BY THE C@WTROLLER GENERAL OF THE UNITED STATE§ llllllllllllll llllllll llll1lull LM103775 lllllllll llll U.S. Forces in the Philippinesemploy about 22,000 Filipino nationals who are pard more than the local wage rates. The Secretary of Defense should make changes which would bring wages and benefits for Filipino nation. als more in line with local rates, improve procedures, and reduce costs. Department of Defense attempts to follow local prevailrng pay practices have been ham- pered by labor agreements and a strong employee union, and changes wi!l be drffrcult to make. OCTOBER 5, 1977 COMPTROUSR GENERAL OF THE UNITFD STATES WASWMWSTDid. D.C. tDlLB B-179343 The Honorable John L. McClellan, Chairman Committee on Appropriations United States Senate Dear Mr. Chairman: In response to your rqueat of April 29, 1977, we are reviewrng the compensation and use overseas of foreign na- tional employees by the Department of Defense, including the possibility of using alternative labor sources that might be less costly to. the. Government. .. . . . This report on fc:2!ign national employment practices in the Philippines, the second of a series of reports on five countries, addresses the cost of compensation benefits and separation allowances, possible substitutes for foreign national employees, and barriers limiting 'U.S. sontrol over wage increases. Although foreign national labor costs in the Philippines are relatively low by world star.dards, the Filipino national employee is generously compensated relative to the average worker in that country. In part, rhis results from agreements with the Philippine Government and the foreign national em- ployees' union which restrict the Defense Department's flexibility as an employer. Compensation costs could be re- duced by improving procedures used to determine wages. Ac- cordingly, w.2 are recommending to the Secretary of Defense that several changes be made to wage setting methods. As requested by your office, we did not obtain formal comments from agency officials; however, we discussed the results of our work with them and considered their comments. Defense was not optimistic that certain of our recommendations could be implemented due to strong union opposition. Because of the political situation surrounding the military base negotia- tions, we also obtained informal comments on our draft report from the State Department. They questioned the feasibility of implementing our recommendations in the near future: instead, they believe that any changes should be made over a period of several years. While we recognize that Defense's flexibil- ity is limited by labor agreements and the current political situation, we believe every effort should be made to assure that Filipino employees receive the prevailing wage. B-179343 I As agreed with your office, we are sending copies of I the report to the Department of Defense. Copies will also be available to ether interested parties who request them. Sinczreiy yours, Al of the United States - . . . . . . . * , 2 APPENDIX I APPENDIX I IMPROVEMENTS NEEDED IN FOREIGN NATIONAL COMPENSATION PRACTICSS IN.THE PHILIPPINES BACKGROUND Section 444 of the Foreign Service Act, as amended, provides that compensation for foreign national employees will be based on locally prevailing wage rates that are consistent with the public interest. The lead agent for Filipino national personnel policies is the Navy's Commander in Chief, Pacific Fleet, in Hawaii. Interservice coordination for foreign national personnel poli- cies in the Philippines is the responsibility of the Comman- der in Chief, Pacific Representative, Philippines, who acts on the advice' of 'a'.Joint Labor- Affairs Cdrknittee~.' The'Navy and Air Force have one voting member on the Labor Affairs Committee. U.S. civilian agencies in the Philippines and nonappropriated fund activities , who base compensation paid to their local employees on Department of Defense (DOD) wage survey results , may participate as nonvoting me;rlbers. Assisted by the Labor Affairs Committee, representatives of the U.S. Pacific Fleet in Hawaii oversee wage surveys of Philippine companies to determine local prevailing practices and thus foreign national compensation benefits. Recommen- dations for wage increases are forwarded to the Pacific Com- mand's Joint Labor Policy Committee in Hawaii, which coor- dinates DOD personnel policies in the Pacific area. Acting on the decision of the policy committee, the Commander, Pacific Fleet, in Hawaii, relays revised- schedules to the Philippines. Number of-employees and.wages DOD employs nearly 22,000 Filipino nationals at an es- timated cost of $42 million for fiscal year 1977 as shown on th, following page. APPENDIX I APPENDIX I FY 19 ‘7 Number of estimated Average employees payroll cost per (note a) costs employee (000 omitted) I i Appropriated fund: i Navy 10,620 $24,794 $2,300 i Air Force (note b) 3,100 3,101 2,300 Total 13,720 31,895 2,300 ; ' / Nonappropriated fund: Nai'y 4,100 * - 5,378 _ 1,300 -. _ I .- Air Force . 3,840: 4,768 1,200 Total 7,940 10,146 -- 1,300 I I Total 21,660 $42,041 $1,900 __p g/Includes full-time, part-time, and intermittent personnel. G/Includes Department of Defense 162 employees) and Army (2 hires). Filipiro employees also accrue separation entitlements up to 1 month's pay for each year of service, payable upon retirement, disability, death, or reduction in force. If an employee quits before retirement or is removed for cause, be receives no separation benefits. As of June 1977, the total separation liability was over $23 million ($18 million appropriated and $5 million nonappropriated), or about $1,100 per employeez Although wage increases have averaged about 8.7 percent since 1971, devaluations of Philippine currency have limited average dollar cost increases to about 6.7 percent annually. Bowever, the 1976 wage increases r*ere sizeable-- percent for manual employees and 12 percent for nonmanual. Officials a.- predicted the Philippines expanding econcmy could lead to similar increases in the future; therefore, employment con- straints and questionable wage survey techniques now ha.ving , a limited adverse impact are apt to be tore costly in future years. 2 APPENDIX I APPENDIX I Constraints on DOD'sr employment flexibility In part, DOD's' attempts to adhere to prevailing practice criteria have been constrained by labor agreements and a strong local employees' union. Basic conditions of employ- ment for Filipino employees are laid out in the Base Labor Agreement. The agreement is a diplomatic arrangement signed in 1968 by the Philippine and United States Governments to clarify labor provisions in the 1947 Military Base Agz.eement. Negotiations for a new bases (and labor) agreement were..-- ini- _-._ tiated in April 1976 but have progressed sporadically. As of June 1977, no consensus existed on when or if a new agree- ment would be reached. Major provisions in the Base Labor Agreementnt include: Agreeme . . .- --Preferential'.emplo~ent: --Preferential'.emplo~ent. Filipinos will be be used in clvllian.positions except when security or other "special management needs". require a U.S U.S. . citizen. --Joint committee. A U.S./Philippines body for the purpose of hearing and attempting to resolve any dispute brought to it by either side: the committee has no enforcement authority. S- ectave operation of the bases" until the joint committee has ex- hausted attempts to bring about resolution of the issues in dispute. . --Wage setting. Wages and compensation practices of progressive employers will be determined by technical surveys in which the union will participate, and these will be used as a basis for setting wages of U.S. Forces employees.. --Midyear bonus. A 200 peso bonus (about $27 in June m/7) paid to each employee annually. In recognition of Filipino rights to organize and bargain collectively, DOD and the employees' union further define employer-management relations in a Collective Bar- gaining Agreement. The present agreement became effective in 1976 and has a 3-year life. Most of the provisions of the Collective Bargaining Agreement elaborate on provisions of the Base Labor Agreement. However, the bargaining agree- ment establishes additional restrictions by limiting the 3 I i APPENDIX I APPENDTX I annual waqe survey to a current agreed list of 30 companies, with any change to the list requiring bo%h DOD and union agreement. 1 , If the Base Labor Agreement is renegotiated as part of ; a new base rights package, DC3 officials are pessimistic 1, about any relief from past concessions and propose to retain , the status quo wherever possible in negotiating a new labor I agreement. Moreover, although the bargaining eqreement will be subject.to renegotiation in 1979, it now provides that cur- i rent provisions remain in effect unless both signators agref? to changes. I . f Filipino national employees' union t About 16,000 employees-- 80 percent of the work force-- 1 . . are represented by .one' union, the largest in the Philippines. * . * i According to DOD ofiicials, this union has close ties with ! the Philippine Department of Labor and the news media. Re- I portedly, wh?n the union is dissatisfied with a decision af- \ fecting employment, they appeal to the Labor Department which pursues the issue with the U.S. Embassy. The union's posi- I! tion on labor issues is also well aired by local newspapers. i We were told the union can effectively limit DOD attempts to meet congressionally established criteria of prevailing practices by escalating disputes to a government-to-government level or by threatening to strike. Both the Base Labor and Collective Bargaining Agreements -state that disruptions of base operations before the joint committee has taken its final action may be cause for with- drawing recognition of that organization and+disciplining disruptive employees. Even so, officials felt circumstances, political and otherwise, would dictate the control DOD could exert. Because of political sensitivities, we were told that the Navy, Air Force, and the Embassy would be reluctant to confront the union and the Department of Labor to correct some of the concessions discussed later in this report. WAGE SURVEY IMPROVEMENTS NEEDED The Collective Bargaining Agreement requires annual wage surveys to ascertain prevailing compensation levels in the Philippine private sector. Survey teams, consisting of one U.S. empioyee and one Filipino union official, visit private companies to obtain wage data which is summarized and used to establish wage schedules. APPENDIX I APPENDIX I CSe identified the following practices which differ from local prevailing practice, affect the validity of wage sur- vey data, and result in excessive Defense wage costs: --Reiyinq on wage information from high paying companies in a high paying area. --Including monetized allowances in base pay computations . which inflate other compensation items calculated on base pay. --Paying midyear bonuses .irl addition to total compensa- tion reflected in the p, .vate sector. --Matching average private sector earnings to a pre- . determined wage schedule step, rather th'an the .average . work force earnings. --Selecting key jobs with limited regard to work force composition. Survev companies not representative DOD bases its wage increases on wages and benefits paid by 30 companies in the Greater Manila area--hiah payers in a high wage area. Moreover, the Subic Bay Naval Complex and Clark Air Base are located outside the Manila area in the lower cost, smaller citiec of Olongapo and Angeles. The Collective Bargaining Agreement requires union agree- ment on any addition or change to the company list. In the past the union has rejected proposals to expand the number of companies surveyed or to include companies from areas around DOD bases. The union has stated that it opposes changes to the company list which might reduce wage survey results. We compared the results of the DOD survey and a recent Philippine Government survey of 237 private Philippine com- panies. For 14 comparable key jobs, LCD survey results averaged 75 percent higher than the Philippine Government survey. Examples are shown on the followzng page. i APPENDIX I APPENDIX I Annual salary, Philippine Governmen: Annual salary, Percent DOD Job survey DOD survev h.lgher Clerk . $ 838 $1,287 54 Laborer 587 945 61 Electrician 813 1,488 83 Security guard 794 1,676 111 S'.enoyrapher 1,076 1,720 60 NOTE: Comparability between Philippine Government and DOD survey positions was established by DOD personnel of- ficials. ' DOD.officials did not consider the Philippines-wide . survey representative of wage rates in the vicinity of the two major bases. We were not able to isolate those companies surveyed in the immediate bases area, but DODsurvey results still averaged 73 percent higher than those for 184 firms in the highest cost area--Metro Manila. Based on the above comparison, DOD is paying consider- ably more than Philippine industry for comparable positions. By expanding the wage survey to include companies paying more moderate salaries, both inside and outside the Manila area, F3D could expect more representative wage data. De- spite predictable union opposition, DOD should initiate ac- tions to .amend bargaining agreement clal-ses that restrict flexibility in company selection. Monetized allowances inflate base pay Total compensation paid to Filipino employees includes base salary, a yearend bonus (125 percent of 1 month's base pay) I a midyear bonus (about $27 per emplcyee), and a cost- of-living allowance (about $82 annually per employee but likely to increase to $180 after the next wage survey). Other em- ployee benefits include eligibility for premium pay, hospitali- zation h,Jd death benefits, enrollment in Philippine Social d Security, and entitlement to a lump-sum separation payment upon retirement, death, or reduction in force. Wage survey teams identify all compensation paid by pri- vate employers, including base pay, cash allowances, bonuses, and payments-in-kind, such as meals, transportation, and company products. To determine base pay rates, D3D monetizes and combines pavments-in-k,nd with nriva",E sector base pay rates, which in?lat?s base pay and in turn inflates separa- tion entitlements, premium rates, and bonuses calculatea on 6 *’ APPENDIX I APPENDIX I / base pay rates. We were told that private industry does not compute its separation. entitlements, premium pa;', and bonuses on base pay plus payments-in-kind, but on base pay alone: ;r A sample of 1976 wage survey results showed t;.at mcne- l tized payments-i n-kind equated to about 17 percent of base pay- By separating payments-in-kind from base pay and com- puting separation liabilities, premium pay, and yearend bonuses on real base pay only, we estimate that a total of $5.6 million could have been saved in fiscal year 1977. Separation Premium Yearend liability EY bonus Total Appropriated fund: 'Navy $2,560,000 S1,070,00.0 $120,000 $3,750,000 Air Force 550,330 .- 50,oco 70,000 670,000 Total appropria: kd 3,110,300 1,120,GOO 190,000 4,420,OOO Nonappropriated: Navy 530,000 90,coo 70,000 690,000 ----? Air Force 420,000 20,000 60,000 500,000 -.., : 1 ’ Total nonappro- . ‘\. priatcd 950,000 110,000 130,000 1,190,000 Total $4,060,000 S1,230,000 $?20,000 $5,610,~~ Navy and Air Force personnel officials agreed that payments-in-kind should b? segregate3 from base pay. Because the Collective Bargaining Agreement requires DOD to pay wages based on surveys of prevailing r>ractices in the private ,c sector, we believe an appropriate change could be made uni- laterally. A similar plan has been successfully implemented by U.S. Forces in Korea. lilidvear bonus paid in addition to prevail ina comDensat2on As an incentive to the ?hilippine Government for signing the i969 Base Labor Agreement, DOD and State Department nego- tiators agreed to pay an annual 200 peso (about $27) midyear bonus to each employee. Because of tne extenuating circum- stances concerning midyear bonuses, DZD wage specialists consider midyear bonuses payable in addition to compensation based on annual wage surveys. For example, if an employee's annual wage is determined tc ne 52,OCZ after wage survey data has been analyzed, he then receives 52,000 plus his midyear bor‘us, or $2,027. 7 - APPSDIX I APPENDIX I In line with prevailing practice criteria, the midyear bonus should be considered as par t of total employee compen- . sation. Waqe survey data already includes midyear bonuses paid in the private sector (about 20 percent of surveyed em- ployees received midyear bonuses in 1976). Using the above example, the employee should receive $1,973 in other wages plus the $27 midyear bonus, or $2,000. By considering midyear bonuses as part of total com- pensation, appropriated fund activities could have saved about $370,030 in 1977 ($290,000 by the Navy and $80,000 by the Air Force). Another $220,000 would be saved by nonap- propr.iated activities. Feed to match averaqe prevailina rate to averaa%ZZZncs * . .. . .. . . . . . . . Presently, the a\ erage lok:al wace. determined by the DOD survey is established as step 4 >Z the Filipino employ- ees ’ 20-grade c 7-ste::, wage schedule;- . In a 1975 report on U.S. Federal blue-callar employees, LL”*O suggested that private sector average pav rates should be -*-ated to a point in the pay range equal to the average c:c-p of employees rather than a predetermined step. Feder: I w’lite-collar wages are determined by eucating averag,e pr.l--3te sector rates with the average Fedrtra.1 rate. The OiflsZ of Management and Budget, the C:. 7” Service Commissicn, 2nd GAO reasoned that this was appropr,.?te because private sector averages repre- sented neither an entry rate nor a r’inal rate, but instead, a rate earned by persons who aver‘?Ged an unknown number of years’ experience and an unknown number of pay increases corresponding to Federal within-grade increases. The Sec- retary of Defense commented on this point in a recent letter to the Chairman of the Senate Armed Services Committee en- dorsing Federal blue-collar wage reform in the United States. He reported : “True comparability cannot be achieved, however, as long as there is a requirement for any fixed step as the payline rate. St can only be achieved by comparing averaae private industry earnings as determined by surveys to the average earnings of Federal blue-collar workers and then making adjustments in rates to bring Federal rates in line with local prevailing rates.” In our view, this should also apply to determining foreign national wages. The Filipino national work force currently averages ster, 5. If 1976 wage survey results 8 - APPENDIX I APPENDIX I had been pegged to this average rather than step 4, about $930,000 in appropriated funds ($720,000 by the Navy and $210,000 by the Air Force) would have been saved in 1977. An additional $300,000 ($160,000 by the Navy and S140,OOO by the Air Force) could have been saved by nonappropriated fund activities. Key iob selection should reflect work force composition The Defense survey in the Philippines establishes new wage rates by obtaining prevailing rates for about 100 "key jobs." Selecting key jobs that are representative of the work force is essential to determining valid prevailing wage rates. ‘Althougzh the Navy employs. over 75 -percent of the\ Fili- pinos paid with appropriated funds, it does not periodically / inventory its %ork force--that is, determine how many clerks, 1 accountants, carpenters, etc., are employed. As a result, .the hoary cannot determine whether survey key jobs give a valid representation of prevailing wage rates for its work i force. Although the Air Force and the major nonappropriated fund employers could identify the number of employees in I t such positions, they had not reviewed the key job list to ensure representation. bje believe DOD would benefit by updating and revising its key job list. For example, white-collar key jobs make up over half the positions surveyed, but white-collar em- ployees account for only one third of DOD's work force. Also, DOD's key jobs represented less than 9 percent of U.S. Embassy local employees, even though the Embassy and other U.S. civilian agencies base annual wage increases on DOD surveys. I tie suggested, and officials agreed, that work force 9, composition should be monitore3 and key jobs appropriately updated. In addjtion, key job selection snould be coor- dinated with al! U.S. Government agencies in the Philip- pines. 1 LIMITED OPPORTUKITIES TO 'NCREASE t U.S. CIVILIAN HIRES Although, relative to the private sector, Filipino em- ployees appear to be generously compensated, Filipino wage costs remain well below U.S. civilian costs. On a one-for- one basis, it is unlikely that a Filipino employee could J 9 APPENDIX I be cost effectively replaced by a U.S. civilian. In addi- tion, DOD is limited in its employing of U.S. civilians in Filipino positions by a preferential employment clause in the Base Labor Agreement. DOD employs about 1,160 U.S. civilians in the Philip- pines, including about 540 teachers for DOD dependents. Non- appropriated activities employ an additional 530. DOD's U.S. civilian payroll will total nearly $23 million in fiscai year 1977, or about $21,000 per full-time employee (excluding change-of-station costs). About 500 of these U.S. civilians are hired locally through the DOD dependent-hire program or through overseas limited appointments. Local hires receive no change-of- station benefits, area-differentials, or quarte,rs.allowance, and they-are generally not .eligible for civil service retire- . ment. Even so, foreign national costs remain well below U.S. local-hire costs. We estimate that locally hired U.S. civilians cost four to five times more than Filipino em- ployees in comparable positions. Article I, paragraph 1, of the Base Labor Agreement provides that Filipino citizens will be used in civilian positions except when security or other special management needs require a U.S. citizen. The Collective Bargaining Agreement further defines special management needs as when duties require (1) an understanding of U.S. cultural or ethnic characteristics, (2) technical advice sensitive to policv decisions or actions on behalf of the bases, and (3) direct discipline or control of U.S. citizens involved in recrea- tional or.social activities. The Collective Bargaining Agreement also requires that whenever a position occupied by a U.S. civilian is vacated, the position will be reevaluated to determine whether the special management needs still exist. The Filipino employ- ees ' union frequently questions U.S. civilian positions and recently requested that 100 U.S. positions be redesignated as Filipino positions. In a July 28, 1976, letter to the Secretary of Defer:se (FPCD-76-79, B-182312), GAO questioned the preferential em- ployment clause in the labor agreement on the grounds that it may violate section 106 of Public Law 92-129, approved September 28, 1971, which provides: 10 . APPENDIX I APPENDIX I "* * * Unless prohibited by treaty, no person shall be discriminated agairst by the Department of De- fense or by any officer or employee thereof in the employment of civilian personnel at any facility or installation operated by the Department of Defense in any foreign country because such person is a citizen of the United States or is a dependent of a member of the Armed Forces of the United States * * **ti DOD has argued that the agreement has the same binding _ effect as a treaty and therefore is exempt from the provi- sions of section 106. As of March 1977 no lawsuits were pending to test this interpretation. The House Appropriations Commit.teq has also taken issue . with the preferential employment- clause and believes DOD should renegotiate those agreements which provide little or no flexibility to the military service to employ the type of labor that it. believes to be lowest in ,ost, most efficient, or necessary for the welfare of its personnel. Local officials believe the preferential clause does not adversely affect base operation costs because Filipino costs are considerably lower than U.S. civilian costs. Moreover, DOD dependents have less need to work in the Philippines than in higher cost areas, such as Germany or Japan. Officials also believe they retain some flexibility in hiring DOD dependents. For example, we were told that the Navy and Air Force recently hired an additional 470 DOD dependents under a Summer Bire Program (paying $1 per hour) with no strong union opposition. CONCLUSIONS AND RECOMMENDATIONS DOD appropriated fund activities employ nearly 14,000 foreign national employets in the Philippines with payroll costs exceeding $31 million and a separation liability of $18 million. The 19'76 wage survey resulted in sizeable pay raises, and future raises were expected to be significant. Although wages in the Philippines are relatively low by world standards, DOD's employees are paid considerably more than prevailing private sector rates--the criteria for com- pensation established in the Foreign Service Act. For ex- ample, DOD is limited by the agreement with the employees' union to surveying high paying companies. il ii APPENDIX I APPENDIX I Other questionable wage practices differ from frevail- ing practice, add to wage costs, and affect the validity of wage survey data. These practices are --including monetized allowances in base pay computa- tions, --paying midyear bonuses in addition to total compen- sation based on,?revailing private sector practices, --matching average private sector wage rates to a predetermined wage schedule step, and =--selecting wage survey key jobs with limited regard to work force composition. We recommend that the-secretary-of Defense direct the military departments to: . . --Initiate action to obtain control over the selection of companies surveyed. ' . ---Separate monetized allowances from base pay, thereby reducing the basis for computing separation pay liabilities, premium pay, and yearend bonuses. (Es- timated $4.4 million savings annually to the Govern- ment plus an additional $1.2 million for nonappro- . priated activities.) --Make midyear bonuses part of, instead of an addition to, total compensation based on prevailing amounts. (Estimated $370,000 annual savings to the Government plus $220,000 for nonappropriated activities.) --Apply average survey results to the Filipino average step rather than to a predetermined midpoint step. (Estimated $930,000 annual savings plus $300,000 for nonappropriated activities.) --Develop and coordinate occupational ir.ventories to ensure that survey key jobs represent :he work force of DOD and U.S. civilian agencies. (963064) 12
Department of Defense Should Change Pay Setting for Filipino Nationals
Published by the Government Accountability Office on 1977-10-05.
Below is a raw (and likely hideous) rendition of the original report. (PDF)