Order Code RL31954
CRS Report for Congress
Received through the CRS Web
Civil Service Reform: Analysis of the
National Defense Authorization Act for FY2004
Updated November 7, 2003
Barbara L. Schwemle, Coordinator
Government and Finance Division
Congressional Research Service ˜ The Library of Congress

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Civil Service Reform: Analysis of the
National Defense Authorization Act for FY2004
Summary
The National Defense Authorization Act for FY2004, H.R. 1588, passed the
House of Representatives, amended, on May 22, 2003. Title XI of the bill included
provisions on personnel management that would apply government-wide as well as
provisions for a National Security Personnel System for the Department of Defense
(DOD). Many of the provisions had been included in H.R. 1836, the Civil Service
and National Security Personnel Improvement Act, as reported to the House,
amended. The Senate version of the defense authorization bill, S. 1050, as passed
by the Senate, amended, on May 22, 2003, did not include these Title XI personnel
management provisions. On June 4, 2003, the Senate struck all after the enacting
clause and substituted the text of S. 1050 in H.R. 1588. The Senate then passed H.R.
1588, amended, by voice vote the same day. Senator Susan Collins introduced S.
1166, the National Security Personnel System Act, on June 2, 2003. The Senate
Committee on Governmental Affairs marked up the bill on June 17, 2003, and on a
10 to 1 roll call vote ordered S. 1166, as amended, to be reported to the Senate.
Section 2 of S. 1166 would authorize establishment of a Department of Defense
National Security Personnel System. H.R. 1588 as passed by the Senate included
several personnel provisions not in the House-passed version of the bill or in S. 1166.
On November 7, 2003, the House agreed to the conference report (H.Rept. 108-
354) accompanying H.R. 1588 on a 362-40, 2 present (Roll No. 617) vote.
Title XI, Subtitle A would authorize the Secretary of Defense and the Director
of the Office of Personnel Management to establish a new human resources
management system for DOD’s civilian employees. The bill would authorize the
Secretary of Defense and the Director of the Office of Personnel Management to
jointly prescribe regulations for the new human resources management system.
Language in the House-passed version of the bill that would have authorized the
Secretary to waive the requirement for joint regulations for reasons of national
security was dropped in conference. Subtitle A also includes provisions relating to
collective bargaining and employee relations and appellate procedures (much of the
language was taken from S. 1166). Subtitle C of Title XI of H.R. 1588 includes
amendments to the government-wide policies for the federal employee overtime pay
cap, military leave, and Senior Executive Service pay, and would create a Human
Capital Performance Fund to reward the highest-performing and most valuable
employees in an agency.
This report analyzes each of the provisions in Title XI of the conference report
accompanying H.R. 1588, as agreed to by the House.

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Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Department of Defense National Security Personnel System — Title XI, Subtitle A,
of H.R. 1588 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 9901. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 9902. Establishment of Human Resources Management System . . . 4
In General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Requirements for the HRM System . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Personnel Management at Defense Laboratories . . . . . . . . . . . . . . . . . . 7
Limitations Relating to Pay . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Provisions to Ensure Collaboration With Employee Representatives on
National Security Personnel System . . . . . . . . . . . . . . . . . . . . . . 11
Provisions Regarding National Level Bargaining . . . . . . . . . . . . . . . . 12
Provisions to Ensure Collaboration With Employee Representatives on
Development of Labor Relations System . . . . . . . . . . . . . . . . . . 12
Provisions Relating to Appellate Procedures . . . . . . . . . . . . . . . . . . . . 13
Provisions Related to Separation and Retirement Incentives . . . . . . . 16
Provisions Relating to Reemployment . . . . . . . . . . . . . . . . . . . . . . . . . 17
Additional Provisions Relating to Personnel Management . . . . . . . . . 17
Phase-In . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Section 9903. Attracting Highly Qualified Experts . . . . . . . . . . . . . . . . . . 18
Section 9905. Special Pay and Benefits for Certain Employees Outside the
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Impact on Department of Defense Civilian Personnel . . . . . . . . . . . . . . . . . 20
Department of Defense Civilian Personnel Generally — Title XI, Subtitle B, of H.R.
1588 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Military Leave for Mobilized Federal Civilian Employees . . . . . . . . . . . . . 20
Extension of Authority for Experimental Personnel Program for Scientific and
Technical Personnel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Department of Defense Civilian Personnel Generally — Title XI, Subtitle C, of H.R.
1588 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Modification of the Overtime Pay Cap . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Common Occupational and Health Standards for Differential Payments as a
Consequence of Exposure to Asbestos . . . . . . . . . . . . . . . . . . . . . . . . 21
Increase in Annual Student Loan Repayment Authority . . . . . . . . . . . . . . . 22
Authorization for Cabinet Secretaries, Secretaries of Military Departments, and
Heads of Executive Agencies to be Paid on a Biweekly Basis . . . . . . 23
Senior Executive Service and Performance . . . . . . . . . . . . . . . . . . . . . . . . . 23
Post-Employment Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Design Elements of Pay-for-Performance Systems in Demonstration Projects
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Federal Flexible Benefits Plan Administrative Costs . . . . . . . . . . . . . . . . . 25
Employee Surveys . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Human Capital Performance Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Transfer of Personnel Investigative Functions and Related Personnel of the
Department of Defense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

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Provisions Dropped In Conference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Contracting For Personal Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Key CRS Policy Staff . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
List of Tables
Table 1. Career Groups and Pay Bands for Nonsupervisory Employees, Science and
Technology Reinvention Laboratories, Department of Defense . . . . . . . . . 33
Table 2. Career Groups and Pay Bands for Supervisory Employees, Science and
Technology Reinvention Laboratories, Department of Defense . . . . . . . . . 34
Table 3. Selected Features of the Pay-for-Performance Evaluation System, Science
and Technology Reinvention Laboratories, Department of Defense . . . . . . 36

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Civil Service Reform: Analysis of the
National Defense Authorization Act
for FY2004
Introduction
In April 2003, the Department of Defense (DOD) sent a proposal entitled “The
Defense Transformation for the 21st Century Act” to Congress.1 The proposal is
principally directed to changes in the uniformed military personnel and acquisition
systems. However, it also would change the statutory bases for much of DOD’s
civilian personnel system. Some 735,000 civilian personnel are directly employed
by DOD. Those staff constitute about 26% of federal civilian personnel worldwide.
The House of Representatives passed H.R. 1588, the National Defense
Authorization Act for FY2004, amended, on May 22, 2003, on a 361 to 68 (Roll No.
221) vote.2 As reported to the House, H.R. 1588 included personnel management
provisions that would apply government-wide at Subtitle A of Title XI. The bill also
included provisions for a National Security Personnel System at DOD at Subtitle B.
Many of the provisions had originated in DOD’s April 2003 proposal and had been
included in H.R. 1836, the Civil Service and National Security Personnel
Improvement Act, reported to the House, amended (H.Rept. 108-116, part 1), by the
Committee on Government Reform on May 19, 2003.3 The provisions were added
to H.R. 1588 during Armed Services Committee markup.4 Several additional
amendments were made to the personnel management provisions during House
consideration and passage of H.R. 1588. The Senate version of the defense
authorization bill, S. 1050, as passed by the Senate, amended, on May 22, 2003, on
a 98 to 1 (No. 194) vote, did not include these Title XI personnel management
provisions (but included other personnel provisions at Title XI). On June 4, 2003,
the Senate struck all after the enacting clause and substituted the text of S. 1050 in
1 The text of the DOD proposal can be accessed at [http://www.defenselink.mil/dodgc/lrs/
docs/Transformation.pdf], visited June 10, 2003.
2 H.R. 1588 was introduced by Representative Duncan Hunter, by request, on April 3, 2003,
and was referred to the House Committee on Armed Services. The Committee marked up
the bill on May 9 and May 14, 2003. H.R. 1588 was reported to the House, amended
(H.Rept. 108-106) on May 16, 2003.
3 U.S. Congress, House Committee on Government Reform, Civil Service and National
Security Personnel Improvement Act, report to accompany H.R. 1836, 108th Cong., 1st sess.,
H.Rept. 108-116, part 1 (Washington: GPO, 2003). Hereafter referred to as H.Rept. 108-
116, part 1.
4 H.R. 1836 was introduced by Representative Tom Davis on April 29, 2003, and was
referred to the House Committees on Armed Services, Government Reform, and Science.
The Government Reform Committee marked up the bill on May 7, 2003.

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CRS-2
H.R. 1588. The Senate then passed H.R. 1588, amended, by voice vote the same
day.5 H.R. 1588, as passed by the Senate, included, at Title XI, personnel provisions
on pay authority for critical positions, the experimental personnel program for
scientific and technical personnel, and personnel investigations that were not
included in the House-passed version of the bill or S. 1166.
Senator Susan Collins introduced S. 1166, the National Security Personnel
System Act, on June 2, 2003, and it was referred to the Senate Committee on
Governmental Affairs. The committee conducted a hearing on the bill on June 4,
2003, and marked-up the bill on June 17, 2003. The same day the committee ordered
S. 1166 to be reported to the Senate, amended, on a 10 to 1 roll call vote. During the
mark-up, the committee agreed to an amendment offered by Senator Joseph
Lieberman which would have clarified the intent of the bill’s provisions on collective
bargaining and an amendment offered by Senator George Voinovich which would
have excluded 10 DOD laboratories from the National Security Personnel System.
Both amendments were agreed to by voice vote.
Senator Collins, Chairman of the Senate Governmental Affairs Committee, a
conferee on the conference committee for H.R. 1588, along with Senators Voinovich
and Carl Levin (an H.R. 1588 conferee), among others, expressed the hope that the
provisions of S. 1166, as amended, would be seriously considered by the conference
as an alternative to the provisions in H.R. 1588 on the National Security Personnel
System. On July 14, 2003, Senators Collins, Voinovich, Stevens, and Sununu wrote
a letter to their Senate colleagues expressing their support for, and sharing their views
on, the personnel provisions of S. 1166. They stated that, “[a]s a template for future
governmentwide civilian personnel reform, the personnel provisions in the defense
bill must strike the right balance between promoting a flexible system and protecting
the rights of our constituents who serve in the federal civil service” and that “[w]e
believe that our proposal strikes such a balance.”6
On November 7, 2003, the House agreed to the conference report (H.Rept. 108-
354) accompanying H.R. 1588 on a 362-40, 2 present (Roll No. 617) vote. Changes
made in conference are noted.
Following the June 4, 2003, Senate Governmental Affairs Committee hearing,
Senators Voinovich and Thomas Carper asked the Comptroller General, David
Walker, to respond to several additional questions. His response, submitted on July
3, 2003, included the following comments.
[I]t is critical that agencies or components have in place the human capital
infrastructure and safeguards before implementing new human capital reforms.
This institutional infrastructure includes, at a minimum (1) a human capital
5 S. 1050 was introduced by Senator John Warner and reported to the Senate (S.Rept. 108-
46) by the Committee on Armed Services on May 13, 2003. Earlier, on May 7 and 8, 2003,
the Armed Services Committee marked up the bill.
6 Letter from Senators Susan Collins, George Voinovich, Ted Stevens, and John Sununu to
Senate colleagues, July 14, 2003. Provided to CRS by the Senate Committee on
Governmental Affairs by facsimile.

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CRS-3
planning process that integrates the agency’s human capital policies, strategies,
and programs with its program mission, goals, and desired outcomes, (2) the
capabilities to develop and implement a new human capital system effectively,
and (3) a modern, effective, credible and, as appropriate, validated performance
appraisal and management system that includes adequate safeguards, such as
reasonable transparency and appropriate accountability mechanisms, to ensure
the fair, effective, and nondiscriminatory implementation of the system.
Although we do not believe that DOD should wait for the full implementation of
the new human capital system at the Department of Homeland Security (DHS),
... we do think that there are important lessons that can be learned from how DHS
is developing its new personnel system. For example, DHS has implemented an
approach that includes a design team of employees from DHS, the Office of
Personnel Management (OPM), and major labor unions. To further involve
employees, DHS has conducted a series of town hall meetings around the country
and held focus groups to further learn of employees’ views and comments ...
DOD ... needs to ensure that employees are involved in order to obtain their ideas
and gain adequate “buy-in” for any related transformational efforts.
[W]e suggest that DOD also be required to link its performance management
system to program and performance goals and desired outcomes.... [This] helps
the organization ensure that its efforts are properly aligned and reinforces the line
of sight between individual performance and organizational success so that an
individual can see how her/his daily responsibilities contribute to results and
outcomes.
In our view, it would be preferable to employ a governmentwide approach to
address certain flexibilities that have broad-based application and serious
potential implications for the civil service system .... broad banding, pay for
performance, reemployment, and pension offset waivers. In these situations, it
may be prudent and preferable for Congress to provide such authorities on a
governmentwide basis and in a manner that assures that a sufficient personnel
infrastructure and appropriate safeguards are in place before an agency
implements the new authorities.
Based on our experience, while DOD’s leadership has the intent and the ability
to transform the department, the needed institutional infrastructure is not in place
in a vast majority of DOD organizations.... In the absence of the right
institutional infrastructure, granting additional human capital authorities will
provide little advantage and could actually end up doing damage if the authorities
are not implemented properly by the respective department or agency.7
This report analyzes each of the provisions in Title XI of the conference report
accompanying H.R. 1588, as agreed to by the House. For discussion of the
background to the provisions and side-by-side comparisons of the provisions with
current law, see CRS Report RL31805, Authorization and Appropriations for
FY2004: Defense, by Amy Belasco and Stephen Daggett; CRS Report RL31924,
Civil Service Reform — H.R. 1836, Homeland Security Act, and Current Law, by
Barbara L. Schwemle and Thomas J. Nicola; and CRS Report RL31916, Defense
7 U.S. General Accounting Office, Posthearing Questions Related to Proposed Department
of Defense (DOD) Human Capital Reform, GAO-03-965R (Washington: July 3, 2003).

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CRS-4
Department Original Transformation Proposal: Compared to Existing Law, by
Robert L. Goldich, Gary J. Pagliano, Barbara L. Schwemle, and Thomas J. Nicola.
Contributors to this report are Richard Best, Valerie Grasso, Sharon Gressle, L.
Elaine Halchin, Fred Kaiser, Bob Lyke, Jack Maskell, Thomas Nicola, Patrick
Purcell, Barbara Schwemle, and Jon Shimabukuro.
Department of Defense National Security
Personnel System — Title XI, Subtitle A, of
H.R. 1588
The conference report accompanying H.R. 1588 (H.Rept. 108-354) would
provide the following. (The discussion is based on the text of the conference report
as it appears on the Web site of the House Committee on Rules on November 7,
2003.)
Section 1101(a)(1) of H.R. 1588 would amend Part III, Subpart I, of Title 5
United States Code by adding a new Chapter 99 entitled Department of Defense
(DOD) National Security Personnel System. The new system would cover some
730,000 DOD civilian employees.
Section 9901. Definitions
This section defines terms for the new chapter. “Director” means the Director
of the Office of Personnel Management (OPM) and “Secretary” means the Secretary
of Defense.
Section 9902. Establishment of
Human Resources Management System
In General. The new Section 9902(a) of H.R. 1588 would provide that
notwithstanding any other provision of Part III, the Secretary of Defense could, in
regulations prescribed jointly with the OPM Director, establish, and from time to
time adjust, a human resources management (HRM) system for some or all of the
organizational or functional units of the Department of Defense. The human
resources management system established under the authority of this section would
be referred to as the National Security Personnel System.
The provision in H.R. 1588, as passed by the House, that this requirement for
a joint regulation or adjustment could be waived by the Secretary, subject to the
President’s decision, if he certified that issuance or adjustment of a regulation, or the
inclusion, exclusion, or modification of a particular provision therein, is essential to
the national security (the legislation does not define “national security”) was dropped
in conference.

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CRS-5
Requirements for the HRM System. The HRM system would be flexible
and contemporary. The new Section 9902(b) would provide that it could not waive,
modify, or otherwise affect:
! the public employment principles of merit and fitness at 5 U.S.C.
2301, including the principles of hiring based on merit, fair
treatment without regard to political affiliation or other non-merit
considerations, equal pay for equal work, and protection of
employees against reprisal for whistleblowing;
! any provision of 5 U.S.C. 2302, relating to prohibited personnel
practices;
! any provision of law referred to in 5 U.S.C. 2302(b)(1)(8)(9); or any
provision of law implementing any provision of law referred to in 5
U.S.C. 2302(b)(1)(8)(9) by providing for equal employment
opportunity through affirmative action; or providing any right or
remedy available to any employee or applicant for employment in
the public service.
Various subparts and chapters of Part III of Title 5 United States Code which
could not be waived, modified, or otherwise affected in the new HRM system are
listed at the new Section 9902(d) as follows:
Subpart A — General Provisions, including Chapter 21 Definitions; Chapter 23
Merit System Principles; Chapter 29 Commissions, Oaths, Records, and
Reports;
Subpart B — Employment and Retention, including Chapter 31 Authority for
Employment; Chapter 33 Examination, Selection, and Placement; Chapter
34 Part-time Career Employment Opportunities; Chapter 35 Retention
Preference (RIF), Restoration, and Reemployment;
Subpart E — Attendance and Leave, including Chapter 61 Hours of Work;
Chapter 63 Leave;
Subpart G — Insurance and Annuities, including Chapter 81 Compensation for
Work Injuries; Chapters 83 and 84 Retirement; Chapter 85 Unemployment
Compensation; Chapter 87 Life Insurance; Chapter 89 Health Insurance;
Chapter 90 Long Term Care Insurance;
Subpart H — Access to Criminal History Record Information, including
Chapter 91 for individuals under investigation;
Chapter 41 — Training;
Chapter 45 — Incentive Awards;
Chapter 47 — Personnel Research Programs and Demonstration Projects;

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Chapter 55 — Pay Administration, including biweekly and monthly pay periods
and computation of pay, advanced pay, and withholding of taxes from pay,
except that Subchapter V of Chapter 55 on premium pay (overtime, night,
Sunday pay), apart from section 5545b, could be waived or modified;
Chapter 57 — Travel, Transportation, and Subsistence;
Chapter 59 — Allowances, which includes uniforms, quarters, overseas
differentials;
Chapter 71 — Labor Management and Employee Relations [H.R. 1588, as
passed by the House, did not include this provision];
Chapter 72 — Antidiscrimination, Right to Petition Congress, including
minority recruitment, antidiscrimination on the basis of marital status and
handicapping condition, furnishing information to Congress;
Chapter 73 — Suitability, Security, and Conduct, including security clearance,
political activities (Hatch Act), misconduct (gifts, drugs, alcohol);
Chapter 79 — Services to Employees, including safety program, protective
clothing and equipment; or
any rule or regulation prescribed under any provision of law referred to in any
of the statements in bullets immediately above.
Other requirements for the HRM system include that it would:
! ensure that employees could organize, bargain collectively as
provided for in the proposed Chapter 99, and participate through
labor organizations of their own choosing in decisions that affect
them, subject to the provisions of the proposed Chapter 99 and any
exclusion from coverage or limitation on negotiability established
pursuant to law;
! not be limited by any specific law or authority under Title 5, or by
any rule or regulation prescribed under Title 5, that is waived in
regulations prescribed under the proposed Chapter 99, subject to the
requirements stated above; and
! include a performance management system. Such a system would
incorporate these elements: adherence to the merit principles of 5
U.S.C. 2301; a fair, credible, and transparent employee performance
appraisal system; a link between the performance management
system and the agency’s strategic plan; and a means for ensuring
employee involvement in the design and implementation of the
system. Other elements the system would have to incorporate are:
adequate training and retraining for supervisors, managers, and
employees in the implementation and operation of the performance
management system; a process for ensuring ongoing performance

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CRS-7
feedback and dialogue between supervisors, managers, and
employees throughout the appraisal period, and setting timetables for
review; effective safeguards to ensure that the management of the
system is fair and equitable and based on employee performance;
and a means for ensuring that adequate agency resources are
allocated for the design, implementation, and administration of the
performance management system; and a pay-for-performance
evaluation system to better link individual pay to performance, and
provide an equitable method for appraising and compensating
employees.
Personnel Management at Defense Laboratories. The National
Security Personnel System would not apply with respect to the laboratories listed
below before October 1, 2008. It would apply on or after October 1, 2008, only to
the extent that the Secretary determines that the flexibilities provided by the National
Security Personnel System are greater than the flexibilities provided to those
laboratories pursuant to section 342 of the National Defense Authorization Act for
Fiscal Year 1995 (P.L.103-337) and section 1101 of the Strom Thurmond National
Defense Authorization Act for Fiscal Year 1999 (5 U.S.C. 3104 note) respectively.
The laboratories covered by this provision (5 U.S.C. 9902(c)) would be the Aviation
and Missile Research Development and Engineering Center; the Army Research
Laboratory; the Medical Research and Materiel Command; the Engineer Research
and Development Command; the Communications-Electronics Command; the
Soldier and Biological Chemical Command; the Naval Sea Systems Command
Centers; the Naval Research Laboratory; the Office of Naval Research; and the Air
Force Research Laboratory. (Senator Voinovich offered a similar provision as an
amendment that was agreed to by voice vote by the Senate Governmental Affairs
Committee during mark-up of S. 1166. According to Senator Voinovich’s office, the
amendment would continue the authority of the reinvention laboratories to use
various personnel flexibilities that DOD has found to be successful. The NSPS
provisions might reduce these personnel flexibilities at the laboratories if they were
to be included in NSPS said his office. In an article on the Governmental Affairs
Committee mark-up, The Washington Post quoted a DOD official who said that the
provision “while designed to protect existing flexibilities at the labs, would prevent
the Pentagon from increasing those flexibilities.”8
Limitations Relating to Pay. Nothing in Section 9902 would constitute
authority to modify the pay of any employee who serves in an Executive Schedule
position. Except for this provision, the total amount of allowances, differentials,
bonuses, awards, or other similar cash payments paid under Title 5 in a calendar year
to any employee who is paid under 5 U.S.C. 5376 (senior-level pay) or 5383 (Senior
Executive Service pay) or under Title 10 or other comparable pay authority
established for DOD senior executives or equivalent employees could not exceed the
total annual compensation payable to the Vice President ($198,600).
8 Stephen Barr, “Senate Committee Backs Plan for Overhaul of Pentagon Pay, Rules,” The
Washington Post, June 18, 2003, p. B2.

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CRS-8
H.R. 1588 would provide that to the maximum extent practicable, the rates of
compensation for civilian DOD employees would be adjusted at the same rate, and
in the same proportion, as are rates of compensation for members of the uniformed
services.
To the maximum extent practicable, for FY2004 through FY2008, the overall
amount allocated for compensation of the civilian employees of an organizational or
functional unit of DOD that is included in the National Security Personnel System
would not be less than the amount of civilian pay that would have been allocated for
compensation of such employees for such fiscal year if they had not been converted
to the National Security Personnel System. The amount would be based on, at a
minimum, the number and mix of employees in such organizational or functional unit
prior to the conversion of such employees to the National Security Personnel System;
and adjusted for normal step increases and rates of promotion that would have been
expected had such employees remained in their previous pay schedule. (S. 1166
included a similar provision.)
To the maximum extent practicable, the regulations implementing the National
Security Personnel System would provide a formula for calculating the overall
amount to be allocated for fiscal years after FY2008 for compensation of the civilian
employees of an organizational or functional unit of DOD that is included in the
National Security Personnel System. The formula would ensure that in the aggregate,
employees are not disadvantaged in terms of the overall amount of pay available as
a result of conversion to the National Security Personnel System, while providing
flexibility to accommodate changes in the function of the organization, changes in
the mix of employees performing those functions, and other changed circumstances
that might impact pay levels. (S. 1166 included a similar provision.)
The Executive Schedule is the pay system for the heads of federal departments
and agencies. As of January 2003, pay for the five levels of the Executive Schedule
ranged from $125,400 to $171,900. This provision would appear to authorize pay,
for individual employees, which could exceed that of the department or agency
heads. Under current law, OPM is required to certify that an agency has an
acceptable performance management system in place before salaries for these
employees could range up to the Vice President’s salary. Since the proposals would
not amend 5 U.S.C. 5307, it remains to be determined if OPM certification of the
DOD policy would be required.
Under the new Section 9902(d) in H.R. 1588, DOD would be authorized to
make changes in Title 5 Chapters 43 (Performance Appraisal) and 53 (Pay Rates and
Systems) in establishing the new HRM system. H.R. 1588 does not provide any
further detail on the design and operation of that new pay system.
Discussion of the Provisions. Several key chapters of Part III of Title 5
United States Code could be waived, modified, or otherwise affected as the new
human resources management system is developed. These are:
! Chapter 43 — Performance Appraisal
! Chapter 51 — Position Classification
! Chapter 53 — Pay Rates and Systems

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! Chapter 71 — Labor Management and Employee Relations (H.R.
1588 only)
! Chapter 75 — Adverse Actions
! Chapter 77 — Appeals
The Chapters 71, 75, and 77 changes are discussed below. As for the Chapters
43 (Performance Appraisal), 51 (Position Classification), and 53 (Pay Rates and
Systems) changes, DOD has provided few details about its plans for the new HRM
system. During testimony before the House Subcommittee on Civil Service and
Agency Organization at its April 29, 2003 hearing on the proposed National Security
Personnel System of the Defense Transformation for the 21st Century Act, however,
David S. C. Chu, Under Secretary of Defense for Personnel and Readiness, discussed
DOD’s Best Practices Initiative. He referred Members of Congress to an April 2,
2003 Federal Register notice for additional details on the types of human resources
management flexibilities the department is implementing at its science and
technology reinvention laboratories.9
On April 2, 2003, DOD published notice in the Federal Register of amendment
of demonstration project plans covering personnel at eight science and technology
reinvention laboratories.10 Such demonstration projects are currently ongoing at:
! Department of the Army — Army Research Laboratory; Aviation
and Missile Research, Development, and Engineering Center;
Communications-Electronics Command Research, Development,
and Engineering Community; Engineer Research and Development
Center; and Medical Research and Materiel Command;
! Department of the Navy — Naval Research Laboratory; Naval Sea
Systems Warfare Centers; and
! Department of the Air Force — Air Force Research Laboratory
The Federal Register notice provides details about performance appraisal,
position classification, and pay flexibilities that DOD is implementing at the
reinvention laboratories. This information may provide some insight into what DOD
is contemplating for these aspects of a new human resources management system for
the department. The following discusses each of these aspects of HRM at the
reinvention laboratories.
Performance Appraisal. Currently, Title 5 United States Code provides that
each executive branch agency must develop performance appraisal systems to
periodically appraise the job performance of employees and to encourage employee
participation in establishing performance standards. Appraisals are to be used to
train, reward, reassign, promote, reduce in grade, retain, and remove employees. The
Office of Personnel Management (OPM) prescribes regulations on establishing
9 Statement of David S. C. Chu, Under Secretary of Defense for Personnel and Readiness,
April 29, 2003, p. 5. (unpublished)
10 U.S. Department of Defense, “Science and Technology (S&T) Reinvention Laboratory
Personnel Management Demonstration Project; Notice of Amendment of Demonstration
Project Plans,” Federal Register, vol. 68, April 2, 2003, pp. 16119-16142.

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standards for accurately evaluating job performance on the basis of objective criteria,
as required by law.
Performance management includes both individual and group performance to
improve organizational effectiveness in accomplishing an agency’s mission and
goals. Agencies are authorized to establish performance appraisal systems and may
use one of eight patterns of summary levels of performance. These patterns range
from a pass/fail system with two summary levels (unacceptable and fully successful)
to a system with five summary levels (unacceptable, less than fully successful, fully
successful, exceeds fully successful, and outstanding).
The reinvention laboratories will have their own pay-for-performance (PFP)
evaluation system. Various features of the system are listed in Table 3 in the
Appendix.
Position Classification. At present, the technique of position classification is
used to craft the federal government’s civilian white-collar pay system, called the
General Schedule (GS). Federal jobs are arranged into classes on the basis of the
kind of work involved, its level of difficulty, responsibility, and the qualifications
necessary to perform it. Rates of pay are then attached to each specific class. The
pay structure is a job hierarchy. As an employee progresses through it, salary
increases. Positions at the GS-12 level, for instance, are said to demand more in
terms of knowledge and skill, responsibility, and expected results than those at the
GS-11 level, and therefore, have both a higher classification and rate of pay related
to them.
The current system of classification standards established by OPM will be used
by the reinvention laboratories to determine the occupational series and position titles
for white-collar jobs. The OPM designations of such jobs as professional,
administrative, technical, clerical, or other also will be used. References in the
classification standards to the GS grades which are defined in statute (5 U.S.C. 5104)
will not be used. Instead, descriptors for nonsupervisory and supervisory jobs will
be prepared and used to compare individual positions for the purposes of determining
the appropriate pay band levels. The nonsupervisory descriptors will derive from
OPM’s Primary Standard for the Factor Evaluation System, which provides for
comparisons among factors necessary to perform a particular job.
Pay. The current pay system for federal civilian white-collar occupations at
DOD (and government-wide) is the General Schedule. It is comprised of 15 grades
with 10 steps in each grade. The pay grades are defined in statute at 5 U.S.C. 5104.
An employee progresses through the steps of a pay grade after serving a specified
amount of time11 at a particular level and having at least an acceptable level of
performance.
11 An employee must wait 52 calendar weeks to be advanced to steps 2, 3, and 4 of a pay
grade; 104 calendar weeks to be advanced to steps 5, 6, and 7 of a pay grade; and 156
calendar weeks to be advanced to steps 8, 9, and 10 of a pay grade. (5 U.S.C. 5335)

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At the reinvention laboratories DOD will replace the GS system with a pay
banding system. Under the new system, pay bands would be associated with each of
five career groups (CG) — CG 1, Scientific and Engineering Research; CG 2,
Professional and Administrative Management; CG 3, Engineering, Scientific, and
Medical Support; CG 4, Business and Administrative Support; and CG 5, College
Cooperative Education Program. Descriptors of the pay band levels for
nonsupervisory employees will state the characteristics of the positions at the top of
the pay band level and will be established by the Under Secretary of Defense
(Civilian Personnel Policy). Table 1 in the Appendix shows the career groups and
their associated pay band levels for nonsupervisory employees.
Career groups CG 1 through CG 4 will apply to supervisory employees.
Descriptors of the pay band levels for supervisory employees will define limited
supervision (supervisor A), first-level (supervisor B), second-level (supervisor C),
and third-level managerial (supervisor D). A supervisory position’s career group and
pay band level are predicated upon the career group and pay band level of the
subordinate workforce. A position must meet the narrative criteria in the descriptor
and perform supervisory functions a significant portion of the time to be assigned a
supervisory pay band level. The descriptors will be established by the Under
Secretary of Defense (Civilian Personnel Policy). Table 2 in the Appendix shows
the career groups and their associated pay band levels for supervisory employees.
Proponents of pay banding emphasize that it increases the discretion of
managers to set and adjust pay rates for individual employees. Skeptics who express
concern about pay banding emphasize the need for strong internal controls to prevent
escalating salary costs at the top levels of the pay bands.
DOD has not provided information on how the pay system for its blue-collar
workers covered by the Federal Wage System might be changed by the new HRM
system.
Provisions to Ensure Collaboration With Employee Representatives
on National Security Personnel System. H.R. 1588 would add a new section,
5 U.S.C. 9902(f), requiring the Secretary of Defense and the Director of the Office
of Personnel Management to provide a written description of the proposed personnel
system or adjustments to such system to the labor organizations representing
employees in the department. The bill uses the term “employee representatives” to
describe these organizations. The employee representatives would be given at least
30 calendar days to review and make recommendations with respect to the proposal,
unless extraordinary circumstances require earlier action. Such recommendations
would have to be given full and fair consideration by the Secretary and the Director.
Section 9902(f)(B)(i) would require the Secretary and the Director to notify Congress
of those parts of the proposal for which recommendations were made, but not
accepted.
Section 9902(f)(B)(ii) would require the Secretary and the Director to meet and
confer with the employee representatives for not less than 30 calendar days to attempt
to reach agreement on whether and how to proceed with those parts of the proposal
for which recommendations were made, but not accepted. At the Secretary’s option,
or if requested by a majority of the employee representatives participating, the

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Federal Mediation and Conciliation Service could assist with the discussions. After
30 calendar days following notification and consultation, the Secretary could
implement any or all of the disputed parts of the proposal if it were determined that
further consultation and mediation were unlikely to produce agreement. However,
such implementation could occur only after 30 days following notice to Congress of
the decision to implement the part or parts involved. Implementation could occur
immediately for those parts of the proposal that did not generate recommendations
from the employee representatives, and where the Secretary and the Director accepted
the recommendations of the employee representatives. The Secretary may, at his
discretion, engage in any and all of the collaboration activities at an organizational
level above the level of exclusive recognition.
If a proposal were implemented, the Secretary and the Director would have to
develop a method for employee representatives to participate in any further planning
or development which might become necessary. In addition, employee
representatives would have to be given adequate access to information to make
participation productive.
Provisions Regarding National Level Bargaining. A new section, 5
U.S.C. 9902(g)(1), of H.R. 1588 would allow any personnel system implemented or
modified under Section 9902(f) and the new Chapter 99 established by H.R. 1588 to
include employees from any bargaining unit with respect to which a labor
organization has been accorded exclusive recognition. For any of these bargaining
units, the Secretary would be permitted to bargain at an organizational level above
the level of exclusive recognition. The decision to bargain at a level above the level
of exclusive recognition would not be subject to review or to dispute resolution
procedures outside the department.
Any bargaining conducted at a level above the level of exclusive recognition
would be binding on all subordinate bargaining units and on the department and its
subcomponents; would supercede all other collective bargaining agreements, except
as otherwise determined by the Secretary; would not be subject to further
negotiations for any purpose, except as provided for by the Secretary; and would be
subject to review by an independent third party only to the extent permitted by the
Act.
Because organizational bargaining would likely focus on the larger issues
affecting all employees, other topics may not be considered, including concerns that
are significant only to a particular bargaining unit. Proponents of organizational
bargaining, however, contend that such bargaining is more expeditious.
Provisions to Ensure Collaboration With Employee Representatives
on Development of Labor Relations System. Section 9902(d)(2) would
prevent the new personnel system from waiving the application of chapter 71 of the
U.S. Code. Chapter 71 sets forth the labor-management relations structure for the
federal government. At the same time, however, Section 9902(m)(1) would
authorize the Secretary and the Director to establish and from time to time adjust a
seemingly tailored labor relations system for the department. Section 9902(m)(1)
indicates that such a system would “address the unique role that the Department’s
civilian workforce plays in supporting the Department’s national security mission.”

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To ensure that there is collaboration between the Secretary, Director, and
employee representatives, the Secretary would be required to implement a process
similar to the one defined for the creation of the National Security Personnel System.
The Secretary and the Director would be required to give employee representatives
and management the opportunity to have meaningful discussions concerning the
development of the new system. Representatives would be given at least 30 calendar
days to review the proposal for the system and make recommendations with respect
to the proposal, unless extraordinary circumstances require earlier action.
Recommendations would have to be given full and fair consideration.
Section 9902(m)(3)(B)(i) would require the Secretary and the Director to meet
and confer with the employee representatives for not less than 30 calendar days to
attempt to reach agreement on whether and how to proceed with those parts of the
proposal for which recommendations were made, but not accepted. At the
Secretary’s option, or if requested by a majority of the employee representatives
participating, the Federal Mediation and Conciliation Service could assist with the
discussions. After 30 calendar days following consultation and mediation, the
Secretary could implement any or all of the disputed parts of the proposal if it was
determined that further consultation and mediation were unlikely to produce
agreement. However, such implementation could occur only after 30 days following
notice to Congress of the decision to implement the part or parts involved.
Implementation could occur immediately for those parts of the proposal that did not
generate recommendations from the employee representatives, and where the
Secretary and the Director accepted the recommendations of the employee
representatives.
The process for collaboration with the employee representatives would have to
begin no later than 60 calendar days after the date of enactment. Section 9902(m)(4)
would authorize the Secretary to engage in any and all of the collaboration activities
at an organizational level above the level of exclusive recognition.
The labor relations system developed or adjusted under Section 9902(m) would
have to provide for the independent third party review of decisions. The system
would determine which decisions could be reviewed, who would conduct the review,
and the standards to be used during the review. Unless extended or otherwise
provided for in law, the authority to establish, implement, and adjust the labor
relations system would expire six years after the date of enactment. At that time, the
provisions of chapter 71 would apply.
Provisions Relating to Appellate Procedures.12 The new section, 5
U.S.C. 9902(h), of H.R. 1588 would (1) (A) authorize the Secretary of Defense to
establish an appeals process which would provide employees of DOD organizational
and functional units that are included in the National Security Personnel System fair
treatment in any appeals that they bring in decisions relating to their employment;
and (B) would mandate that the Secretary in prescribing regulations for that appeals
process (i) ensure that these employees are afforded due process protections; and (ii)
toward that end, be required to consult with the Merit Systems Protection Board
12 Almost all of this section was taken from S. 1166, with a few changes.

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(MSPB) before issuing such regulations. (2) Regulations implementing the appeals
process may establish legal standards and procedures for personnel actions, including
standards for applicable relief, to be taken for employee misconduct or performance
that fails to meet expectations. These standards must be consistent with the public
employment principles of merit and fitness et forth in section 2301 of title 5 of the
United States Code. (3) Legal standards and precedents applied before the effective
date of the new section 9902 of title 5 by the MSPB and the courts under chapters
43 (Performance Appraisal), 75 (Adverse Actions) and 77 (Appeals) of title 5 would
be required to apply to DOD employees included in the National Security Personnel
System, unless these standards and precedents are inconsistent with standards
established in section 9902.
(4) An employee who (A) is removed, suspended for more than 14 days,
furloughed for 30 days or less, reduced in pay, or reduced in pay band (or comparable
reduction) by a final decision under the appeals process established under paragraph
1; (B) is not serving a probationary period under regulations established under
paragraph (2); and (C) would otherwise be eligible to appeal a performance-based or
adverse action under chapter 43 or 75, as applicable, to the MSPB would have the
right to petition the full MSPB for a review of the record of that decision pursuant to
regulations established under paragraph (2). The Board would be authorized to
dismiss any petition that, in the Board’s view, does not raise substantial questions of
fact or law. No personnel action could be stayed and no interim relief could be
granted during the pendency of the Board’s review unless specifically ordered by the
Board.
(5) The Board would be authorized to order corrective action as it considers
appropriate only if it determines that the Department’s decision was (A) arbitrary,
capricious, an abuse of discretion, or otherwise not in accordance with law; (B)
obtained without procedures required by law, rule, or regulation having been
followed; or (C) unsupported by substantial evidence. (6) An employee who is
adversely affected by a final order or decision of the MSPB would be able to obtain
judicial review of the order or decision as provided in section 7703. The Secretary
of Defense, after notifying the Director of the Office of Personnel Management,
could obtain judicial review of any Board final order or decision under the same
terms and conditions as provided an employee.
(7) Nothing in subsection (h) of the new section 9902 of title 5 of the United
States Code should be construed to authorize waiving any provision of law, including
an appeals provision providing a right or remedy under section 2302(b)(1), (8), or (9)
of title 5 that is not otherwise waivable under subsection (a) of the new section 9902.
Section 2302(b)(1) makes it prohibited personnel practice to discriminate for or
against any employee on such bases as race, color, religion, sex, or national origin,
age, handicapping conditions under relevant statutes, or marital status or political
status under any law, rule, or regulation. Section 2302(b)(8) prohibits personnel
actions in reprisal for whistleblowing. Section 2302(b)(9) prohibits personnel actions
in reprisal for such things as exercising any right of appeal, complaint, or grievance;
cooperating with or disclosing information to the Inspector General or Special
Counsel, or refusing to obey an order that would require an individual to violate a
law.

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(8) The right of an employee to petition the Merit Systems Protection Board
of the final decision of the Department of Defense on an action covered by paragraph
(4) of section 9902(h), and the right of the Board to review such action or to order
corrective action pursuant to paragraph (5), is provisional for 7 years after the date
chapter 99 is enacted, and becomes permanent unless Congress acts to revise such
provisions.
Chapter 77 is one of the chapters of Title 5 that is subject to waiver or
modification by the Secretary of Defense in establishing a human management
resources management system for DOD. Section 7701 of Title 5 grants employees
and applicants for employment a right to appeal to the Merit Systems Protection
Board from any action which is appealable to the Board under any law, rule, or
regulation. An appellant has a right to a hearing at which a transcript will be kept
and to be represented by an attorney or other representative.
An agency decision is sustained by the Board only if it is supported by
substantial evidence in the case of an action based on unacceptable performance
described in 5 U.S.C. § 4303 or a removal from the Senior Executive Service for
failing to be recertified or if it is supported by a preponderance of evidence in any
other case. Notwithstanding these standards, an agency’s decision may not be
sustained, if the employee or applicant for employment–(A) shows harmful error in
the application of the agency’s procedures in arriving at its decision; (B) shows that
the decision was based on any prohibited personnel practice described in 5 U.S.C. §
2302; or (C) shows that the decision was not in accordance with law.
Section 7702 of Title 5 prescribes special procedures for any case in which an
employee or applicant who has been affected by an action appeals to the Board and
alleges that a basis for the action was discrimination. The Board first decides both
the appealable action and the issue of discrimination within 120 days after it is filed.
In any action before an agency which involves an appealable action and
discrimination, the agency must resolve the matter within 120 days. An agency
decision is judicially reviewable unless the employee appeals the matter to the Board.
Any decision of the Board in an appealable action where discrimination has
been alleged is judicially reviewable as of the date the Board issues its decision if an
employee or the applicant does not file a petition for consideration by the Equal
Employment Opportunity Commission. Within 30 days after a petition is filed, the
commission must decide whether to consider the Board’s decision. If the
commission decides to consider such a decision, within 60 days it must concur in the
Board’s decision or issue a written decision which differs from it. Within 30 days
after receiving a commission decision that differs from the Board’s initial decision,
the Board must consider the commission’s decision and either concur in whole in
it or reaffirm its initial decision or reaffirm its initial decision with appropriate
revisions. A Board decision to concur and adopt in whole a commission decision is
judicially reviewable.
If the Board reaffirms its initial decision or reaffirms it with revisions that it
determines appropriate, the matter must immediately be certified to a special panel
comprised of one individual appointed by the President, one Board member, and one
commission member. Within 45 days after certification, the special panel is required

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to review the record, decide the disputed issues on the basis of the record, and issue
a final decision, which is judicially reviewable. The special panel must refer its
decision to the Board, which is required to order the agency involved to take any
appropriate action to carry out the panel’s decision. The panel must permit the
employee or applicant who brought the complaint and the agency to appear before
it to present oral arguments and to present written arguments.
If prescribed time periods for action by an agency, Board, or commission are not
met, an employee is entitled to file a civil action in district court under some
antidiscrimination statutes. If an agency does not resolve a matter appealable to the
Board where discrimination has been alleged within 120 days, the employee may
appeal the matter to the Board. Nothing in section 7702 of Title 5 “Actions
Involving Discrimination” shall be construed to affect the right to trial de novo in
district court under named antidiscrimination statutes after a judicially reviewable
action.
Under Section 7703 of Title 5, any employee or applicant who is adversely
affected or aggrieved by a final order or decision of the Merit Systems Protection
Board may obtain judicial review of the order or decision. Except in cases involving
allegations of discrimination, a petition to review a final Board order or decision
must be filed with the United States Court of Appeals for the Federal Circuit within
60 days after the petitioner received notice of the final order or decision. Cases
involving discrimination must be filed in district court under procedures prescribed
in antidiscrimination statutes within 30 days after the individual filing the case
received notice of a judicially reviewable action. In any case filed with the Federal
Circuit Court of Appeals, the court is required to hold unlawful and set aside any
agency action, findings, or conclusions found to be (1) arbitrary, capricious, an abuse
of discretion, or otherwise not in accordance with law; (2) obtained without
procedures required by law, rule, or regulations having been followed; or (3)
unsupported by substantial evidence, except that in the case of discrimination brought
under named antidiscrimination statutes, an employee or applicant has a right to have
the facts heard in a trial de novo by a reviewing court.
Provisions Related to Separation and Retirement Incentives. Under
current law, a federal agency that is restructuring or downsizing can, with the
approval of OPM, offer voluntary early retirement to employees in specific
occupational groups, organizational units, or geographic locations who are age 50 or
older and have at least 20 years of service, or who are any age and have at least 25
years of service. Also with the approval of OPM, a federal agency may offer
voluntary separation incentive payments of up to $25,000 to employees who retire
or resign. The full amount must be repaid if individual is re-employed by the federal
government within five years.
H.R. 1588 would create a new Section 9902(i) of Title 5 that would authorize
the Secretary of Defense, without review by OPM, to offer (1) early retirement to
employees who are age 50 or older with 20 years of service or any age with 25 years
of service and (2) separation incentive pay of up to $25,000 to DOD employees who
retire or resign. It would prohibit re-employment within DOD for 12 months after
receipt of separation pay unless the prohibition were waived by the Secretary on a
case-by-case basis. It would require anyone who is re-employed by the federal

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government within five years of receiving separation pay to repay the full amount to
the DOD.
Provisions Relating to Reemployment. Under current law, a retired
federal employee who is re-employed by the federal government may not receive a
federal retirement annuity and a federal salary simultaneously. Sections 8344 (Civil
Service Retirement System (CSRS)) and 8468 (Federal Employees’ Retirement
System (FERS)) of Title 5 provide that if a retired federal employee who is receiving
an annuity from the Civil Service Retirement and Disability Fund is re-employed by
a federal agency, an amount equal to the annuity shall be deducted from his or her
pay. If re-employment lasts more than one year, the individual will be eligible for a
supplemental annuity for the period of re-employment when he or she retires.
H.R. 1588 would create a new Section 9902(j) of Title 5 that would provide that
if a retired federal employee who is receiving an annuity from the Civil Service
Retirement and Disability Fund were to be employed by the Department of Defense,
his or her annuity would continue. The employee would not accrue additional credit
under either CSRS or FERS during this period of re-employment. (Note: It may be
that this section of the bill was drafted incorrectly. Under current law, a re-employed
annuitant’s annuity continues during the period of re-employment. His or her pay is
reduced by the amount of his or her annuity.)
Additional Provisions Relating to Personnel Management.
Notwithstanding Section 9902(d), the Secretary of Defense, in establishing and
implementing the National Security Personnel System, would not be limited by any
provision of Title 5 or any rule or regulation prescribed under Title 5 in establishing
and implementing regulations relating to—
(A) the methods of establishing qualification requirements for, recruitment for,
and appointments to positions;
(B) the methods of assigning, reassigning, detailing, transferring, or promoting
employees; and
(C) the methods of reducing overall agency staff and grade levels, except that
performance, veterans’ preference, tenure of employment, length of
service, and such other factors as the Secretary considers necessary and
appropriate would be considered in decisions to realign or reorganize the
Department’s workforce.
Phase-In. The Secretary could apply the National Security Personnel System
(1) to an organizational or functional unit that includes up to 300,000 civilian
employees of the Department of Defense, without having to make a
determination described immediately below; and
(2) to an organizational or functional unit that includes more than 300,000
civilian employees of the Department of Defense, if the Secretary determines that
the Department has in place a performance management system that meets the
criteria specified.
S. 1166 included a similar phase-in provision.

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H.R. 1588, as passed by the House, would have provided that the Secretary
could have exercised authorities that would otherwise be available to him under 5
U.S.C. 4703(a)(1), (3), and (8). Chapter 47 of Title 5 United States Code covers the
conduct of personnel research programs and demonstration projects. The provision
at 5 U.S.C. 4703(a) provides that the conduct of demonstration projects is not limited
by any lack of specific authority under Title 5 to take the action contemplated, or by
any provision of Title 5 or any rule or regulation prescribed under Title 5 which is
inconsistent with the action, including any law or regulation relating to:
(1) the methods of establishing qualification requirements for, recruitment for,
and appointment to positions
(3) the methods of assigning, reassigning, or promoting employees
(8) the methods of reducing overall agency staff and grade levels
This provision could increase the flexibility of the Secretary of Defense to hire
personnel and to manage the current allocation of the workforce.
Section 9903. Attracting Highly Qualified Experts
The new Section 9903 would authorize the Secretary of Defense to carry out a
program in order to attract highly qualified experts in needed occupations, as
determined by him. Under the program, the Secretary could appoint personnel from
outside the civil service and uniformed services (as such terms are defined in 5
U.S.C. 2101) to positions in DOD without regard to any provision of Title 5
governing the appointment of employees to positions in DOD. The Secretary also
could prescribe the rates of basic pay for positions to which employees are appointed
at rates not in excess of the maximum rate of basic pay authorized for senior-level
positions under 5 U.S.C. 5376, as increased by locality-based comparability
payments, notwithstanding any provision of Title 5 governing the rates of pay or
classification of employees in the executive branch. The Secretary could pay any
employee appointed under this section payments in addition to basic pay within the
limits applicable to the employee as discussed below.
The service of an employee under an appointment made pursuant to this section
could not exceed five years. The Secretary could, however, in the case of a particular
employee, extend the period to which service is limited by up to one additional year
if he determines that such action is necessary to promote DOD’s national security
missions.
The total amount of the additional payments paid to an employee under this
section for any 12-month period could not exceed the lesser of $50,000 in FY2004,
or an amount equal to 50% of the employee’s annual rate of basic pay. The $50,000
could be adjusted annually thereafter by the Secretary, with a percentage increase
equal to one-half of one percentage points less than the percentage by which the
Employment Cost Index, published quarterly by the Bureau of Labor Statistics, for
the base quarter of the year before the preceding calendar year exceeds the
Employment Cost Index for the base quarter of the second year before the preceding
calendar year.

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An employee appointed under this section would not be eligible for any bonus,
monetary award, or other monetary incentive for service except for payments
authorized under this section. Notwithstanding any other provision of this subsection
or of 5 U.S.C. 5307, no additional payments could be paid to an employee in any
calendar year, if, or to the extent that, the employee’s total annual compensation will
exceed the maximum amount of total annual compensation payable to the Vice
President.
The number of highly qualified experts appointed and retained by the Secretary
would not exceed 2,500 at any time. (Under S. 1166, the limitation would have been
300.)
In the event that the Secretary terminates this program, the following would
occur. In the case of an employee who on the day before the termination of the
program is serving in a position pursuant to an appointment under this section, the
termination of the program does not affect the employee’s employment in that
position before the expiration of the lesser of the period for which the employee was
appointed or the period to which the employee’s service is limited, including any
extension made under this section before the termination of the program. The rate
of basic pay prescribed for the position could not be reduced as long as the employee
continues to serve in the position without a break in service.
The committee report which accompanied H.R. 1836 stated that “The authority
[in this provision] is consistent with that now available to the Defense Advanced
Research Projects Agency and Military Departments for hiring scientists and
engineers.”13
Section 9905. Special Pay and Benefits for
Certain Employees Outside the United States
The new Section 9905 of H.R. 1588 would authorize the Secretary of Defense
to provide to certain civilian DOD employees assigned to activities outside the
United States, as determined by the Secretary to be in support of DOD activities
abroad hazardous to life or health or so specialized because of security requirements
as to be clearly distinguishable from normal government employment, allowances
and benefits. Such allowances and benefits would be comparable to those provided
by the Secretary of State to members of the Foreign Service under Chapter 9 of Title
I of the Foreign Service Act of 1980 or any other provision of law; or comparable to
those provided by the Director of Central Intelligence to personnel of the Central
Intelligence Agency (CIA). Special retirement accrual benefits and disability in the
same manner provided for by the CIA Retirement Act and in Section 18 of the CIA
Act of 1949 also would be provided.
13 H.Rept. 108-116, Part 1, p. 33. This provision in H.R. 1588, as passed by the House of
Representatives, is found in Sec. 102(a) of H.R. 1836, as reported.

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Impact on Department of Defense Civilian Personnel
Section 1101(b) of H.R. 1588 would provide that any exercise of authority
under the proposed new Chapter 99, including under any system established under
that chapter, would be in conformance with the requirements of this subsection. No
other provision of this act or of any amendment made by this act could be construed
or applied in a manner so as to limit, supersede, or otherwise affect the provisions of
this section, except to the extent that it does so by specific reference to this section.
Department of Defense Civilian Personnel Generally
— Title XI, Subtitle B, of H.R. 1588
Military Leave for Mobilized Federal Civilian Employees
Section 1113 of H.R. 1588 would amend 5 U.S.C. 6323 to authorize military
leave for an individual who performs full-time military service as a result of a call or
order to active duty in support of a contingency operation.14 Under military leave, the
individual receives leave without loss of, or reduction in, pay, leave to which he or
she is otherwise entitled, credit for time or service, or performance or efficiency
rating, for up to 22 workdays in a calendar year. The provision would apply to
military service performed on or after the act’s enactment date.
The committee report accompanying H.R. 1836 explained the need for the
provision:
This section would help Federal civilian employees whose military pay is less
than their Federal civilian salary “transition” to military service by allowing them
to receive 22 additional workdays of military leave when mobilized. Such leave
would help alleviate the difference in pay for the first month of service by
enabling them to receive the difference between their Federal civilian pay and
their military pay. Current law only entitles Reserve component members to the
additional military leave.15
Extension of Authority for Experimental Personnel Program
for Scientific and Technical Personnel
Section 1116 would amend Subsection (e)(1) of Section 1101 of the Strom
Thurmond National Defense Authorization Act for FY1999 (P.L. 105-261; 112 Stat.
2139; 5 U.S.C. 3104 note) to extend the experimental personnel program for
14 Contingency operation is defined as a military operation that is designated by the
Secretary of Defense as an operation in which members of the armed forces are or may
become involved in military actions, operations, or hostilities against an enemy of the
United States or against an opposing military force. It also could be a military operation that
results in the call or order to, or retention on, active duty of members of the uniformed
services during a war or during a national emergency declared by the President or Congress.
15 H.Rept. 108-116, part 1, p. 34. The language in H.R. 1588, as passed by the House of
Representatives, is identical to the language in Sec. 203 of H.R. 1836, as reported.

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scientific and technical personnel until September 30, 2008 (the annual report would
be required in 2009).
This provision was not included in H.R. 1588, as passed by the House. It was
included in S. 1050, as introduced, reported, and passed by the Senate and under the
Senate version, would have increased the limitation on the number of appointments
to scientific and engineering positions that could be made to the program from 40 to
50.
Subtitle B also includes provisions on an automated personnel management
program, the demonstration project relating to certain acquisition personnel
management, restoration of annual leave to certain DOD employees affected by base
closings, and employment of certain civilian faculty members at a Defense institution
which are beyond the purview of this report.
Department of Defense Civilian Personnel Generally
— Title XI, Subtitle C, of H.R. 1588
The provisions at Subtitle C of Title XI of H.R. 1588 would apply to federal
civilian employees government-wide.
Modification of the Overtime Pay Cap
Section 1121 would amend 5 U.S.C. 5542(a)(2) which covers the computation
of overtime rates of pay. Current law provides that an employee whose basic pay rate
exceeds GS-10, step 1 (including any locality pay or special pay rate) receives
overtime at a rate of one and one-half times the hourly rate for GS-10, step 1 (150%
of GS-10, step 1). The proposed amendment would provide that such an employee
would receive overtime at a rate which would be the greater of one and one-half
times the hourly rate for GS-10, step 1, or his or her hourly rate of basic pay.
For employees whose regular pay is greater than the 150% of GS-10, step 1 cap,
current law results in overtime pay at a rate less than their regular hourly rate. This
amendment would address this circumstance and the situation in which managers and
supervisors, whose overtime rate is capped at 150% of GS-10, step 1, receive less
compensation for overtime work than employees who are subordinate to them. The
Congressional Budget Office (CBO) determined that the provision would affect
employees above GS-12, step 5.16
Common Occupational and Health Standards for Differential
Payments as a Consequence of Exposure to Asbestos
Section 1122 would amend 5 U.S.C. 5343(c)(4), which authorizes blue-collar
employees to receive pay differentials for unusually severe working conditions or
unusually severe hazards, and 5 U.S.C. 5545(d), which authorizes pay differentials
16 H.Rept. 108-116, part 1, p. 54.

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for unusual physical hardship or hazard for General Schedule employees. The
amendment would provide that pay differentials for any hardship or hazard related
to asbestos would be determined by applying occupational safety and health
standards consistent with the permissible exposure limit promulgated by the
Secretary of Labor under the Occupational Safety and Health Act of 1970. Subject
to any vested constitutional property rights, any administrative or judicial
determination after the act’s enactment date concerning backpay for a differential
under 5 U.S.C. 5343(c)(4) or 5545(d) would be based on occupational safety and
health standards under the Occupational Safety and Health Act of 1970.
The Congressional Budget Office (CBO) explained the provision in its cost
estimate for H.R. 1836. According to CBO, the provision would provide that
federal wage-grade employees would be subject to the same standards as general
schedule employees when determining eligibility for environmental differential
pay (EDF) due to exposure to asbestos. Under current law, general schedule
employees are entitled to 8 percent hazard differential pay if they are exposed to
asbestos that exceeds the permissible exposure limits established by OSHA. The
current EDP standard for wage-grade employees entitles them to the same 8
percent of pay but does not set an objective measure for determining the level of
asbestos exposure necessary to qualify for EDP. In several instances when wage-
grade employees have sought back pay for EDP, arbitrators have found in favor
of the employees when asbestos levels were below those consistent with OSHA
standards.17
Increase in Annual Student Loan Repayment Authority
Section 1123 would amend 5 U.S.C. 5379(b)(2)(A) to provide that student loan
repayments to an employee could not exceed $10,000 in any calendar year, replacing
the up to $6,000 per calendar year that the current law allows. The amendment
would become effective on January 1, 2004. (H.R. 1588, as passed by the House, did
not include an effective date).
Given the increasingly larger burdens of debt that graduates are assuming, this
amendment could provide additional flexibility to managers and agencies wanting
to offer student loan repayments to their employees. Federal agencies have said that
they would need additional appropriations to fund such incentives as student loan
repayments.
17 H.Rept. 108-116, part 1, pp. 53-54. The language in H.R. 1588, as passed by the House
of Representatives, is identical to the language in Sec. 204 of H.R. 1836, as reported. The
complete Congressional Budget Office cost estimate is at pp. 51-58 of H.Rept. 108-116, part
1.

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Authorization for Cabinet Secretaries, Secretaries of
Military Departments, and Heads of Executive Agencies
to be Paid on a Biweekly Basis
Section 1124 would “allow cabinet secretaries, secretaries of military
departments and heads of executive agencies to be paid bi-weekly like most Federal
employees. This proposal would save time and cost resources by relieving civilian
pay and disbursing operations from having to utilize special manual procedures to
accommodate these personnel.”18
Section 5504 of Title 5 would be modified by consolidating the definition of
employee for the purpose of the section so that the same groups are covered by the
requirement for a bi-weekly pay period and by the methods for converting annual
rates of pay into hourly, daily, weekly, or biweekly rates. Currently “employee” is
defined under each of these provisions and both exclude groups of people excluded
from the definitions of employees in 5 U.S.C. 5541 on premium pay. H.R. 1588
would continue that exclusion, but add a provision that an agency could elect to have
excluded employees be paid on the bi-weekly basis. It should be noted that under the
current provisions, employees in the judicial branch are covered under the conversion
language, but are not included in the proposed language. It is not known if that
omission was by intent or if the latitude for discretionary inclusion was assumed to
apply to that class of employee.
Senior Executive Service and Performance
Section 1125(a) would effect changes to basic pay and locality pay for members
of the Senior Executive Service (SES), and individuals in certain other positions.
Regarding basic pay, this section would replace 5 U.S.C. 5382. The new language
would require the establishment of a range of rates of basic pay for the SES, subject
to regulations prescribed by OPM. Each senior executive would be paid at one of the
rates within the range, based on individual performance, contribution to the agency’s
performance, or both. Currently, Section 5382 requires the establishment of at least
five rates of basic pay; each senior executive is paid at one of the rates. Section
1125(a) also would raise the cap on basic pay from level IV of the Executive
Schedule ($134,000 in 2003) to level III of the Executive Schedule ($142,500). The
cap on basic pay would increase to level II of the Executive Schedule ($154,700) for
any agency whose performance appraisal system is certified as making meaningful
distinctions based on relative performance. This provision is similar to Section 1322
of P.L. 107-296, the Homeland Security Act,19 which established a similar
mechanism — certification of a performance appraisal system — for allowing the cap
on total compensation (which includes awards and bonuses) to move from level I of
the Executive Schedule ($171,900) to the Vice President’s salary ($198,600) for
senior executives and individuals in certain other positions governmentwide. OPM
has not yet released regulations or guidance for implementing Section 1322.
18 H.Rept. 108-116, part 1, p. 35. The language in H.R. 1588, as passed by the House of
Representatives, is identical to the language in Sec. 206 of H.R. 1836, as reported.
19 116 Stat. 2137; Nov. 25, 2002.

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Language in Section 1125(a) would protect any senior executive who transfers from
a certified agency to a noncertified agency by prohibiting a reduction in pay.
Instituting a pay band and shifting the cap on basic pay from level IV to level
III might help to ease pay compression, at least temporarily, within the Senior
Executive Service. A shift to level II would provide additional relief. However, until
OPM issued regulations for implementing this initiative, the consequences for senior
executives, besides the opportunity to earn more pay, are unclear. Many believe this
provision has the potential for interjecting more accountability into the SES. Others
are concerned that in an effort to develop and apply a performance appraisal system
that is based on meaningful distinctions, agencies might create and impose a forced
distribution of performance ratings.
Section 1125(a) would amend 5 U.S.C. 5304 so that the following positions
would no longer be eligible for locality pay: positions in the SES; positions in the
Federal Bureau of Investigation (FBI) and Drug Enforcement Administration (DEA)
SES; and positions in a system equivalent to the SES, as determined by the
President’s pay agent. The legislation does not address whether this change would
be prospective or retrospective. Considering the changes made to the cap on total
compensation, and the proposed changes to the cap on basic pay, which result, or
would result, in the establishment of caps at levels I, II, and III of the Executive
Schedule, the elimination of locality pay might be viewed as a practical matter.
However, senior executives employed by an agency whose performance appraisal
system is not certified could be adversely affected by the loss of locality pay.
Under Section 1125(c), the amendments made by this section would take effect
on the first date of the first pay period that begins on or after January 1 following the
date that this section is enacted.20 Section 1125(c) also would ensure that a senior
executive’s basic rate of pay is not reduced, as a result of changes effected by Section
1125(a), during the first year after enactment. For the purpose of ensuring that an
individual’s rate of basic pay is not reduced, a senior executive’s rate of basic pay
would equal the rate of basic pay and the locality pay he or she was being paid on the
date of enactment of this legislation. Section 1125(c) notes that any reference in law
to a rate of basic pay above the minimum level and below the maximum level
payable to senior executives would be considered a reference to the rate of pay for
Executive Schedule level IV.
Post-Employment Restrictions
Section 1125(b) would apply the post-employment conflict of interest provision
commonly known as the one-year “cooling off” period (18 U.S.C. 207(c)(1)) to (in
addition to those paid on the Executive Schedule) those not paid on the Executive
Schedule but who are compensated at a rate of pay equal to, or greater than, 86.5%
of the rate of basic pay for level II of the Executive Schedule ($148,512 in 2003), or,
for two years after the enactment of this Act, those persons who would have been
covered by the restriction the day before the Act was passed (those compensated at
20 Sec. 1125(b) addresses post-employment restrictions generally, and is addressed in
another section of this report.

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a base rate of pay equal to or greater than a level 5 for the Senior Executive Service,
$134,000 for 2003). The provision would amend 18 U.S.C. 207(c)(2)(A)(ii).
Design Elements of Pay-for-Performance Systems
in Demonstration Projects
Section 1126 would amend 5 U.S.C. Chapter 47 which covers the conduct of
personnel research programs and demonstration projects. The amendment would
specify certain elements which would have to be present in a demonstration project’s
pay-for-performance system. The eight elements would be:
! adherence to merit system principles under 5 U.S.C. 2301;
! a fair, credible, and transparent employee performance appraisal
system;
! a link between elements of the pay-for-performance system, the
employee performance appraisal system, and the agency’s strategic
plan;
! a means for ensuring employee involvement in the design and
implementation of the system;
! adequate training and retraining for supervisors, managers, and
employees in the implementation and operation of the pay-for-
performance system;
! a process for ensuring ongoing performance feedback and dialogue
between supervisors, managers, and employees throughout the
appraisal period, and setting timetables for review;
! effective safeguards to ensure that the management of the system is
fair and equitable and based on employee performance; and
! a means for ensuring that adequate agency resources are allocated
for the design, implementation, and administration of the pay-for-
performance system.
These eight elements address longstanding concerns expressed by employees,
their unions, and representatives about the pay-for-performance component of
demonstration projects.
Federal Flexible Benefits Plan Administrative Costs
Section 1127 would prohibit federal agencies that offer a flexible spending
accounts (FSAs) from imposing fees on employees to defray their administrative
costs. It also would require agencies to forward to OPM (or an entity it designates)
amounts to offset these costs. OPM would be required to submit reports to the House
Committee on Government Reform and the Senate Committee on Governmental
Affairs no later than March 31, 2004, on the administrative costs associated with the
governmentwide FSA program for FY2003 and the projected administrative costs for
each of the five fiscal years thereafter. At the end of each of the first three calendar
years in which an agency offers FSAs, the agency would be required to submit a
report to the Office of Management and Budget on the employment tax savings from
the accounts (i.e., the Social Security and Medicare taxes they otherwise would have
had to pay), net of administrative fees paid.

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Employees in most federal agencies were given a flexible spending account
option starting in July 2003. The new benefit allows employees to put pretax money
aside for unreimbursed health care or dependent care expenses in exchange for
receiving lower pay. (Section 5525 of Title 5 provides that agency heads may
establish procedures under which employees are permitted to make allotments and
assignments out of their pay for such purposes as the agency head considers
appropriate.) For example, employees might elect to reduce their pay by $50 each
pay period in exchange for having $1,300 (i.e., $50 x 26 pay periods in a year) placed
in their health care FSA. When they incur unreimbursed health care expenses (e.g.,
copayments and deductibles, or dental expenditures not covered by insurance) they
would be reimbursed from their account. FSA reimbursements are exempt from
federal income and employment taxes as well as state income taxes; thus, employees
electing to participate can save on taxes they otherwise would have incurred had they
instead used take-home pay for the expenses. Information about the federal FSAs can
be found at [http://www.fsafeds.com].
FSAs involve administrative costs, particularly for determining the eligibility
of submitted claims. OPM, which has contracted with SHPS, Inc., to administer the
FSAs, originally intended to have participating employees pay $4 a month for their
health care FSA and 1.5% annually of the amount set aside for their dependent care
FSA. Shortly before the program started, OPM gave agencies the option of
absorbing administrative expenses themselves, and most have done so. The
conference agreement on H.R. 1588 would require participating agencies to pay the
administrative costs and prohibit the government from charging employees fees.
One argument for having employees pay FSA administrative costs is that they
are the principal beneficiaries; if the government were to pay, the cost might be
partially borne by employees without FSAs or by other programs or even taxpayers
generally. However, imposing fees on employees could discourage participation.
Few private sector or other employers impose FSA fees on participants; most pay for
the administrative costs out of their employment tax savings.
Employee Surveys
Section 1128 would mandate annual surveys of employees by federal executive
departments, government corporations, and independent establishments. OPM would
issue regulations prescribing survey questions that would appear on all agency
surveys so as to allow a comparison of results across agencies. Questions unique to
an agency also could be included on the survey. The surveys would address
leadership and management practices that contribute to agency performance.
Employee satisfaction with leadership policies and practices, work environment,
rewards and recognition for professional accomplishment and personal contributions
to achieving organizational mission, opportunity for professional development and
growth, and opportunity to contribute to achieving organizational mission also would
be surveyed. Agency results would be available to the public. They also would be
posted on the respective agency’s website unless the agency head determined that
doing so would jeopardize or negatively affect national security.
From time to time, OPM has conducted surveys of federal employees, but the
surveys authorized by this provision would be conducted by agencies and particularly

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focus on their leadership and performance and employee contribution to agency
mission. The provision does not mandate any remedial actions that an agency might
want to take once the survey results are known. As to not posting survey results for
reasons of national security, the term “national security” is not defined. OPM could
address this issue in its regulations.
Human Capital Performance Fund
Section 1129 would amend Part III, Subpart D of Title 5 United States Code by
adding a new Chapter 54 entitled Human Capital Performance Fund. The legislation
states that the purpose of the provision is to promote greater performance in the
federal government. According to H.R. 1588, the fund will reward the highest
performing and most valuable employees in an agency and offer federal managers a
new tool for recognizing employee performance that is critical to an agency achieving
its mission.
Organizations eligible for consideration to participate in the fund would be
executive departments, government corporations, and independent agencies. The
General Accounting Office would not be covered by the chapter. The fund could be
used to reward General Schedule, Foreign Service, and Veterans Health
Administration employees; prevailing rate employees; and employees included by
OPM following review of plans submitted by agencies seeking to participate in the
fund. Executive Schedule (or comparable rate) employees; SES members;
administrative law judges; contract appeals Board members; administrative appeals
judges; and individuals in positions which are excepted from the competitive service
because of their confidential, policy-determining, policy-making, or policy-
advocating character would not be eligible to receive payments from the fund.
OPM would administer the fund which would be authorized a $500,000,000
appropriation for FY2004. Such sums as may be necessary to carry out the provision
would be authorized for each subsequent fiscal year. In the first year of
implementation, $50,000,000 (up to 10% of the appropriation) would be available
to participating agencies to train supervisors, managers, and other individuals
involved in the appraisal process on using performance management systems to make
meaningful distinctions in employee performance and on using the fund.
Agencies seeking to participate in the fund would submit plans to OPM for
approval. The plans would have to incorporate the following elements:
! adherence to merit principles under 5 U.S.C. 2301;
! a fair, credible, and transparent performance appraisal system;
! a link between the pay-for-performance system, the employee
performance appraisal system, and the agency’s strategic plan;
! a means for ensuring employee involvement in the design and
implementation of the system;
! adequate training and retraining for supervisors, managers, and
employees in the implementation and operation of the pay-for-
performance system;

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! a process for ensuring ongoing performance feedback and dialogue
between supervisors, managers, and employees throughout the
appraisal period, and setting timetables for review;
! effective safeguards to ensure that the management of the system is
fair and equitable and based on employee performance; and
! a means for ensuring that adequate agency resources are allocated
for the design, implementation, and administration of the pay-for-
performance system.
An agency would receive an allocation of monies from the fund once OPM, in
consultation with the Chief Human Capital Officers Council, reviews and approves
its plan.21 Ninety percent of the remaining amount appropriated to the fund
($405,000,000) could be allocated to the agencies. An agency’s prorated distribution
could not exceed its prorated share of executive branch payroll. (Agencies would
provide OPM with necessary payroll information.) If OPM were not to allocate an
agency’s full prorated share, the remaining amount would be available for
distribution to other agencies.
Ten percent of the remaining amount appropriated to the fund ($45,000,000) as
well as the amount of an agency’s prorated share not distributed because of the
agency’s failure to submit a satisfactory plan, would be allocated among agencies
with exceptionally high-quality plans. Such agencies would be eligible to receive a
distribution in addition to their full prorated distribution.
Agencies, in accordance with their approved plans, could make human capital
performance payments to employees based on exceptional performance contributing
to the achievement of the agency mission. In any year, the number of employees in
an agency receiving payments could not be more than the number equal to 15% of
the agency’s average total civilian full-time and part-time permanent employment for
the previous fiscal year. A payment could not exceed 10% of the employee’s basic
pay rate. The employee’s aggregate pay (basic, locality pay, human capital
performance pay) could not exceed Executive Level IV ($134,000 in 2003).
A human capital performance payment would be in addition to annual pay
adjustments and locality-based comparability payments. Such payments would be
considered basic pay for purposes of Civil Service Retirement System, Federal
Employees’ Retirement System, life insurance, and for such other purposes (other
than adverse actions) which OPM determines by regulation. Information on
payments made and the use of monies from the fund would be provided by the
agencies to OPM as specified.
Initially, agencies would use monies from the fund to make the human capital
performance payments. In subsequent years, continued financing of previously
awarded payments would be derived from other agency funds available for salaries
and expenses. Under current law, 5 U.S.C. 5335 authorizes agencies to pay periodic
within-grade increases to employees performing at an acceptable level of
21 The Chief Human Capital Officers Council would include an evaluation of the
formulation and implementation of agency performance management systems in its annual
report to Congress.

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competence. Presumably, funds for such within-grade increases could be used to pay
human capital performance payments. Monies from the fund could not be used for
new positions, for other performance-related payments, or for recruitment or
retention incentives.
OPM would issue regulations to implement the new Chapter 54 provisions.
Those regulations would include criteria governing:
! an agency’s plan;
! allocation of monies from the fund to the agencies;
! the nature, extent, duration, and adjustment of, and approval
processes for, payments to employees;
! the relationship of agency performance management systems to the
Human Capital Performance Fund;
! training of supervisors, managers, and other individuals involved in
the process of making performance distinctions; and
! the circumstances under which funds could be allocated by OPM to
an agency in amounts below or in excess of the agency’s pro rata
share.
The Human Capital Performance Fund is proposed by President George Bush
in his FY2004 budget. According to the budget, the fund “is designed to create
performance-driven pay systems for employees and reinforce the value of employee
performance management systems.”22 The effectiveness of agency performance
management systems and whether the performance ratings would be determined
according to preconceived ideas of how the ratings would be arrayed across the
particular rating categories are among the concerns expressed by federal employees
and their unions and representatives. Other concerns are that the fund could take
monies away from the already reduced locality-based comparability payments and
that the performance award amounts would be so small as to not serve as an
incentive.
Transfer of Personnel Investigative Functions and Related
Personnel of the Department of Defense
Section 906 would authorize the transfer of the personnel security investigations
functions and associated personnel from the Department of Defense Security Service
(DSS) to the Office of Personnel Management (OPM).23 The functional transfer is
contingent on acceptance by both the Secretary of Defense and the Director of OPM.
If so agreed, the transfer of DSS investigative personnel is mandatory, while the
transfer of support personnel is at the discretion of the Secretary and the Director.
If the transfer is made, the Secretary is to review all functions initially performed by
DSS and make a written determination as to “whether each function is inherently
governmental or is otherwise inappropriate for performance by contractor personnel.”
Such functions may not be contracted to private contractors unless and until the
22 U.S. Executive Office of the President, Office of Management and Budget, Budget of the
United States Government Fiscal Year 2004 Appendix (Washington: GPO, 2003, p. 973).
23 This provision was Section 1104 in H.R. 1588, as passed by the House.

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Secretary determines that these are not inherently governmental or otherwise
inappropriate for contractor performance. If so, the contracting would be governed
by the requirements of OMB Circular A-76.
Provisions Dropped In Conference
A provision at Section 1109 of H.R. 1588, as passed by the House, on
clarification of the Hatch Act was dropped in conference. It would have exempted
a federal employee or individual who was employed by the DOD Inspector General’s
office before the Act’s enactment date and transferred to a Special Court sponsored
by the United Nations from the provisions of 5 U.S.C. 7326. Section 7326 authorizes
an employee’s removal from position or 30 days’ suspension without pay for
violating the prohibitions on federal employee political activities. The exemption
would have no longer applied if the employee or individual subsequently became
reemployed in the civil service.
The provision would have provided that once employees in this specific
category leave government service they would no longer by covered by the Hatch Act
restrictions on political activities by federal employees.24 H.R. 1509, which would
have applied this provision to a broader category of employees, was introduced by
Representative Tom Davis on March 31, 2003 and referred to the House Committee
on Government Reform.25
H.R. 1588, as passed by the Senate, included the following two provisions
related to critical pay for federal employees. The provisions were included in S.
1050, as introduced, reported, and passed by the Senate. They were not included in
H.R. 1588, as passed by the House, or S. 1166, and were dropped in conference.
Section 1102 of H.R. 1588, as passed by the Senate, would have amended 10
U.S.C. Chapter 81 by adding a new Section 1599e on pay authority for critical
positions. When the Secretary of Defense sought a grant of authority under 5 U.S.C.
5377 for critical pay for one or more positions within DOD, the Director of the
Office of Management and Budget could have fixed the rate of basic pay,
notwithstanding 5 U.S.C. 5377(d)(2) and 5307, at any rate up to the Vice President’s
salary ($198,600 as of January 2003). Notwithstanding 5 U.S.C. 5307, no allowance,
differential, bonus, award, or similar cash payment could have been paid to any
employee receiving critical pay at a rate fixed under the above authority, in any
calendar year if, or to the extent that, the employee’s total annual compensation
would exceed the maximum amount of total annual compensation for the Vice
President.
24 See also, Stephen Barr, “Hatching a Plan to Stop Prosecution of Former Worker, Failed
Candidate,” The Washington Post, June 12, 2003, p. B2.
25 For a statement upon introduction of H.R. 1509 by Representative Davis, see Hon. Tom
Davis, “Clarifying the Enforcement Provisions of the Hatch Act,” Congressional Record,
daily edition, March 31, 2003, p. E627.

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Under temporary streamlined critical pay authority, the Secretary of Defense
could have established, fixed the compensation of, and appointed persons to positions
designated as critical administrative, technical, or professional positions needed to
carry out DOD’s functions. This authority could have been exercised only if the
following conditions were met:
! the position requires expertise of an extremely high level in an
administrative, technical, or professional field;
! the position is critical to the successful accomplishment of an
important DOD mission;
! the exercise of the authority is necessary to recruit or retain a person
exceptionally well qualified for the position;
! the number of all positions covered by the exercise of the authority
does not exceed 40 at any one time;
! in the case of a position designated as a critical administrative,
technical, or professional position by an official other than the
Secretary of Defense, the designation is approved by the Secretary;
! the term of appointment to the position is limited to not more than
four years;
! the appointee to the position was not a DOD employee before the
date of the enactment of the National Defense Authorization Act for
FY2004;
! the total annual compensation for the appointee to the position does
not exceed the highest total annual compensation for the Vice
President; and
! the position is excluded from collective bargaining units.
The authority for temporary streamlined critical pay could have been exercised
without regard to the pay authority for critical positions; the provisions of Title 5
United States Code governing appointments in the competitive service or the Senior
Executive Service; and 5 U.S.C. Chapters 51 and 53, relating to position
classification and pay rates. The authority could not have been exercised after the
date that is 10 years after the enactment date of the National Defense Authorization
Act for FY2004.
For so long as a person continues to serve without a break in service in a
position to which appointed under this subsection, the expiration of authority would
not have terminated the position, terminated the person’s appointment in the position
before the end of the term for which appointed, or affected the compensation fixed
for the person’s service in the position during such term of appointment. Subchapter
II of Chapter 75 of Title 5 (on removal, suspension for more than 14 days, reduction
in grade or pay, or furlough for 30 days or less) would not have applied to an
employee during a term of service in a critical administrative, technical, or
professional position to which the employee is appointed under this subsection.
Contracting For Personal Services
Section 841of the conference version of H.R. 1588 would permit the Secretary
of Defense to enter into personal services contracts in the United States if the

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personal services directly support the mission of a defense intelligence element as
defined in statute. (A similar authority is provided for personal services that directly
support the mission of the special operations command.)
Section 504 of S. 1025, the Senate version of the FY2004 Intelligence
Authorization bill, also would provide authority for funds available to intelligence
agencies or elements in DOD to be expended on personal services contracts
“necessary to carry out the mission of the covered component, including personal
services without regard to limitations on types of persons to be employed.” The
accompanying report (S.Rept. 108-44) notes that this authority is similar to that
available to the CIA in accordance with the provisions of the CIA Act of 1949 (50
USC 403j(a)(1)). A similar provision is also included as Section 503 of the House
version of the FY2004 Intelligence Authorization bill, H.R. 2417. The
accompanying House Report (H.Rept. 108-163) notes that DOD intelligence
elements “frequently have a temporary need for additional personnel with specific
expertise to meet unanticipated yet significant operational requirements requiring a
bolstering of organizational and personnel efforts created by world events. Current
examples include experts on al-Qa’ida, the countries of the Middle East, chemical
and biological warfare, and Islamic militant personalities, along with linguists to
support interrogation of detainees and review of captured documents.”
H.R. 1588 and H.R. 2417 would authorize personal services contracts “in the
United States”; the versions in S. 1025 and the Senate version of H.R. 1588 included
no such limitation.

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CRS-33
Appendix
Table 1. Career Groups and Pay Bands for
Nonsupervisory Employees, Science and Technology
Reinvention Laboratories, Department of Defense
Pay Bands
Career Group
Level 1
Level 2
Level 3
Level 4
CG 1, Science
GS 5-12
GS 13-15
Above GS-15
Not
and Engineering
Applicable
Research
CG 2,
GS 5-11
GS 12-13
GS 14-15
Above GS-15
Professional
and
Administrative
Management
CG 3,
GS 1-4
GS 5-7
GS 8-11
GS-12 and
Engineering,
above to CG2
Scientific, and
Medical
Support
CG 4, Business
GS 1-4
GS 5-7
GS 8-10
GS-11 and
and
above to CG2
Administrative
Support
CG 5, College
GS 1-5
GS 6-8
GS 9-11
GS-12
Cooperative
Education
Program
Source: U.S. Department of Defense, “Science and Technology (S&T) Reinvention Laboratory
Personnel Management Demonstration Program; Notice of Amendment of Demonstration Project
Plans,” Federal Register, vol. 68, April 2, 2003, pp. 16119-16142. Career groups are referenced in
the table as CG. GS refers to the General Schedule pay system.

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CRS-34
Table 2. Career Groups and Pay Bands for
Supervisory Employees, Science and Technology
Reinvention Laboratories, Department of Defense
Supervisory
Pay Bands
Level
Level 1
Level 2
Level 3
Level 4
CG 1, Science and Engineering Research
Supervisor A
Not
Not
Not
Not in CG
Applicable26
Applicable
Applicable
Supervisor B
Not
$61,241-
Not
Not in CG
Applicable
$129,498
Applicable
Supervisor C
Not
$61,251-
Not
Not in CG
Applicable
$150,865, but
Applicable
capped at
$133,800 (SES
level ES-4 in
2003)
Supervisor D
Not
Not
Not
Not in CG
Applicable
Applicable
Applicable
CG 2, Professional and Administrative Management
Supervisor A
$23,442-
$51,508-
Not
Not
$61,460
$87,592
Applicable
Applicable
Supervisor B
$23,442-
$51,508-
$72,381-
Not
$66,961
$94,098
$129,498
Applicable
Supervisor C
$23,442-
$51,508-
$72,381-
Not
$79,629
$110,682
$150,865, but
Applicable
capped at
$133,800 (SES
level ES-4 in
2003)
Supervisor D
$23,442-
$51,508-
Not
Not
$94,098
$129,498
Applicable
Applicable
26 “Not Applicable” means that establishment of supervisory positions at these levels is not
anticipated. If a supervisory position were established at such a level, the maximum rate of
pay would be 20% above the maximum rate for the base level supervised. Pay would not
exceed SES level ES-4 ($133,800 in 2003).

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CRS-35
Supervisory
Pay Bands
Level
Level 1
Level 2
Level 3
Level 4
CG 3, Engineering, Scientific, and Medical Support
Supervisor A
$15,214-
$23,442-
$32,158-
Not in CG
$28,868
$40,014
$61,460
Supervisor B
$15,214-
$23,442-
$32,158-
Not in CG
$30,471
$41,806
$66,961
Supervisor C
Not
$23,442-
$32,158-
Not in CG
Applicable
$46,175
$79,629
Supervisor D
Not
$23,442-
Not
Not in CG
Applicable
$50,851
Applicable
CG 4, Business and Administrative Support
Supervisor A
$15,214-
$23,442-
$32,158-
Not in CG
$28,868
$40,014
$55,936
Supervisor B
$15,214-
$23,442-
$32,158-
Not in CG
$30,471
$41,806
$61,021
Supervisor C
Not
$23,442-
$32,158-
Not in CG
Applicable
$46,175
$66,961
Supervisor D
Not
$23,442-
Not
Not in CG
Applicable
$50,851
Applicable
Source: U.S. Department of Defense, “Science and Technology (S&T) Reinvention Laboratory
Personnel Management Demonstration Program; Notice of Amendment of Demonstration Project
Plans,” Federal Register, vol. 68, April 2, 2003, pp. 16119-16142.

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CRS-36
Table 3. Selected Features of the Pay-for-Performance
Evaluation System, Science and Technology Reinvention
Laboratories, Department of Defense
Allows for more employee involvement in the evaluation process, increases
communication between supervisor and employee, promotes a clear accountability of
contribution by each employee, facilitates employee progression by linking individual
employee performance to mission accomplishment, and provides an understandable
basis for salary and structural changes.
At the beginning of the rating cycle, employees and supervisors will jointly develop
performance objectives that reflect the types of duties and responsibilities expected at
the respective pay band level.
The performance objectives ... should be in place within 30 days from the beginning
of each rating cycle.
Performance factors are used to evaluate accomplishment of performance objectives
.... The DOD component has the discretion to weight performance factors based on the
importance in accomplishing an individual’s performance objectives.
The seven performance factors used to evaluate accomplishment of performance
objectives are as follows: Technical Competence/Problem Solving;
Cooperation/Teamwork; Communication; Customer Care; Resource Management;
Leadership/Supervision; and Contribution to Mission Accomplishment.
Benchmark performance standards are descriptors that are used to measure, evaluate,
and score each performance factor with regard to the accomplishment of performance
objectives .... The descriptors for these benchmark performance standards indicate the
level of performance appropriate for the high end of each score range for the
performance factor. These performance standards will assist the supervisor in
determining the percentage of the performance factor that the employee actually
attained.
The duration of the rating cycle will be 12 months [October 1 through September 30].
The supervisor may provide on-going feedback as necessary to employees on how
well they are accomplishing performance objectives.
At the end of the rating period, the supervisor may request that the employee provide
narrative comments describing accomplishment of his/her performance objectives
throughout the year.
Performance payouts will be funded from pay pools. The amount of money available
within a pay pool for basic pay increases is determined by the general pay increase
(GPI) and the money that would have been available for quality step increases, within-
grade increases, and promotions between grades that are banded. Performance
incentive payments are funded separately, but the amount of money available for
performance incentive payments must be equivalent to a minimum of 1% of total
salary dollars (typically 1.3% to 1.8 %).
Typically, pay pools may range from as small as 25 to as large as 500 employees.
Each DOD component shall establish a pay pool manager for each pay pool.
Generally supervisors will be placed in a pay pool separate from their employees.

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CRS-37
Following a review of the employee’s accomplishments, the supervisor will score
each relevant performance factor by assigning a value to each performance factor.
The overall score is the sum of the individual performance factor scores.
Score ranges and Shares for Payout:
a score of 98-100 = 13, 14, 15, or 16 shares
a score of 95-97 = 11 or 12 shares
a score of 91-94 = 9 or 10 shares
a score of 86-90 = 7 or 8 shares
a score of 81-85 = 5 or 6 shares
a score of 66-80 = 3 or 4 shares
a score of 51-65 = 1 or 2 shares
a score of 0-50 = 0 shares
The share value is calculated by first multiplying each individual employee’s basic
pay salary by the number of shares awarded to the employee. This can be referred to
as (Salary x Shares). Then the amount of money in the pay pool is divided by the sum
total of (Salary x Shares) for all employees to derive the share value.
An employee will receive a performance payout as a percentage of current basic pay.
The employee’s total performance payout is the share value multiplied by the
employee’s end-of-rating cycle basic pay salary multiplied by the number of shares
earned by the employee.
A performance review board or an equivalent process for oversight will be established
for reviewing supervisors’ preliminary scores and recommendations for the number of
shares to be granted to individual employees.
An employee may grieve the performance score.
Informal employee performance reviews will be provided on an on-going basis, so that
corrective action, to include placing an employee on a performance improvement plan
(PIP), may be taken at any time during the rating cycle.
Source: The statements in the table are quotations from U.S. Department of Defense, “Science and
Technology (S&T) Reinvention Laboratory Personnel Management Demonstration Program; Notice
of Amendment of Demonstration Project Plans,” Federal Register, vol. 68, April 2, 2003, pp. 16119-
16142.

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CRS-38
Key CRS Policy Staff
Area of Expertise
Name
Phone
Contracting for Personal
Richard Best
7-7607
Services, Intelligence Agencies
Contracting for Personal Services
Valerie Grasso
7-7617
Civil Service
Sharon S. Gressle
7-8677
Senior Executive Service
L. Elaine Halchin
7-0646
Personnel Investigations
Fred Kaiser
7-8682
Flexible Spending Accounts
Bob Lyke
7-7355
Post-Employment Restrictions
Jack H. Maskell
7-6972
Appellate Procedures
Thomas J. Nicola
7-5004
Retirement and Re-employment;
Patrick J. Purcell
7-7571
Employment of Older Americans
Civil Service
Barbara L. Schwemle
7-8655
Labor Management and
Jon O. Shimabukuro
7-7990
Employee Relations

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