The Annual Pay Ritual Has Lost Relevance

Few seem to have noticed, but the Federal Salary Council has not met this year and new members have not been appointed. Last year, the council’s conclusions were reported by the media in October and its report was submitted to the President’s Pay Agent in December. That was somewhat later than usual, but a year later, the Pay Agent—a body composed of the secretary of Labor and the directors of the Office of Management and Budget and Office of Personnel Management—has yet to make recommendations to President Trump.  

The president obviously did not need the report in August when he proposed a 1.9 percent raise for white collar employees.  

That raises the question: Does it matter? The council’s recommendations have never been accepted. The ritual with the Pay Agent and council was mandated in the 1990 Federal Employees Pay Comparability Act, but today it has lost relevance.

In 2016, the Federal Salary Council concluded that General Schedule salaries lagged, on average, 34 percent behind non-federal salaries. In the prior year, the Pay Agent reported the remaining gaps, after locality payments, ranged from a high in Washington, D.C., of 51 percent, to a 21 percent gap in Cincinnati.  For the rest of the United States, the gap was 19 percent.

It’s doubtful, however, if anyone working for the government in Washington has found evidence showing their pay is half what they would be paid in other organizations. Since that’s an average, it means the pay gap for many employees would be even larger.  

In years past, a number of think tanks have released reports contradicting estimates by the Bureau of Labor Statistics and the Federal Salary Council. Reports by the Congressional Budget Office have also been part of the ritual. These reports show that federal salaries are at least competitive with those in the private sector, and if benefits are included in the calculations, the totals are above market levels.

Significantly, the largest survey in the Washington area, conducted annually by the Human Resources Association of the National Capital Area, has data for 250,000 local area employees in over 500 benchmark jobs. Relatively few jobs are relevant for government comparisons, but for those that match federal jobs the data do not show a 50 percent gap. That’s also true of pay data on websites like Glassdoor.  

In every major metropolitan area and every industry group similar benchmark job surveys are used routinely for salary planning. Similar surveys are the basis of the Federal Wage System. The approach has also been used by agencies with separate pay authority.

The plan when the Federal Employees Pay Comparability Act was enacted was to rely on a benchmark job survey that had been conducted for years by the Bureau of Labor Statistics. The survey was similar to those used by other employers with pay data for a list of generic jobs (e.g., registered nurse). The FEPCA plan was to rely on the survey in large locality areas each year and in smaller areas in alternating years.  The Employment Cost Index was to be used only to adjust the base GS ranges and when job-specific locality data were not collected.

That plan was scuttled in the mid-1990s when BLS ended the benchmark survey. Neither side now produces data showing job-specific market pay levels. Black box statistics have replaced readily understood survey data. Employees can no longer assess how well they are paid.

Relying on the Employment Cost Index shifted the focus from comparative salary levels to the percentage increase in GS ranges. Employees want to know their pay is fair. Benchmark surveys help them assess their pay. That’s why Glassdoor is popular. Now they learn only that the gap is increasing but are not told anything specific to their jobs.

A core issue that was ignored until CBO highlighted it in a report earlier this year is that federal increases are not limited to the schedule adjustments. Step increases are clearly part of the pay package for all GS employees as their career progresses. My calculations show slightly less than half of the workforce can expect step increase each year, which adds an average 1.4 percent annually. In addition, a few employees earn quality step increases, some are promoted (with increases roughly double the percentages typical in the private sector), and a few have their jobs reclassified with a pay increase.

When the increases are aggregated, the average annual increase from 2005 to 2015, as reported by CBO, was 4.3 percent annually, more than double the schedule adjustments. Those dollars are reflected in federal paychecks.

Pay increases compound from year to year. Based on the increases reported in the CBO report, federal salaries increased over 50 percent in the 11-year period. That compares with the increase attributable to annual schedule adjustments, averaging 1.6 percent or a compounded 18.4 percent.

WorldatWork, the professional association for compensation specialists, conducts an annual survey of salary increase budgets. The U.S. participants typically exceed 2,000 employers with few of the small mom-and-pop businesses in BLS surveys. Since the 2008-2009 recession, employers have been budgeting an average 3 percent each year for non-executive white collar employees. New hires and recently promoted employees are not eligible for increases, which frees up funds for larger increases for other employees. That means the average increase is higher than 3 percent.

But the average would not reach the federal 4.3 percent. The bottom line is that GS employees have had competitive pay increases—but that does not mean salary levels are competitive.

Government ignores another important of element of compensation. Many companies, including federal contractors, make stock ownership an important part of their compensation packages for executives, managers, and senior professionals. BLS does not include stock-related income as compensation, but in a good year the dollar amounts can easily exceed base salary. Since early 2009, the Dow index has increased 375 percent. Ignoring this income severely understates the compensation of executives and managers in the private sector.

No well-managed company would continue an annual ritual equivalent to the Federal Salary Council’s report to the President’s Pay Agent. A credible analysis of market pay levels is long overdue. Below market salaries help to explain staffing problems.

This should not be a political issue. Presidents Clinton, Bush and Obama each stated support for replacing the GS system. The National Academy of Public Administration, the Partnership for Public Service as well as the Office of Personnel Management have published reports arguing for replacement programs. That’s a key to improving government performance.