Federal Executive Pay is Inadequate

A recent story in USA Today, “Vice President Pence's pay bump is not as big as Republicans wanted,” illustrates a problem at the core of government’s staffing problems. For employees paid under the General Schedule, the new 1.9 percent increase—when combined with an average 1.4 percent step increase—is consistent with increase trends in the private sector. The total is also better than the 2018 increase in the Consumer Price Index.

That is not to suggest federal employee salaries are adequate. Since the recession GS salary increases, when compounded, have been below the levels for comparable jobs in the private sector.

But the reality is worse at the executive level. The individuals leading and managing government operations—from the managers in the higher GS grades to the vice president—are badly underpaid. The Senior Executive Service pay range is set to begin at 120 percent of the rate for GS-15 Step 1 employees. That’s $126,148 today. The Executive Schedule salaries and the Vice President’s salary have been frozen for several years.

What’s more, the SES pay calculation does not include locality pay, the pay adjustment calibrated to keep government competitive in high pay areas. In Washington, where the majority of senior executives are located, a GS-15 Step 1 employee with the locality adjustment would start at $134,789; with regular increases to Step 10, it would be $164,200. Every year the SES range adjustment is lower than the increase in the pay of Washington area colleagues under the GS schedule, the gap grows and the problem gets worse.

And that adjustment mechanism effectively defines increases for everyone in elected or appointed positions. Those pay levels have been politically linked for decades. The problem has been compounded by a freeze on the highest-level salaries, including the vice president’s, since 2013.  

Realistically, this is a problem for every federal agency, including the Postal Service. Executive level salaries are an effective ceiling that impedes staffing at all levels of management.

Executive Pay in Other Sectors

Executive pay in the private sector is moving in a very different direction. The consulting firm Korn Ferry released a study in 2018 that compared increase trends over the decade since the Great Recession (“Salaries 10 Years Post-Recession”) for three cohorts: clerical/entry-level professional; mid-level professional; and senior managers. Their analysis focused on real wage growth for 5.5 million U.S. employees in nearly 2,000 companies. Real wages are adjusted for inflation.

Their analyses show real wages for the lower paid cohort fell over the decade by 2.3 percent. Inflation rates have been low—CPI data show the annual average has been only 1.5 percent or less than 17 percent for the decade—but real wage levels for the group have fallen behind. The mid-level professional group saw real wages increase by 2.4 percent while real wages for senior managers increased by 5.7 percent.

That is consistent with data showing a growing income gap in the United States. Real wages at lower job levels have not risen appreciably since the 1970s.  

The Korn Ferry data did not include possible income from stock ownership. The Dow Jones Industrial Average fell starting in 2007 by over 50 percent to a low of 6,443 in March 2009. Today the DJIA is now at 25,800, a 300 percent gain. For high-level business executives, stock ownership income is a multiple of their income from salaries and incentives. Stock-ownership is a core component in the total compensation package for corporate managers at job levels comparable to members of the SES (although the income levels have rarely been documented).

There are over 20 million small businesses in the US but only a small percentage of generally larger companies are represented in annual surveys reporting compensation levels. Jobs comparable to SES or senior federal managers are found only in the largest. On a listing of the largest 1,000 companies, the smallest reported revenues in excess of $1 billion. The executive and manager compensation levels in those companies are well in excess of federal levels. Market pay data from the Economic Research Institute shows the cash compensation of a vice president in a company with a billion in revenues would exceed $500,000.

It’s also frequently reported that specialists in artificial intelligence and cybersecurity command higher and higher salaries. Where stock is included in the offers, the total package can be worth more than a million.  Those operations of course also need well qualified managers and executives.

In other sectors compensation levels well in excess of federal SES levels are increasingly common. In medicine, for example, the website Salary.com reports the compensation range for cardiologists is between $343,221 and $515,531. Hospital chief executive officers sometimes earn more than $1 million. The CEO of one of the larger for-profit (and publicly traded) hospital management companies earned more than $50 million in 2016. A study of CEO compensation at 22 major nonprofit medical centers on the U.S. News & World Report 2016-17 Honor Roll found the average compensation increased from $1.6 million in 2005 to $3.1 million in 2015, a 93 percent increase.

Executive pay in higher education has also increased although not as rapidly. Today, the total compensation of the 10 highest-paid public university presidents is over a million dollars. The highest in 2017 was $4.3 million. In private universities each of the 50 highest-paid presidents earned more than $1 million. Some professors (excluding medical schools) are paid more than $1 million. The highest paid are athletic coaches, led by Duke University’s Mike Krzyzewski, who was paid $8.9 million to coach the men’s basketball team.

Public school systems across the country now commonly pay local superintendents more than Vice President Pence receives in salary. In my state, Pennsylvania, the highest salary for a school superintendent is $319,749. Nine others in the Philadelphia suburbs are paid more than the vice president.  The highest superintendent salary in the country was $406,484 for a suburban Houston district.

When school superintendents are paid significantly more than government’s leaders, something is wrong.

An Old Problem Has Gotten Worse

Its doubtful many recall the quadrennial Commissions on Executive, Legislative, and Judicial Salaries that developed recommendations to raise the salaries of federal leaders. The commissions were abolished following the 1988 report. The final report recommended raising congressional salaries from $89,500 to $135,000. A year later the report from the National Commission on the Public Service (the first Volcker commission), "Rebuilding the Public Service," reconfirmed that executive, legislative, and judicial salaries lost purchasing power with inflation. In 1991, the salary of members of Congress was raised to $125,100.  

The GS 15 Step 1 rate—the basis for SES salaries—was $61,643 in 1991. Today, the salary should be $106,595 with the most recent raise, a 73 percent increase. However, over that period, the Consumer Price Index increased 85 percent.  

Members of Congress have been paid $174,000 since 2009. Adjusting the salary for inflation since 1991 would raise it to $231,883.  

Washington is known to be a high cost area. To understand what the CPI means to local residents, one report, using 100 as the U.S. average, put Washington’s living costs at 173.9. (There are no government indices comparing inter-city living costs.) A truly valid comparison would also account for the spending patterns of people in the age bracket typical of Senior Executive Service members. (The annual cost to attend a DC area college can exceed $75,000.)

A new study from the Economic Policy Institute, “America’s slow-motion wage crisis,” provides another important perspective. Their analysis shows real wages for individuals at the 90th percentile of the wage distribution increased 33 percent from 1991 to 2017 while the real wages of those at the 50th percentile—middle America—increased only 16 percent.  

It is highly likely the increase in spending power of those above the 90th percentile—that includes business executives in jobs comparable to the SES—would exceed 33 percent. (The EPI analyses do not consider investment-related income.) By comparison, federal executives have lost purchasing power.

Some states pay at least selected executives more than their highest elected officials. It’s something government should consider.