What is Fair Pay for Federal Employees?

The government plans to do something it’s never done before—develop a market analysis comparing the total compensation for federal jobs with their non-federal counterparts. It may be surprising but the General Schedule system was not planned to pay jobs or employees competitively.  

In 1949, when the Classification Act created the general schedule, that was impossible—the first pay surveys were several years away. What’s more, the thinking behind the GS system dates to the 1920s.  The system is based on the concept referred to as “internal equity,” which defines fair pay relative to the pay of similar jobs. Companies then relied on the same pay philosophy. It’s not coincidental that the most widely used job evaluation system (read job classification), the Hay system, was introduced in the same period and used by major companies for years.

During these years, employees typically stayed with the same employer throughout their careers. That made market comparisons less relevant.  

But corporate workforce management began to change with the 1990 recession, which prompted companies to eliminate bureaucratic practices, flatten hierarchies and decentralize. That was followed by the emergence of knowledge jobs and the growing competition for talent. Looking to the future, demographic trends and the demand for critical skills will make that increasingly important and drive up market pay levels.

It’s Not 1949

In 1949, the classification system was frozen in statute and from that point forward engineers and historians were, at least in government, to be paid the same. Since then, new occupations with critical skills have emerged. An increased focus on performance prompted employers to switch from seniority-based policies to practices that reward individual and group performance. For the government, it’s still 1949.

Today, in every other sector, wage and salary planning decisions are routinely based on surveys of the pay for commonly defined benchmark jobs. Survey data are available for hundreds of occupations, industries and locations. It’s straightforward, intuitively credible, and rarely questioned. Several off-budget agencies as well as the Federal Wage System rely on the same approach.

For reasons that were never reported, the Bureau of Labor Statistics switched in the 1990s from benchmark job surveys and salary levels to the current focus on pay increases. Their current surveys were not planned to compare and report salaries by job level. Instead, using a simplified job classification process, survey jobs are slotted to GS grades. But that does not produce data useful in deciding if federal salaries are competitive.

BLS has worked for years to fine tune the methodology but the result is always the same: Each year the Salary Council reports the gap to the Pay Agent and then it is restated in another report to the President, who rejects the results. At this point, the reports are meaningless.

Significantly, when the average salaries for a long list of federal jobs are compared with data for the same jobs in the private sector using BLS data, the federal pay levels are fully competitive. (That assessment is based on 2018 national mean salary data reported at www.bls.gov/oes/current/000001.htm#23-0000.) There is no evidence of a 30% pay gap or higher, as the Salary Council estimates.

Through the years both the Pay Agent and the Salary Council reports have expressed concern about the methodology and the reliability of the gap estimates. An added concern is the omission of employee benefits in the comparison. Finally, at the November 2018 Council meeting, three of the seven members, including Council Chair Ron Sanders, “supported the recommendation [from a] . . . Working Group that the Pay Agent consider alternatives to the current salary survey methodology.” The recommendation is fully justified.

Three of the five proposed alternatives involve efforts to validate the existing methodology. I can state with assurance that they will not resolve the problems.  

The other two alternatives could set the stage for developing a new methodology and for building consensus to replace the GS system. One option announced last fall is the total compensation analysis that was to take a year. The second was the creation of commission to review civilian compensation.

Defining a Compensation Strategy

Discussions of federal pay over the years are silent on the foundation of well planned and managed compensation programs – the employer’s commitment to a set of guiding principles and program goals for managing compensation. In the best companies, employees know what they can expect. A key element is the basis for compensation planning and the alignment of compensation with market pay levels.

A statement in the president’s management agenda is as close as I have seen:

Aligning total compensation with competitive labor market practice: It is important to appropriately compensate personnel based on mission needs and labor market dynamics.

That does not answer many questions but it suggests a far more flexible and responsive pay system.

Yes, the statement would commit government to maintaining competitive salaries. To this point, only Title 38 and the special pay authority recognize the importance of competitive compensation. An exception was when the U.S. Postal Service was created in 1970. The law stipulated, “a standard of comparability to the compensation and benefits paid for comparable levels of work in the private sector of the economy.” That has never been fully interpreted but it implicitly recognizes that pay planning should focus on employers where the jobs are comparable. For the Postal Service, as with federal agencies, millions of small, mom-and-pop organizations are logically excluded.  

The focus on total compensation makes sense but will make the market comparison far more complicated for several reasons.

• First, it makes it important to include all common elements of direct and indirect compensation, including cash incentives (which are not included in BLS data). The analysis should be limited to employers with both cash and benefit information in the database.
• The comparison should focus on larger, well established national employers. Start-ups as well as small, local businesses are not competing for the same talent. Employers with a high percentage of part time workers should be excluded (e.g., Walmart). An early step in any study should be to identify and eliminate from the study employers where the staffing strategy has little in common with federal agencies.
• The average federal worker is age 47 and that drives up benefit costs. For example, health insurance premiums at that age are roughly 30 percent higher than in firms where the average is age 35. Workers should not be penalized for long service.  
• Since federal and private sector retirement plans are funded differently, the costs included in the analysis should be adjusted to make apples-to-apples comparisons.
• The miscellaneous benefits provided by many companies – e.g., child care, tuition assistance, gym memberships, stock purchase plans, employee assistance programs – may not have a large dollar value but they play a role in recruiting.

Government’s Dilemma

Government’s staffing problems for essential skills are projected to get worse. As this is written, Newsweek has an article on the “shrinking staff” at the Internal Revenue Service. The problem is demographics combined with projected retirements and the deterioration of government’s brand as an employer.  

The rigidity of the GS system precludes responding to staffing needs. The dilemma is the need to make government an attractive place to work for highly qualified talent starting their careers while sustaining the commitment of older workers. The dilemma is recognizing the value of employees with critical skills within a system based on seniority.

The planned market analysis will be an important step in documenting the problems. It will also highlight the occupational disparities in pay, and that will reaffirm the need to replace the GS system. The study should be completed before the 2020 election. However, it’s unlikely to be accepted by all stakeholders.

At some point, to strengthen bi-partisan support, the fifth of the options, creating a commission to review civilian compensation, is the best answer.  The Council report refers to the Quadrennial Review of Military Compensation. Decades ago a Commission on Executive, Legislative and Judicial Salaries performed a similar function every four years.  The recommendations could be made early in the next administration.