A Straightforward Assessment of Federal Pay and Benefits is Badly Needed

The Congressional Budget Office once again has presented a contentious assessment of federal pay and benefits. In the years when federal pay was “frozen,” CBO data confirms salaries continued to increase, thanks to step increases and promotions. What’s more, federal benefits are more generous than those typical in other sectors.

But it’s not clear what value the analysis has other than feeding the debate over whether federal employees are overpaid or underpaid (the answer is both—it all depends on what specific jobs you’re talking about). The CBO analysis cannot be used for planning either cash compensation or benefits.  

Payroll costs are important for all employers but competing for needed talent is the overriding reason employers offer benefits and align salaries with prevailing market rates. Companies routinely monitor compensation trends and with few exceptions adjust their salary programs annually to stay competitive.  As a matter of policy, some companies offer above-average compensation assuming it will help them attract above-average talent. It’s a reasoned policy decision.

A key point is that over the past two decades there has been a sea change in the management philosophy governing employee compensation in the country’s leading companies. One element is the shift from managing talent as an asset rather than a cost. When employees are managed as assets, it makes business sense to invest in workforce capabilities—and comparative payroll costs become less important.

Recently the business media has highlighted emerging skill shortages. The demographics indicate that will be a problem for years to come, especially for public employers with aging workforces. A new Harvard Youth Poll reported only 25 percent of millennials are interested in public service careers. That’s a problem. For agencies that want to hire critical skills, this is not a time to make changes that make federal careers less attractive.

For employers competing for talent, the first step would be to define their workforce priorities—that is, the essential skills—along with the known talent competitors. That effectively defines the relevant labor markets and needed survey data. There are regular surveys in virtually every industry tracking compensation trends. Hundreds are conducted annually. The general goal is always the same—to plan salaries that make it possible to attract adequately qualified talent.

Realistically, government agencies compete with a different group of employers in each local area where federal facilities are located. That is the rationale for the Federal Wage System. FWS wages are based on local surveys of the pay for matched jobs in selected industries. The Veterans Affairs Department relies on a similar policy, using surveys of local area hospitals to adjust the salary schedules of its specialists.

The rationale of the FWS system contradicts the CBO conclusion that federal workers “with no more than a high school education earned 34 percent more.” Although less is known about VA’s use of survey data, presumably their salaries are aligned with market averages as well.

Lessons from the Private Sector

Unfortunately, the CBO analysis is far more complicated than anything used for this purpose in business.  Moreover, CBO relied on data and methods that cannot be readily validated or confirmed with independent analyses. That’s also a problem with the annual Bureau of Labor Statistics surveys used to assess the claimed gap with General Schedule salaries. Both are classic black-box analyses.

That’s not true with a corporate market analysis. Those are based somewhat simplistically on job matching and widely understood descriptive statistics. That’s textbook and has been for decades.

The last market analysis comparing GS salaries with private sector rates based on benchmark jobs was completed over 20 years ago. Since the only compensation information normally made public are the reports summarizing the latest gap estimate (34 percent) and the President’s decision to adjust the GS ranges, it’s been years since job-to-job pay comparisons were publicly available.  

CBO’s analysis of federal benefits is not surprising, nor is it news. Federal benefits are more generous than those in the average company. That’s true for paid time off as well. Realistically the cost of benefits is inflated because the workforce is aging but at a time when millions of private employers provide little beyond legally required benefits, it is difficult to justify. It’s not that government is wrong; with companies shutting down employer-provided benefits many older citizens are experiencing financial problems.

A point from the CBO study that stands out is their conclusion that for employees with a doctorate or professional degree, “benefits were about the same in the two sectors.”  The fact is, highly educated employees are likely to work in the better private sector organizations. (They rarely work in the ‘mom-and-pop’ businesses in government surveys.) That is relevant because it confirms there are employers that continue to provide attractive benefits.

Federal salaries for those highly educated professionals as well as other high demand specialists are generally not competitive. The GS system lacks the flexibility to be responsive to market trends. Reducing the value of federal benefits will erode government’s ability to compete for and retain critical talent.

CBO’s analysis is not definitive, although within limitations it appears to be solid. The problem is the Current Population Survey was not planned for this purpose. Respondents to the CPS questionnaire, to illustrate the point, are asked about degrees awarded but not college majors. The analysis then assumes, simplistically, that all undergraduate degrees are paid the same.

The core problem, however, is that macro statistical analyses cannot produce evidence appropriate for addressing specific pay problems. But the BLS/OPM gap analysis has never been accepted because of similar problems. Neither will ever provide a broadly accepted answer.

The alternative that is solidly accepted in every other sector (as well as a long list of state and local public employers) is the use of benchmark job surveys to understand market pay levels. It’s a project that could be completed for a fraction of the cost of the BLS surveys. It’s consistent with the FWS and VA’s use of survey data as well as the occasional studies undertaken by off-budget agencies.

Government needs to go back to the basics, complete agency workforce analyses to understand future workforce needs, and then develop an understanding of the supply of needed skills and the pay those specialists command. Market analyses are routine in every other sector. Leaders need to know payroll dollars are well spent.