Considerations for Public Employee Compensation

OCPA Memorandum December 11, 2012

Considerations for Public Employee Compensation Information from this document was presented in an interim study of state employee compensation by the Oklahoma House Representatives on October 23, 2012.

By Jonathan Small, CPA Policymakers are currently considering the pay of state government employees. This exercise is not new, but previous attempts to address the pay of state employees were more influenced by politics than good policy. The political nature of pay raises is evident: Simply consider that elected officials in the legislature typically grant pay raises to all state employees (regardless of performance) in election years. As a former state employee with more than six years’ experience working for the state, I know firsthand that, to adequately address the pay of government employees, several issues must be considered.

All compensation must be considered Advocates of increases in pay for all state government employees regularly cite the statistic that state employees are paid “19 percent below market.” Considering only pay or wages is a flawed way to evaluate pay for government employees. This view is flawed because state employees receive more than just salary or wages; employees receive health benefits, retirement benefits, and other compensation that exceeds the level of private or “market” employees. In fact, the total compensation cost of a state employee is just 7.45 percent less than that of a “market” employee, according to the FY-2011 Compensation Annual Report1 prepared by the State of Oklahoma Office of Personnel Management (OPM). While a state employee, my total compensation regularly exceeded my similarly situated and degreed colleagues in the private sector.

State employment excess benefit allowance is a unique benefit According to the FY-2011 Compensation Annual Report prepared by OPM, 89.7 percent of active state employees and their families have 100 percent of their core benefits paid for, plus they receive an additional $173 per month, on average, in excess benefit allowance that can be used to pay for optional benefits and/or added to paychecks. The excess benefit allowance is a significant benefit, and, according to OPM, the excess benefit is not included in the calculation of state employee compensation comparisons. As evidenced in the report, the vast majority of private or “market” employers offer no such benefit, which on average increases compensation by $2,073 for those receiving the benefit. While a state employee, my family received an excess benefit allowance over this average amount.

State employment more secure than private or “market” employment Advocates of increases in pay for all state government employees regularly attempt to selectively compare the pay of state employees to the pay of private or “market” employees. This comparison is flawed. The employment of state employees is governed by state law, including, for example, Title 74 Section 840-1.1-840-6.9, the “Oklahoma Personnel Act.” This law has strict guidelines for the hiring, firing, and treatment of state employees, especially

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classified or “Merit” employees. State law provides significant protections for classified state employees, requiring a lengthy process for the firing of non-performing employees. Private or “market” employers can easily (i.e. without a lengthy bureaucratic process) hire, fire, and discipline non-performing private or “market” employees. This job security for state employees is not valued by compensation studies, but is reality and a significant benefit to state employees. I worked for the state during high- and low-revenue years, but, as a state employee, I was never concerned that I would be fired because revenues were down nor did I experience the same performance pressure. As a private employee, I am regularly aware that a down economy could affect my employment status and that my continued exemplary performance is the sole reason I am able to maintain private employment.

State employment turnover not unique, impacted by far more than pay Advocates of increases in pay for all state government employees regularly cite the turnover rate for state employees. These advocates constantly cite the total state employee turnover rate of 13.0 percent as evidence pay is insufficient. To evaluate turnover, however, a deeper analysis is necessary. According to the Oklahoma Employment Security Commission2, for the period covered by the OPM report, total employee turnover for all of Oklahoma was 10.6 percent. Based on these statistics, state employee turnover is not significantly higher than the turnover experience for all employers. Turnover is a natural and necessary part of a free-market economy and turnover can never be eradicated. Total turnover includes resignations, retirements, discharges and deaths. Considering some of these variables in the analysis of the impact of pay on turnover is flawed. Generally employers cannot control the death of employees. Given the onerous standards of the Oklahoma Personnel Act, discharged employees were justifiably released and there is a cost avoidance benefit to the state of no longer employing a non-performing employee. Arguably the most lucrative and rare benefit offered by the state is its costly, forced defined-benefit retirement plan. For many state employees, the retirement plan and the prospect of retirement are the most significant reasons for entering state employment and remaining a state employee. The structure of defined-benefit plans is a direct inducement to retire, as soon as possible, to draw benefits as long as possible. Considering these factors, state employee retirements cannot be blamed on pay. Although some resignations are because of pay, others are not. People change employment for some of the following reasons: • Spouse accepts a job requiring a move • Employee decides to make a career change • Employee differences with management unrelated to pay • Employee differences with fellow employees unrelated to pay • Employee determines to take care of dependents full-time • Multiple other factors Based on the OPM report and limited detail reporting on resignations of employees, it is generally difficult to ascertain the specific reason for resignations. Assuming all resignations are because of pay (again, they are not, but data documenting differences is unavailable), and extracting clearly non-pay variables included in total turnover, actual turnover for state employees is 8.1 percent.

State employees can receive annual leave despite discipline actions Compensation is for the purpose of reimbursing employees for services they provide to the state. When employees are undergoing disciplinary action, under-performing or non-performing, current state law provides protections that do not exist for many private or “market” employees. For example, based on communications with state agencies, regardless of an employee’s disciplinary or performing status, they must receive the annual longevity payment. Several unsuccessful attempts to obtain records from the state regarding the number of employees under disciplinary action or in an under-performing status suggest no such report is currently available.

Solutions for state employee pay 1. Policymakers, agency managers and state employees must recognize state employment at its foundation includes a “service” component. Improvements to pay should be made, but all government pay and compensation should never exceed or equal private or “market” pay and compensation.

2. Policymakers and agency managers must recognize that salary and wage decisions must be viewed independently, on a per-job and a per-employee basis, and not “across the board.” All employees do not perform the same and all jobs are not equal. It is impossible that all employees deserve a raise, and it is also true that some employees have performed in a way to earn a raise, but not received it.

3. State law must be amended to allow state agency managers to construct tailored, performance-based salary structures, independent of the bureaucratic and “one-size-fits-all” styled classified pay bands. These statutory changes can be made without increasing state appropriations.

4. State law must be amended to allow state agency managers the flexibility to create performance-based bonus structures, allowing agencies to pay performance-based bonuses of up to 10 percent of salary. These statutory changes can be made without increasing state appropriations. Employees and the nature of the economy and workforce require mobile and performance-based structures, which are largely absent from current state employment policy.

5. Policymakers must modernize the current approach to employee compensation by shifting away from centralized, burdensome and costly defined-benefit plans, and implement full defined-contribution plans including a defined-contribution retirement plan for all new state employees.

6. State law must be amended to remove bureaucratic barriers in personnel statutes that prohibit state agency managers from efficiently and effectively managing state agencies.

Endnotes 1 http://www.ok.gov/opm/documents/FY11CompensationAccessible.pdf 2 Total turnover of 10.6 percent for all employees (public and private) in Oklahoma was obtained in response to an information request of the Oklahoma Employment Securities Commission by OCPA. The OESC provided the information on 7/30/2012.