Human Capital:

Designing and Managing Market-Based and More Performance-Oriented Pay Systems

GAO-05-1048T: Published: Sep 27, 2005. Publicly Released: Sep 27, 2005.

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The federal government must have the capacity to plan more strategically, react more expeditiously, and focus on achieving results. Critical to the success of this transformation are the federal government's people--its human capital. Yet, in many cases the federal government has not transformed how it classifies, compensates, develops, and motivates its employees to achieve maximum results within available resources and existing authorities. A key question is how to update the federal government's compensation system to be market-based and more performance-oriented. To further the discussion of federal pay reform, GAO partnered with key human capital stakeholders to convene a symposium in March 2005 to discuss public, private, and nonprofit organizations' successes and challenges in designing and managing market-based and more performance-oriented pay systems. This testimony presents the strategies that organizations considered in designing and managing market-based and more performance-oriented pay systems and describes how they are implementing them.

GAO strongly supports the need to expand pay reform in the federal government. While implementing market-based and more performance-oriented pay systems is both doable and desirable, organizations' experiences in designing and managing their pay systems underscored three key themes that can guide federal agencies' efforts. First, the shift to market-based and more performance-oriented pay must be part of a broader strategy of change management and performance improvement initiatives. Second, market-based and more performance-oriented pay cannot be simply overlaid on most organizations' existing performance management systems. Rather, as a precondition to effective pay reform, individual expectations must be clearly aligned with organizational results, communication on individual contributions to annual goals must be ongoing and two-way, meaningful distinctions in employee performance must be made, and cultural changes must be undertaken. Finally, organizations need to build up the basic management capacity of their organizations. Training and developing new and current staff to fill new roles and work in different ways will play a crucial part in building the capacity of the organizations. Organizations presenting at our symposium considered the following strategies in designing and managing their pay systems. (1) Focus on a set of values and objectives to guide the pay system; (2) Examine the value of employees' total compensation to remain competitive in the market; (3) Build in safeguards to enhance the transparency and help ensure the fairness of pay decisions; (4) Devolve decision making on pay to appropriate levels; (5) Provide training on leadership, management, and interpersonal skills to facilitate effective communication; (6) Build consensus to gain ownership and acceptance for pay reforms; and (7) Monitor and refine the implementation of the pay system. Moving forward, it is possible to enact broad-based reforms that would enable agencies to move to market-based and more performance-oriented pay systems. However, before implementing reform, each executive branch agency should demonstrate and the Office of Personnel Management should certify that the agency has the institutional infrastructure in place to help ensure that the pay reform is effectively and equally implemented. At a minimum, this infrastructure includes a modern, effective, credible, and validated performance management system in place that provides a clear linkage between institutional, unit, and individual performance-oriented outcomes; results in meaningful distinctions in ratings; and incorporates adequate safeguards.

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