oversight

Results-Oriented Cultures: Modern Performance Management Systems Are Needed to Effectively Support Pay for Performance

Published by the Government Accountability Office on 2003-04-01.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                          United States General Accounting Office

GAO                       Testimony
                          Before the Subcommittee on Civil Service and Agency
                          Organization, Committee on Government Reform,
                          House of Representatives


For Release on Delivery
Expected at 1 p.m. EST
Tuesday, April 1, 2003
                          RESULTS-ORIENTED
                          CULTURES
                          Modern Performance
                          Management Systems Are
                          Needed to Effectively
                          Support Pay for
                          Performance
                          Statement of J. Christopher Mihm
                          Director, Strategic Issues




GAO-03-612T
                          a
                                                 April 1, 2003


                                                 RESULTS-ORIENTED CULTURES

                                                 Modern Performance Management
Highlights of GAO-03-612T, testimony
before the Subcommittee on Civil Service         Systems Are Needed to Effectively
and Agency Organization, Committee on
Government Reform, House of
Representatives
                                                 Support Pay for Performance


There is widespread agreement                    The need for results-oriented pay reform is one of the most pressing human
that the basic approach to federal               capital issues facing the federal government today. To implement results-
pay is broken and that it needs to               oriented pay reform, commonly referred to as “pay for performance,”
be more market- and performance-                 agencies must have modern, effective, credible, and validated performance
based. Doing so will be essential if             management systems that are capable of supporting pay and other personnel
the federal government is to
maximize its performance and
                                                 decisions. Pay for performance works only with adequate safeguards,
assure accountability for the                    including reasonable transparency and appropriate accountability
benefit of the American people.                  mechanisms in place, to ensure its fair, effective, and responsible
While there will be debate and                   implementation. Modern performance management systems are the
disagreement about the merits of                 centerpiece of those safeguards and accountability.
individual reform proposals, all
should be able to agree that a                   Most federal agencies are a long way from meeting this test. All too often,
performance management system                    agencies’ performance management systems are based on episodic and
with adequate safeguards,                        paper intensive exercises that are not linked to the strategic plan of the
including reasonable transparency                organization and have only a modest impact on the pay, use, development,
and appropriate accountability                   and promotion potential of federal workers. Leading organizations, on the
mechanisms in place, must serve as
the fundamental underpinning of
                                                 other hand, use their performance management systems to accelerate
any fair, effective, and appropriate             change, achieve desired organizational results, and facilitate two-way
pay reform.                                      communication throughout the year so that discussions about individual and
                                                 organizational performance are integrated and ongoing. Effective
At the request of the                            performance management systems are not merely used for once- or twice-
Subcommittee, GAO discussed the                  yearly individual expectation setting and ratings processes, but are tools to
key practices for effective                      help the organization manage on a day-to-day basis.
performance management that
federal agencies should consider as              GAO identified key practices leading public sector organizations both here in
they develop and implement                       the United States and abroad have used in their performance management
performance management systems                   systems to link organizational goals to individual performance and create a
as part of any pay reform.
                                                 “line of sight” between an individual’s activities and organizational results.
                                                 These practices can help agencies develop and implement performance
                                                 management systems with the attributes necessary to effectively support pay
                                                 for performance.




www.gao.gov/cgi-bin/getrpt?GAO-03-612T.

To view the full testimony statement, click on
the link above. For more information, contact
J. Christopher Mihm at (202) 512-6806 or
mihmj@gao.gov.
Madam Chairwoman and Members of the Subcommittee:

I am pleased to be here today to discuss the need for results-oriented pay
reform, one of the most pressing human capital issues currently facing the
federal government. My major point today is that, as Comptroller General
Walker has said, in order to implement such reforms, commonly referred to
as “pay for performance,” agencies must have modern, effective, credible,
and validated performance management systems that are capable of
supporting pay and other personnel decisions. Quite simply, pay for
performance works only with adequate safeguards, including reasonable
transparency and appropriate accountability mechanisms in place, to
ensure its fair, effective, and responsible implementation. Modern
performance management systems are the centerpiece of those safeguards
and accountability.

Unfortunately, most federal agencies are a long way from meeting this test.
All too often, we find that agencies’ performance management systems are
based on episodic and paper-intensive exercises that are not linked to the
strategic plans of the organizations and have only a modest impact on the
pay, use, development, and promotion potential of federal workers.
Leading organizations, on the other hand, use their performance
management systems to accelerate change, achieve desired organizational
results, and facilitate two-way communication throughout the year so that
discussions about individual and organizational performance are integrated
and ongoing. Effective performance management systems are not merely
used for once- or twice-yearly individual expectation setting and ratings
processes, but are tools to help the organization manage on a day-to-day
basis. Chairwoman Davis, today you are releasing a report that we
prepared at your and Senator Voinovich’s request that shows specific
practices that leading public sector organizations here in the United States
and abroad have used in their performance management systems to create
clear linkages between individual performance and organizational
success.1

There can be little question that modernizing agency performance
management systems and linking them to agency strategic plans and
desired outcomes should be a top priority. The Office of Personnel


1
 U.S. General Accounting Office, Results-Oriented Cultures: Creating a Clear Linkage
between Individual Performance and Organizational Success, GAO-03-488 (Washington,
D.C.: Mar. 14, 2003).




Page 1                                                                   GAO-03-612T
Management’s (OPM) recently released 2002 Federal Human Capital
Survey found that better performance management systems are needed in
federal agencies. The results show that while 80 percent of federal
employees believe they are held accountable for results, most are not
satisfied with the recognition or the rewards they receive for a job well
done. Specifically, less than half of employees believe that the awards in
their work units depend on how well employees perform their jobs and less
than a third of employees believe that their organizations’ awards programs
provide them with an incentive to do their best. Also, less than a third of
employees agree that steps are taken to deal with poor performers.

These results appear to reinforce the findings from OPM’s white paper on
modernizing federal pay issued in April 2002.2 The paper described the
need for the federal pay system to be more performance-oriented, flexible,
and market-sensitive as well as a better tool for improving strategic human
capital management. It amply demonstrated that the current federal pay
system was designed for the heavily clerical and low graded workforce of
the 1950s rather than today’s knowledge-based government. Similarly,
OPM’s survey results underscore the findings of the National Commission
on the Public Service’s recent report, Urgent Business for America:
Revitalizing the Federal Government for the 21st Century. The
commission observed that agencies need greater freedom to connect pay
both to the market and to performance. As the nature of the federal
workforce has changed, so too should its pay system if we are to effectively
compete for top talent and create incentives for both individual and
institutional success.

The Congress and the administration are working on initial steps to
implement result-oriented pay reform and modern performance
management systems across the executive branch.

• The Homeland Security Act of 2002, passed by the Congress in
  November, provides for the increase of the total annual compensation
  limit for senior executives (from $171,900 to $198,600 for 2003) in those
  agencies that OPM and the Office of Management and Budget certify as
  having performance appraisal systems that, as designed and applied,
  make meaningful distinctions based on relative performance.



2
 Office of Personnel Management, A White Paper: A Fresh Start for Federal Pay: The Case
for Modernization (Washington, D.C.: April 2002).




Page 2                                                                     GAO-03-612T
                        • The administration proposed for the fiscal year 2004 budget to allow
                          managers to increase pay beyond annual raises for high-performing
                          employees. OPM would administer a $500 million Human Capital
                          Performance Fund for the purpose of allowing agencies to deliver
                          additional pay to certain employees based on individual performance or
                          other human capital needs, in accordance with plans submitted to and
                          approved by OPM.

                        • In addition, in the fiscal year 2004 budget proposal, the administration
                          proposed the creation of a wider, more open pay range for senior
                          executive compensation, thus allowing for pay to be more directly tied
                          to performance. This is consistent with the proposals you and Senator
                          Voinovich are considering.

                        Today, I will highlight the key practices for effective performance
                        management that federal agencies should consider as they revise their
                        performance management systems to be more results-oriented, customer-
                        focused, and collaborative in nature. These practices are fully discussed in
                        the report that you are releasing today. Next, I will discuss what selected
                        federal agencies have done to implement results-oriented pay reforms,
                        including how we in GAO are implementing a broadbanded pay for
                        performance system as part of our performance management system. Last,
                        I will suggest next steps for results-oriented pay reform for all interested
                        parties as they work together to better link pay to performance.



Key Practices for       We identified specific practices that leading public sector organizations
                        both here in the United States and abroad have used in their performance
Effective Performance   management systems to create a clear linkage—“line of sight”—between
Management              individual performance and organizational success. Federal agencies
                        should consider these practices as they develop and implement the
                        modern, effective, and credible performance management systems with the
                        adequate safeguards, including reasonable transparency and appropriate
                        accountability mechanisms in place, needed to effectively link pay to
                        performance. The key practices include the following.3




                        3
                         We included the agency examples supporting the key practices primarily from previously
                        issued GAO reports. We did not update the examples, and as a result, the information in the
                        examples may, or may not, have changed since the issuance of these reports.




                        Page 3                                                                        GAO-03-612T
1. Align individual performance expectations with organizational
goals. An explicit alignment of daily activities with broader results helps
individuals see the connection between their daily activities and
organizational goals and encourages individuals to focus on their roles and
responsibilities to help achieve those goals. To this end, for example, the
Federal Aviation Administration (FAA) was able to show in fiscal year 2000
how the Department of Transportation’s strategic goal to promote public
health and safety was cascaded through the FAA Administrator’s
performance expectation to reduce the commercial air carrier fatal
accident rate to a program director’s performance expectation to develop
software to help aircraft maintain safe altitudes in their approach paths.

2. Connect performance expectations to crosscutting goals. As
public sector organizations shift their focus of accountability from outputs
to results, they have recognized that the activities needed to achieve those
results often transcend specific organizational boundaries. High-
performing organizations use their performance management systems to
strengthen accountability for results, specifically by placing greater
emphasis on fostering the necessary collaboration, interaction, and
teamwork across organizational boundaries to achieve these results. In this
regard, the Veterans Health Administration’s Veterans Integrated Service
Network (VISN) headquartered in Cincinnati implemented performance
agreements in 2000 for the “care line” directors, such as primary care or
mental health directors, that included improvement goals related to that
care line for the entire VISN. To make progress towards these goals, the
mental health care line director had to work collaboratively with the
corresponding mental health care line managers at each of the four medical
centers to establish consensus among VISN officials and external
stakeholders on the strategic direction for the services provided by the
mental health care line across the VISN, among other things.

3. Provide and routinely use performance information to track
organizational priorities. High-performing organizations provide
objective performance information to individuals to show progress in
achieving organizational results and other priorities and help them to
manage during the year, identify performance gaps, and pinpoint
improvement opportunities. Having this performance information in a
useful format also helps individuals track their performance against
organizational goals and compare their performance to that of other
individuals. For example, the Bureau of Land Management’s (BLM) Web-
based data system, called the Director’s Tracking System, collects and
makes available on a real-time basis data on each senior executive’s



Page 4                                                           GAO-03-612T
progress in his or her state office towards BLM’s organizational priorities,
such as the wild horse and burro program, and the resources expended on
each priority.

4. Require follow-up actions to address organizational priorities.
High-performing organizations require individuals to take follow-up actions
based on performance information available to them. By requiring and
tracking such follow-up actions on performance gaps, these organizations
underscore the importance of holding individuals accountable for making
progress on their priorities. For example, the Federal Highway
Administration required senior executives to use 360-degree feedback
instruments to solicit employees’ views on their leadership skills in 2001.
The senior executives were to identify action items based on the feedback
and incorporate them into their individual performance plans for the next
fiscal year. While the 360-degree feedback instrument was intended for
developmental purposes to help senior executives identify areas for
improvement and is not included in the executives’ performance
evaluations, executives were held accountable for taking some action on
the 360-degree feedback results and responding to the concerns of their
peers, customers, and subordinates.

5. Use competencies to provide a fuller assessment of performance.
High-performing organizations use competencies, which define the skills
and supporting behaviors that individuals need to effectively contribute to
organizational results, and are based on valid, reliable, and transparent
performance management systems. To this end, the Internal Revenue
Service (IRS) implemented a performance management system in fiscal
year 2000 that requires executives and managers to include critical job
responsibilities with supporting behaviors (broad actions and
competencies) in their performance agreements each year. The critical job
responsibilities and supporting behaviors are intended to provide
executives and managers with a consistent message about how their daily
activities are to reflect the organization’s core values.

6. Link pay to individual and organizational performance. High-
performing organizations seek to create pay, incentive, and reward systems
that clearly link employee knowledge, skills, and contributions to
organizational results. At the same time, these organizations recognize that
valid, reliable, and transparent performance management systems with
adequate safeguards for employees are the precondition to such an
approach. In the Canadian Province of Ontario, an individual executive’s
performance pay is based on the performance of the provincial government



Page 5                                                           GAO-03-612T
as a whole, the executive’s home ministry, the ministry’s contribution to
governmentwide results, as well as the individual’s own performance. The
amount of the award can range up to 20 percent of base salary.

7. Make meaningful distinctions in performance. Effective
performance management systems seek to achieve three key objectives to
help make meaningful distinctions in performance: (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. For example, IRS established
an executive compensation plan for determining base salary, performance
bonuses, and other awards for its senior executives that is intended to
explicitly link individual performance to organizational performance. As
part of this plan, IRS converts senior executive performance appraisal
ratings into points to help ensure realistic and consistent performance
ratings. Each IRS business unit has a “point budget” for assigning
performance ratings, which is the total of four points for each senior
executive in the unit. For fiscal year 2001, an “outstanding” rating
converted to six points; an “exceeded” rating to four points, which is the
baseline; a “met” rating to two points; and a “not met” rating to zero points.
If the business unit exceeded its point budget, it had the opportunity to
request additional points from the Deputy Commissioner. IRS officials
indicated that none of the business units requested additional points for the
fiscal year 2001 ratings.

The senior executive performance appraisal ratings and bonuses for fiscal
year 2001 show that IRS is beginning to make distinctions in pay related to
performance. For fiscal year 2001, 31 percent of the senior executives
received a rating of outstanding compared to 42 percent for fiscal year
2000, 49 percent received a rating of exceeded expectations compared to
55 percent, and 20 percent received a rating of met expectations compared
to 3 percent. In fiscal year 2001, 52 percent of senior executives received a
bonus, compared to 56 percent in fiscal year 2000. IRS officials said that
IRS is still gaining experience using the new compensation plan and will
wait to establish trend data before it evaluates the link between
performance and bonus decisions.




Page 6                                                             GAO-03-612T
                       8. Involve employees and stakeholders to gain ownership of
                       performance management systems. High-performing organizations have
                       found that actively involving employees and stakeholders in developing
                       performance management systems and providing ongoing training on the
                       systems helps increase their understanding and ownership of the
                       organizational goals and objectives. As one of the single most important
                       safeguards that they can put in place, these leading organizations consulted
                       a wide range of employees and stakeholders early in the process, obtained
                       direct feedback from them, and engaged employee unions or associations.
                       For example, in New Zealand, an agreement between government and the
                       primary public service union created a “Partnership for Quality” framework
                       that provides for ongoing, mutual consultation on issues such as
                       performance management. Specifically, the Department of Child, Youth,
                       and Family Services and the Public Service Association entered into a joint
                       partnership agreement that emphasizes the importance of mutual
                       consideration of each other’s organizational needs and constraints.

                       9. Maintain continuity during transitions. The experience of
                       successful cultural transformations and change management initiatives in
                       large public and private organizations suggests that it can often take 5 to 7
                       years until such initiatives are fully implemented and cultures are
                       transformed in a substantial manner. Because this time frame can easily
                       outlast the tenures of top political appointees, high-performing
                       organizations recognize that they need to reinforce accountability for
                       organizational goals during times of leadership transitions through the use
                       of performance agreements as part of their performance management
                       systems. For example, the Ontario Public Service institutionalized the use
                       of performance agreements in its performance management system to
                       withstand organizational changes and cascaded the performance
                       agreements from top leadership to front line employees.



Creating a Results-    With the performance management practices of leading organizations in
                       mind, we need to fundamentally rethink our approach to federal pay and
Oriented Approach to   develop an approach that places a greater emphasis on a person’s
Federal Pay            knowledge, skills, position, and performance rather than the passage of
                       time, the rate of inflation, and geographic location. Under the current
                       federal pay system, the overwhelming majority of each year’s increase in
                       federal employee pay is largely unrelated to an employee’s knowledge,
                       skills, position, or performance. In fact, over 80 percent of the cost
                       associated with the annual increases in federal salaries is due to longevity
                       and the annual pay increase. In addition, current federal pay gaps vary by



                       Page 7                                                            GAO-03-612T
the nature of the person’s position; yet the current method for addressing
the pay gap assumes that it is the same throughout government. We must
move beyond this outdated, “one size fits all approach” to paying federal
employees. Under authorities granted by the Congress, a number of
agencies are at various stages in using approaches in their pay and award
systems that are designed to be more flexible and results-oriented.

U.S. General Accounting Office. We at GAO believe it is our
responsibility to lead by example. Our people are our most valuable asset,
and it is only through their combined efforts that we can effectively serve
our clients and country. By managing our workforce strategically and
focusing on results, we are helping to maximize our own performance and
ensure our own accountability. By doing so, we also hope to demonstrate
to other federal agencies that they can make similar improvements in the
way they manage their people.

We have identified and made use of a variety of tools and flexibilities, some
of which were made available to us through the GAO Personnel Act of 1980
and our human capital legislation enacted in 2000, but most of which are
available to federal agencies. The most prominent change in human capital
management that we implemented as a result of the GAO Personnel Act of
1980 was a broadbanded pay-for-performance system. The primary goal of
this system is to base employee compensation primarily on the knowledge,
skills, and performance of individual employees. It provides managers
flexibility to assign and use employees in a manner that is more suitable to
multi-tasking and the full use of staff. Importantly, careful design and
effective implementation is crucial to obtaining the benefits of
broadbanding in an equitable and cost-effective manner. Under our current
broadbanded system, analyst and analyst-related staff in grades 7 through
15 were placed in three bands. High-performing organizations continually
review and revise their performance management systems to support their
strategic goals. In that spirit, we expect to modify our banded system in the
future based on our experience to date.

In January 2002, we implemented a new competency-based performance
management system that is intended to create a clear linkage between
employee performance and our strategic plan and core values. It includes
12 competencies that our employees overwhelmingly validated as the keys
to meaningful performance at GAO. The competencies are




Page 8                                                            GAO-03-612T
• achieving results,

• maintaining client and customer focus,

• developing people,

• thinking critically,

• improving professional competence,

• collaborating with others,

• presenting information orally,

• presenting information in writing,

• facilitating and implementing change,

• representing GAO,

• investing resources, and

• leading others.

These competencies are the centerpiece of our other human capital
programs, such as promotions, pay decisions, and recognition and rewards.

Under our revised system, pay-banded employees are placed in one of five
pay categories based on their demonstrated competencies, performance,
and contributions to organizational goals. Merit pay increases across these
five categories range from up to about $5,700 for some of those in the top
pay category to no merit increases for those in the lowest category. In
addition, those in the top two categories receive bonuses, referred to as
“Dividend Performance Awards,” of $1,000 and $500, respectively.

As a result of GAO's implementation of its new competency-based
performance management system and other changes to key human capital
programs, GAO has been able to achieve greater dispersion in its
performance appraisals and merit pay decisions. For example, for fiscal
year 2002, the GAO-wide average performance appraisal rating was 2.19
(out of 5) compared with 4.26 (out of 5) for fiscal year 2001. Similarly,
under the new system, no employees received a score of 4.7 or higher,



Page 9                                                          GAO-03-612T
while 19 percent of employees received a score of 4.7 or higher for fiscal
year 2001.

Federal Aviation Administration. The Congress granted FAA wide-
ranging personnel authorities in 1996 by exempting the agency from key
parts of Title 5. Among the initiatives FAA subsequently introduced were a
pay system in which compensation levels are set within pay bands and a
performance management system intended to improve employees’
performance through more frequent feedback with no summary rating.

The pay band system includes plans tailored to specific employee
segments: a core compensation plan for the majority of nonunion
employees and negotiated versions of the core compensation plan for
employees represented by unions; a unique pay plan for air traffic
controllers and air traffic managers; and an executive pay plan for
nonpolitical executives, managers, and some senior professionals.

Under its core compensation plan, all eligible employees can receive
permanent pay increases, called organizational success increases, based on
the FAA Administrator’s assessment of the extent to which the entire
agency has achieved its annual goals. In addition, notably high-performing
individuals may receive additional permanent pay increases, called
superior contribution increases, based on supervisory recommendation.4
The criteria for awarding a superior contribution increase include
collaboration, customer service, and impact on organizational success.

At the end of the performance evaluation cycle, employees receive a
narrative performance summary instead of a year end rating that defines
employees’ performance in specific categories. That is, FAA's performance
management system does not use a multi-tiered rating system to rate
individual employee performance. We have previously raised concerns that
such approaches may not provide enough meaningful information and
dispersion in ratings to recognize and reward top performers, help
everyone attain their maximum potential, and deal with poor performers.
Moreover, FAA employee performance summaries reflect an assessment of
achievements based on outcomes and expectations, while professional
competencies such as collaboration and customer service are elements of
the compensation system. As a result, the performance management


4
 Under the core compensation plan, employees who do not meet minimum requirements do
not receive either of the permanent pay increases.




Page 10                                                                 GAO-03-612T
system is not directly linked to pay elements in FAA’s compensation
systems.

In February 2003, we reported that FAA’s human capital reform efforts
were still in progress.5 While FAA has established preliminary linkages
between its reform goals and the agency’s program goals, we found that the
lack of explicit linkage will make it difficult to assess the effects of the
reform initiatives on the program goals of the organization even after data,
measurable goals, and performance measures for human capital
management efforts are established. FAA has acknowledged the
importance of establishing these elements and has repeatedly said that it is
working to collect and analyze data and develop performance goals and
measures. However, it has not completed these critical tasks, nor has it
established specific steps and time frames by which it will do so.

Internal Revenue Service. IRS was granted broad authority related to its
human capital management through the IRS Restructuring and Reform Act
of 1998. The Restructuring and Reform Act gave the Secretary of the
Treasury various pay and hiring flexibilities not otherwise available under
Title 5, such as the authority to establish new systems for hiring and
staffing, compensation, and performance management.6 Some of these
flexibilities are intended to allow IRS managers more discretion in
rewarding good performers and in making employees accountable for their
performance.




5
 U.S. General Accounting Office, Human Capital Management: FAA’s Reform Effort
Requires a More Strategic Approach, GAO-03-156 (Washington, D.C.: Feb. 3, 2003).
6
 U.S. General Accounting Office, Human Capital: Effective Use of Flexibilities Can Assist
Agencies in Managing Their Workforces, GAO-03-2 (Washington, D.C.: Dec. 6, 2002).




Page 11                                                                     GAO-03-612T
IRS implemented new performance management systems for executives
and managers for fiscal year 2000 and for the front line employees for fiscal
year 2001. As an initial step, IRS implemented a pay for performance
system for senior executives beginning in fiscal year 2001, which
emphasizes performance in determining compensation and makes
meaningful distinctions in senior executive performance.7 In July 2002, we
reported that IRS had not completed all the elements of the redesign that it
envisioned.8 IRS said that it expects to integrate the new systems with its
overall human resources systems linking evaluations to decisions about
developmental needs, rewards and recognition, and compensation. IRS
anticipates that the complete redesign and implementation of the
performance management systems will take about 5 years.

OPM Personnel Demonstration Projects. Personnel demonstration
projects, authorized by OPM under the authority provided by the Civil
Service Reform Act of 1978, provide a means for testing and introducing
beneficial change in governmentwide human resources management
systems. Over the past 25 years, 17 demonstration projects have been
implemented across the federal government. Twelve of these
demonstration projects have implemented some form of pay for
performance compensation system. OPM reports that demonstration
projects that have implemented pay for performance have shown increased
retention of high performers.9

To become a demonstration project, a federal agency obtains authority
from OPM to waive existing federal human resources management law and
regulations in Title 5 and propose, develop, test, and evaluate interventions
for its own human resources management system that shape the future of
federal human resource management.10 Under the demonstration project
authority, OPM approves project plans and regulations, approves project

7
 U.S. General Accounting Office, Results-Oriented Cultures: Using Balanced Expectations
to Manage Senior Executive Performance, GAO-02-966 (Washington, D.C.: Sept. 27, 2002).
8
U.S. General Accounting Office, Performance Management Systems: IRS’s Systems for
Frontline Employees and Managers Align with Strategic Goals but Improvements Can Be
Made, GAO-02-804 (Washington, D.C.: July 12, 2002).
9
 U.S. Office of Personnel Management, Demonstration Projects and Alternative Personnel
Systems: HR Flexibilities and Lessons Learned (Washington, D.C.: September 2001).
10
   No waivers of law are permitted in areas of employee leave, employee benefits, equal
employment opportunity, political activity, merit system principles, or prohibited personnel
practices.




Page 12                                                                        GAO-03-612T
evaluation plans, provides technical assistance to agencies, publishes
plans, and disseminates results. The agencies are responsible for designing
and implementing project plans and regulations; consulting with unions
and employees about project design; and designing, conducting, and
funding evaluations.

For example, the Department of Defense (DOD) implemented a personnel
demonstration project covering members of its civilian acquisition,
technology, and logistics workforce in 1999. Recognizing the need to
reform and modernize its acquisition performance management system in
order to perform efficiently and effectively, DOD designed the project to
provide incentives and rewards to multi-skilled personnel, allow managers
to compete with the private sector for the best talent and make timely job
offers, and provide an environment that promotes employee growth and
improves local managers’ ability and authority to manage their workforces.

The project replaced 22 occupational families with 3 career paths; reduced
the 15 General Schedule grades to 3 to 5 pay bands; and implemented a
contribution-based compensation and appraisal system, which measures
an employee’s contribution to the mission and goals of the organization.
This compensation system is designed to enable the organization to
motivate and equitably compensate employees based on their contribution
to the mission. Salary adjustments and contribution awards are to be based
on an individual’s overall annual contribution when compared to all other
employees and their current level of compensation. Contribution is to be
measured using a standard set of competencies that apply to all career
paths. These competencies are (1) problem solving, (2) teamwork/
cooperation, (3) customer relations, (4) leadership/supervision,
(5) communication, and (6) resource management.

A detailed evaluation of project results is due to OPM in May of this year
that is to assess such fundamental issues as the extent to which the
demonstration project improved the link between pay and contribution to
organizational goals and objectives. Preliminary data indicate that the
attrition rate for high contributors is declining while the attrition rate for
low contributors is increasing. DOD officials we spoke with told us that
increased pay setting flexibility has allowed organizations to offer more
competitive salaries, which in turn has improved recruiting.




Page 13                                                            GAO-03-612T
Next Steps for Results-   We believe that as part of the exploration now under way of using more
                          market- and performance-based approaches to federal pay, we need to
Oriented Pay Reform       continue to experiment with providing agencies with the flexibility to pilot
                          alternative approaches to setting pay and linking pay to performance.

                          In the short term, the Congress may wish to explore the benefits of
                          broadbanding by (1) giving OPM additional flexibility that would enable it
                          to grant governmentwide authority for all agencies (i.e., class exemptions)
                          to use broadbanding for certain critical occupations and/or (2) allowing
                          agencies to apply to OPM (i.e., case exemptions) for broadbanding
                          authority for their specific entities or occupations. However, agencies
                          should be required to demonstrate to OPM’s satisfaction that they have
                          modern, effective, credible, and validated performance management
                          systems in place before they are allowed to use broadbanding or related
                          pay for performance initiatives. This is consistent with the approach that
                          the Congress took with raising the increase of the total annual
                          compensation limit for senior executives as part of the Homeland Security
                          Act. The Congress may also want to consider providing guidance on the
                          criteria that OPM should use in making judgments about individual
                          agencies’ performance management systems. We believe that the practices
                          we described today could serve as a starting point for that consideration.

                          In summary, there is widespread agreement that the basic approach to
                          federal pay is broken and we need to move to a more market- and
                          performance-based approach. Doing so will be essential if we expect to
                          maximize the performance and assure the accountability of the federal
                          government for the benefit of the American people. Reasonable people can
                          and will debate and disagree about the merits of individual reform
                          proposals. However, all should be able to agree that a performance
                          management system with adequate safeguards, including reasonable
                          transparency and appropriate accountability mechanisms in place, must
                          serve as the fundamental underpinning of any fair, effective, and
                          appropriate results-oriented pay reform. The practices that have been used
                          by leading organizations in developing and using their performance
                          management systems to link organizational goals to individual
                          performance and create a line of sight between an individual’s activities
                          and organizational results show the way in how to implement performance
                          management systems with the necessary attributes.




                          Page 14                                                          GAO-03-612T
                  Chairwoman 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       For further information regarding this statement, please contact
                  J. Christopher Mihm, Director, Strategic Issues, on (202) 512-6806 or at
Acknowledgments   mihmj@gao.gov. Individuals making key contributions to this testimony
                  included Anne Kidd, Janice Lichty, Lisa Shames, Marti Tracy, and Andrew
                  White.




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