Human Capital
Observations on Final Regulations for DOD's National Security Personnel System Gao ID: GAO-06-227T November 17, 2005People are critical to any agency transformation because they define an agency's culture, develop its knowledge base, promote innovation, and are its most important asset. Thus, strategic human capital management at the Department of Defense (DOD) can help it marshal, manage, and maintain the people and skills needed to meet its critical mission. In November 2003, Congress provided DOD with significant flexibility to design a modern human resources management system. On November 1, 2005, DOD and the Office of Personnel Management (OPM) jointly released the final regulations on DOD's new human resources management system, known as the National Security Personnel System (NSPS). Several months ago, with the release of the proposed regulations, GAO observed that some parts of the human resources management system raised questions for DOD, OPM, and Congress to consider in the areas of pay and performance management, adverse actions and appeals, and labor management relations. GAO also identified multiple implementation challenges for DOD once the final regulations for the new system were issued. This testimony provides GAO's overall observations on selected provisions of the final regulations.
GAO believes that DOD's final NSPS regulations contain many of the basic principles that are consistent with proven approaches to strategic human capital management. For instance, the final regulations provide for (1) a flexible, contemporary, market-based and performance-oriented compensation system--such as pay bands and pay for performance; (2) giving greater priority to employee performance in its retention decisions in connection with workforce rightsizing and reductions-in-force; and (3) involvement of employee representatives throughout the implementation process, such as having opportunities to participate in developing the implementing issuances. However, future actions will determine whether such labor relations efforts will be meaningful and credible. Despite these positive aspects of the regulations, GAO has several areas of concern. First, DOD has considerable work ahead to define the important details for implementing its system--such as how employee performance expectations will be aligned with the department's overall mission and goals and other measures of performance, and how DOD would promote consistency and provide general oversight of the performance management system to ensure it is administered in a fair, credible, transparent manner. These and other critically important details must be defined in conjunction with applicable stakeholders. Second, the regulations merely allow, rather than require, the use of core competencies that can help to provide consistency and clearly communicate to employees what is expected of them. Third, although the regulations do provide for continuing collaboration with employee representatives, they do not identify a process for the continuing involvement of individual employees in the implementation of NSPS. Going forward, GAO believes that (1) DOD would benefit from developing a comprehensive communications strategy, (2) DOD must ensure that it has the necessary institutional infrastructure in place to make effective use of its new authorities, (3) a chief management officer or similar position is essential to effectively provide sustained and committed leadership to the department's overall business transformation effort, including NSPS, and (4) DOD should develop procedures and methods to initiate implementation efforts relating to NSPS. While GAO strongly supports human capital reform in the federal government, how it is done, when it is done, and the basis on which it is done can make all the difference in whether such efforts are successful. DOD's regulations are especially critical and need to be implemented properly because of their potential implications for related governmentwide reform. In this regard, in our view, classification, compensation, critical hiring, and workforce restructuring reforms should be pursued on a governmentwide basis before and separate from any broad-based labor-management or due process reforms.
GAO-06-227T, Human Capital: Observations on Final Regulations for DOD's National Security Personnel System
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Testimony:
Before the Committee on Homeland Security and Governmental Affairs,
U.S. Senate:
United States Government Accountability Office:
GAO:
For Release on Delivery Expected at 10:00 a.m. EST:
Thursday, November 17, 2005:
Human Capital:
Observations on Final Regulations for DOD's National Security Personnel
System:
Statement of David M. Walker:
Comptroller General of the United States:
GAO-06-227T:
GAO Highlights:
Highlights of GAO-06-227T, a testimony to the Committee on Homeland
Security and Governmental Affairs, U.S. Senate:
Why GAO Did This Study:
People are critical to any agency transformation because they define an
agency‘s culture, develop its knowledge base, promote innovation, and
are its most important asset. Thus, strategic human capital management
at the Department of Defense (DOD) can help it marshal, manage, and
maintain the people and skills needed to meet its critical mission. In
November 2003, Congress provided DOD with significant flexibility to
design a modern human resources management system. On November 1, 2005,
DOD and the Office of Personnel Management (OPM) jointly released the
final regulations on DOD‘s new human resources management system, known
as the National Security Personnel System (NSPS).
Several months ago, with the release of the proposed regulations, GAO
observed that some parts of the human resources management system
raised questions for DOD, OPM, and Congress to consider in the areas of
pay and performance management, adverse actions and appeals, and labor
management relations. GAO also identified multiple implementation
challenges for DOD once the final regulations for the new system were
issued.
This testimony provides GAO‘s overall observations on selected
provisions of the final regulations.
What GAO Found:
GAO believes that DOD‘s final NSPS regulations contain many of the
basic principles that are consistent with proven approaches to
strategic human capital management. For instance, the final regulations
provide for (1) a flexible, contemporary, market-based and performance-
oriented compensation system”such as pay bands and pay for performance;
(2) giving greater priority to employee performance in its retention
decisions in connection with workforce rightsizing and reductions-in-
force; and (3) involvement of employee representatives throughout the
implementation process, such as having opportunities to participate in
developing the implementing issuances. However, future actions will
determine whether such labor relations efforts will be meaningful and
credible.
Despite these positive aspects of the regulations, GAO has several
areas of concern. First, DOD has considerable work ahead to define the
important details for implementing its system”such as how employee
performance expectations will be aligned with the department‘s overall
mission and goals and other measures of performance, and how DOD would
promote consistency and provide general oversight of the performance
management system to ensure it is administered in a fair, credible,
transparent manner. These and other critically important details must
be defined in conjunction with applicable stakeholders. Second, the
regulations merely allow, rather than require, the use of core
competencies that can help to provide consistency and clearly
communicate to employees what is expected of them. Third, although the
regulations do provide for continuing collaboration with employee
representatives, they do not identify a process for the continuing
involvement of individual employees in the implementation of NSPS.
Going forward, GAO believes that (1) DOD would benefit from developing
a comprehensive communications strategy, (2) DOD must ensure that it
has the necessary institutional infrastructure in place to make
effective use of its new authorities, (3) a chief management officer or
similar position is essential to effectively provide sustained and
committed leadership to the department‘s overall business
transformation effort, including NSPS, and (4) DOD should develop
procedures and methods to initiate implementation efforts relating to
NSPS.
While GAO strongly supports human capital reform in the federal
government, how it is done, when it is done, and the basis on which it
is done can make all the difference in whether such efforts are
successful. DOD‘s regulations are especially critical and need to be
implemented properly because of their potential implications for
related governmentwide reform. In this regard, in our view,
classification, compensation, critical hiring, and workforce
restructuring reforms should be pursued on a governmentwide basis
before and separate from any broad-based labor-management or due
process reforms.
What GAO Recommends:
www.gao.gov/cgi-bin/getrpt?GAO-06-227T.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Derek B. Stewart at (202)
512-5559 or stewartd@gao.gov.
[End of section]
Madame Chairman Collins, Senator Lieberman, and Members of the
Committee:
I appreciate the opportunity to be here today to provide our
observations on the Department of Defense's (DOD) final National
Security Personnel System (NSPS) regulations, which the Secretary of
Defense and the Director of the Office of Personnel Management (OPM)
published earlier this month.[Footnote 1] NSPS will not only affect the
roughly 700,000 DOD civilian employees, but it could have far-reaching
implications for civil service reform across the federal government.
As I have previously testified, we support moving forward with
appropriate human capital reform, but how it is done, when it is done,
and the basis on which it is done can make all the difference in
whether such efforts are successful. Human capital reforms to date
recognize that the "one-size-fits-all" approach is not appropriate to
all agencies' demands, challenges, and missions. However, we have
reported that a reasonable degree of consistency across the government
is desirable and that broader reforms should be guided by a common
framework consisting of principles, criteria, and processes.[Footnote
2] The final NSPS regulations, if implemented properly, could go a long
way in the area of helping to shape such a framework and serve, along
with GAO's, the Department of Homeland Security's, and other reform
efforts, as a potential model for governmentwide reform in the area of
human capital management.
Summary:
My statement today makes three overall points. First, DOD has
considerable work ahead to define the details of the implementation of
its system, and understanding these details is critical to the overall
success of the system. We find that the final regulations contain many
of the basic principles that are consistent with proven approaches to
strategic human capital management, including several approaches used
by GAO.[Footnote 3] DOD has plans to issue a number of issuances that
will contain detailed policies and procedures for the new system. These
issuances will be of critical importance and their content will include
important details that can serve to either enhance or reduce the
likelihood of a successful implementation. These critically important
details must be defined in conjunction with applicable key stakeholders
and certain steps should be taken before any new authorities are
implemented.
Specifically, DOD and other federal agencies must ensure they have the
institutional infrastructure in place to make effective use of their
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, 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 to ensure a fair, effective,
non-discriminatory, and credible implementation of the new system.
Second, DOD has stated that it is committed to continuing to involve
employees, including employee representatives, throughout the
implementation process, another critical ingredient for success. For
instance, under the final regulations, employee representatives are to
have opportunities to participate in developing the implementing
issuances, as outlined under the "continuing collaboration" provisions.
However, future actions will determine whether such employee and labor
relations efforts will be meaningful and credible. In this regard,
despite extensive efforts by many, DOD's attempts to date to involve
labor unions have not been without controversy. Ten federal labor
unions have filed suit alleging that DOD failed to abide by the
statutory requirements to include employee representatives in the
development of the labor relations system, and that the new adverse
actions process and labor relations system are unlawful.[Footnote 4] We
believe that sustained and committed leadership can provide the
continuing, focused attention needed to successfully complete this
multiyear conversion to the new human resources management system, and
an ongoing two-way communication strategy can help ensure the quality
of that involvement.
Third, and finally, recent actions, as evidenced by these DOD final
regulations, may have significant, precedent-setting implications for
the rest of the government. They represent both progress and
opportunities, but also raise legitimate concerns. We are fast
approaching the point where "standard governmentwide" human capital
policies and processes are neither standard nor governmentwide. Human
capital reform should avoid further fragmentation within the civil
service, ensure reasonable consistency within the overall civilian
workforce, and help maintain a reasonably level playing field among
federal agencies when competing for talent. Further, human capital
reform should maintain key merit principles and appropriate safeguards
against discrimination and other prohibited personnel practices. While
we strongly support human capital reform in the federal government, how
it is done, when it is done, and the basis on which it is done can make
all the difference in whether such efforts are successful. In our view,
classification, compensation, critical hiring, and workforce
restructuring reforms should be pursued on a governmentwide basis
before and separate from any broad-based labor-management or due
process reforms.
This morning I would like to (1) provide some observations on selected
provisions, (2) discuss the multiple challenges that DOD faces as it
moves toward implementation of its new human resources management
system, and then (3) suggest a governmentwide framework that can serve
as a starting point to advance human capital reform. Lastly, I will
suggest next steps for human capital reform.
Observations on DOD's Final Human Capital Regulations:
DOD's final NSPS regulations establish a new human resources management
system within the department that is intended to ensure its ability to
attract, retain, and reward a workforce that is able to meet its
critical mission. Further, the human resources management system is to
provide DOD with greater flexibility in the way employees are to be
paid, developed, evaluated, afforded due process, and represented by
employee representatives while reflecting the principles of merit and
fairness embodied in the statutory merit systems principles.
As with any major change management initiative, the final regulations
have raised a number of concerns among employees, employee
representatives, and other stakeholders because they do not contain
many of the important details of how the system will be implemented. We
have reported that individuals inevitably worry during any change
management initiative because of uncertainty over new policies and
procedures.[Footnote 5] A key practice to help address this worry is to
involve employees and their representatives to obtain their ideas and
gain their ownership for the initiative throughout the development
process and related implementation effort.
We continue to believe that many of the basic principles underlying
DOD's final regulations are generally consistent with proven approaches
to strategic human capital management. Today, I will provide our
observations on the following elements of DOD's human resources
management system as outlined in the final regulations--pay and
performance management, staffing and employment, workforce shaping,
adverse actions and appeals, and labor management relations.
Pay and Performance Management:
Earlier this year, we testified that DOD's proposed NSPS regulations
reflected a growing understanding that the federal government needs to
fundamentally rethink its current approach to pay and better link pay
to individual and organizational performance.[Footnote 6] To this end,
DOD's final regulations take another valuable step toward a modern
performance management system that provides for elements of a more
market-based and performance-oriented pay system. For instance, the
final regulations provide for the creation of pay bands for most of
DOD's civilian workforce that would replace the 15-grade General
Schedule (GS) system now in place for most civil service employees.
Specifically, DOD, after coordination with OPM, may define occupational
career groups and levels of work within each career group that are
tailored to the department's missions and components. The final
regulations also give DOD considerable discretion, after coordination
with OPM, to set and annually adjust the minimum and maximum rates of
pay for each of those career groups or bands, based on national and
local labor market factors and other conditions such as availability of
funds. In addition, the regulations provide that DOD may, after
coordination with OPM, set and annually adjust local market supplements
for different career groups or for different bands within the same
career group. We strongly support the need to expand pay reform in the
federal government and believe that implementing more market-based and
performance-oriented pay systems is both doable and desirable. The
federal government's current pay system is heavily weighted toward
rewarding length of service rather than individual performance and
contributions, including requiring across-the-board annual pay
increases, even to poor performers. It also compensates employees
living in various localities without adequately considering the local
labor market rates applicable to the diverse types of occupations in
the area.
Regarding performance management issues, we identified several issues
in earlier testimonies that DOD will need to continue to address as it
moves forward with the implementation of the system. These include
aligning individual performance to organizational goals, using
competencies to provide a fuller assessment of employee performance,
making meaningful distinctions in employee performance, and continuing
to incorporate adequate safeguards to ensure fairness and guard against
abuse.
Aligning Individual Performance to Organizational Goals:
Consistent with leading practices, the DOD final regulations stipulate
that the performance management system will, among other things, align
individual performance expectations with the department's overall
mission and strategic goals, organizational program and policy
objectives, annual performance plans, and other measures of
performance. DOD's 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 this end, an explicit
alignment of daily activities with broader results is one of the
defining features of effective performance management systems in high-
performing organizations. In our previous testimony on DOD proposed
NSPS regulations,[Footnote 7] we testified that the regulations did not
detail how DOD was to achieve such an alignment. The final regulations
were not modified to provide such details. These details do matter and
are critical issues that will need to be addressed as DOD's efforts in
implementing a new personnel system move forward.[Footnote 8]
Using Competencies to Provide a Fuller Assessment of Performance:
In the final regulations, performance expectations may take several
different forms. These include, among others, goals or objectives that
set general or specific performance targets at the individual, team, or
organizational level; a particular work assignment, including
characteristics such as quality, quantity, accuracy, or timeliness;
core competencies that an employee is expected to demonstrate on the
job; or the contributions that an employee is expected to make. In a
previous testimony, we reported that DOD needed to define, in more
detail than was provided in the proposed regulations, how performance
expectations will be set. In addition, public comments to the proposed
regulations expressed concerns about the variety of forms that
performance expectations could take. In response to public comments to
its proposed regulations and feedback obtained during the meet and
confer process with employee representatives, DOD modified the proposed
regulations, so that the final regulations state that the basic
performance expectations should be provided to employees in writing.
As DOD develops its implementing issuances, the experiences of leading
organizations suggest that DOD should reconsider its position of merely
allowing, rather than requiring, the use of core competencies as a
central feature of its performance management system.[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.[Footnote 10] By including competencies such as change
management, achieving results, teamwork and collaboration, cultural
sensitivity, and information sharing, DOD could create a shared
responsibility for organizational success and help ensure
accountability for the transformation process.
Making Meaningful Distinctions in Employee Performance:
High-performing organizations make meaningful distinctions between
acceptable and outstanding performance of individuals and appropriately
reward those who perform at the highest level.[Footnote 11] These
organizations seek to create pay, incentive, and reward systems that
clearly link employee knowledge, skills, and contributions to
organizational results. As in the proposed regulations, DOD's final
regulations stated that DOD supervisors and managers are to be held
accountable for making meaningful distinctions among employees based on
performance and contribution, fostering and rewarding excellent
performance, and addressing poor performance.
Consistent with the proposed regulations, the final regulations provide
for a multilevel rating system for evaluating employee performance.
However, the final regulations do not specify exactly how many rating
levels will be used. We urge DOD to consider using at least four
summary rating levels to allow for greater performance-rating and pay
differentiation. This approach is in the spirit of the new
governmentwide performance-based pay system for the Senior Executive
Service (SES), which requires at least four rating levels to provide a
clear and direct link between SES performance and pay as well as to
make meaningful distinctions based on relative performance. Cascading
this approach to other levels of employees can help DOD recognize and
reward employee contributions and achieve the highest levels of
individual performance.[Footnote 12]
Providing Adequate Safeguards to Ensure Fairness and Guard Against
Abuse:
As DOD develops its implementing issuances, it needs to continue
building safeguards into its performance management system to ensure
fairness and guard against abuse. A concern that employees often
express about any pay for performance system is supervisors' ability
and willingness to assess performance fairly. Using safeguards, such as
having an independent body to conduct reasonableness reviews of
performance management decisions, can help allay these concerns and
build a fair, credible, and transparent system. In our previous
testimonies,[Footnote 13] we noted that although DOD's proposed
regulations provided for some safeguards, additional safeguards should
be developed. However, the final regulations do not offer details on
how DOD would, among other things, (1) promote consistency and provide
general oversight of the performance management system to ensure it is
administered in a fair, credible, and transparent manner; and (2)
incorporate predecisional internal safeguards to achieve consistency
and equity, and ensure nondiscrimination and nonpoliticization of the
performance management process. As DOD moves forward, it will need to
commit itself to define, in more detail than is currently provided, how
it plans to review such matters as the establishment and implementation
of the performance appraisal system--and, subsequently, performance
rating decisions, pay determinations, and promotion actions--before
these actions are finalized, to ensure they are merit based.
Staffing and Employment:
The authorizing legislation allows DOD to implement additional hiring
flexibilities that would allow it to (1) determine that there is a
severe shortage of candidates or a critical hiring need and (2) use
direct-hire procedures for these positions. Under current law, OPM,
rather than the agency, determines whether there is a severe shortage
of candidates or a critical hiring need. Direct-hire authority allows
an agency to appoint candidates to positions without adherence to
certain competitive examining requirements (such as veterans'
preference or numerically rating candidates based on experience,
training, and education) when there is a severe shortage of qualified
candidates or a critical hiring need.
In our previous testimonies, we noted that while we strongly endorse
providing agencies with additional tools and flexibilities to attract
and retain needed talent, additional analysis may be needed to ensure
that any new hiring authorities are consistent with a focus on merit
principles, the protection of employee rights, and results. Hiring
flexibilities alone will not enable federal agencies to acquire the
personnel necessary to accomplish their missions. Agencies must first
conduct gap analyses of the critical skills and competencies needed in
their workforces now and in the future, or they may not be able to
effectively design strategies to hire, develop, and retain the best
possible workforces.
Workforce Shaping:
Similar to the proposed regulations, the final NSPS regulations allow
DOD to reduce, realign, and reorganize the department's workforce
through revised reduction-in-force (RIF) procedures. For example,
employees would be placed on a retention list in the following order:
tenure group (i.e., a career employee, including an employee serving an
initial probationary period and an employee serving on a term
appointment), veterans' preference eligibility (disabled veterans will
be given additional priority), level of performance, and length of
service. In a change from the proposed regulations, employees serving
in an initial probationary period have a lower retention standing than
career employees (i.e., permanent will be listed first, followed by
employees serving an initial probationary period, and then followed by
employees on temporary appointments). In another change, the final
regulations reflect the use of more than one year's performance ratings
in placing employees on the retention list. Under current regulations,
length of service is considered ahead of level of performance. I have
previously testified, prior to the enactment of NSPS, in support of
revised RIF procedures that would require much greater consideration of
an employee's performance.[Footnote 14]
DOD's approach to reducing, realigning, and reorganizing should be
oriented toward strategically shaping the makeup of its workforce if it
is to ensure the orderly transfer of institutional knowledge and
achieve mission results. DOD's final regulations include some changes
that would allow DOD to rightsize the workforce more carefully through
greater precision in defining competitive areas, and by reducing the
disruption associated with RIF orders as their affect ripples through
an organization. Under the current regulations, the minimum RIF
competitive area is broadly defined as an organization under separate
administration in a local commuting area. Under the final NSPS
regulations, DOD would be able to establish a minimum RIF competitive
area on a more targeted basis, using one or more of the following
factors: geographical location, line of business, product line,
organizational unit, and funding line. The final regulations also
provide DOD with the flexibility to develop additional competitive
groupings on the basis of career group, occupational series or
specialty, and pay band. Under the current GS system, DOD can establish
competitive groups based only on employees (1) in the excepted and
competitive service, (2) under different excepted service appointment
authorities, (3) with different work schedules,[Footnote 15] (4) in the
same pay schedule, or (5) in trainee status. The new reforms could help
DOD approach rightsizing more carefully; however, as I have stated,
agencies first need to identify the critical skills and competencies
needed in their workforce if they are to effectively implement their
new human capital flexibilities.
Adverse Actions and Appeals:
Similar to DOD's proposed regulations, the final regulations are
intended to streamline the employee adverse action process. While the
final regulations contain some features meant to ensure that employees
receive due process, such as advance written notice of a proposed
adverse action, they do not require DOD managers to provide employees
with performance improvement periods, as is required under existing law
for other federal employees. It is too early to tell what affect, if
any, these final regulations will have on DOD's operations and
employees or on other entities involved in the adverse action process,
such as the Merit Systems Protection Board (MSPB). Close monitoring of
any unintended consequences, such as on the MSPB and its ability to
manage adverse action cases from DOD and other federal agencies, is
warranted.[Footnote 16]
Similar to the proposed regulations, DOD's final regulations also
modify the current federal system by providing the Secretary of Defense
with the sole, exclusive, and unreviewable authority to identify
specific offenses for which removal is mandatory. In our previous
testimonies, we noted that DOD's proposed regulations only indicated
that its employees would be made aware of the mandatory removal
offenses. We also noted that the process for determining and
communicating which types of offenses require mandatory removal should
be explicit and transparent, and involve relevant congressional
stakeholders, employees, and employee representatives. Moreover, we
suggested that DOD exercise caution when identifying specific removable
offenses and the associated punishment, and noted that careful drafting
of each removable offense is critical to ensure that the provision does
not have unintended consequences. In a change from the proposed
regulations, DOD's final regulations explicitly provide for publishing
a list of the mandatory removal offenses in the Federal Register.
Similar to its proposed regulations, DOD's final regulations generally
preserve the employee's basic right to appeal mandatory removal
offenses and other adverse action decisions to an independent body--the
MSPB--but retain the provision to permit an internal DOD review of the
initial decisions issued by MSPB adjudicating officials. Under this
internal review, DOD can modify or reverse an initial decision or
remand the matter back to the adjudicating official for further
consideration. Unlike other criteria for review of initial decisions,
DOD can modify or reverse an initial MSPB adjudicating official's
decision where the department determines that the decision has a direct
and substantial adverse effect on the department's national security
mission.[Footnote 17] In our previous testimonies on the proposed
regulations, we expressed some concern about the department's internal
review process and pointed out that the proposed regulations do not
offer additional details on the department's internal review process,
such as how the review will be conducted and who will conduct it. We
noted that an internal agency review process this important should be
addressed in the regulations rather than in an implementing directive
to ensure adequate transparency and employee confidence in the process.
However, the final regulations were not modified to include such
details.
Similar to DOD's proposed regulations, the final regulations shorten
the notification period before an adverse action can become effective,
provide an accelerated MSPB adjudication process, and continue to give
the MSPB administrative judges (AJs) and arbitrators less latitude to
modify DOD-imposed penalties than under current practice. Under the
current system, MSPB reviews penalties during the course of a
disciplinary action against an employee to ensure that the agency
considered relevant prescribed factors and exercised management
discretion within tolerable limits of reasonableness. MSPB may mitigate
or modify a penalty if the agency did not consider prescribed factors.
In a change from the proposed regulations, which precluded the MSPB
from modifying a penalty imposed on an employee by DOD for an adverse
action unless such a penalty was so disproportionate to the basis of
the action as to be "wholly without justification," under the final
regulations the MSPB AJs and arbitrators will be able to mitigate a
penalty only if it is "totally unwarranted in light of the pertinent
circumstances" while the full MSPB Board may mitigate penalties in
accordance with the standard prescribed in the NSPS authorizing
legislation.[Footnote 18] As stated by DOD in the supplementary
information to the final regulations, the "totally unwarranted in light
of all pertinent circumstances" standard is similar to that recognized
by the federal courts and is intended to limit mitigation of penalties
by providing deference to an agency's penalty determination.
The final regulations continue to encourage the use of alternative
dispute resolution (ADR) and provide that this approach be subject to
collective bargaining to the extent permitted by the final labor
relations regulations. 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, including the use of
ombudsmen as an informal alternative to addressing conflicts. As we
have reported, ADR helps lessen the time and the cost burdens
associated with the federal redress system and has the advantage of
employing techniques that focus on understanding the disputants'
underlying interests rather than techniques that focus on the validity
of their positions. For these and other reasons, we believe that it is
important to continue to promote ADR throughout the process.
Labor-Management Relations:
The final regulations recognize the right of employees to organize and
bargain collectively. Similar to the proposed regulations, the final
regulations would reduce the scope of collecting bargaining by removing
the requirement for DOD management to bargain on matters considered to
be management rights--such as the policies and procedures for deploying
personnel, assigning work, and introducing new technologies. However,
in a departure from the proposed regulations, the final regulations
provide that the Secretary of Defense may authorize bargaining on these
management rights if the Secretary in his or her sole, exclusive, and
unreviewable discretion determines that bargaining would be necessary
to advance the department's mission or promote organizational
effectiveness.[Footnote 19]
Our previous work on individual agencies' human capital systems has not
directly addressed the scope of specific issues that should or should
not be subject to collective bargaining and negotiations. At a forum we
co-hosted exploring the concept of a governmentwide framework for human
capital reform, which I will discuss later, participants generally
agreed that the ability to organize, bargain collectively, and
participate in labor organizations is an important principle to be
retained in any framework for reform.
DOD's final regulations create its own internal labor relations board-
-the National Security Labor Relations Board--to deal with most
departmentwide labor relations policies and disputes rather than submit
them to the Federal Labor Relations Authority. DOD's proposed
regulations did not provide for any employee representative input into
the appointment of board members. However, DOD's final regulations
require that for the appointment of two of the three board members, the
Secretary of Defense must consider candidates submitted by employee
representatives. However, the Secretary retains the authority to both
appoint and remove any member.
DOD Faces Many Challenges to Successful Implementation:
With the issuance of the final regulations, DOD faces multiple
challenges to the successful implementation of its new human resources
management system. We highlighted multiple implementation challenges at
prior hearings and in our July 2005 report on DOD's efforts to design
the new system.[Footnote 20] For information about these challenges
identified in our prior work, as well as related human capital issues
that could potentially affect the implementation of NSPS, see the
"Highlights" pages from previous GAO products on DOD civilian personnel
issues in appendix I.
We continue to believe that addressing these challenges is critical to
the success of DOD's new human resources management system. These
challenges include establishing an overall communications strategy,
ensuring sustained and committed leadership, providing adequate
resources for the implementation of the new system, involving employees
in implementing the system, and evaluating the new system after it has
been implemented.
Establishing an Overall Communications Strategy:
Another significant challenge for DOD is to ensure an effective and
ongoing two-way communications strategy, given DOD's size,
geographically and culturally diverse audiences, and the different
command structures across DOD organizations. While we have reported
that developing a comprehensive communications strategy is a key
practice of a change management initiative,[Footnote 21] we reported in
July 2005 that DOD lacks such a strategy.[Footnote 22] We recommended
that the Secretary of Defense take steps to ensure that its
communications strategy effectively addresses employee concerns and
their information needs, and facilitates two-way communication between
employees, employee representatives, and management. In prior
testimonies, we also suggested that this communications strategy must
involve a number of key players, including the Secretary of Defense.
Providing Adequate Resources for Implementing the New System:
DOD also is challenged to provide adequate resources to implement its
new personnel system, especially in times of increased fiscal
constraints. OPM reports that the increased costs of implementing
alternative personnel systems should be acknowledged and budgeted for
up front. [Footnote 23] Based on the data provided by selected OPM
personnel demonstration projects, we found that direct costs associated
with salaries and training were among the major cost drivers of
implementing pay for performance systems. Certain costs, such as those
for initial training on the new system, are one-time in nature and
should not be built into the base of DOD's budget. Other costs, such as
employees' salaries, are recurring and thus should be built into the
base of DOD's budget for future years. DOD estimates that the overall
cost associated with implementing the new human resources management
system--including developing and delivering training, modifying
automated personnel information systems, and starting up and sustaining
the National Security Labor Relations Board--will be approximately $158
million through fiscal year 2008. Since experience has shown that
additional resources are necessary to ensure sufficient planning,
implementation, training, and evaluation for human capital reform,
funding for NSPS will warrant close scrutiny by Congress as DOD's
implements the new system.
* We plan to evaluate the costs associated with the design and
implementation of NSPS and look forward to sharing our findings with
Congress upon completion of our review.
Ensuring Sustained and Committed Leadership:
One challenge DOD faces is the need to elevate, integrate, and
institutionalize leadership responsibility for large-scale
organizational change initiatives, such as its new human resources
management system, to ensure success. A chief management officer or
similar position could effectively provide the sustained and committed
leadership essential to successfully completing these multiyear
business transformation initiatives. Especially for an endeavor as
critical as DOD's new human resources management system, such a
position could serve to:
* elevate attention to overcome an organization's natural resistance to
change, marshal the resources needed to implement change, and build and
maintain organizationwide commitment to new ways of doing business;
* integrate this new system with various management responsibilities so
that they are no longer "stove-piped" and fit into other organizational
transformation efforts in a comprehensive, ongoing, and integrated
manner; and:
* institutionalize accountability for the system to sustain the
implementation of this critical human capital initiative.[Footnote 24]
Involving Employees and Other Stakeholders in Implementing the System:
DOD faces a significant challenge in involving its employees, employee
representatives, and other stakeholders in implementing NSPS. Similar
to the proposed regulations, DOD's final regulations, while providing
for continuing collaboration with employee representatives, do not
identify a process for the continuing involvement of employees in
implementation of NSPS. According to DOD, almost two-thirds of its
700,000 civilian employees are represented by 41 different labor
unions, including over 1,500 separate bargaining units. Consistent with
DOD's proposed regulations, its final NSPS regulations about the
collaboration process, among other things, would permit the Secretary
of Defense to determine (1) the number of employee representatives
allowed to engage in the collaboration process, and (2) the extent to
which employee representatives are given an opportunity to discuss
their views with and submit written comments to DOD officials. In
addition, DOD's final regulations indicate that nothing in the
continuing collaboration process will affect the right of the Secretary
of Defense to determine the content of implementing guidance and to
make this guidance effective at any time. DOD's final regulations will
give designated employee representatives an opportunity to be briefed
and to comment on the design and results of the new system's
implementation.[Footnote 25]
The active involvement of all stakeholders will be critical to the
success of NSPS. Substantive and ongoing involvement by employees and
their representatives both directly and indirectly is crucial to the
success of new initiatives, including implementing a modified
classification and pay for performance system. This involvement must be
early, active, meaningful, and continuing if employees are to gain a
sense of understanding and ownership of the changes that are being
made. The 30-day public comment period on the proposed regulations
ended March 16, 2005. During this time period, according to DOD, it
received more than 58,000 comments. The public comment period was
followed by a period during which DOD and OPM officials met and
conferred with employee representatives to resolve differences on any
portions of the proposed regulations where agreement had not been
reached. Earlier this year, during testimony, we stated that the meet
and confer process had to be meaningful and was critically important
because there were many details of the proposed regulations that had
not been defined. According to DOD, a significant issue raised in the
public comments and during the meet and confer process concerned the
lack of specificity in the proposed regulations. However, as we noted
earlier in this statement, DOD still has considerable work to define
the details for implementing its system. These details do matter, and
how they are defined can have a direct bearing on whether or not the
ultimate new human resources management system is both reasoned and
reasonable.
Evaluating DOD's New Human Resources Management System:
Evaluating the effect of NSPS will be an ongoing challenge for DOD.
This element is especially important because DOD's final regulations
would give managers more authority and responsibility for managing the
new human resources management system than they have under the existing
system. High-performing organizations continually review and revise
their human capital management systems based on data-driven lessons
learned and changing needs in the work environment. Collecting and
analyzing data on the costs, benefits, and effects of NSPS will be the
fundamental building block for measuring the effectiveness of NSPS in
support of the mission and goals of the department.
DOD's final regulations indicate that DOD will evaluate the regulations
and their implementation. In our July 2005 report on DOD's efforts to
design NSPS, we recommended that DOD develop procedures for evaluating
NSPS that contain results-oriented performance measures and reporting
requirements.[Footnote 26] We also recommended that these evaluation
procedures could be 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, effects
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 and 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 DOD 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. In commenting on our recommendation, the department stated that
it has begun developing an evaluation plan and will ensure that the
plan contains results-oriented performance measures and reporting
mechanisms. If the department follows through with this effort, we
believe that it will be responsive to our recommendation.
Framework for Governmentwide Human Capital Reform:
The federal government is quickly approaching the point where "standard
governmentwide" human capital policies and processes are neither
standard nor governmentwide, raising the issue of whether a
governmentwide framework for human capital reform should be
established. The human capital environment in the federal government is
changing, illustrated by the fact that DOD's new human capital
authority joins that given to several other federal departments and
agencies--such as the Department of Homeland Security (DHS), GAO, the
National Aeronautics and Space Administration, and the Federal Aviation
Administration--to help them strategically manage their human resources
management system to achieve results.
To help advance the discussion concerning how governmentwide human
capital reform should proceed, we and the National Commission on the
Public Service Implementation Initiative co-hosted a forum on whether
there should be a governmentwide framework for human capital reform
and, if so, what this framework should include.[Footnote 27] While
there was widespread recognition among the forum participants that a
one-size-fits-all approach to human capital management is not
appropriate for the challenges and demands faced by government, there
was equally broad agreement that there should be a governmentwide
framework to guide human capital reform. Further, a governmentwide
framework should balance the need for consistency across the federal
government with the desire for flexibility so that individual agencies
can tailor human capital systems to best meet their needs. Striking
this balance would not be easy to achieve, but is important for
maintaining a governmentwide system that is responsive enough to adapt
to agencies' diverse missions, cultures, and workforces.
While there were divergent views among the forum participants, there
was general agreement on a set of principles, criteria, and processes
that could serve as a starting point for further discussion in
developing a governmentwide framework in advancing human capital
reform, as shown in figure 1. We believe that these principles,
criteria, and processes provide an effective framework for Congress and
other decision makers to use as they consider governmentwide civil
service reform proposals.
Figure 1: Principles, Criteria, and Processes for a Governmentwide
Human Capital Reform Framework:
Principles that the government should retain in a framework for reform
because of their inherent, enduring qualities:
* Merit principles that balance organizational mission, goals, and
performance objectives with individual rights and responsibilities;
* Ability to organize, bargain collectively, and participate through
labor organizations;
* Guaranteed due process that is fair, fast, and final;
Criteria that agencies should have in place as they plan for and manage
their new human capital authorities:
* Demonstrated business case or readiness for use of targeted
authorities;
* An integrated approach to results-oriented strategic planning and
human capital planning and management;
* Adequate resources for planning, implementation, training, and
evaluation;
* A modern, effective, credible, and integrated performance management
system that includes adequate safeguards to ensure equity and prevent
discrimination;
Processes that agencies should follow as they implement new human
capital authorities:
* Prescribing regulations in consultation or jointly with the Office of
Personnel Management;
* Establishing appeals processes in consultation with the Merit Systems
Protection Board;
* Involving employees and stakeholders in the design and implementation
of new human capital systems;
* Phasing in implementation of new human capital systems;
* Committing to transparency, reporting, and evaluation;
* Establishing a communications strategy;
* Ensuring adequate training.
Source: GAO.
[End of figure]
Next Steps for Human Capital Reform:
Moving forward with human capital reform, in the short term, Congress
should consider selected and targeted actions to continue accelerating
the momentum to make strategic human capital management the centerpiece
of the government's overall transformation effort. One option may be to
provide agencies one-time, targeted investments that are not built into
agencies' bases for future year budget requests. For example, Congress
established the Human Capital Performance Fund to reward agencies'
highest performing and most valuable employees. However, the
Administration's draft proposed "Working for America Act" proposes to
repeal the Human Capital Performance Fund. According to OPM, the
provision was never implemented, due to lack of sufficient funding. We
believe that a central fund has merit and can help agencies build the
infrastructure needed to implement a more market-based and performance-
oriented pay system. To be eligible, agencies would submit plans for
approval by OPM that incorporate features such as a link between pay
for performance and the agency's strategic plan, employee involvement,
ongoing performance feedback, and effective safeguards to ensure fair
management of the system. In the first year of implementation, up to 10
percent of the amount appropriated for the fund would be available to
train employees who are involved in making meaningful distinctions in
performance. These features are similar to those cited in the draft
proposal as the basis for OPM's certification for agencies to implement
their new pay and performance management systems.
In addition, as agencies develop their pay for performance systems,
they will need to consider the appropriate mix between pay awarded as
base pay increases versus one-time cash bonuses, while still
maintaining fiscally sustainable compensation systems that reward
performance. A key question to consider is how the government can make
an increasing percentage of federal compensation dependent on achieving
individual and organizational results by, for example, providing more
compensation as one-time cash bonuses rather than as permanent salary
increases. However, agencies' use of cash bonuses or other monetary
incentives has an effect on employees' retirement calculations since
they are not included in calculating retirement benefits. Congress
should consider potential legislative changes to allow cash bonuses
that would otherwise be included as base pay increases to be calculated
toward retirement and thrift savings benefits by specifically factoring
bonuses into the employee's base pay for purposes of making
contributions to the thrift savings plan and calculating the employee's
"high-three" for retirement benefits.
Concluding Observations:
Consistent with our observations earlier this year, DOD's final NSPS
regulations take another valuable step toward a modern performance
management system that provides for a more market-based and performance-
oriented pay system. DOD's final NSPS regulations are intended to align
individual performance and pay with the department's critical mission
requirements; provide meaningful distinctions in performance; and give
greater priority to employee performance in connection with workforce
rightsizing and reductions-in-force. However, how it is done, when it
is done, and the basis on which it is done will be critical to the
overall success of the new system. That is why it is important to
recognize that it is critically important that DOD define the details
for implementing its system and that DOD does it in conjunction with
applicable key stakeholders. It is equally important for DOD to ensure
that is has the necessary infrastructure in place to implement the
system. DOD's regulations are especially critical and need to be
implemented properly because of their potential implications for
related governmentwide reform. However, compensation, pay,
compensation, critical hiring, and workforce restructuring reforms
should be the first step in any governmentwide reforms.
Contact and Acknowledgments:
For further information, please contact Derek B. Stewart, Director,
Defense Capabilities and Management, at (202) 512-5559 or
stewartd@gao.gov. For further information on governmentwide human
capital issues, please contact J. Christopher Mihm, Managing Director,
Strategic Issues, at (202) 512-6806 or mihmj@gao.gov. Contact points
for our Offices of Congressional Relations and Public Affairs may be
found on the last page of this report. Individuals making key
contributions to this statement include Sandra F. Bell, Renee S. Brown,
William J. Doherty, George M. Duncan, Barbara L. Joyce, Julia C. Matta,
Susan W. Tieh, and John S. Townes.
FOOTNOTES:
[1] Department of Defense Human Resources Management and Labor
Relations System, 70 Fed. Reg. 66116 (Nov. 1, 2005).
[2] GAO and the National Commission on the Public Service
Implementation Initiative, Highlights of a Forum: Human Capital:
Principles, Criteria, and Processes for Governmentwide Federal Human
Capital Reform, GAO-05-69SP (Washington, D.C.: Dec. 1, 2004)
[3] GAO, Human Capital: Preliminary Observations on Proposed
Regulations for DOD's National Security Personnel Systems, GAO-05-559T
(Washington, D.C.: Apr. 14, 2005); GAO, Human Capital: Preliminary
Observations on Proposed Department of Defense National Security
Personnel System Regulations, GAO-05-517T (Washington, D.C.: Apr. 12,
2005); GAO, Preliminary Observations on Proposed DOD National Security
Personnel System Regulations, GAO-05-432T (Washington, D.C.: Mar. 15,
2005).
[4] See American Federation of Government Employees, AFL-CIO et al v.
Rumsfeld et al, No. 1:05cv02183 (D.D.C. filed Nov. 7, 2005).
[5] GAO, Results-Oriented Cultures: Implementing Steps to Assist
Mergers and Organizational Transformations, GAO-03-669 (Washington,
D.C.: July 2, 2003) and Highlights of a GAO Forum: Lessons Learned for
a Department of Homeland Security and Other Federal Agencies, GAO-03-
293SP (Washington, D.C.: Nov. 14, 2002).
[6] GAO-05-559T, GAO-05-517T, and GAO-05-432T.
[7] GAO-05-517T.
[8] GAO-05-517T.
[9] GAO, Results-Oriented Cultures: Creating a Clear Linkage between
Individual Performance and Organizational Success, GAO-03-488
(Washington, D.C.: Mar. 14, 2003).
[10] GAO, Human Capital: Implementing Pay for Performance at Selected
Personnel Demonstration Projects, GAO-04-83 (Washington, D.C.: Jan. 23,
2004).
[11] GAO-03-488.
[12] GAO, Human Capital: Observations on Final DHS Human Capital
Regulation, GAO-05-391T (Washington, D.C.: Mar. 2, 2005).
[13] GAO-05-559T, GAO-05-517T, and GAO-05-432T.
[14] GAO, Defense Transformation: DOD's Proposed Civilian Personnel
System and Governmentwide Human Capital Reform, GAO-03-741T
(Washington, D.C.: May 1, 2003); and GAO, Human Capital: Building on
DOD's Reform Effort to Foster Governmentwide Improvements, GAO-03-851T
(Washington, D.C.: June 4, 2003).
[15] For example, employees who work full time, part time, seasonally,
or intermittently.
[16] Ten federal labor unions have filed suit alleging that, among
other things, DOD's adverse actions and appeals process is unlawful.
See American Federation of Government Employees, AFL-CIO et al v.
Rumsfeld et al, No. 1:05cv02183 (D.D.C. filed Nov. 7, 2005).
[17] Any final DOD decision under this review process may be further
appealed to the full MSPB. Further, the Secretary of Defense or an
employee adversely affected by a final order of decision of the full
MSPB may seek judicial review.
[18] The full MSPB Board may order such corrective actions, including
the mitigation of penalties, as the board considers appropriate where
the Board determines a decision was: arbitrary, capricious, an abuse of
discretion, or otherwise not in accordance with the law; obtained
without procedures required by law, rule, or regulation having been
followed; or unsupported by substantial evidence. 5 U.S.C. §
9902(h)(5).
[19] Ten federal labor unions have filed suit alleging that, among
other things, DOD's labor relations system is unlawful. See American
Federation of Government Employees, AFL-CIO et al v. Rumsfeld et al,
No. 1:05cv02183 (D.D.C. filed Nov. 7, 2005).
[20] GAO, Human Capital: DOD's National Security Personnel System Faces
Implementation Challenges, GAO-05-730 (Washington, D.C.: July 14,
2005).
[21] GAO-03-669.
[22] GAO-05-730.
[23] OPM, Demonstration Projects and Alternative Personnel Systems: HR
Flexibilities and Lessons Learned (Washington, D.C.: September 2001).
[24] On September 9, 2002, we convened a roundtable of government
leaders and management experts to discuss the chief operating officer
concept. For more information, see GAO, Highlights of a GAO Roundtable:
The Chief Operating Officer Concept: A Potential Strategy to Address
Federal Governance Challenges, GAO-03-192SP (Washington, D.C.: Oct. 4,
2002), and The Chief Operating Officer Concept and Its Potential Use as
a Strategy to Improve Management at the Department of Homeland
Security, GAO-04-876R (Washington, D.C.: June 28, 2004).
[25] Ten federal labor unions have filed suit alleging that, among
other things, DOD failed to abide by the statutory requirements to
include employee representatives in the development of DOD's new labor
relations system authorized as part of NSPS. See American Federation of
Government Employees, AFL-CIO et al v. Rumsfeld et al, No. 1:05cv02183
(D.D.C. filed Nov. 7, 2005).
[26] GAO-05-730.
[27] GAO-05-69SP.
