Human Capital Execs Are ‘Resigned’ to Operating Around a Failed HR System

Recently I had a chance to participate in a panel discussion of human capital reform along with two senior HR executives. Each of us had 15 minutes and the session concluded with a Q and A discussion. Both did an excellent job of outlining ongoing initiatives and strategies to address staffing issues. 

In listening to the first speaker, it struck me that at no time did she mention the General Schedule and federal pay. I made that point as a question in my opening comments. In a sidebar conversation with the panelists, the answer was striking: They are “resigned”—their word—to working around what is obviously a failed pay system. They see no hope of addressing federal pay problems and that has implications for adding the talent needed to tackle critical national concerns.

Cybersecurity gets the attention but there are a number of other complex problems where agencies need true experts. Imagine where the country would be if the National Institutes of Health and the Centers for Disease Control and Prevention did not have experts in dealing with infectious diseases. To deal with climate change, NOAA needs experts. Most agencies have a similar need for experts. This is not the 1940s.  

Looking to the future, the GS system will be a barrier to rebuilding a workforce with essential expertise.  

Focusing on the Value of Employee Capabilities

A thread that runs through the reports of the Federal Salary Council is the idea that employees can and should be managed as a cost. Council reports showing payroll cost increases reflect that management philosophy. That thinking is also apparent in statements by members of Congress.

In the 1930s, when employees competed for jobs at the lowest wage level, holding down wages and reducing labor costs was a common management goal. It was central to the reason unions became powerful. It also triggered support for minimum wage laws.  

There is a contrary argument, however, that flows from the research on high performance organizations and in the logic of naming the “great places to work.” The best performing companies see building workforce capabilities as an investment.

Today, with talent shortages, employers are forced to adjust pay levels to stay competitive. A year ago the idea of a $15 minimum wage was only supported by progressives; now it’s the norm in many parts of the country.  

There are companies that elect to pay above average salaries; assuming higher salaries will increase the applications from better qualified candidates. Highly qualified new hires have the potential to perform at higher levels. The best performers are paid more in virtually every field.

The rapid growth in knowledge jobs—those where expertise is important—has triggered a revolution in the way many workers are managed. In those roles, employees function with a great deal of autonomy; many are essentially self-managed. The pandemic and working remotely made self-management the norm for millions of workers.  

This “new normal” work experience requires a high level of mutual trust. It also requires open communication to discuss goals and problems. It is most successful when employees know they are expected to collaborate and make job-related decisions. That’s the basis for a performance culture.

Imagine what that could mean to government. Layers of management could be eliminated. Fewer employees would be needed. A highly qualified, empowered workforce could actually reduce costs.

Former Comptroller General David Walker stated the argument succinctly: “Federal employees represent an asset that needs to be valued, not a cost that needs to be cut.”

The pandemic confirmed the value of staff expertise. Those “heroes work here” signs make it clear that employees are more than a cost.

Pay is Central in Competing for Talent

In every other sector an employer’s compensation strategy is central to competing for talent, especially for scarce or high demand skills. Articles on what’s important to job seekers are often silent on starting salary because salary offers, with rare exceptions, are within a narrow range. Further, high performers expect to be recognized and rewarded. Pay increases are the most common tool for recognizing employee value.  

Salary planning is not a hot HR topic but it's basic. Annual market analyses and planning adjustments to remain competitive are discussed in every HR textbook. Employers that want to attract above average talent pay above average salaries. That’s straight out of microeconomic theory.  

No employer—government is the exception—would knowingly maintain below market salaries. That has clear ramifications for the caliber of applicants as well as employee engagement and retention.

Government’s core problem is the statutory requirement that only Bureau of Labor Statistics surveys can be used to monitor market pay levels. Their methodology was not planned to compare the pay of federal employees with their private sector counterparts. Especially important, their surveys ignore the starting salaries in those high demand fields. BLS data fails to show the jobs where pay levels are below market.  

But that’s not the only problem. The GS system is administered as if it exists in a vacuum. Job vacancies are ignored; the local availability of qualified talent is ignored; barriers to commuting are ignored; the mix of local employers is ignored; local market practices like signing bonuses are ignored. The only information that’s relevant? The BLS data.

When federal pay is low, OPM can authorize special pay rates but then those employees are locked into the same treadmill of scheduled step increases. It’s hardly the answer to attract and retain the best talent.

Yes, Total Compensation is Relevant

Recent Federal Salary Council reports have discussed switching the analysis to total compensation. That followed from a 2017 Congressional Budget Office report that argued the higher costs of federal benefits should be considered in planning cash compensation levels: “Overall, the federal government paid 17 percent more in total compensation than it would have if average compensation had been comparable with that in the private sector.” Both claim private employers rely on total compensation.

That is true. Companies need to keep their operating costs in line with their direct competitors, and payroll costs are one of the largest budget items.

However, both the Council and CBO report arguments are flawed: 

1.  Corporations deduct payroll expenses which reduces the net cost of pay and benefits.  

2.  The federal workforce is older than average which drives up the costs. But government’s problem is attracting talented young applicants. The CBO logic would reduce salaries.

3.  BLS data do not include incentive payments along with income from stock options, which for managers and professionals can add at least 10% to their compensation. It's erroneous to argue for including benefit costs but ignore income from incentives and stock appreciation.

4.  The practice in the private sector is for companies to compare pay and benefits with their direct talent competitors, normally in the same industry. The Federal Wage Scale is based on that logic. Government is not competing with the thousands of mom-and-pop businesses represented in BLS surveys.

The GS System is a Problem

Pay reform has been recommended countless times, going back to at least 1972 when a task force studied options for upgrading the government's classification and pay systems. That was a half century ago. The work management paradigm is vastly different today.

But a proven program option was developed less than a decade later. That is the salary band model first introduced in the China Lake demonstration program in 1980. Banded systems have since proven to be a better answer in a number of agencies. The flexibility enables agencies to compete for qualified talent.

Pay reform initiatives have been evaluated and discussed in reports by the National Academy for Public Administration, the Government Accountability Office and OPM. A 2003 NAPA report, Broadband Pay Experience in the Public Sector, reported:

• Implementation of pay-for-performance increases job satisfaction.
• Increases in individual effort and motivation were found.
• The flexibility was helpful in attracting and retaining talent.
• There was no overall negative impact.
• Pay satisfaction increased.

The failure of the National Security Personnel System came later.  It ran for roughly five years. While it was ended by Congress in 2009, observers at the time argued that the Defense Department’s “insistence on radical changes to labor relations and employees appeals systems” along with President Obama’s election and the change of control in Congress were important in its demise. Employees satisfaction with the way their pay and performance were managed showed the NSPS was better than the GS system.

The silence on the problems attributable to the GS system is understandable but change is needed. The current focus on cybersecurity staffing problems is the proverbial tip of an iceberg. The House hearings in February, “Revitalizing the Federal Workforce,” made that clear.

The problems are most acute for the high demand STEM (science, technology, engineering, and mathematics) occupations. It's not coincidental that those occupations were prominent in several demos.  

It’s clear that the GS system is the wrong answer for these job families. The static nature of the GS system as well as the tenure based pay increases are out of sync with competitive practices.

Given the importance and the staffing problems with STEM job families, the development of a new pay and performance system based on salary bands would be a solid strategy to develop a prototype that could replace the GS system. There is a solid track record of successful reform initiatives and broad recognition that the GS system is a barrier to staffing these critical jobs. The planning should start soon.