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Before Subcommittees of the Senate Committee on Governmental Affairs 
and the House Committee on Government Reform:

United States General Accounting Office:


For Release on Delivery Expected at 10:00 a.m. EST:

February 25, 2004:


Preliminary Observations on Proposed DHS Human Capital Regulations:

Statement of David M. Walker,

Comptroller General of the United States:


GAO Highlights:

Highlights of GAO-04-479T, testimony before subcommittees of the 
Senate Committee on Governmental Affairs and the House Committee on 
Government Reform

Why GAO Did This Study:

The creation of the Department of Homeland Security (DHS) almost one 
year ago represents an historic moment for the federal government to 
fundamentally transform how the nation will protect itself from 
terrorism. DHS is continuing to transform and integrate a disparate 
group of agencies with multiple missions, values, and cultures into a 
strong and effective cabinet department. Together with this unique 
opportunity, however, also comes significant risk to the nation that 
could occur if this transformation is not implemented successfully. In 
fact, GAO designated this implementation and transformation as high 
risk in January 2003.

Congress provided DHS with significant flexibility to design a modern 
human capital management system. GAO reported in September 2003 that 
the design effort to develop the system was collaborative and 
consistent with positive elements of transformation. Last Friday, the 
Secretary of DHS and the Director of the Office of Personnel 
Management (OPM) released for public comment draft regulations for 
DHS’s new human capital system. This testimony provides preliminary 
observations on selected major provisions of the proposed system. The 
subcommittees are also releasing Human Capital: Implementing Pay for 
Performance at Selected Personnel Demonstration Projects (GAO-04-83) 
at today’s hearing. 

What GAO Found:

The proposed human capital system is designed to be aligned with the 
department’s mission requirements and is intended to protect the civil 
service rights of DHS employees. Many of the basic principles 
underlying the DHS regulations are consistent with proven approaches 
to strategic human capital management, including several approaches 
pioneered by GAO, and deserve serious consideration. However, some 
parts of the system raise questions that DHS, OPM, and Congress should 
* Pay and performance management: The proposal takes another valuable 
step towards results-oriented pay reform and modern performance 
management. For effective performance management, DHS should use 
validated core competencies as a key part of evaluating individual 
contributions to departmental results and transformation efforts.
* Adverse actions and appeals: The proposal would retain an avenue for 
employees to appeal adverse actions to an independent third party. 
However, the process to identify mandatory removal offenses must be 
collaborative and transparent. DHS needs to be cautious about defining 
specific actions requiring employee removal and learn from the 
Internal Revenue Service’s implementation of its mandatory removal 
* Labor relations: The regulations recognize employees’ right to 
organize and bargain collectively, but reduce areas subject to 
bargaining. Continuing to involve employees in a meaningful manner is 
critical to the successful operations of the department.

Once DHS issues final regulations for the human capital system, it 
will be faced with multiple implementation challenges:
* DHS plans to implement the system using a phased approach, however, 
nearly half of DHS civilian employees are not covered by these 
regulations, including more than 50,000 Transportation Security 
Administration screeners. To help build a unified culture, DHS should 
consider moving all of its employees under a single performance 
management system framework. 
* DHS noted that it estimates that about $110 million will be needed 
to implement the new system in its first year. While adequate 
resources for program implementation are critical to program success, 
DHS is requesting a substantial amount of funding that warrants close 
scrutiny by Congress.
* The proposed regulations call for comprehensive, ongoing 
evaluations. Continued evaluation and adjustments will help to ensure 
an effective and credible human capital system.
* DHS has begun to develop a strategic workforce plan. Such a plan can 
be used as a tool for identifying core competencies for staff for 
attracting, developing, evaluating, and rewarding contributions to 
mission accomplishment.

The analysis of DHS’s effort to develop a strategic human capital 
management system can be instructive as other agencies request and 
implement new strategic human capital management authorities.

To view the full testimony statement, click on the link above. For 
more information, contact J. Christopher Mihm at (202) 512-6806 or

[End of section]

Chairman Voinovich, Chairwoman Davis, and Members of the Subcommittees:

It is a pleasure to appear before you today to provide our preliminary 
observations on the Department of Homeland Security's (DHS) proposed 
regulations on its new human capital system.[Footnote 1] The creation 
of DHS almost one year ago represents an historic moment for the 
federal government to fundamentally transform how the nation will 
protect itself from terrorism. DHS is continuing to transform and 
integrate a disparate group of agencies with multiple missions, values, 
and cultures into a strong and effective cabinet department. However, 
this unique opportunity also brings significant risk to the nation if 
this transformation is not implemented successfully. In fact, we 
designated this implementation and transformation as high risk in 
January 2003.[Footnote 2]

Last Friday, the Secretary of DHS and the Director of the Office of 
Personnel Management (OPM) released for public comment proposed 
regulations for DHS's new human capital system. The regulations are 
intended to provide the broad outline of the DHS proposed system and 
are not, nor were they intended to be, a comprehensive presentation of 
the details of how the new system will be implemented. As the system 
evolves, critical issues such as how DHS will link individual 
performance expectations to DHS's mission and goals, how it will define 
performance expectations to promote individual accountability, and how 
it will continue to incorporate adequate safeguards to ensure fairness, 
will need to be addressed. Such detailed implementation policies and 
procedures will need to be developed in a transparent and inclusive 
manner as the system evolves. Although we are still reviewing these 
extensive regulations issued last week, this morning I will provide 
some preliminary observations on selected provisions that in our view 
are most in need of close scrutiny as Congress considers the DHS 

The proposed DHS regulations have both significant precedent-setting 
implications for the executive branch and far-reaching implications on 
how the department is managed. In my view, many of the basic principles 
underlying the proposed DHS regulations are consistent with proven 
approaches to strategic human capital management, including several 
approaches pioneered by GAO, and deserve serious consideration. In 
designing the proposed system, DHS and OPM met with a wide range of 
individuals and organizations with expertise in human capital. At the 
request of DHS and OPM, we were pleased to share the results of our 
work looking at leading human capital practices as well as our own 
experiences with performance management at GAO. My statement today is 
based on our ongoing review of DHS's design and implementation of its 
human capital system, recent work on strategic human capital 
management, including performance management, and our own experience.

Preliminary Observations on the Proposed Human Capital Regulations:

DHS's and OPM's proposed regulations would establish a new human 
resources management system within DHS that covers pay, classification, 
performance management, labor relations, adverse action, and employee 
appeals. These changes are designed to ensure that the system aligns 
individual performance and pay with the department's critical mission 
requirements and to protect the civil service rights of its employees. 
However, it is important to note at the outset that the proposed 
regulations do not apply to nearly half of all DHS civilian employees, 
including nearly 50,000 screeners in the Transportation Security 
Administration (TSA). DHS officials have noted that additional 
employees can be included through further administrative action, but 
that legislation would be needed to include other employees such as the 
screeners and the uniformed division of the Secret Service.[Footnote 3] 
We have found that having one performance management system framework 
facilitates unifying an organizational culture and is a key practice to 
a successful merger and transformation. Based on the department's 
progress in implementing the system and any appropriate modifications 
made based on their experience, DHS should consider moving all of its 
employees under the new human capital system.

Pay and Performance Management:

Today, Mr. Chairman and Madam Chairwoman, you are releasing a report 
that we prepared at your request that shows the variety of approaches 
that OPM's personnel demonstration projects took to design and 
implement their pay for performance systems.[Footnote 4] Their 
experiences provide insights into how some organizations in the federal 
government are implementing pay for performance and thus can guide DHS 
as it develops and implements its own approach. These demonstration 
projects illustrate that understanding how to link pay to performance 
is very much a work in progress in the federal government and that 
additional work is needed to ensure that performance management systems 
are tools to help them manage on a day-to-day basis and achieve 
external results.

As we testified last spring when the Department of Defense (DOD) 
proposed its civilian personnel reform, from a conceptual standpoint, 
we strongly support the need to expand pay for performance in the 
federal government.[Footnote 5] Establishing a better link between 
individual pay and performance is essential if we expect to maximize 
the performance and ensure the accountability of the federal government 
for the benefit of the American people. However, 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. The DHS proposal 
reflects a growing understanding that the federal government needs to 
fundamentally rethink its current approach to pay and better link pay 
to individual and organization performance. To this end, the DHS 
proposal takes another valuable step towards results-oriented pay 
reform and modern performance management. My comments on specific 
provisions follow.

Linking Organizational Goals to Individual Performance:

Under the proposed regulations, the DHS performance management system 
must, among other things, align individual performance expectations 
with the mission, strategic goals, or a range of other objectives of 
the department or of the DHS components. The proposed guidelines do not 
detail how such an alignment is to be achieved, a vital issue that will 
need to be addressed as DHS's efforts move forward. Our work looking at 
public sector performance management efforts here in the United States 
as well as abroad have underscored the importance of aligning daily 
operations and activities with organizational results. We have found 
that organizations often struggle with clearly understanding how what 
they do on a day-to-day basis contributes to overall organizational 
results. High performing organizations, on the other hand, understand 
how the products and services they deliver contribute to results by 
aligning performance expectations of top leadership with organizational 
goals and then cascading those expectations to lower levels.

As an organization undergoing its own merger and transformation, DHS's 
revised performance management system 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. To help DHS merge its various 
originating components into a unified department and transform its 
culture to be more results oriented, customer focused, and 
collaborative in nature, we reported at your request, Mr. Chairman and 
Madam Chairwoman, how a performance management system that defines 
responsibility and assures accountability for change can be key to a 
successful merger and transformation.[Footnote 6] While aligning 
individual performance expectations with DHS's mission and strategic 
goals will be key to DHS's effective performance management, it is 
important to note that DHS has not yet released its strategic plan 
which may hamper creating the formal linkage to the performance 
management system and make it difficult to ensure that the proposed 
regulations support and facilitate the accomplishment of the 
department's strategic goals and objectives.

Establishing Pay Bands:

Under the proposed regulations, DHS would create broad pay bands for 
much of the department in place of the fifteen-grade General Schedule 
(GS) system now in place for much of the civil service. Specifically, 
DHS officials have indicated that they will form ten to fifteen 
occupational pay clusters of similar job types, such as a management or 
science and technology cluster. Most of these occupational clusters 
would have four pay bands ranging from entry level to supervisor. 
Within each occupational cluster, promotion to another band (such as 
from full performance to senior expert) would require an assessment 
and/or competition. Under the proposed regulations, DHS is not to 
reduce employees' basic rate of pay when converting to pay bands. In 
addition, the proposed regulations would allow DHS to establish a 
"control point" within a band, beyond which basic pay increases may be 
granted only for meeting criteria established by DHS, such as an 
outstanding performance rating.

The use of control points can be a valuable tool because managing 
progression through the bands can help to ensure that employees' 
performance coincides with their salaries and can help to prevent all 
employees from eventually migrating to the top of the band and thus 
increasing salary costs. Both demonstration projects at China Lake and 
the Naval Sea Systems Command Warfare Center's (NAVSEA) Dahlgren 
Division have checkpoints or "speed bumps" in their pay bands designed 
to ensure that only the highest performers move into the upper half of 
the pay band. For example, when employees' salaries at China Lake reach 
the midpoint of the pay band, they must receive a performance rating 
equivalent to exceeding expectations, before they can receive 
additional salary increases.

Pay banding and movement to broader occupational clusters can both 
facilitate DHS's movement to a pay for performance system, and help DHS 
to better define occupations, which can improve the hiring process. We 
have reported that the current GS system as defined in the 
Classification Act of 1949 is a key barrier to comprehensive human 
capital reform and the creation of broader occupational job clusters 
and pay bands would aid other agencies as they seek to modernize their 
personnel systems.[Footnote 7] The standards and process of the current 
classification system is a key problem in federal hiring efforts 
because they are outdated and not applicable to the occupations and 
work of today. Many employees in agencies that are now a part of DHS 
responding to OPM's 2002 Federal Human Capital Survey (FHCS) believe 
that recruiting is a problem - only 36 percent believe their work unit 
is able to recruit people with the right skills.[Footnote 8]

Setting Employee Performance Expectations:

The DHS performance management system is intended to promote individual 
accountability by communicating performance expectations and holding 
employees responsible for accomplishing them and by holding supervisors 
and managers responsible for effectively managing the performance of 
employees under their supervision. While supervisors are to involve 
employees as far as practicable in developing their performance 
expectations and employees seek clarification if they do not understand 
them, the final decision on an employee's expectations is the 
supervisor's sole and exclusive discretion. Supervisors must monitor 
the performance of their employees and provide periodic feedback, 
including one or more formal interim performance reviews during the 
appraisal period.

The proposed regulations provide a general description of DHS's 
performance management system with many important details to be 
determined. Under the proposed regulations, performance expectations 
may take the form of goals or objectives that set general or specific 
performance targets at the individual, team, and/or organizational 
level; a particular work assignment, including characteristics such as 
quality, accuracy, or timeliness; or competencies an employee is 
expected to demonstrate on the job; and/or the contributions an 
employee is expected to make, among other things. As DHS's system 
design efforts move forward, it will need to define in further detail 
than currently provided how performance expectations will be 
established, including the degree to which DHS components, managers, 
and supervisors will have flexibility in setting those expectations.

Nevertheless, the range of expectations that DHS will consider in 
setting individual employee performance expectations are generally 
consistent with those we see used by leading organizations. In 
addition, DHS appropriately recognizes that given the vast diversity of 
work done in the Department, managers and employees need flexibility in 
crafting specific expectations. However, the experiences of leading 
organizations suggest that DHS should reconsider its position to merely 
allow, rather than require the use of core employee competencies as a 
central feature of DHS's performance management efforts.[Footnote 9] 
Based on our review of others' efforts and our own experience at GAO, 
core competencies can help reinforce employee behaviors and actions 
that support the department's mission, goals, and values and can 
provide a consistent message to employees about how they are expected 
to achieve results. For example, the Civilian Acquisition Workforce 
Personnel Demonstration Project (AcqDemo), which covers various 
organizational units of the Air Force, Army, Navy, Marine Corps, and 
the Office of the Under Secretary of Defense, applies organizationwide 
competencies for all employees such as teamwork/cooperation, customer 
relations, leadership/supervision, and communication.

More specifically and consistent with leading practices for successful 
mergers and organizational transformation, DHS should use its 
performance management system to serve as the basis for setting 
expectations for individual roles in its transformation 
process.[Footnote 10] To be successful, transformation efforts, such as 
the one underway at DHS, must have leaders, managers, and employees who 
have the individual competencies to integrate and create synergy among 
multiple organizations involved in the transformation effort. 
Individual performance and contributions can be evaluated on 
competencies such as change management, cultural sensitivity, teamwork 
and collaboration, and information sharing. Leaders, managers, and 
employees who demonstrate these competencies are rewarded for their 
success in contributing to the achievement of the transformation 
process. DHS, by including such competencies throughout its revised 
performance management system, would create a shared responsibility for 
organizational success and help assure accountability for change.

Translating Employee Performance Ratings into Pay Increases and Awards:

A stated purpose of DHS's performance management system is to provide 
for meaningful distinctions in performance to support adjustments in 
pay, awards, and promotions. All employees who meet organizational 
expectations are to receive pay adjustments, generally to be made on an 
annual basis. In coordination with OPM, the pay adjustment is to be 
based on considerations of mission requirements, labor market 
conditions, availability of funds, pay adjustments received by other 
federal employees, and other factors. The pay adjustment may vary by 
occupational cluster or band. Employees that meet or exceed 
expectations are also eligible to receive a performance-based pay 
increase, either as an increase to base pay or a one-time award, 
depending on the employee's performance rating. Employees with 
unacceptable ratings are not to receive the pay adjustment or a 
performance-based pay increase. The proposed regulations provide 
managers with a range of options for dealing with poor performers, such 
as remedial training, reassignment, an improvement period, among other 

In coordination with OPM, DHS may additionally set the boundaries of 
locality pay areas. Participants in the DHS focus groups expressed 
concerns regarding the shortcomings of the current locality pay system, 
including its impact on recruitment and retention.[Footnote 11]

While the DHS proposal does not provide additional detail on how it 
would consider labor market conditions, its proposed approach is 
broadly consistent with the experiences of some of the demonstration 
projects that considered the labor market or the fiscal condition of 
the organization in determining how much to budget for pay increases. 
For example, NAVSEA's Newport Division considers the labor market and 
uses regional and industry salary information compiled by the American 
Association of Engineering Societies when determining how much to set 
aside for pay increases and awards. In addition, the Newport Division 
is financed in part through a working capital fund and thus must take 
into account fiscal condition when budgeting for pay increases and 
awards. Responding to higher salaries in the labor market, the Newport 
Division funded pay increases at a higher rate in fiscal year 2001 than 
in 2000. Conversely, in fiscal year 2002, the performance pay increase 
and award pools were funded at lower levels than in 2001 because of 
fiscal constraints.

Under the proposed regulations, DHS would establish performance pay 
pools by occupational cluster and by band within each cluster, and may 
further divide them by unit and/or location. Performance-based pay 
would be based on "performance points" whereby points correspond to a 
rating level. In an example used by DHS, for a four-level system, the 
point value pattern may be 4-2-1-0, where 4 points are assigned to the 
highest rating and 0 points to an unacceptable rating. While each pay 
pool has the option to use this point value pattern or another, DHS is 
to determine the value of a performance point. The proposed regulations 
do not provide more detailed information on how ratings will be used 
for pay and promotions.

Under the proposed regulations, DHS may not impose a quota on any 
rating level or a mandatory distribution of ratings. DHS would create a 
Performance Review Board (PRB) to review ratings in order to promote 
consistency and provide general oversight of the performance management 
system to ensure it is administered in a fair, credible, and 
transparent manner. DHS may, in turn, appoint as many review boards 
within the departmental components as it deems necessary to effectively 
carry out these intended functions and, when practicable, may include 
employees outside the organizational unit, occupation, and/or location 
of employees subject to review by the PRB. The proposed regulations do 
not offer additional details on other matters such as the selection 
process for the members nor their qualifications. Where circumstances 
warrant, the PRB may remand individual ratings for additional review 
and/or modify a rating.

While much remains to be determined about how the DHS PRB will operate, 
we believe that the effective implementation of such a board is 
important to assuring that predecisional internal safeguards exist to 
help achieve consistency and equity, and assure nondiscrimination and 
nonpolitization of the performance management process. The key will be 
to create a PRB that is independent of line management and review such 
matters as the establishment and implementation of the performance 
appraisal system and later, performance rating decisions, pay 
determinations, and promotion actions before they are finalized to 
ensure they are merit based.

Several of the demonstration projects consider an employee's current 
salary when making decisions on permanent pay increases and one-time 
awards - a procedure that is worth additional consideration in the 
proposed DHS regulations. By considering salary in such decisions, the 
projects intend to make a better match between an employee's 
compensation and his or her contribution to the organization. Thus, two 
employees with comparable contributions could receive different pay 
increases and awards depending on their current salaries. For example, 
at AcqDemo, supervisors recommend and pay pool managers approve 
employees' "contribution scores." Pay pool managers then plot 
contribution scores against the employees' current salaries and a 
"standard pay line" to determine if employees are "appropriately 
compensated," "under-compensated" or "over-compensated," given their 

As a result of this system, AcqDemo has reported that it has made 
progress in matching employees' compensation to their contributions to 
the organization. From 1999 to 2002, appropriately compensated 
employees increased from about 63 percent to about 72 percent, under-
compensated employees decreased from about 30 percent to about 27 
percent and over-compensated employees decreased from nearly 7 percent 
to less than 2 percent. A recent evaluation of AcqDemo by Cubic 
Applications, Inc. found that employees' perceptions of the link 
between pay and contribution increased, from 20 percent reporting that 
pay raises depend on their contribution to the organization's mission 
in 1998 to 59 percent in 2003.

Providing Adequate Safeguards to Ensure Fairness and Guard Against 

According to the proposed regulations, the DHS performance management 
system must comply with the merit system principles and avoid 
prohibited personnel practices; provide a means for employee 
involvement in the design and implementation of the system; and 
overall, be fair, credible, and transparent. Last spring, when 
commenting on the DOD civilian personnel reforms, we testified that 
Congress should consider establishing statutory standards that an 
agency must have in place before it can implement a more performance-
based pay program and developed an initial list of possible safeguards 
to help ensure that pay for performance systems in the government are 
fair, effective, and credible.[Footnote 12]

While much remains to be defined, DHS is proposing taking actions that 
are generally consistent with these proposed safeguards. For example, 
as I noted previously, DHS plans to align individual performance 
management with organizational goals and provide for reasonableness 
reviews of performance management decisions through its PRB. Moreover, 
employees and their union representatives played a role in shaping the 
design of the proposed systems, as we previously reported.[Footnote 13]

DHS should continue to build in safeguards into its revised performance 
management system. For example, we noted that 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 overall results of performance 
management and individual pay decisions while protecting individual 
confidentiality and reporting periodically on internal assessments and 
employee survey results relating to the performance management system. 
DHS should commit to publishing the results of the performance 
management process. Publishing the results in a manner that protects 
individual confidentiality can provide employees with the information 
they need to better understand the performance management system. 
Several of the demonstration projects publish information for employees 
on internal Web sites about the 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.

Adverse Actions and Appeals:

The DHS proposal is intended to streamline the employee adverse action 
process, while maintaining an independent third-party review of most 
adverse actions. It is designed to create a single process for both 
performance-based and conduct-based actions,[Footnote 14] and shortens 
the adverse action process by removing the requirement for a 
performance improvement plan and reducing other timeframes. The 
proposed regulations also adopt the lower standard of proof for adverse 
actions in DHS, requiring the agency to meet a standard of "substantial 
evidence" instead of a "preponderance of the evidence." An independent 
review is to be retained by allowing employees to appeal to the Merit 
Systems Protection Board (MSPB). The appeals process at MSPB is, 
however, to be streamlined by shortening the time for filing and 
processing appeals. The proposal also encourages the use of Alternative 
Dispute Resolution (ADR).

Retention of a qualified and independent third-party to address 
employee appeals may be especially important in light of OPM's FHCS 
results. Specifically,

* 38 percent of DHS respondents believe that complaints, disputes, or 
grievances are resolved fairly - lower than the governmentwide response 
of 44 percent;[Footnote 15] and:

* 38 percent of DHS respondents perceive that arbitrary action, 
personal favoritism, and coercion for partisan political purposes are 
not tolerated - lower than the governmentwide response of 45 percent.

Providing an avenue for an independent appeal can enhance employee 
trust of the entire human capital system. The point was echoed during 
the DHS focus groups, in which employees and managers believed it was 
important to maintain a neutral third-party reviewer in the appeals 
process. In a separate survey that we administered (GAO survey), 
members of the field team identified the presence of a neutral third-
party in the process as the most critical challenge in terms of the 
discipline and appeals system, while others identified options 
retaining a third-party reviewer as most likely to address the 
department's challenges in discipline and appeals.[Footnote 16]

DHS's commitment to use ADR is a very positive development. To resolve 
disputes in a more efficient, timely, and less adversarial manner, 
federal agencies have been expanding their human capital programs to 
include ADR approaches. These approaches include mediation, dispute 
resolution boards and ombudsmen. Ombudsmen are typically used to 
provide an informal alternative to addressing conflicts. We reported on 
common approaches used in ombudsmen offices, including (1) broad 
responsibility and authority to address almost any workplace issue, (2) 
their ability to bring systemic issues to management's attention, and 
(3) the manner in which they work with other agency offices in 
providing assistance to employees.[Footnote 17] The proposed 
regulations note that the department will use ADR, including an 
ombudsman, where appropriate.

The proposal authorizes the Secretary of DHS to identify specific 
offenses for which removal is mandatory. Employees alleged to have 
committed these offenses will have the right to a review by an 
adjudicating official and a further appeal to a newly created panel. 
Members of this three-person panel are to be appointed by the Secretary 
for three-year terms and qualifications for these members are 
articulated in the proposed regulations. Members of the panel may be 
removed by the Secretary "only for inefficiency, neglect of duty, or 
malfeasance." Qualifications for the adjudicating officials, who are 
designated by the panel, are not specified.

One potential area of caution is the authority given to the Secretary 
to identify specific offenses for which removal is mandatory. I believe 
that the process for determining and communicating which types of 
offenses require mandatory removal should be explicit and transparent 
and involve a member of key players. Such a process should include an 
employee notice and comment period before implementation, collaboration 
with relevant Congressional stakeholders, and collaboration with 
employee representatives.

We also would suggest that DHS exercise caution when identifying 
specific removable offenses and the specific punishment. When 
developing these proposed regulations, DHS should learn from the 
experience of the Internal Revenue Service's (IRS) implementation of 
its mandatory removal provisions.[Footnote 18] We reported that IRS 
officials believed this provision had a negative impact on employee 
morale and effectiveness and had a "chilling" effect on IRS frontline 
enforcement employees who are afraid to take certain appropriate 
enforcement actions.[Footnote 19] Careful drafting of each removable 
offense is critical to ensure that the provision does not have 
unintended consequences.

Moreover, the independence of the panel that will hear appeals of 
mandatory removal actions deserves further consideration. Removal of 
the panel members by the Secretary may potentially compromise the real 
or perceived independence of the panel's decisions. As an alternative, 
the department should consider having members of the panel removed only 
by a majority decision of the panel. DHS may also wish to consider 
staggering the terms of the members to ensure a degree of continuity on 
the board.

Labor Management Relations:

The DHS proposed regulations recognize the right for employees to 
organize and bargain collectively.[Footnote 20] However, the proposal 
reduces the scope of bargaining by removing the requirement to bargain 
on matters traditionally referred to as "impact and implementation," 
which include the processes used to deploy personnel, assign work, and 
use new technology, for example, and redefining what are traditionally 
referred to as the "conditions of employment." A DHS Labor Relations 
Board is proposed that would be responsible for determining appropriate 
bargaining units, resolving disagreements on the scope of bargaining 
and the obligation to bargain, and resolving impasses, and would be 
separate and independent from the Federal Labor Relations Authority 
(FLRA). The Labor Relations Board would have three members selected by 
the Secretary. No member could be a current DHS employee and one member 
would be from FLRA. The FLRA is retained to resolve complaints 
concerning certain unfair labor practices and to supervise or conduct 
union elections.

Regardless of whether it is as a part of collective bargaining, 
involving employees in such important decisions as how they are 
deployed and how work is assigned is critical to the successful 
operations of the department. During the course of the design process, 
DHS has recognized the importance of employee involvement and has been 
involving multiple organizational components and its three major 
employee unions in designing the new human capital system.[Footnote 21] 
This is consistent with our finding that leading organizations involve 
unions and incorporate their input into proposals before finalizing 
decisions.[Footnote 22] Engaging employee unions in major changes, such 
as redesigning work processes, changing work rules, or developing new 
job descriptions, can help achieve consensus on the planned changes, 
avoid misunderstandings, speed implementation, and more expeditiously 
resolve problems that occur. These organizations engaged employee 
unions by developing and maintaining an ongoing working relationship 
with the unions, documenting formal agreements, building trust over 
time, and participating jointly in making decisions.

DHS employees' comments can prove instructive when determining the 
balance in labor management relations. In the DHS focus groups, 
employees suggested having informal mechanisms in place to resolve 
issues before the need to escalate them to the formal process and 
holding supervisors accountable for upholding agreements. Supervisors 
and employees also expressed a need for increased training in roles and 
responsibilities in the labor process and an interest in training in 
ADR. Respondents to the GAO survey said the most critical challenge in 
terms of labor relations will be to maintain a balance between the 
mission of the agency and bargaining rights.

DHS Faces Multiple Implementation Challenges:

Once DHS issues final regulations for the human capital system, the 
department will be faced with multiple implementation challenges. While 
we plan to provide further details to the Congress on some of these 
challenges in the near future, they include the following.

Implementing the system using a phased approach. The DHS proposed 
regulations note that the labor relations, adverse actions, and appeals 
provisions will be effective 30 days after issuance of the interim 
final regulations later this year. DHS plans to implement the job 
evaluation, pay, and performance management system in phases to allow 
time for final design, training, and careful implementation. We 
strongly support a phased approach to implementing major management 
reforms. A phased implementation approach recognizes that different 
organizations will have different levels of readiness and different 
capabilities to implement new authorities. Moreover, a phased approach 
allows for learning so that appropriate adjustments and midcourse 
corrections can be made before the regulations are fully implemented 

Providing adequate resources for additional planning, implementation, 
and evaluation. The administration recognizes the importance of funding 
this major reform effort and has requested for fiscal year 2005 over 
$10 million for a performance pay fund in the first phase of 
implementation (affecting about 8,000 employees) to recognize those who 
meet or exceed expectations and about $100 million to fund training and 
the development of the performance management and compensation system. 
In particular, DHS is appropriately anticipating that its revised 
performance management system will have costs related to both 
development and implementation - a fact confirmed by the experience of 
the demonstration projects. In fact, OPM reports that the increased 
costs of implementing alternative personnel systems should be 
acknowledged and budgeted for up front.

DHS is recognizing that there are up front costs and that its 
components are starting from different places regarding the maturity 
and capabilities of their performance management systems. At the same 
time, DHS is requesting a substantial amount of funding that warrants 
close scrutiny by Congress. In addition, certain costs are one-time in 
nature and therefore should not be built into the base of DHS's budget 
for future years. Furthermore, presumably most of any performance-based 
pay will be funded from what otherwise would be used from automatic 
across the board adjustments and step increases under the existing GS 

The DHS proposal correctly recognizes that a substantial investment in 
training is a key aspect of implementing a performance management 
system. The demonstration projects' experiences show that while 
training costs are generally higher in the year prior to 
implementation, the need for in-depth and varied training continues as 
the system is implemented. We have reported that agencies will need to 
invest resources, including time and money, to ensure that employees 
have the information, skills, and competencies they need to work 
effectively in a rapidly changing and complex environment.[Footnote 23]

Evaluating the impact of the system. High-performing organizations 
continually review and revise their human capital management systems 
based on data-driven lessons learned and changing needs in the 
environment. DHS indicates that it is committed to an ongoing 
comprehensive evaluation of the effectiveness of the human capital 
system, including the establishment of human capital metrics and the 
use of employee surveys. Collecting and analyzing data is the 
fundamental building block for measuring the effectiveness of these 
approaches in support of the mission and goals of the agency.

DHS should consider doing evaluations that are broadly modeled on the 
evaluation requirements of the OPM demonstration projects. Under the 
demonstration project authority, agencies must evaluate and 
periodically report on results, implementation of the demonstration 
project, cost and benefits, impacts on veterans and other equal 
employment opportunity groups, adherence to merit system principles, 
and the extent to which the lessons from the project can be applied 
governmentwide. A set of balanced measures addressing a range of 
results, customer, employee, and external partner issues may also prove 
beneficial. An evaluation such as this would facilitate congressional 
oversight; allow for any midcourse corrections; assist DHS in 
benchmarking its progress with other efforts; and provide for 
documenting best practices and sharing lessons learned with employees, 
stakeholders, other federal agencies, and the public.

Building a DHS-wide workforce plan. DHS has recently begun drafting a 
departmental workforce plan, using the draft strategic plan as a 
starting point. Workforce plans of different levels of sophistication 
are used in the five legacy agencies we studied. Despite their efforts, 
DHS headquarters has not yet been systematic or consistent in gathering 
relevant data on the successes or shortcomings of legacy human capital 
approaches or current and future workforce challenges--a deficiency 
that will make workforce planning more difficult. The strategic 
workforce plan can be used, among other things, as a tool for 
identifying core competencies for staff for attracting, developing, and 
rewarding contributions to mission accomplishment.[Footnote 24]

Involving employees and other stakeholders in designing the details of 
the system. We reported last fall that DHS's and OPM's effort to design 
a new human capital system were collaborative and facilitated 
participation of employees from all levels of the department.[Footnote 
25] We recommended that the Secretary of DHS build on the progress that 
has been made and ensure that the communication strategy used to 
support the human capital system maximize opportunities for employee 
involvement through the completion of the design process, the release 
of the system options, and implementation, with special emphasis on 
seeking the feedback and buy-in of frontline employees.

Moving forward, employee perspectives can provide insights on areas 
that deserve particular attention while implementing the new 
performance management system. For example, DHS employees responding to 
the OPM FHCS reported that:

* 37 percent indicated that high-performing employees are recognized or 
rewarded on a timely basis, which is lower than the governmentwide 
average of 41 percent;

* 60 percent believe that their appraisals are fair reflections of 
their performance, which is lower than the governmentwide average of 65 

* 23 percent believe that steps are taken to deal with a poor performer 
who cannot or will not improve, which is lower than the governmentwide 
average of 27 percent; and:

* 28 percent perceive that selections for promotions in their work 
units are based on merit, which is lower than the governmentwide 
average of 37 percent.

In the GAO survey, members of the field team said that the most 
critical challenge in terms of performance management will be to create 
a system that is fair. Such data underscore the continuing need to 
involve employees in the design and implementation of the new system to 
obtain their buy-in to the changes being made. More specifically, 
employee involvement in the validation of core competencies is critical 
to ensure that the competencies are both appropriate and accepted.

Summary Observations:

As we testified on the DOD civilian personnel reforms, the bottom line 
for additional performance-based pay flexibility is that an agency 
should have to demonstrate that it has a modern, effective, credible, 
and as appropriate, validated performance management system in place 
with adequate safeguards, including reasonable transparency and 
appropriate accountability mechanisms, to ensure fairness and prevent 
politicalization and abuse of employees. To this end, DHS's proposed 
regulations take another valuable step towards results-oriented pay 
reform and modern performance management. DHS's performance management 
system is intended to align individual performance to DHS's success; 
hold employees responsible for accomplishing performance expectations; 
provide for meaningful distinctions in performance through performance-
and market-based payouts; and be fair, credible, and transparent. 
However, the experiences of leading organizations suggest that DHS 
should require core, and as appropriate, validated competencies in its 
performance management system. The core competencies can serve to 
reinforce employee behaviors and actions that support the DHS mission, 
goals, and values and to set expectations for individuals' roles in 
DHS's transformation, creating a shared responsibility for 
organizational success and ensuring accountability for change. DHS 
should also continue to build safeguards into its revised human capital 

DHS's overall effort to design a strategic human capital management 
system can be particularly instructive for future human capital 
management and reorganization efforts within specific units of DHS. Its 
effort can also prove instructive as other agencies design and 
implement new authorities for human capital management.

Mr. Chairman, Madam Chairwoman, and Members of the Subcommittees, this 
concludes my prepared statement. I would be pleased to respond to any 
questions that you may have.

Contacts and Acknowledgments:

For further information, please contact J. Christopher Mihm, Managing 
Director, Strategic Issues, at (202) 512-6806 or Major 
contributors to this testimony include Edward H. Stephenson, Jr., Lisa 
Shames, Ellen V. Rubin, Lou V. B. Smith, Tina Smith, Masha Pasthhov-
Pastein, Marti Tracy, Ron La Due Lake, Karin Fangman, Michael Volpe, 
and Tonnye Conner-White.

[End of section]

Appendix I: Methodology:

In presenting our preliminary observations on the Department of 
Homeland Security's (DHS) regulations, we reviewed the proposed human 
capital regulations issued jointly by DHS and the Office of Personnel 
Management (OPM) on February 20, 2004, in the Federal Register. 
Additional documents reviewed include relevant laws and regulations, 
the 52 DHS human capital system options released in October 2003, and 
testimony presented by leaders of DHS employee unions and the Merit 
Systems Protection Board (MSPB). Interviews with experts in federal 
labor relations and the federal adverse actions and appeals system 
provided additional insights. The official transcripts and report 
summarizing the proceedings of the Senior Review Advisory Committee 
meetings in October 2003 were also examined. A draft of the report 
summarizing the proceedings of the Senior Review Advisory Committee 
meetings in October 2003 was reviewed by members of the committee to 
ensure its reliability. Additionally, we attended the committee's 
October 2003 meetings. Relevant GAO reports on human capital management 
were used as criteria against which the proposals were evaluated.

To respond to your particular interest in seeking out and incorporating 
employee perspectives on the human capital system, we gathered 
information on employee perceptions from a variety of sources and 
presented these findings throughout the statement. Insights to employee 
opinions were gathered from the OPM Federal Human Capital Survey 
(FHCS), a GAO-administered survey of the field team used to inform the 
human capital system design effort (GAO survey), and a report 
summarizing findings from the DHS focus groups held during the summer 
of 2003.

OPM Federal Human Capital Survey:

To assess the strengths and weaknesses of selected provisions of DHS's 
proposed human capital system, we reviewed the analysis of the DHS 
component agencies' responses to relevant questions on OPM's FHCS of 
2002 for those legacy components that are now within DHS: the Animal 
and Plant Health Inspection Service (APHIS); the U.S. Coast Guard; the 
U.S. Customs Service; the Federal Emergency Management Agency; the 
Immigration and Naturalization Service; Federal Law Enforcement 
Training Center; U.S. Secret Service; Office of Emergency Preparedness 
and National Disaster Medical System; and the Federal Protective 
Service. This governmentwide survey was conducted from May through 
August 2002. It was administered to employees of 24 major agencies 
represented on the President's Management Council, which constitute 93 
percent of the executive branch civilian workforce. There were 189 
subelement/organizational components of the 24 agencies that 
participated. The sample was stratified by employee work status: 
supervisory, nonsupervisory, and executive. Of the more than 200,000 
employees contacted, a little over 100,000 employees responded to the 
survey, resulting in a 51 percent response rate. OPM reported that the 
margin of error for the percentages of respondents governmentwide was 
plus or minus 1 percent at a 95 percent confidence interval. Likewise, 
it reported that the margin of error for the percentages of respondents 
for individual agencies was somewhat higher but less than plus or minus 
5 percent.

The OPM survey was conducted during the same time frame that the 
administration proposed legislation to form DHS; thus, the opinions 
expressed by the respondents to the survey were before the formation of 
DHS. For reporting purposes, OPM compiled the DHS responses by 
combining the various subentities cited above. The responses 
approximate the views of some, but not all, employees now at DHS. For 
example, the Transportation Security Administration (TSA) screeners 
were not hired at the time of the survey. Also, APHIS employees were 
divided between DHS and the Department of Agriculture (USDA), so the 
APHIS respondents included some employees who remained at USDA.

Because OPM did not provide us with a copy of the full survey data set 
that included all records or the strata weights for any of the records, 
we could not perform our own analyses of the data or calculate the 
confidence intervals that would be associated with such analyses. OPM 
did, however, provide us with access to a Web site that provided 
reports with weighted data analyses for the FHCS 2002. We addressed the 
reliability of the survey analyses by (1) reviewing existing 
information about the survey data collection and analysis processes and 
(2) interviewing OPM agency officials who were knowledgeable about the 
data. We determined that the data were sufficiently reliable for the 
purposes of this testimony. We reviewed the analyses of the DHS 
component agencies presented on the Web site in four areas (pay and 
performance management, classification, labor relations, and adverse 
actions and appeals) that compared DHS-wide data to governmentwide 

GAO Field Team Survey:

We were interested in obtaining the views of the field team 
participants who served as a key source of information for DHS's Core 
Design Team. The field team consisted of DHS managers and staff. 
Members were selected by departmental management or the three major 

From October through December 2003, we surveyed the 31 members of the 
team to obtain their insights into the DHS design process and proposed 
human capital system options. The survey, administered by e-mail and 
fax, contained two parts. The first part addressed their views on how 
effectively the field team was utilized throughout the design process. 
The second part addressed their views about human capital challenges 
and the proposed policy options in four areas: (1) pay and 
classification, (2) performance management, (3) labor relations, and 
(4) discipline and appeals. Prior to distribution, the questionnaire 
was reviewed by DHS and OPM officials and pretested with a field team 
member to ensure clarity of the questions and determine whether the 
respondent had the knowledge to answer the questions. The questionnaire 
was revised based on their input. We received completed questionnaires 
from 19 of 31 field team members. We aggressively followed up with 
nonrespondents by telephone and e-mail. Because many of the field team 
members were either not based in offices, on extensive travel, or 
difficult to reach, we extended our survey through December 2003. The 
views that we obtained are not representative of all the participants.

DHS Focus Groups:

DHS conducted multiple focus groups and Town Hall meetings from the end 
of May through the beginning of July 2003 in 10 cities across the 
United States.[Footnote 26] Six focus group sessions were held in each 
city to obtain employee input and suggestions for the new human 
resource system. In most cities, five of the six sessions were devoted 
to hearing employees' views while the remaining sessions heard the 
views of supervisors and managers. Each focus group was facilitated by 
a contractor. The contractor used a standard focus group facilitation 
guide to manage each session. Additionally, the contractor was 
responsible for recording the issues identified during each focus group 
session and compiling a summative report on the findings from all the 
focus groups. We did not attend any focus group sessions and were not 
able to review any original notes from the sessions to assess the 
accuracy of the summative report.

Participation in the focus groups was not random nor was it necessarily 
representative of DHS employees. DHS reports that employee 
participation generally reflected the population in that location. For 
example, the level of bargaining unit representation at the focus 
groups was determined based on OPM data on bargaining unit membership. 
Bargaining unit employees were selected by union representatives to 
participate in the focus groups, while nonbargaining unit employees and 
supervisors were selected by DHS management. Union representatives and 
DHS managers were asked to select a diverse group of participants based 
on occupation, work location, gender, ethnicity, and age.

This work was done in accordance with generally accepted government 
auditing standards from March 2003 through February 2004.


[1] Senate Committee on Governmental Affairs, Subcommittee on Oversight 
of Government Management, the Federal Workforce, and the District of 
Columbia and House Committee on Government Reform, Subcommittee on 
Civil Service and Agency Organization.

[2] U.S. General Accounting Office, Major Management Challenges and 
Program Risks: Department of Homeland Security, GAO-03-102 (Washington, 
D.C.: January 2003). 

[3] The Homeland Security Act of 2002 gave DHS authority to waive or 
modify parts of civil service law in Title 5 of the U.S. Code. However, 
not all employees of DHS are covered under Title 5. According to DHS 
officials, this impacts coverage of TSA, part of the Coast Guard, the 
Uniformed Division of the Secret Service, and part of the Emergency 
Preparedness and Response Directorate. These same DHS officials 
indicated that DHS can administratively extend the new human capital 
system to many of these employees. However, they said that legislation 
would be required to move TSA screeners and Secret Service uniformed 
employees completely into the new system. 

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

[5] U.S. General Accounting Office, Defense Transformation: Preliminary 
Observations on DOD's Proposed Civilian Personnel Reforms, GAO-03-717T 
(Washington, D.C.: Apr. 29, 2003).

[6] U.S. General Accounting Office, Results-Oriented Cultures: 
Implementation Steps to Assist Mergers and Organizational 
Transformations, GAO-03-669 (Washington, D.C.: July 2, 2003).

[7] U.S. General Accounting Office, Human Capital: Opportunities to 
Improve Executive Agencies' Hiring Processes, GAO-03-450 (Washington, 
D.C.: May 30, 2003). 

[8] The DHS responses reported by the OPM FHCS approximate the views of 
some, but not all, employees now at DHS. For example, TSA screeners 
were not hired at the time of the survey. Also, though the Animal and 
Plant Health Inspection Services (APHIS) employees were divided between 
DHS and the U.S. Department of Agriculture (USDA), the APHIS 
respondents included those remaining at USDA. Details on the objective, 
scope, and methodology for the OPM FHCS are described in more detail in 
app I.

[9] U.S. General Accounting Office, Creating a Clear Linkage between 
Individual Performance and Organizational Success, GAO-03-488 
(Washington, D.C.: Mar. 14, 2003).

[10] GAO-03-669.

[11] Details on the objective, scope, and methodology for the DHS focus 
groups are described in more detail in app. I. 

[12] GAO-03-717T.

[13] U.S. General Accounting Office, Human Capital: DHS Personnel 
System Design Effort Provides for Collaboration and Employee 
Participation, GAO-03-1099 (Washington, D.C.: Sept. 30, 2003). 

[14] Title 5 has a process for performance-based actions in Chapter 43 
and a different process in Chapter 75 which can be used for conduct or 
performance-based actions.

[15] In all instances comparing DHS's results to the OPM FHCS 
governmentwide average, DHS results are lower by a statistically 
significant amount according to OPM data.

[16] Field team participants served as a key source of information 
during the design process. The field team consisted of DHS managers and 
staff. Details on the objective, scope, and methodology for the GAO-
administered survey of the field team are described in more detail in 
app. I. 

[17] U.S. General Accounting Office, Human Capital: The Role of 
Ombudsmen in Dispute Resolution, GAO-01-466 (Washington, D.C.: Apr. 13, 

[18] Section 1203 of the IRS Restructuring and Reform Act of 1998 
outlines conditions for firing of IRS employees for any of ten acts of 
misconduct. 26 USC 7804 note.

[19] U.S. General Accounting Office, Tax Administration: IRS and TIGTA 
Should Evaluate Their Processing of Employee Misconduct Under Section 
1203, GAO-03-394 (Washington, D.C.: Feb. 14, 2003).

[20] Under current law, the rights of employees to bargain may be 
suspended for reasons of national security. 5 U.S.C. Sect. 7103(b), 

[21] GAO-03-1099. 

[22] U.S. General Accounting Office, Human Capital: Practices that 
Empowered and Involved Employees, GAO-01-1070 (Washington, D.C.: Sept. 
14, 2001). 

[23] U.S. General Accounting Office, Human Capital: A Guide for 
Assessing Strategic Training and Development Efforts in the Federal 
Government, GAO-03-893G (Washington, D.C.: July 2003).

[24] U.S. General Accounting Office, Human Capital: Key Principles for 
Effective Strategic Workforce Planning, GAO-04-39 (Washington, D.C.: 
Dec. 11, 2003). 

[25] GAO-03-1099.

[26] The 10 cities were Atlanta, Georgia; Detroit, Michigan; El Paso, 
Texas; Los Angeles, California; Miami, Florida; New York, New York; 
Norfolk, Virginia; Seattle, Washington; Washington, D.C.; and 
Baltimore, Maryland.