Thank you, Richard W. Bell, National President, Classification and Compensation Society, for that very warm and very kind introduction.  I appreciate your not going through that very long list of jobs I have held, because all it really tells you is that I cannot keep one.

I can tell you that I believe that the job I have right now as the Director of OPM is one of the most interesting and exciting.  I figure I can say that to you all who are involved in classification and compensation because by all counts your definition of what is interesting and exciting tracks with mine.  I am interested in these issues and find them quite exciting.

I am glad to have this opportunity to thank you all.  You have been a tremendous help working with the staff at OPM to make the General Schedule Classification System as responsive to todays needs as possible.  I realize that your ranks are increasingly thin, and we are trying to be realistic about what we expect of you.  And I do want you to know that you are doing a very good job with what the law gives us.  Keep up the good work.

But even as I say that, I do so with the knowledge that there is a growing consensus that the federal governments pay systems are going to have to change. 

The call for modernizing the way our Civil Service systems work has been coming from you in the agencies, from employees, from the Hill, from a range of stakeholders in the federal community, from observers in academia, from the nonprofit sector, and perhaps, most importantly, from job applicants themselves. 

So what I would like to do this afternoon is to spend some time sharing with you some of the things that we are focusing on in the area of compensation reform where we are, where we are going and to ask for your help.

Let us begin with the President, because this is a leader who has been very clear about his management direction for the federal government.  He wants government to be:

• Citizen-centered

• Results-oriented

• Market-based

To help us get there, this summer the President released his management agenda.  That agenda includes five governmentwide initiatives for improving government performance.  And I think it is important that every federal employee knows and understands this agenda.  The number one item on this agenda is the Strategic Management of Human Capital (second is Competitive Sourcing; third, Improved Financial Performance; fourth, Expanded Electronic Government; and fifth, Budget and Performance Integration).

I know that most of you are familiar with the term Human Capital.  It has become a term of art in the HR world, both in government and in the private sector.  But I have heard from some who find it offensive, especially when combined with the term strategic management.  So let me try to place it in context for you. 

When we talk about Strategic Management of Human Capital, we are talking about valuing our employees, investing in them not just looking at people as a cost of doing business. 

The term is an inherent recognition that the people who work for any organization be it government or private sector are the key to its success and its effectiveness.  In todays world, where we are counting on our employees to be knowledge workers, our managers need to look ahead at the skills and the talents they are going to require in the future.  They should be adopting strategies to make sure that we have the right people in the right jobs to deliver the high quality services that the American public expects and deserves.

Strategic Management of Human Capital is at the top of the Presidents list for a very good reason. This is our first President with an MBA, and he recognizes that how well the government works is dependent on the people who work in government.  You will find Human Capital Management on the General Accounting Offices high risk list as well.  And the Inspectors General of nine major federal agencies have listed workforce problems among the 10 most serious management challenges that face their agencies.

One of the reasons for all of this concern is the demographics of the federal workforce.  By the end of 2005, one out of every three current federal employees will be eligible for optional retirement.  

We know from experience that not everyone who is eligible to retire will do so.  In fact, in the aftermath of September 11^th, almost 11,000 retirees have registered on OPMs Patriot database to return to work if their skills are needed.  Still, if just half of those who are eligible to retire choose to do so, that is almost a quarter of a million workers.  Let that sink in for a minute.

Downsizing in the last decade, which was set in motion with what I believe to be insufficient planning, has exacerbated the imbalance in the skills mix in many agencies. 

Developing the incentives necessary to attract, reward and retain experienced and high-performing men and women is essential to preventing further brain drain from the federal workforce.

The federal governments recruitment challenges have become even more urgent in the aftermath of the events of September 11^th.   We have even created a new, special link for Homeland Readiness and Security positions on the USAJobs website to direct potential applicants to the law enforcement, investigation and security jobs that we so badly need to fill right now. 

The President has laid some critical groundwork and provided some important tools to help the federal governments agencies and departments manage their workforces strategically, whether they are directly involved in the war on terrorism and assuring homeland security, or carrying out essential work for government.

Earlier this year, every federal agency engaged in a comprehensive workforce analysis, looking at their workforce needs and projections over the next five years.  The workforce analysis was followed by a restructuring plan.  Given your roles in your agencies, you may well have been involved in getting this done.

Let me assure you, this was not just a paperwork exercise.  These plans were the initial roadmap for delivering a diverse, high-quality workforce in every single agency.  Agency leaders have been encouraged to take advantage of the opportunity to draft and redraft, update and refine those documents so that they are working documents designed to reflect new opportunities and challenges.

As further evidence that this is no hollow effort, the President is keeping a close watch on agencies progress on these plans.  You may have heard or read about agencies getting their scores back.  This is very serious within the Administration.

The Office of Management and Budgets Executive Scorecard is measuring every single agencys progress toward all five initiatives in the Presidents Management Agenda, including Human Capital.  Agencies get a red, a yellow or a green light for each initiative based on its status.

To help agencies achieve green (and I know there are not any yet that have a earned green in Human Capital), OPM has designed a Human Capital Scorecard.  The Scorecard includes specific performance goals and measures for success in five key areas:  (1) strategic alignment, (2) strategic competencies (talent), (3) leadership, (4) performance culture, and (5) learning. 

I have pledged my support to both the Chief Operating Officers and the Human Resources Directors in your agencies.   As you assess where you are on the Human Capital Scorecard, OPM stands ready to help you develop plans and strategies for improvement.  Several agencies already have taken us up on our offer of strike force assistance.

OPM also has been encouraging agencies and departments to make better use of existing flexibilities, such as the Three Rs and others, such as student loan repayment. 

By the way, I want to be sure to let you all know that I recently made a decision to give the program responsibility for student loan repayments as well as superior qualifications appointments to Don Winsteads team in the Workforce Performance Service at OPM.  I know you have a lot of experience working with Don and his staff and will agree that these programs will be in good hands.

Even more and better flexibilities are included in the Managerial Flexibility Act of 2001, the first legislative component of the Presidents Freedom to Manage Initiative. 

This legislation streamlines the demonstration process and makes proven alternative personnel systems easier to adopt as well as making improvements to existing flexibilities.

Some have criticized these proposals because they dont come with funding. They are not designed to.  They are flexibilities, not mandates.  Not all agencies need every authority.  We are trying to provide agencies with an assortment of tools that they can use at their discretion.  They will be in the best position to determine which are the best strategic tools to employ for their agencies. 

Full use of these flexibilities requires strategic budgeting.  At OPM, I have instituted zero-based budgeting.  Starting from the ground up allows us to identify and free up resources so they can be redirected to support the Presidents agenda and our strategic concerns, including targeting dollars to training and HR flexibilities.

When I speak to Cabinet Secretaries, to deputies, to managers, to budget officers, and to HR professionals, I tell them that they need to budget for these flexibilities, and build the business case for the funding.

Those are first steps at reform.  Improving the existing system, however, may not be enough.  The problem is that the strategic management of human capital requires the strategic use of compensation.  Unfortunately, our current compensation system does not support strategy very well.

In one sense, the federal compensation system is built on a very, very firm foundation.  I refer to the Merit System Principles.  Most familiar is the first part of the principles:

• Equal pay should be provided for work of equal value.

But if one reads on, it is clear that the Merit Principles support more than just a very narrow view of internal equity.

They continue:

• with appropriate consideration of both national and local rates paid by employers in the private sector (external equity)

• and appropriate incentives and recognition should be provided for excellence in performance (individual equity)

The Merit System principles are remarkably timeless and can and should serve as the fundamental drivers of our compensation system to ensure that we maintain the trust we have been given by the American people to oversee a fair and diverse workforce.  We want people treated fairly and to be rewarded on the basis of merit, not cronyism or patronage.

But the time has come to recognize that these principles might be equally well or even better served by simpler, more flexible practices designed to fit a particular organization and workforce.

The problem lies not with the Merit System Principles themselves, but the antiquated compensation system that we have in place to effectuate them, embodied in the Classification Act of 1949.  Now, given the fact that you are dealing with this on a daily basis, I know that I am preaching to the choir.  This is a system whose time has come and gone.

The idea that the Civil Service is merely an undifferentiated workforce of low-graded clerks intent on a 30-year career is a concept that must be overhauled along with the entire systems and operations designed to support it.  The work has changed, and so has the worker.

At the end of the 1940s, over 70 percent of federal white-collar jobs consisted of clerical work.  By contrast, government work today is highly skilled and, increasingly, it is specialized knowledge work.  Yet in the age of e-Government, the federal government still uses with relatively minor modifications a compensation system that was custom-built for the process-obsessed age of the file clerk.

Employee expectations have changed as well.  Many of the people we need expect to work for several employers during their lifetime.  The issue is not that they believe the job market is too unstable to be able to depend on long careers with a single company.  Rather, they truly value change and the chance to try new endeavors, to try their skills in new arenas.  They want their personal contributions to be recognized with immediate rewards, not some long-term promise of better days in their golden years.

Cycle times for developing new products, programs, and technologies are getting shorter all the time. That means the systems for attracting, selecting, managing and rewarding and retaining people doing the governments work have to be very, very nimble. We must be able to react quickly as needed skills change. We have to be able to compete in a very "hot" labor market.

We can and we must establish systems for the federal government that respond better to 21st Century organizational demands and employee concerns.  Todays government especially our Presidents e-Government initiative must and will produce its results through knowledge workers.  Employees dont manufacture things or push paper (at least we hope they dont); they use their talents and brains to deliver results the American people have come to want and to expect from its federal workforce.

One of the precepts embodied in the federal governments Merit Principles is market sensitivity.  This is because, in addition to talking about equal pay for equal work, the same Merit Principle goes on to say taking into consideration national and local rates of pay.  That is the part we often lose sight of.

That consideration was given a place to some degree under the Federal Employees Pay Comparability Act of 1990 (FEPCA). With the locality pay provisions, the government made a profound pay system change which has helped us gain a better understanding of labor markets as well as experience using different local pay schedules.  Federal employees in New York City get paid more than federal workers in Oklahoma City because other employers in the Big Apple pay higher salaries. It is easy to forget how radical a notion that was just 10 years ago.

But even with the FEPCA reforms, the federal concept of comparability remains two-dimensional.  It reflects only grade (level of work) and locality.

This concept, I believe, is deeply flawed.  Labor markets are significantly more nuanced than that.

• Labor market rates differ across occupations, not just pay grades.

• Labor market rates differ within an occupation.

• Labor market rates differ among individuals.

• Labor markets can and do change rapidly.

And in the private-sector, organizations do not respond uniformly to labor market changes.  The importance of those changes to a given organization depends on the nature of its business.  They place different values on the work and thus are not affected uniformly. 

FEPCAs Achilles heel is its inability to reflect systemic pay differences among occupations at the same level of work; the auxiliary mechanisms under the General Schedule such as special salary rates have proved inadequate to recognize occupational differences. 

In addition, FEPCAs survey methodology presumes an illusory level of precision and requires lengthy deliberation, both at the expense of relevance and timeliness.  Because these surveys are extensive and statistically rigorous, significant lags occur between data gathering and pay-setting and implementation.  As a result, the relationship between pay adjustments and current market conditions is tenuous at best.

As the President is trying to make government results-oriented, the federal white-collar compensation system sends the message that performance does not matter.   

The message begins with the structure of the General Schedule.  OPMs research into non-federal compensation practices shows that private-sector organizations pay structures provide much more room for performance-based distinctions.

To be sure, General Schedule pay administration rules do have some pay-for-performance features.  But they are overwhelmed by the larger performance-insensitive system, which relies largely on the passage of time.  The result is that the way the Government delivers pay increases and the relative value of those pay increases reinforces the message that performance is secondary at best. 

In any given year, the bulk of pay increases are delivered more as a reward for merely remaining on the payroll than for meeting or exceeding performance expectations. 

Yes, individual equity means making distinctions among performers, and I recognize that this makes some uneasy. But there is an awful lot of rigidity in a system that makes a manager give exactly the same-sized pay increase called a "wiggy," right? to the employee who is doing a really terrific job and the employee who is just sort of coasting.

Our system does a reasonably good job of maintaining internal equity it is what the whole classification system is all about.

But while basic internal consistency is important, internal equity is only one part of the equation.  High-performing organizations know that their pay must be competitive in the market in which they operate in other words, provide external equity or they will lose the best employees.  They recognize that performance should be rewarded that individual equity also must be part of a successful compensation system.

The National Academy of Public Administration recently examined federal IT recruitment and retention issues.  This was the conclusion in its report, issued earlier this year:

By focusing on internal equity, the federal governments human resources management system is severely constrained in competing for IT talent and effectively managing the IT talent that it already has.

NAPA called for a new compensation system for IT to strike a better balance between internal equity, external equity, and personal or contribution equity.

These same conclusions can be reached about the entire system.

The federal compensation system emphasizes internal equity at the expense of external and individual equity. The systems architecture and guidelines generally do not permit federal agencies to allow non-classification factors (things such as the importance of the work to the employing agency, salaries paid by competing employers, turnover rates) to influence base pay. 

The classification system rewards supervision and creates layers by requiring that supervisory positions be evaluated at least one grade higher than subordinate positions.  I understand that may be a bit oversimplified, but it is basically true.  The classification system is predicated on a hierarchy, the very layering that the President has said that he wants to reduce to move agencies closer to their customers.  And the internal equity emphasis limits the Governments ability to give individual equity and external equity their due weight in compensation decisions.

Simple put:  The dominant rigidities of the classification system put strategic human capital management and nimbleness nearly beyond reach.

I am convinced the system needs comprehensive reform.  I know that we can do better than what we currently have.

We need to offer competitive salaries in those fields where talent is scarce.  And if we hope to capitalize on the renewed interest in federal employment, we have got to use a reward system that recognizes performance when it happens and commensurate with its level of excellence, not in fixed increments driven by the calendar.

We must put in place a system that truly balances the equities for government workers internal equity, individual equity, and external equity.  And we must integrate our personnel and performance measures so that the Human Capital Scorecard the scorecard that we are holding managers accountable to shows for real results.

As you know, staff at OPM have been looking at ways we can modernize the pay and job evaluation systems.  I was very pleased to learn about all the research and ongoing discussions that were already underway when I arrived.

We owe a great deal of thanks to all of you who have already participated in discussions of the problems and possibilities in pay and job evaluation.  Your thoughts and your observations contribute to our effort, as do those of all the stakeholders we work with.

I expect to use the coming weeks and months to have further conversations with stakeholders about how the federal compensation system can better support the strategic management of human capital as the President envisions it.

Shortly, OPM will circulate a White Paper that I asked be prepared to lay out the issues and opportunities that lie before us.  I plan to use the paper to open the conversation and to begin the discussion and debate.

I am open to all ideas.  I want to hear all sides of these issues from all quarters.  I want to hear from your leadership in the Classification and Compensation Society.  I will be coming to you for your expert advice and counsel and I urge you to pass it along to me and to others at OPM.  And I want to hear from you through your Coalition for Effective Change.

I am starting with a blank sheet of paper.  My goal is to do what is right and what is real for the federal government so that pay and job evaluation can contribute to achieving agencies strategic objectives.  We have got to be in a position of attracting, managing, and retaining excellent government workers. 

I know that whenever we start to talk about change, people get uneasy and squeamish.  I know that those of you in this room have managed this particular system and done it well  for a long, long time.  That is why it is absolutely essential that you be a very critical and integral part of any changes that take place.

Just dream with me for just a minute.  What would it look like if we had the opportunity to set it all aside and design a system that made sense for todays workers.  It is a tremendous opportunity, and I hope you will join me in that effort.

Thank you very much.

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