Postal Service inflated incentives for senior managers

For the past several years, Postal Service managers have been rewarded by a benefits system that inflated revenues and thus boosted their year-end incentives, according to a new report by the agency's inspector general. Issued Dec. 7, the IG report found that the Postal Service used an "inflation adjustment" in 1997 that boosted revenues by $4.9 billion for three years. As a result, management officials earned $805 million in incentives for fiscal years 1998 through 2000, a time when profits were starting to decline. The agency began the pay-for-performance plan for executives, senior managers, supervisors and postmasters in 1996. Each of the groups agreed to the program in lieu of annual cost-of-living increases, overtime and locality pay. The plan is aimed at rewarding managers for increasing "economic value" and achieving strategic goals. Economic value is calculated by subtracting certain capital expenditures from revenue. Since its inception, the program has been under fire from labor unions that claim their workers are responsible for gains in productivity. Members of Congress have also been critical of the program, especially at a time when the agency is losing money. "This year alone, the program helped us save $520 million in the compensation system," said agency spokesman Gerry Kreienkamp, noting that managers do not get the same annual increases as other government officials. "That gets lost in this entire debate over whether we should make these payments." For the first two years of the program, the Postal Service recorded $2.8 billion in profits. Once capital was subtracted, the total dropped to $1.9 billion in "economic value added." The agency paid out $554 million in incentives to managers in 1996 and 1997. "However, in 1997, Postal Service managers became concerned that the concept, as implemented, would no longer fit the break-even environment and provide the funds to reward employees for achieving strategic goals," the inspector general stated. "Specifically, financial projections showed the Postal Service could not continue to generate positive economic value added; thereby eliminating incentive awards for the foreseeable future." So, the Postal Service board of governors adopted a new formula, one that adjusted for inflation. Under the new formula, the agency created $2.9 billion in economic valued added between 1998 and 2000. Without the adjustment, it would have been negative $2 billion. The agency, in its response to the inspector general, said "indexing for inflation recognizes the unique nature of our rate-setting constraints and adjusts accordingly." It also ensures that incentives are not simply tied to increased postage prices. The agency went on to say that the program encourages managers to increase revenue, constrain costs and maximize return on investment. Nonetheless, the agency has been looking at news ways to fund the pay-for-performance program. It expects to make a recommendation to address this issue by the end of the fiscal year.