oversight

Federal White-Collar Employee Salary Reform

Published by the Government Accountability Office on 1990-03-14.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                   United States General Accounting   OffIce     /g/3      7 0

’ * GAO            Tedimony


                                                                        II
                                                                        141370

  For Release      Federal   White-Collar    Employee          Salary   Reform
  on Delivery
  Expected at
  1:00  p.m. EST
  Wednesday
  March 14, 1990




                   Statement of
                   Richard L, Fogel, Assistant  Comptroller                  General
                   for General Government Programs

                   Before the
                   Subcommittee  on Compensation   and Employee'
                   Benefits
                   Committee on Post Office    and Civil Service
                   House of Representatives




                                                                        GAO Form 160 (12/87)
                 FEDERAL WHITE-COLLAR EUPLOYBB SALARY REFORM
                               Summary of Statement         by
                                     Richard    L. Fogel
                           Assistant      Comptroller    General
                                             for
                            General     Government    Programs




GAO strongly       endorses      actions     to reform       federal     white-collar
employee      pay-setting       principles       and processes.          The salary
comparability        principle       adopted     in 1962 has been ineffective
because     (1) increases         necessary      to maintain       comparability          with
rates   paid by nonfederal            employers      have not been granted              for many
years,    and (2) national           average     nonfederal       salary    rates     used to
determine      comparability         have little       relevance      to nonfederal          rates
in many localities            where federal        employees      work.     Rlso,     the
comparability        principle       does not consider          the wide variances             in
the cost-of-living            in different       parts    of the country.
Noncompetitive         salary   rates     are the     major      reason    for        federal
recruitment       and retention       difficulties,           especially         in     high-cost,
high-paying       localities.
GAO believes         that    federal      salary      rates   must    be restored     to
competitive        levels      in a fiscally          responsible      manner.      An initial
goal of filling           some percentage,            such as one-half,        of the pay
disparities        by locality,         could be a reasonable             approach.      These
interim      reforms      could    include       locality      adjustments     to the
national      salary      schedule      based on prevailing            nonfederal     salary
rates     and cost-of-living            levels      in each locality.
GAO also points      out that     private     sector  companies       often    grant
salary    increases    to individual       employees    based on their          job
performance      and suggests     that requiring      greater      accountability
from federal      employees    in return      for higher    salary      levels      is               an
issue   that    needs serious     consideration.
Mr.       Chairman          and members                  of            the      subcommittee:


Thank       you     for          the      opportunity                     to appear                  here    tpday         and
provide       our         views           on the         issue                of     federal           white-collar

employee          pay       reform.               This            is     an extremely                     important
subject       on which                   we have         done             considerable                   work        and have

several       reviews               currently                in         process,


Our    work       all       points           to    one            basic             conclusion.                The federal
government               must       recognize                that             its     pay       disparities                with          the
nonfederal               sector           can     no longer                     be tolerated.                       Federal
recruitment               and       retention                difficulties                       are real.               The
government               must       be able             to        compete              for          and hire         quality
employees           if      it      is     to     effectivel.y                       deliver           services            to     the
American          people.



WHAT IS THE PAY PROBLEMMD
WHAT CAUSED IT?


The Federal               Salary           Reform            Act         of         1962,       as refined              by the

Federal       Salary              Reform          Act        of         1970,         established                 the
principle          that           federal          salary                rates          for         white-collar

employees          should              be comparable                         with       average             rates       paid        by
private       sector              employers              for            similar              jobs.          The
comparability                principle               holds               that         the       private           sector          will
determine          the           “going         rates”             for         jobs          like      those         found        in
the   government,                  and by paying                         national               average           rates,          the
F




    government,                 federal            employees,                    and     the        taxpayers             are
    assured           that        federal.             salary          rates            are      reasonable             and
    competitive.



    Two factors                 have       prevented                  the        comparability                  principle
    from       operating              as intended.                         First,          the        process
    established                 to    maintain                salary             comparability                  with       the

    private           sector          has        not      been         followed               for      many years.
    Every       year,           beginning                in     1978,            Presidents               have        decided         to

    grant       federal              pay        raises         at      lesser            amounts              than     needed         to
    maintain             comparability.                        As a result,                    a large               gap between
    national           average             federal             and private                    sector           salaries
    gradually             developed               over         the         years.             The federal               salary
    increase           recently             granted              in        January            provides               a good
    illustration                 of       how the             gap continues                    to      grow.           To stay

    even       with       the        average            salary             increase            in      the’ private              sector
    during         the       previous             year,             federal             salaries              should       have       been
    increased             about           6.4     percent.                      Instead,            a 3.6       percent

    increase           was granted,                     thereby              widening               the       gap even
    further.


    The other             factor           that         caused             the      pay comparability
    principle             not        to    accomplish                  its        objective               was its
    assumption,                 implicit            in        the      use of            national              averages,             that

    nonfederal
     u                       rates         are      similar                in     the      different             parts          of    the
    country           where          federal            employees                 work.             W h ile     very      lim ited


                                                                       2
information                   is     now publicly                  available                 on how federal                         rates
for      particular                  jobs      in       specific              locations                compare            to
nonfederal                   rates      in     the        same localities,                         we are            finding

that        substantial                 variances                exist.               A national               average               often
has      little          relevance                 to     nonfederal                  rates        in     a specific
locality.



For      example,              our      work         in       connection                 with      the        National
Commission               on Law Enforcement                             showed            that         state         and local
government               salaries              for        law      enforcement                   personnel                clearly

varied            by region,                with        the      lowest           salaries              reported               in     the
South,            Southwest,                and      rural         areas            of    the     Midwest.                   The

highest            salaries             were         in       California,                 New York,                 Washington

State,            New Jersey,                and Massachusetts.


In     another           analysis,                 we are          comparing               private             sector           and
federal            salaries             by job            level         and         location            for         certain

occupations                   primarily              in    the         technical                and clerical                   job

categories.                    Our      analysis               was limited                  to    about             60 of        the

over        250 metropolitan                         areas         in       the      country.                 Of the

locality/job                   level         comparisons                    we were             able      to        make,       we

found          that      the         private            sector          paid         more        than         the      federal
government               about          90 percent                 of       the      time.             The private

sector            pay    advantages                  ranged            from       minor          amounts             to    over         100

Qercent.                In     over         80 percent                 of     the        comparisons,                  the
private            sector            advantage             was at             least         10    percent.                 Overall,


                                                                   3
the       median             private          sector            pay      advantage                 was over              four      times
greater            than         the        median          federal            pay       advantage.                  Among the
areas        in        our      analysis             where         the          federal            rate      *was most

behind           the        private           sector            rates         were        Detroit,            San
Francisco,                  Los      Angeles,              Newark,            Boston,             and New York.


The comparability                           principle              also          does       not       consider             the         wide
variance               in     the      cost-of-living                      in      different               parts          of     the
country.                When two              federal             employees               in    different                 locations
are       paid      the        same salary,                     their         purchasing                  power      can         be
quite       different                  depending                on the           cost-of-living                     in     their
locations.                    Among the              59 metropolitan                        areas          with      at         least

5,000       federal                 white-collar                 employees,                 living           costs         vary
more       than         65 percent.                   Housing              costs          differ           widely          by area
and are           the         primary          determinant                    of    the        living         cost
variances.                    For      example,             the         current           market           value          for      a
house       in      San Francisco                     is        more      than          three         times        the          market
value       of      the        same house                  in    San Antoniol.                       Yet,         federal

employees               with         the      same job             in     these           two       cities         receive              the
same base               pay         under      the         federal            General           Schedule             salary
system.



In      general,              the      areas       with          the      highest              nonfederal                 salary
levels           also        have       the     highest                cost        of     living.             However,


‘The standard                    house used for comparison  purposes                                                 contained
1,400 square                   feet,  3 bedrooms and 1.5 baths.
                                                                   4
    there            are       many exceptions.                                  For      example,                salary            rates         are
    quite            high        in    Houston,                  but        Houston’s                 cost-of-living                         is
    below            the        national                average.                  Conversely,                     San Diego                has
    relatively                   average                salary             rates,          but        its         cost        of       living
    ranks            10th        among            the      59 areas                 with         5,000            or     more          employees.



    While            we believe                   it      is    appropriate                      to        continue                a national
    salary               structure                for      white-collar                     employees,                       we are
    convinced                  that      locality-based                             pay     adjustments                       are         needed

    because               of     the        significant                     differences                     in      nonfederal                  salary
    rates           and cost-of-living                                 by locality.


WHAT ARE TEE EFFECTS OF THE PAY PROBLEM?


    If        federal           salary                 rates         are      not       competitive,                         the
    implications                      are      clear            --         the      government                    will        be     unable          to
attract                   and     keep         the         kinds            of      employees                it        needs         to     carry

out            the        Nation’s             business.                      Unfortunately,                           our         work     and

studies                   by other            groups,                  such         as the            Law Enforcement
Commission                      and      the            National             Commission                     on     the        Public

Service,                   have        shown             that          recruiting                 and        retention                  problems

are            occurring               and can only                         get        worse          if     corrective                    action

is            not    taken.              Some            examples                 illustrate                 these            problems:



-        0,         According                to         federal             law        enforcement                     personnel,                 lack
                    of     competitive                     pay deters                   qualified                  people            from


                                                                             5
            applying.                  More       than        half         of     all       managers           and
            employees               the       Law Enforcement                         Commission            surveyed
            felt          this      to     be true            and many law enforcement
            officials               believe            it     is     the        main        reason         law
            enforcement                   personnel                leave        federal           service.


            In      Boston,            entry-level                  school            bus      drivers         receive
            higher           pay       than       journeyman                 federal            aircraft
            mechanics.



            The      Internal              Revenue            Services'                 Newark,          New Jersey
            office           found         the     applicants                   for      revenue           agent
            positions               to     be     of        such     poor        quality           that        it         chose
            to      leave         50     positions             vacant:                and


            The Navy              reported             it     is     losing             electronics
            technicians                  who work             on sophisticated                         radar         systems

            at      the      Alameda            Naval         Air     Station               because         they           can
          make $5 more                    an hour             working            on stoplights                      for         the
            local          city        government.



We are       finding              that      the        greatest             reason             employees             quit
federal          jobs        is    low        salary          levels.                 The pay disparities                             are
occurring            in     virtually              all        locations,                 but     the       recruitment
and   retention                  problems          are        most         pronounced              in      areas           where

nonfederal              salary           rates         and     the         cost-of-living                   are           the

                                                               6
highest             and in      areas                    where         other           employment                     opportunities

are readily                 available.                          Agencies               tell         us that             high         turnover
rates         cause         them         numerous                  operational                      problems,                including
reduced          service           delivery,                       increased                   recruiting                 and        training
costs,         more         overtime.                    pay,      and         upper-level                     employees               having
to     do lower-level                     work.

                                     1


Of potentially                  greater                        long-term               significance,                      we are
finding          in    a series                     of     meetings               with          college                students              that
they         have     very      little                    interest              in       seeking               a federal               job
when they             graduate.                      They          have         been           subjected                to     so much
anti-government                      rhetoric                     that         they           appear           convinced               that

more      challenging                    careers                 are         available                   in    the      private
sector.             They      particularly                             find          federal              pay        rates        to    be
unsatisfactory                  or        “exploitive”                          as one              student             described
them.          Of 64 students                             in     our         various            discussion                   groups,
only         2 indicated                 a willingness                          to      accept                a starting               salary
at     the     federal          entry-level                            rate.             Interestingly,                        the

students            thought              the         threshold                  for       an appropriate                          salary            is
a function             of     what             it         costs          to     live           in        a given          location.
They      saw little               logic                  to     national               salary                rates       when the
cost-of-living                  was so different                                 across                  the     country.


Hopefully,             positive                     recruiting                  efforts                  can    help         to
counteract             the      negative                        perceptions                    of        federal          employment

that      college            students                     hold.              However,               it        is’apparent               that


                                                                         7
,low     entry-level                      salary             rates           will          continue             to      be a problem
unless          corrective                     actions              are        taken.



PRIVATE SECTOR PAY PRACTICES


As part          of        our      assessment                      of       federal             pay      and other
employment                 programs,                   we are             surveying                the         practices
followed             by large                  companies                 that,            like          the     government,
have        employees                in        numerous                 locations.                  We sent
questionnaires                      to         all       148 companies                       in     the         country            that
our      data        source              indicated                  had        at     least             25,000          employees

each        and had              employees                   in     at       least          10     locations.                     The
survey          is     not         yet         complete,                 but         to     date         we have             received

usable          responses                  from          62 companies                       that         met     our         selection
criteria.                  Responses                   from         14 other                companies                indicated             that
they        either          did          not         meet         our        selection              criteria                 or    were     so
decentralized                      and diverse                      that         they        could             not      complete           the

questionnaire                      from         a company-wide                            standpoint.


Since        the       survey              is        still         on-going,                 we cannot                  at    this        time
say      anything                definitive                   about            private             sector            practices             in
general,             but         we are              seeing             some        very         interesting

information                 from          the          responses                 received                to     date.


Th@ questionnaire                              asked          the        companies                 to     indicate                their
wage and             salary           objective                    in        relation              to     market             rates.


                                                                         8
Almost         without            exception,                  the         62 compa.nies                  said         their
objective              is    to      have         pay        rates         no lower              than         the       50th
percentile              of     rates          paid           by other           employers,                    thereby

indicating              that         maintaining                    competitive                  salary             levels           is     a
very        important             aspect           of        the         compensation                  philosophy                of       the
Nation’s             leading          private                companies.                   Some of             the       companies
said        their       objective                 is     to     pay        above          the        50th          percentile.

Since        the      government’s                     pay      rates         are         around             the      40th
percentile              of     national                average             salaries,                 these          findings              are

further             evidence          that         the        government                  is     not         a competitive
employer.


We also             asked      the         companies                whether            they          paid       different

rates        by locality.                    The 62 respondents                                indicated                a wide
variety         of      pay       practices,                  including              local             schedules               for        all

job     categories,                  national                schedules              for        all      job         categories,
national             schedules              for        some categories                         (most          often           top
officials             and managers                     and professional                          employees)                  and

local        schedules               for     others,                and      some local                 and         some
national             schedules              for        the     same employee                         groups.             In      some
cases,         the      companies                 had local                variations                  for      their

employees             on national                  schedules,                 such         as different                      pay
raise        amounts           for         employees                in     different                 locations               and
cost-of-living                    allowances                  for        employees              in      high-cost                areas.




                                                                    9
The      responses                 received                 to        date            do not             show any predominant

pattern           in     the           private              sector                on locality                    pay     practices                for
white-collar                   employees.                        It         is        evident,             however,             that
companies              give          a great                deal           of         thought             to     how they             set
salary          levels             to     meet         their               own needs                     and that            there          is
often          considerable                     variation                       in      pay practices                    by locality.
One company,                   for        example,                    reported                    that      it    has div.ided                   the
country          into         three             regions                based                on analyses                 of    the      cost-
of-living              in      its        various                locations,                          Base        salaries             are        set

for      the     lowest              cost-of-living                               region,                and     employees             in        the
other          two     regions                 receive                10 percent                     and 20 percent                    add-ons

to    the       base        salaries                  for        their                pay      grades.             This         practice

is    followed              for         employees                     in        all         job      categories.                    Another
company          reported                 it      uses           local                salary             schedules            for      all
employee             categories                   except               top            executives.                  On the             other

hand,       one        company                 said         it     paid               all         employees             at    national
rates,          and      these            national                    rates             were         based        on prevailing

salary          levels            in     New York                     City            where         the        company’s
headquarters                  is        located.                   This               company             acknowledged                 that
its      pay     rates            in     many parts                        of         the      country            are        higher          than
needed          to     be competitive                            with            other             employers.




                                                                           10
WHAT KINDS OF CHANGESARE NEEDED?


Our       work      strongly            suggests            that*         the     following              basic
principles                 should       be followed                 in      determining              federal            salary
amounts:


1.       Federal           salaries        must       be competitive                     by locality                to
attract          and        retain       high-quality                     employees.


2.        In    determining              prevailing                 salaries            in     a locality,               rates
paid       by state            and local             governments                  as well         as private
companies             should          be taken           into            account.             (The       law      now

limits          salary         comparisons               to        the     private            sector.)


3.        The      restoration             of     federal                pay    to     competitive                amounts

must       be done            in     a fiscally             responsible                 manner.



4.        Action         should         be taken            to      avoid         any    further           widening             of

the       national           pay gap.


H.R.       3979       is     generally            consistent                   with     the      above
principles.                  However,           we are             concerned            that      the      bill         could
be a very            expensive             undertaking                    in    this     period           of      budget
austerity            in      presuming            that        the         pay disparities                  by locality

can       be fully           eliminated              over          3-year         periods.              The vast           gulf
that       has      been       allowed          to    develop              in    most        locations             between


                                                              11
federal            salary            levels           and market                       rates           is     simply                too        large
to      correct           at one time.                        We suggest                     a responsible.
alternative                  could        be to             fill             some percentage,                            maybe one-
half,        of     the        pay disparities.                                 In doing                so,        federal                pay
rates        would           become           more          competitive.                          Later             a reading                   could
be taken            of       the, budget              situation                    and a plan                      developed                    for
correcting                any        remaining                disparities.



A further             alternative                  is         to         begin          to     reduce              the         disparities
immediately                  only        in    cities                   with      the        greatest                   differences
between            federal            and nonfederal                            rates.             Also,             though               it     may
take        some time               to    reduce              the            disparities                    for         all         levels            of

the      federal             workforce,                it          is     critical                that            the         disparity                at
the      entry        level           be dealt                with             quickly            to        better              insure           the

government’s                  competitiveness.



Until        the      full          pay disparity                         can      be corrected,                              we believe
the      federal          pa,y formula                      should              consider                cost         of        living
differences                  within           localities                       as well            as the             prevailing

nonfederal               pay        rates.            As mentioned                           previously,                       nonfederal
rates       do not            always           mirror                   cost      of     living              differences                        by

locality.                By adding               cost              of     living             to    the            prevailing
rates,        federal               pay       rates           can         be equalized                        in     terms            of
spending            power.               Adjustments,                          however,            should                not         result            in
federal           pay        rates        exceeding                      the      nonfederal                      rate         in      any
area.


                                                                        12
The      notion            of        affordability                     also            has      another                 aspect.               We do
not      believe               agencies,                  across           the         board,           should            be expected
to      absorb           all         or      large         parts           of     the        cost            of    pay      increases
within         their            existing                  budgets.                If     Presidents                      and      Congress

want        good         government,                      they        must        pay        for        it.          Once         it        has

been        decided             what          federal             programs               are        appropriate                        to     be
funded,            the         costs          of     properly                carrying               out           the     programs
must        also       be funded.                         These        costs            include               equitable
compensation                        levels          for         the    employees                   who manage                   and
operate            the         programs.


CONSIDERATION                        OF PERFORMANCE LEVELS
IN MAKING SALARY ADJUSTI’UZNTS



In making                federal              pay         rates        more            competitive                   with         the
nonfederal                 sector,              Congress               may        also        wish            to     explore                 the

feasibility                    of      tieing             together               pay     adjustment                      amounts              and
individual                employee                  performance.                        According                  to     the
questionnaires                         we have             received               thus        far         from           private
companies,                very            few companies                     grant            automatic                   pay      increases

to    all      employees                     when salary                   schedules                are           adjusted.                   They
generally                report              that         job     performance                      is     the        primary
criteria            used             in      determining                   the         amount           of        increase              to     be
received            by individual                          employees.                    We think                  the      concept                has

merit        and       should                be explored.

                                                                      13
                              *   *   *    *.    *    *




That   concllzdes   my   statement.        My   colleagues      and   I would   be
pleased    to   answer   any questions          you may have.




                                      14