Why Governments’ Pay Problems Have to Be Addressed

The public sector's workforce issues aren't going to be solved as long as the dynamics of labor markets are ignored.
September 26, 2018
A teacher protests at the Oklahoma Capitol earlier this year. (AP/Sue Ogrocki)
By Howard Risher  |  Contributor
Consultant focusing on public-sector pay and performance

It's not surprising that, as a recent Governing column reported, public workers' compensation and rights as employees have become issues in this year's gubernatorial campaigns. Year after year, government's workforce problems are ignored until they trigger negative headlines.

In the private sector, headlines like those were common through the 1970s. The auto industry stands out; its labor-management confrontations were at times violent. But since the 2008-2009 recession, the industry has committed to a version of the German "shared governance" model. Autoworkers now share in corporate profits; early this year, each General Motors worker received a check for $11,750.

Today, just about the only employers living with strikes are in the public sector. Strikes in business are at the lowest level since 1947. That's in large part because progressive corporate employers have taken a new path. They now see employees as assets, not costs, and that has opened the door to a different way of managing compensation. These companies realize that attracting well qualified applicants -- "talent" is the current buzzword -- and managing employees as valued contributors produces higher performance levels and better results.

In far too many state and local jurisdictions, you would think it's still the 1970s. Government does not need to pay profit-sharing bonuses, but with growing labor shortages and difficult technical problems such as cybersecurity to confront, public employers should commit to enhancing their "brand" as an employer. Pay freezes may win a few votes, but adopting basic ideas from successful companies will produce better performance. The management of compensation is basic to sustaining employee commitment. Public employers need to acknowledge some realities:

• Employees' perception of their pay and the way its administered is more important than the reality. If they think they are paid fairly, everything is great. But if they are convinced its unfair, regardless of the facts, it's a problem -- and the longer that continues, the more serious the problem. That no doubt was a factor in the recent teacher strikes. Communication should play a major role in compensation management.

• Pay and the way its perceived are associated with employee engagement. Highly engaged employees are more productive and approach their work in a way that minimizes the costs of turnover, absenteeism or accidents. When employees are disengaged, productive effort goes down and costs increase. Rather than saving money, decisions to deny or minimize pay increases can end up inflating costs.

• Tight labor markets are limited largely to fields that require specialized knowledge or skills, such as cybersecurity, or jobs that are simply unattractive, such as those of correctional officers. There are other jobs that absolutely need to be filled regardless of the cost. Teaching, for example, was once an attractive choice for women, but the number of graduates has declined steadily as the current workforce has aged. Freezing salaries will have an obvious impact on recruiting and deter students from choosing teaching as a career. Competing successfully for talent requires an understanding of labor-market dynamics and the flexibility to offer salaries to attract needed talent.

• Population trends and demographics are relevant. People are moving away from urban and rural areas to the suburbs. In some Rust Belt areas, aging populations and the gradual obsolescence of job knowledge are added factors. In my state of Pennsylvania, for example, the salaries for a commonly defined job, registered nurse, range from an average of $82,770 in Philadelphia to a low of $58,880 in Erie. Maintaining a one-size-fits-all statewide salary program that isn't responsive to local market dynamics has to create problems.

• Applicants in most regions can chose from multiple employers, and the best qualified can command higher starting salaries. Some businesses pay above-average salaries by policy. A client in the past decided to pay new specialized engineers at the 90th percentile. Offering below-market salaries has obvious implications for applicant qualifications.

• Finally, pay for performance is effectively universal outside of government for white-collar workers. It can gain acceptance in government, but requires leadership and an investment in more effective performance-management systems. Millennials want jobs where they can expect regular feedback and are recognized for their contributions. If public agencies do not adopt policies and practices that are attractive to young workers, the staffing problems will get progressively worse.

Traditional government salary systems are incompatible with dynamic labor markets. As long as those systems continue unchanged, public agencies will continue to experience staffing problems. With retirements and loss of talent, performance will deteriorate.

To be sure there, are a few public employers that have put modern pay and workforce management programs in place -- Tennessee is a standout -- but far too many have not reconsidered their pay programs in decades. It's something every public employer should do periodically. We know the policies and practices that have been proven to work.