oversight

Defense Transformation: DOD's Proposed Civilian Personnel System and Governmentwide Human Capital Reform

Published by the Government Accountability Office on 2003-05-01.

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

                            United States General Accounting Office

GAO                         Testimony
                            Before the Committee on Armed Services,
                            House of Representatives


For Release on Delivery
Expected at 9:00 a.m. EDT
Thursday, May 1, 2003       DEFENSE
                            TRANSFORMATION
                            DOD's Proposed Civilian
                            Personnel System and
                            Governmentwide Human
                            Capital Reform
                            Statement of David M. Walker
                            Comptroller General of the United States




GAO-03-741T
                                                 May 1, 2003


                                                 DEFENSE TRANSFORMATION

                                                 DOD’s Proposed Civilian Personnel
 Highlights of GAO-03-741T, testimony
 before the Committee on Armed Services,
                                                 System and Governmentwide Human
 House of Representatives                        Capital Reform



DOD is in the midst of a major                   Many of the basic principles underlying DOD’s civilian human capital proposal
transformation effort including a                have merit and deserve serious consideration. The federal personnel system is
number of initiatives to transform               clearly broken in critical respects—designed for a time and workforce of an
its forces and improve its business              earlier era and not able to meet the needs and challenges of our current rapidly
operations. DOD’s legislative                    changing and knowledge-based environment. DOD’s proposal recognizes that,
initiative would provide for major               as GAO has stated and the experiences of leading public sector organizations
changes in civilian and military                 here and abroad have found, strategic human capital management must be the
human capital management, make                   centerpiece of any serious government transformation effort.
major adjustments in the DOD
acquisition process, affect DOD’s                More generally, from a conceptual standpoint, GAO strongly supports the need
organization structure, and change               to expand broad banding and pay for performance-based systems in the federal
DOD’s reporting requirements to                  government. However, moving too quickly or prematurely at DOD or elsewhere,
Congress, among other things.                    can significantly raise the risk of doing it wrong. This could also serve to
                                                 severely set back the legitimate need to move to a more performance- and
DOD’s proposed National Security                 results-based system for the federal government as a whole. Thus, while it is
Personnel System (NSPS) would                    imperative that we take steps to better link employee pay and other personnel
provide for wide-ranging changes                 decisions to performance across the federal government, how it is done, when it
in DOD’s civilian personnel pay and              is done, and the basis on which it is done, can make all the difference in whether
performance management,                          or not we are successful. One key need is to modernize performance
collective bargaining, rightsizing,              management systems in executive agencies so that they are capable of
and a variety of other human                     supporting more performance-based pay and other personnel decisions.
capital areas. The NSPS would                    Unfortunately, based on GAO’s past work, most existing federal performance
enable DOD to develop and                        appraisal systems, including a vast majority of DOD’s systems, are not currently
implement a consistent DOD-wide                  designed to support a meaningful performance-based pay system.
civilian personnel system.
                                                 The critical questions to consider are: should DOD and/or other agencies be
This testimony provides GAO’s
                                                 granted broad-based exemptions from existing law, and if so, on what basis? Do
preliminary observations on
aspects of DOD’s legislative                     DOD and other agencies have the institutional infrastructure in place to make
proposal to make changes to its                  effective use of any new authorities? This institutional infrastructure includes,
civilian personnel system and                    at a minimum, a human capital planning process that integrates the agency’s
discusses the implications of such               human capital policies, strategies, and programs with its program goals and
changes for governmentwide                       mission, and desired outcomes; the capabilities to effectively develop and
human capital reform. This                       implement a new human capital system; and, importantly, a set of adequate
testimony summarizes many of the                 safeguards, including reasonable transparency and appropriate accountability
issues discussed in detail before                mechanisms to ensure the fair, effective, and credible implementation of a new
the Subcommittee on Civil Service                system.
and Agency Organization,
Committee on Government                          In GAO’s view, as an alternative to DOD’s proposed approach, Congress should
Reform, House of Representatives                 consider providing governmentwide broad banding and pay for performance
on April 29, 2003.                               authorities that DOD and other federal agencies can use provided they can
                                                 demonstrate that they have a performance management system in place that
                                                 meets certain statutory standards, that can be certified to by a qualified and
                                                 independent party, such as OPM, within prescribed timeframes. Congress
                                                 should also consider establishing a governmentwide fund whereby agencies,
 www.gao.gov/cgi-bin/getrpt?GAO-03-741T.         based on a sound business case, could apply for funding to modernize their
                                                 performance management systems and ensure that those systems have adequate
 To view the full testimony, click on the link
 above. For more information, contact Derek
                                                 safeguards to prevent abuse. This approach would serve as a positive step to
 Stewart at (202) 512-5559 or                    promote high-performing organizations throughout the federal government
 stewartd@gao.gov.                               while avoiding further human capital policy fragmentation.
Chairman Hunter, Mr. Skelton, and Members of the Committee:

It is a pleasure to appear before you today to provide our preliminary
observations on the Department of Defense’s (DOD) proposed National
Security Personnel System (NSPS) included as part of the Defense
Transformation for the 21st Century Act of 2003. As you know, I testified
on Tuesday on the NSPS before the Subcommittee on Civil Service and
Agency Organization, House Committee on Government Reform.1 We have
provided the statement prepared for that hearing to the Armed Services
Committee for the record for today’s hearing. Therefore, in the interests of
brevity this morning, I will highlight some of the major points covered in
that statement.

DOD is in the midst of a major transformation and it has undertaken a
number of related initiatives to transform its forces and fundamentally
improve its business operations. As part of DOD’s transformation process,
the Secretary of Defense and senior civilian and military leaders have
committed to adopt a capabilities-based approach to acquisition planning
and to improve the linkage between overall strategy and individual
investments. At the same time, DOD has embarked on a series of efforts to
achieve strategic savings and improve its business processes, including
strengthened financial management, support infrastructure reforms to
include base closures, information technology modernization, logistics
reengineering, and more strategic human capital management. In that
regard, I am pleased to serve as an observer to the Defense Business
Practice Implementation Board. Notwithstanding these ongoing efforts,
GAO has reported a range of DOD challenges for many years. Importantly,
DOD also is covered by 9 of the 25 areas on our January 2003 high-risk list,
including the area of strategic human capital management.

The proposed Defense Transformation for the 21st Century Act of 2003
represents a substantive legislative proposal that has far-reaching
implications for the way DOD is managed. DOD’s legislative initiative
would, among other things, provide for major changes in civilian and
military human capital management, make important adjustments to the
DOD acquisition process, affect DOD’s organization structure, and change
DOD’s reporting requirements to Congress. While my written statement



1
  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).



Page 1                                                                  GAO-03-741T
today covers just the proposed civilian personnel reforms, I have some
serious concerns with other sections of the proposed legislation especially
in connection with the acquisition reform and reporting requirements
parts of the DOD proposal, and I look forward to discussing those
concerns with the Committee.

DOD’s NSPS proposal recognizes that, as GAO has stated and the
experiences of leading public sector organizations here and abroad have
found, strategic human capital management must be the centerpiece of
any serious government transformation effort. Many of the basic principles
underlying DOD’s civilian human capital proposals have merit and deserve
serious consideration. The federal personnel system is clearly broken in
critical respects—designed for a time and workforce of an earlier era and
not able to meet the needs and challenges of our current rapidly changing
and knowledge-based environment. The proposed NSPS would provide for
wide-ranging changes in DOD’s civilian personnel pay and performance
management, collective bargaining, rightsizing, and a variety of other
human capital areas. The NSPS would enable DOD to develop and
implement a consistent, DOD-wide civilian personnel system bringing
together the many disparate systems that exist today. DOD officials have
said that the Department’s current thinking is that NSPS will be based on
the work done by DOD’s Human Resources Best Practices Task Force.
The Task Force reviewed federal personnel demonstration projects and
selected alternative personnel systems to identify practices that it
considered promising for a DOD civilian human resources strategy. These
practices were outlined in a April 2, 2003, Federal Register notice asking
for comment on DOD’s plan to integrate all of its current science and
technology reinvention laboratory demonstration projects under a single
human capital framework consistent with the best practices DOD
identified.2

Given the massive size of DOD and the nature and scope of the changes
that are being considered, DOD’s proposal also has important precedent-
setting implications for federal human capital management in general, and
the Office of Personnel Management (OPM), in particular. As a result,
NSPS should be considered in that context. Several critical questions are
raised by the Department’s proposal, including should DOD and/or other
agencies be granted broad-based exemptions from existing law, and if so,
on what basis; and whether they have the institutional infrastructure in


2
 68 Fed. Reg. 16,119-16,142 (2003).



Page 2                                                         GAO-03-741T
                       place to make effective use of the new authorities. This institutional
                       infrastructure includes, at a minimum, a human capital planning process
                       that integrates the agency’s human capital policies, strategies, and
                       programs with its program goals and mission, and desired outcomes; the
                       capabilities to effectively develop and implement a new human capital
                       system; and importantly, the existence of a modern, effective, and credible
                       performance management system that includes adequate safeguards,
                       including reasonable transparency and appropriate accountability
                       mechanisms, to ensure the fair, effective, and non-discriminatory
                       implementation of a new system. Based on our experience, while the DOD
                       leadership has the intent and the ability to implement the needed
                       infrastructure, it is not consistently in place across DOD at the present
                       time.

                       I believe that it would be more prudent and appropriate for Congress to
                       address certain authorities that DOD is seeking on a governmentwide
                       basis and in a manner that assures that appropriate performance
                       management systems and safeguards are in place before the new
                       authorities are implemented in any respective agency. This approach
                       would accelerate needed human capital reform throughout the
                       government in a manner that assures reasonable consistency on key
                       principles within the overall civilian workforce. It also would provide
                       agencies with reasonable flexibility while incorporating key safeguards to
                       help maximize the chances of success and minimize the chances of abuse
                       or significant litigation.


                       There is growing agreement on the need to better link individual pay to
Adequate Safeguards,   performance. Establishing such linkages is essential if we expect to
Reasonable             maximize the performance and assure the accountability of the federal
                       government for the benefit of the American people. As a result, from a
Transparency,          conceptual standpoint, we strongly support the need to expand broad
Appropriate            banding approaches and pay for performance-based systems in the federal
                       government. However, moving too quickly or prematurely at DOD or
Accountability, and    elsewhere can significantly raise the risk of doing it wrong. This could also
Governmentwide         serve to severely set back the legitimate need to move to a more
Reform                 performance- and results-based system for the federal government as a
                       whole. Thus, while it is imperative that we take steps to better link
                       employee pay to performance across the federal government, how it is
                       done, when it is done, and the basis on which it is done can make all the
                       difference in whether or not such efforts are successful. In our view, one
                       key need is to modernize performance management systems in executive
                       agencies so that they are capable of adequately supporting more

                       Page 3                                                           GAO-03-741T
    performance-based pay and other personnel decisions. Unfortunately,
    based on GAO’s past work, most existing federal performance appraisal
    systems, including a vast majority of DOD’s systems, are not designed to
    support a meaningful performance-based pay system.

    At the request of Representative Jo Ann Davis and Senator George
    Voinovich, we identified key practices leading public sector organizations
    both here in the United States and abroad have used in 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.3 These practices can help agencies develop and
    implement performance management systems with the attributes
    necessary to effectively support pay for performance.

    The bottom line, however, is that in order to implement any additional
    performance-based pay flexibility for broad based employee groups,
    agencies should have to demonstrate that they have modern, effective,
    credible, and, as appropriate, validated performance management systems
    in place with adequate safeguards, including reasonable transparency and
    appropriate accountability mechanisms, to ensure fairness and prevent
    politicalization and abuse. As a result, Congress should consider
    establishing statutory standards that an agency must have in place before
    it can implement broad banding or a more performance-based pay
    program.

    At the request of Congressman Danny Davis, we developed an initial list of
    possible safeguards for Congress to consider to help ensure that any pay
    for performance systems in the government are fair, effective, and
    credible:

•   Assure that the agency’s performance management systems (1) link to the
    agency’s strategic plan, related goals, and desired outcomes, and (2) result
    in meaningful distinctions in individual employee performance. This
    should include consideration of critical competencies and achievement of
    concrete results.




    3
      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 4                                                                  GAO-03-741T
•   Involve employees, their representatives, and other stakeholders in the
    design of the system, including having employees directly involved in
    validating any related competencies, as appropriate.

•   Assure that certain predecisional internal safeguards exist to help achieve
    the consistency, equity, nondiscrimination, and nonpoliticization of the
    performance management process (e.g., independent reasonableness
    reviews by Human Capital Offices and/or Offices of Opportunity and
    Inclusiveness or their equivalent in connection with the establishment and
    implementation of a performance appraisal system, as well as reviews of
    performance rating decisions, pay determinations, and promotion actions
    before they are finalized to ensure that they are merit-based; internal
    grievance processes to address employee complaints; and pay panels
    whose membership is predominately made up of career officials who
    would consider the results of the performance appraisal process and other
    information in connection with final pay decisions).

•   Assure reasonable transparency and appropriate accountability
    mechanisms in connection with the results of the performance
    management process (e.g., publish overall results of performance
    management and pay decisions while protecting individual confidentiality,
    and report periodically on internal assessments and employee survey
    results).

    The above items should help serve as a starting point for Congress to
    consider in crafting possible statutory safeguards for executive agencies’
    performance management systems. OPM would then issue guidance
    implementing the legislatively defined safeguards. The effort to develop
    such safeguards could be part of a broad-based expanded pay for
    performance authority under which whole agencies and/or employee
    groups could adopt broad-banding and move to more pay for performance
    oriented systems if certain conditions are met. Specifically, an agency
    would have to demonstrate, and OPM would have to certify, that a
    modern, effective, credible, and, as appropriate, validated performance
    management system with adequate safeguards, including reasonable
    transparency and appropriate accountability mechanisms, is in place to
    support more performance-based pay and related personnel decisions,
    before the agency could implement a new system. OPM should be required
    to act on any individual certifications within prescribed time frames (e.g.,
    30-60 days).

    This alternative approach would allow for a broader-based yet more
    conceptually consistent approach to linking federal employee pay and


    Page 5                                                          GAO-03-741T
                         other personnel decisions to performance. It would help to assure that
                         agencies have the reasonable flexibility they need to modernize their
                         human capital policies and practices, while maximizing the chances of
                         success and minimizing the potential for abuse. This alternative approach
                         would also facilitate a phased-implementation approach throughout
                         government.

                         Congress should also consider establishing a governmentwide fund
                         whereby agencies, based on a sound business case, could apply for funds
                         to modernize their performance management systems and ensure those
                         systems have adequate safeguards to prevent abuse. This approach would
                         serve as a positive step to promote high-performing organizations
                         throughout the federal government while avoiding human capital policy
                         fragmentation within the executive branch.


                         With almost 700,000 civilian employees on its payroll, DOD is the second
Observations on          largest federal employer of civilians in the nation, after the Postal Service.
Selected Provisions of   Defense civilian personnel, among other things, develop policy, provide
                         intelligence, manage finances, and acquire and maintain weapon systems.
the Proposed NSPS        NSPS is intended to be a major component of DOD’s efforts to more
                         strategically manage its workforce and respond to current and emerging
                         challenges. This morning I will highlight several of the key provisions of
                         NSPS that in our view are most in need of close scrutiny as Congress
                         considers the DOD proposal:

                     •   The DOD proposal would allow the Secretary of Defense to jointly
                         prescribe regulations with the Director of OPM to establish NSPS.
                         However, unlike the legislation creating the Department of Homeland
                         Security (DHS), the Defense Transformation for the 21st Century Act
                         would allow the Secretary of Defense to waive the requirement for joint
                         issuance of regulations if, in his or her judgment, it is “essential to the
                         national security” which is not defined in the act. Therefore, the act would,
                         in substance, provide the Secretary of Defense with significant
                         independent authority to develop a separate and largely autonomous
                         human capital system for DOD.

                     •   As I have noted, performance-based pay flexibility for broad-based
                         employee groups should be grounded in performance management
                         systems that are capable of supporting pay and related decisions. DOD’s
                         personnel demonstration projects clearly provide helpful insights and
                         valuable lessons learned in connection with broad banding and pay for
                         performance efforts. At the same time these projects and related DOD


                         Page 6                                                            GAO-03-741T
    efforts involve less than 10 percent of DOD’s civilian workforce and
    expanding these approaches to the entire department will require
    significant effort and likely need to be implemented in phases over several
    years.

•   Similarly, the NSPS would increase the current total allowable annual
    compensation limit for senior executives up to the Vice President’s total
    annual compensation. The Homeland Security Act provided that OPM,
    with the concurrence of the Office of Management and Budget, certify that
    an agency has performance appraisal systems that, as designed and
    applied, make meaningful distinctions based on relative performance
    before an agency is allowed to increase the annual compensation limit for
    senior executives. NSPS does not include such a certification provision.
    On the other hand, the Senior Executive Service needs to take the lead in
    matters related to pay for performance.

•   The NSPS would include provisions intended to ensure collaboration with
    employee representatives in the planning, development, and
    implementation of a human resources management system. As discussed
    at the Civil Service and Agency Organization Subcommittee, Committee on
    Government Reform hearing on Tuesday, direct employee involvement in
    the development of the NSPS legislative proposal has thus far been
    limited. Moving forward, and aside from the specific statutory provisions
    on consultation, the active involvement of employees will be critical to the
    success of NSPS, or for any human capital reform for that matter.

•   The legislation has a number of provisions designed to give DOD flexibility
    to help obtain key critical talent. These authorities give DOD considerable
    flexibility to obtain and compensate individuals and exempt them from
    several provisions of current law. While we have strongly endorsed
    providing agencies with additional tools and flexibilities to attract and
    retain needed talent, the broad exemption from some existing ethics and
    other personnel authorities without prescribed limits on their use raises
    some concern. Congress should consider building into the NSPS
    appropriate numerical or percentage limitations on the use of these
    provisions and basic safeguards to ensure such provisions are used
    appropriately.

•   The NSPS proposal would provide DOD with a number of broad
    authorities related to rightsizing and organizational alignment. Authorities
    such as voluntary early retirements have proven to be effective tools in
    strategically managing the shape of the workforce. I have exercised the
    authority that Congress granted me to offer voluntary early retirements in
    GAO in both fiscal years 2002 and 2003 as one element of our strategy to


    Page 7                                                          GAO-03-741T
                   shape the GAO workforce. In DOD’s case, while it has used existing
                   authorities to mitigate the adverse effects of force reductions in the past,
                   the Department’s approach to those reductions was not oriented toward
                   strategically shaping the makeup of the workforce. Given these problems,
                   there is reason to be concerned that DOD may struggle to effectively
                   manage additional authorities that may be provided. Importantly, the
                   NSPS provisions would create an uneven playing field among agencies in
                   competing for experienced talent.

               •   The legislation would also allow DOD to revise Reduction-in-Force (RIF)
                   rules to place greater emphasis on an employee’s performance. I
                   conceptually support revised RIF procedures that involve much greater
                   consideration of an employee’s performance. However, as noted above,
                   agencies must have the proper performance management systems in place
                   to effectively and fairly implement such authorities. Furthermore, DOD
                   proposes to lower the degree of preference provided to veterans under
                   current law.

               •   The proposed NSPS would allow the Secretary, after consultation with the
                   Merit Systems Protection Board, to prescribe regulations providing fair
                   treatment in any appeals brought by DOD employees relating to their
                   employment. The proposal states that the appeals procedures shall ensure
                   due process protections and expeditious handling, to the maximum extent
                   possible. This provision is substantially the same as a similar provision in
                   the Homeland Security Act of 2002 allowing DHS to prescribe regulations
                   for employee appeals related to their employment. Given the transparency
                   of the federal system dispute resolution and its attendant case law, the
                   rights and obligations of the various parties involved are well developed. It
                   is critical that any due process changes that DOD would make under this
                   authority are not only fair and efficient but, importantly, minimize any
                   perception of unfairness.


                   In summary, many of the basic principles underlying DOD’s civilian human
Concluding         capital proposals have merit and deserve serious consideration. They are,
Observations       however, unprecedented in their size, scope, and significance. As a result,
                   they should be considered carefully—and not just from a DOD
                   perspective. The DOD proposal has significant precedent-setting
                   implications for the human capital area in government in general, and for
                   OPM in particular.

                   The DOD civilian human capital proposal raises several critical questions
                   both for DOD as well as for governmentwide policies and approaches.
                   Should DOD and/or other federal agencies be granted broad-based


                   Page 8                                                           GAO-03-741T
exemptions from existing law, and if so, on what basis? Does DOD have
the institutional infrastructure in place to make effective use of the new
authorities? Our work has shown that while progress is being made,
additional efforts are needed by DOD to integrate its human capital
planning process with the department’s program goals and mission. The
practices that have been shown to be critical to the effective use of
flexibilities provide a validated roadmap for DOD and Congress to
consider.4 We believe it would be more prudent and appropriate to
approve the broad banding and pay for performance issues on a
governmentwide basis. Nevertheless, if additional authorities are granted
to DOD, Congress should consider establishing additional safeguards to
ensure the fair, merit-based, transparent, and accountable implementation
of NSPS. This includes addressing the issues I have raised in this
statement.

As I have suggested, Congress should consider providing governmentwide
broad banding and pay for performance authorities that DOD and other
federal agencies can use provided they can demonstrate that they have a
performance management system in place that meets certain statutory
standards and can be certified to by a qualified and independent party,
such as OPM. Congress should also consider establishing a
governmentwide fund whereby agencies, based on a sound business case,
could apply for funds to modernize their performance management
systems and ensure that those systems have adequate safeguards to
prevent abuse. This would serve as a positive step to promote high-
performing organizations throughout the federal government while
avoiding further fragmentation within the executive branch in critical
human capital policies and approaches.

We look forward to continuing to support Congress and work with DOD in
addressing the vital transformation challenges it faces.

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




4
  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).



Page 9                                                                  GAO-03-741T
                  For further information on human capital issues at DOD, please contact
Contacts and      Derek Stewart, Director, Defense Capabilities and Management on (202)
Acknowledgments   512-5559 or at stewartd@gao.gov. For further information on
                  governmentwide human capital issues, please contact J. Christopher
                  Mihm, Director, Strategic Issues, on (202) 512-6806 or at mihmj@gao.gov.
                  Individuals making key contributions to this testimony included William
                  Doherty, Clifton G. Douglas, Jr., Christine Fossett, Bruce Goddard, Judith
                  Kordahl, Janice Lichty, Bob Lilly, Lisa Shames, Ellen Rubin, Edward H.
                  Stephenson, Jr., Tiffany Tanner, Marti Tracy, and Michael Volpe.




(450214)
                  Page 10                                                        GAO-03-741T
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