<DOC> [109 Senate Hearings] [From the U.S. Government Printing Office via GPO Access] [DOCID: f:24240.wais] S. Hrg. 109-343 ALTERNATIVE PERSONNEL SYSTEMS: ASSESSING PROGRESS IN THE FEDERAL GOVERNMENT ======================================================================= HEARING before the OVERSIGHT OF GOVERNMENT MANAGEMENT, THE FEDERAL WORKFORCE AND THE DISTRICT OF COLUMBIA SUBCOMMITTEE of the COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS UNITED STATES SENATE ONE HUNDRED NINTH CONGRESS FIRST SESSION __________ SEPTEMBER 27, 2005 __________ Printed for the use of the Committee on Homeland Security and Governmental Affairs U.S. GOVERNMENT PRINTING OFFICE 24-240 PDF WASHINGTON : 2006 ________________________________________________________________________________ For Sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512-1800 Fax: (202) 512-2250 Mail: Stop SSOP, Washington, DC 20402-0001 COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS SUSAN M. COLLINS, Maine, Chairman TED STEVENS, Alaska JOSEPH I. LIEBERMAN, Connecticut GEORGE V. VOINOVICH, Ohio CARL LEVIN, Michigan NORM COLEMAN, Minnesota DANIEL K. AKAKA, Hawaii TOM COBURN, Oklahoma THOMAS R. CARPER, Delaware LINCOLN D. CHAFEE, Rhode Island MARK DAYTON, Minnesota ROBERT F. BENNETT, Utah FRANK LAUTENBERG, New Jersey PETE V. DOMENICI, New Mexico MARK PRYOR, Arkansas JOHN W. WARNER, Virginia Michael D. Bopp, Staff Director and Chief Counsel Joyce A. Rechtschaffen, Minority Staff Director and Chief Counsel Trina D. Tyrer, Chief Clerk OVERSIGHT OF GOVERNMENT MANAGEMENT, THE FEDERAL WORKFORCE AND THE DISTRICT OF COLUMBIA SUBCOMMITTEE NORM COLEMAN, Minnesota, Chairman TED STEVENS, Alaska CARL LEVIN, Michigan TOM COBURN, Oklahoma DANIEL K. AKAKA, Hawaii LINCOLN D. CHAFEE, Rhode Island THOMAS R. CARPER, Delaware ROBERT F. BENNETT, Utah MARK DAYTON, Minnesota PETE V. DOMENICI, New Mexico FRANK LAUTENBERG, New Jersey JOHN W. WARNER, Virginia MARK PRYOR, Arkansas Andrew Richardson, Staff Director Richard J. Kessler, Minority Staff Director Nanci E. Langley, Minority Deputy Staff Director Tara E. Baird, Chief Clerk C O N T E N T S ------ Opening statements: Page Senator Voinovich............................................ 1 Senator Collins (ex officio)................................. 2 Senator Akaka................................................ 3 Senator Carper............................................... 31 WITNESSES Tuesday, September 27, 2005 Hon. Dan G. Blair, Deputy Director, U.S. Office of Personnel Management..................................................... 4 Hon. David M. Walker, Comptroller General, U.S. Government Accountability Office.......................................... 6 Jeffery K. Nulf, Deputy Assistant Secretary for Administration, U.S. Department of Commerce.................................... 20 Arleas Upton Kea, Director, Division of Administration, Federal Deposit Insurance Corporation.................................. 22 Dr. Hratch G. Semerjian, Deputy Director, National Institute of Standards and Technology, Technology Administration, U.S. Department of Commerce......................................... 24 C. Morgan Kinghorn, Jr., President, National Academy of Public Administration................................................. 34 Colleen M. Kelley, National President, National Treasury Employees Union................................................ 36 John Gage, National President, American Federation of Government Employees, AFL-CIO............................................. 39 Alphabetical List of Witnesses Blair, Hon. Dan G.: Testimony.................................................... 4 Prepared statement........................................... 51 Gage, John: Testimony.................................................... 39 Prepared statement........................................... 128 Kea, Arleas Upton: Testimony.................................................... 22 Prepared statement........................................... 90 Kelley, Colleen M.: Testimony.................................................... 36 Prepared statement........................................... 119 Kinghorn, C. Morgan, Jr.: Testimony.................................................... 34 Prepared statement........................................... 114 Nulf, Jeffery K.: Testimony.................................................... 20 Prepared statement........................................... 82 Semerjian, Dr. Hratch G.: Testimony.................................................... 24 Prepared statement with an attachment........................ 109 Walker, Hon. David M.: Testimony.................................................... 6 Prepared statement........................................... 61 APPENDIX Michael B. Styles, National President, Federal Managers Association, prepared statement................................ 146 Charts submitted by Mr. Blair for the record..................... 157 Questions and answers submitted for the record from: Mr. Blair.................................................... 160 Mr. Walker with attachments.................................. 166 Mr. Nulf..................................................... 176 Ms. Kea...................................................... 181 Mr. Kinghorn................................................. 189 Ms. Kelley................................................... 191 Mr. Semerjian................................................ 193 Mr. Gage..................................................... 196 Mr. Styles................................................... 198 ALTERNATIVE PERSONNEL SYSTEMS: ASSESSING PROGRESS IN THE FEDERAL GOVERNMENT ---------- TUESDAY, SEPTEMBER 27, 2005 U.S. Senate, Oversight of Government Management, the Federal Workforce, and the District of Columbia Subcommittee, of the Committee on Homeland Security and Governmental Affairs, Washington, DC. The Subcommittee met, pursuant to notice, at 10:07 a.m., in room SD-342, Dirksen Senate Office Building, Hon. George V. Voinovich, Chairman of the Subcommittee, presiding. Present: Senators Voinovich, Collins (ex officio), Akaka, and Carper. OPENING STATEMENT OF SENATOR VOINOVICH Senator Voinovich. The Subcommittee will please come to order. Good morning and thank you all for coming. I am particularly pleased that the Chairman of our Committee is here with us. Thank you for being here, and my good friend, Senator Akaka, the Ranking Member of the Subcommittee. Today's hearing, Alternative Personnel Systems: Assessing Progress in the Federal Government, will assess the progress of Federal agencies in utilizing established workforce authorities to develop alternative personnel systems. I first of all would like to thank Senator Akaka for being at today's hearing. Senator Akaka continues to be a strong partner in this Subcommittee's efforts to address the Federal Government's workforce challenges. Oversight of the Federal workforce by this Subcommittee this year has focused on recently enacted legislation. The Federal workforce is in a great state of change. Almost half of the Federal workforce will be transitioned into new personnel systems over the next several years, and all agencies now can use significant new flexibilities that have been provided to them. Further change for the remainder of the Federal workforce has been proposed, but that is not the subject of today's hearing. Indeed, we must do our due diligence and determine how change has been managed. Congress cannot expect the Federal Government to successfully implement workforce reforms, however sound and meritorious in their own right, if the capacity of the Federal Government to implement the reform and accompanying change is lacking. Even the best ideas need to be tested and validated. As many of the reforms are so new that we cannot yet fully judge their effectiveness, alternative personnel systems might offer us the best window right now into change in the Federal workforce. The purpose of this hearing is to assess how existing alternative personnel systems, two at the Department of Commerce and one at the Federal Deposit Insurance Corporation, were developed, implemented, and subsequently refined. We hope to learn more about what rules were changed. We seek to learn how successfully these agencies managed difficult transitions. In my mind, this is just as important as any of the new workforce management concepts that are being employed. For example, what was the role of the key management agencies, such as the Office of Personnel Management? And is it indicative of its ability to drive and manage workforce transformation throughout the Executive Branch? Mr. Blair, you are completely familiar with this, and we will have a hearing later on about the capacity of OPM to handle this transition, particularly in oversight over the new personnel management systems. Do Federal managers require specialized and additional training before they use pay banding and classification? I would also like to learn how Federal employees have been involved in these alternative personnel systems. From their prepared statements, I know that the American Federation of Government Employees has opted out of participating in some of the new systems, while the National Treasury Employees Union members are participating at the Federal Deposit Insurance Corporation. I look forward to learning more about their experiences. It is important to learn the lessons from the experience of these agencies and others. We all want a better system, and although individuals may differ as to the details, this is not the key question. The key question is: What do we have to do to prepare and manage the transition from the old to the new? I hope that today we will develop a good sense of how these three Federal agencies have fared in this regard. Senator Akaka, since we have the Chairman of our Committee here, would you permit me to yield to our Chairman before your opening statement? Senator Akaka. Yes. OPENING STATEMENT OF CHAIRMAN COLLINS Chairman Collins. Thank you very much, Mr. Chairman. First, let me take a moment to thank you and Senator Akaka for your continued leadership in ensuring that our Federal Government has the ability to recruit, retain, and reward the highest quality workforce needed to accomplish its many missions. Your December 2000 report to the President, ``The Crisis in Human Capital,'' highlighted the critical importance of addressing the government's human capital challenges and helped our Committee to focus on the need for more flexible Federal personnel management systems. This hearing provides a valuable opportunity for the Committee to evaluate the success of the Federal Government's current alternative personnel systems. It is particularly timely given the reforms underway at the Departments of Defense and Homeland Security, as well as the ongoing debate about whether and when to proceed with more comprehensive personnel reform. I look forward to learning more about the practical and cultural challenges associated with the development and implementation of the Federal Government's existing alternative systems. I think that the Administration would have done well to focus more on what was working out there right now before moving to transform the personnel systems of large departments. I am particularly interested in learning how the agencies have worked with their employees to ensure that they have the necessary training and a clear understanding of the new systems as they were brought forward. I know that GAO did a lot of work in this area, and as a result, the employee acceptance of the new personnel systems has been quite high at the Government Accountability Office. Today's dialogue will provide constructive guidance as we ensure that our civil service system continues to meet the government's current and future workforce needs. So thank you so much for your leadership on this. Senator Voinovich, you truly are the Senate's leader on human capital issues, and I appreciate your having this hearing. Senator Voinovich. Thank you, Madam Chairman. I would now like to call on the Ranking Member of our Subcommittee, Senator Akaka. OPENING STATEMENT OF SENATOR AKAKA Senator Akaka. Thank you very much, Mr. Chairman, for holding this hearing, which I believe will make a huge difference because I believe in the future of our government and our country. You and I have been good partners. I very much appreciate, Mr. Chairman, working with you on such joint efforts like the chief human capital officers council and other workforce flexibilities. As you know, the first and third largest Federal agencies have been granted broad flexibility to develop their own personnel systems, and the Administration is endorsing similar authority for the rest of the government. I also want to thank Chairman Collins for her leadership on our full Committee. Our Committee has really been focusing, as she mentioned, which for me is very important, on existing systems and possible future systems. And I want to tell her that I enjoy working with her. Chairman Collins. Thank you. Senator Akaka. Today's hearing focuses on the effectiveness of existing alternative personnel systems. I am interested in learning from our witnesses how they designed and implemented pay for performance and other changes to their personnel systems. I am also interested in hearing from our union witnesses regarding any concerns they may have with these alternative personnel systems. And I believe today's testimony will underscore the importance of meaningful employee input. Working with employees and their representatives will increase acceptance of the changes, improve employee morale, allow for quick identification and response to any problems, and improve the employee-manager working relationship in other areas as well. My goal is to solidify the acceptance of meaningful employee involvement in any personnel reform. I am curious to learn how our witness agencies have used what GAO and organizations such as NAPA have told us for years--that when implementing personnel reform, agencies need money to reward performance, training on how to measure performance, accountability for those in charge when problems arise, oversight to address such problems, and meaningful union and employee participation. Employees need to be assured that the reforms represent an improvement over the current system, that they will not be subjected to arbitrary adverse action because of the changes, and that any proposed changes will indeed work. I thank all of our distinguished witnesses for sharing their testimony with us today, and I thank you again, Mr. Chairman, for your continued diligence in making the Federal Government an employer of choice. Thank you. Senator Voinovich. Thank you, Senator Akaka. If the witnesses will please stand. As you know, the custom of this Subcommittee is swearing our witnesses. Do you swear that the testimony you are about to give this Subcommittee is the truth, the whole truth, and nothing but the truth, so help you, God? Mr. Blair. I do. Mr. Walker. I do. Senator Voinovich. Time is always at a premium in the Senate, and we have three panels of distinguished witnesses today. I would ask that the witnesses limit their oral statements to 5 minutes, and remind everyone that their entire written statement will be inserted in the record today. On our first panel, we have the Hon. Dan Blair, the Deputy Director of the Office of Personnel Management, and the Hon. David M. Walker, Comptroller General of the United States. And I want to thank you both for coming. Comptroller General, I just want to thank you publicly for the tremendous support--and I am sure that the Chairman shares my appreciation--that you have given this Subcommittee over the years. So much of your testimony has been so valuable to us as we have crafted legislation to make a difference in our personnel systems here in the Federal Government. Mr. Blair, will you please proceed? TESTIMONY OF HON. DAN G. BLAIR,\1\ DEPUTY DIRECTOR, U.S. OFFICE OF PERSONNEL MANAGEMENT Mr. Blair. Thank you. Chairman Voinovich, Chairman Collins, and Senator Akaka, thank you for including me in this hearing today. On behalf of Director Springer, I want to thank you for the opportunity to appear before you here today. She was disappointed that the Subcommittee schedules and her schedules didn't permit her to be here. She is looking forward to her next opportunity to testify. --------------------------------------------------------------------------- \1\ The prepared statement of Mr. Blair appears in the Appendix on page 51. --------------------------------------------------------------------------- I think we have a good story to share with you today. Senator Voinovich. As I mentioned, we are looking forward to having Director Springer testify before the Subcommittee on the capacity of OPM to manage governmentwide transformation. Mr. Blair. I think she would jump at that opportunity. I have a longer statement, and I would ask that be included in the record as well. The concept of alternative personnel systems is most clearly connected with the demonstration projects that Congress authorized the Office of Personnel Management (OPM) to establish as part of the Civil Service Reform Act of 1978. That authority provided a means for the government to try out alternative merit-based approaches to specific personnel management tasks and processes before making them generally applicable and available. Alternatives successfully tested in some demonstration projects have already been made available governmentwide. These include recruitment and retention incentives and examining using category rating. We have leaders in Congress like you and the Subcommittee Members to thank for helping achieve this goal. That is why we particularly appreciate your interest today in the other broad category of alternative systems, those that try alternatives to the General Schedule classification and pay system, and those alternatives all emphasize performance. Across government, more than 90,000 employees are covered by such systems. They are employed by a variety of agencies, serve in a variety of occupations, and perform a variety of functions. Our test beds are not narrow. Together they provide significant and compelling evidence that these alternative approaches work and work well. We have been successful at meeting goals to better manage, develop, and reward employees through these alternative pay systems. Evaluations of these alternative systems, particularly the Department of Defense (DOD) labs, have produced evidence of success against several benchmarks. Better performers are paid more. Employees are more satisfied with their pay. Turnover among high performers is significantly reduced. Teamwork and morale have not suffered. Communication has improved, and so has trust in management. These agencies are better equipped to compete for talent. They use their pay systems to reinforce the message that performance makes a difference and will be rewarded. We understand that implementing these pay systems takes dedication and strong leadership and, of course, effective performance management systems. OPM plays a significant role in providing design assistance and support as well as ensuring that appropriate oversight and accountability are maintained. When one looks across these successful alternative pay systems, the original intent of the demonstration project authority remains unfulfilled. We believe the record is clear. These approaches can and do work, and we have shared with you and stakeholders our approach to do so. We are convinced some agencies are ready to implement these ideas now, and we are leading efforts at other agencies to ready themselves for such changes. Using the President's management scorecard, we have set goals for agencies to demonstrate they are ready to move into systems where pay is more directly linked to performance. OPM and the Federal Government have already learned and applied lessons through these alternative personnel systems. We believe the time has come to allow these alternatives to achieve the same performance as other successful demonstration projects have earned. Title 5 should be amended to give all agencies carefully controlled access to the classification and pay approaches already tested successfully in these alternative pay systems and make them a permanent part of their strategic human capital management. That concludes my oral statement, Mr. Chairman. I am happy to answer any questions you may have. Senator Voinovich. Thank you, Mr. Blair. Mr. Walker. TESTIMONY OF HON. DAVID M. WALKER,\1\ COMPTROLLER GENERAL, U.S. GOVERNMENT ACCOUNTABILITY OFFICE Mr. Walker. Chairman Voinovich, Chairman Collins, and Senator Akaka, it is always a pleasure to be back before you. --------------------------------------------------------------------------- \1\ The prepared statement of Mr. Walker appears in the Appendix on page 61. --------------------------------------------------------------------------- I would like to start off, if I can, with a brief comment on a strategic framework for addressing this Nation's challenges. As you all know, GAO issued on February 16 of this year our ``21st Century Challenges'' report, which I believe provided a clear and compelling case on the need to fundamentally review and re-engineer the base of the Federal Government. One of the questions in the ``21st Century Challenges'' document is how should the Federal Government update its compensation systems to be more market-based and more performance-oriented, which is the subject of today's hearing. I would like to commend you on addressing this important topic, and I hope to have the opportunity to work with the Senate Homeland Security and Governmental Affairs Committee and other committees to address this and other topics that need to be addressed. As you know, we are involved in this area from two perspectives: One, we are leading by example. We are in the vanguard of change. We are practicing what we preach, and we have real live examples of what works and what does not work. What we have done is one way, it is not the only way; but it is scalable, it is transferable, and we are trying to help others help themselves see the way forward in this area. Second, with regard to the work that we have done dealing with government at large, we strongly believe that a more market-based and more performance-oriented pay system is called for. The current classification and annual compensation adjustments that apply to a vast majority of the Executive Branch agencies, are based on the Federal workforce in the 1950s. Much has changed since the 1950s, and we need to update and modernize our policies to recognize 21st Century realities. At the same point in time, how it is done, when it is done, and on what basis it is done makes all the difference in the world as to whether or not you are likely to be successful or not. There needs to be a very inclusive and participatory process, working with employees, their representatives, and others in order to try to figure out the best way to move forward. At the same point in time, I don't want to kid anybody. This is a very complex and controversial endeavor. It involves fundamental cultural transformation, and there will be segments of the population that will not like it, and that is a fact. Nonetheless, I believe very strongly that this is the way forward, and we need to make sure that we try to do it the right way in order to maximize the chance of success and to minimize the possibility of not only failure, but abuse of employees. There are three key themes that I think have to be kept in mind. First, a shift to a more market-based and performance- oriented pay system needs to be part of a more comprehensive change management and performance improvement strategy throughout the Federal Government. This is a means to an end. It is not an end in and of itself. But it is a critically important element. Second, more market-based and performance-oriented pay systems cannot be overlaid on most organizations' existing performance management systems. Most of the current performance appraisal and management systems in the Federal Government, frankly, aren't very good. They don't provide for meaningful feedback to employees. They don't provide meaningful distinctions between top performers and people who aren't performing as well as they should. They don't necessarily have adequate checks and balances to assure consistency throughout the organization and equity throughout the organization. It is not just having the authority to implement a market-based and performance oriented pay system, it is making sure that the infrastructure is in place before an agency can operationalize that authority. That is of critical importance. Third, organizations need to build up their basic management capacity, and they also have to engage in fundamental training, development, and a variety of communications initiatives in order to be able to make this shift successful. We believe that before Executive Branch agencies should be able to implement more market-based and performance-oriented compensation systems, they should be required to demonstrate to OPM that they have met certain critical criteria before they move forward. They need an objective third party to be able to do that because, otherwise, they could not only be hurting themselves and their employees, they could be tainting the water for broader-based reforms throughout the Federal Government. Again, I would be happy to answer any questions with regard to work that we have done in the past or with regard to our own experience, and thank you for the opportunity to be here. Senator Voinovich. Thank you, Mr. Walker. Madam Chairman, I am not aware of what your schedule is. If it is all right with you, Senator Akaka, I would be more than happy to let Chairman Collins start off with the questioning. Chairman Collins. Thank you very much, Mr. Chairman. That is very generous of you. I do have an Armed Services meeting right now, so I am being torn between two priorities. Mr. Blair, the Administration has proposed legislation that would extend certain personnel flexibilities, some of which are associated with the Departments of Defense and Homeland Security to agencies throughout the Federal Government. In drafting the proposal, did the Administration consider instead building upon the authority that OPM already has to work with agencies to develop more pilot projects or to expand existing ones rather than seeking legislation for a governmentwide approach? Mr. Blair. Right now, the authority we have for demonstration projects is severely limited. It is limited to no more than 10 projects, I believe, and no more than 5,000 employees. we think that the experience that we have had, especially with the lab demos, offers us the experience base we need to apply it on a more governmentwide basis. I was glad to hear Mr. Walker's comments. It is important that in expanding this, we make sure that there are safety measures in place, and that is one of the things that the proposal that we have drafted and is still subject to comment and review would do, is allow for OPM certification. But as far as the current demo projects, it is very limited in scope, and it doesn't offer us the needed flexibility to expand it on a governmentwide basis as we would want. Chairman Collins. Mr. Walker made a very important point when he said you cannot just overlay a new system on an old system and think it is going to work. It takes a lot of training. I know this is an issue which Senator Voinovich has stressed, and that you need to make sure that managers understand the system, and that they are trained in it. The year 2000 baseline evaluation of the demonstration project at the Department of Commerce indicated that the employees felt that their supervisors were ``too busy'' to provide a greater level of attention to their individual performance appraisals. This is a fear that I hear expressed by Federal employees all the time--that there is not going to be the training and that their supervisors are not going to apply it fairly because they will not know exactly how to do it or it just will not be done. If you are going to try pay to performance, something I do strongly support, you have to have an infrastructure that ensures that you have trained, committed supervisors performing the appraisal. What steps is OPM taking to ensure that agencies' managers are trained? And I would ask you that question with DHS and DOD as well as the pilot programs you have ongoing. Mr. Blair. I think you hit an important point. You know, what we have heard from the field in our feedback is not just that some managers aren't prepared to do this, but the question is my manager is a bonehead and what am I supposed to do when that manager is in charge of my pay. Very legitimate question. One is training. We have to properly train our managers and supervisors to begin work that they should have been doing in the first place, but because of the lack of incentives in the current system, haven't always been doing. In our President's Management Agenda right now, in the scorecard, we are going to ask that agencies have robust performance management systems in place covering 60 percent of their workforce. It is a start. We are also asking that agencies develop what we call a beta site or a pilot project, essentially, whereby agencies would have robust performance management in place, having constant and ongoing feedback between supervisors and employers, and be ready to link at the appropriate time, when given the authorization, pay to performance. I think that this beta site concept is critical because it gives critical mass within an agency or department to begin expanding the performance management culture, which we need to do. Chairman Collins. Mr. Walker, you have emphasized not only the need for training, but also employee involvement and constant communication. What steps did GAO take to ensure that its workforce was prepared for the cultural changes associated with its shift to a pay-for-performance system since in my view you are a model that other agencies could learn from? Mr. Walker. Thank you, Madam Chairman. We are not perfect. We never will be. But we try very hard to lead by example and to get this right. It starts with communication from the very top of the agency, in our case, myself. The case for change starts with explaining why the status quo is unacceptable, why there is a need for change, and then establishing mechanisms to make sure that employees and their representatives, to the extent that they are unionized, have a key part in helping to see the way forward from where we are at to where we need to be. The process needs to be very participatory, involving a lot of players, and considering information from a variety of parties. Ultimately the buck stops at the agency head's desk, and obviously, before I make final decisions, we end up having informal focus groups and task teams, publish proposed regulations, and obtain comments on those proposed regulations before final decisions are made. I cannot emphasize enough the importance of making the case from the top, having consistent communications, and having a broad net of involvement by all key stakeholders. In the final analysis, there are people that are going to like and not like what ultimately gets decided on. But hopefully nobody will be able to credibly argue about the process. The process must have integrity. Everybody has to be heard. All of their thoughts have been considered, and that is really important for credibility in order to provide the necessary degree of trust. Chairman Collins. Thank you. And thank you so much, Mr. Chairman, for accommodating my schedule. I really appreciate it. Mr. Walker. Mr. Chairman, can I mention one thing before Chairman Collins leaves? I know you are on the Armed Services Committee. I would like to have an opportunity in the near future to brief you on our recent report on military compensation. The average military compensation for active-duty military is $112,000 a year when the average compensation in the United States is $50,000. That system is fundamentally broken, just like the civilian pay system, and I would love to have a chance to talk to you about it. Thank you. Chairman Collins. I would look forward to that. Thank you, Mr. Chairman. Senator Voinovich. Thank you, Madam Chairman. I just want to publicly say how much Senator Akaka and I appreciate the support that we are getting from you, too, in our endeavor over the last several years. Thanks. Chairman Collins. You are doing good work. Senator Voinovich. Senator Akaka. Senator Akaka. Thank you, Mr. Chairman. I want to add to Chairman Collins, my thanks for the support she has given the Chairman and me on these critical human capital issues. Thank you. I want to add my welcome to our panelists, Mr. Blair and Mr. Walker. Director Blair, I am interested in knowing where agencies get the money to fund new training programs. You have mentioned this is one important part of moving into a new system. And, on average, what are the costs associated with training for demonstration projects? Can you comment on that? Mr. Blair. For the most part, agencies have funded the costs for training out of their existing budgets. Some agencies have independent authority, and I think you will hear more from them. They may have had alternative sources to fund these types of things. To expand this on a government-wide basis certainly is going to require some start-up costs, and there is no doubt about that, and let's be up front about that. We will have to anticipate what those costs will be. At this present time, I don't know what the exact costs of the demonstration projects have been, but I would be happy to provide that for the record.\1\ --------------------------------------------------------------------------- \1\ The charts submitted by Mr. Blair for the record appear in the Appendix on page 157. --------------------------------------------------------------------------- As far as the overall costs, agencies that have been part of these demo projects have funded it out of their current appropriations and have been able to do so without costs varying significantly from their General Schedule costs. Senator Akaka. Mr. Walker. Mr. Walker. Senator, in the case of GAO, we made a business case to the Congress, not only our oversight committees but also the appropriators. We were up front that there was going to be a one-time, up-front cost in moving from the old system to the new system. There are incremental costs, and I seriously question whether or not agencies will be able to fund that one- time incremental cost out of their baseline budget without having adverse implications in other areas. Designing these new systems and effectively implementing them includes training and development. The Administration, at one point in time, had requested a governmentwide human capital fund for pay for performance. While I don't think that made sense, I do think that a governmentwide fund on which agencies might be able to draw upon as a basis to design and implement new performance appraisal systems and other actions that are necessary to build the infrastructure to make performance-based pay work would make sense. That is something that I think should be considered by the Congress because if agencies don't have the necessary infrastructure in place, they will not be successful. Senator Akaka. Yes, and I want to repeat that Director Blair had mentioned the importance of training in bringing this about, and I have said I am interested in how much it will cost, and, of course, to be sure that we have that money so that we can do it properly. Mr. Blair. Senator, if I may, I have in my report, according to GAO, start-up costs for designing, installing, and maintaining automation and data systems at one of the DOD laboratories cost $125,000 at NAVSEA's Dahlgren Division, and the acquisition demo was $4.9 million. So let the record be clear there are those up-front costs that will have to be either funded or absorbed within existing budgets. Smaller organizations may be able to do so. For large organizations, it is going to be something that we will have to account for. Senator Akaka. Mr. Blair, you said that in a pay-for- performance system, agencies need to have strong management systems in place. Do you feel that we do have that in our agencies, or is that something that we need to work on as well? Mr. Blair. I think we need to work on that, and we are doing that. As we speak, we have been urging agencies to move away from pass-fail systems because those systems don't make meaningful distinctions in levels of performance. We have the revised Senior Executive Service (SES) system, which is relatively new but will be improving year after year, as it continues to operate. And that allows those meaningful distinctions in levels of performance to be recognized and tied to any pay increases. But most importantly, we are looking at what can we do within the current system to ensure that every-- I don't want to use the term ``flexibility,'' but that every opportunity is being used to enhance performance short of pay. So if pay is taken off the table, what can we do? We have asked agencies again to establish a pilot project in each of their own organizations which, short of linking it to pay, would have a performance management system up and running in place. Employees and supervisors would be providing meaningful feedback to one another. Expectations would be established, communications would be set, and what we would want to do is, from that pilot project within an agency, or a beta site, as we call it, have that expand to the rest of the agency or department in preparation for linking it to the reward system. In answer to your question, though, we are not there yet, but we are preparing agencies. Senator Akaka. I have further questions for the next round. Thank you. Senator Voinovich. Mr. Blair, Mr. Walker has said that it would be a joke to overlap a new system on the current system of performance evaluation. What puzzles me is that performance appraisals are very important to management, and basically what Mr. Walker has said--and you can speak for yourself, Mr. Walker--is that effective systems are not in place. We have had hearings before about the performance systems rating, and that all employees are rated about 95 out of 100. I specifically might reference the General Services Administration where I have spent time with Mr. Perry, who, in spite of the fact GSA does not have the authority to implement pay for performance, he is instituting a whole new performance system as part of his management objectives in the Department. Don't you believe that this might be the best way to move in preparation for the long-term goals of the proposed Working for America initiative that has been talked about? Mr. Blair. I think that is the direction we are moving. By requiring agencies to re-evaluate what their performance appraisal systems are and the performance management systems are, we are asking them to prepare themselves for the day that we can link it to pay. Are we there yet? Absolutely not. But we do have evidence and signs of success. The General Services Administration is one of them. The Department of Labor is another. And we are moving in that direction. Does it mean that you continue to do the same things the same old way? No. It means that you have to start focusing managerial attention and leadership on developing these systems in ways in which you have meaningful employee feedback, expectations are set up front, and distinctions are made between levels of performance. It is a cultural change. What we are trying to say within government now is that performance matters. Unfortunately, we have that undertow of the current General Schedule system that says time rather than performance matters, and we have to fight against that undertow. But we are urging and pushing agencies in the direction of developing and implementing and getting results from better performance management systems. Senator Voinovich. OK. And you think you can do that without the incentive of being tied to pay reform? Mr. Blair. We will do everything that we can, but I will tell you that providing that incentive of linking it to pay would be the primary driver in something like this. But short of that, we will continue within the Executive Branch and those agencies affected to make sure that we have better systems in place. But until you can actually say that your performance is linked to pay, you don't have that hammer there to really put strength behind your performance management system. Senator Voinovich. One other question, and that is, have you identified an existing alternative personnel systems? Mr. Blair. Well, we have through the alternative personnel systems looked at benchmarks such as employee satisfaction, turnover rates, commitment to mission. And for the most part, we have seen increases in employee satisfaction, and employees don't want to go back to the old systems that they had before these alternative systems. But I think that a driver here is how are we going to change, not only the culture, and the culture is that performance should matter, but also other values that are affected by that, such as commitment to mission, commitment to work, and job satisfaction. By better linking performance with pay, you start helping driving those other cultural changes as well. We have established well-known benchmarks for our demonstration projects, and in the Administration draft proposal, known as Working for America, agencies couldn't move, and couldn't link their performance management systems to pay until they are certified by OPM according to--I believe it is nine criteria that the draft legislation proposes. So what we are not proposing, is to turn a switch on overnight and suddenly overlay a pay system on top of the current performance management systems. We know we have a substantial amount of work to do. We are starting that work. I think we will be seeing progress over the next couple of years. But in no way would we say that we are turning a switch on today and that it would happen. It is going to take dedication and commitment from the Congress and from the Executive Branch to get this done, but we think it is very important because it is a value that we think that we should inculcate in the Federal Government. Senator Voinovich. Mr. Walker. Mr. Walker. Two things, Mr. Chairman. First, if you want a high-performing organization, whether you are in the private sector, the government, or the not-for- profit sector, you must link institutional, unit, and individual performance measurement and reward systems on an outcome basis. There are some exceptions in the Federal Government, but the vast majority of the Federal Government has not done that. That is fundamental. That must be done first before you go to pay for performance. Frankly, even if you don't have pay for performance, as you pointed out, you should do it anyway. Now, the other difficulty is that there hasn't been a lot of incentives or accountability for people to do that in the past, in part because of the current classification and pay system. For most of the Executive Branch, 85 percent of the annual pay adjustments have nothing to do with skills, knowledge, and performance. They relate to the across-the-board pay adjustments and the passage-of-time step increases. Even the QSIs, the quality step increases, which are supposed to be performance-related, aren't realistic because you have performance appraisal systems where everybody walks on water. Therefore, too many people get the increases. Therefore, when you have a situation where there is no meaningful distinction made between top performers and people who aren't performing as well--you have a big problem. Don't get me wrong, a vast majority of people in the Federal Government are dedicated and capable. They are just as good as the private sector, and are doing a really good job day in and day out. But when there is no meaningful distinction made between top and poor performers, it is a fundamental flaw in the system, and it needs to be corrected. But, again, how you do it, when you do it, and on what basis you do it matters to make sure that you are successful in the transition. Mr. Blair. Mr. Chairman, if I could add to that, in our demonstration project experience, we have seen that where we have had these linkages, we have had a better distribution in the performance ratings. I think we can certainly provide that for the record,\1\ but I think that it goes to show you that when the incentives are there, these government entities are up to the challenge and can perform. But where these incentives aren't in place, it is harder to accomplish that kind of cultural change. --------------------------------------------------------------------------- \1\ The chart submitted by Mr. Blair for the record appears in the Appendix on page 159. --------------------------------------------------------------------------- Senator Voinovich. It will be interesting to hear from the folks that are talking about alternative personnel systems to just see how much the linkage to the pay was an incentive for them to move forward with their system. Senator Akaka. Senator Akaka. Yes, Mr. Blair, you mentioned about OPM certifying agencies. I want to ask Mr. Walker the question. You testified that agencies should be authorized to implement reform only after they have met certain requirements, including an assessment of demonstrated institutional infrastructure and an independent certification by OPM. In your opinion, does OPM have the capacity to certify agencies, and if not, who should certify agencies? Mr. Walker. For the Executive Branch, I think OPM is the logical choice. It has to be somebody independent from the line agency, and obviously there are a lot of very capable and dedicated people at OPM that have a lot of human capital and human resources expertise. I do, however, have a serious concern as to whether OPM has adequate capacity, both as to number and as to skills and knowledge, to be able to deal with a significant volume of certifications that may be required in any given period of time. I think that is a real issue. Frankly, I think one of the biggest transformation challenges in the Federal Government is OPM, and I have told Linda Springer that. Mr. Blair. If I can respond to that, Senator Akaka. I know that Mr. Walker and Director Springer have had conversations about this, and over the last decade, OPM has substantially changed from where it was 10, 15 years ago and is continuing to change. I think the evidence of our capacity and evidence of the willingness to build on our current capacity has been seen through our leadership role in the President's Management Agenda. We are the only outside agency other than the Office of Management and Budget that owns an initiative, the Strategic Management of Human Capital, and we have been leading that now for 5 years and have been pushing agencies forward, constantly raising the bar for agencies to improve their management of human capital. Are we better off today than where we were last year? Absolutely. Are we going to be better off tomorrow than where we are today? We expect so and we are going to push agencies to do so. But, we are subject to the vagaries of the appropriations process. Just this past year, there were attempts to cut our appropriation from one of our policy shops which had been helping to drive that change. That is not helpful for us, and we understand that process can go through several permutations, and we understood the strains on the budget as well. But to cut our policy shop, the very people who are doing the work that Mr. Walker just described that we need to be doing seems to run counter to where we really want to be. And so I think that is one of the challenges to our capacity, is making sure that we have the proper funding and that we avoid attempts like that to undermine us that we have seen in the past. Senator Akaka. Thank you, Mr. Blair. I would like to have you comment on this. In her testimony, Ms. Kelley at NTEU, writes that there is a shortage of information to indicate that alternative pay systems have had any significant impact on recruitment, on retention, or on performance, and that a January 2004 GAO report on demonstration projects found no evidence that the systems improved any of those measures. I would like to get your response on her comments. Mr. Blair. Well, Ms. Kelley is a friend of mine, and we were just talking before the hearing began on some other issues. And I certainly respect her point of view, but I strongly differ with that. We have had 25 years of experience at this, and the 25 years of experience shows that these are better alternatives to a 50-year-old system that is currently in place. Can any one of the demonstration projects be held up as an example of reform that can be extended out to the rest of the system? No. But taken in their totality, I think we have important lessons that we have learned, and those lessons are that performance does matter and that we can shed the 15-grade, 10-step General Schedule in favor of a better pay-banding system. We can have more market-based pay in something like that, as well as rewarding performance. When you give poor performers, high performers, outstanding performers, and mediocre performers the same pay raise in the same year, what message does that send? I don't think it sends the appropriate message that we want to send to the American people nor our workforce, that your performance is valued and will be rewarded. Senator Akaka. Mr. Walker, your comments? Mr. Walker. Yes, Senator. To the extent that you move to a more market-based, skills-, knowledge-, and performance- oriented compensation system, I think you will find several things. The people that have the higher degrees of skills and knowledge and performance will like it. The younger people, by and large, because of their philosophy, will like it. At the same point in time, there are segments of the population who are good people, who are performing well day in and day out, that may not like it. The reason they may not like it is because right now under the Federal system, once you end up getting into a grade level--whether it is GS-12, GS-15, whatever--you have an entitlement to make the pay cap. It is not a matter if you are going to make the pay cap. It is only a matter when you are going to make the pay cap if you stay there long enough, unless you are promoted. Since 85 percent-plus of Executive Branch pay adjustments are on autopilot and have nothing to do with skills, knowledge, and performance, by definition that can create a system where there is a negative correlation to skills, knowledge, and performance for people who are the pay cap because they are the people that didn't get promoted. You can actually have people who are making more money than the people at the next level but have poorer performance and less responsibility because of the way the system is structured. The current system made sense when a significant majority of the Federal workforce was clerks, which it was in the 1950s. But now we have some of the most skilled, knowledgeable and dedicated people in this country working for the Federal Government, and we need to move to a system that reflects that fact. Senator Akaka. Thank you, Mr. Walker. Mr. Chairman, I, too, have to go to Armed Services, but I am hoping to be back here as soon as I ask my questions there. Thank you very much. Senator Voinovich. Thank you, Senator Akaka. The point that was just made by Senator Akaka, again, I am anxious to hear from the folks that have put in alternative systems, personnel systems, about the impact that it has had on the agency's effectiveness and performance. Mr. Walker, has it made a measurable difference at GAO? Is GAO a better organization, more effective, working harder and smarter and doing more with less? Mr. Walker. It clearly has, but I can also say that we have made a number of other changes. This is one of many changes that we have made. I will also say, Mr. Chairman, we didn't take a vote on this. When my predecessor, Chuck Bowsher, implemented broadbanding in 1989, he didn't take a vote on whether or not we were going to go to broadbanding. More recently, we didn't take a vote as to whether or not we were going to go to a more market-based performance compensation system. We didn't take a vote as to whether we were going to go to skills-, knowledge-, and performance-based system. And there were differences of opinion. There were differences of opinion within our workforce, as there will be in others. Some people like it and some people don't like it. It depends on where you sit and how you think it will affect you. That is human nature. It is understandable. But there is absolutely no question in my mind it has been a major contributor to our doubling our performance in virtually every category as compared to 5 years ago. Senator Voinovich. Mr. Blair, with the war in Iraq and now Hurricanes Katrina and Rita, some of my colleagues are talking about paying for the natural disasters out of an across-the- board reduction in various departments in the Federal Government. I have argued that, yes, we should look for economies, but there are so many unmet needs in some of these agencies that we have got to be careful about what we are doing. And the question I have is: Does the Administration understand the financial commitment that must be made in order to move forward with this human capital reform? How knowledgeable is this Administration in terms of the kind of financial commitment that is going to have to be made in the agencies to move with new systems like MaxHR and the Defense Department's National Security Personnel System? Mr. Blair. Well, you are always going to have the budget considerations, and the budget considerations are going to be exacerbated by the disasters that have occurred over the last month in terms of Hurricanes Katrina and Rita. That is the atmosphere in which we are operating today. Are we going to be asked to do more with less resources? I think that is assumed. That is something that I think we can expect. I have no specific knowledge of anything, but I would just say from having two decades of experience here in Washington, you can see that happening. But you have to also ask the question: If not now, when? We are always going to have budget considerations on board like this, and if we are going to say that we spend--$105 billion or $108 billion a year on Federal payroll, are we spending it in the best way possible? I think the answer is no. So I think that we need to make a concerted effort to improve the way that we award these scarce dollars that we have, however, many dollars we have. And I think that we also need to say that in awarding that, what is the value that we want to place in our culture, in our Federal workplace culture? And I think that the value that we want to have is performance. Right now, time drives that. Time on the job is the factor for within-grades. Basically if you are on the job and have a pulse, you get the annual increase. I think that is the wrong value that we want to send. If we talk about the war for talent, being able to bring in the best and the brightest, being able to bring in good and high performers into a high-performing organization, having a multi-level, multi-step system, which is complicated and foreign to those who are not familiar with the Federal workforce, isn't the best way of recruiting. We have seen with the demonstration projects that we can bring in better talent, and the best talent we bring in does, in fact, stay. But as far as the costs are concerned, the up-front costs, we will have to negotiate that as time goes on. We have to admit that those are going to be there, though. I think that to ignore that would be to ignore reality. We have to make sure that we have the investment in time and energy and resources in order to get this done. Senator Voinovich. It will be interesting to hear from the second panel what resources they needed. For example, have they hired consultants to help with implementing the new system? Mr. Walker, would you like to comment? Mr. Walker. Yes, I can, several quick points. First, we did hire outside consultants to help us, and it did cost money. It was a one-time cost, and we will be happy to provide that for the record. I think it will provide you with a sense as to what that one-time investment might be for other agencies. Second, the across-the-board annual pay adjustment that the Deputy Director just referred to is--even unacceptable performers are currently entitled to that by law. Let me restate: Even unacceptable performers are entitled to it by law. I don't know of anything that is performance-oriented about that. Third, I think the worst thing that Congress could do is across-the-board cuts. That is exactly the opposite of promoting high-performing organizations. That means that high- performing organizations would suffer just as much as ones that aren't deserving, that haven't done the job of re-engineering the base of their operations and transforming for the 21st Century. We need to look at the base of government. A vast majority of government is based on the 1950s and 1960s, whether it is spending or whether it is tax policy. Our current base of government is not only unaffordable; it is unsustainable. And you know that, Mr. Chairman. You have read our ``21st Century Challenges'' document. I just wish all your colleagues would, because it is clear and compelling that our children and grandchildren are going to pay a huge price if we don't start getting our act together soon. Thank you, Mr. Chairman. Senator Voinovich. When I was governor and mayor, our senior management was paid according to performance. Implementing that wasn't easy. I will never forget it. At the State level, we talked about implementing it, but it was just such a gigantic task, we decided to spend our time on quality management. But I can tell you this, that through quality management, when I left the governor's office, we had 17 percent less people working for the State of Ohio than we had when I came into office, except for the Department of Corrections. The point is we had a better workforce. People came to me and said through quality management, they participated, they were happier, they felt better about the job that they were doing. It made a big difference. It seems to me that if a new system isn't going to make a difference in terms of, (1) the effectiveness of the organizations for the benefit of the people of the United States, and, (2) for the betterment of employees, then you have to ask yourself, well, why go through the exercise? So I am anxious to hear from our next witnesses about what impact these respective systems have made in their operations. Mr. Blair, I would like to say to you that at this stage, I am pleased with what is going on in the Department of Defense, even though the regulations are not final. Implementation will begin in several spirals. We have several of them in Ohio. I want you to know I am monitoring them to see what is happening. I have become familiar with the people involved in Ohio and what they are doing. I think it is important for your OPM to understand that a lot of this is in your hands. You are going to have to be as candid as you possibly can be with us and with the Administration in terms of the commitment of resources they are going to need to make this system a successful system. Mr. Blair. Well, Senator, we are certainly not shy internally about voicing our opinions about what would be needed in order to get the job done. And I think that you know from our relationship and the organization's relationship with you, we have, I believe, a straight-talking relationship in which we value what you say and we share with you what our thoughts are. And I hope we can continue along those lines. We seem to have focused quite a bit on the start-up costs of these demonstration projects and what the start-up costs would be should a systemwide reform be enacted. Let's remember what has been taking place, too, over the last 5 years in the Federal Government. You referenced a report that you provided to then-incoming President George Bush in 2000. I think that we have made substantial progress on the Strategic Management of Human Capital in those 5 years, and during those 5 years we have devoted significant resources to improving human capital management in government. We are not where we should be, and we are not where we want to be, but we are on the path of where we want to be. The efforts that we have put in over the last 5 years at your insistence and with your help will also enable us to better lay the foundation for this robust performance management system which would best be linked with pay. Senator Voinovich. I have just one last comment I will make, and that is, if we peel back a lot of the problems that we have in the hearings on FEMA and so forth--it is the issue of having the right people with the right knowledge and skills at the right place. And the public has got to understand, as well as Members of Congress, that people do make the difference. In any good organization you have good finance and you have good people; and the better the people that you have, the better the organization that you have. That is what we should be striving for--the best and the brightest people in the Federal Government. We should be able to attract them, and we should be able to motivate those individuals. How well we do on that is going to have a lot to do with what kind of a country we live in in the future. Mr. Walker. Mr. Walker. I can underline that, Mr. Chairman. There is a natural tendency when something as tragic as Katrina happens or a similar event for the Congress to want to act and to provide support and assistance. Candidly, the Federal Government, as you know, tends to be a lag indicator. It tends to get involved late, in many cases when others have failed to act or when things go wrong. Government tends to do three things: one, throw spending at it, the more the better, the assumption is you care more if you spend more; two, throw tax preferences at it, again, the more the better, it shows that you care more; and, three, throw new players at it or new organizations at it. You hit the key. The key is not that. You can throw all kinds of money, you can throw all kinds of tax preferences, you can throw all kinds of players. But if you don't have the right people with the right skills, the right knowledge, in the right place at the right time, and if we don't have our organizational structures functioning given 21st Century realities, we are wasting a bunch of time and money, and we are never going to be effective. So you are so right, and that underlines the importance of this fundamental review and re- examination of the base of government, including the issue that you are holding a hearing on today. So thank you, sir. Senator Voinovich. Thank you very much. You are right. We are at it again, and we haven't even heard from the agencies. Of course, I think that they have some responsibilities. In fact, several of us have written to Secretary Mike Chertoff and to Andy Card, requesting the Administration come back to us and tell us what it is that they are doing to respond to all of the questions being raised in the Congress. We should give them that opportunity. Rather than throw more money at a problem, we have to make people understand it is the quality of the people that we have that really make the difference. Thank you very much. Our next witnesses are the Hon. Jeffery K. Nulf, Deputy Assistant Secretary for Administration, Department of Commerce; Arleas Upton Kea, Director of the Division of Administration, the Federal Deposit Insurance Corporation, FDIC; and Dr. Hratch Semerjian, the Deputy Director of the National Institute of Standards and Technology. I want to thank the witnesses for coming. As you know, it is customary to swear in witnesses. Before you sit down--if you will raise your right hand. Do you swear that the testimony you are about to give this Subcommittee is the whole truth, and nothing but the truth, so help you, God? Mr. Nulf. I do. Ms. Kea. I do. Dr. Semerjian. I do. Senator Voinovich. They all answered yes. Mr. Nulf, we will call on you first, and I thank you very much for being here today, and we are anxious to hear your testimony. Again, as I reminded the other witnesses, please keep your statement to 5 minutes, understanding that your full testimony will be part of the record, I would appreciate it. Thank you. TESTIMONY OF HON. JEFFERY K. NULF,\1\ DEPUTY ASSISTANT SECRETARY FOR ADMINISTRATION, U.S. DEPARTMENT OF COMMERCE Mr. Nulf. Good morning, Mr. Chairman. Thank you for the opportunity to appear before you today on the Department's efforts in managing alternative personnel systems. I have the honor of serving President Bush and Secretary Gutierrez as the Deputy Assistant Secretary for Administration at the Department of Commerce. As one of the principal tenets of President Bush's Management Agenda, strategically managing Commerce's workforce to better achieve our mission-critical objective is a key priority for Secretary Gutierrez and the Department. --------------------------------------------------------------------------- \1\ The prepared statement of Mr. Nulf appears in the Appendix on page 82. --------------------------------------------------------------------------- Commerce has been managing pay for performance since 1988. As Dr. Semerjian will testify, our involvement in alternative pay-for-performance systems occurred at the National Institute of Standards and Technology following the success of China Lake. Based on the successful results achieved with that effort, we established the Commerce Demonstration Project in 1998. Over the last 7 years, it has grown to 4,200 employees in five operating units stationed throughout the Nation. In October, we anticipate adding 33 employees represented by two local bargaining units that have asked to participate. We are also working with OPM to include 3,500 additional NOAA employees. The demo's benefits are perhaps most clearly evident in five areas: One, performance. Under the demo, managers have greater flexibility to recognize the contributions made by high performers. Since pay level adjustments and bonuses are determined as part of the annual performance appraisal, the nexus between performance and salary is very clear to all employees at all levels. During our most recent program evaluation, 53 percent of supervisors in the demo project reported that they were able to identify and reward good performers under the new system as compared with 26 percent in the GS schedule. Two, recruitment. Recognizing the highly competitive job market in which we must operate, the demo provides managers with a real opportunity to effectively negotiate salaries with job candidates. The tool is serving us well, particularly in recruiting individuals with specialized skills in mission- critical occupations. The most recent evaluation of the demo indicated that 41 percent of participating supervisors believe that they are better equipped to recruit well-qualified employees as a result of being able to offer competitive salaries. Only 19 percent of GS supervisors felt the same way. Three, classification. Under the Commerce demo, the GS classification system of hundreds of career series has been streamlined into four career paths. This allows managers to more quickly advertise to fill vacancies and to consider a broader range of skill sets to meet their specific needs. Four, employee satisfaction. As employees and managers have gained experience with the demo, trust in the system has grown. Over half of the demo employees surveyed agreed that increases were directly related to an employee's performance compared to roughly one-third within the GS schedule. Five, employee retention. It is clear that the demo project has had a positive effect on retaining good performers. Employees are rated on a 100-point scale. Those receiving a score of 40 or above are eligible to receive a bonus and/or pay increase. By allowing managers to better distinguish and reward differences in performance, we have found that turnover is lower among high performers, for example, a 1.5-percent turnover rate for those employees receiving 90 or above, while a 7.7-percent turnover rate for those employees receiving lower scores. Based on our experience, we believe that the success of alternative performance systems depends on several factors: Communication. We have learned that first and foremost a well-developed approach to educate employees and managers about any new system is essential. This helps to create a mutual understanding of the objectives of the new system and provide a shared perception that change will be implemented together as a team. Effective management. As with any personnel management system, if pay for performance is not managed well, it can be problematic. Employees need to feel confident that their rights are protected under a new system. Managers must have the skills needed to manage employees effectively. This can only be accomplished by providing training in performance management and performance feedback to all affected individuals. At Commerce, we provide quarterly briefings to all new demo employees and quarterly training on demo flexibilities to new supervisors. This year and last year we conducted training on performance feedback both for supervisors and employees at the end of the appraisal cycle to better position everyone for success. Routine and objective evaluation. Not only do annual evaluations ensure transparency to interested stakeholders and that the merit system principles are followed and the system is free of discriminatory reprisal, they also provide the basis on which human resource managers may objectively assess the success of the demo and determine any need for adjustment. At Commerce, such adjustments have included strengthening supervisory training in providing performance feedback; instituting performance management training and communicating performance expectations to employees; establishing a centralized data manager to oversee and ensure the quality of automated systems and data collection; and adjusting how service retention credit is calculated based on performance rating. Furthermore, we are more closely examining the impact of the demo on minority employees by adding focus groups and expanding how we analyze the results for annual evaluations. We have had very good success with testing pay for performance and believe that the experiences that Commerce and other Federal agencies have had provide a sound basis on which we can continue to move forward. Change is never easy. Far-reaching changes to a decades-old system that will profoundly affect the work lives of hundreds of thousands of Federal employees will inevitably, and justifiably, cause concern and merit careful consideration. Based on our experience and that of Federal agencies across the government, however, we believe the tools are in place that are needed to continue the forward momentum initiated by the various demonstration projects. Thank you for giving me the opportunity to speak, sir, and I welcome your questions. Senator Voinovich. Thank you very much. Ms. Kea. TESTIMONY OF ARLEAS UPTON KEA,\1\ DIRECTOR, DIVISION OF ADMINISTRATION, FEDERAL DEPOSIT INSURANCE CORPORATION Ms. Kea. Good morning, Mr. Chairman, and thank you for the opportunity to testify on behalf of the Federal Deposit Insurance Corporation regarding our experiences administering and managing a personnel system at an independent Federal corporation. --------------------------------------------------------------------------- \1\ The prepared statement of Ms. Kea appears in the Appendix on page 90. --------------------------------------------------------------------------- I will briefly highlight how the FDIC's personnel system has helped us achieve our mission, the importance of flexible personnel policies in today's rapidly changing financial industry, and our experience with ``pay banding'' and ``pay for performance.'' The FDIC has served as an integral part of our Nation's financial system for over 70 years. Established at the depth of the most severe banking crisis in the Nation's history, the immediate contribution of the FDIC was the restoration of public confidence in banks. Today, the FDIC's mission remains unchanged. We maintain our Nation's confidence in our financial system in three important ways: We insure the deposits held in our Nation's banking system; we examine and supervise banks for safety and soundness and compliance with laws and regulations; and, we handle the resolution of failed banks when that becomes necessary. In carrying out its mission, the FDIC does not receive appropriated funds. The FDIC is funded by insurance assessments on the deposits held by insured institutions and by the interest earned on the deposit insurance funds. In the late 1980s and early 1990s, the FDIC faced a banking crisis unprecedented since the Great Depression. The FDIC successfully responded to that challenge as it has to other challenges throughout its history. Part of the reason for that success was the flexibility the FDIC had to adjust the size of its workforce rapidly and substantially. In the early 1980s, the FDIC employed 4,000 people. By the early 1990s, the FDIC employed over 23,000 people, and today the FDIC employs fewer than 5,000 people. The FDIC was able to use its hiring flexibility in managing a mix of temporary, term, and permanent appointments to meet changing workforce needs and its authority to set compensation and benefits to encourage voluntary departures of employees through buyouts instead of involuntary, disruptive reductions in force. My written statement covers the history and the major lessons the FDIC has learned in using its flexibility to develop our personnel programs, and I would like to highlight five of the lessons that we believe may be of most interest to the Subcommittee. First, the rapidly changing technology in financial fields of the 21st Century demand that government agencies have access to flexible hiring authority as a part of their staffing options. The FDIC used a temporary appointment authority to meet its fluctuating personnel needs during the banking crises of the 1980s and the 1990s. Over the past year, working with the U.S. Office of Personnel Management (OPM), the FDIC has received delegated authority to offer competitive term appointments with the possibility of conversion to a permanent position without further competition. This kind of approach should address our need to expand and contract the FDIC's workforce to meet our future work challenges. The employees hired into this ``Corporate Employee Program'' are given introductory training in three critical business functions. They are then trained to become commissioned in one or more of these functions. If retained by the FDIC at the end of their term appointment, these employees will have a broad range of skills and perspective that will serve to benefit the Corporation. In addition, we are also close to finalizing delegated authority from OPM to quickly reemploy recent retirees to handle any banking crisis. My second point is that managing fluctuating personnel needs requires creative solutions. Setting targets and conducting RIFs is fast and effective, but such actions do not permit an organization to consider other more time-consuming and employee-friendly alternatives. For example, when the FDIC's failure resolution activity declined, we knew we had employees with great ability but little work. And so to address this issue, we received authority from OPM to waive certain critical job level requirements and create a crossover program which allowed employees who were trained to handle bank failures to become bank examiner trainees without a significant reduction in pay. This was a very successful program. In addition, the FDIC's compensation flexibility permitted us to offer more generous buyout programs than those offered in the Executive Branch. This also ensured that we had large numbers of voluntary separations of those in surplus positions. As we have used them, buyouts have taken a little bit longer, but they have saved money in the long run over RIFs, and they were better received by the employees. My third point is that compensation programs that recognize performance rather than longevity are very beneficial to organizations, but they do need to be implemented very carefully. The experience at the FDIC is that pay-for- performance program implementation works best when executives lead by example and compensation changes are made first for the executives and then managers and supervisors. My fourth point is that it is important to listen to employee feedback and be willing to adapt and evolve any changes in performance-based programs. An organization should expect that implementing pay-for-performance systems will need to make changes based on practical experience and from the feedback from those involved and subjected to the program. The FDIC is currently on its fourth iteration of its pay- for-performance system for managers and executives and has made a number of changes based on feedback received from the surveys and focus groups tasked with suggesting improvements. We do have indications that our managers agree with this change in the pay philosophy and culture. They are committed, as we are, to improving the system going forward. My final and fifth point is that it is extremely important that the organization invest the time and effort to train both managers and employees on the new pay system, and that it create a system that is perceived to be fair by those evaluated and compensated under it. This concludes my oral statement, and I would be happy to answer any questions that you may have. Senator Voinovich. Thank you very much. Dr. Semerjian. TESTIMONY OF HRATCH G. SEMERJIAN,\1\ DEPUTY DIRECTOR, NATIONAL INSTITUTE OF STANDARDS AND TECHNOLOGY, TECHNOLOGY ADMINISTRATION, U.S. DEPARTMENT OF COMMERCE Dr. Semerjian. Thank you, Mr. Chairman, and thank you for the opportunity to testify today before this Subcommittee regarding the Alternative Personnel Management System used at the National Institute of Standards and Technology. --------------------------------------------------------------------------- \1\ The prepared statement of Dr. Semerjian with an attachment appears in the Appendix on page 109. --------------------------------------------------------------------------- Originally founded in 1901 as the National Bureau of Standards, NIST is a non-regulatory Federal agency within the U.S. Commerce Department's Technology Administration. NIST serves industry, academia, and other parts of the government by advancing measurement science, standards, and technology to enhance economic security and improve the quality of life for all Americans. In order to accomplish this mission, NIST has primarily relied on one key asset: Its staff of dedicated scientists and engineers, technicians, administrative, and support staff. Recognizing the need to attract and retain top- quality staff, NIST's management worked with Congress, starting in the mid-1980s, to establish an alternative personnel management system. NIST's Authorization Act for Fiscal Year 1987 established a 5-year project to demonstrate an alternative personnel management system. The NIST demonstration system became permanent as of March 1996 through the National Technology Transfer and Advancement Act of 1995. The goals of the NIST system were to improve hiring of high-quality personnel and retention of high performers in order to more effectively accomplish the mission and goals of NIST. Evaluations and feedback from managers and employees show that these changes have significantly improved NIST's ability to recruit and retain high-quality staff. In addition, a basic objective of the original project was to design the system to serve as a model for simplifying and improving Federal personnel systems governmentwide, not just at NIST. The so- called new and improved system has dramatically changed NIST's management of human resources. It also has provided a model of reform to other agencies within the Department of Commerce, such as the Technology Administration, NOAA, and the Bureau of Economic Analysis. And I understand NASA is in the process of implementing an APS based on the NIST experience. NIST's alternative personnel management system has enabled us to do several things much better. Today, NIST competes more effectively in the labor market through more efficient and faster staffing mechanisms. NIST compensates and retains good performers more effectively. NIST has simplified, accelerated, and improved the classification process. We use performance appraisal results as the basis for granting pay increases and performance bonuses. NIST has streamlined the personnel Administration process through a reduction of paperwork, automation of personnel processes, and delegation. And, line management is more directly involved in the recruiting. The NIST system covers approximately 2,500 NIST employees in four career paths: Scientific and engineering professionals, technicians, administrative professionals, and administrative support staff. Senior Executive Service employees and ``trades and craft''--wage grade--employees are not covered by this system. Since implementing the alternative personnel management system, according to an OPM report, NIST is more competitive for talent, has retained more top performers than a comparison group, and NIST managers reported significantly more authority to make decisions concerning employee pay. Key indicators of NIST's ability to attract and retain world-class scientists and engineers are the numerous awards and recognition that NIST staff have received, since the implementation of the APMS. NIST staff have won two Nobel Prizes for Physics, been selected for a MacArthur ``Genius'' Award, received the National Medal of Science, received UNESCO's 2003 Women in Science Award, received 21 Presidential Early Career Awards for Science and Engineering, and 16 members of the staff have been inducted into the National Academies of Science and Engineering. While I would like to say everything has worked perfectly since its implementation, the fact is that NIST has had to make minor adjustments to the system over time. This was not unexpected, and has improved the functionality of the system. Over the years, both supervisory and nonsupervisory employees have provided ideas for improving the system, through focus groups and other forums. NIST responded to this feedback by developing a revised performance appraisal and payout system in 1991, more recent feedback--from the 2000 and 2002 NIST Employee Surveys, the NIST Research Advisory Committee's 2002 Report, and stakeholder focus groups--has led to the latest changes which will be implemented during the next performance cycle. Starting on October 1, NIST will replace the current 100- point rating scale with six performance ratings and link pay increases to these ratings. This will simplify the system, strengthen the pay-for-performance link, and increase the transparency of the system. In its present form, I think the NIST system offers improvements in position classification, recruitment, extended probationary period for research positions, performance appraisal, pay for performance, automation and paperwork reductions, and delegations of authority to managers, all of which have many advantages over the current GS system. In conclusion, the NIST Alternative Personnel Management System is meeting its objectives to recruit and retain quality staff; to make compensation more competitive; to link pay to performance; to simplify position classification; to streamline processing; to improve the staffing process and get new hires on board faster; and to increase the manager's role and accountability in personnel management. The NIST system continues to operate as an innovative personnel system which has a proven track record of demonstrating new ideas in the area of human resources management. Mr. Chairman, thank you for inviting me to testify today, and I would be happy to answer any questions you may have. Senator Voinovich. Thank you very much. My first observation is in the FDIC and in NIST, particularly in NIST, you are going after the best and brightest people in the country. The conclusion must have been made some time ago that if you were going to get them, you had to mirror the private sector or you were not going to be able to be competitive. I would like you to comment. Do you think at this stage, because of the new system, that you are in that position where you can be competitive? Dr. Semerjian. From personal experience, I can assure you that we are a lot more competitive than we were 15 or 20 years ago. As a supervisor, when I was trying to recruit people, I felt that I had a high obstacle to jump over to be able to compete with offers from the private sector. I think we are doing much better in that regard. Our recruiting is much more successful, and our retention of our high-quality people is much better. Those two Nobel Prize winners are still at NIST. I am not sure that would not have been the case if we were operating in the old system. Senator Voinovich. In other words, could you comment on how pay for performance has helped? The question is: If I am being interviewed for a job at NIST, how important is it for me to know I am going to work for an organization that is going to pay me on the basis of my performance? Dr. Semerjian. The people we recruit aren't necessarily coming to NIST to get rich, so to speak, but obviously they have to have a reasonable living, and they want to make sure that they are not going to get stuck on some level, artificial level, that they have the opportunity to move up in terms of their salary as well as in the organization. And I think that the fact that we have this documented experience, where the statistics are actually on our website for everybody to see for transparency's sake, I think, helps us a great deal in our recruitment. Senator Voinovich. In other words, they can see how you reward people. And, of course, once they are on board, that is very important in terms of retaining them. Dr. Semerjian. Absolutely. Senator Voinovich. A very good friend of mine has a son-- and I will not mention the agency he worked with, but he went to work for them for about a year and a half, and left. He just said that it was mediocrity. He felt that people were not being rewarded for what they were contributing, that it was an automatic thing, and he left them. Ms. Kea, how about the FDIC? How much of a difference has pay for performance made in recruiting and retention at FDIC? Ms. Kea. Thank you, Mr. Chairman. There are several areas, which we look at. First, I would like to say that there is a comparability statute, which does require us at the FDIC to remain comparable with the other financial institution regulators. That is one factor we look at as we are setting our pay and our benefits. But in addition to that, we do find---- Senator Voinovich. Just a minute. It is an independent agency, but you are allowed to establish compensation the FDIC maintains comparable with other regulatory agencies? Ms. Kea. That is correct, sir, and the history behind that is, I believe, Congress did not want us to be in danger, each of the financial institution regulators, of losing some of our best and brightest to the other financial institution regulators. And so each year, we do take that into consideration, and we share and exchange information. In addition to that, we do believe that we do lose employees in some instances to the industry which we regulate. We also have some difficulty attracting certain professionals in the area of research, which is the heart and soul of some of our work at the FDIC. We do believe that our flexibilities allow us the opportunity to do a better job of recruiting those individuals in particular. Senator Voinovich. Is pay for performance taken a factor in their coming to work with you? Ms. Kea. Yes, because it is the pay for performance that would allow us to give them increases in their pay. Senator Voinovich. And that helps with retention, too. Ms. Kea. Yes, sir. Senator Voinovich. I have a theory that one of the reasons why we had the tremendous scandal in our financial institutions is in part due to the Securities and Exchange Commission losing a lot of their people to other regulatory agencies because of their compensation. And, of course, we found out about it too late. At the FDIC, how do you determine whether or not the system is really working, that people indeed are being paid on the basis of their performance and it is not arbitrary? I am sure you hear constantly from folks that this is an arbitrary system, it is very subjective, not objective, and leads to favoritism and so forth. How do you guarantee that is not present in the organization? Ms. Kea. That is something that we pay a lot of attention to. We have tried to create a process that has transparency. We have well-defined objectives that are linked to the mission of each of the divisions, the offices, the branches, or the entire corporate mission. We publicize those. We provide training to our employees with regard to how they can achieve those objectives. We also provide, and invest, much time in training our managers on the new system. With regard to the nominations, that is a very rigorous process and a number of different individuals participate in that process. We provide a formal opportunity for our executive levels to give us feedback through a survey. We make adjustments based on what we hear in that survey. With regard to our bargaining unit employees, whether or not we conduct a survey is something that we would bargain with our union. We have not done that thus far, but we have found other means to get feedback from our employees. We have large employee gatherings, where our executives are available to hear feedback about our system. I should say that we are in our fourth iteration of our pay-for-performance system for our executives, and those changes have come directly from the feedback that we have heard. I should also mention---- Senator Voinovich. All of your employees are in pay for performance now, including those represented by unions? Ms. Kea. That is correct. Senator Voinovich. OK. Ms. Kea. I should also mention that every 3 years we bargain pay and compensation with our union. This year is a pay and compensation bargaining year, and we are in negotiations at this point with our union. Senator Voinovich. OK, but you negotiate the pay-for- performance system in place. Ms. Kea. In fact, the pay-for-performance system is something that is also subject to the negotiation. The system that we have in place right now today is one that the union did participate in the details of creating through that negotiation. Senator Voinovich. But it is a pay-for-performance system. Ms. Kea. Yes. Senator Voinovich. How long have you worked with the agency? Ms. Kea. I have been at the FDIC since June 1985, so it is over 20 years. Senator Voinovich. OK. So you have a good indication of the history. How do you think that they feel about this new system, in terms of their happiness on the job and their productivity, self-worth? Ms. Kea. I would say that there are mixed reviews from the employees. We have some pretty specific information, as I indicated earlier, from our executives. Overall, they have indicated that they certainly prefer this. They think that it is more fair than everyone receiving the same pay for work that is at varying levels, of high or low contribution. We have also surveyed our non-bargaining unit employees, and they have confirmed to us that they certainly prefer a system that gives a greater reward for a greater contribution. I think that it is probably mixed with regard to the greater part of the population, the remaining part of the population, and the reason for that would be that it is a very large shift in the culture. I think as some comments have already been made by OPM and GAO, the culture has been one of everybody receiving everything across the board. This is a very different culture, one where you receive an award based on how great your contribution. I feel that this pay-for-performance system provides some sense of motivation and encouragement. I have been involved in some conversations with some of our employees where they wanted to know: Well, how did that employee get that? How can I get it? And what sort of plan can I put myself on where I can get that? Senator Voinovich. So you would agree that for management this has been helpful? Ms. Kea. Yes. Senator Voinovich. With respect to the organization, do you see it as a more efficient, vibrant organization that is getting the job done, with this system contributing to that? It has not been a negative but, rather, a positive type of exercise that has helped. Ms. Kea. I think that it has helped us to be more efficient as an organization in terms of achieving our mission. If you recall, when I gave the numbers of how we were a very small organization, we became very large in response to a crisis, and then we had to shrink back down. I think that there is no question we are doing much more work with a smaller number---- Senator Voinovich. You went from 4,000 to 23,000 employees, and then from 23,000 down to 5,000? Ms. Kea. Slightly under 5,000 today. Senator Voinovich. Amazing. Ms. Kea. So we are doing much more with fewer resources, and I think one of the ways that we have met that challenge is to provide these kinds of incentives to attract individuals and for those who are there to motivate them to work harder. Senator Voinovich. Thank you. Senator Akaka. Senator Akaka. Thank you, Mr. Chairman. Sorry I had to run off to another committee, but I am delighted to be back here to ask my questions. I want to add my welcome to the panel. Mr. Nulf, I understand that there are over 100 employees in Hawaii participating in a demonstration project at the Department of Commerce. Can you explain how pay for performance works for those employees who receive what we call a non- foreign COLA and whether it differs from the system in place for other employees? Mr. Nulf. Thank you, sir. In Hawaii, as well as throughout, with the demo project in Commerce, my fellow members on the panel have been speaking to the fact of expectations being laid out and the pay-for-performance aspect that is brought to the table by ringing out an entitlement and rewarding your performers. At the end of the day, pay for performance does a number of things, some with purpose and some maybe as an indirect complement to what otherwise is going on. Your performers stay. We have 1.5-percent turnover in 90 and above. We have performers that are down into the 40s that we have high turnover almost double-digit. I think those things are reflective of the fact that people want to be successful. When you put this type of system in place, I think it is well received by employees. I think the managers enjoy the flexibilities to it. But, most importantly, I think whether it is a team unit, a department, whether it is a group stationed in Hawaii, whether it is a group stationed here at the Herbert Hoover Building, people and teams and agencies want to be successful. I would agree with what Mr. Walker said earlier that the Federal workforce, on the whole, is an incredibly talented and diverse group of folks that are committed to what they are doing, and the opportunity to serve is extremely important. But the other aspect of that is people do have bills and people do have mortgages, and given the opportunity for your performers to have access to a greater degree than your lesser performers, I think it creates a win- win situation, sir. Senator Akaka. The employees' non-foreign COLA that we are talking about, will they be impacted at all? Mr. Nulf. Will they be impacted? In what way, sir? Senator Akaka. Well, will the COLA still be an allowance? Mr. Nulf. Yes, sir. Senator Akaka. And my question is how does this new system impact COLA? Mr. Nulf. Yes, they receive their COLA for those that are in place regardless. And for those that are rated eligible by the performance ratings they receive, of course, the additional performance pay that is put on the table. But, yes, they are certainly eligible for COLAs, sir. Senator Akaka. Will the COLA be reduced or increased based on performance? Do you have an idea at this point in time? Mr. Nulf. I do not, sir. I can certainly respond back to this Subcommittee. Senator Akaka. Thank you. My next question is to the entire panel. Was there an increase in the number of discrimination and unfair treatment complaints following the implementation of a pay-for-performance system at your respective agencies? If so, what type of redress options do employees have if they believe their pay is based on matters other than their performance? Ms. Kea. I will speak first on behalf of the FDIC, and my answer is yes, we did see a number of increases in the number of complaints. These were either a labor grievance or an EEO complaint. Management feels, at the FDIC, that it is very important to have an appeals process to the pay-for-performance system. We anticipated that because it is such a great cultural change that there would be a number of such increases. I will say that with regard to the number of cases that have come through the system, a number of them have been overturned in favor of management. However, we do look at those cases and what is said in them, and if there are lessons to be learned, or if there is information that we find helpful, we certainly look at that information and use that as we try to improve our system. Senator Akaka. Mr. Nulf. Mr. Nulf. Yes, sir. In the early stages, we as well saw similar numbers, I would say, as we experienced within the GS. That being said, though, we have a focus similar to what has been testified today to make sure that the communication process and the involvement from affinity groups and monthly meetings and quarterly meetings with the CFO ASA, that all the various groups and everybody has a stake, if you will, in the process. And that has in the long run, certainly over the course of the last survey, in the last 5 years those numbers have gone down and, in fact, are below what we have otherwise with the GS schedule. Senator Akaka. Dr. Semerjian. Dr. Semerjian. Senator, we have not seen any major increase in grievances, but, first of all, I think NIST had a culture of technical excellence, so rewarding excellence was not a foreign concept. But, also, I think it is very important to make sure that we establish the metrics as part of the contract, so to speak, the performance agreement that we establish at the beginning of the year. We provided quite a bit of training for our managers to make sure that they know how to prepare appropriate performance agreements with the appropriate metrics. Performance appraisal is always a subjective process, of course. The question is how can we make it as objective as possible, and by establishing the metrics, the expectations at the beginning of the year, I think goes a long way to avoid those kinds of grievances. But we have not seen, when we started this process almost 20 years ago, any major increase. Senator Akaka. Thank you for your responses. Mr. Chairman, my time has expired. Senator Voinovich. Senator Carper, welcome. OPENING STATEMENT OF SENATOR CARPER Senator Carper. Thanks, Mr. Chairman. I was just meeting with one of your constituents from Toledo, CEO of Owen Illinois, who used to run a big part of Dupont's fibers business. He sends his best. He is interested in asbestos. Senator Voinovich. Hopefully we will get that bill. Senator Carper. In Delaware, in my old job, as well as Governor Voinovich, we used to focus a lot on education, and we had a problem in my State, with being able to get enough well- qualified substitute teachers to show up on a daily basis at schools who could come into the classroom and do a good job when the regular teacher was not there. One of the ways that we finally settled on to address the problem was we tried to get retired teachers who still wanted to be in the classroom but they just did not want to do it every day, but they were willing to work as a substitute teacher. And the pay was not great, but what we finally worked out was an arrangement where they could come back to work as a substitute teacher, still receive their pension benefits, full pay, full pension pay, which you were entitled to, and they would also receive the daily stipend that was paid in a particular school district as a substitute teacher. I am told that you mentioned in your testimony before I got here, that the FDIC would like to have the authority to bring back some of your former employees with skills that might be needed when your workload increases, maybe for a merger or bankruptcy, or that kind of thing. I just shared with you one example of what we have done in a little State to enable us to do something like that with some success, and I just want to ask if you know of any other agencies that have a similar kind of authority, that I think you are looking for for the FDIC. Is there a model out there, at least at the Federal level, or maybe a non-Federal level, that you think could be adopted by the FDIC or other agencies in similar circumstances? Ms. Kea. Thank you, Senator Carper. That is a very good point, and we are very interested in bringing back our retirees, obviously, in the event of some catastrophic failures that would require more than the number of staff that we have available. It would be an excellent resource for being able to go out and get individuals who are already trained, have the knowledge in their head, and could be of immediate assistance to us. We have been in serious talks with OPM, and we would like to be able to waive the dual compensation to allow them to continue to receive their benefits and still be compensated during the time that they are working for us. We think that it is something that would work quite well, and, obviously, it would alleviate any increase in adding employees to the rolls of the FDIC. I am not aware, just off the top of my head, of what other organizations currently have that. That is some information that I would be happy to supply back to the Subcommittee, and I could do that. Senator Carper. I understand, Dr. Semerjian, that you mentioned in your testimony that the National Institute of Standards and Technology is now, you believe, more competitive in hiring and maybe doing a better job of retaining folks, the kind of folks that you have been seeking to attract since you implemented this--I guess it is called an alternative personnel system. And I would just like to ask two questions. First, what aspects of that system do you think have contributed most to those improvements that have been noted? And, second, did the agency experience the kind of problems earlier that you face today? First of all, what aspect of the system do you think has contributed most to the improvements that have been noted? Dr. Semerjian. Certainly, our ability to recruit high performers has been affected, as well as our ability to recruit in a timely fashion, because now we actually have direct hiring authority for our professionals. So that makes a huge difference when we are competing with other offers, so to speak, to be able to make a commitment as opposed to waiting months. But probably the biggest impact has also been in the retention area. Senator Carper. How so? Dr. Semerjian. As I had mentioned earlier, we have very high performers, such as Nobel Prize winners, and you could imagine they have a lot of transportability, so to speak, that they get a lot of offers just about every week. And to be able to retain them at NIST, we had to be fairly creative, and we have the tools, the ways of rewarding them through retention bonuses and other ways to keep them at NIST as part of our atmosphere, culture of technical excellence. Senator Carper. OK. Good. Thanks. My last question is for Ms. Kea again, and I don't know if we will have time for anyone else to comment, but I would at least ask you to start. I understand that Colleen Kelley from the Treasury Employees will testify later that the pay-for- performance system at the FDIC has been, in her view, demoralizing for at least some of the folks who work there. And I would like to ask you to comment on that, but I would also like to ask you to speak for a minute about how you--``you'' more broadly than ``you'' as an individual, but how you seek to make the system fair, treating other people the way we would want to be treated? I know there are always some bad apples in every agency. We have had bad apples in every outfit I have been a part of my whole life. So my guess is you probably have some, too. But we also strive to get everyone, I guess, up to a certain level. Any thoughts you have how you differentiate between employees that are doing a good job and those that are doing a great job? How do you all differentiate there? Ms. Kea. Thank you, Senator. First, I do want to say I have a great deal of respect for Ms. Kelley, but I do not agree with her opinion or her assessment that our current system has been demoralizing for employees. We actually have worked with the union in developing this system. I am not sure you were in the room when I did state earlier that we at the FDIC do negotiate pay and compensation, which includes our performance appraisal system with the union. We do that every 3 years. Senator Carper. I was not here, no. Ms. Kea. This is a third year for us, and we are, in fact, in negotiations now currently with the union, and one of the items for discussion on the table is our performance evaluation system. We are very interested in hearing continuing and ongoing feedback from the union. With this program that we currently have in place--we started it at the executive level from the top going down--we surveyed our executives about the program and got pretty specific feedback. They indicated that they definitely felt that a system which gave them higher pay for higher performance, was more fair than one where everybody received the same pay but had unequal performance. We then implemented a similar pay-for-performance system with our non-bargaining unit employees, and we also surveyed them. And the feedback that we received was that they also felt that it was a more fair system than everybody receiving the same increase across the board. We have not implemented a formal survey for our bargaining unit employees. We would have to bargain, in fact, to do that. However, we found other ways to receive feedback. We go to staff meetings. We make managers available at the large staff meetings, and we try to talk to employees. We had a very through training system where we gave briefings and staff meetings to our employees about the new system so that they could understand what the goals were in order to be eligible for an increase in their pay. And we tried to link those to either a corporate mission or a mission at the branch level or at the division level, thereby giving everybody an opportunity to make a contribution and eliminating the thought or the philosophy that the nature of some jobs provide greater opportunities to make a contribution. We really focused on that. The review process for determining who would get the award was a very thorough one involving several levels. And, in fact, before the results were released, the union did get the opportunity to review those results just to look at them to see if there was some statistical imbalance. So we tried at all levels to build in some guarantees, some assurances, and to put as much transparency as we possibly could in the process. One thing that I also stated earlier is that we are in the fourth iteration of our pay-for-performance system for our executives, and we have changed it based on the feedback that we have received through that process. So we feel that while no system is perfect and we have had a number of different systems at the FDIC, we are committed to trying to refine the system based on the feedback, based on the involvement that we have from the individuals who are both managing it and those who are being subjected to it. Senator Carper. All right. Great. Well, Mr. Chairman, you have been generous with the time. I thank you and I thank our witnesses for their comments and responses to these questions. Thank you. Senator Voinovich. I want to thank the witnesses for being here. There may be some other questions that we want to submit to you in writing. We would appreciate your getting back to us as soon as possible. We would like to have you stick around some more, but we have three other witnesses and it is 5 minutes after 12 o'clock. We have got to get on with our work. Thank you very much for coming. Senator Voinovich. Our next witness is Morgan Kinghorn, who is the President of the National Academy of Public Administration. Colleen Kelley is the National President of the National Treasury Employees Union. John Gage is the National President of the American Federation of Government Employees. It is good to see all of you again and welcome. Before you sit down, if you would raise your right hand and repeat after me. Do you swear that the testimony you are about to give this Subcommittee is the whole truth, and nothing but the truth, so help you, God? Mr. Kinghorn. I do. Ms. Kelley. I do. Mr. Gage. I do. Senator Voinovich. Mr. Kinghorn, if you will begin. TESTIMONY OF C. MORGAN KINGHORN, JR.,\1\ PRESIDENT, NATIONAL ACADEMY OF PUBLIC ADMINISTRATION Mr. Kinghorn. Thank you, Mr. Chairman, Senator Akaka, and Members of the Subcommittee, for inviting me to testify on a subject that I have certainly had a personal interest during my 25-year career and my 9-year career in the private sector and now in a nonprofit organization, about looking at the alternative public personnel systems. --------------------------------------------------------------------------- \1\ The prepared statement of Mr. Kinghorn appears in the Appendix on page 114. --------------------------------------------------------------------------- As President of the National Academy of Public Administration, I am really pleased to appear before you to provide some personal perspectives on the work of the Academy. As you know, the Academy is an independent, nonpartisan organization chartered by the Congress to give trusted advice. The views presented today are my own and are not necessarily those of the Academy as an institution. What I would like to do is really depart from my written testimony and reflect on what I have heard in the last 2 hours and really give you some perspectives that are contained in my testimony, but also really are based on my experience in both the private and public sector on what we really should be looking at. I think the fact that there is a consistency in what the Subcommittee is hearing really shows the long evolution of performance-based systems. They have been around for a long time, and they certainly can work. The first point I would like to make is I think the reforms in this system are absolutely essential. The Academy, about a year and a half ago, did ``Conversations on Public Service,'' which came out of our work on pay for performance and the Volcker Commission. In addition, there was a survey that OPM did about 3 years ago that I would like to share, two questions and answers that I think go to the point. One question that was asked was: ``My performance appraisal is a fair reflection of my performance.'' Sixty-five percent of the 100,000 responders in the Federal Government said yes. There was obviously a lot of work going on in performance appraisals. The next question, though, is a little more interesting: ``Our organization's awards program provides me with an incentive to do my best.'' Seventy percent of the responders neither agreed or didn't--disagreed or strongly disagreed. That would tell me that we have organizations that are certainly involved in some kind of performance evaluations, but it is unclear to me how they have been used. They certainly haven't been used in terms of awards. So I think the system needs to be changed and probably needs to be changed fairly radically. Second, you have heard a lot about the importance in these systems at every level in the organization being involved. That is crucial. It also ties into why, in those organizations that are successful, it goes from the top of the organization down to the employee, and it is nearly always tied to a strategic plan and the objective of that organization. Without that, there is rarely a connection between employee performance, whether it is a manager or a working employee, and the agency's core mission. You have also heard, which I completely agree with, on the transparency of the process and the transparency of the outcomes. I think that is crucial. When I came into consulting 13 years ago, after a 25-year career in the Federal Government, I came out of a structure where I started as a GS-9, ended as an SES-6, and really was appalled for those 25 years at the inability of the system to really appropriately differentiate between the best performers and, in particular, the average or mediocre performers. I came into a private sector organization that had pay for performance. However, it was often based on which partner in the consulting business liked you or didn't like you. So when I became a partner 2 years later, I decided to change that process and basically created a peer review process in my practice--it was the second largest practice in PricewaterhouseCoopers at the time in the public sector--in which at the end of those review processes the transparency of the decisions to all the employees as well as the outcomes was pretty clear. It passed the laugh test, which is an important test to pass. Individuals may not have been happy with the outcome, but when they looked at who was rewarded, about 18 percent of the people got cash awards or bonuses or pay increases--not a large number--they understood why, because there was a process in place, training in place, and everyone from the partner down to the employee was involved in that process. The final thing I would like to share with you is that I think one of our focuses needs to be on the future. Government is transforming in a variety of ways. What government does, how it does it, and who does it is changing radically. A lot of our discussion appropriately focuses on the current 2 million plus or minus Federal employees. But over the next 20 years, which these reforms will impact, we have a different workforce coming in from what our research tells us, one that demands different kinds of rewards, one that wants more agility in the way they work, more flexibility, the ability to move around quickly, the ability to move up, and not be hampered by what appears to them to be a very complex 25- to 30-year career process called the General Service. So they really do expect change, and if they don't get it, we won't be able to retain them and we won't be able to get them. Finally, I think we have to realize that there is a constistancy in this change. I ran a relatively small practice in Pricewaterhouse that was 600 people with 24 partners, but it was part of a 35,000-person organization, all of which had pay for performance, which worked reasonably well. But we changed it nearly every year. We learned from the process. So I think if we attempt to create and wait for a process that is perfect, certainly for the individual agencies, all of whom are unique, have unique requirements, we are never going to get there. And with the changing nature of the workforce, where many programs that really the primary people involved are no longer Federal employees--they may be contractors, they may be for-profit, they may be nonprofit, they may be grantees, people receiving money from the Federal Government--the relationship of how we reward performers is going to change even further in the next 10 years. So I think clearly it is time to move on. We have learned a lot from both the experiments that have been performed, we have learned a lot from the private sector, and certainly from State and local governments who have been involved in this for a long time. I will be glad to answer any questions the Subcommittee may have of me. Senator Voinovich. Thank you very much. Ms. Kelley. TESTIMONY OF COLLEEN M. KELLEY,\1\ NATIONAL PRESIDENT, NATIONAL TREASURY EMPLOYEES UNION Ms. Kelley. Thank you, Chairman Voinovich, and Ranking Member Akaka. I very much appreciate the opportunity to testify here today. --------------------------------------------------------------------------- \1\ The prepared statement of Ms. Kelley appears in the Appendix on page 119. --------------------------------------------------------------------------- I would like to comment specifically about three alternative pay systems that NTEU has been involved with: The FDIC system, which has been in effect for several years; the Department of Homeland Security system, which is still in the pre-implementation stage; and the IRS system that right now only applies to managers. I must say at the outset that I believe that these alternative personnel systems have very little positive impact on recruiting, retaining, and maximizing the performance of Federal employees. NTEU has bargained over compensation at the FDIC since 1997. While we have serious concerns about the current state of the pay system there, we strongly believe that, in the absence of a statutorily defined pay system, like the GS system, pay should be subject to collective bargaining, as it is in the private sector. Especially in a government environment, employees and the public need a credible means of ensuring that pay is set objectively. NTEU is at odds with the FDIC on the current system to determine performance pay. While the FDIC itself has stated that ``more graduated levels of rewards are better than fewer levels,'' it has dropped a multi-level performance evaluation system, and the FDIC has moved to a pass-fail performance evaluation system. Under this system employees who pass are eligible to be nominated by their supervisor for a pay increase that they call a Corporate Success Award. Now, NTEU insisted that there be some guarantee that front- line employees would have access to these Corporate Success Awards and that they would receive some of this money, so there is language that guarantees that at least one-third of bargaining unit employees, front-line employees, will receive these CSAs. But that one-third minimum might as well be a limitation because to date the FDIC has only been willing to recognize and reward one-third of the workforce. And the standards for who gets these increases are vague, they are subjective, and they are not apparent to those who are covered by the system. The application of this one-third limitation on the availability of pay adjustments and its lack of transparency have demoralized FDIC employees. Our members report that the system is divisive, it discourages teamwork, and it sends the message that two-thirds of the workforce are not contributing. The previous system at the FDIC, which was based on multi-level performance evaluations without limits on the number of employees who could receive additional pay, did have credibility with employees. The current system does not. DHS. While the pay-for-performance system at DHS has not yet been implemented, we are very concerned that it will push employees who are already demoralized out of the agency when the importance of keeping experienced, skilled employees is greater than ever. Let me be clear: The employee opposition to the proposed DHS system is not about ``fear of change,'' as some have tried to portray it. I know firsthand that this group of employees, who are entrusted with protecting our country from terrorists and other criminals, is not a fearful group. What they most object to about the proposed DHS system is that it will make it harder, not easier, to accomplish the critical mission of the agency. There are several reasons for this: One, the system is not set by statute or subject to collective bargaining as the FDIC's system is, so there is nothing to provide it any credibility among employees. Two, the system will have employees competing against each other over small amounts of money, discouraging teamwork, which is critically important in law enforcement. Three, the system is subjective, which will lead to at least the appearance of favoritism. Four, the system is enormously complex, the administration of which will require huge amounts of money that is so much more desperately needed in front-line functions, not to mention siphoning off money that could go for more pay in a less administratively burdensome system. And, five, the draft competencies for the new DHS system do not recognize or reward the real work that these employees do to keep our country safe. The IRS. While employees represented by NTEU are not covered by a paybanding performance-based system at the IRS, IRS managers are. The Hay Group, a consultant which was hired by the IRS, did a senior manager payband evaluation on this system for the IRS last year. Here are just some of the results: 76 percent of covered managers felt the system had a negative or no impact on their motivation to perform their best; 63 percent said it had a negative or no impact on the overall performance of senior managers; only one in four senior managers agree that this paybanding system is a fair system for rewarding job performance or that ratings are handled fairly under the system; and increased organizational performance was not attributed to this paybanding system. The results of this IRS system are dismal, yet it is pointed to as a model for moving the whole Federal Government to a similar system. In fact, there is a dearth of information to indicate that alternative pay systems have had any significant impact on recruitment, retention, or performance. The GAO report I mentioned in my full testimony includes virtually no evidence that the systems improved any of those measures. In fact, the Civilian Acquisition Personnel Demonstration Project that was reviewed in that report had as one of its main purposes to ``attract, motivate, and retain a high-quality acquisition workforce.'' Yet attrition rates increased across the board under the pilot. NTEU is not averse to change. We have welcomed, at the FDIC and elsewhere, the opportunity to try new things and new ways of doing things. Based on my experience, these are the things I believe will have the most impact on the quality of applicants and the motivation, performance, loyalty, and success of Federal workers: One is leadership. Rules and systems don't motivate people. Leaders do. Two, opportunities for employees to have input into decisions that affect them and the functioning of their agencies. Employees have good ideas that management is currently ignoring. And, three, a fair compensation system that has credibility among employees, promotes teamwork, is not administratively burdensome, and is appropriately funded. Unfortunately, I do not believe the systems that are currently being pursued by the Administration follow these standards. I ask that the Members of this Subcommittee closely review and analyze what data exists on these current alternative personnel systems that exist today. I don't think the evidence supports their use as successful models across government. I thank you for the opportunity to testify and would welcome any questions that you have. Senator Voinovich. Thank you very much. Mr. Gage. TESTIMONY OF JOHN GAGE,\1\ NATIONAL PRESIDENT, AMERICAN FEDERATION OF GOVERNMENT EMPLOYEES, AFL-CIO Mr. Gage. Thank you, Mr. Chairman, for inviting me to testify today, and also thank you, Senator Akaka, for your support of Federal employees, not just on this Subcommittee but also the VA and Armed Services committees. --------------------------------------------------------------------------- \1\ The prepared statement of Mr. Gage appears in the Appendix on page 128. --------------------------------------------------------------------------- I would like to focus my remarks today on the experience of AFGE Local 1904 at the Army's Fort Monmouth, in New Jersey, which has had about 5 years of experience with the Acquisition Demonstration Project. I must say the demo at Fort Monmouth works relatively well for two primary reasons: Collective bargaining and funding. Crucial aspects of the system have been established through the process of collective bargaining, and the resulting collective bargaining agreements are fully enforceable. Labor and management have a respectful relationship, and the contracts negotiated between Local 1904 and local management reflect the good-faith efforts of both parties. In addition, the demo portion of the pay system is funded separately and is treated as a supplement. Virtually every employee covered receives his regular ECI and locality increase each year. The demo raises are on top of these regular across-the-board increases. Although money formerly used for within-grade and quality step increases is used for the demo, at Fort Monmouth additional program funds have been provided to allow the improvements in overall pay levels. My written testimony includes a description of some of the terms of the contract between AFGE Local 1904 and Fort Monmouth management. As you know, a contract such as this will be unenforceable in DOD and DHS once the NSPS and MaxHR go into effect. In fact, managers will not even have the authority or flexibility to negotiate with the local union or use a contract like this to navigate the inevitable conflicts that arise over how to implement a pay system that requires subjective evaluations. This contract, like all collective bargaining agreements, reflects a balance between the rights of management and workers subject to the constraint of mission accomplish. It reflects the joint acknowledgment of various roles and responsibilities and their limits. Despite the positives I have described, the demo at Fort Monmouth is far from perfect. Like all pay schemes that seek to individualize pay adjustments, it raises the question of what the system is trying to accomplish, whether those aims have been met, whether the pay system should get credit for improvements and results, and whether the costs associated with administering complex, multifaceted pay adjustment processes are offset by measurable benefits. The most important point is that the crucial protections for employees that are included in the Fort Monmouth demo are absent from both NSPS and MaxHR. The classification system at Fort Monmouth still provides a floor for an employee's salary based on the duties and responsibilities of the job, and they are entirely objective criteria. Collective bargaining rights are intact and fully exercised. The fact is that the demo at Fort Monmouth, and its success, has far more in common with the General Schedule than it does with either MaxHR or NSPS. Time and again the employees at Fort Monmouth urged me to tell you that they oppose the NSPS in the strongest possible terms and that the real reason that their project works as well as it does at Fort Monmouth is the strong, fair, and reliable system of checks and balances achieved and maintained through collective bargaining. Mr. Chairman, I know you brought up Katrina, and this past week or so I have received incredible reports of Federal workers, who have gone the extra mile. Social Security was down there instantly, gave out 30,000 checks to people who would not have gotten them through the mail or any other way. We have pictures of VA employees standing in knee-deep water doing their job. We received more volunteers from Border Patrol and Homeland Security to go down there on their own to help out. And, Senator, while you are sitting here trying to look at how to motivate employees, provide fair compensation, then we get hit last week with our retirement going from high three to high five, retiree health insurance being hit, paying for parking--and this comes to about $7 billion over 5 years. And, Senator, it is hard for Federal employees to see anything objective about new personnel systems, when they see in the wings our benefits, our retirement, and our pay ready to be slashed. So, Senator, I would like to commend you for having these hearings and for looking at Federal employment, but you have to realize that a tax on our current system certainly is nothing to do and will not help rewarding the best and brightest or attracting the new generation of Federal employees or retaining the ones that we have. Thank you, Senator. Senator Voinovich. Thank you very much, Mr. Gage. Senator Akaka, if it is all right, I will ask you to start asking questions. I have to excuse myself for a minute, but I will be back. Senator Akaka [presiding]. Thank you very much, Mr. Chairman. I want to add my welcome to this panel, and thank you for your testimony. Ms. Kelley, I am concerned about what you said about the personnel system at FDIC. I want you to know that I plan to ask further questions of FDIC regarding the issues you raised. Ms. Kelley. Thank you. Senator Akaka. The FDIC, Ms. Kelley, as we know, is exempt from the prohibited personnel practices outlined in Title 5, other than the prohibition of retaliation for whistleblowing. Do you believe this exemption has an impact on the number of prohibited personnel practices at FDIC? Ms. Kelley. We have been looking at this from a number of angles, Senator, including the pay system, and I don't have any data that I could share with you right now. As we come to any conclusions or recommendations that we see as next steps, I would be glad to provide that to you. Senator Akaka. Thank you, also, if you don't have it now, maybe you can provide me with recommendations on how to fix or what you think is the way of fixing the problem. Ms. Kelley. I would be glad to do that. Senator Akaka. That is fair. Mr. Kinghorn, you raise a very interesting question and a very interesting issue in your testimony: The challenges associated with a multi-sector workforce. These issues are quite timely given the increasing number of contract employees working for the Federal Government. I am particularly interested in the first challenge you mentioned in your testimony regarding accountability. Do you have any suggestions as to how to assure accountability for a multi-sector workforce? Mr. Kinghorn. Senator Akaka, it is an incredibly growing issue. For some agencies, perhaps like NASA where there has been what we call multi-sector--we don't think the term ``blended workforce'' works because we don't think it is necessarily blended or working in all cases. But in many agencies, this is beginning to happen increasingly. So, I think it is one of the major frustrations people have. I think first of all, many organizations get into alternative work without really thinking through it strategically. I think the thing that bothers many Fellows of the Academy is that agencies and organizations and other people simply slip into the use of contractors, either because of crisis situations--and there is not really a strategic thought given to looking down the road, what could or could not happen and then building in some defense mechanisms per se, that if you are going to go that route, what do you really need to be careful of? And I think we have plenty of evidence in the last 25 years where that has happened. So one of the key questions on how you deal with it is, you need to think about it in advance, and perhaps the Subcommittee can have some hearings on that subject as to when you go outside a Federal workforce or when a State goes outside its State public service. And this is beyond outsourcing and offshoring. What strategic thought was given to doing that? Was it an economic decision to save money? Which it generally has been. And have the downsides of that been examined? I don't have any particular off-the-cuff sensibility that it is wrong to do that, but I think it needs to be given thought before it happens. The other question of accountability, if you look at the grant programs, I came out of the Environmental Protection Agency where I worked for nearly 10 years back in the 1980s, when the EPA obviously with its several statutes, probably 25 statutes, was really the fundamental enforcer of many of the programs until they were delegated to the States. You fast forward now 20 years later, and most of EPA's programs are delegated, and they are paid for and managed through grants to grantees, whether they be States or other organizations. And I think that whole question of grant accountability, how do you hold a Federal employee who is issuing those grants--and we went through a period of 10 or 15 years where the accountability was purposely softened because we wanted block grants and other kinds of grants. What mechanisms do we need for the next 15 to 20 years to hold the right people accountable? I was at a large department's senior executive training session about 2 weeks ago, mainly a grantee organization, and they are struggling with that now. What is their role in the 21st Century other than just being an oversight of grantees? Should they have a role that looks at best practices of how the grants are used? Should there be a stronger accountability role? So it really is a difficult question that not enough thought has been given to. Senator Akaka. Yes, I agree and I would like to ask Mr. Gage and Ms. Kelley if they have any further comments on this. Mr. Gage. Mr. Gage. Well, I think on the contracting side of it, clearly we are looking--what are there, 6 million contractor employees of the Federal Government now with no accountability that I can see? We have been asking for it in legislation, some sort of accountability. I think the mix of Federal employees and contractors on the work site is a confusing one, and it is something that I don't think really contributes to good government. So I think when we are looking at pay for performance or any type of personnel system, I think accountability, not just for Federal employees, but also on the contractors and the work that they do or don't do, is something that needs to be magnified. Ms. Kelley. And I think that will become even clearer if you look closely at similar work done by Federal employees and that same kind of work being done by contractors. I think, unfortunately, we are going to see this in the very near future as the IRS moves forward with its plan to put collection tax accounts in the hands of private collection agencies, and there will be private collection agencies doing the tax collection work of the IRS instead of IRS employees. And we are going to see, I believe, a lot of accountability questions and conflicts here as this moves forward, and I will give you just one key example of this. There is a law today in effect that prohibits IRS employees from being evaluated on dollars collected. That law was put into place to protect taxpayers from the fear of aggressive collection tactics by Federal employees. So IRS employees cannot be evaluated on dollars collected. But within the next 12 months, private collection agencies are going to be paid by being able to keep up to 25 percent of what they collect from taxpayers. So they will be paid based on dollars collected, which is going to raise a lot of accountability issues when it comes to who should do this kind of work--IRS employees who are accountable or these private collection agencies who will be paid a bounty to do the same work. Senator Akaka. Mr. Gage, you mentioned the proposals being floated by some to offset the funds government is spending for Hurricane Katrina. I share your concern with these proposals, and I assure you that those coming under the purview of this Subcommittee will be carefully reviewed if introduced in the Senate. We are concerned about that, and we will certainly be looking at it further. Mr. Gage, the Comptroller General said in his written testimony that the current pay system is outmoded because it rewards length of service over performance and contribution, automatically provides across-the-board annual pay increases, even to poor performers, and compensates employees living in various localities without adequately considering the local labor market rates. And my simple question to you is: Do you agree? Mr. Gage. No, I don't agree. I think there are a lot of straw men in that statement by the Comptroller General. Some of these, when you look at the statistics on the pay for performance, for instance, the one I testified up at Monmouth, in 5 years two employees were unsuccessful. Two in 5 years. So that bugaboo about this system is going to weed out the non-performer is, I think, not accurate. Obviously, our members don't like non-performers. They work next to them. If there is one, I think there is a peer pressure there that gets it moving. But I don't think that saying that the old system is outmoded because there are--this bugaboo that the Federal Government employees just don't work. And even under the pay-for-performance systems--and I know there is another one in Huntsville, Alabama, and these are all scientists. I think in 4 years there was one Federal employee that was unsuccessful. I would like to comment on some things that Ms. Kelley said. First of all, the old system is old, therefore, we have to blow it up, and to say that this system will do all these things, there is really no information about that. The Fort Monmouth people that we talked about in preparation for this, they really feel that it was so much ado about nothing, that the new system is so complex and is so time-consuming and resource-swallowing that it really doesn't motivate them. There is just a little bit of money involved, and that the amount of work that has to go into it really diverts from the mission rather than adds to it. If I had my say, I think we could do some tinkering, some serious tinkering with the current system, and have one that really works, not just for scientists, but we have to talk about those rank-and-file Federal employees who are in VA hospitals or in Social Security. These are not the high-grade types that most of these projects have involved. Here a consistency and a dedication is really required and necessary to do Social Security claims or VA service, and a lot of that simply will not be captured--a lot of that dedication simply will not be captured in this pay-for-performance system. Senator Akaka. Ms. Kelley, do you agree, too? And finally I will ask Mr. Kinghorn. Ms. Kelley. I think broad statements about the system being old and needing replacement are just that. They are very broad statements that don't provide specifics. I would not say the GS system is perfect. There are surely things that if there are valid problems, we are more than willing to work with the Administration and with the agencies to address those. But in earlier testimony, just today, for example, Deputy Director Blair said that if an employee has a pulse, they receive a within-grade increase. Now, I would suggest that any manager who is implementing the current system that way should not be a manager. So once again, the problem is with the implementation of the system, not with the system itself. And if agencies cannot appropriately implement the GS system that has a lot of structure to it, then I think employees are absolutely right to doubt any agency's ability to implement a system that doesn't have those kinds of structures, that doesn't provide for transparent and fair criteria. If the within-grade increase needs a framework around it as to what employees need to do to achieve that, then tell the employees what that is, and they will be glad to strive for that and to accomplish it. The things that need fixing are within the system, and the bigger problem, as far as I can see, across the board is implementation of the system. It is not the system itself. It is how agencies and managers implement it. That is only going to get worse in a system that is much more vague, which is exactly the road that all of these agencies are headed down, the ones that have the authority today and where the DHS and DOD and this Administration's proposal are going. Senator Akaka. Mr. Kinghorn. Mr. Kinghorn. I think the objective of a performance system--and performance-based pay is one system. Over time my goal was, and still is in my own organization, which has one, is ultimately not to have anyone that is a poor performer. So the fact that in a system after a couple of years there were no poor performers could be the fact that grade creep has happened again, or it could be simply that the performance system, the ones I am familiar with, ultimately drives out the people that are poorer performers. But that is not the objective per se. The objective is to reward people, and that is the second step. Again, in systems that I have been familiar with, both in my current job and previously, is that the performance system measured performance, and then even people in the organizations I worked in that received satisfactory, and sometimes above satisfactory, did not receive pay. At the consulting firm, I think we had 2.2 percent of pay to reward people. That doesn't sound like a lot of money, and it may not have been, but that is what we had. So we had a very high standard, and that is why people talked about the transparency of getting there was critically important, because you were not rewarding satisfactory people in that system, and you weren't even rewarding above average people. So if you didn't have transparency, it would have fallen apart, and in that practice, we improved retention. At one point we had about a 36-percent attrition rate in consulting, in the consulting business. That dropped down to 14 percent. Some of that was market, but some of it was the fact that people understood the performance system was much fairer. So you have to differentiate how you measure performance, I think, and its objectives, which can be different for different places, and then in that performance structure, with all the people you have, how do you use your reward system to provide the rewards? And some organizations might want to go down to satisfactory. Others want to stay at a higher end because they have certain objectives. And, again, as I suggested, you review that and the way you use both the system itself and the reward mechanisms might change, because your organization may change. Very different for NIST than it would be for IRS. Senator Akaka. Thank you, panelists. Thank you, Mr. Chairman. Senator Voinovich [presiding]. Thank you, Senator Akaka. I am a little perplexed because we are moving forward with MaxHR at DHS and NSPS at the Department of Defense. What I hope that we get out of this hearing today is some benchmark information that should be followed implementing alternative systems in a fair way. I think we heard some good things about involving employees, and I would hope that we continue to get input from the unions on things that could be done administratively or legislatively. I am interested in hearing from you and your members in those agencies under an alternative personnel system, including the Department of Defense's NSPS that are the first to transition in--what do you call them again? Mr. Gage. Spirals. Senator Voinovich. Spirals, thank you. We must get as much information on the transition as we possibly can from you. Ms. Kelley, do you represent anybody at the DFAS in Columbus? Ms. Kelley. No. Mr. Gage. We do. Senator Voinovich. That is right. You have a strong, active union there. I think I have met with the woman who leads that local. Mr. Gage. That is right. Patty Viers. Senator Voinovich. Yes, she is terrific. I would really like to have input from people like Ms. Viers and others, so we can monitor and make corrections if necessary. Also, I was pleased to hear that OPM understands that there are many things that need yet to be done in terms of preparing for this. For example, having in place a performance evaluation system period, whether unionized or not, I think people like to know whether they are doing good or whether they need to make improvements. I think that helps everyone. So I just would like to say to you that we are going forward. It seems to me that we also ought to be looking at the kinds of employees involved in the various alternative personnel systems. Ms. Kelley, you just mentioned that there is a stark difference between NIST and other agencies. It is a whole different culture when competing for Ph.Ds, and if you didn't have a pay-for-performance system in place, you may not get them to come to work for you, and for sure they wouldn't stay very long. I think that there has to be some distinction between types of employees and a need to maintain comparability with the private sector. What kind of a system do agencies have in place in order to attract employees? And then once they are on board, how do you get them to stay? So I think maybe that is the direction that I would be interested in directing your reaction to. Maybe that is the direction that we should go and to make sure that this isn't a one-size-fits-all because if we do, I don't think we are going to be successful for anybody. Any reaction? Senator Akaka. Mr. Chairman, let me say that I am so pleased to hear your comments on MaxHR at DHS and also NSPS at DOD. And I want you to know I look forward to working with you and your employee organizations on this. Thank you. Senator Voinovich. Thank you. Would you like to comment on what I just said? Mr. Gage. Well, I agree with you. I think to say that we are going to have pay for performance, it is going to be based on these competencies and thrown out there, when most of the experience comes from scientists and that we really haven't looked at the broad scope of Federal employment, and as we have been saying all along, I think this is a disaster for law enforcement. I don't even think you should try it. I think in many of our other jobs where there is such a team element, I don't think it is going to work there either. So I really respect and appreciate your comments that we have to try, since we are going down this road, but we definitely have to customize it to the different agencies and the different jobs. Ms. Kelley. In my view, the accountability is what needs to be there, though, for the agencies because absent a collective bargaining agreement or a statutory definition of what their system is, they will be left to their own devices. And if there is not the leadership, if there is not the employee involvement, if there is not the transparency and the funding, it will fail. And the evidence or the facts as we have lived them, that I have presented in my testimony, are to highlight that, our biggest fear right now is that there are--we know that NSPS and MaxHR are moving forward. That is very clear. But the models that are being pointed to as a reason to expand governmentwide are full of flaws, and they should not be held up as a model to expand. There will be a lot of things I believe that can be learned from the DOD and DHS implementation. They are still in the pre- implementation stages. This rush to point to other systems in place--like the IRS management system. If the IRS managers who are under it give the feedback to the consultant hired by the IRS that we have in the report, these are the same managers that are then going to be responsible for implementing a paybanding system someday for the front-line employees? I mean, it is doomed to failure if that system is looked to as a model for something that should be rolled out in that or any other agency. For whatever reason, there seems to be a resistance or a hesitancy to acknowledge the flaws in these systems and to learn from them, and also to look and see what we can learn from DOD and DHS. You have such a variety of occupations within both of those agencies that cut across the gamut of Federal employees if you look at all of the employees in DHS and DOD. So you are going to have this wide range of everything from IT workers to accountants to lawyers to scientists to engineers, so all that experience will be there. And yet there seems to be no interest in seeing what can be learned from that and instead trying to point to these other APSs as models. And there is not one of them that I think employees should trust as the model that their system should be based on. So that is what I would ask, is for your help to acknowledge that there is a lot to learn, not because they can be applicable in every agency, but there will be things that should be looked to and not to buy into the reports that are issued about how great these other models are. Ask the employees who are living under them, and that is what I did before I submitted my testimony. And I do it every time I visit with them, and the feedback is consistent that these are not systems that should be in place for them today, much less be held up as a model anywhere else. Mr. Kinghorn. I think it would be unfortunate for the other million employees not covered by some of these new systems either to become at a competitive disadvantage in terms of the flexibilities of the systems but also just the confusion that could arise. So I certainly would support much like what the Administration has proposed. And if you look at the DOD and Homeland Security, 85 percent of it is probably very similar. There are some key differences, certainly, in the appeals process and collective bargaining, which I think are appropriate for discussion. But I think it would be unfortunate to have the rest of the million doing it piecemeal, either agency by agency, bureau by bureau. So I think that would be important to proceed. I think it does need a set of core values to work with what are many of the key elements under Title 5, everything from diversity in the workforce to inherently governmental work defined. And I think there does need to be a criteria in which OPM needs to look at these flexible authorities before implemented. But I really look toward the future of the civil service, and this civil service system does not attract and I don't think will hold the kind of workforce that we are going to require in the next 20 years. Again, they need more agility. They need a different look at what career means. For them, career is going to be coming and going. It is going to be rare, I think, we can keep someone for 20 years in any organization, public or private. And if they see a system that prevents them from easy entry and easy exit and coming back perhaps, I think it will be difficult to attract the new government. People don't like to change. I am no different than anyone else, and you have 2 million Federal employees, all of whom are dedicated. But I think we need to also look toward the new employees that we are going to be bringing in over the next two decades. Senator Voinovich. That is interesting. As I observe the workforce around the country, there are less and less places that you can go and have some sense of having a career. I think that is a real advantage in the Federal workforce. Individuals can come and work until retirement. I think people are looking for an opportunity where they can make a contribution, but at the same time have some security because there is such uncertainty today in the private sector. Mr. Kinghorn. I think it is mixed. I think as Mr. Gage has indicated--and I think we talked about it before--what might make sense for the IRS in its existing service centers, for example, or for law enforcement it may be different. But a lot of what I think government is going to be doing--and, again, this diverse workforce we are working with. What I have seen in terms of people I hired and I see people going in from the private sector finally, I don't see them interested particularly in many cases in a 20- or 25-year career anywhere. Some agencies have had to deal with that. If you go to PTO or go to SEC, many people go into those organizations at a very young age out of school to get experience of how to understand the SEC and they leave. I think that concept is increasing. I agree with you. I enjoyed a 25-year career. But, I don't think I am completely reflective of the new workforce that is coming in. But, clearly, there will be people that like the security, like the excitement, and do want to stay 30 years. But I am not sure the current system also rewards them in the appropriate ways, either. Senator Voinovich. It is interesting that Mr. Walker always talks about how well reform has worked. He is very careful to explain how elements are in place before reforms are implemented. The real question is are we going to commit the resources so that agencies can dot the I's and cross the T's so that new systems are successful? That is my real concern about all of this that we are undertaking. Also, I have to say this to you, Senator Akaka. I think that a lot of our colleagues don't get it. I don't think they do. I don't think a lot of our colleagues understand how important people are in the Federal Government and how important they are to the system. We are going to do oversight of FEMA, but I am going to be really interested to see what happens at the Department of Homeland Security. In creating the Department, people from one organizational culture were merged with people from another. I would not be surprised if people in FEMA left because they didn't like the merger. We had hearings and witnesses testified that employees were leaving because of changes in the culture of the new organization. So all of these things, I think, have to be examinted. We ought to consider what do agencies have to do to compete to get the people that they need. Then Congress must act. Implementing reform so it cascades, rather than doing massively across the board may be more effective. Your point is it should be available to all the agencies. The fact of the matter is that if you don't commit the resources, then it is not going to work. Mr. Kinghorn. I would concur with that. I think everyone today I heard said that. Even in a small organization, in consulting, every partner is directly involved. And when we went through the evaluation process, we basically shut the place down for 5 days with the people involved and went through the evaluations. It is an enormous undertaking, and we knew what to expect. We were trained at what to expect. We were trained in a system that was different. And I think everyone's concerns about that issue, I think you need to monitor that and keep oversight on it. Senator Voinovich. I just went through mine with my chief of staff. I am still not finished with it. I think the whole process is going to take 4 to 5 hours. I just think it is easier said than done. In some areas--maybe, Mr. Gage, you point out that because of the nature of some jobs, a different personnel system is needed. But we are moving, and the idea is moving, and we must do it right. Senator Akaka. Senator Akaka. Mr. Chairman, I just want to tell you that I am concerned, as you are. There are those who feel that this is a program of the future. My concern is trying to overlay this throughout the whole system at one time. We should consider limiting this. Now that we have it at DHS and DOD, we should limit it to those two organizations and see how it works before expanding it to the total system, and we should correct whatever needs to be corrected before it is expanded. I would look forward to discussing that possibility. Thank you, Mr. Chairman. Senator Voinovich. Thank you for being here today. 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