Federal Benefit Comparisons: Be Sure to Read the Fine Print

The author says that studies comparing federal benefits to those in the private sector miss a key issue and that there are substantial differences in the benefit packages across industry sectors.

At some point in 2015 after Senator Ron Johnson takes over as the chair of the Homeland and Governmental Affairs Committee, he plans to hold hearings on federal pay and benefits.  In a recent interview, he was quoted as saying, “We have to hold hearings on the facts. The pay has to be aligned and can’t be out of whack — that’s the businessman’s approach to keeping things competitive with the private sector.”

If Johnson agrees with the critics who argue federal benefits should be cut, the hearings will be an anxious time for federal employees.

For Johnson, the ‘facts’ include “good solid pay and benefits comparisons.”  That would be standard practice in corporate market analyses.  Those pay comparisons are actually straightforward, far more so than the Federal Salary Council’s annual gap analysis.

In contrast, the choices in benefit coverages along with the factors that influence costs preclude simple employer-to-employer comparisons.  The current Open Season and the many options for health, dental/vision, and for flexible spending accounts highlight that reality.  Life and long term care coverage are not as complex but even here there is no simple comparison since employees make choices.

Federal retirement benefits have been more generous than those common in the private sector but the increased contributions over the past two years change that comparison significantly.

Company benefits offer more limited options but the level of benefits offered and in the cost split between employees and employer varies significantly from sector to sector.  Thousands of companies provide little beyond required benefits.

The most recent analysis of federal benefits is a January 2012 report from the Congressional Budget Office (CBO), Comparing the Compensation of Federal and Private-Sector Employees.  It’s heavy on statistics that few understand.  Their analyses show the “economic cost” of benefits for lower level employees is significantly higher than in the private sector but for better educated employees the “average benefits were about the same in the two sectors.”  Other studies, principally those by think tanks, have reported similar conclusions.  (The recent increase in employee contributions would of course change the conclusions.)

But those studies overlook a key issue.  There are substantial differences in the benefit packages across industry sectors.  In the business world, compensation and benefits are planned to compete for talent.  The benefits provided, for example, by a retail company are planned to compete with other retailers.  That’s why most surveys focus on industry groups.  It’s certain that Walmart’s benefits, for example, were not planned to compete with GE’s.

Pay packages include salaries, stock grants, signing bonuses, relocation allowances, etc, and of course benefits.  For talent in short supply – e.g. cybersecurity specialists – companies will offer whatever makes their job offer attractive.

There are of course laws governing the management of benefits but for the other elements of ‘total compensation’ companies have wide discretion.  The frequent articles on the ‘best places to work’ mention a surprising variety of practices and services that often have an insignificant cost but are highly valued by employees.  Companies today emphasize recognition and reward practices tied to company and employee achievements.  The CBO’s narrow focus on core benefits and comparative costs does not represent a useful approach to help federal agencies manage today’s workers.

The Comparisons Can Be Misleading

Federal benefits are in fact better than those provided by the average company but – it’s a huge but – the average U.S. company has only 20 employees.  Almost 80% have less than 10 employees.  Many of those mom-and-pop businesses provide only required benefits.  Only 981 employers have 10,000 or more employees.  Bureau of Labor Statistics (BLS) data confirms that larger employers provide better benefits.  Averages in this context are misleading.

Government also has an older workforce and that drives up benefit costs.  It also has low turnover.  At the extreme, companies that hire young workers and experience high turnover have extremely low benefit costs.  Their health expenditures are low; death and disability rates are low; and few workers stay long enough to vest in savings or pension plans.  By comparison, federal benefit costs are comparatively high because the workforce is older and stable.

Federal health benefits are no doubt inflated for the same reason locality pay is necessary.  Federal offices tend to be concentrated in or near metropolitan areas and healthcare costs generally are higher.  That has to translate into higher insurance premiums.

It’s rarely recognized but companies can deduct benefit costs as a business expense.  That makes a difference.  It generates tax savings and means companies can provide benefits at a lower net cost.

It’s also relevant that CBO was asked to limit its analysis to private sector employers.  That excludes the benefits provided to almost 20 million state and local government employees.  Public employers are known to provide above average benefits.

Finally, while the termination of defined benefit pension plans has had media attention, an important development over the past 20 years has been the expanded role of stock ownership plans.  Too often executives and the amounts they earn from those plans are the focus but broadened eligibility provisions frequently extend ownership opportunities to lower level employees.  The income fluctuates up and down but over time it’s too significant to ignore and would change comparisons of federal and private sector compensation and benefits.

Government’s Labor Markets

A key issue that is often overlooked is that government needs to be competitive and able to hire well qualified people.  Many federal agencies have jobs where world class experts are needed and unless they are only interested in public service, they can command generous pay and benefit packages.  And the companies trying to hire those experts are more than likely offering above average pay and benefit packages.  An alternative for many is working for a federal contractor for fully competitive compensation.

Senator Johnson recognized the need to be competitive in his comments.  “We can’t underpay and expect to get the quality of individual we need  . . .”

That is particularly relevant for occupations affected by skill shortages.  As this is written, the media reported that “a new survey that says 97 percent of the country’s CEOs judge the skills gap to be a ‘significant problem.’  The report says that over the next five years employers must hire close to a million employees with ‘basic STEM literacy’ and more than 600,000 with ‘advanced STEM knowledge.’”  That is or should be central to federal compensation and benefit planning.

The same day it was also reported “That Lawmakers strike deal on sweeping IT reform bill.”  That was of course not the only IT story in the media.  Government’s IT operations will undoubtedly be prominent stories for years to come.  There is little question that government needs to be competitive for these occupations.

If one were to define government’s primary talent competitors, virtually all of them have offices in the Washington area.  The list of larger federal contractors includes the companies trying to recruit the same talent.  Their pay and benefit packages would be a logical basis for comparing federal compensation.

It’s important to note that the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) was enacted years ago to enable the financial regulatory agencies to compete for talent.  Congress recognized those agencies needed to develop their own pay systems.  It follows that the benefit packages of the larger financial firms are an appropriate basis for comparison.

Comparing benefit levels with federal contractors or large financial firms would lead to significantly different conclusions than the cost approach used by CBO and others.  Significantly the CBO analyses do not explore plan design issues or compare the level of benefits.  The report is also silent on how pay or benefits impacts workforce management.  Aside from satisfying a congressional request, it’s not clear how it can help policy makers.

Conclusions from Previous CBO Benefit Studies

In 1998, CBO released a report comparing federal and private sector benefits. Benefit values were calculated for five hypothetical employees at different ages and years of service. The values were based on the plans of 800 larger companies and included only the company-provided benefits. The analyses were performed by actuaries who specialize in employee benefits.

Their methodology is consistent with a “businessman’s approach” that is easy to understand.  Their analyses showed federal benefits were better but only by 5 to 7%.

In developing the pay reform recommendations in 1990, the plan was to align federal salaries with market levels at step 4 of the GS ranges, less 5% to reflect the higher value of benefits.  That was based on a prior CBO study completed by the same actuarial firm.

It is not clear why but federal reports on pay and benefits rely on analytical methods that would never be adopted by other employers.  That’s true for both BLS and CBO.  Policy makers need understandable analyses and recommendations that follow logically from the data.  Recent reports from both agencies fail that test.

About the Author

Howard Risher is a private consultant who focuses on pay and performance. His career extends over 40 years and includes years managing consulting practices for two national firms. He recently became the editor of the journal Compensation and Benefits Review. He has written four books, including Aligning Pay and Results. He has an MBA and Ph.D from the Wharton School of the University of Pennsylvania.