Why Public-Sector Pay Is a Mess

Government compensation systems are out of touch with the modern economy.

The years since the recession have not been good ones for public employees. Talent was lost and pay levels for the most critical, skilled occupations have fallen steadily behind those of the private sector. Morale took a hit and in many jurisdictions has not recovered. Public service continues to attract young workers, but there have been reports of early turnover attributable to dissatisfaction with the work experience.

One measure of that dissatisfaction is the state of employees' engagement with their jobs, and here the news is not good. Gallup reports that 71 percent of state and local government employees are not engaged and that, troublingly, fully 17 percent are "actively disengaged." Those are averages. Currently I am working with a public organization where the number of employees who are actively disengaged exceeds 40 percent. The way this employer has administered pay is central to the dissatisfaction.

The emerging problem for the public sector is that as the economy and job markets improve, even the best- paying companies can have trouble attracting scarce skilled workers. There are also increasingly opportunities in the nonprofit sector for the careers desired by millennials that emphasize service -- but without the bureaucracy.

This is a far cry from the way things worked in the past. Up until a couple of decades ago, government careers were an attractive employment alternative. Budgets were growing and public employers were adding workers. The pay was not fully competitive, but the benefits and job security were good, and the growth meant attractive opportunities. Public-service careers were valued in society.

In many parts of the country, particularly in rural areas, the situation has deteriorated in a way that has not been reported by the media or studied by researchers. Back in 1989 and 1990 I was involved in a project in my home state of Pennsylvania to create a state court system (after 300 years of county courts). I met with the president judges and court administrators in 38 of the 62 county courts. I learned that when factories and coal mines closed, the numbers of DUIs and cases involving spousal abuse skyrocketed. Good-paying jobs in many rural counties are even more scarce now. The population and government's workforce are aging. Millennials who grew up in those counties are looking for jobs closer to urban areas.

Regardless of the local economy, however, government is expected to provide needed services. Teachers are needed. Prisons have to be staffed. Residents need health care. When workers retire from government jobs, especially in occupations requiring post-high-school training, those areas have to be able to hire and retain qualified replacements.

That is particularly difficult when it comes to attracting people with the specialized skills that governments increasingly need, such as financial expertise. As an attorney who represents a Kansas municipality involved in a dispute with the Security and Exchange Commission told the Wall Street Journal recently, "There are not enough people living in the community who can do the job."

Budgets are a core problem, but the situation is exacerbated by the continued reliance on noncompetitive, inflexible pay systems. When companies experience a staffing problem, they simply raise the starting salary. High-demand occupations command premium pay. Moreover, in the private sector pay for performance attracts the higher performers.

Competitive pay systems aren't unknown in government. Federal regulations permit agencies to pay special rates when they experience staffing problems. And the Federal Wage System covering hourly employees is based on surveys of market pay in over 250 local areas. Agencies at all levels of government need the flexibility to adjust rates to attract essential talent.

The continuing budget problems make it even more important to use available funds wisely. Across-the-board increases are not the best use of limited funds, nor are cost-of-living increases or automatic step increases. Those practices continue only in government.

Change initiatives will hit resistance. Assuring that employees will be treated fairly is basic. The decision to transition from a traditional civil-service pay system would be easier if the public sector had documented the advantages of such a change. Pay for performance has long been accepted in some jurisdictions -- Indiana has had a such a policy since 2006 -- but there is little evidence that many of those programs have been evaluated to affirm their benefits.

That's just one of the questions that will need to be answered if elected officials are going to be convinced that attracting qualified job applicants and retaining high performers is essential to meeting the public's growing need for government services.

A consultant focusing on public-sector pay and performance