Analysis: Time for a fresh look at the federal pay system

While conservative analysts continue seeking to prove federal employees are overpaid, President Obama's State of the Union speech opened the door to a broader need to rethink the General Schedule salary system. In the speech, Obama mentioned federal pay only in passing, but the proposed five-year freeze on nondefense discretionary spending and the restructuring of government would, if enacted, trigger a need for a pay system more flexible than the GS grid.

The government in the president's vision was never contemplated when the GS system was created in 1949. Today's analysts from the Heritage Foundation and the American Enterprise Institute are right in arguing the pay system is out of sync with the labor market. But their analysis sheds no light on the problem. In fact, their idea of aligning federal pay with prevailing market levels was never contemplated when Title 5 was enacted. Much of the government that is now being considered for restructuring -- not to mention a number of essential occupations -- did not exist back then.

A basic flaw in their analysis is the assumption that government agencies are competing for talent with millions of mom-and-pop businesses. They assume the pay of the average U.S. worker should be the standard for paying federal employees. At one level that sounds reasonable. But 90 percent of the country's 5.7 million employers have fewer than 100 employees. Almost 50 percent have fewer than 5 employees. The smaller employers tend to be in industries like food services and drinking places and general merchandise stores. In examining government employees, a market analysis should focus on employers with jobs requiring the same skill sets.

The Current Population Survey the conservatives' used in their analysis was not developed for this purpose. It includes no information about job levels. Senior managers cannot be distinguished from new graduates. The survey tracks degrees attained but, to illustrate a point, engineering degrees cannot be differentiated from degrees in physical education. The CPS data simply do not help us understand the dynamics of labor markets.

No better is the Bureau of Labor Statistics database that the Office of Personnel Management uses for its gap analyses. It was designed to support the Employment Cost Index. OPM has been forced to put together a Rube Goldberg-like methodology to incorporate the data -- and it appears to have lost credibility.

The critics are correct in arguing for an "objective analysis." I would add the need for transparency. This is a straightforward problem for every other employer. Most compile survey data for benchmark jobs and plan their salary programs to enable them to compete for appropriately qualified talent. It's only the federal government that relies on convoluted approaches that require a Ph.D. to understand.

The regression analyses are best left to the academics. Statistical models generate nothing that helps decision-makers assess the situation, or develop plans for the future.

Federal agencies employ a number of world-class experts in their respective fields. Some have the credentials to justify their above-average salaries. The president acknowledged that some lower-level employees are paid above market. Others are no doubt paid below market. We simply do not know how well federal employees are paid. The critics, however, have grabbed headlines with simplistic claims and influenced more than a few editorials across the country.

Some observers have predicted that pay cuts or an extended freeze could prompt unusually high attrition. Resignations among young, recently hired graduates already have been highlighted. Older workers who opt for retirement will take with them a great deal of institutional and professional knowledge. Moreover, the federal "brand" as an employer is going to be hurt by the freeze, the proposed cuts and the denigration of government. Attracting qualified replacements could prove difficult.

I appreciate that the Republicans' proposed cuts focus on nondefense agencies. But as a taxpayer, I also am concerned about avoiding another disastrous oil spill, stopping the next Bernie Madoff, learning when a blizzard is expected and a host of other functions federal employees fulfill. To quote from the State of the Union speech, "We shouldn't just give our people a government that's more affordable; we should give them a government that's more competent and efficient." Achieving that goal depends totally on the federal workforce.

Up until now, the impact on morale and the new hot-button issue of federal employee engagement have largely been ignored. To use Gallup Organization terminology, some currently "engaged" employees inevitably will react to all the anti-government rhetoric by slipping to "not engaged' and others to "actively disengaged." Performance will deteriorate. The unknown is how rapidly it will become a concern.

I have read assertions that the government's challenge is no different from that of businesses that have had to freeze or cut pay and eliminate jobs. It's true, of course, that many employers have reduced staff. But that is usually attributable to reduced demand for products or services. Fewer employees are needed. That's not true in government. The public is going to expect -- and in some cases need -- service levels to be maintained. The pressure on the workforce can be expected to grow over time, exacerbating the morale problem.

Some would argue contractors can fill the void. But I have seen estimates that when the cost of a contract employee is "fully loaded," the total price paid by government is roughly 50 percent higher than that of a similarly qualified federal employee. And contractors' commitment to public service is unlikely to be as strong.

The problems with the GS system are going to become apparent quickly when the administration initiates the announced restructuring. It would be hard to find a salary system that is more bureaucratic or rigid. Moreover, affected employees naturally resist possible changes to salary grades.

The naval research lab at Naval Weapons Air Station China Lake in California is illustrative. It was created by the merger of two labs in 1980. The commanding officer was told it would take a couple of years to reclassify all the jobs. At that point he is reported to have told his human resources department that this wasn't acceptable -- he needed a better answer. That trigger prompted the now solidly established idea of salary banding. But it involved only two labs.

The changes necessary to modernize workforce management are not new to government. In the early 1990s, Vice President Al Gore championed many ideas that were spreading in other sectors. Industry during that same period initiated dramatic changes in the way work is organized and managed. There is solid evidence that a new work management paradigm (a popular word in those days) can trigger dramatic increases in workforce productivity. But Title 5 and the GS system as currently structured will impede such change.

The five-year freeze in domestic spending is obviously at odds with the slow but inevitable increase in market pay rates, and that has important workforce management ramifications. At some point, OPM and the Obama administration will be forced to bend the rules or replace the GS system. They also will have to develop strategies to identify the individuals critical to agency performance -- the "A players"-- and develop strategies to avoid losing them.

Such innovation would move the civil service in a new direction. The president's vision -- and the tough times -- demand 21st-century thinking.

Howard Risher is an independent compensation and performance management consultant. He was the managing consultant for the studies leading to the 1990 Federal Employees Pay Comparability Act. He is the author or co-author of five books, including Planning Wage and Salary Programs (WorldatWork Press, 2009).