My annual salary before I retired was $84,628. On a bi-weekly basis, it was $3,244.
Just to double check, I multiplied $3,244 by 26 – the number of pay periods in one year. I was shocked to find the result was $84,344, or $284 short! Knowing this must be an error, easily corrected, I contacted payroll.
Payroll told me it is not an error even though my math skills were not suffering any apparent decline. Here’s the way it works: Divide your nominal yearly salary by 2,087, multiply by 80 (to get the bi-weekly), then multiply again by 26, to get the annual. The result is slightly less than your nominal annual salary.
How can this be?
What is the logic behind this?
Here is the answer.
During the Reagan administration, the OMB director, David Stockman, noticed that 26 pay periods are equal to 364 days, one day short of a full year. In leap year, they are two days short. This meant that employees received a full year’s pay in less than a year; in other words, they were overpaid.
Alarmed, Mr. Stockman devised a tactic to fix this. He proposed to divide the nominal salary by 2,087 – instead of the then current, conventional 2,080 – and use the resulting hourly figure for calculating actual pay.
His proposal worked. Since then, federal employees have been paid less than their nominal annual salaries.
Now, if you or I had such an idea, management would waste no time telling us the many and varied reasons it was no good. But in this case, the fellow with the idea was the Director of the Office of Management and Budget. So, they did it.
Check it out. Multiply your bi-weekly gross by 26. See? The result is less than what your annual salary is supposed to be. But of course, you have one more day’s pay in one year, after the 26 pay periods are used up. When you add this in, you are no longer under-paid. Are you?
As a practical matter, the above means almost nothing. But it is interesting to see what happens when a high-ranking executive has an idea that would be shot down quickly if a rank and file employee proposed it.
(The author developed the software at fedbens.us.)