Federal White-Collar Employee Salary Reform

Published by the Government Accountability Office on 1990-03-21.

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

                    United   States General Accounting   Office

For Release          Federal     White-Collar     Employee        Salary   Reform
on Delivery
Expected    at
9:30   a.m.   EST
March 21, 1990

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

                     Before    the
                     Committee      on Governmental      Affairs
                     United    States   Senate

                              Summary of Statement     by
                                    Richard L. Fogel
                          Assistant      Comptroller General
                           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.       Also, 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.      S.2214
accomplishes         this objective       by initially       calling     for adjustments
to basic pay rates in localities                 where nonfederal         pay rates are
above the national            average.      The bill    does not require         the direct
comparison       of federal       and nonfederal       salaries      in the localities,
but is designed           to make federal      salaries      more competitive         in
those localities           where the federal         pay disparities        are the most
severe.        GAO suggests       that direct      comparisons       of federal      and
nonfederal       salaries       would be more appropriate            and believes       that
cost-of-living          levels    should also be considered            in determining
locality       adjustments.
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     today       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 effectively                      deliver          services           to the
American       people.



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

Two factors            have prevented                the      comparab ility            pr inc     pie
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

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            rates       are similar              in the different               parts       of the
country         where        federa 1 employees                work.          While     very      1 imited

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

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

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

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                  rn 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

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

lThe standard  house used for comparison  purposes                                                    contained
1,400 square feet,  3 bedrooms and 1.5 baths.
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.


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:

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

          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

          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

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.

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

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


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.

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

Almost       without          exception,                   the 62 companies                  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

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.

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 divided                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.


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

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.

S.2274         is generally           consistent            with      the above principles.
It     uses     nonfederal        pay relatives                to determine           locality          pay
adjustments             and calls        for       a plan      to be developed               later      to
correct         any remaining            pay disparities.                   To stop      the overall
pay gap from widening,                       the    bill      also     requires       that       General
Schedule          rates      be adjusted            each year          to reflect        increases

in the Employment                   Cost       Index        (ECI)      compiled        by the Bureau
of Labor       Statistics.

We agree       with        the bill's            incremental              approach           to resolving
the government's                salary          problems.              The vast        gulf        that     has
been allowed             to develop             between         federal           salary      levels           and
market       rates       is simply             too     large        to correct         at one time.

However,       we would             point-out           that        the pay relatives                  the bill
uses to determine                   locality           adjustments           measure          local
nonfederal             pay rates         against            national        average          nonfederal
pay rates.              They do not             compare         local       federal          and
nonfederal             salaries.             Accordingly,              these       pay relatives                will
not     show the extent                to which             federal        salaries          are behind
(or     ahead of)          prevailing                nonfederal           rates      in any locality.
They do,        however,            afford       a means by which                   an initial             step
can be taken              to provide            some relief               in those         localities
where the pay disparities                             are    the most severe.

We think          it    would       be more appropriate                     over      the long            term         to
directly        compare            federal       and nonfederal                   salaries         in each
locality.              Moreover,           we believe           cost-of-living                differences
among localities                   should       be considered               along      with        the     salary
comparisons             in determining                 the     locality           adjustments.                 Since
the     primary         objective            of the bill              is to make federal                   pay
rates       more competitive,                   not      necessarily              comparable            with

nonfederal             rates,         including         cost-of-living               considerations
in deriving             locality          pay adjustments                  would     better
accomplish             that     objective.

Also,        as mentioned              previously,             nonfederal           pay rates            do not
always        mirror          cost     of living            differences            by locality.               By
adding        cost      of living          differences              to the         salary
comparisons,              federal         salary        rates      can be equalized                   in terms
of     spending         power.          Adjustments,              however,          should         not
result        in federal              salary        rates      exceeding           the     nonfederal
rates        in any area.

If     our    suggestions              are adopted,              a decision              would     then       have
to be made on how much of the pay disparities                                               by locality
could        be corrected              in the        short       run.       One possible              approach
is to fill             some percentage,                 maybe one-half,                   of the pay
disparities.                  As the bill            provides,          a reading           could        be
taken        later      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.

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.



In our opinion,                    the      bill          is on the            right          track      in calling
for      a study           of the        feasibility                   of linking              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.

                                *    *   *    *    *     *

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