Human Capital: Preliminary Observations on the Administration's  
Draft Proposed "Working for America Act" (05-OCT-05,		 
GAO-06-142T).							 
                                                                 
The federal government must have the capacity to plan more	 
strategically, react more expeditiously, and focus on achieving  
results. Critical to the success of this transformation are the  
federal government's people--its human capital. We have commended
the progress that has been made in addressing human capital	 
challenges in the last few years. Still, significant		 
opportunities exist to improve strategic human capital management
to respond to current and emerging 21st century challenges. A key
question, for example, is how to update the federal government's 
classification and compensation systems to be more market-based  
and performance-oriented. The Administration's draft proposed	 
"Working for America Act" is intended to ensure that agencies are
equipped to better manage, develop, and reward their employees.  
Under this proposal, the Office of Personnel Management (OPM) is 
to design a new core classification and pay system, among other  
things. In addition, the draft proposal amends some provisions of
Title 5 covering labor management relations and adverse actions  
and appeals. This testimony presents preliminary observations on 
the draft proposal; presents the principles, criteria, and	 
processes for human capital reform; and suggests next steps for  
selected and targeted actions.					 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-06-142T					        
    ACCNO:   A39097						        
  TITLE:     Human Capital: Preliminary Observations on the	      
Administration's Draft Proposed "Working for America Act"	 
     DATE:   10/05/2005 
  SUBJECT:   Compensation					 
	     Federal employees					 
	     GS grade classification				 
	     Human capital					 
	     Human capital management				 
	     Merit compensation 				 
	     Pay for performance				 
	     Performance management				 
	     Performance measures				 
	     Personnel management				 
	     Proposed legislation				 
	     Strategic planning 				 
	     Performance-based pay				 

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GAO-06-142T

     

     * The Administration's Draft Proposed "Working for America Act"
          * Pay and Performance Management
               * More Market-Based and Performance-Oriented Pay
               * OPM Certification
          * OPM's Roles and Responsibilities
          * Labor Management Relations and Adverse Actions and Appeals
               * Labor Management Relations
               * Adverse Actions and Appeals
     * Framework for Governmentwide Human Capital Reform
     * Next Steps for Human Capital Reform
     * Contact and Acknowledgments
     * Highlights of Selected GAO Reports
     * end of testimony.pdf
          * PDF5-Ordering Information.pdf
               * Order by Mail or Phone

                 United States Government Accountability Office

Testimony

GAO

Before the Subcommittee on the Federal Workforce and Agency Organization,
Committee on Government Reform,

U.S. House of Representatives

For Release on Delivery Expected at 10:00 a.m., EDT Wednesday, October 5,
2005

HUMAN CAPITAL

  Preliminary Observations on the Administration's Draft Proposed "Working for
                                  America Act"

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

                                       a

  GAO-06-142T

HUMAN CAPITAL

Preliminary Observations on the Administration's Draft Proposed "Working
for America Act"

  What GAO Found

GAO supports moving forward with appropriate human capital reforms and
believes that implementing more market-based and performance-oriented pay
systems is both doable and desirable. Importantly, broad-based human
capital reform must be part of a broader strategy of change management and
performance improvement initiatives and cannot be simply overlaid on
existing ineffective performance management systems. In addition,
organizations need to build up their basic management capacity and must
have adequate resources to properly design and effectively implement more
market-based and performance-oriented systems.

Before implementing dramatic human capital reforms, executive branch
agencies should follow a phased approach that meets a "show me" test. That
is, each agency should be authorized to implement a reform only after it
has shown it has met certain conditions, including an assessment of its
related institutional infrastructure and an independent certification by
OPM that such infrastructure meets specified statutory standards. In any
event, OPM's and agencies' related efforts should be monitored by
Congress.

Given the above, GAO has the following observations on the draft proposal.

     o Congress should make pay and performance management reforms the first
       step in governmentwide reforms. The draft proposal incorporates many
       of the key principles of more market-based and performance-oriented
       pay systems and requires that OPM certify that each agency's pay for
       performance system meets prescribed criteria. Going forward, OPM
       should define in regulation what it will take in terms of fact-based
       and data-driven analyses for agencies to demonstrate that they are
       ready to receive this certification and implement new authorities.
     o OPM should play a key leadership and oversight role in helping
       individual agencies and the government as a whole work towards
       overcoming a broad range of human capital challenges. OPM's role would
       be expanded in several areas under the draft proposal. It is unclear
       whether OPM has the current capacity to discharge these new
       responsibilities.
     o Congress should move more cautiously in connection with labor
       management relations and adverse actions and appeals reforms. Selected
       federal agencies have been implementing more market-based and
       performance-oriented pay systems for some time and thus they have
       built a body of experience and knowledge about what works well and
       what does not that allows the sharing of lessons learned. On the other
       hand, the federal government has had far less experience in changes
       regarding labor management relations and adverse actions and appeals.
       Congress may wish to monitor the Departments of Homeland Security's
       and Defense's implementation of related authorities, including lessons
       learned, before moving forward in these areas for the rest of the
       federal government.

                 United States Government Accountability Office

Chairman Porter, Representative Davis, and Members of the Subcommittee:

I appreciate the opportunity to be here today to discuss human capital
reform and to offer preliminary observations on the Administration's draft
proposed "Working for America Act," which is intended to ensure that
agencies are equipped to better manage, develop, and reward their
employees. In order to respond to a daunting array of governance and
fiscal challenges in the 21st century, the federal government must have
the institutional capacity to plan more strategically, react more
expeditiously, and focus on achieving results. Critical to the success of
this transformation are the federal government's people-its human capital.
We have commended the progress that has been made in addressing human
capital challenges in the last few years. Still, significant opportunities
exist to improve strategic human capital management to respond to current
and emerging 21st century challenges.1 For example, the government has not
transformed, in many cases, how it classifies, compensates, develops, and
motivates its employees to achieve maximum results within available
resources and existing authorities. Thus, a key question for the 21st
century is "How should the federal government update its compensation
systems to be more market-based and performance-oriented?"2

Congress has recognized that federal agencies will need the most effective
human capital systems to succeed in their transformations and has given
selected agencies statutory authorities intended to help them manage their
people strategically to achieve results.3 Most recently, the Departments
of Homeland Security (DHS) and Defense (DOD) received the authority to

1GAO, High-Risk Series: An Update, GAO-05-207 (Washington, D.C.: January
2005) and GAO, High-Risk Series: Strategic Human Capital Management,
GAO-03-120 (Washington, D.C.: January 2003).

2GAO, 21st Century Challenges: Reexamining the Base of the Federal
Government, GAO- 05-325SP (Washington, D.C.: February 2005).

3GAO, Human Capital: Selected Agencies' Statutory Authorities Could Offer
Options in Developing a Framework for Governmentwide Reform, GAO-05-398R
(Washington, D.C.: Apr. 21, 2005).

establish "flexible and contemporary" human capital and pay systems.4 GAO
has also received human capital authorities that have given our agency the
tools to more effectively support Congress in meeting its constitutional
responsibilities. We strive to lead by example and understand that
effective implementation of any new policies and procedures is of critical
importance.

Before discussing the Administration's draft proposal as we understand it,
I would like to emphasize the following three themes that I believe are
critical to considering any governmentwide approach to civil service
reform.

     o First and foremost, we need to move forward with appropriate human
       capital reforms, but 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. Human capital reforms to date recognize that the
       "one-size-fits-all" approach is not appropriate to all agencies'
       demands, challenges, and missions. However, we have reported that a
       reasonable degree of consistency across the government is still
       desirable and that broader reforms should be guided by a common
       framework consisting of principles, criteria, and processes.5
     o Before implementing dramatic human capital reforms, executive branch
       agencies should follow a phased approach that meets a "show me" test.
       That is, each agency should be authorized to implement a reform only
       after it has shown it has met certain conditions, including an
       assessment of its institutional infrastructure to effectively,
       efficiently, economically, and fairly implement any new authorities.
       The Office of Personnel Management (OPM) should also independently
       certify that such infrastructure meets specified statutory standards
       before the agency could implement such reforms. In any event, OPM's
       and agencies' related efforts should be monitored by Congress.

4For more information on DHS's and DOD's human capital authorities, see
for example, GAO, Human Capital: Preliminary Observations on Final
Department of Homeland Security Human Capital Regulations, GAO-05-320T
(Washington, D.C.: Feb. 10, 2005) and GAO, Human Capital: Preliminary
Observations on Proposed DOD National Security Personnel System
Regulations, GAO-05-432T (Washington, D.C.: Mar. 15, 2005).

5GAO and the National Commission on the Public Service Implementation
Initiative,

Highlights of a Forum: Human Capital: Principles, Criteria, and Processes
for Governmentwide Federal Human Capital Reform, GAO-05-69SP (Washington,
D.C.: Dec. 1, 2004).

        * GAO strongly supports the need to expand pay reform in the federal
          government and believes that implementing more market-based and
          performance-oriented pay systems is both doable and desirable.
          Specifically, pay increases should no longer be treated as an
          entitlement but should be based on employees' contributions to the
          organizations' missions and goals. However, GAO's and other
          organizations' experiences demonstrate that the shift to more
          market-based and performance-oriented pay must be part of a broader
          strategy of change management and performance improvement
          initiatives and cannot be simply overlaid on existing ineffective
          performance management systems6.
        * Hearings such as this one today offer opportunities for
          stakeholders to express their views as we move forward with human
          capital reforms. As I have testified on other occasions, reasonable
          people can and will disagree about the merits of an individual
          proposal. This morning I would like to speak broadly about the
          Administration's draft proposal and highlight three preliminary
          observations based on our understanding of it.
     o Congress should make pay and performance management reforms the first
       step in governmentwide reforms. The draft proposal incorporates many
       of the key principles of more market-based and performance-oriented
       pay systems and requires that OPM certify that each agency's pay for
       performance system meets prescribed criteria. Going forward, OPM
       should define in regulation what it will take in terms of fact-based
       and data-driven analyses for agencies to demonstrate that they are
       ready to receive this certification and implement new authorities.
     o Second, OPM should play a key leadership and oversight role in helping
       individual agencies and the government as a whole work towards
       overcoming a broad range of human capital challenges. OPM's role would
       be expanded in several areas under the draft proposal. It is unclear
       whether OPM has the current capacity to discharge these new
       responsibilities.
     o Third, Congress should move more cautiously in connection with labor
       management relations and adverse actions and appeals reforms. Selected
       federal agencies have been implementing more market-based

6GAO, Human Capital: Symposium on Designing and Managing Market-Based and
More Performance-Oriented Pay Systems, GAO-05-832SP (Washington, D.C.:
July 27, 2005).

Page 3 GAO-06-142T

and performance-oriented pay for some time-some organizations for well
over a decade-and thus they have built a body of experience and knowledge
about what works well and what does not that allows the sharing of lessons
learned. On the other hand, the federal government has had far less
experience in changes regarding labor management relations and adverse
actions and appeals. Congress granted DHS and DOD related new authorities
in these areas and may wish to monitor the implementation of those
authorities, including lessons learned, before moving forward for the rest
of the federal government.

I will now provide some more specific comments on the Administration's
draft proposal. I will then suggest next steps for human capital reform,
including selected and targeted authorities and a framework comprised of
principles, criteria, and processes for governmentwide reform.

The draft proposed "Working for America Act" is intended to ensure that
agencies are equipped to better manage, develop, and reward employees to
better serve the American people.7 Its purpose is to establish a federal
human capital system under which employees have clear performance goals
and opportunities for professional growth; managers who help them succeed;
and pay increases based on performance rather than the passage of time. In
addition, any new flexibilities are to be exercised in accordance with the
merit system principles; related core values; and protections, such as
against discrimination, political influence, and personal favoritism, of
the civil service. Today I will provide observations on three central
areas of the draft proposal as we understand it: pay and performance
management; OPM's new responsibilities to implement the proposed pay
reform; and labor management relations and adverse actions and appeals.

  The Administration's Draft Proposed "Working for America Act"

Pay and Performance Management

As I stated earlier, GAO strongly supports the need to expand pay reform
in the federal government and believes that implementing more market-based
and performance-oriented pay systems is both doable and desirable. The
federal government's current pay system is weighted toward rewarding
length of service rather than individual performance and contributions;
automatically providing across-the-board annual pay increases, even to

7The observations made today are based on the draft version given to GAO
dated July 18, 2005.

Page 4 GAO-06-142T

More Market-Based and Performance-Oriented Pay

poor performers. It also compensates employees living in various
localities without adequately considering the local labor market rates
applicable to the diverse types of occupations in the area. Importantly,
the draft proposal, as we understand it, incorporates many of the key
practices of more market-based and performance-oriented pay systems and
requires that OPM certify that each agency's pay for performance system
meet prescribed criteria. Going forward, OPM should define in regulation
what fact-based and data-driven analyses agencies will need to provide to
OPM to receive certification.

Clearly, a competitive compensation system can help organizations attract
and retain a quality workforce. 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 various levels of responsibility. In addition, organizations
generally structure their competitive compensation systems to separate
base salary from bonuses and other incentives and awards.

Under the draft proposal, OPM is to design a new core classification and
pay system and agencies, in coordination with OPM, are to establish
performance appraisal systems to promote high performance. Specifically,
the General Schedule is to be repealed and to replace it, OPM is to
establish pay bands for occupational groups based on factors such as
mission, competencies, or relevant labor market features. For each pay
band, OPM is to establish ranges of basic pay rates that apply in all
locations. There are to be market-oriented pay adjustments. The
governmentwide national market adjustment is to vary by occupational group
and band with the flexibility to make additional local market adjustments.
Going forward, more information is needed on what compensation studies are
to be conducted in setting these market-based pay rates.

Effective performance management systems 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. Such systems work to achieve three key
objectives:

(1) they strive to provide candid and constructive feedback to help
individuals maximize their contribution and potential in understanding and
realizing the goals and objectives of the organization, (2) they seek to
provide management with the objective and fact-based information it needs
to reward top performers, and (3) they provide the necessary information
and documentation to deal with poor performers.

The draft proposal incorporates many of the key practices that we have
reported have helped agencies implement effective performance management
systems.8 These practices include:

Linking Organizational Goals to Individual Performance. Under the draft
proposal, agencies are to set performance expectations that support and
align with the agencies' mission and strategic goals, organizational
program and policy objectives, annual performance plans, results, and
other measures of performance. Further, agencies are to communicate the
performance expectations in writing at the beginning of the appraisal
period.

Making Meaningful Distinctions in Performance. Supervisors and managers
are to be held accountable for making meaningful distinctions among
employees based on performance, fostering and rewarding excellent
performance, and addressing poor performance, among other things. Agencies
are not to impose a forced distribution of performance ratings in terms of
fixed numeric or percentage limitations on any summary rating levels.
Performance appraisal systems are to include at least two summary rating
levels, essentially a "pass/fail" system, for employees in an
"Entry/Developmental" band and at least three summary rating levels for
other employee groups.

Pass/fail systems by definition will not provide meaningful distinctions
in performance ratings. In addition, while a three-level system might be
workable, using four or five summary rating levels is preferable since it
naturally allows for greater performance rating and pay differentiation.
Moreover, this approach is consistent with the new governmentwide
performance-based pay system for the members of the Senior Executive
Service (SES), which requires agencies to use at least four summary rating
levels to provide a clear and direct link between SES performance and pay
as well as to make meaningful distinctions based on relative performance.9
Cascading this approach to other levels of employees can help agencies
recognize and reward employee contributions and achieve the highest levels
of individual performance.

8GAO, Results-Oriented Cultures: Creating a Clear Linkage between
Individual Performance and Organizational Success, GAO-03-488 (Washington,
D.C.: Mar. 14, 2003).

9For more information, see GAO, Human Capital: Senior Executive
Performance Management Can Be Significantly Strengthened to Achieve
Results, GAO-04-614 (Washington, D.C.: May 26, 2004).

Page 6 GAO-06-142T

Linking Pay to Performance. Employees must receive at least a "fully
successful" rating to receive any pay increase. Those employees who
receive less than a fully successful rating are not to receive an
increase, including the national and local market adjustments discussed
above. Performance pay increases for employees are to be allocated by the
"performance shares" of a pay pool. Agencies are to determine the value of
one performance share, expressed as a percentage of the employee's basic
pay or as a fixed dollar amount. There are to be a set number of
performance shares for each pay pool so that the employees with higher
performance ratings are to receive a greater number of shares and thus, a
greater payout. At the agency's discretion, any portion of the employee's
performance pay increase not converted to a basic pay increase may be paid
out as a lump-sum payment.

Providing Adequate Safeguards to Ensure Fairness and Guard Against Abuse.
Agencies are to incorporate effective safeguards to ensure that the
management of systems is fair and equitable and based on employee
performance in order to receive certification of their pay for performance
systems. We have found that a common concern that employees express about
any pay for performance system is whether their supervisors have the
ability and willingness to assess employees' performance fairly. Using
safeguards, such as having independent reasonableness reviews of
performance management decisions before such decisions are final, can help
to allay these concerns and build a fair and credible system. This has
been our approach at GAO and we have found it works extremely well.

In addition, 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 internally
the overall results of performance management and individual pay decisions
while protecting individual confidentiality. For example, we found that
several of OPM's demonstration projects publish information for employees
on internal Web sites that include the overall 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.10 GAO is also publishing aggregate data for all

10GAO, Human Capital: Implementing Pay for Performance at Selected
Personnel Demonstration Projects, GAO-04-83 (Washington, D.C.: Jan. 23,
2004).

Page 7 GAO-06-142T

of our pay, promotion, and other important agency-wide human capital
actions.

OPM Certification As I noted, before implementing any human capital
reforms, executive branch agencies should follow a phased approach that
meets a "show me" test. That is, each agency should be authorized to
implement a reform only after it has shown it has met certain
requirements, including an assessment of its institutional infrastructure
and an independent certification by OPM of the existence of this
infrastructure. This institutional infrastructure includes (1) a strategic
human capital planning process linked to the agency's overall strategic
plan; (2) capabilities to design and implement a new human capital system
effectively; (3) a modern, effective, credible, and validated performance
management system that provides a clear linkage between institutional,
unit, and individual performance-oriented outcomes, and results in
meaningful distinctions in ratings; and (4) adequate internal and external
safeguards to ensure the fair, effective, and nondiscriminatory
implementation of the system.

A positive feature of the draft proposal is that agencies are to show that
their pay for performance systems have met prescribed criteria in order to
receive certification from OPM to implement their new systems. Among these
criteria are having the means for ensuring employee involvement in the
design and implementation of the pay for performance system; adequate
training and retraining for supervisors, managers, and employees in the
implementation and operation of the pay for performance system; a process
for ensuring periodic performance feedback and dialogue between
supervisors, managers, and employees throughout the appraisal period; and
the means for ensuring that adequate agency resources are allocated for
the design, implementation, and administration of the pay for performance
system. Further, OPM may review an agency's pay for performance systems
periodically to assess whether they continue to meet the certification
criteria. If they do not, OPM may rescind the agency's certification and
direct the agency to take actions to implement an appropriate system,
which the agency must follow.

Going forward, I believe that OPM should define in regulation what it will
take in terms of fact-based and data-driven analyses for agencies to
demonstrate that they are ready to receive this certification. Clearly,
the President's Management Agenda, and its standards for the strategic
management of human capital, can inform the certification process. Also,
as an example of the analyses that have been required, OPM has outlined in
regulations for the SES performance-based pay system the necessary data

                        OPM's Roles and Responsibilities

and information agencies need to provide in order to receive certification
and thus raise the pay cap and total compensation limit for their senior
executives. Specifically, agencies must provide, among other things, the
data on senior executives' performance ratings, pay, and awards for the
last 2 years to demonstrate that their systems, as designed and applied,
make meaningful distinctions based on relative performance. Under the SES
regulations, agencies that cannot provide these data can request
provisional certification of their systems. In our view such provisional
certifications should not be an option under any broad-based
classification and compensation reform proposal.

OPM should play a key leadership and oversight role in helping individual
agencies and the government as a whole work towards overcoming a broad
range of human capital challenges. Our understanding of the
Administration's draft proposal is that OPM's leadership and oversight
role is to expand in several areas, such as establishing a more
market-based and performance-oriented pay system governmentwide and
implementing a new core classification system. At the request of Chairman
Collins and Ranking Member Lieberman, Senate Committee on Homeland
Security and Governmental Affairs, along with Chairman Voinovich and
Ranking Member Akaka, Subcommittee on Oversight of Government Management,
the Federal Workforce, and the District of Columbia, and to assist
Congress as it considers OPM's additional responsibilities as outlined in
this draft proposal, we are assessing OPM's current capacity to lead a
broad-based governmentwide human capital reform effort, including
providing appropriate assistance to federal agencies as they revise their
human capital systems and conducting effective monitoring of any related
reform implementation efforts.

OPM is in the process of its own transformation-from being a rulemaker,
enforcer, and independent agent to being more of a consultant, toolmaker,
and strategic partner in leading and supporting executive agencies' human
capital reform efforts and management systems. However, it is unclear
whether OPM has the current capacity to discharge its new
responsibilities. Specifically, OPM reported in its June 2001 workforce
analysis that 4.2 percent of its employees (about 123 per year), on
average, were projected to retire each year over the next 10 years, and
the largest percentage of projected retirements, about 8 percent each
year, would come from members of its SES. OPM's expected retirement rate
for its workforce overall is more than the annual retirement rate of 2
percent governmentwide that we identified in a report issued in 2001.11

Labor Management Relations and Adverse Actions and Appeals

Our prior work has shown that when required to implement new legislation,
OPM could have done more to accomplish its leadership and oversight
mission in a decentralized human capital environment. For example,
Congress passed a law in 1990 authorizing agencies to repay, at their
discretion, their employees' student loans as a means to recruit and
retain a talented workforce. In 2001, OPM issued final regulations to
implement the program. The regulations were subsequently changed in 2004
to reflect legislative amendments that increased the ceiling on annual and
total loan repayments. In our review of the federal student loan repayment
program, we found that while human capital officials recognized OPM's
efforts, they felt they could use more assistance on the technical aspects
of operating the program, more coordination in sharing lessons learned in
implementing it, and help consolidating some of the

12

program processes.

Similarly, we found that while OPM had several initiatives underway to
assist federal agencies in using personnel flexibilities currently
available to them in managing their workforces, OPM could more fully meet
its leadership role to assist agencies in identifying, developing, and
applying human capital flexibilities across the federal government.13 In
addition, we reported that in its ongoing internal review of its existing
regulations and guidance, OPM could more directly focus on determining the
continued relevance and utility of its regulations and guidance by asking
whether they provide the flexibility that agencies need in managing their
workforces while also incorporating protections for employees.

The Administration's draft proposal would amend some provisions of Title 5
of the U.S. Code covering labor management relations and adverse actions
and appeals. Selected federal agencies have been implementing more
market-based and performance-oriented pay for some time-some organizations
for well over a decade-and thus they have built a body of

11GAO, Federal Employee Retirements: Expected Increase Over the Next 5
Years Illustrates Need for Workforce Planning, GAO-01-509 (Washington,
D.C.: Apr. 27, 2001).

12GAO, Federal Student Loan Repayment Program: OPM Could Build on Its
Efforts to Help Agencies Administer the Program and Measure Results,
GAO-05-762 (Washington, D.C.: July 22, 2005).

13GAO, Human Capital: OPM Can Better Assist Agencies in Using Personnel
Flexibilities, GAO-03-428 (Washington, D.C.: May 9, 2003).

                           Labor Management Relations

                          Adverse Actions and Appeals

experience and knowledge about what works well and what does not that
allows the sharing of lessons learned. On the other hand, the federal
government has had far less experience in changes regarding labor
management relations and adverse actions and appeals. Congress granted DHS
and DOD related new authorities in these areas and may wish to monitor the
implementation of those authorities, including lessons learned, before
moving forward for the rest of the federal government. Discussion of
selected proposed amendments follows.

Under Title 5, agencies now have a duty to bargain over conditions of
employment, other than those covered by a federal statute; a
governmentwide rule or regulation; or an agency rule or regulation for
which the agency can demonstrate a compelling need. Under the draft
proposal, agencies are to be obligated to bargain with employees only if
the effect of the change in policy on the bargaining unit (or the affected
part of the unit) is "foreseeable, substantial, and significant in terms
of impact and duration."

In addition, an agency now has the right to take any action to carry out
the agency's mission in an emergency, without a duty to bargain. However,
what constitutes an emergency can be defined through a collective
bargaining agreement. Under the draft proposal, an agency is to have the
right to take any action to prepare for, practice for, or prevent an
emergency, or to carry out the agency's mission in an emergency. The draft
proposal also adds a new definition of "emergency" as requiring immediate
action to carry out critical agency functions, including situations
involving an (1) adverse effect on agency resources, (2) increase in
workload because of unforeseeable events, (3) externally imposed change in
mission requirements, or (4) externally imposed budget exigency. By
broadly defining "emergency" without time limits and adding to
management's right an explicit authority to take action to prepare for,
practice for, or prevent any emergency, the proposed change as we
understand it, could serve to significantly restrict the scope of issues
subject to collective bargaining.

Under Title 5, conduct-based adverse actions are reviewed by the Merit
Systems Protection Board (MSPB) under the preponderance of the evidence
standard (there is more evidence than not to support the action).
Performance-based adverse actions are reviewed under the lower standard of
substantial evidence (evidence that a reasonable person would find
sufficient to support a conclusion), but agencies must first give
employees a reasonable opportunity to demonstrate acceptable performance
under a performance improvement plan. Under the draft proposal, MSPB is to

  Framework for Governmentwide Human Capital Reform

apply a single standard of proof-the higher standard of preponderance of
the evidence-to review adverse actions taken for either performance or
conduct. On the other hand, while due process features, such as advance
written notice of a proposed adverse action are still required,
performance improvement plans are no longer required. As we understand the
draft proposal, applying the same standard to both types of adverse
actions could add more consistency to the appeals process.

Also under Title 5, MSPB now reviews penalties during the course of a
disciplinary action against an employee to ensure that the agency
considered relevant prescribed factors and exercised management discretion
within tolerable limits of reasonableness. MSPB may mitigate or modify a
penalty if the agency did not consider prescribed factors. Under the draft
proposal, MSPB will be able to mitigate a penalty only if it is totally
unwarranted in light of all pertinent circumstances. This change would
restrict MSPB's ability to mitigate penalties.

To help advance the discussion concerning how governmentwide human capital
reform should proceed, GAO and the National Commission on the Public
Service Implementation Initiative co-hosted a forum on whether there
should be a governmentwide framework for human capital reform and, if so,
what this framework should include.14 While there was widespread
recognition among the forum participants that a one-size-fits-all approach
to human capital management is not appropriate for the challenges and
demands government faces, there was equally broad agreement that there
should be a governmentwide framework to guide human capital reform.
Further, a governmentwide framework should balance the need for
consistency across the federal government with the desire for flexibility
so that individual agencies can tailor human capital systems to best meet
their needs. Striking this balance would not be easy to achieve, but is
necessary to maintain a governmentwide system that is responsive enough to
adapt to agencies' diverse missions, cultures, and workforces.

While there were divergent views among the forum participants, there was
general agreement on a set of principles, criteria, and processes that
would serve as a starting point for further discussion in developing a

14GAO-05-69SP.

  Next Steps for Human Capital Reform

governmentwide framework in advancing human capital reform, as shown in
figure 1. We believe that these principles, criteria, and processes
provide an effective framework for Congress and other decision makers to
use as they consider and craft governmentwide civil service reform
proposals.

                 Figure 1: Principles, Criteria, and Processes

Principles that the government should retain in a framework for reform
because of their inherent, enduring qualities:

     o Merit principles that balance organizational mission, goals, and
       performance objectives with individual rights and responsibilities
     o Ability to organize, bargain collectively, and participate through
       labor organizations
     o Certain prohibited personnel practices
     o Guaranteed due process that is fair, fast, and final

Criteria that agencies should have in place as they plan for and manage
their new human capital authorities:

     o Demonstrated business case or readiness for use of targeted
       authorities
     o An integrated approach to results-oriented strategic planning and
       human capital planning and management
     o Adequate resources for planning, implementation, training, and
       evaluation
     o A modern, effective, credible, and integrated performance management
       system that includes adequate safeguards to help ensure equity and
       prevent discrimination

Processes that agencies should follow as they implement new human capital
authorities:

     o Prescribing regulations in consultation or jointly with the Office of
       Personnel Management
     o Establishing appeals processes in consultation with the Merit Systems
       Protection Board
     o Involving employees and stakeholders in the design and implementation
       of new human capital systems
     o Phasing in implementation of new human capital systems
     o Committing to transparency, reporting, and evaluation
     o Establishing a communications strategy
     o Assuring adequate training

                                  Source: GAO.

Moving forward with human capital reform, in the short term, Congress
should consider selected and targeted actions to continue to accelerate
the momentum to make strategic human capital management the centerpiece of
the government's overall transformation effort. One option may be to
provide agencies one-time, targeted investments that are not built into

Page 13 GAO-06-142T

agencies' bases for future year budget requests. For example, Congress
established the Human Capital Performance Fund to reward agencies' highest
performing and most valuable employees. However, the draft proposal
proposes to repeal the Human Capital Performance Fund. According to OPM,
the provision was never implemented, due to lack of sufficient funding. We
believe that a central fund has merit and can help agencies build the
infrastructure that is necessary in order to implement a more market-based
and performance-oriented pay system. To be eligible, agencies would submit
plans for approval by OPM that incorporated features such as a link
between pay for performance and the agency's strategic plan, employee
involvement, ongoing performance feedback, and effective safeguards to
ensure fair management of the system. In the first year of implementation,
up to 10 percent of the amount appropriated would be available to train
those involved in making meaningful distinctions in performance. These
features are similar to those cited in the draft proposal as the basis for
OPM's certification for agencies to implement their new pay and
performance management systems.

In addition, as agencies develop their pay for performance systems, they
will need to consider the appropriate mix between pay awarded as base pay
increases versus one-time cash increases, while still maintaining fiscally
sustainable compensation systems that reward performance. A key question
to consider is how the government can make an increasing percentage of
federal compensation dependent on achieving individual and organizational
results by, for example, providing more compensation as one-time cash
bonuses rather than as permanent salary increases. However, agencies' use
of cash bonuses or other monetary incentives has an impact on employees'
retirement calculations since they are not included in calculating
retirement benefits. Congress should consider potential legislative
changes to allow cash bonuses that would otherwise be included as base pay
increases to be calculated toward retirement and thrift savings benefits
by specifically factoring bonuses into the employee's basic pay for
purposes of calculating the employee's "high-3" for retirement benefits
and making contributions to the thrift savings plan.

As we continue to move forward with broader human capital reforms, they
should be guided by a framework consisting of principles, criteria, and
processes. While the reforms to date have recognized that the
"one-size-fits-all" approach is not appropriate to all agencies' demands,
challenges, and missions, a reasonable degree of consistency across the
government is still desirable. Striking this balance is not easy to
achieve, but is necessary to maximize the federal government's performance
within available resources and assure accountability for the benefit of
the American people.

Chairman Porter, Representative Davis, and Members of the Subcommittee,
this concludes my statement. I would be pleased to respond to any
questions that you may have.

For further information regarding this statement, please contact Lisa

  Contact and

Shames, Acting Director, Strategic Issues, at (202) 512-6806 or

[email protected]. Individuals making key contributions to this statement
include Anne Inserra, Carole Cimitile, Janice Latimer, Belva Martin,
Jeffrey McDermott, and Katherine H. Walker.

Appendix I

                       Highlights of Selected GAO Reports

Highlights of GAO-05-1048T, a 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

Why GAO Did This Study

The federal government must have the capacity to plan more strategically,
react more expeditiously, and focus on achieving results. Critical to the
success of this transformation are the federal government's people- its
human capital. Yet, in many cases the federal government has not
transformed how it classifies, compensates, develops, and motivates its
employees to achieve maximum results within available resources and
existing authorities. A key question is how to update the federal
government's compensation system to be market-based and more
performance-oriented.

To further the discussion of federal pay reform, GAO partnered with key
human capital stakeholders to convene a symposium in March 2005 to discuss
public, private, and nonprofit organizations' successes and challenges in
designing and managing market-based and more performance-oriented pay
systems.

This testimony presents the strategies that organizations considered in
designing and managing market-based and more performance-oriented pay
systems and describes how they are implementing them.

www.gao.gov/cgi-bin/getrpt?GAO-05-1048T.

To view the full product, including the scope and methodology, click on
the link above. For more information, contact Lisa Shames at (202)
512-6806 or [email protected].

September 27, 2005

HUMAN CAPITAL

Designing and Managing Market-Based and More Performance-Oriented Pay
Systems

What GAO Found

GAO strongly supports the need to expand pay reform in the federal
government. While implementing market-based and more performance-oriented
pay systems is both doable and desirable, organizations' experiences in
designing and managing their pay systems underscored three key themes that
can guide federal agencies' efforts.

     o The shift to market-based and more performance-oriented pay must be
       part of a broader strategy of change management and performance
       improvement initiatives.
     o Market-based and more performance-oriented pay cannot be simply
       overlaid on most organizations' existing performance management
       systems. Rather, as a precondition to effective pay reform, individual
       expectations must be clearly aligned with organizational results,
       communication on individual contributions to annual goals must be
       ongoing and two-way, meaningful distinctions in employee performance
       must be made, and cultural changes must be undertaken.
     o Organizations need to build up the basic management capacity of their
       organizations. Training and developing new and current staff to fill
       new roles and work in different ways will play a crucial part in
       building the capacity of the organizations.

Organizations presenting at our symposium considered the following
strategies in designing and managing their pay systems.

rmance-oriented pay
systems. However, before implementing reform, each executive branch agency
should demonstrate and the Office of Personnel Management should certify
that the agency has the institutional infrastructure in place to help
ensure that the pay reform is effectively and equally implemented. At a
minimum, this infrastructure includes a modern, effective, credible, and
validated performance management system in place that provides a clear
linkage between institutional, unit, and individual performance-oriented
outcomes; results in meaningful distinctions in ratings; and incorporates
adequate safeguards.

United States Government Accountability Office

Appendix I Highlights of Selected GAO Reports

Highlights of GAO-05-832SP

Critical to the success of the federal government's transformation are its
people- human capital. Yet the government has not transformed, in many
cases, how it classifies, compensates, develops, and motivates its
employees to achieve maximum results within available resources and
existing authorities. One of the questions being addressed as the federal
government transforms is how to update its compensation system to be more
market based and performance oriented.

To further the discussion of federal pay reform, GAO, the U.S. Office of
Personnel Management, the U.S. Merit Systems Protection Board, the
National Academy of Public Administration, and the Partnership for Public
Service convened a symposium on March 9, 2005, to discuss organizations'
experiences with market-based and more performance-oriented pay systems.
Representatives from public, private, and nonprofit organizations made
presentations on the successes and challenges they experienced in
designing and managing their market-based and more performance-oriented
pay systems. A cross section of human capital stakeholders was invited to
further explore these successes and challenges and engage in open
discussion. While participants were asked to review the overall substance
and context of the draft summary, GAO did not seek consensus on the key
themes and supporting examples.

www.gao.gov/cgi-bin/getrpt?GAO-05-832SP.

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

July 2005

HUMAN CAPITAL

Symposium on Designing and Managing Market-Based and More
Performance-Oriented Pay Systems

While implementing market-based and more performance-oriented pay systems
is both doable and desirable, organizations' experiences show that the
shift to market-based and more performance-oriented pay must be part of a
broader strategy of change management and performance improvement
initiatives. GAO identified the following key themes that highlight the
leadership and management strategies these organizations collectively
considered in designing and managing market-based and more
performance-oriented pay systems.

1. Focus on a set of values and objectives to guide the pay system.

Values represent an organization's beliefs and boundaries and objectives
articulate the strategy to implement the system.

erformance to organizational
       results, and giving and receiving feedback need renewed emphasis to
       make such systems succeed.
 While changes
are usually inevitable, listening to employee views and using metrics
helps identify and correct problems over time.

These organizations found that the key challenge with implementing
market-based and more performance-oriented pay is changing the culture. To
begin to make this change, organizations need to build up their basic
management capacity at every level of the organization. Transitioning to
these pay systems is a huge undertaking and will require constant
monitoring and refining in order to implement and sustain the reforms.

Appendix I Highlights of Selected GAO Reports

Highlights of GAO-04-83, a report to congressional requesters

There is a growing understanding that the federal government needs to
fundamentally rethink its current approach to pay and to better link pay
to individual and organizational performance. Federal agencies have been
experimenting with pay for performance through the Office of Personnel
Management's (OPM) personnel demonstration projects.

GAO identified the approaches that selected personnel demonstration
projects have taken to implement their pay for performance systems. These
projects include: the Navy Demonstration Project at China Lake (China
Lake), the National Institute of Standards and Technology (NIST), the
Department of Commerce (DOC), the Naval Research Laboratory (NRL), the
Naval Sea Systems Command Warfare Centers (NAVSEA) at Dahlgren and
Newport, and the Civilian Acquisition Workforce Personnel Demonstration
Project (AcqDemo). We selected these demonstration projects based on
factors such as status of the project and makeup of employee groups
covered.

We provided drafts of this report to officials in the Department of
Defense (DOD) and DOC for their review and comment. DOD provided written
comments concurring with our report. DOC provided minor technical
clarifications and updated information. We provided a draft of the report
to the Director of OPM for her information.

www.gao.gov/cgi-bin/getrpt?GAO-04-83.

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

January 2004

HUMAN CAPITAL

Implementing Pay for Performance at Selected Personnel Demonstration
Projects

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, as shown in the table below.

      Demonstration Project Approaches to Implementing Pay for Performance

              Using competencies to evaluate employee performance.

High-performing organizations use validated core competencies as a key
part of evaluating individual contributions to organizational results. To
this end, AcqDemo and NRL use core competencies for all positions. Other
demonstration projects, such as NIST, DOC, and China Lake, use
competencies based on the individual employee's position.

    Translating employee performance ratings into pay increases and awards.

Some projects, such as China Lake and NAVSEA's Newport division,
established predetermined pay increases, awards, or both depending on a
given performance rating, while others, such as DOC and NIST, delegated
the flexibility to individual pay pools to determine how ratings would
translate into performance pay increases, awards, or both. The
demonstration projects made some distinctions among employees'
performance.

     Considering current salary in making performance-based pay decisions.

Several of the demonstration projects, such as AcqDemo and NRL, consider
an employee's current salary when making performance pay increases and
award decisions to make a better match between an employee's compensation
and contribution to the organization.

               Managing costs of the pay for performance system.

According to officials, salaries, training, and automation and data
systems were the major cost drivers of implementing their pay for
performance systems. The demonstration projects used a number of
approaches to manage the costs.

To ensure fairness and safeguard against abuse, performance-based pay
programs should have adequate safeguards, including reasonable
transparency in connection with the results of the performance management
process. To this end, several of the demonstration projects publish
information, such as the average performance rating, performance pay
increase, and award.

Source: GAO.

GAO strongly supports the need to expand pay for performance in the
federal government. 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. High-performing organizations continuously review and revise
their performance management systems. These demonstration projects show an
understanding that how to better link pay to performance is very much a
work in progress at the federal level. Additional work is needed to
strengthen efforts to ensure that performance management systems are tools
to help them manage on a day-to-day basis. In particular, there are
opportunities to use organizationwide competencies to evaluate employee
performance that reinforce behaviors and actions that support the
organization's mission, translate employee performance so that managers
make meaningful distinctions between top and poor performers with
objective and fact-based information, and provide information to employees
about the results of the performance appraisals and pay decisions to
ensure reasonable transparency and appropriate accountability mechanisms
are in place.

Appendix I Highlights of Selected GAO Reports

Highlights of GAO-03-488, a report to congressional requesters

The federal government is in a period of profound transition and faces an
array of challenges and opportunities to enhance performance, ensure
accountability, and position the nation for the future. High-performing
organizations have found that to successfully transform themselves, they
must often fundamentally change their cultures so that they are more
results-oriented, customer-focused, and collaborative in nature. To foster
such cultures, these organizations recognize that an effective performance
management system can be a strategic tool to drive internal change and
achieve desired results.

Based on previously issued reports on public sector organizations'
approaches to reinforce individual accountability for results, GAO
identified key practices that federal agencies can consider as they
develop modern, effective, and credible performance management systems.

www.gao.gov/cgi-bin/getrpt?GAO-03-488.

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

March 2003

RESULTS-ORIENTED CULTURES

Creating a Clear Linkage between Individual Performance and Organizational
Success

Public sector organizations both in the United States and abroad have
implemented a selected, generally consistent set of key practices for
effective performance management that collectively create a clear linkage-
"line of sight"-between individual performance and organizational success.
These key practices include the following.

y use performance information to track
       organizational priorities. Individuals use performance information to
       manage during the year, identify performance gaps, and pinpoint
       improvement opportunities.
nce gaps,
       organizations underscore the importance of holding individuals
       accountable for making progress on their priorities.
agement systems. Early and direct involvement helps increase
       employees' and stakeholders' understanding and ownership of the system
       and belief in its fairness.
nt and other organizational goals.

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