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Administration's Draft Proposed "Working for America Act"' which was 
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Testimony: 

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: 

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-06-142T]: 

GAO Highlights: 

Highlights of GAO-06-142T, a testimony before the Subcommittee on the 
Federal Workforce and Agency Organization, Committee on Government 
Reform, U.S. House of Representatives: 

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. 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. 

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. 

* 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. 
* 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.
* 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. 

www.gao.gov/cgi-bin/getrpt?GAO-06-142T. 

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 shamesl@gao.gov. 

[End of section] 

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.[Footnote 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?"[Footnote 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.[Footnote 3] Most 
recently, the Departments of Homeland Security (DHS) and Defense (DOD) 
received the authority to establish "flexible and contemporary" human 
capital and pay systems.[Footnote 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. 

* 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.[Footnote 5] 

* 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. 

* 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 
systems[Footnote 6]. 

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. 

* 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. 

* 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. 

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

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.[Footnote 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. 

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 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. 

More Market-Based and Performance-Oriented Pay: 

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.[Footnote 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.[Footnote 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. 

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.[Footnote 10] GAO is also publishing aggregate data for all 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 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's Roles and Responsibilities: 

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.[Footnote 11] 

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 program processes.[Footnote 12] 

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.[Footnote 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. 

Labor Management Relations and Adverse Actions and Appeals: 

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 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. 

Labor Management Relations: 

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. 

Adverse Actions and Appeals: 

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 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. 

Framework for Governmentwide Human Capital Reform: 

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.[Footnote 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 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: 

* Merit principles that balance organizational mission, goals, and 
performance objectives with individual rights and responsibilities; 
* Ability to organize, bargain collectively, and participate through 
labor organizations; 
* Certain prohibited personnel practices; 
* 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: 

* Demonstrated business case or readiness for use of targeted 
authorities; 
* An integrated approach to results-oriented strategic planning and 
human capital planning and management; 
* Adequate resources for planning, implementation, training, and 
evaluation; 
* 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: 

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

Source: GAO. 

[End of figure] 

Next Steps for Human Capital Reform: 

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 
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. 

Contact and Acknowledgments: 

For further information regarding this statement, please contact Lisa 
Shames, Acting Director, Strategic Issues, at (202) 512-6806 or 
[Hyperlink, shamesl@gao.gov]. 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: 

GAO-05-1048T: 

GAO Highlights: 

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. 

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. 

* The shift to market-based and more performance-oriented pay must be 
part of a broader strategy of change management and performance 
improvement initiatives. 
* 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.
* 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. 

1. Focus on a set of values and objectives to guide the pay system.
2. Examine the value of employees’ total compensation to remain 
competitive in the market. 
3. Build in safeguards to enhance the transparency and help ensure the 
fairness of pay decisions. 
4. Devolve decision making on pay to appropriate levels. 
5. Provide training on leadership, management, and interpersonal skills 
to facilitate effective communication. 
6. Build consensus to gain ownership and acceptance for pay reforms. 
7. Monitor and refine the implementation of the pay system. 

Moving forward, it is possible to enact broad-based reforms that would 
enable agencies to move to market-based and more performance-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. 

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 shamesl@gao.gov. 

[End of section] 

GAO-05-832SP: 

GAO Highlights: 

Highlights of GAO-05-832SP 

Why GAO Convened This Symposium: 

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. 

What Participants Said: 

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. 

2. Examine the value of employees’ total compensation to remain 
competitive in the market. Organizations consider a mix of base pay 
plus other monetary incentives, benefits, and deferred compensation, 
such as retirement pay, as part of a competitive compensation system. 

3. Build in safeguards to enhance the transparency and ensure the 
fairness of pay decisions. Safeguards are the precondition to linking 
pay systems with employee knowledge, skills, and contributions to 
results. 

4. Devolve decision making on pay to appropriate levels. When devolving 
such decision making, overall core processes help ensure reasonable 
consistency in how the system is implemented. 

5. Provide training on leadership, management, and interpersonal skills 
to facilitate effective communication. Such skills as setting 
expectations, linking individual performance to organizational results, 
and giving and receiving feedback need renewed emphasis to make such 
systems succeed. 

6. Build consensus to gain ownership and acceptance for pay reforms. 
Employee and stakeholder involvement needs to be meaningful and not pro 
forma. 

7. Monitor and refine the implementation of the pay system. 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. 

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 mihmj@gao.gov. 

[End of section] 

GAO-04-83: 

GAO Highlights: 

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

Why GAO Did This Study: 

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. 

What GAO Found: 

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. 

Providing information to employees about the results of performance 
appraisal and pay decisions: 

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. 

[End of table] 

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. 

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 mihmj@gao.gov. 

[End of section] 

GAO Highlights: 

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

Why GAO Did This Study: 

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. 

What GAO Found: 

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:
1. Align individual performance expectations with organizational goals. 
An explicit alignment helps individuals see the connection between 
their daily activities and organizational goals.
2. Connect performance expectations to crosscutting goals. Placing an 
emphasis on collaboration, interaction, and teamwork across 
organizational boundaries helps strengthen accountability for results. 
3. Provide and routinely use performance information to track 
organizational priorities. Individuals use performance information to 
manage during the year, identify performance gaps, and pinpoint 
improvement opportunities.
4. Require follow-up actions to address organizational priorities. 
By requiring and tracking follow-up actions on performance gaps, 
organizations underscore the importance of holding individuals 
accountable for making progress on their priorities.
5. Use competencies to provide a fuller assessment of performance. 
Competencies define the skills and supporting behaviors that 
individuals need to effectively contribute to organizational results. 
6. Link pay to individual and organizational performance. Pay, 
incentive, and reward systems that link employee knowledge, skills, and 
contributions to organizational results are based on valid, reliable, 
and transparent performance management systems with adequate 
safeguards.
7. Make meaningful distinctions in performance. Effective performance 
management systems strive to provide candid and constructive feedback 
and the necessary objective information and documentation to reward top 
performers and deal with poor performers.
8. Involve employees and stakeholders to gain ownership of performance 
management systems. Early and direct involvement helps increase 
employees’ and stakeholders’ understanding and ownership of the system 
and belief in its fairness.
9. Maintain continuity during transitions. Because cultural 
transformations take time, performance management systems reinforce 
accountability for change management and other organizational goals. 

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 mihmj@gao.gov. 

[End of section] 

(450448): 

FOOTNOTES 

[1] GAO, 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). 

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

[3] GAO, 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). 

[4] For 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). 

[5] GAO 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). 

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

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

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

[9] For 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). 

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

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

[12] GAO, 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). 

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

[14] GAO-05-69SP.