How to Create a New Federal Pay System Fair to Both Taxpayers and Employees

All the evidence suggests pay reform is coming. In the 2018 budget materials, the emphasis on rewarding top performers makes that clear (see the chapter on Strengthening the Federal Workforce in the Analytical Perspectives volume). George Nesterczuk’s nomination to head the Office of Personnel Management is the latest signal that the administration is taking reform seriously.

The General Schedule system should have been replaced years ago, but now the changes associated with the “first-ever rebuilding of the federal government” can be expected to trigger an overwhelming workload for HR offices across government. It’s not possible to anticipate how many jobs will be redefined and reclassified, but rearranging the boxes on organization charts and eliminating layers of management will require stacks of rewritten job descriptions. The appeals alone could bury OPM.

I am always reminded of the story of the merger of the two research labs to create the Naval Air Weapons Station China Lake near San Diego. When the Commander learned that the paperwork to reclassify the jobs would take two years, he told his HR people they had to find a better answer. The answer was a new salary model that reduced the bureaucracy dramatically through broadbanding, the adoption of wide pay bands.

The way annual pay adjustments are determined in the General Schedule is very different from how other employers manage salaries. Assuming the plan is to reform the salary system, a place to start should be to consider the practices common today in other large organizations.

Those practices are summarized in the compensation survey report of the Human Resource Association of the National Capital Area. They are also discussed in my book, Primer on Total Compensation in Government (IPMA-HR, 2016).

The HRA-NCA survey includes information from a mixed bag of 228 employers, including associations, hospitals, colleges, professional service organizations, non profits, local government, along with corporations. These employers do not maintain “overly generous” compensation programs, as the GS system was recently described. The average number of local employees was 1,380.

Of the survey participants with formal compensation philosophy statements—yes, many employers make a promise to employees—by far the majority manage salaries to be competitive at the 50th percentile. Only 3 plan salaries at a lower percentile while 14 plan to be at the 60th or 75th percentile. Stated differently, their policy is to pay employees at rates that exceed market averages.

Apparently, all participants have a pay for performance policy for at least their white collar staff, although the survey did not ask the question directly. Performance ratings play a defined role in determining salary increases in 86 percent of the participants. (Smaller employers often rely on informal increase practices.)  The average salary increase budget in the past two years was 3 percent of payroll. The increases for the top performers averaged 9.6 percent. Merit increases higher than 10 percent were reported.

Traditional salary grades and ranges are used by 57 percent of employers, 16 percent use broad salary bands, and 26 percent rely on market ranges. Significantly only 8 percent use a formal job classification process (like the Federal Evaluation System) to assign jobs to grades. The largest number, 66 percent, assign jobs to grades using market pay data (that assures salary grades are competitive). Others use less formal policies. The focus is on being competitive.

In federal pay programs, salary bands have become the accepted framework for three reasons. Bands minimize the bureaucracy associated with classifying jobs. Second, employees and their salaries can be slid from the GS system to a new system without adjustments. Third, the concept is compatible with federal career ladders. It simplifies salary management.

But a discussion of best practices would be incomplete if the increasing importance of variable pay is ignored. Incentives and bonuses are far more powerful rewards than salary increases. In this mix of local employers, 71 percent paid bonuses or incentives. In the typical organization using variable pay, 75 percent of the non-executive staff received awards. Eighty -five percent of the managers and supervisors received payouts averaging 11.5 percent of salary.

The most important difference, however, is the annual analysis to determine how an employer’s salaries compare with market levels. The universal practice is to identify the organizations competing for talent and compile survey data based on benchmark jobs. That’s the reason there are more than 1,000 surveys conducted across the country. Survey data are available for the common jobs in every sector of the economy. No employer relies on an approach similar to the OPM/BLS “gap” analysis.

BLS at one time conduct a benchmark survey that was used to assess the pay gap but in the mid-1990s it was discontinued. The fallback, relying on statistical models, makes it impossible to validate their conclusion. The BLS models suffer from the same problem that opens the Congressional Budget Office report to criticism—the BLS cannot state the market compensation for specific jobs.

That needs to be emphasized: Both the BLS and CBO methodologies fail on a fundamental point. Neither is capable of reporting how much a specific job is paid in the labor market. Job specific pay data are essential for assessing federal salaries. It’s the salary of the accountant in Chicago or the chemist in Boston that is the issue; neither the BLS or CBO provides that information.

That is the value of benchmark job surveys. They are based on widely understood descriptive statistics—means, medians, and percentiles—with listings of participating organizations. Only benchmark survey results can satisfy Congressman Mark Meadows’ request for the “facts” at the recent House hearing. The cost to acquire and analyze the pay data would be a fraction of the current cost.

As steps in developing a 21st century pay program, government should:

• Commission an independent market analysis to assess the competitiveness of federal salaries and then develop a plan complete a similar assessment annually;
• Create a task force to configure a new federal salary system along with policies and practices to manage salaries;
• Review the experience with managing salaries in the demonstration projects and the agencies that have replaced the GS system, including the failed systems, for lessons learned;
• Create a task force to study the experience of states in moving to pay for performance;
• Create task forces in each department and agency to evaluate the effectiveness of managers and supervisors in planning and managing performance;
• Direct agencies to identify the job families and specialized skills critical to achieving the mission along with those where recruiting has proven to be the most difficult;
• Direct OPM to study the way leading companies select new supervisors and prepare them to be effective managers, and then develop a strategy to improve manager effectiveness;
• Develop new performance management processes based on best practices and test the new system for at least a year before linking ratings to salary increases.
• Train a cadre of specialists in each agency to administer a new salary system.

Then and only then should the replacement compensation program be implemented.