Pay Agent: Locality pay increases, when implemented, need to be calculated specifically to job skills

Federal employees know that annual pay increases are not guaranteed. Congress or the president must act to make sure that it happens. In fact, there have been several years in recent decades when—though Social Security recipients and many private-sector employees got at least some inflation-indexed boost—for feds, there was no uptick at all.  

For most years, there is a year-over-year pay hike. And, as most feds know, since the early 1990s, feds who work in more costly cities and suburbs get an added step up in compensation—according to a formula that tracks the usually even faster inflationary pressures in such areas. 

But a new study released this month, the Annual Report of the President’s Pay Agent, echoing several previous such reports, finds that the formula used to calculate locality pay is inadequate to the purpose. Generally, it underestimates the faster rate of pay inflation for certain in-demand jobs—therefore making federal agencies less competitive at attracting new and experienced applicants with skills in those fields. 

“[We] believe there is a need to consider major legislative reforms of the GS pay system, which continues to establish a single percentage locality rate in each locality pay area without regard to the differing labor markets and average salary levels for major occupational groups,” the report states. “The current pay comparison methodology used in the locality pay program ignores the fact that non-federal pay in a local labor market varies substantially between different occupational groups.” 

In other words, unless the problem is corrected, it’s another strike against keeping federal recruiting and retention—a problem already baked in for decades at most agencies. 

The Federal Pay Agent consists of a panel of three high-ranking officials: Office of Personnel Management Director Kiran A. Ahuja, Office of Management and Budget Director Shalanda Young, and Labor Department Acting Secretary Julie A. Su.

The study explains how locality pay, and how locality pay boosts, are currently tabulated. The document notes that the law pertaining to calculating locality pay mandates that the Bureau of Labor Statistics use figures from two buckets of data for its calculations: data from the National Compensation Survey are incorporated to calculate how salaries vary from the occupational average, and data from Occupational Employment and Wage Statistics to get estimates of salaries by occupation for each locality pay area.

Some experts on federal compensation systems think that the reason that comparatively low pay in government has never been addressed as recommended by the report is because such fixes, when tried, have proven unworkable. 

“Making annual pay adjustments by profession—specifically according to shifting demand and pay within that profession or skill—is a long-running organizational idea,” Ken Warren, an expert on public administration at Saint Louis University, told Government Executive. “It is also one that—in practice—is not usually implemented, either by governments or companies in the private sector. It’s too difficult to do.” 

“Most of the economy is like the government, where you see mostly across-the-board pay raises by a certain percentage—sometimes with certain people or specialties getting bonuses or better pay at some employers,” Warren continued “Overall, though, raises just don't reflect very well the idea of an index of pay inflation keyed to certain job categories.”

Warren explained that with base pay, “when you get hired originally, your specialty and the demand for it is acknowledged. But once that base pay is set, in subsequent years employers mostly just give across-the-board percentage increases, something that might track inflation, along with maybe a merit pool for some employees of another 2% or whatever.” 

But trying to parse things out by job categories  “in practice, turn out to be exactly as the critics say—unworkable,” Warren said. “Ideally, sure, both starting pay and annual pay increases should be gauged by the competitiveness of each given profession, as the report suggests. But in the real world arguments always erupt over whether the resulting unequal adjustments are being calculated correctly and fairly. It’s very, very difficult. Most institutional workplaces, especially, just default to a pay raise that tries to track with inflation—like the government does. And that’s that.” 

“Technically, the common, imperfect across-the-board pay raise solution is called ‘incrementalism,’” Warren said, adding with a laugh, “it’s also referred to as the ‘science of muddling through.’”