OPM and OMB for certification of its SL/ST performance management
system, and if the system is certified as making meaningful distinctions
in relative performance, an agency may raise the total annual compensation
maximum for SL/ST employees to the salary of the Vice President. However,
certification does not affect the maximum rate of basic pay of SL/ST
employees.

3 Pub.L. No.108-136, Nov. 24, 2003.

4GAO, Human Capital: Trends in Executive and Judicial Pay, GAO-06-708
(Washington, D.C.: June 21, 2006).

We believe the new senior executive pay-for-performance system is an
important step in aligning individual, team, and unit performance with
organizational results. Indeed, high-performing organizations have
recognized that their performance management systems are strategic tools
to help them manage on a day-to-day basis and achieve organizational goals
in part by linking their senior executive performance management systems
to their organizations' success. Moreover, the lessons learned from
implementing the new senior executive pay system can inform efforts to
modernize the pay systems under which other federal employees are
compensated. Indeed, cascading aspects of this approach to other levels of
employees can help agencies recognize and reward employee contributions
and achieve the highest levels of individual performance.

In my remarks today, I will discuss (1) the regulatory structure of the
senior executive pay system and the importance of achieving a line of
sight between executives' performance and organizational success by
linking pay with performance, (2) the agency certification process and
agencies' views of it, and (3) OPM's role in evaluating and monitoring the
system, and the number of agencies that have been certified to date.

Mr. Chairman, as you know, the Senate Committee on Homeland Security and
Governmental Affairs and your Oversight of Government Management, the
Federal Workforce, and the District of Columbia Subcommittee requested
that we conduct a review of OPM to identify management challenges that
could affect its ability to lead human capital reform efforts. As part of
our review, we have interviewed or obtained written responses from all 23
members of the Chief Human Capital Officers Council (CHCO) and/or their
corresponding agency human resource (HR) directors to gain a customer
perspective of OPM's products and services and their views of OPM
management challenges. We obtained agencies' views on their experiences
with OPM's certification of SES pay-for-performance systems. Our
forthcoming report on this work will be issued in November 2006 and will
include the agencies' experiences with the certification process, as well
as recommended actions to enhance OPM's capacity to lead and implement
human capital reform overall. My statement today is based on our issued
products which were conducted in accordance with generally accepted
government auditing standards.

 The Regulatory Structure of the Senior Executive Performance Management System
          Helps Link Executives' Performance to Organizational Results

Overall, the regulations that OPM developed to administer a
performance-based pay system for senior executives serve as a substantive
and positive step for agencies in holding senior executives accountable
for their performance and contributions to organizational success. The new
senior executive pay system raises the cap on base pay and total
compensation. For 2006, the caps are $152,000 for base pay (Level III of
the Executive Schedule) with a senior executive's total compensation not
to exceed $183,500 (Level I of the Executive Schedule). If an agency's
senior executive performance management system is certified by OPM and OMB
concurs, the caps are increased to $165,200 for base pay (Level II of the
Executive Schedule) and $212,100 for total compensation (the total annual
compensation payable to the Vice President).

To qualify for these flexibilities, agencies' performance management
systems need to meet nine specified certification criteria, including
demonstrating that the systems align individual performance expectations
with the mission and goals of the organization and that its appraisal
system as designed and applied makes meaningful distinctions in
performance.

To receive a full 2-calendar-year certification, an agency must provide
documentation that its senior executive performance management system
meets all nine of the criteria. Otherwise, agencies can meet four of nine
criteria and demonstrate that their system in design meets the remaining
certification criteria to receive 1-year provisional certification and use
the higher pay rates. Agencies with 1-year provisional certification must
reapply annually, and agencies with full certification must reapply every
2 years. Those agencies with more than one performance management system
for their senior executive employees are to certify each system
separately.

The certification criteria are framed as broad principles designed to
serve as guidelines to position agencies to use their performance
management system(s) strategically to support the development of a strong
performance culture and the attainment of the agency's mission, goals, and
objectives. The certification criteria are generally consistent with our
body of work identifying key practices for effective performance
management.5 Specifically, we identified key practices, including aligning
individual performance expectations with organizational goals, linking pay
to individual performance, and making meaningful distinctions in
performance, that collectively create a line of sight between an
individual's performance and an organization's success. These practices
are reflected in the final certification criteria.

Key aspects of the OPM certification criteria, as outlined in the
regulations, are as follows:

(1) Alignment: Individual performance expectations must be linked to or
derived from the agency's mission, strategic goals, program/policy
objectives, and/or annual performance plan.

(2) Consultation: Individual performance expectations are developed with
senior employee involvement and must be communicated at the beginning of
the appraisal cycle.

(3) Results: Individual expectations describe performance that is
measurable, demonstrable, or observable, focusing on organizational
outputs and outcomes, policy/program objectives, milestones, etc.

(4) Balance: Individual performance expectations must include measures of
results, employee and customer/stakeholder satisfaction, and/or
competencies or behaviors that contribute to outstanding performance.

(5) Assessments and Guidelines: The agency head or a designee provides
assessments of the performance of the agency overall, as well as each of
its major program and functional areas.

(6) Oversight: The agency head or designee must certify that (1) the
appraisal process makes meaningful distinctions based on relative
performance; (2) results take into account, as appropriate, the agency's
performance; and (3) pay adjustments and awards recognize
individual/organizational performance.

5GAO, Results-Oriented Cultures, Creating a Clear Linkage between
Individual Performance and Organizational Success, GAO-03-488 (Washington,
D.C.: Mar.14, 2003).

(7) Accountability: Senior employee ratings (as well as subordinate
employees' performance expectations and ratings for those with supervisor
responsibilities) appropriately reflect employees' performance
expectations, relevant program performance measures, and other relevant
factors.

(8) Performance Differentiation: Among other provisions, the agency must
provide for at least one rating level above Fully Successful (must include
an Outstanding level), and in the application of those ratings, make
meaningful distinctions among executives based on their relative
performance.

(9) Pay Differentiation: The agency should be able to demonstrate that the
largest pay adjustments and/or highest pay levels (base and performance
awards) are provided to its highest performers, and that, overall, the
distribution of pay rates in the SES rate range and pay adjustments
reflects meaningful distinctions among executives based on their relative
performance.

In commenting on OPM's draft regulations, we included suggestions intended
to help agencies broaden the criteria to reinforce cultures that are
results oriented, customer focused, and collaborative in nature. For
example, we suggested that OPM require agencies to have their senior
executives identify specific programmatic crosscutting, external, and
partnership-oriented goals or objectives in their individual performance
plans to help foster the necessary collaboration, interaction, and
teamwork to achieve results.

Further, based on our previous testimony that performance management
processes need to assure reasonable transparency,6 we noted the new
performance management system should have adequate safeguards to ensure
fairness and guard against abuse.7 Specifically, we suggested that OPM
require agencies to build in safeguards as part of their senior executive
performance management systems when linking pay to performance. For
example, communicating the overall results of the performance management
decisions to the senior executives, while protecting individual
confidentiality, could help enhance the transparency of the performance
management process. We also recognized that scalability needs to be
considered, and that small agencies might face difficulties communicating
overall results of the performance management process while protecting the
confidentiality of the fewer numbers of senior executives. In response,
OPM changed some aspects of its criteria by incorporating these
suggestions into the interim final regulations.

6 GAO, Defense Transformation: Preliminary Observations on DOD's Proposed
Civilian Personnel Reforms, GAO-03-717T (Washington, D.C.: Apr. 29, 2003),
p. 8.

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

                The Process for Certifying Agencies' Submissions

Agencies can submit their applications to OPM for certification anytime
during the year. If fully certified, the certification is good for the
remainder of the calendar year in which the agency applied, as well as all
of the following calendar year. If provisionally certified, an agency's
certification is only good for the calendar year in which it applied. For
example, if an agency is provisionally certified in October 2005, its
certification would expire in December 2005. To ensure the agency's
submission is complete, the agency's OPM contact-the Human Capital Officer
(HCO)-first verifies that the application contains the required materials
and documents. If complete, the HCO sends copies to the two OPM divisions
responsible for reviewing the application, the Human Capital Leadership
and Merit System Accountability (HCLMSA) division and the Strategic Human
Resources Policy (SHRP) division, and an additional copy to OMB. An
agency's submission is reviewed independently by representatives within
HCLMSA and SHRP in an attempt to bring different organizational
perspectives to the review.

A submission is reviewed against the nine certification criteria, but each
review team has its own method for analyzing the application. After an
initial examination, the reviewers from HCLMSA and SHRP hold an informal
meeting to discuss the submission. The reviewers meet again in a formal
panel after a more thorough review, and this time they are joined by the
HCO. This panel decides whether they have enough information to reach a
certification decision about the agency. If the panel concludes there is
not enough information to reach a decision, the HCO will request that the
agency provide any missing or additional supporting information. If the
panel decides there is sufficient information to reach a decision, it will
either certify or reject the application.

When an application is rejected, the HCO works with the agency to help
modify its appraisal system so that it meets the criteria. If the
application is approved, the HCO contacts OMB for concurrence. OMB uses
the same nine criteria to evaluate agency applications, but primarily
focuses on measures of agency performance. If OMB concurrence is not
achieved, the HCO works with the agency to address OMB's concerns until
resolution is reached. Once OMB concurs, the Director of OPM certifies the
agency's appraisal system and the HCO provides additional comments to the
agency on their system and identifies any improvement needs. For example,
these comments may direct the agency to focus more on making meaningful
distinctions in performance.

Agencies' Experience in Implementing the Senior Executive Pay System Highlights
Areas Where Improvements Might be Needed

In our ongoing work on OPM's capacity to lead and implement human capital
reform, we asked agency chief human capital officers (CHCO) and human
resource (HR) directors to describe their experiences with OPM's
administration of the senior executive pay-for-performance certification
process. As the Comptroller General testified before this Subcommittee in
June 2006,8 we heard a number of concerns from agencies regarding OPM's
ability to communicate expectations, guidance, and deadlines to agencies
in a clear and consistent manner. When the senior executive certification
process began in 2004, OPM provided agencies with limited guidance for
implementing the new regulations. OPM's initial guidance consisted of a
list of documents required for provisional and full certification and a
sample cover letter to accompany each application. The lack of more
specific guidance created confusion as agencies attempted to interpret the
broadly defined regulatory criteria and adjust to the requirements for
certification. Officials at a majority of the CHCO Council agencies told
us they did not have enough guidance to properly prepare for
certification. As a result, agencies did not fully understand what was
required in the regulations to receive certification.

For example, one official noted that while OPM tries to point agencies in
the right direction, it will not give agencies discrete requirements. This
leads to uncertainty about what agencies must and should demonstrate to
OPM. Some CHCOs and HR directors also told us that, in some cases, OPM
changed expectations and requirements midstream with little notice or
explanation. However, OPM explains that it intentionally allowed some
ambiguity in the regulations for the new senior executive appraisal
system, in an attempt to provide agencies with management flexibilities. A
senior OPM official said OPM did not provide agencies with "best
practices" examples because OPM did not want agencies to think there was
only one "right" way to get certified.

8GAO, Office of Personnel Management: OPM is Taking Steps to Strengthen
Its Internal Capacity for Leading Human Capital Reform, GAO-06-861T
(Washington, D.C: June 27, 2006).

Agencies also indicated that because OPM did not issue guidance for
calendar year 2006 submissions until January 5, 2006, some were unable to
deliver their submissions to OPM before the beginning of the calendar
year. Further, OPM clarified this guidance in a January 30, 2006,
memorandum to agencies, telling agencies that senior executive performance
appraisal systems would not be certified for calendar year 2006 if the
performance plans did not hold senior executives accountable for achieving
measurable business outcomes. As a result, agencies had to revise their
submissions, where necessary, to meet OPM's additional requirements.

Some agencies indicated that OPM's late issuance of guidance also created
an uneven playing field among agencies, as those that chose to wait until
OPM issued guidance before applying for certification were unable to give
their senior executives higher pay, while those who did not wait got
certified sooner. OPM officials we spoke with about this agreed that they
need to be able to provide clear and consistent guidance to agencies and
said they are working to improve this. Further, they said their evaluation
of agencies' submissions is evolving as their understanding of the senior
executive certification criteria is increasing.

     OPM's Role in Evaluating and Monitoring the Pay-for-Performance System

The regulations include several positive internal checks and balances that
should help maintain the rigorous application of the new senior executive
pay system. As I noted earlier, agencies granted full certification are to
have their systems renewed for an additional 2 calendar years and agencies
granted provisional certification are to reapply for certification after 1
calendar year in order to continue setting the rate of basic pay for
senior executives at the higher level. In addition, OPM can suspend
certification at any time during the certification period if it
determines, with OMB concurrence, that the agency's system is not in
compliance with the certification criteria. OPM's regulations also require
review of each senior executive's rating by a performance review board
appointed by the agency head. As noted above, the regulations also require
oversight of the performance appraisal system by the agency head who must
certify that the system makes meaningful distinctions in relative
performance.

According to OPM data, 26 performance management systems at 24 agencies
were certified during calendar year 2006.9 Of these 26, only the
Department of Labor's system received full certification. As of September
19, 2006, the remaining 25 systems received only provisional
certification. These findings are not surprising. In our April 2005
testimony before this Subcommittee, we stated that a number of agencies
would be challenged in the short term to provide the necessary performance
data on their senior executives in order to receive full certification or
to maintain their certification (agencies must provide 2 years of
performance rating and bonus data showing that meaningful distinctions in
senior executive performance were made to qualify).10 Other factors might
also be at work. For example, a number of agencies have told us that the
certification process is burdensome. One agency said that OPM's
requirements for the certification of a submission are time intensive,
laborious, and can disrupt an agency's recruitment and retention efforts.

As we also noted at the April 2005 hearing, OPM will need to carefully
monitor the implementation of agencies' performance management systems,
especially those that have provisional certification. This is because, as
I have stated earlier, agencies with provisional certification can still
receive the flexibilities of the new pay system, even though they do not
meet all of OPM's certification requirements. In other words, agencies can
receive the benefits of the new pay-for-performance system without meeting
all of its requirements and safeguards. We believe that, going forward, it
will be important for OPM to continue to monitor the certification
process, determine whether any obstacles are impeding agencies from
receiving full certification, and take appropriate measures to address
them. These actions will help ensure that agencies continue to make
substantive progress toward modernized performance management systems, and
that provisional certifications do not become the norm.

Once agencies have provisional or full certification, OPM monitors senior
executive performance appraisal systems by measuring the distributions of
agencies' performance ratings and pay. This information helps OPM
determine if agencies are making meaningful distinctions among the
performance of their senior executives. Such distinctions are important
because effective performance management requires the organization's
leadership to make meaningful distinctions between acceptable and
outstanding performance and appropriately reward those who perform at the
highest level.

9 An agency may have multiple performance management systems for senior
employees-including SES and SL/ST members-and an agency must apply to OPM
for certification of each system separately. In 2006, the National
Aeronautics and Space Administration received separate certification for
its Inspector General's Office and the Department of Defense received
separate certification for its SL/ST systems.

10 GAO, Human Capital: Agencies Need Leadership and the Supporting
Infrastructure to Take Advantage of New Flexibilities, GAO-05-616T
(Washington, D.C.: Apr. 21, 2005).

In its Report on Senior Executive Pay for Performance for Fiscal Year
2005, OPM stated that the data indicate that federal agencies are taking
seriously the requirement to develop rigorous appraisal systems and to
make meaningful distinctions in performance ratings and pay. All reporting
agencies have moved away from pass/fail appraisal systems and now have at
least one performance level above "fully successful." In 2005, 43 percent
of career SES governmentwide were rated at the highest performance level,
compared to 75 percent in 2003 prior to the implementation of the SES
pay-for-performance system. Further, OPM reported for fiscal year 2005
that the percentage of SES rated at the highest performance level declined
16 percent from the prior year. OPM also reported that the largest
increases in salary went to SES rated at the highest performance level.
Although SES pay and performance award amounts vary by agency based on
factors such as compensation strategy, funding, and agency performance
levels, OPM believes these general trends suggest a further refinement may
be occurring in the process of distinguishing outstanding performers.

                               Concluding Remarks

As we have said in our prior reports and testimonies, senior executives
need to lead the way in transforming their agencies' cultures to be more
results oriented, customer focused, and collaborative in nature. Credible
performance management systems, specifically those that (1) align
individual, team, and unit performance to organizational results; (2)
contain built-in safeguards; and (3) are effectively implemented, can help
manage and direct this process.

The pay-for-performance system for the government's senior executives that
I have discussed today is an important milestone on the march toward
modern compensation systems that are more market based and performance
oriented. Although OPM and agencies have encountered various challenges in
implementing the system, such challenges are not surprising given the
cultural shift that the new system represents. Moreover, just 2 years have
passed since OPM issued its regulations for certifying agencies'
pay-for-performance systems, and some growing pains are to be expected
given agencies' lack of experience with performance management systems
that meet OPM's requirements. Moving forward, what will be important is
how OPM works with agencies to provide the tools and resources they need
to design and implement performance management systems that meet the
certification criteria in as streamlined a fashion as possible.

The lessons learned in implementing the senior executive
pay-for-performance system will be critical to modernizing the performance
management systems under which other federal employees are compensated. In
particular, establishing an explicit line of sight between individual,
team, and unit performance and organizational success, as well
highlighting opportunities to improve guidance, communications,
transparency, and safeguards, will serve the government well moving
forward. We stand ready to assist OPM and Congress in exploring and
implementing these critical human capital reforms.

Chairman Voinovich, Senator Akaka, and Members of the Subcommittee, this
completes my prepared statement. I would be pleased to respond to any
questions that you may have.

                          Contact and Acknowledgments

For further information regarding this statement, please contact Brenda S.
Farrell, Acting Director, Strategic Issues, at (202) 512-6806 or
[email protected] . Individuals making key contributions to this statement
include Carole J. Cimitile, William Colvin, Laura Miller Craig, William
Doherty, Robert Goldenkoff, Janice Latimer, Trina Lewis, Jeffrey
McDermott, and Michael Volpe.

(450535)

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Highlights of GAO-06-1125T , testimony before the Subcommittee on
Oversight of Government Management, the Federal Workforce and the District
of Columbia, Committee on Homeland Security and Governmental Affairs, U.S.
Senate

September 26, 2006

HUMAN CAPITAL

Aligning Senior Executives' Performance with Organizational Results Is an
Important Step Toward Governmentwide Transformation

The government's senior executives need to lead the way in transforming
their agencies' cultures. Credible performance management systems-those
that align individual, team, and unit performance with organizational
results-can help manage and direct this process. In past work, GAO found
that the performance management systems for senior executives fell short
in this regard.

In November 2003, recognizing that reforms were needed, Congress
authorized a new performance-based pay system that ended the practice of
giving annual pay adjustments to senior executives. Instead, agencies are
to consider such factors as individual results and contributions to agency
performance. If the Office of Personnel Management (OPM) certifies an
agency's new performance system and the Office of Management and Budget
(OMB) concurs, the agency has the flexibility to raise the pay of its
highest performing senior executives above certain pay caps.

This testimony addresses (1) the performance management system's
regulatory structure, (2) OPM's certification process and agencies' views
of it, and (3) OPM's role in monitoring the system, and the number of
agencies that have been certified to date. This statement is based on
GAO's issued work, which included interviews with senior OPM officials,
agency Chief Human Capital Officers and Human Resource officers, and
reviews of agency documents.

Overall, the regulations that OPM and OMB developed to administer a
performance-based pay system for executives serve as an important step for
agencies in creating an alignment or "line of sight" between executives'
performance and organizational results. To qualify for the pay
flexibilities included in the statute, OPM must certify and OMB must
concur that an agency's performance management system meets nine
certification criteria, including demonstrating that its performance
management system aligns individual performance expectations with the
mission and goals of the organization and that its system as designed and
applied makes meaningful distinctions in performance. The certification
criteria are generally consistent with key practices for effective
performance management systems GAO identified that collectively create a
line of sight between an individual's performance and an organization's
success. To receive a full 2-calendar-year certification, an agency must
document that its senior executive performance management system meets all
nine of the criteria. Agencies can meet four of nine criteria and
demonstrate that their system in design meets the remaining certification
criteria to receive 1-year provisional certification and use the higher
pay rates.

Two divisions in OPM, as well as OMB, independently review agencies'
certification submissions. A number of agencies GAO contacted expressed
concern over OPM's ability to communicate expectations, guidance, and
deadlines to agencies in a clear and consistent manner. OPM officials
agreed that agencies need better guidance and were working on
improvements.

In monitoring agencies' performance management systems, OPM can suspend an
agency's certification at any time with OMB concurrence if an agency is
not complying with the certification criteria. According to OPM data,
performance management systems at 24 agencies were certified during
calendar year 2006. Of these, only the Department of Labor's system
received full certification; the remaining systems received only
provisional certification. These findings are not surprising. As GAO has
noted in its past work, agencies could find it initially difficult to
provide the necessary performance data to receive full certification.
Going forward, it will be important for OPM to continue to monitor the
certification process to help ensure that provisional certifications do
not become the norm, and agencies develop performance management systems
for their senior executives that meet all of OPM's requirements.

The new performance management system for the government's senior
executives will help agencies align individual, team, and unit performance
with organizational results. Although there have been some implementation
challenges, what will be important is how OPM works with agencies to meet
the certification criteria. Moreover, the lessons learned in implementing
the senior executive performance management system can be applied to
modernizing the performance management systems of employees at other
levels.
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