To Keep Up with the Private Sector, Governments Must Focus on More Than Just Pay

Thanks to recent revenue increases, some states are unfreezing public workers’ pay for the first time since before the recession. But looking at pay levels rather than total compensation hides a great deal of the story.

When citizens gripe about the plush pay packages that public-sector employees get, they’re often describing a luxury cruise ship without mentioning the leaks. “The sense in the private sector is that state employees get a lot,” Sara Walker, director of the West Virginia Division of Personnel, tells us, “but the private sector doesn’t understand how pay has been impacted in state government.”

Walker uses the word “impacted.” If you ask us, the better word would be “strangled.” A few examples: Alabama hasn’t given cost-of-living raises to employees since October 2008 or merit increases since January 2009. Maine’s employees have been living in a land without raises for the same stretch of time. And Nevada’s last general raise was in 2007 -- not to mention a 2.5 percent pay cut in 2011 and more lost pay due to mandated furlough days.

Read the rest of this month's magazine issue.

Thanks to recent revenue increases, some states are unfreezing pay. Nevada’s legislature reinstated pay from the 2011 pay cut and will reinstate merit raises in July 2015. But it takes quite a while for employees to start feeling satisfied after years of stagnant salaries.

But looking at pay levels exclusively -- whether they’re going up or down -- hides a great deal of the story. For policymakers, the number to focus on is total compensation, including benefits. That’s one of the key messages delivered by state personnel directors to the State Government Workforce Project. The project is an effort to research and disseminate information by the National Association of State Personnel Executives, professor Sally Selden of Lynchburg College and -- full disclosure -- the two of us.

Florida employees, for example, have been asked to contribute 3 percent of their salary to pensions (a step that’s currently being litigated). Moves like that, along with rising co-pays, higher deductibles and greater responsibility for premium payments, eat into employee salaries and negate infrequent salary increases. In many states, peculiar elements of state law add additional complexities. Up until recently, Minnesota capped salaries at 85 to 95 percent of the governor’s pay, depending on the agency (whereas it established a 110 percent cap for local governments).

Want more management news & commentary? Click here.

In Pennsylvania, Jim Honchar, deputy secretary of the Office for Human Resources Management, says that 10 years ago, second-career employees were a big portion of hires -- people who had worked in another career and were coming to the government for job security, a pension or a good health benefit package. “Now that’s not as prevalent as it used to be,” he says, noting that benefits, which used to be generous, now are just competitive, particularly in terms of health care. “We used to say we couldn’t compete from a salary standpoint, but we could make up the difference in pension and benefits. We can no longer say that.”

According to Honchar and others, when the economy’s bad, states generally don’t have problems recruiting, but when things start improving, they have difficulty hiring people. That’s largely because governments are increasingly uncompetitive with the private sector.

“We need to get at the big picture of compensation,” says Candy Sarvis, deputy commissioner for the Human Resources Administration in Georgia. “There’s such a focus on pay. The focus needs to be larger in scope. If someone says, ‘I’m thinking of working for the state.’ I should be able to say, ‘These are the benefits you get. These are the pay supplements; these are the sick days you get. This is the retirement package.’ We have all these pieces.”

As the economy improves and states and cities face the specter of large-scale baby boomer retirement, the need to consider the state’s human capital through the lens of total compensation -- instead of just pay -- is likely to become more acute.

Tennessee, for example, estimates that in the next four to five years, it will need to replace some 15,000 employees who will be eligible to retire. Aware of that startling fact, the plan at first was to do a simple salary survey of state employees, says Rebecca Hunter, commissioner of the Department of Human Resources. But when she heard a presentation about total remuneration at a conference last year, she decided, “We need to be looking at that.”

The finding of that survey turned out to be significant. Salaries were below market, but benefits were above. This underlined an important aspect of Tennessee finances: Pension costs had grown from $264 million annually in 2003 to $731 million last year -- an expensive proposition.

A first step in altering the state’s compensation structure occurred when Tennessee’s treasurer proposed a plan to alter retirement benefits. As passed by the legislature in 2013, the state is replacing its traditional defined-benefit pension plan with a hybrid pension system. It combines a less expensive defined-benefit component and a defined-contribution element that allows for greater portability. That’s seen to be an attractive formula for young applicants.

“We needed to reallocate the mix of salaries and benefits,” says Hunter, adding that “savings obtained through restructured benefits can also be utilized to make salaries more competitive.”

Join the Discussion

After you comment, click Post. You can enter an anonymous Display Name or connect to a social profile.

More from Smart Management