2007 Pay for Feds Lags Private Sector

Merit pay is rampant in the private sector. In the federal government, equal pay raises across the board are the norm although a report issued in 2006 shows that federal employees have not fared too badly. The systems are different and pay and the sources of job satisfaction are unlikely to ever match up.

Having spent a number of years in both the federal and private sectors, my experience has been that the amount of pay given to employees is always a controversial topic.

Government is unique in many respects and working within these unique paramaters makes it more difficult to have a pay system that is fair and rewards the best performers.

Private companies are heading in the direction of pay for performance. A recent report from Hewitt Associates, cited in the Wall Street Journal, reports that 80% of companies now have a bonus plan while just 67% of companies had such a plan in 1997.

In effect, companies are trying to put the “merit” back into merit pay increases rather than just giving an across-the-board pay raise to everyone each year.

And, says, the Journal, companies are increasingly giving the highest performing employees bigger bonuses. Moreover, the base pay for employees is also based largely on performance.

Here are some figures that will catch the attention of some readers. The small group of employees that are rated highest by their companies will probably receive an average base pay increase of 5.4% in 2007. The employees with the lowest ratings will get an average increase of 1.4% while the largest group will get about 3.3%.

In 2007, unless Congress takes some action, the average federal pay increase will be about 2.2% with many federal workers getting about 1.8% because they are not in the locality pay areas getting the biggest increase.

There are several major differences between federal jobs and those in private companies. A big one is that the profitability of a company will make more money available for salaries. And, generally, the philosophy is that a company that is successful will make more money. In government, the amount of money available depends on the whim of Congress. In a year where there is no increase in budget, less money is available. But, even with less money available, employees generally get at a raise but cutbacks are made elsewhere whether in travel, equipment or less money spent on the mission of the agency in other ways.

And, in reality, the amount of money available to agencies may not be related to their performance. Some agencies actually get more money after having failed to perform in previous years. The theory that may work in Congress is that more money is necessary to correct the failure.

Deciding how much federal employees should be paid is, in reality, determined by political considerations as well as economic. High inflation rates can obviously make a difference and the outcome of elections can make a difference. Some federal employees may not appreciate the full extent to which they work in a political arena. While removed from the spotlight in their day-to-day work, the outcome of the political process impacts salary and benefits.

A pay for performance system is hard to implement in the federal workforce, In part, the “iron triangle” of Congress, federal employee unions (and their PAC contributions) and the legal process that enables numerous appeals to be filed have worked to effectively strangle attempts to implement such a system. Moreover, the power of profit that exists in private companies is lacking. A federal agency may not have enough money but it is unlikely to cease to exist. A private company will often go out of business if it cannot perform well.

In 2006, a report from the Cato Institute used data from the Bureau of Economic Analysis (part of the Commerce Department) and contended that compensation for federal employees exceeded the compensation increases of private sector employees for most years going back to 1991. (See “Underpaid Feds?”)

Keep in mind that these different figures are not just reflecting across the board pay increases. As noted in the report: “Increases in federal compensation have stemmed from general wage increases, increased locality pay, expansions of benefits, changes in the nature of federal work, growth in the number of high-paid jobs as the workforce has become more top heavy, and other factors. Pay inflation has been fueled by routine adjustments that move workers into higher salary brackets regardless of performance, and by jobs that are redefined upward into higher pay ranges.”

The report concluded: In the near term, Congress should restrain federal compensation by freezing federal wages for a period of years and examining fringe benefit programs for possible savings.”

Did the Cato report influence the President and Congress in deciding that federal employees should be paid less than private sector employees in 2007?

Probably no one knows with any certainty but there is no doubt that the report received considerable attention and it highlighted the fact that the “quit rate” for federal employees is lower than in the private sector. In other words, if federal employees do think they are underpaid, they are not quitting in droves to make more money elsewhere.

Stated differently, the system may not be fair. The federal system will reward some workers better than others. Even with a pay for performance system, the best workers may not be given the most money or substantial raises because the pot of money available is not determined by objective factors.

Some would conclude that the inability of the federal system to have a pay for performance system in place will mean that it will be difficult to recruit the best possible people and that the highest performing people will leave to work in an environment where merit is recognized by money.

While these observations are true to a degree because some will be motivated by money, the reality is that many federal workers will continue to stay in their jobs until they retire. Some are undoubtedly overpaid and could not make as much in the private sector. Some are underpaid and could make more elsewhere but like the working environment, the mission of the agency, the benefits or are just comfortable and don’t want to leave.

The reality is that the federal system is different and is unlikely to ever be comparable to the private sector. People motivated by high compensation will likely not be attracted to government employment. Even the highest paid people will never match the money made by highly successful business people.

Anyone too dissatisfied with the federal environment will eventually leave. Those that are not very happy but just gripe or complain and stick around are probably relatively satisfied. The reality is that unless there is a massive change in government structure, there are going to be differences in compensation and, possibly, in how job satisfaction is achieved in the different environments.

Anyone contemplating a career in government would probably be well-advised to know and accept the difference or remain unhappy for an entire career.

About the Author

Ralph Smith has several decades of experience working with federal human resources issues. He has written extensively on a full range of human resources topics in books and newsletters and is a co-founder of two companies and several newsletters on federal human resources. Follow Ralph on Twitter: @RalphSmith47