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. The final regulations were not modified to provide such details. 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. A chief management officer or similar position could  effectively provide the sustained and committed leadership essential to  successfully completing these multiyear business transformation  initiatives. The active involvement of all stakeholders will be critical to the success of  NSPS. However, as we noted  earlier in this statement, DOD still has considerable work to define the  details for implementing its 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. 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. DOD will face multiple implementation challenges. GAO has several areas of concern: the proposed regulations do not  (1) define the details of the implementation of the system, including such  issues as adequate safeguards to help ensure fairness and guard against  abuse; (2) require, as GAO believes they should, the use of core  competencies to communicate to employees what is expected of them on  the job; and (3) identify a process for the continuing involvement of  employees in the planning, development, and implementation of NSPS. On February 14, 2005, DOD and the  Office of Personnel Management  (OPM) released for public  comment the proposed NSPS  regulations. This testimony  (1) provides GAO’s preliminary  observations on selected  provisions of the proposed  regulations, (2) discusses the  challenges DOD faces in  implementing the new system, and  (3) suggests a governmentwide  framework to advance human  capital reform. Going forward, GAO believes that (1) the development of the position of  Deputy Secretary of Defense for Management, who would act as DOD’s  Chief Management Officer, is essential to elevate, integrate, and  institutionalize responsibility for the success of DOD’s overall business  transformation efforts, including its new human resources management  system; (2) DOD would benefit if it develops a comprehensive  communications strategy that provides for ongoing, meaningful two-way  communication that creates shared expectations among employees,  employee representatives, and stakeholders; and (3) DOD must ensure that  it has the institutional infrastructure in place, including a modern  performance management system and an independent, efficient, effective,  and credible external appeals process, to make effective use of its new  authorities before they are operationalized. For instance, the proposed regulations provide for   (1) elements of a flexible and contemporary human resources management  system—such as pay bands and pay for performance; (2) DOD to rightsize its  workforce when implementing reduction-in-force orders by giving greater  priority to employee performance in its retention decisions; and   (3) continuing collaboration with employee representatives. Thus, while it is  imperative that we take steps to better link employee pay and other personnel  decisions 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 we are successful. Human capital  challenges are severe in certain areas.
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.