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Public Sector Compensation Reform: Friend or Foe?

Compensation of public sector employees is a hot topic of conversation and an important part of election year politics.  Liberal unions and conservative think tanks have developed numerous studies and policy papers regarding public sector compensation.  Unfortunately, these groups have their own partisan objectives and missions.  The truth is public sector compensation is a difficult and complex issue often characterized by straw men and generalizations.

Many public employees are overpaid and many senior level government executives are underpaid.  Different studies show public sector employees as a whole and federal employees in general have higher education levels than the general public.  Government work is becoming less and less about filing and more and more about knowledge management and analysis.  Government lawyers, scientists, and doctors remain significantly underpaid compared to their private sector counterparts.  Government employees typically have a significant portion of their salaries in benefits including health insurance and pension benefits.  Private sector employees typically receive more in salaries, matches in retirement accounts, stock options, employee stock purchase plans, and bonus programs. Other differences also abound, government employee salaries are subject to open records and sunshine laws.  Private sector salaries of course are not, so often private sector data is self reported or comes from data from the Internal Revenue Service.  However, with all the talk of the private sector bringing efficiency and precision with pay for performance plans, the financial crisis has shown that many financial sector companies do not have pay for performance plans.  Many banking institutions took huge hits in their profit margins and stock values, yet compensation for many senior executives did not change.  Pay for performance is not a cure-all, as noted by the Federal Governments’ failed attempt at pay for performance through the National Security Personnel System (NSPS).

The battle over the downturn in the economy has been characterized as some having “wealth envy” when pointing out the massive and growing income disparity between workers and senior executives.  I would posit there has been “benefits envy” as many taxpayers are now decrying the benefits provided to public sector employees.  Many people who have lost jobs, decreasing home values, and are disgruntled are looking for someone to blame.  Unfortunately, government employees seem to be on the receiving end of much of this blame.   The perception seems to be if I do not have great benefits, then no government employee should, if i have suffered, so should everyone.   However, public employees should not be blamed for the promises made by previous generations of politicians.  Private sector companies have done a tremendous job of selling products and services through deceptive marketing.  Unfortunately, government agencies have done a terrible job of defending pay plans, benefit practices, and selling the nobility of public service careers.  The public has a terrible perception of government employees, but studies show most interactions with government employees are in fact positive.  The public often confuses non-partisan public employees with the political partisan Congress and other elected officials.

Many government agencies have begun making cost cutting moves such as cutting pensions, cost of living adjustments, health insurance benefits, freezing salaries, and slowing or not hiring new employees.  These are all short term fixes.  Financially, many government agencies cannot afford to pay for the significant costs associated with future pension and healthcare costs.  The choice is stark, make cuts to change course now or make huge cuts down the road when the ship of state runs aground.

An unintended byproduct of short term benefit changes is employees with different hire dates and members of different generations may perform the same job next to each other, but may have dramatically different pensions, salaries, or benefits.  This will lead to something government agencies do not want, further tensions between generations in the workplace.  Imagine a workplace with many crusty veterans who are close to retiring with a pension that pays sixty percent of their final salary.  Compare that with a newly hired Millenial fresh out of college who may not have a pension, but a 401 (k) type retirement plan, higher healthcare costs, and  significant student loan debt.  This new employee will have to save a significantly higher portion of their income to have a quality retirement while also confronting student loan debt and credit card debt.  Creating these generational distinctions may impede workforce continuity.  Younger employees and new hires are already less likely to stay on with a government agency, as many agencies see large turnover between the three and five years of experience mark.  A benefit system designed for a mobile workforce will led to precisely that, as millenials stay for three to five years (if that long) and then leave.  While benefit costs will be reduced, turnover costs to hire, train, and replace employees will increase.  The electorate should remember that lesson the next time a politician proposes an easy fix to public sector compensation and benefits or decries why turnover costs have increased.  Politicians will continue to play the game the United States Congress has played so well, continue to kick the can down the road for another generation to deal with and then blame someone else for the problem come election time.

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