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 January 28, 2004
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 applicable government-wide and on a National
Security Personnel System (NSPS) for the Department of Defense (DOD). The
Senate version of the bill, S. 1050, as passed by the Senate, amended, on May 22,
2003, did not include the Title XI 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
(Section 2 covered the NSPS). 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. 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. The Senate agreed to the conference report on a 95-3 vote (No. 447) on
November 12, 2003. H.R. 1588 was enacted as P.L. 108-136 on November 24, 2003.
Title XI, Subtitle A, of the law authorizes the Secretary of Defense and the
Director of the Office of Personnel Management (OPM) to establish a new human
resources management system for DOD’s civilian employees and to jointly prescribe
regulations for the system. The Secretary and the Director are authorized to establish
and adjust a labor relations system and are required to provide a written description
of the proposed personnel system or any adjustments to such system to the labor
organizations representing DOD employees. A collaboration procedure must be
followed by the Secretary, Director, and employee representatives. The Secretary is
authorized to engage in any collaboration activities and collective bargaining at an
organizational level above the level of exclusive recognition. The Secretary also is
authorized to establish an appeals process that provides fair treatment for DOD
employees covered by the NSPS. Regulations applicable to employee misconduct
or performance that fails to meet expectations may not be prescribed until after the
Secretary consults with the Merit Systems Protections Board (MSPB) and must
afford due process protections and conform to public employment principles of merit
and fitness at 5 U.S.C. §3201. A qualifying employee subject to some severe
disciplinary actions may petition the MSPB for review of the department’s decision.
The board could dismiss any petition that does not raise a substantial question of fact
or law and order corrective action only if the board finds that the department’s
personnel decision did not meet some prescribed standards. An employee adversely
affected by a final decision or order of the board could obtain judicial review.
Subtitle C of Title XI includes amendments to the government-wide policies for
the federal employee overtime pay cap, military leave, and Senior Executive Service
pay, and creates 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 P.L. 108-136.

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Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Department of Defense National Security Personnel System —
Title XI, Subtitle A, of P.L. 108-136 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 9901. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 9902. Establishment of Human Resources Management System . . . 5
In General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Requirements for the HRM System . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Personnel Management at Defense Laboratories . . . . . . . . . . . . . . . . . . 7
Limitations Relating to Pay . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Provisions to Ensure Collaboration With Employee Representatives
on National Security Personnel System . . . . . . . . . . . . . . . . . . . . 12
Provisions Regarding National Level Bargaining . . . . . . . . . . . . . . . . 12
Provisions to Ensure Collaboration With Employee Representatives
on Development of Labor Relations System . . . . . . . . . . . . . . . . 13
Provisions Relating to Appellate Procedures . . . . . . . . . . . . . . . . . . . . 14
Provisions Related to Separation and Retirement Incentives . . . . . . . 17
Provisions Relating to Reemployment . . . . . . . . . . . . . . . . . . . . . . . . . 18
Additional Provisions Relating to Personnel Management . . . . . . . . . 19
Phase-In . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Section 9903. Attracting Highly Qualified Experts . . . . . . . . . . . . . . . . . . 20
Section 9905. Special Pay and Benefits for Certain Employees
Outside the United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Impact on Department of Defense Civilian Personnel . . . . . . . . . . . . . . . . . 21
Department of Defense Civilian Personnel Generally —
Title XI, Subtitle B, of P.L. 108-136 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Military Leave for Mobilized Federal Civilian Employees . . . . . . . . . . . . . 21
Extension of Authority for Experimental Personnel Program for
Scientific and Technical Personnel . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Department of Defense Civilian Personnel Generally —
Title XI, Subtitle C, of P.L. 108-136 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Modification of the Overtime Pay Cap . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Common Occupational and Health Standards for Differential Payments
as a Consequence of Exposure to Asbestos . . . . . . . . . . . . . . . . . . . . . 23
Increase in Annual Student Loan Repayment Authority . . . . . . . . . . . . . . . 24
Authorization for Cabinet Secretaries, Secretaries of Military Departments,
and Heads of Executive Agencies to be Paid on a Biweekly Basis . . . 24
Senior Executive Service and Performance . . . . . . . . . . . . . . . . . . . . . . . . . 25
Post-Employment Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Design Elements of Pay-for-Performance Systems in
Demonstration Projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Federal Flexible Benefits Plan Administrative Costs . . . . . . . . . . . . . . . . . 27
Employee Surveys . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Human Capital Performance Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

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Other Personnel Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Contracting For Personal Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Transfer of Personnel Investigative Functions and Related Personnel
of the Department of Defense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Provisions Dropped In Conference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Key CRS Policy Staff . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
List of Tables
Table 1. Career Groups and Pay Bands for Nonsupervisory Employees,
Science and Technology Reinvention Laboratories,
Department of Defense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Table 2. Career Groups and Pay Bands for Supervisory Employees,
Science and Technology Reinvention Laboratories,
Department of Defense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Table 3. Selected Features of the Pay-for-Performance Evaluation System,
Science and Technology Reinvention Laboratories,
Department of Defense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

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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 Changes in the
uniformed military personnel and acquisition systems were the principal focus of the
proposal. However, it also recommended changes to 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.
On May 22, 2003, the House of Representatives passed H.R. 1588, the National
Defense Authorization Act for FY2004, amended, by a 361 to 68 (Roll No. 221)
vote.2 As reported to the House, H.R. 1588 included provisions at Subtitle A of Title
XI related to government-wide personnel management. The bill also included
provisions for a National Security Personnel System (NSPS) for 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,
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
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.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, Chairman of the Senate Committee on Governmental
Affairs, introduced S. 1166, the National Security Personnel System Act, on June 2,
2003, and it was referred to the Senate Governmental Affairs Committee. On June
4, 2003, the committee conducted a hearing on the bill. Following the 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
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
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.

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CRS-3
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.6
The Senate Governmental Affairs Committee marked up the bill on June 17,
2003, and, on the same day, 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 to clarify the intent of the bill’s
provisions on collective bargaining and an amendment offered by Senator George
Voinovich to exclude 10 DOD laboratories from the NSPS. Both amendments were
agreed to by voice vote. On September 5, 2003, the committee reported S. 1166 to
the Senate with amendments and without a written report.
Senator Collins, 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
NSPS. 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.”7 Several provisions that were the
same or similar to S. 1166 were added to H.R. 1588 in conference.
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. The
Senate agreed to the conference report on a 95-3 (No. 447) vote on November 12,
2003. President Bush signed H.R. 1588 into law on November 24, 2003, as P.L. 108-
136 (117 Stat. 1392). Changes made in conference are noted in the report.
6 U.S. General Accounting Office, Posthearing Questions Related to Proposed Department
of Defense (DOD) Human Capital Reform, GAO-03-965R (Washington: July 3, 2003).
7 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-4
This report analyzes each of the provisions in Title XI of P.L. 108-136.8 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
General Distribution Memorandum, Department of Defense Transformation
Proposal (Title I, Subtitle A, Section 101) and H.R. 1588 Conference Report (Title
XI, Subtitles A,B,C): A Side-by-Side Comparison, coordinated by Barbara L.
Schwemle; 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 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 P.L. 108-136
The conference report accompanying H.R. 1588 (H.Rept. 108-354) provides the
following.9
Section 1101(a)(1) of P.L. 108-136 amends 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 covers 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.
8 Sections 1111 (automated personnel management program), 1112 (demonstration project
relating to certain acquisition personnel management), 1114 (restoration of annual leave to
certain DOD employees affected by base closings), and 1115 (employment of certain
civilian faculty members at a Defense institution) of Title XI, Subtitle B of P.L. 108-136 are
beyond the purview of this report.
9 U.S. Congress, Conference Committees, 2003, National Defense Authorization Act for
Fiscal Year 2004, conference report to accompany H.R. 1588, 108th Cong., 1st sess., H.Rept.
108-354 (Washington: GPO, 2003), pp. 162-163, 171-173, 232-256, 733, and 758-764.

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CRS-5
Section 9902. Establishment of
Human Resources Management System
In General. The new Section 9902(a) of P.L. 108-136 provides that
notwithstanding any other provision of Part III, the Secretary of Defense may, in
regulations prescribed jointly with the OPM Director, establish, and from time to
time adjust, a human resources management (HRM) system, referred to as the
National Security Personnel System (NSPS), for some or all of the organizational or
functional units of DOD.
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.
Requirements for the HRM System. The HRM system must be flexible
and contemporary. The new Section 9902(b) provides 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
cannot 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;

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CRS-6
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;
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, may 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 must:
! ensure that employees may organize, bargain collectively as
provided for in the proposed Chapter 99, and participate through
labor organizations of their own choosing in decisions that affect

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CRS-7
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 must
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 must 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
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 NSPS will not
apply with respect to the laboratories listed below before October 1, 2008. It will
apply on or after October 1, 2008, only to the extent that the Secretary determines
that the flexibilities provided by the NSPS 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)) are 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 continued 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

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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.”10
Limitations Relating to Pay. Nothing in Section 9902 constitutes 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 may not exceed the
total annual compensation payable to the Vice President ($203,000).
The law provides 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 NSPS may 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 NSPS. The amount will 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 NSPS; 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 NSPS
will 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 NSPS. The formula will 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 NSPS, 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 2004, pay for the five levels of the Executive Schedule
ranges from $128,200 to $175,700. This provision appears 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
10 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-9
U.S.C. §5307, it remains to be determined if OPM certification of the DOD policy
will be required.
Under the new Section 9902(d) in P.L. 108-136, DOD is authorized to make
changes in Title 5 Chapters 43 (Performance Appraisal) and 53 (Pay Rates and
Systems) in establishing the new HRM system. The law 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 may be waived, modified, or otherwise affected as the new HRM
system is developed. These are:
! Chapter 43 — Performance Appraisal
! Chapter 51 — Position Classification
! Chapter 53 — Pay Rates and Systems
! Chapter 71 — Labor Management and Employee Relations
! 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. The agency has established a website on the NSPS.11 In a November 2003
briefing document, DOD announced that the NSPS will be built through coordination
with OPM and collaboration with employee representatives. There will be a
minimum 90-day period of discussion, mediation, and notification to Congress of
differences. Discussions were expected to begin in December 2003. Implementation
of the NSPS will begin in the current FY2004 and will continue for at least a two-
year period.12
During testimony before the House Subcommittee on Civil Service and Agency
Organization at its April 29, 2003 hearing on the proposed NSPS 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 HRM flexibilities the department is implementing
at its science and technology reinvention laboratories.13
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.14 Such demonstration projects are currently ongoing at:
11 See [http://www.cpms.osd.mil/nsps/index.html], visited Jan. 13, 2004.
12 Ibid.
13 Statement of David S. C. Chu, Under Secretary of Defense for Personnel and Readiness,
April 29, 2003, p. 5. (unpublished)
14 U.S. Department of Defense, “Science and Technology (S&T) Reinvention Laboratory
(continued...)

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! 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 HRM 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
OPM prescribes regulations on establishing 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, his or her
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.
14 (...continued)
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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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 time15 at a particular level and having at least an acceptable level of
performance.
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.
15 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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CRS-12
According to DOD, blue-collar workers under the Federal Wage System can be
covered by the NSPS. Currently, a working group is looking at this issue.
Provisions to Ensure Collaboration With Employee Representatives
on National Security Personnel System. P.L. 108-136 adds a new section, 5
U.S.C. §9902(f), requiring the Secretary of Defense and the Director of OPM 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 must be given full and
fair consideration by the Secretary and the Director. Section 9902(f)(B)(i) requires
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) requires 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 may assist with the discussions. After 30
calendar days following notification and consultation, the Secretary may 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 may occur only after 30 days following notice to Congress of the
decision to implement the part or parts involved. Implementation may 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 must develop a
method for employee representatives to participate in any further planning or
development which might become necessary. In addition, employee representatives
must 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), ofP.L. 108-136 allows any personnel system implemented or
modified under Section 9902(f) and the new Chapter 99 established by the law to
include employees from any bargaining unit with respect to which a labor
organization has been accorded exclusive recognition. (A labor organization is
described as having been accorded “exclusive recognition” when an election has
occurred (with the labor organization receiving support from a majority of
employees) and the results have been certified by the National Labor Relations Board
or the Federal Labor Relations Authority.) For any of these bargaining units, the
Secretary is 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

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CRS-13
recognition is not subject to review or to dispute resolution procedures outside the
department.
Any bargaining conducted at a level above the level of exclusive recognition is
binding on all subordinate bargaining units and on the department and its
subcomponents; supersedes all other collective bargaining agreements, except as
otherwise determined by the Secretary; is not subject to further negotiations for any
purpose, except as provided for by the Secretary; and is 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) prevents the
new personnel system from waiving the application of Chapter 71 of the United
States Code. Chapter 71 sets forth the labor-management relations structure for the
federal government. At the same time, however, Section 9902(m)(1) authorizes 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.”
To ensure that there is collaboration between the Secretary, the Director, and
employee representatives, the Secretary is required to implement a process similar
to the one defined for the creation of the NSPS. The Secretary and the Director are
required to give employee representatives and management the opportunity to have
meaningful discussions concerning the development of the new system.
Representatives must 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 must be given full and fair
consideration.
Section 9902(m)(3)(B)(i) requires 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 may assist with the discussions. After
30 calendar days following consultation and mediation, the Secretary may 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 may occur only after 30 days following notice to Congress of the
decision to implement the part or parts involved. Implementation may occur
immediately for those parts of the proposal that do not generate recommendations
from the employee representatives, and where the Secretary and the Director accepted
the recommendations of the employee representatives.

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CRS-14
The process for collaboration with the employee representatives must begin no
later than 60 calendar days after the date of enactment. Section 9902(m)(4)
authorizes 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) must
provide for the independent third party review of decisions and for determining
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 expires six
years after the date of enactment. At that time, the provisions of chapter 71 will
apply.
Provisions Relating to Appellate Procedures.16 The new section, 5
U.S.C. §9902(h), ofP.L. 108-136 (1) (A) authorizes the Secretary of Defense to
establish an appeals process that must provide employees of DOD organizational and
functional units that are included in the NSPS fair treatment in any appeals that they
bring in decisions relating to their employment; and (B) mandates 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 (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 set 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 must apply to DOD employees
included in the NSPS, 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) is otherwise eligible to appeal a performance-based or adverse
action under Chapters 43 or 75, as applicable, to the MSPB has 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 is authorized to dismiss any petition that,
in the board’s view, does not raise substantial questions of fact or law. No personnel
action may be stayed and no interim relief may be granted during the pendency of the
board’s review unless specifically ordered by the board.
(5) The board is authorized to order corrective action as it considers appropriate
only if it determines that the department’s decision was (A) arbitrary, capricious, an
16 Almost all of the provisions on appellate procedures derive from S. 1166, with a few
changes.

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CRS-15
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 may obtain judicial review of the order or
decision as provided in section 7703. The Secretary of Defense, after notifying the
OPM Director, may 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 the waiving of 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 a 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.
(8) The right of an employee to petition the final decision of DOD on an action
covered by paragraph (4) of section 9902(h) to MSPB, 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 an HRM system for DOD.
Section 7701 of Title 5 grants employees and applicants for employment a right to
appeal to MSPB 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

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CRS-16
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
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” can 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 MSPB 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 receives
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

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CRS-17
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.
P.L. 108-136 creates a new Section 9902(i) of Title 5 that authorizes the
Secretary of Defense, without review by OPM, to establish a program within DOD
under which employees may be eligible for early retirement, offered separation
incentive pay to separate from service voluntarily, or both.17 The authority may be
used to reduce the number of personnel employed by DOD or to restructure the
workforce to meet mission objectives without reducing the overall number of
personnel. It is in addition to, and notwithstanding, any other authorities established
by law or regulation for such programs.
The Secretary may not authorize the payment of voluntary separation incentive
pay (VSIP) to more than 25,000 employees in any fiscal year, except that employees
who receive VSIP as a result of a closure or realignment of a military installation
under the Defense Base Closure and Realignment Act of 1990 (Title XXIX of P.L.
101-510) will not be included in that number. The Secretary must prepare a report
each fiscal year setting forth the number of employees who received such pay as a
result of a closure or realignment of a military base and submit it to the Senate
Committees on Armed Services and Governmental Affairs and the House
Committees on Armed Services and Government Reform.
“Employee” means a DOD employee serving under an appointment without
time limitation. The term does not include (A) a reemployed annuitant under 5
U.S.C. Subchapter III, Chapters 83 or 84, or another retirement system for federal
employees; (B) an employee having a disability on the basis of which he or she is or
would be eligible for disability retirement; or (C) for purposes of eligibility for
separation incentives, an employee who has received a decision notice of involuntary
separation for misconduct or unacceptable performance.
An employee who is at least 50 years of age and has completed 20 years of
service, or has at least 25 years of service, could, pursuant to regulations promulgated
under this section, apply and be retired from DOD and receive benefits in accordance
with Chapters 83 or 84 if he or she has been employed continuously within DOD for
17 In January 2004, the Department of Defense issued guidelines on buyouts and early
retirements. See Stephen Barr, “Defense Authorizes Up to 25,000 Buyouts For Civil
Service Workers,” The Washington Post, Jan. 13, 2004, p. B2. The DOD memorandum had
not been posted on the agency’s website as of this writing.

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more than 30 days before the date on which the determination to conduct a reduction
or restructuring within one or more DOD components is approved.
Separation pay will be paid in a lump sum or in installments and will be equal
to the lesser of (i) an amount equal to the amount the employee would be entitled to
receive under 5 U.S.C. 5595(c), if the employee were entitled to payment; or (ii)
$25,000. Separation pay is not a basis for payment, and is not included in the
computation, of any other type of government benefit. It will not be taken into
account to determine the amount of any severance pay to which an individual could
be entitled under 5 U.S.C. 5595, based on any other separation. If paid in
installments, separation pay will cease to be paid upon the recipient’s acceptance of
federal employment, or commencement of work under a personal services contract.
An employee who receives separation pay may not be reemployed by DOD for
a 12-month period beginning on the effective date of the employee’s separation,
unless this prohibition is waived by the Secretary on a case-by-case basis. An
employee who receives separation pay on the basis of a separation occurring on or
after the enactment date of the Federal Workforce Restructuring Act of 1994 (P.L.
103-236) and accepts employment with the federal government, or who commences
work through a personal services contract with the United States within five years
after the date of the separation on which payment of the separation pay is based,
would be required to repay the entire amount of the separation pay to DOD. If the
employment is with an executive agency other than DOD, the OPM Director could,
at the request of the agency head, waive the repayment if the individual involved
possesses unique abilities and is the only qualified applicant available for the
position. If the employment is within DOD, the Secretary could waive the repayment
if the individual involved is the only qualified applicant available for the position.
If the employment is with an entity in the legislative branch, or with the judicial
branch, the head of the entity or the appointing official, or the Director of the
Administrative Office of the U.S. Courts, could waive the repayment if the individual
involved possesses unique abilities and is the only qualified applicant available for
the position.
Under this program, early retirement and separation pay may be offered only
pursuant to regulations established by the Secretary, subject to such limitations or
conditions as the Secretary may require.
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.
P.L. 108-136 creates a new Section 9902(j) of Title 5 that provides that if a
retired federal employee who is receiving an annuity from the Civil Service
Retirement and Disability Fund were to be employed by DOD, his or her annuity

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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 NSPS, is not 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 must be
considered in decisions to realign or reorganize the Department’s workforce.
In implementing this subsection, the Secretary must comply with 5 U.S.C.
§2302(b)(11), regarding veterans’ preference requirements.
Phase-In. The Secretary may apply the NSPS to an organizational or
functional unit that includes up to 300,000 civilian DOD employees and to an
organizational or functional unit that includes more than 300,000 civilian DOD
employees, 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.
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.

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CRS-20
Section 9903. Attracting Highly Qualified Experts
The new Section 9903 authorizes 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 may 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
may 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 may 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
may not exceed five years. The Secretary may, 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 may 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
may 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 (ECI), published quarterly by the Bureau of Labor Statistics,
for the base quarter of the year before the preceding calendar year exceeds the ECI
for the base quarter of the second year before the preceding calendar year. “Base
quarter” has the same meaning given at 5 U.S.C. §5302(3).
An employee appointed under this section is not 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 may 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 ($203,000).
The number of highly qualified experts appointed and retained by the Secretary
may 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 will 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

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CRS-21
under this section before the termination of the program. The rate of basic pay
prescribed for the position may 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 “[t]he 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.”18
Section 9905. Special Pay and Benefits for
Certain Employees Outside the United States
The new Section 9905 ofP.L. 108-136 authorizes the Secretary of Defense to
provide allowances and benefits 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. Such allowances and benefits will 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 that are
in the same manner provided for by the CIA Retirement Act and in Section 18 of the
CIA Act of 1949 also will be provided.
Impact on Department of Defense Civilian Personnel
Section 1101(b) ofP.L. 108-136 provides that any exercise of authority under
the proposed new Chapter 99, including under any system established under that
chapter, must be in conformance with the requirements of this subsection. No other
provision of this act or of any amendment made by this act may 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 P.L. 108-136
Military Leave for Mobilized Federal Civilian Employees
Section 1113 of P.L. 108-136 amends 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.19 Under military leave, the
18 H.Rept. 108-116, Part 1, p. 33. This provision in H.R. 1588, as passed by the House of
Representatives, was Sec. 102(a) of H.R. 1836, as reported.
19 Contingency operation is defined as a military operation that is designated by the
(continued...)

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CRS-22
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 applies to military
service performed on or after the act’s enactment date, November 24, 2003.
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.20
Extension of Authority for Experimental Personnel Program
for Scientific and Technical Personnel
Section 1116 amends 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 scientific and
technical personnel until September 30, 2008 (the annual report will 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 may be made to the program from 40 to
50.
Subtitle B of Title XI of P.L. 108-136 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.
19 (...continued)
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.
20 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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Department of Defense Civilian Personnel Generally
— Title XI, Subtitle C, of P.L. 108-136
The provisions at Subtitle C of Title XI ofP.L. 108-136 apply to federal civilian
employees government-wide.
Modification of the Overtime Pay Cap
Section 1121 amends 5 U.S.C. §5542(a)(2) which covers the computation of
overtime rates of pay. It provides that such an employee will receive overtime at a
rate which will 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. The law previously in effect provided
that an employee whose basic pay rate exceeded GS-10, step 1 (including any locality
pay or special pay rate) received overtime at a rate of one and one-half times the
hourly rate for GS-10, step 1 (150% of GS-10, step 1).
For employees whose regular pay is greater than the 150% of GS-10, step 1 cap,
the law previously in effect resulted in overtime pay at a rate less than their regular
hourly rate. P.L. 108-136 addresses 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 5.21
OPM will revise its regulations to reflect the new policy, but agencies were
advised to ensure that proper overtime payments were being made as of November
24, 2003, the law’s enactment date.
Common Occupational and Health Standards for Differential
Payments as a Consequence of Exposure to Asbestos
Section 1122 amends 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
for unusual physical hardship or hazard for General Schedule employees. The
amendment provides that pay differentials for any hardship or hazard related to
asbestos will 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) will 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 provides that
21 H.Rept. 108-116, part 1, p. 54.

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CRS-24
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.22
Increase in Annual Student Loan Repayment Authority
Section 1123 amends 5 U.S.C. §5379(b)(2)(A) to provide that student loan
repayments to an employee may not exceed $10,000 in any calendar year, replacing
the up to $6,000 per calendar year that the current law allows. The provision became
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
provision 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.
Authorization for Cabinet Secretaries, Secretaries of
Military Departments, and Heads of Executive Agencies
to be Paid on a Biweekly Basis
Section 1124 “allow[s] cabinet secretaries, secretaries of military departments
and heads of executive agencies to be paid bi-weekly like most Federal employees.
This proposal save[s] time and cost resources by relieving civilian pay and disbursing
operations from having to utilize special manual procedures to accommodate these
personnel.”23
Section 5504 of Title 5 is 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. P.L. 108-136 continues that
exclusion, but adds a provision that an agency could elect to have excluded
22 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.
23 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.

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CRS-25
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 language of this provision. 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) effects 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 replaces 5 U.S.C. §5382. The new language requires the
establishment of a range of rates of basic pay for the SES, subject to regulations
prescribed by OPM. Each senior executive will 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
raises the cap on basic pay from level IV of the Executive Schedule ($137,000 in
2004) to level III of the Executive Schedule ($145,600). The cap on basic pay
increases to level II of the Executive Schedule ($158,100) 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,24 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
($175,700) to the Vice President’s salary ($203,000) for senior executives and
individuals in certain other positions governmentwide. OPM has not yet released
regulations or guidance for implementing Section 1322. Language in Section
1125(a) protects 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 SES. A shift
to level II would provide additional relief. 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) amends 5 U.S.C. §5304 so that the following positions will 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. 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
24 116 Stat. 2137; Nov. 25, 2002.

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CRS-26
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 will take effect
on the first date of the first pay period that begins on or after January 1, 2004.25
Section 1125(c) also ensures 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 will 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 will be
considered a reference to the rate of pay for Executive Schedule level IV.26
Post-Employment Restrictions
Section 1125(b) applies 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 ($158,100 in 2004, so
$136,757), 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 a base rate of pay equal to or greater than a level 5 for the SES. The
provision amends 18 U.S.C. §207(c)(2)(A)(ii).27
Design Elements of Pay-for-Performance Systems
in Demonstration Projects
Section 1126 amends 5 U.S.C. Chapter 47 which covers the conduct of
personnel research programs and demonstration projects. The provision specifies
certain elements that must be present in a demonstration project’s pay-for-
performance system. The eight elements are:
! adherence to merit system principles under 5 U.S.C. §2301;
! a fair, credible, and transparent employee performance appraisal
system;
25 Sec. 1125(b) addresses post-employment restrictions generally, and is addressed in
another section of this report.
26 See: U.S. Office of Personnel Management, Memorandum For Heads of Departments and
Agencies, “New Performance-Based Pay System for the Senior Executive Service,” Dec.
16, 2003; U.S. Office of Personnel Management, Memorandum For Heads of Executive
Departments and Agencies, “Conversion to New SES Performance-Based Pay System,” Jan.
9, 2004; and U.S. Office of Personnel Management, “Senior Executive Service Pay and
Performance Awards,” Federal Register, vol. 69, Jan. 13, 2004, pp. 2048-2052.
27 See: U.S. Office of Personnel Management, Memorandum For Heads of Executive
Departments and Agencies, “Notification of Changes in Post-Employment Restrictions
Coverage for Members of the Senior Executive Service (SES),” Jan. 6, 2004.

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CRS-27
! 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 prohibits federal agencies that offer flexible spending accounts
(FSAs) from imposing fees on employees to defray their administrative costs. It also
requires agencies to forward to OPM (or an entity it designates) amounts to offset
these costs. OPM is required to submit to the House Committee on Government
Reform and the Senate Committee on Governmental Affairs, no later than March 31,
2004, reports 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 will be required to submit a report to the Office of
Management and Budget (OMB) 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.
Employees in most federal agencies were given an FSA 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].

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CRS-28
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. P.L. 108-136
requires participating agencies to pay the administrative costs and prohibits the
government from charging fees to employees.
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 mandates annual surveys of employees by federal executive
departments, government corporations, and independent establishments. OPM will
issue regulations prescribing survey questions that will appear on all agency surveys
so as to allow a comparison of results across agencies. Questions unique to an
agency also may be included on the survey. The surveys will 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 will be surveyed.
Agency results will be available to the public. They also will be posted on the
respective agency’s website unless the agency head determines 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
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 amends 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 the law, 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.

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CRS-29
Organizations eligible for consideration to participate in the fund are executive
departments, government corporations, and independent agencies. The General
Accounting Office is not covered by the chapter. The fund may 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 are not eligible to receive
payments from the fund.
OPM will administer the fund which is authorized a $500,000,000 appropriation
for FY2004. Such sums as may be necessary to carry out the provision are
authorized for each subsequent fiscal year. In the first year of implementation, up to
$50,000,000 (up to 10% of the appropriation, which is pending in H.R. 2673) will 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 will submit plans to OPM for
approval. The plans must 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;
! 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 will receive an allocation of monies from the fund once OPM, in
consultation with the Chief Human Capital Officers Council, reviews and approves
its plan.28 After the reduction for training (discussed below), 90% of the remaining
amount appropriated to the fund ($405,000,000, appropriation pending in H.R. 2673)
28 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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CRS-30
may be allocated to the agencies. An agency’s prorated distribution may not exceed
its prorated share of executive branch payroll. (Agencies will provide OPM with
necessary payroll information.) If OPM were not to allocate an agency’s full prorated
share, the remaining amount will be available for distribution to other agencies.
After the reduction for training, 10% 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, will be
allocated among agencies with exceptionally high-quality plans. Such agencies will
be eligible to receive a distribution in addition to their full prorated distribution.
Agencies, in accordance with their approved plans, may 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 may 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 may not exceed 10% of the employee’s basic pay
rate. The employee’s aggregate pay (basic, locality pay, human capital performance
pay) may not exceed Executive Level IV ($137,000 in 2004).
A human capital performance payment will be in addition to annual pay
adjustments and locality-based comparability payments. Such payments will 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 will be provided by the agencies
to OPM as specified.
Initially, agencies will use monies from the fund to make the human capital
performance payments. In subsequent years, continued financing of previously
awarded payments will be derived from other agency funds available for salaries and
expenses. Under current law (5 U.S.C. §5335) agencies pay periodic within-grade
increases to employees performing at an acceptable level of competence.
Presumably, funds for such within-grade increases could be used to pay human
capital performance payments. Monies from the fund may not be used for new
positions, for other performance-related payments, or for recruitment or retention
incentives.
OPM will issue regulations to implement the new Chapter 54 provisions. Those
regulations must 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

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CRS-31
! the circumstances under which funds could be allocated by OPM to
an agency in amounts below or in excess of the agency’s pro rated
share.
The Human Capital Performance Fund was 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.”29 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.
Other Personnel Provisions
Contracting For Personal Services
Title VIII, Subtitle D, Section 841, of P.L. 108-136 amends 10 U.S.C. §129(b)
by adding a new subsection that authorizes the Secretary to enter into personal
services contracts if the personal services (A) are to be provided by individuals
outside the United States, regardless of their nationality, and are determined by the
Secretary to be necessary and appropriate for supporting the activities and programs
of DOD outside the United States; (B) directly support the mission of a defense
intelligence component or counterintelligence organization of DOD; or (C) directly
support the mission of the special operations command of DOD. The contracting
officer for a personal services contract under this subsection is responsible for
insuring that (A) the services to be procured are urgent or unique; and (B) it would
be impracticable for DOD to obtain such services by other means. The requirements
of 5 U.S.C. 3109 will not apply to a contract entered into under this subsection.
Transfer of Personnel Investigative Functions and
Related Personnel of the Department of Defense
Title IX, Section 906, of P.L. 108-136 authorizes the transfer of the personnel
security investigations functions and associated personnel from the Department of
Defense Security Service (DSS) to OPM.30 The functional transfer is contingent on
acceptance by both the Secretary of Defense and the OPM Director. 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 Director, in coordination with the Secretary, is to review all functions
29 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).
30 This provision was Section 1104 in H.R. 1588, as passed by the House.

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CRS-32
performed at the time of the transfer by DSS and make a “written determination
regarding whether each such 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 Director makes a written
determination that these are not inherently governmental or otherwise not
inappropriate for contractor performance. If so decided, the contracting will 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.31 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.32
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 OMB
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 ($203,000). 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
31 See also, Stephen Barr, “Hatching a Plan to Stop Prosecution of Former Worker, Failed
Candidate,” The Washington Post, June 12, 2003, p. B2.
32 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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CRS-33
annual compensation would exceed the maximum amount of total annual
compensation for the Vice President.
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 SES;
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 an employee continued 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 his or her appointment in the position
before the end of the term for which appointed, or affected the compensation fixed
for the individual’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 was appointed under this subsection.

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CRS-34
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-35
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
Applicable33
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 SES
level ES-4
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 SES
level ES-4
Supervisor D
$23,442-
$51,508-
Not
Not
$94,098
$129,498
Applicable
Applicable
33 “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. P.L. 108-136 authorizes a new pay-for-performance system for the
Senior Executive Service (SES).

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CRS-36
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-37
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-38
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-39
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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