Alternative Approaches to

Adjusting Compensation for

Federal Blue-Collar Employees

November 1980

Congress of the United States

Congressional Budget Office
ALTERNATIVE APPROACHES TO

ADJUSTING COMPENSATION FOR

FEDERAL BLUE-COLLAR EMPLOYEES

The Congress of the United States

Congressional Budget Office

For sale by the Superintendent of Documents, U.S.. Government Printing Office

Washington, D.C. 20402

PREFACE

This paper, prepared at the request of the Senate Committee

on Governmental Affairs, provides a discussion of various proposals to change pay and benefit provisions for the federal

government's blue-collar work force. Particular attention is

given to specific legislative proposals introduced in 1979 by

the Carter Administration to amend or repeal those provisions

of the Federal Wage System that govern blue-collar pay practices

and to include fringe benefits in the compensation adjustment

process. A CBO companion paper, Compensation Reform for Federal

White-Collar Employees; The Administration

 fs Proposal and

Budgetary Options for 1981, addresses similar issues for the

General Schedule work force. In keeping with the Congressional

Budget Office's mandate to provide objective and nonpartisan

analysis, the report makes no recommendations.

The report was prepared by Daniel F. Huck of the National

Security and International Affairs Division of the Congressional

Budget Office under the general supervision of David S.C. Chu and

Robert F. Hale. The author wishes to acknowledge the research

assistance support of David Seide, formerly of CBO; the helpful

review guidance offered by Alfred Fitt, General Counsel to CBO;

and the able administrative assistance provided by Nancy Swope of

CBO. Raymond C. Weissenborn commented on an early draft of

this paper, and the final version has benefited greatly from his

suggestions as well as from the comments of others within the

Department of Defense and the Office of Personnel Management.

Responsibility for any errors of course remains the author's.

Francis Pierce edited the manuscript, which was typed for publication by Janet Stafford.

Alice Rivlin

Director

November 1980

iii

CONTENTS

Page

SUMMARY xiii

CHAPTER I. INTRODUCTION 1

Objectives and Organization

of the Federal Wage System 2

Criticisms of the Federal

Wage System 3

Framework of This Report 3

CHAPTER II. CRITICISMS OF THE PAY-SETTING

PRACTICES OF THE FEDERAL

WAGE SYSTEM 5

The Within-Grade Step System 5

Out-of-Area Wage Survey Data 9

Uniform Night-Shift Differential 10

Exclusion of State

and Local Government

Employees From the Survey 13

Other Concerns Over the

Survey Process 16

Chapter Overview 17

CHAPTER III. INCLUSION OF FRINGE BENEFITS

IN THE COMPARABILITY PROCESS:

THE CARTER ADMINISTRATION'S

APPROACH 19

Measuring the Value of

Benefits: The Carter

Administration's Approach 19

Growth and Diversity in

Private-Sector Fringe

Benefits: A Major

Challenge to the Carter

Administration's Approach 21

Chapter Overview 30

CONTENTS (Continued)

CHAPTER IV. CALCULATING DISPARITIES IN PAY

AND BENEFITS BETWEEN FEDERAL

WAGE SYSTEM AND PRIVATE-SECTOR

BLUE-COLLAR EMPLOYEES 33

Disparities in Hourly Pay Rates 33

Disparity in the Cost

of Retirement Programs 36

Disparities in Paid Leave 40

Health Benefits 44

Chapter Overview 45

CHAPTER V. OPTIONS TO ALTER FEDERAL WAGE

SYSTEM COMPENSATION 47

Options to Address Pay Comparability .. . 47

Options that Affect Both Pay

and Benefits 56

vii

TABLES

TABLE 1. AUTOMATIC STEP PROGRESSION

PATTERN FOR FWS EMPLOYEES

Page

7

TABLE 2. SUMMARY OF SHIFT DIFFERENTIAL

PROVISIONS FOR PLANT WORKERS

IN MANUFACTURING INDUSTRIES 11

TABLE 3. MEDIAN HOURLY EARNINGS OF

MALE FULL-TIME NON-FARM

WAGE AND SALARY WORKERS

BY SHIFT, MAY 1978 ... 12

TABLE 4.

TABLE 5.

TABLE 6.

TABLE 7,

TABLE 8.

PERCENTAGE CHANGES IN

AVERAGE FWS EARNINGS WHEN

STATE AND LOCAL GOVERNMENT

DATA ARE ADDED TO PRIVATESECTOR WAGE DATA, SELECTED

OCCUPATIONS

FRINGE BENEFITS AS A PERCENTAGE

OF TOTAL COMPENSATION

PAID LEAVE AS A PERCENTAGE

OF TOTAL WORK HOURS IN

MANUFACTURING INDUSTRIES, 1974 .

PERCENTAGES OF EMPLOYEES

RECEIVING COMPANY-SUPPORTED

LIFE AND/OR HEALTH INSURANCE

IN MANUFACTURING AND

NONMANUFACTURING INDUSTRIES, 1974

COMPARISON OF FEDERAL WAGE

SYSTEM RETIREMENT PROVISIONS

WITH TYPICAL PRIVATE-SECTOR

BLUE-COLLAR PLANS

15

24

25

25

27

ix

69-628 0 - 80 - 2

TABLES (Continued)

TABLE 9.

TABLE 10.

TABLE 11.

INDEX OF PER-CAPITA EMPLOYER

COMPENSATION COSTS FOR FWS

EMPLOYEES, FISCAL YEAR 1980 .

CALCULATION OF FWS HOURLY

PAY PREMIUM RESULTING FROM

THE STEP PROMOTION SYSTEM . ,

FORECAST COMPARISON OF FWS

AND COMPARABLE PRIVATESECTOR PAY INDEXES . . . ,

34

35

37

TABLE 12. COMPARISON OF ENTRY-AGE

NORMAL COST VALUATIONS OF

RETIREMENT PROGRAMS . . . 40

TABLE 13.

TABLE 14.

DISTRIBUTION OF AVAILABLE

WORKDAYS BY LEAVE CATEGORY

FOR BLUE-COLLAR AND FWS

EMPLOYEES

SUMMARY OF PAYROLL COSTS

AVOIDED UNDER VARIOUS FWS

EMPLOYEE COMPENSATION

OPTIONS

41

48

TABLE 15.

TABLE 16.

COMPARISON OF CBO-PROJECTED

FWS EMPLOYEE PAY RAISES

UNDER VARIOUS OPTIONS . . .

PAYROLL COSTS AVOIDED THROUGH

AMENDING THE FWS PAY-SETTING

STATUTES UNDER OPTION I ...

49

50

xi

SUMMARY

Provisions of the Federal Wage System (FWS) establish

the pay of over 400,000 blue-collar employees of the federal

government. Recent administrations have contended, however, that

FWS pay levels are substantially and unjustifiably higher than

those prevailing outside the system. A similar criticism is made

of nonwage fringe benefits, which are determined separately from

pay. I/ The Carter Administration has prepared legislation that

would change the way blue-collar pay is determined and count

benefits as part of total compensation.

This report examines the factors governing FWS pay and

benefits and compares several alternative approaches, including

the Carter Administration's proposal. Depending upon the particular option chosen, CBO estimates that between $2.5 billion and

$6.3 billion in FWS payroll costs could be avoided over the next

five years. As the dominant FWS employer, the Department of

Defense would realize about 80 percent of these savings. To

generate payroll savings of this size, however, would require that

average annual pay raises over the next five years range from one

to three percentage points below the normal comparability raise.

CURRENT STATUTES PROVIDE A PAY AND BENEFIT PREMIUM

CBO's analyses found FWS employees earning an average of 6

percent more in hourly pay (after adjusting for two successive pay

caps) than their nonfederal counterparts in jobs judged comparable

by federal surveys. Most of this hourly rate premium can be

attributed to the five-step within-grade advancement system, which

does not conform to the common private-sector practice of three or

four steps.

JL/ The same general criticism has been leveled at federal white-

~~ collar (General Schedule) employees, an issue treated in

a companion study. See Congressional Budget Office, Compensation Reform for Federal White-Collar Employees; The

Administration's Proposal and Budgetary Options for 1981,

Background Paper (May 1980).

xiii
Available data also suggest that FWS employees receive

a package of major fringe benefits costing the federal government

about 15 percent more than private-sector employers pay for

fringe benefits (including Social Security). The greater expense

can be attributed almost entirely to the much more liberal retirement program available to FWS employees. In fact, of the seven

benefits analyzed, FWS employees have an advantage over their

private-sector counterparts in only two instances: retirement and

paid sick leave. They have similar vacation plans, but receive

fewer holidays. In addition, FWS employees pay a larger share of

their health and life insurance costs than do private-sector

employees.

When the premiums in both pay and benefits are taken together, an FWS employee costs the federal government about

9 percent more in total compensation than would be the case

if nonfederal-sector pay and benefit practices were adopted.

OPTIONS TO ALTER FEDERAL WAGE SYSTEM COMPENSATION

Payroll costs avoided by the five options analyzed in this

report are compared in Table S-l. Pay raises resulting from the

adoption of these options are shown in Table S-2. The first three

options address only the issue of pay comparability, while the

remaining two take both pay and benefits into account. The

options reflect varying judgments about comparability standards

and the scope of the comparability process.

Option I; Amend or Repeal All Disputed Pay-Setting Provisions of

the Federal Wage System

This option would implement the portion of the Carter

Administration's proposal relating to pay, but not that covering

fringe benefits. It would:

o Repeal the five-step within-grade advancement system

and grant the President discretionary authority to

establish whatever advancement scheme he finds desirable.

o Repeal the so-called Monroney amendment, which requires

the inclusion of out-of-area wage data when survey samples

for certain specialized occupations (such as aircraft

technicians) prove insufficient. The Monroney amendment

often results in higher hourly rates than the average for

private-sector employees in a given area.

xiv
SUMMARY TABLE 1. SUMMARY OF PAYROLL COSTS AVOIDED UNDER VARIOUS FWS EMPLOYEE

COMPENSATION OPTIONS (In millions of dollars, by fiscal year)

1981 1982 1983 1984 1985

1981-

1985

Total Payroll Budget

Under Current

FWS Statutes a/ 9,850 11,000 12,100 13,260 14,470 60,680

Options to Address

Pay Comparability

I. Amend/repeal

disputed FWS

pay-setting

provisions b/

II. Amend/repeal

FWS step

provision only c_/

III. Cap pay at 9.1

percent in fiscal

year 1981 only d/

-335 -800 -990 -1,090 -1,195 -4,410

-240 -480 -550 -600 -660 -2,530

-290 -550 -600 -660 -720 -2,820

Options to Address

Both Pay and Benefits

IV. Adopt Carter

Administration

 Ts

total compensation

proposal

V. Cap pay at 7.8 percent

through fiscal year

1985 to offset total

compensation premium

-370 -970 -1,450 -1,700 -1,780 -6,270

-350 -790 -1,080 -1,260 -1,660 -5,140

a/ Payroll levels absent any pay caps and assuming a constant size work force with

no further shifts in employee distribution among the grades and steps.

b/ Adopts that portion of the Carter Administration's total compensation proposal

~ amending or repealing the pay-setting provisions of the Federal Wage System

statutes. Assumes a three-step "average-to-average" within-grade advancement

system.

c/ Savings reflect a return to a three-step system with the comparability norm

retained at step two as an alternative.

d_/ The pay raise adopted for fiscal year 1981; excludes 5.7 percentage points in

raises due to prior pay caps.
SUMMARY TABLE 2. COMPARISON OF CBO-PROJECTED FWS EMPLOYEE PAY

RAISES UNDER VARIOUS OPTIONS (In percent, by

fiscal year) a/

1981 1982 1983 1984 1985 1981-1985

Under Current

FWS Statutes,

With No Pay Caps 14.8 b/ 9.9 9.9 9.3 9.0 10.6

Option

Option

Option

Option

Option

I

II

III

IV

V c/

7

9

9

7

7

.7

.8

.1

.4

.8

6.

9.

9.

5.

7.

7

2

9

0

8

8.

9.

9.

7.

7.

9

9

9

0

8

9.3

9.3

9.3

9.6

7.8

9.

9.

9.

9.

7.

0

0

0

9

8

8.3

9.4

9.4

7.8

7.8

aj Data show only the projected annual comparability raise and

exclude consideration of possible pay increases through

within-grade step advancement or promotion to a higher grade.

b/ Includes 5.4 percentage points as a catch-up for prior pay

caps in fiscal years 1979 and 1980. CBO projects the normal

comparability pay raise in fiscal year 1981 to be 9.4 percent.

c/ Equivalent to the average annual pay raise over five years

under Option IV.

Repeal the provision in current law prohibiting inclusion

of wage data for state and local government employees in

the areas surveyed. Hourly rates for comparable occupations in state and local government are usually below

those for both private-sector and FWS employees. Thus,

their inclusion would tend to reduce the average hourly

pay rate computed in the survey.

Amend the provision requiring a fixed percentage differential for evening or night shifts. This would give the

President the authority to set hourly rate differentials

based on prevailing practices in the nonfederal sector for

each local wage area.

xvi
Since the enactment of the Federal Wage System in 1972,

successive administrations have asserted that the above paysetting provisions undermine the pay comparability process. CBO's

review tends to confirm that these provisions differ from typical

private-sector practices. After allowing for the effects of

two successive pay caps, these four provisions now provide FWS

hourly rates that average 5.8 percent above the prevailing rates

computed from the area wage surveys.

If the Congress chose to phase in these proposed changes

using the half-raise provision included in the Carter Administration's legislative proposal, the hourly rate premium would

be eliminated by fiscal year 1984. During the period 1981-

1983, those FWS employees earning such a premium would receive

wage increases no less than one-half the normal comparability

raise for that fiscal year. Under this option, CBO estimates

that raises would average 8.3 percent over the next five fiscal

years (see Table S-2). In contrast, should the pay caps be

lifted without any change in FWS pay-setting practices, the raises

would average 10.6 percent over the same five-year period. Thus,

enactment of this option would avoid about $4.4 billion in FWS

payroll costs over the five-year period.

Over 90 percent of the payroll costs avoided would result

from repeal of the five-step within-grade advancement system and

its replacement with an "average-to-average" three-step system—

the most likely of the substitute step arrangements being considered by the Carter Administration. Under this system, those

now in steps four and five would revert to step three. Pay rates

would be set so that the average step for FWS employees would

provide pay equal to the average rate computed from the area wage

surveys of the nonfederal sector.

This three-step "average-to-average" advancement system

would initially introduce entry-level (step one) wage rates

about 7 percent below those in the private sector for comparable jobs. In contrast, the five-step system authorized under

current FWS statutes provides entry rates 4 percent below the

comparability norm in the absence of pay caps. While CBO could

find no substantive evidence of widespread recruiting problems, a

step system that reduces entry-level wage rates further below the

average in the nonfederal sector raises the risk that such

problems could arise in the future.

xvii

69-62 8 0-80- 3
Option II; Amend or Repeal the FWS Step Provision Only

The bulk of the payroll savings avoided in Option I result

from a change in the step advancement system. A less complicated,

but still substantive, legislative action would amend only Title 5

U.S.C. 5343(e), which prescribes the step advancement system for

FWS employees. By such an amendment, the Congress could direct a

return to the arrangement in effect prior to enactment of the FWS

statutes in 1972—the three-step system, with step two retained as

the comparability norm. This alternative would limit entry wages

to 4 percent below the comparability norm and provide a premium

at step three of no more than 4 percent above the norm. When

compared to the current, uncapped five-step system, this would

narrow the range of within-grade advancement and thus more closely

conform to private-sector practices.

Yet cumulative five-year savings under this option would be

$1.9 billion less than under Option I (see Table S-l). It would

produce lower savings because over 85 percent of the FWS work

force now at or above step three could still earn a 4 percent

premium. It would also offer a more favorable entry wage than the

"average-to-average" system under Option I.

Unfortunately, as the above discussion suggests, neither

of the step advancement systems proposed under Options I and

II produces an entirely satisfactory solution to the dual problem

of how to offer a competitive entry wage and at the same time

offer more selective wage premiums to reward tenure and experience. Should the Congress decide to adopt this option, it may

wish to explore with the Administration a broader range of pay

advancement alternatives covering not only the number of steps,

but also the pay differential between steps and the time in

service required to progress from one step to the next.

Option III; Cap Pay Raise in Fiscal Year 1981 at 9.1 Percent

In fiscal year 1981, the Congress has again chosen to

cap FWS pay raises, this time at the 9.1 percent level recommended by the Carter Administration. 2/ A continuation of pay

2j The joint resolution providing continuing appropriations for

fiscal year 1981 (P.L. 96-369) contained language prohibiting

annual increases in FWS hourly rates from exceeding the

increase authorized for General Schedule employees.

xviii
caps offers a legislatively expedient way to reduce further or

eliminate entirely any compensation premium now accorded FWS

employees. A 9.1 percent pay cap in fiscal year 1981 would reduce

but not eliminate the average hourly rate premium accorded FWS

employees over their nonfederal counterparts. CBO estimates that

FWS employees would still average about 4.8 percent above the pay

comparability norm. Obviously, a lower raise or a continuation of

pay caps would eventually eliminate this premium.

Five-year cumulative payroll costs avoided under this option

would amount to $2.8 billion. This option also assumes a return

to normal comparability pay raises beginning in fiscal year 1982.

Thus, the five-year average raise under this option would amount

to 9.4 percent.

While pay caps offer a legislatively expedient way to

reduce or eliminate a compensation premium and save large sums

of money, they create a number of difficulties:

o Across-the-board pay caps can distort the principle of

locality pay by conferring different shares of full

comparability raises in different wage areas. 3/

o Unlike selective use of the half-raise provision under

Options I and II, pay caps depress wages at all steps.

This can adversely affect recruiting when entry wages in

the lower steps drop well below the comparability norm.

o While pay caps made through the appropriations process

would offer a legislatively expedient device to limit this

compensation premium and save money, they would have to be

legislated each year; the budgetary consequences of

failing to approve a pay cap would grow year by year. 4/

3/ Using a 9.1 percent cap as an example, a wage area entitled

to a normal comparability raise of 9.5 percent would lose

only 0.4 percentage points, while an area entitled to a 10.0

percent raise would lose 0.9 percentage points.

kf An alternative legislative method for capping pay, enactment of permanent authorizing legislation that in effect

would lower the comparability payline to reflect prior

pay caps, would avoid the need for pay-cap language in

annual appropriation bills.

xix
By fiscal year 1985, the Congress would find the cost of

failing to cap pay beyond the normal comparability raise

surpassing $650 million.

Probably the most telling criticism of the use of pay caps

lies in their rigidity. The mechanism of pay caps fails

to provide managers with the flexibility necessary to

adjust compensation so as to reflect local labor market

conditions.

Option IV; Adopt the Carter Administration's Total Compensation

Proposal

This option addresses both pay and benefit issues simultaneously. In addition to the changes in pay-setting practices

in Option I, it would further adjust pay to reflect differences in

fringe benefit practices between the federal and nonfederal

sectors. Because the proposed legislation would prohibit downward

adjustment in benefit provisions during the first five fiscal

years, the changes in total compensation would be reflected only

in hourly pay.

If the President was permitted to bring total compensation

into alignment using the half-raise provision, almost $6.3 billion

in FWS payroll costs could be avoided in fiscal years 1981-1985.

To produce these savings, pay raises would be held to an average

of 7.8 percent over the five fiscal years, or about 2.8 percentage

points below the average full comparability raises projected under

current law.

While this option offers the prospect of saving over 10

percent in FWS payroll costs in the next five fiscal years,

it might produce certain undesirable effects:

o In order to bring total compensation into rough agreement

with the nonfederal sector, FWS employee pay raises would

have to lag behind prevailing increases in the nonfederal

sector during the first four years (see Table S-2).

Whereas in 1980 FWS employees would earn a 5.8 percent

hourly rate premium, by 1985 they would average 5 percent

below comparable nonfederal hourly rates. Moreover, entry

wage rates at step one would fall 14 percent below

prevailing nonfederal hourly rates—a factor that might

lead to recruiting and retention problems, especially

among younger workers for whom benefits such as pensions

are less important.

xx
o While FWS employees would continue to maintain an advantage in retirement benefits for five years, this

would be at the expense of the rest of the compensation

system. In order to offset the retirement advantage and

achieve overall equivalence in total compensation, hourly

pay rates and six of the seven major benefits would have

to lag behind the private sector by fiscal year 1985.

If the Congress chose to adjust benefits along with pay

at the outset, instead of prohibiting downward benefit adjustments

for five years, 5/ it would effectively eliminate the incremental

five-year savings of over $2 billion attributed to the inclusion

of benefits in determining compensation. This is because benefit

savings could not be generated in the next five years unless the

Congress decided to reduce retirement payments to current annuitants. Absent this action, there could be no savings in outlays

until those now employed reached retirement. Moreover, almost all

private-sector retirement programs require no contribution from

the employee; if the federal program were also made noncontributory, it would raise agency retirement costs in the short run.

Option V; Cap Annual Pay Increases at 7.8 Percent Through Fiscal

Year 1985 to Offset Total Compensation Premium

Under this option there would be no reform of pay-setting

practices. But it implicitly recognizes the premiums in both pay

and benefits and seeks to offset them through pay caps. A capped

raise of 7.8 percent annually was chosen because this equals the

average raise granted over the five-year period under Option IV,

the Carter Administration's total compensation proposal.

The cumulative five-year savings amount to about $5.1

billion, $1.2 billion less than in Option IV (see Table S-2). The

larger savings under Option IV can be attributed to the sharp

decline in pay raises at the outset of the five-year transition.

The criticisms leveled at the use of pay caps under Option

III carry even greater weight under this option because it would

5/ The Administration would retain the authority to improve

benefit provisions during the first five years, although such

an action would further depress pay levels in an effort to

bring total compensation in line with the nonfederal sector.

xxi
establish a long-term policy of across-the-board limits on pay.

As under Option IV, average pay would fall 5 percent below

prevailing nonfederal rates by fiscal year 1985, and entry-level

step one rates would slide to 15 percent below the comparability

norm. Unless authorizing legislation permanently froze pay levels

at the new capped rate each year, there would be a risk that the

Congress might fail to impose a pay cap annually through the

appropriations process. Such a failure could jeopardize the

entire $5.1 billion in savings generated over the first five

years.

DEVISING AN EFFECTIVE COMPENSATION SYSTEM FOR THE FWS WORK FORCE

The decade of the 1970s witnessed a substantial decline in

the size of the FWS work force; hence, personnel policies placed

less emphasis on recruiting and assured an aging (although more

experienced) work force with a high proportion of employees now

eligible to retire. The challenge of the 1980s will be to devise

a compensation system that maintains comparability, supports the

growing recruiting and retention needs of the FWS work force, and

avoids adverse competitive effects on employment in the nonfederal

sector. None of the alternatives in this study meets all these

criteria, but each has some merits. Each also results in cost

savings, though savings need not be the primary goal.

xxii
CHAPTER I. INTRODUCTION

The Federal Wage System provides the statutory authority

(5 U.S.C. 53) under which federal agencies set hourly wage

rates and classify positions for over 400,000 trade, craft,

and labor employees. These federal blue-collar workers (generically identified here as FWS employees) earn hourly rates based

on surveys of wages for similar occupations in local private

industry. I/

Statutory authority mandating a system of local pay scales

for federal blue-collar workers can be traced back to 1862, when

the Congress passed a law requiring the Secretary of the Navy to

set wages in conformance "... with those of private establishments in the immediate vicinity." _2/ Over time, other federal

agencies adopted locality-based hourly wage systems for their

blue-collar employees. In doing so, however, each federal

agency developed its own procedures; a morass of rate differentials evolved, creating a controversy as to the equity and

validity of the comparability process. _3/

I/ Since private industry wages for similar work vary from one

geographic labor market to the next, the federal government

attempts to emulate this pattern of prevailing rates by

establishing separate pay schedules for 135 wage areas across

the nation. For instance, in 1977 FWS employees in the Boston

wage area earned about 15 percent less than those in the San

Francisco region for similar occupations. M.A. Coursen

and K.R. Powell, Wage Grade Civilians in DoD; Manpower

Profiles and Compensation, Technical Report No. 396 (Presearch, Inc., January 1979), p. 58.

2/ U.S. Civil Service Commission, Challenge and Change; Annual

~~ Report 1968, p. 27.

_3/ In 1967, Senator Monroney, then chairman of the Senate Committee on Post Office and Civil Service, noted: "There are

now about 60 different agency systems in the Executive Branch

for determining Wage Board pay rates." Wage Board Employees,

S. Rept. 592, 90:1 (October 1967), p. 1.
OBJECTIVES AND ORGANIZATION OF THE FEDERAL WAGE SYSTEM

To simplify and standardize federal blue-collar pay practices, the government in 1968 adopted the Coordinated Federal Wage

System. The major features of this system were enacted by

the Congress in 1972, giving explicit statutory status to the

following four principles:

o All agencies will provide equal pay for substantially

equal work in a given wage area.

o Pay differentials within a given wage area will be based

upon substantial or recognizable differences in duties,

responsibilities, and qualification requirements.

o Pay rates will be in line with prevailing levels for

comparable work within a wage area.

o Pay rates will be sufficient to attract and retain qualified employees.

In an effort to comply with these objectives, the current

Federal Wage System utilizes three regular pay plans and about

20 special plans. The three regular plans—nonsupervisory,

leader, and supervisory—cover over 90 percent of the FWS work

force, 15 percent of whom are in supervisory status. The few

covered by the special pay plans consist of apprentices in

training or workers with unique specialties such as lock and dam

operators.

All FWS jobs are "graded"—that is, relevant private-sec tor

wage data determine the grade of each occupation. The nonsupervisory and leader pay plans each contain 15 pay grades ;

the supervisory plan, 19 grades. In each plan, rates differ

from one grade to the next by approximately 40 cents per hour. An

employee in Grade 12, for example, would earn about $1.60 more

per hour than an employee in Grade 8. The multiplicity of

grades reflects the diversity in hourly rates among the many

comparable occupations in the private sector. Unlike the grades

of the General Schedule, the FWS grades were not designed as a

plan for individual career progression. A Grade 7 truck driver,

for example, cannot expect to progress to a higher grade unless he

qualifies for and becomes employed in a higher-grade occupation,

such as Grade 10 electrician.
Aside from the normal annual comparability raise, employees

can receive up to five within-grade step increases equivalent to a

4 percent raise for each step. For the vast majority of FWS

employees who reach journeyman status, step progression represents the only means of pay advancement.

CRITICISMS OF THE FEDERAL WAGE SYSTEM

While the present Federal Wage System provides a marked

improvement over past practices, there remain two general criticisms of it:

o Local wage surveys show that pay-setting and within-grade

advancement practices give FWS employees higher average

hourly rates than those prevailing in the nonfederal

sector.

o Wages alone are not a valid standard of comparison.

Fringe benefits must also be taken into account, since

they constitute a sizable share of compensation for both

public and private employees.

Since the enactment of the Federal Wage System in 1972,

successive administrations have proposed amending the statute to

deal with the first criticism. The Carter Administration has

proposed legislation directed at the second criticism as well,

through adoption of a total compensation comparability process. f\l

FRAMEWORK OF THIS REPORT

This report evaluates the Carter Administration's legislative

proposal and examines other options the Congress may wish to

consider. Chapter II summarizes the criticisms leveled at the

pay-setting practices of the present Federal Wage System, and

presents CBO's findings in this area. Chapter III describes the

Carter Administration's approach to including fringe benefits in

the comparability process and summarizes fringe benefit practices

On June 6, 1979, the President forwarded to the Congress

a bill entitled "Federal Employees Compensation Reform Act of

1979." This legislation would apply to both General Schedule

(white-collar) and FWS employees.

69-628 0 - 80 - 4
in the private sector, especially retirement benefits. Chapter IV

explores the disparities in total compensation by comparing the

pay and benefits provided to FWS employees with those of their

counterparts in private industry. The last chapter analyzes

options ranging from complete adoption of the Carter Administration's proposal to continuation of the current policy.
CHAPTER II. CRITICISMS OF THE PAY-SETTING PRACTICES OF THE

FEDERAL WAGE SYSTEM

Since the enactment of the Federal Wage System in 1972,

several studies have presented evidence that FWS employees

receive higher hourly wages than nonfederal employees earn

for comparable jobs. !_/ They attribute this to four statutory

provisions of the Federal Wage System:

o The five-step within-grade advancement system that

provides hourly pay rates ranging from 4 percent below

to 12 percent above the survey average for comparable

private-sector employment;

o The requirement to import out-of-area wage data when an

insufficient sample exists for a surveyed occupation;

o The application of a uniform night-shift pay-rate differential, regardless of local private industry practices;

o The exclusion of certain workers, such as state and local

government employees, from the wage surveys.

THE WITHIN-GRADE STEP SYSTEM

The administrative arrangements under the Coordinated

Federal Wage System in force during the period 1968 to 1972

specified three pay steps for each FWS grade, with advancement

based on longevity. Each step provided a 4 percent pay differential, with step two pegged as the "reference step," or the

step that received the average wage in private industry according

I/ General Accounting Office, Improving the Pay Determination

Process for Federal Blue-Collar Employees, FPCD-75-122 (June

1975), p. 6, and Staff Report of the President's Panel on

Federal Compensation (January 1976), pp. 107-21.
to the local wage surveys. 2J Thus, an employee may enter a

grade at step one, earning 96 percent of the private industry

average, and eventually progress to step three, earning 104

percent of the comparable private-sector rate.

Hourly Rate Premium Attributed to the Change from a Three- to a

Five-Step System

When the Congress enacted the Federal Wage System in 1972,

it included a provision expanding the number of within-grade

steps from three to five. This provision represented, in part,

a compromise between union representatives, striving for a

10-step system patterned on the General Schedule, and the Administration, preferring no statutory specification of withingrade steps.

Step two remained the reference step, and a 4 percent

differential was retained for each successive step. In contrast

to the maximum 4 percent premium available under the former

three-step system, the five-step system allows FWS employees an

opportunity to earn up to a 12 percent hourly wage premium (step

five). With relatively low turnover, and step progression

occurring at designated tenure points prescribed by statute, more

than half the FWS work force had moved into step five by 1977 (see

Table 1). In fiscal year 1978, for example, FWS wages would have

exceeded the average private-sector wage computed from the

local surveys by 7.8 percent, costing $650 million, had not two

successive pay caps in fiscal years 1979 and 1980 cut this premium

by more than half. 3/

2J The Federal Wage System includes three regular pay plans plus

a number of special plans. Over 80 percent of FWS employees

are in the nonsupervisory regular pay plan. Each pay plan

contains up to 19 grades with five (originally three) steps

for each grade.

_3/ The 7.8 percent premium is the weighted average of the last

two columns in Table 1. The $650 million cost estimate

represents 7.8 percent of the estimated $8.3 billion FWS pay

costs for fiscal year 1978. Note that these figures do not

represent the savings that might be achieved by a return to a

three-step pay system.
TABLE 1. AUTOMATIC STEP PROGRESSION PATTERN FOR FWS EMPLOYEES

Step

One

Two

Three

Four

Five

Number of

Years in Grade

to Next Step

0.5

1.5

2.0

2.0

"~

Percent of

Comparable Private -

Sector Pay Rate

96

100

104

108

112

Percent of

FWS Employees

in Each Step a/

4

10

17

13

56

SOURCE: M.A. Coursen and K.R. Powell, Wage Grade Civilians in

DoD; Manpower Profiles and Compensation (Presearch Inc.,

January 1979), p. 17.

a/ Based upon data covering all FWS employees in the Department

of Defense; these employees constitute about 80 percent of all

FWS employees.

Five Steps Not Comparable with Private Industry Practices

Current and past Administrations have contended that the

five-step system, besides producing an excessive and costly

wage premium, does not reflect private industry rate structures.

Although there appear to be no comprehensive surveys of private

industry step rate structures, the available evidence suggests

that less than half of private industry firms maintain a multiplestep rate structure. For example, a Bureau of Labor Statistics

analysis of 750 collective bargaining agreements covering manufacturing industries in July 1976 revealed that fewer than 45

percent had a multiple-step rate structure. _4/ A 1971 Civil

Service Commission survey of 35 federal wage areas (a 25 percent

47 U.S. Department of Labor, Bureau of Labor Statistics, Characteristics of Major Collective Bargaining Agreements, July 1,

1976, Bulletin 2013 (February 1979), p. 31.
sample) found that about one-third of the establishments surveyed

maintained a multiple-step rate structure. 5/

FWS Range in Pay per Grade Broader than Private Industryys

Limited evidence from surveys reporting on multiple-step rate

structures in private industry suggests fewer steps than in the

Federal Wage System, with a smaller range in pay from the lowest

to highest step. The Civil Service Commission study referred to

earlier found the most common multiple-step rate structure to be a

three- or four-step system, with a 12 percent range in pay from

the lowest to highest step. 6/ Other, more recent reviews of

individual wage areas suggest similar or somewhat less generous

step rate structures. TJ

Even though the 16 percent hourly rate range for each grade

under the Federal Wage System appears to exceed the typical bounds

for private industry, the FWS wage premium could be reduced by

slowing advancement rates through the various steps. The degree

to which this approach would succeed, however, would depend on its

effect on retention patterns. At best, low turnover only delays,

but does not eliminate, a return to a high concentration of

employees in the upper pay steps.

5/ Unpublished study, "U.S. Civil Service Commission Study

of Use of Step Rates and Rate Ranges in Private Industry,"

cited in Federal Blue-Collar Wage Determinations, Hearings

before the Subcommittee on Compensation and Employee Benefits,

House Committee on Post Office and Civil Service, 95:1 (AprilDecember 1977), p. 249.

6/ Ibid. The Bureau of Labor Statistics study cited in footnote

4 provided no data on rate or step ranges, but did indicate

that over 85 percent of employers surveyed used an automatic

step progression scheme or some combination of merit and

automatic progression.

TJ For example, in 1973 the General Accounting Office discussed

pay practices with officials of 172 private establishments in

11 federal wage areas and found that 60 percent of their

employees were paid from schedules with three or fewer steps.

General Accounting Office, Improving the Pay Determination

Process for Federal Blue-Collar Employees, p. 6.
OUT-OF-AREA WAGE SURVEY DATA

The second criticism leveled at the pay-setting practices

under the Federal Wage System concerns the requirement to import

pay rate data from another wage area when the survey sample

for certain specialized occupations (such as aircraft technician) proves insufficient. This provision, commonly referred

to as the Monroney amendment, requires that data be imported

from the ".. . nearest wage area that .. . is most similar

in the nature of its population, employment, manpower, and

industry. . . ." 8/

This requirement occasionally results in FWS wages in small

cities and rural areas being based, in part, on private-sector

wages in more costly big-city areas. (For example, Macon,

Georgia, wages are based in part on data from Atlanta.) Under

Office of Personnel Management regulations, these imported data

cannot be used to lower any wage. The imported data raise

wages for all employees of a given grade in the wage area, not

just for those in the specialized occupation. 9/ In 1979, the

Monroney amendment raised wages in 20 of the 135 wage areas,

benefiting about 25 percent of the FWS work force. 10/ DoD

JJ/ Title 5 U.S.C. 5343(d). Former Senator Monroney, Chairman

of the Senate Committee on Post Office and Civil Service,

originally introduced the amendment in 1968. It became

law under P.L. 90-560. The amendment was rewritten and

incorporated into the 1972 Federal Wage System legislation.

91 This phenomenon results from Federal Wage System regulations

that require incorporation of the imported data into the

survey data base prior to construction of the local area

FWS payline. Thus, including in Grade 10 the pay of aircraft technicians whose pay rate is determined in part by

out-of-area data results in a revised (and often higher) pay

rate for all employees in Grade 10. Moreover, all grades

(through 15) can be affected by the increase because of the

desire to maintain a uniform differential in pay rates among

all grades.

10/ Of the 20 wage areas benefiting, Macon, Georgia, accounts

for over one-third of the cost of the Monroney provision,

although employing less than 10 percent of FWS employees

benefiting from the provision.
has estimated the cost of this provision at $59 million in fiscal

year 1979. ll/

UNIFORM NIGHT-SHIFT DIFFERENTIAL

A statutory provision of the Federal Wage System [5 U.S.C.

5343(f)] mandates a uniform night-shift differential over prevailing hourly rates equivalent to 7.5 percent when the majority

of the hours fall between 3:00 p.m. and midnight. When the

majority of the hours occur between 11:00 p.m. and 8:00 a.m., the

hourly wage rate differential increases to 10 percent. Before

enactment of the 1972 FWS legislation, night-shift differentials

were determined in accordance with prevailing practices in the

local wage area. The Carter Administration has recommended a

return to the pre-1972 practice.

Surveys of Private-Sector Practices

Federally sponsored surveys of private industry indicate that

most companies pay a cents-per-hour shift differential rather

than a percentage of base pay as in FWS employment. Where a

private firm uses a percent-of-base-pay differential, however, the

percentage (7 percent evening, 10 percent night work) approximates

the statutory provision of the FWS (Table 2).

The few private industry employees receiving a uniform

percent-of-pay differential earn a substantial premium over

those on a uniform cents-per-hour standard. For example, the

average 7 percent evening-shift differential equates to 45 cents

per hour under current hourly wage rates—two and one-half

times the average amount paid those receiving a cents-per-hour

differential.

In spite of the differential, the average private-sector

hourly wage earned by male employees working on evening or night

shifts actually falls below the average wage earned by day-shift

11 / While this estimate represents less than one percent of the

total FWS budget, it affords some workers a significant wage

premium. FWS employees in the Macon, Georgia, area, for

instance, receive an approximate 15 percent premium because

of the Monroney amendment.

10
TABLE 2. SUMMARY OF SHIFT DIFFERENTIAL PROVISIONS FOR PLANT

WORKERS IN MANUFACTURING INDUSTRIES

Evening

Shift

Night

Shift

Percent of All Plant Workers on Shifts a/ 19

Percent of Shift Workers Earning:

Uniform cents-per-hour differential

Uniform percent-of-pay differential

Other

64

33

3

74

20

6

Value of Differential

Average cents per hour b/

Average percent of pay

18

7

23

10

SOURCE: U.S. Department of Labor, Bureau of Labor Statistics,

Area Wage Surveys; Metropolitan Areas, United States and

Regional Summaries, 1976, Bulletin 1900-82 (August 1979),

pp. 90-91, 98.

a/ The May 1978 Current Population Survey shows that about 20

percent of employees in blue-collar occupations work on

evening or night shifts. Craftsmen experience the lowest

percentage of shift work (16 percent), while laborers in

manufacturing industries experience the highest (27 percent).

J.P. Hedges and E.S. Sekscenski, "Workers on Late Shifts

in a Changing Economy," Monthly Labor Review (September

1979), p. 18.

b/ Adjusted to reflect 1979 wage rates and cents-per-hour

provision. Assuming that the 5 percent historical growth

rate for the period 1968 to 1976 continues through 1979,

this amounts to 3 and 4 percent of pay for evening and

night shifts, respectively—much less than the differential received by workers earning a uniform percent-of-pay

differential.

11
workers (Table 3). The reasons appear to lie in differences

in the occupation and experience mix of the work forces on the

various shifts. For example, evening-shift workers are typically

younger, have less experience, and are more predominant in

semiskilled and unskilled jobs than day workers. 12/

TABLE 3. MEDIAN HOURLY EARNINGS OF MALE FULL-TIME NON-FARM WAGE

AND SALARY WORKERS BY SHIFT, MAY 1978 a/

Day Shift Workers

Union Status Workers Evening Night

Covered by

Union Contract 7.05 7.00 7.05

Not Covered by

Union Contract 4.56 4.28 4.27

SOURCE: May 1978 Current Population Survey as reported in J.P.

Hedges and E.S. Sekscenski, "Workers on Late Shifts in a

Changing Economy," Monthly Labor Review (September

1979), p. 20.

a/ Earnings of males paid at hourly rates. Not all workers

reported their union status.

Amount of FWS Shift Premium

About 4 percent of FWS employees work on evening or night

shifts, a considerably smaller proportion than their private12/ J.P. Hedges and E.S. Sekscenski, "Workers on Late Shifts in a

Changing Economy," Monthly Labor Review (September 1979),

p. 18.

12
sector counterparts in similar occupations. 13/ CBO estimates

that shift differential pay for FWS employees will cost $30

million in fiscal year 1980. 14/ If the shift differential

reflected private industry practices as given in Table 2, with

respect to the proportion of workers earning cents-per-hour

differentials, the night-shift premium would be reduced by

one-half, or $15 million in fiscal year 1980 dollars.

EXCLUSION OF STATE AND LOCAL GOVERNMENT EMPLOYEES FROM THE

SURVEY

The Federal Wage System provides that "wages surveyed be

those paid by private employers in the wage area for similar

work" [5 U.S.C. 5343(c)]. Critics of this statutory provision

contend that the exclusion of state and local government employees

from the area wage surveys results in an overstatement of actual

wages in the nonfederal employment sector. 1J5/

This assumes that the relevant nonfederal work force contains

appreciable numbers of state and local government employees

13/ This 4 percent estimate was calculated on the basis of

night-shift differential costs amounting to about 0.3 percent

of total FWS pay costs for fiscal year 1980 and a weighted

average differential pay of 8.25 percent for those on night

work. Dividing the total night-shift pay differential cost

by the estimated annual amount per employee yields the number

of employees engaged in night work (that is, 4 percent of all

FWS workers). While no public records are available on the

prevalence of FWS night-shift work, the May 1978 Current

Population Survey indicates that 8 percent of all federal

(non-postal) civilian employees work on evening or night

shifts.

14/ Computed from U.S. Civil Service Commission, Work-Years and

Personnel Costs ; Executive Branch of the United States

Government, Fiscal Year 1977 (August 1978), pp. 6, 10,

42.

15/ Before enactment of the Federal Wage System in 1972, state

and local government employees were included in the wage

survey. These workers tended to be included in surveys of

those areas dominated by local government employment.

13
with average hourly rates below those of their private-sector

counterparts. But state and local government employees make up

less than 8 percent of nonfederal blue-collar employees. 16/ Even

significant wage differences between state and local government

employees and federal employees would be of little weight in area

wage surveys when pooled with data from the private sector.

Wage Differences with the Private Sector

CBO's examination of the Current Population Survey for

March 1978 revealed that state and local government blue-collar

workers employed in occupations similar to FWS occupations earned

about 15 percent less than their counterparts in the private

sector. Their comparatively small number, however, minimizes

their influence on the average nonfederal (that is, private

plus state and local) wage. The 15 percent wage disadvantage

translates into a net reduction of about 1.2 percent in the

average nonfederal blue-collar wage when they are included.

But 1.2 percent of a 1980 wage bill of over $9.9 billion could

mean a saving of over $100 million.

Effect on FWS Wage Rates Not Uniform

While the inclusion of state and local government wage data

in the survey would offer the prospect of significant savings, the

direction and magnitude of the wage effect would not be uniform

for all geographic locations and occupations. The data in

Table 4 show that the largest net decline in nonfederal-sec tor

average wages would occur in the South and among craftsmen working

in the construction trades.

The General Accounting Office, in its 1975 report on FWS

pay practices, noted the significant, albeit far from uniform,

effect on wage data of including appropriate state and local

government occupations in the survey. For example, a doubling of

survey job matches (blue-collar only) occurred in the Augusta,

16/ CBO tabulations of the March 1978 Current Population Survey.

Data pertain to full-time workers in 34 three-digit occupation groups containing at least 5,000 federal blue-collar

employees identified in the survey, excluding those in the

construction industry.

14
TABLE 4. PERCENTAGE CHANGES IN AVERAGE FWS EARNINGS WHEN STATE

AND LOCAL GOVERNMENT DATA ARE ADDED TO PRIVATE-SECTOR

WAGE DATA, SELECTED OCCUPATIONS

Selected Two-Digit

Occupation Groups

Foremen

Auto Mechanics

Mechanics,

Except Auto

Craftsmen in

Construction Tasks

All Other

Craftsmen

Drivers ,

Deliverymen

All Other,

Manufacturing

Northeast

-0.80

1.38

-0.15

-1.26

-0.49

0.56

0.70

North

Central

-0.18

-0.48

-0.82

-1.88

-0.07

-3.81

-1.18

South

-0.72

NA

0.63

-5.30

-1.46

-0.27

-3.63

West

-0.75

1.61

0.27

-2.13

0.58

-0.76

-0.42

SOURCE: CBO tabulations of the March 1978 Current Population

Survey. Data pertain to full-time workers, except those

in construction industries.

Maine, wage area when state and local government employees were

included. 17/ This suggests that the inclusion of state and

local government wage data could have substantial effects on

comparability pay levels in certain isolated instances.

17/ General Accounting Office, Improving the Pay Determination

Process for Federal Blue-Collar Employees, p. 18.

15
OTHER CONCERNS OVER THE SURVEY PROCESS

The exclusion of state and local government workers is

one facet of a somewhat broader concern over coverage in the

survey sample. The roster of private-sector jobs surveyed

has been a source of controversy. For example, the Carter

Administration has resisted efforts by FWS employee unions to

require inclusion of construction industry wage data, contending

that their highly seasonal employment pattern and high wage rates

would tend to distort the comparability payline. Nevertheless,

recent evidence suggests that restructuring the wage sample

would improve survey coverage while reducing the administrative

burden. 18/

Another matter of concern has been the statistical technique

employed to construct a comparability payline from the sample

wage data. Experimentation with various curve-fitting techniques

shows that no single approach produces a best-fit payline for all

wage areas. 19/

Although changes in survey scope and statistical techniques

would be likely to shift the comparability payline in some

wage areas, the net effect nationwide is very uncertain. CBO has

not performed an independent analysis to estimate the budgetary

effects of these other survey issues.

18/ C. Forrest Gilliam and others, Study to Improve the Administrative Procedures of the Federal Wage System, Report

1078-02-79-CR (General Research Corporation, August 1979).

19/ The Administration currently uses linear least-squares

regression to construct a linear payline (that is, a payline

with constant wage differences from one pay grade to the

next). In the statistical sense, this method does not

always provide the most accurate portrayal of the wage-rate

pattern derived from the survey. Other, nonlinear curvefitting techniques, or applications of linear techniques to

transformed nonlinear data, might produce better fits. See,

for example, Linda Pappas, Jerry Allen, and others, Wage

Grade Payline Study, Report 1078-01-79-CR (General Research

Corporation, May 1979).

16
CHAPTER OVERVIEW

This chapter examined four criticisms of the FWS pay-setting

provisions, the most significant being that of the five-step

within-grade advancement system. Few, if any, private firms

offe r such an elaborate step system. Moreover, the majority

of FWS employees are now in steps four and five, entitling

them to hourly rates as much as 12 percent above the average

private-sector rates for comparable jobs.

The three other criticisms were directed at the use of

out-of-area wage data, the uniform night-shift differential, and

the exclusion of state and local government wage data. These have

a less pervasive impact on FWS wage rates than the within-grade

step advancement system. Repealing the Monroney amendment, which

permits out-of-area wage data to be utilized when computing

prevailing rates, would affect the pay of 20 percent of the FWS

work force. The uniform night-shift differential is at variance

with private-sector practices, although fewer than 4 percent of

FWS employees work on evening or night shifts. The inclusion

of state and local government wage data, now prohibited by FWS

statute, would tend to reduce by 1.2 percent the average wage rate

used as a comparability norm, although the impact could vary

substantially from one survey area to the next.

Finally, legitimate questions can be raised about the methods

used to assemble a sample of nonfederal-sector wage data and the

statistical techniques employed to construct the comparability

payline. While there seem to be opportunities for improvement,

the net effec t of such survey changes on the level of wages

remains unclear. CBO has assumed throughout this analysis

that the present comparability payline is a reasonably close

approximation of nonfederal-sector wage rates for similar FWS

occupations, except for its failure to include state and local

government wage data.

17

CHAPTER III. INCLUSION OF FRINGE BENEFITS IN THE COMPARABILITY

PROCESS: THE CARTER ADMINISTRATION'S APPROACH

Proposals to apply the principle of comparability to pay

as well as benefits were made even before the enactment of the

Federal Pay Comparability Act of 1970. At that time, however,

federal fringe benefit costs were much smaller than they are

now; and they were less, as a percentage of payroll, than those

in the private sector. Several recent studies of federal compensation have again recommended extending the principle of

comparability to benefits. I/ This would raise several issues of

policy: the role of the Congress in adjusting federal pay and

benefits; whether pay and benefits should be considered together

or separately; and what sort of guidance the Congress should give

in implementing the changes. These policy issues have been

examined at length in a CBO companion paper on white-collar

compensation reform. 2/ This chapter explains how the Carter

Administration proposes to treat benefits in its compensation

reform bill, and notes a number of simplifications that could

become a source of concern to the Congress.

MEASURING THE VALUE OF BENEFITS: THE CARTER ADMINISTRATION'S

APPROACH

The Carter Administration's bill proposes to include fringe

benefits in the comparability process for all federal nonmilitary

I/ Report to the President of the President's Panel on Federal

Compensation (December 1975); The President's Reorganization

Project, Personnel Management Project, Final Staff Report,

Volume 1 (December 1977); General Accounting Office, Need For

a Comparability Policy for Both Pay and Benefits of Federal

Civilian Employees, FPCD-75-62 (July 1975); and Civil Service

Commission, Bureau of Policies and Standards, Total Compensation Comparability (October 1975).

2/ Congressional Budget Office, Compensation Reform for Federal

White-Collar Employees; The Administration's Proposal and

Budgetary Options for 1981, Background Paper (May 1980).

19
personnel. Both FWS and General Schedule employees would receive

compensation adjustments based upon combined surveys of pay

and fringe benefits. During the first five years, no change

in fringe benefit provisions lowering their value would be

permitted; thereafter, pay and most fringe benefits could be

adjusted to achieve arid maintain total compensation comparability. 3_/ Thus, if surveys indicated total compensation of

FWS employees was higher than that of their counterparts in

the nonfederal sector, adjustments could be made only in the

form of smaller pay raises during the first five years after the

bill's enactment.

How would the value of benefits be measured? The Office of

Personnel Management (0PM) intends to develop a standardized set

of cost and benefit provisions using data collected by the Bureau

of Labor Statistics (BLS). 0PM would calculate a cost for

each benefit provision from a BLS nationwide sample of 1,500

establishments, and weight the results by the respective number of

plan participants in order to derive a standardized, nationwide

per-capita cost for each benefit. The cost calculations would

incorporate a common set of economic and actuarial assumptions

applied against the population characteristics of a standard

federal work force. The resulting weighted-average fringe

benefit cost per employee would be included with wage survey data

to arrive at total compensation amounts for employees in the

nonfederal sector. _4/

Supporters of this approach contend that fringe benefits

are such a significant part of compensation in both the federal

and nonfederal sectors that they should be included in the

comparability process. Others, skeptical of this approach, argue

that the technical difficulties in identifying and measuring the

worth of fringe benefits so as to adjust both pay and benefits in

a valid, equitable manner may exceed the skill and ingenuity

_3/ The bill provides no authority to alter the federal retirement program, however. General Schedule and FWS employees

participate in the same retirement program and generally

have identical provisions in other fringe benefit categories .

_4/ For a more complete description of the methodology, see

Office of Personnel Management, "A Conceptual Framework for

Total Compensation Comparability" (June 20, 1979; processed).

20
of any organization, public or private. The Carter Administration

acknowledges that past data on private-sector fringe benefits

have been inadequate for this purpose. Recently, however, it

has gathered more comprehensive data that it believes would be

sufficient. 5/

GROWTH AND DIVERSITY IN PRIVATE-SECTOR FRINGE BENEFITS; A MAJOR

CHALLENGE TO THE CARTER ADMINISTRATION'S APPROACH

Even if the Administration succeeded in collecting reliable and comprehensive data on fringe benefits, it would face

a number of other challenges in using them to adjust pay and

benefits.

Difficulty in Keeping Pay and Benefits in Proper Balance

As noted earlier, the Carter Administration proposes to make

federal compensation comparable with nonfederal compensation by

estimating the worth of benefits and then adjusting pay in the

first five years to offset any federal advantage in benefits.

This approach, while offering potentially large and immediate

payroll savings, could further distort the relationship between

pay and benefits. Benefit provisions would remain frozen, in

spite of the fact that fringe benefits in the private sector

5/ Until recently, the Bureau of Labor Statistics gathered

data on fringe benefits in the private sector in two surveys.

These represent the prime source of information used in this

report. First, the Area Wage Surveys, conducted biennially in

about 60 metropolitan labor markets, serve private industry

by providing detailed wage and salary data on a wide range of

occupations. The reports also include supplementary data on

fringe benefits. Second, the Employee Compensation in

the Private Nonfarm Economy series surveys over 4,000 private

establishments biennially and provides more comprehensive

coverage and greater detail on employer fringe-benefit

costs. This latter survey, last conducted in 1978, has been

replaced by a revised survey intended to provide the Office of

Personnel Management with the data necessary for implementing

a total compensation comparability process for federal

employees.

21
comprise a significant and growing share of total compensation. 6/

For example, over the decade 1966 to 1976, pay for hours worked in

manufacturing grew by 6.8 percent annually, while fringe benefit

costs grew at an 11.5 percent rate. TJ In the short run, such

rapid growth in private-sec tor benefits will tend to moderate the

need for limits on FWS pay raises to achieve total compensation

comparability. But over the long run, the Administration may be

pressed to upgrade nonretirement benefit provisions at the expense

of comparability in pay.

If the present trend continues, employer fringe benefit

payments for blue-collar workers in manufacturing will increase

from about one-^quarter of total compensation in 1976 to one-third

by the early 1980s. 8/ A number of factors probably contribute to

this trend:

o Rapid increases in program costs over which employers have

little or no control. Health care and Social Security are

two examples of program costs that have grown faster

than wages and other prices over the past decade.

6/ For purposes of this study, fringe benefits include retirement, Social Security, health and life insurance, sick leave,

and vacation/holiday leave. While the private sector offers a

broader range of benefits, the benefit categories used in this

study appear to represent those most commonly offered to

blue-collar employees and constitute almost all of employer

benefit costs.

7J From data on blue-collar compensation in manufacturing in the

BLS survey series Employee Compensation in the Private Nonfarm

Economy, reported in U.S. Department of Labor, Bureau of Labor

Statistics, Handbook of Labor Statistics 1978 (June 1979), pp.

394-95.

8/ Recent evidence indicates that the pace has accelerated. The

United Auto Workers' settlement with General Motors has been

estimated to raise unit labor costs by one-third, from $15 to

$20 per hour, over the next three years. Fringe-benefit

improvements were the focal point of contract negotiations.

Most notable were an automatic full cost-of-living allowance

for retirees, expected to add 40 percent to annuities, and

an increase in paid leave days from 12 to 26 over the next

three years.

22
Revisions in accounting procedures and funding requirements, especially for retirement, that may reflect more

accurately the full cost of programs. The Employee

Retirement Income Security Act (ERISA) of 1974 was

intended, among other things, to improve cost accounting

procedures for federal tax reporting purposes.

Improved benefits for employees, notably more paid holidays and longer vacations. The spread of dental insurance

programs is another example.

Efforts to minimize the employer and employee tax burden

by diverting more of compensation into tax-exempt or

tax-xieferred benefits such as health insurance or retirement, with proportionately less going to wages. The

efforts seek to avoid or defer not only federal income

taxes, but also other taxes such as Social Security and

state and local taxes.

National Norms for Fringe Benefits May Dilute the Principle of

Comparability

The Carter Administration's proposal to adopt a national norm

for nonfederal fringe benefits masks the considerable diversity in

benefit provisions and employee participation along a number of

important dimensions. Large variances around the computed norm

make it less likely that a national benefit provision would be

representative of local prevailing practices.

The growing share of total compensation allocated to fringe

benefits varies by industry and by occupation, as shown in

Table 5. White-collar workers generally receive relatively more

benefits than blue-collar workers, and manufacturing industries

generally pay a larger share of employee compensation as fringe

benefits. Since manufacturing industries employ workers in

occupations similar to those under the Federal Wage System, this

segment of private industry should exert the greatest influence on

comparability measurements.

Larger firms, as would be expected, generally offer more and

better benefits. For example, hours of paid leave as a percentage

of total employed hours increase with firm size for both whiteand blue-collar workers (see Table 6). Employers support health

and life insurance for almost all employees in large (more than

500 employees) manufacturing firms, while fewer than 40 percent of

23
TABLE 5. FRINGE BENEFITS AS A PERCENTAGE OF TOTAL COMPENSATION

Manufacturing Nonmanufacturing

Year White-Collar Blue-Collar White-Collar Blue-Collar

1966 20 18 17 15

1976 27 25 23 20

SOURCE: U.S. Department of Labor, Bureau of Labor Statistics,

Handbook of Labor Statistics 1978 (June 1979), pp. 385,

393.

those employed in small (fewer than 100 employees) nonmanufacturing companies receive such benefits (Table 7).

Major Differences Between Federal and Private-Sec tor Retirement

Programs Would Create Implementation Problems

Of all federal fringe benefits, the Civil Service retirement

program is the most costly, and perhaps the most valuable from the

employee's viewpoint. 9/ Yet the Carter Administration proposes

to exempt this benefit permanently from any adjustment, while

incorporating its actuarial cost in the measure of total compensation. Since retirement constitutes a significant benefit,

its inclusion in the comparability measurement process could have

a sizable effect on pay levels.

An examination of their demographic profile shows why FWS

employees would perceive this benefit as more valuable than

others, and in part explains the Carter Administration's reluctance to alter retirement provisions. In the Department of

Defense, for instance, full-time nonsupervisory FWS employees

_9/ By CBO's estimate, retirement accounts for over one-half of

FWS employee benefit costs and about one-third of privatesector blue-collar benefit costs. The next chapter elaborates

on the cost distinctions among various benefits.

24
TABLE 6. PAID LEAVE AS A PERCENTAGE OF TOTAL WORK HOURS IN

MANUFACTURING INDUSTRIES, 1974 (By firm size)

White -Collar

Blue-Collar

Fewer than

100 Employees

7.1

5.5

100-500

Employees

8.6

7.2

More than

500 Employees

11.1

10.0

All

Sizes

9.6

8.1

SOURCE: U.S. Department of Labor, Bureau of Labor Statistics,

Employee Compensation in the Private Nonfarm Economy,

1974 (1977), p. 46. These figures include vacation,

holiday, sick, and personal leave.

TABLE 7. PERCENTAGES OF EMPLOYEES RECEIVING COMPANY-SUPPORTED

LIFE AND/OR HEALTH INSURANCE IN MANUFACTURING AND

NONMANUFACTURING INDUSTRIES, 1974 (By firm size)

Fewer More

than 100 100-500 than 500 All Unionized

Employees Employees Employees Sizes (All Sizes)

Manufacturing

White-collar 63

Blue-collar 63

77

80

93

93

84

82

N/A

93

Nonmanufacturing

White-collar 56

Blue-coliar 39

75

66

84

88

67

53

N/A

82

SOURCE: U.S. Department of Labor, Bureau of Labor Statistics,

Employee Compensation in the Private Nonfarm Economy,

1974 (1977), p. 46. These figures represent the percentage of employees who receive employer support

(both full and partial cost) for any or all of the

following benefits: life, sickness/accident, and

medical/hospitalization insurance.

25
average 44 years of age and have accumulated an average of 17

years of federal service, including military service, which counts

toward retirement. 10/ Moreover, just over one-quarter of these

DoD employees have reached retirement eligibility status.

While almost all private-sector employees participate in

the Social Security program, participation in some form of

private retirement program is not as universal. By conservative

estimate, however, over three-quarters of blue-collar workers in

manufacturing belong to some private retirement program, ll/

The following appear to be the major differences between the

federal retirement program for FWS employees and retirement

benefits offered to blue-collar workers in the private sector

(summarized in Table 8):

o With few exceptions, private-sector workers usually retire

between ages 62 and 65. Private firms often permit

retirement as early as age 50, but with a substantially

10/ By way of comparison, BLS tabulations of the January 1978

survey found that median years of tenure at a single firm for

males employed full time in private-sector craft and kindred

occupations approximated five years. Thirty-eight represents

the median age for this segment of the blue-collar work

force—about six years less than that of their FWS counterparts. As expected, older workers display longer tenure.

For example, males aged 45 to 49 years average 11 years of

tenure, while those aged 35 to 39 average six years of

tenure. Statistics on DoD employees were taken from tabulations prepared by the Defense Manpower Data Center for

CBO. Age data on the blue-collar work force were estimated

from CBO tabulations of the March 1978 CPS file. Tenure data

are from the January 1978 CPS file as reported in U.S.

Department of Labor, Bureau of Labor Statistics, "Average Job

Tenure Declines," News Release, USDL-79-285 (April 23,

1979).

ll/ The BLS survey Employee Compensation in the Private Nonfarm

Economy, 1974 found that 78 percent of non-office employees

in manufacturing establishments participated in a private

retirement program. Similarly, the BLS 1976 summary, Area

Wage Surveys, found that 86 percent of plant workers in

manufacturing establishments participated.

26
TABLE 8. COMPARISON OF FEDERAL WAGE SYSTEM RETIREMENT PROVISIONS WITH TYPICAL PRIVATE-SECTOR BLUE-COLLAR PLANS

Provision Federal Wage System Private-Sector Blue-Collar Plans

Age and Yearsof-Service

Requirements

Vesting

Benefit Formula

Early Involuntary

Retirement

Social Security

Offset

Disability

Benefit

Survivor

Benefit

Cost-of-Living

Increases for

Annuitants

Employee

Contributions

Age 55, 30 years

Age 60, 20 years

Age 62, 5 years

Full, after 5 years

"High-three" year average salary nrultiplied by 1.5 percent, first 5 years;

1.75 percent, second 5 years; 2 percent,

remaining years

Any age with 25 years; age 50 with 20

years; 2 percent annuity reduction for

each year retiree is under age 55

Does not apply

For full and permanent disability,

immediate annuity of no less than 40

percent of final salary; minimum 5

years

 f service required

55 percent of accrued annuity, but

generally no less than 40 percent of

final average salary to surviving

spouse

Twice-annual increase tied to CPI

7 percent of base pay (more on

voluntary basis)

Age 62 or 65, 10 years

Full, after 10 years

Flat benefit of $10 to $20 per month for

each year of service; rate often negotiated up when wage increases are provided

4 to 6 percent annuity reduction for each

year under age 62 or 65; minimum 10 to 20

years1 service; voluntary early retirement in many plans

Rare under current plans; where it

occurs, pension annuity often reduced by

an amount equal to one-haIf the Social

Security payment

Normal retirement benefit provided until

Social Security disability or retirement

benefit takes effect

Varies considerably; 50 percent of early

retirement annuity (if eligible) common

Intermittent, usually amounts to 25 to

50 percent of CPI growth

Noncontributory
reduced annuity. 12/ The amount of the reduction appears

to range between 3 and 6 percent of the annuity for each

year below the normal retirement age. For example, a

person retiring at age 55 who is participating in a

program with a normal retirement age of 62 might incur

a 25 to 50 percent reduction in annuity. 13/ For civil

servants, on the other hand, normal retirement with

unreduced benefits can begin as early as age 55.

o Most private-sector plans for blue-collar workers do

not incorporate an automatic annual cost-of-living

adjustment clause as does the FWS retirement system. 14/

Annuitants in private plans must rely on the benevolence

of their employers (or the negotiating skill of their

unions) to receive such post-retirement increases.

As a result, the frequency and size of the annuity

increases vary considerably over time and across companies. The inflation protection offered government

employees provides them a considerable advantage over

their private-sector counterparts, especially under

today's economic circumstances.

o Although rare, some private-sector plans for blue-collar

workers include an offset for Social Security benefits.

The offset usually amounts to 50 percent of the old age

12/ See Bankers Trust Company, 1975 Study of Corporate Pension

Plans (1975), p. 10. These data apply to white-collar

employees, but since the FWS employee participates in a

retirement program dominated by the white-collar GS federal

work force, the comparison on a programmatic basis is still

valid. Inspection of a Bureau of Labor Statistics summary of

private-sector benefit plans tends to confirm that a similar

reduced annuity approach for early retirement typifies

blue-collar plans as well.

13/ Based upon a review of 50 corporate retirement plans during

1977 conducted by the Wyatt Company. See Wyatt Company,

Survey of Retirement, Thrift and Profit Sharing Plans Covering Salaried Employees of the 50 Largest U.S. Industrial

Companies as of July 1, 1977 (1978).

14/ The recent General Motors wage settlement is a notable

exception. (See footnote 8 for additional details.)

28
annuity paid under Social Security. 15/ The amount

of the offset is typically fixed at the time the annuitant

begins receiving Social Security benefits, and no additional offset occurs as the benefits are adjusted upward

for inflation. Since federal civilian pay is not subject

to Social Security tax (and, of course, no benefits

accrue), FWS retirees could not be subject to an offset of

this kind. I6/

o Most private-sector blue-collar plans compute the annuity

in a manner that typically results in a less generous

retirement program. The federal retirement program,

and most private-sector white-collar employee plans,

compute the retirement annuity as a percentage of pay—

usually the average of the last three or five years' pay.

Under this method, the annuity can grow as a natural

by-product of wage increases. Most blue-collar workers in

the private sector, however, receive a retirement annuity

based upon a fixed sum—now usually $10 to $15 per month

for each year of service contributed. This latter method

does not allow retirement benefits to grow automatically

as a result of negotiated wage settlements and may result

in a relatively less generous pension than a white-collar

worker retiring at the same salary would receive.

o Vesting rights also differ between the public and private

sectors. The private sector usually offers full vesting

15/ The rationale for the offset appears to be the fact that the

employer and the employee share equally in contributions to

the Social Security Trust Fund. The employer is therefore

entitled to recoup his contributions through a reduction in

the annuity provided in the private plan.

16/ Many federal workers, however, already have sufficient

covered employment to receive a Social Security old age

annuity upon retirement. An examination of the status of

federal employees in 1972 revealed that fully one-third of

all federal workers (that is, both white- and blue-collar)

had sufficient quarters of covered earnings to qualify for at

least minimal Social Security retirement benefits at age 62.

In addition, about half of those employees covered under

Social Security had been earning Social Security credits

through part-time work while maintaining their full-time

federal employment.

29
after ten years of service, compared to five years for

civil service. In addition, job mobility often severs a

person's right to a company pension, while mobility

within the federal government (even between the Executive

and Legislative Branches) does not impair a person's

credit toward retirement benefits.

All of these differences tend to make private-sector retirement plans for blue-collar workers less generous than that for

FWS employees. One important difference cuts the other way,

however:

o Most private-sector plans are noncontributory; that

is, the company pays the entire cost of the retirement

program. FWS employees, on the other hand, contribute

7 percent of their salary toward retirement. While the

federal government as employer contributes the same amount

to the retirement trust fund, the actuarial cost of the

program is considerably higher and will eventually

require much larger contributions.

CHAPTER OVERVIEW

The Carter Administration's proposal to include fringe

benefits in the comparability process is a move toward more

complete treatment of compensation adjustments in the future, but

invites criticism from those skeptical of the government 's ability

to measure the worth of fringe benefits. Available survey

data on private-sector fringe benefits reveal considerable

variability in the value of benefit plans along a number of

important dimensions such as geographic location and company

size. To compute a standardized cost for each major benefit,

as the Carter Administration proposes, would tend to mask these

differences and run counter to the principle of locality-based

pay setting.

In spite of these concerns, the inclusion of fringe benefits in the comparability measurement process, whether in the

manner recommended by the Carter Administration or by some other

approach, would serve both the federal employer and the employee.

An increasing share of employee compensation flows into benefits,

and, over time, this tends to erode the validity of any comparability system that fails to recognize explicitly the value of

fringe benefits.

30
Because retirement benefits constitute one-third and over

one-half of fringe benefit costs for private-sector blue-collar

and FWS employees respectively, this chapter has accorded them

special attention. Most private plans are noncontributory,

but the FWS retirement program offers more generous benefits. The

FWS plan provides for retirement with full benefits by age 55, and

full cost-of-living protection for annuitants. Few, if any,

private plans incorporate both these features.

31

CHAPTER IV. CALCULATING DISPARITIES IN PAY AND BENEFITS BETWEEN

FEDERAL WAGE SYSTEM AND PRIVATE-SECTOR BLUE-COLLAR

EMPLOYEES

The federal government pays FWS employees more per hour and,

because of retirement, maintains a more expensive overall benefit

package than private industry offers its employees in comparable

jobs. This conclusion emerges from several surveys of privatesector pay and fringe benefits described in the previous chapters

of this report. Table 9 compares an indexed valuation of pay

and benefits currently received by FWS employees with what CBO

estimates they would receive if private-sector practices were

adopted. The comparison shows that their "total compensation

index" would decline from 163.1 to 148.8, or by about 9 percent.

This estimate includes the effect of recent limitations on pay

raises, or "pay caps." The following sections of this chapter

explain the derivation of each index component.

DISPARITIES IN HOURLY PAY RATES

As noted in Chapter II, certain provisions of the Federal

Wage System statutes give FWS employees higher hourly rates than

their private-sector counterparts earn. Table 9 shows that

this hourly rate premium currently averages 5.8 percent. This

includes the dampening effect of prior pay caps. The wage

premium can be attributed primarily to the five-step within-grade

advancement system (3.8 percentage points) and, to a lesser

extent, to the use of out-of-area wage data (the Monroney amendment), as well as to the exclusion of state and local government

wage data from the survey process.

Premium Attributable to the Step System

Before pay caps were introduced in fiscal year 1979, the

five-step within-grade advancement system provided FWS employees

an average hourly wage 7.8 percent above the private-sector

prevailing rate computed from the area wage surveys. Table 10

presents the data and calculations used to derive this estimated

7.8 percent premium; note that 55 percent of the FWS population

resides in step five, earning (uncapped) 12 percent above the

private-sector prevailing rate.

33
TABLE 9. INDEX OF PER-CAPITA EMPLOYER COMPENSATION COSTS FOR FWS

EMPLOYEES, FISCAL YEAR 1980

If Private- Current

Sector Practices

Practices Were Under Federal

Adopted Wage System

Pay for Time Worked 100.0 105.8

Benefits a/

Retirement

Paid leave d/

Health insurance

Life insurance

Bonuses, etc.

Total Pay and Benefits

24.4 b/

16.6

5.3

1.9

0.6

148.8

33.7 c/

20.0

3.3

0.3

-0-

163.1

a_/ Expressed as a percentage of pay for time worked. Pay for

time worked constitutes about 85 percent of basic pay after

deducting paid leave.

b/ Includes employer's share of FICA, but excludes employee's

share.

c_/ Excludes employee's contribution of 7 percent of pay.

d_/ Includes paid sick leave.

To what extent the five-step system grants an excessive

and unjustified hourly rate premium to FWS employees remains a

matter of some dispute. Its supporters argue that, when compared

to private-sector practices, the present step system provides

an essential reward for the above-average tenure and greater

experience of the FWS work force. JL/ Sorting out the wage

I/ As noted in Chapter III, FWS employees average 17 years

of total federal service (including military). In sharp

contrast, company tenure in full-time private-sector craft and

kindred occupations averages only five years.

34
premium controversy is further complicated by the method used

to compute prevailing hourly rates for the jobs selected in

the area wage surveys. The prevailing private-sector rate

that eventually forms the step-two FWS hourly rate actually

represents a composite of individual rates for the surveyed job.

The composite rate tends to mask individual company longevity

pay practices and the associated tenure of employees of a firm.

Thus, the resulting rate does not reveal what private-sector

hourly rates would be when matched for similar tenure. To what

degree tenure should be taken into account in setting pay rates

remains an open question. The statutes governing FWS pay-setting

practices are primarily occupation- and locality-based, and they

provide no explicit guidance as to whether or not tenure should be

taken into account in determining the prevailing rate.

TABLE 10. CALCULATION OF FWS HOURLY PAY PREMIUM RESULTING FROM

THE STEP PROMOTION SYSTEM

Pay

Step

One

Two

Three

Four

Five

Percent

Below or Above

Comparability Pay Line

(1)

96

100

104

108

112

Fraction of

FWS Population

in Each Step

(2)

0.039

0.104

0.165

0.134

0.554

Weighted

Average

Pay Index

(1) x (2)

3.7

10.4

17.2

14.5

62.0

Totals 1.000 107.8

Premium Attributable to the Use of Out-of-Area Wage Data and the

Exclusion of State and Local Government Wage Data

The discussion in Chapter II pointed out that, while state

and local government employees earn on average 15 percent less

than their private-sector counterparts, they constitute only 8

35
percent of the relevant nonfederal work force. As a result, their

inclusion in the survey would reduce the comparability payline by

an average of 1.2 percent.

The so-called Monroney provision requires, under certain

circumstances, the importation of pay-rate data from another wage

area, often resulting in higher (but never lower) paylines. About

25 percent of FWS employees benefit from this provision, receiving

an average 5 percent premium. Because the Monroney provision

affects only a few wage areas, its repeal would reduce the

comparability payline by an average of 0.8 percent.

Pay Caps Have Reduced the Hourly Rate Premium

The 5.5 percent pay cap for fiscal year 1979, and the

subsequent 7 percent cap in fiscal year 1980, could reduce the

average hourly rate premium accorded FWS employees from 9.8

percent to about 5.2 percent by fiscal year 1980 (see Table 11).

Moreover, a decision to forego the proposed FWS pay revisions and

limit pay raises to 9.1 percent in fiscal year 1981 would place

over one-half of FWS employees at or below the comparability

norm. 2/

DISPARITY IN THE COST OF RETIREMENT PROGRAMS

The principal reason for the disparity in benefits lies in

the federal retirement program. Chapter III provided a detailed

comparison of the Civil Service Retirement program, which also

covers FWS employees, with programs typically available to bluecollar workers in manufacturing industries. Generally, the Civil

Service Retirement system provides a larger annuity than is

available in the nonfederal sector; it also provides inflation

2/ FWS pay raises do not go into effect automatically at the

beginning of a fiscal year. Rather, the pay raises take

effect soon after the surveys are conducted in the local wage

areas. Over half of the FWS employees are surveyed during the

first four months of the fiscal year, and wage adjustments are

provided. These lags in pay raises tend to complicate

comparisons of pay indexes and slightly overstate the true

difference in the wage premium accorded FWS employees at any

given time, as displayed in Table 11.

36
TABLE 11. FORECAST COMPARISON OF FWS AND COMPARABLE PRIVATESECTOR PAY INDEXES

Fiscal

Year

1978

1979

1980

1981

Private -

Sector

Pay Index a/

100.0

108.2

117.9

129.0

FWS

Pay Index b/

109.8

115.8

124.0

135.3

FWS Pay

Premium

(percent)

9.8

7.0

5.2

4.9

a/ Taking fiscal year 1978 as the base (1978 = 100), the fiscal

year 1979 index reflects the statutory comparability raise

of 8.2 percent computed from the area wage surveys. CBO

estimates increases of 9.0 and 9.4 percent for fiscal years

1980 and 1981, respectively.

b/ Based upon pay caps of 5.5 percent, 7 percent, and 9.1 percent

in fiscal years 1979, 1980, and 1981, respectively. The

index for fiscal year 1978 includes 7.8 percentage points

for the step system calculated in Table 10, as well as 1.2

percentage points for the exclusion of state and local

government wage data and 0.8 percentage points for the

Monroney provision.

protection and permits retirement with full benefits at an earlier

age than under private plans. The fact that private-sector

workers are covered by Social Security retirement tends to narrow,

but not eliminate, the disparity in retirement benefits.

Under certain circumstances, however, a blue-collar employee

in the private sector may receive an annuity equal to or greater

than that of an FWS employee. For example, an FWS worker retiring

today at age 55 with 30 yearsf service can receive 56 percent of

his last three years1 average wage as an annuity. A privatesector employee, on the other hand, who retires at age 62 with 30

years1 service under one of private industry's more generous

retirement plans, and also receives maximum Social Security

benefits, can receive over 60 percent of his last year's wage.

37
While the latter example is not typical, it may become so

if present trends in private-sector retirement provisions and in

Social Security continue. But it is difficult to generalize from

comparisons made on a case-by-case basis.

Actuarial Valuation of Civil Service and Private-Sector Retirement

Plans

Actuarial methods offer another approach to the valuation

of retirement programs. CBO, with the cooperation of the Office

of Personnel Management, developed an actuarial valuation for

the retirement program available to FWS employees and compared

it to the cost of a composite of private-sector programs applied

to the federal work force. _3/

Excluding employee contributions, the entry-age normal

cost of the FWS retirement program amounted to 33.7 percent

of pay for time worked (that is, excluding paid leave), while

that of the chosen private plan amounted to 10.6 percent.

These figures represent the annual amount, expressed as a percentage of pay, that an employer would invest in a retirement

fund during an employee's tenure to pay his future benefits

under an annuity. The estimates apply to a cohort of new entrants (1975 to 1976) to the federal work force (both FWS and

General Schedule) and employ a uniform set of actuarial rates

for withdrawal, retirement, mortality, wage growth, inflation,

etc.

Actuarial Valuation of the Social Security Retirement Program

0PM has also developed an actuarial valuation of the Social

Security (the OASDI portion only) program. It estimates the

entry-age normal cost of Social Security retirement for federal

The private plan actuarially valuated by 0PM was constructed

by CBO and represents a composite of several plans. Its major

features were: a flat monthly annuity benefit of $17 for

each year of service, with the benefit amount growing at a

long-term rate of 4 percent; annual annuitant adjustments

equivalent to one-half the rise in the Consumer Price Index;

and normal retirement with full benefits at age 62 and at

least 10 years of service.

38
employees at 15.8 percent of basic pay. kj The equivalent figure

expressed as a percentage of pay for time worked is 18.6 percent.

On the assumption that FWS employees would pay the standard FICA

tax of 7.8 percent of pay for time worked, the federal government

would pay the remaining actuarial value of 10.8 percent.

To this amount, CBO has added another 3 percentage points

to reflect the tax-free nature of Social Security retirement

benefits. 5J Civil service retirement benefits paid by the

federal government are taxable to the annuitant, and the operating

premise for this study is that FWS employees would receive

equivalent tax benefits should they fall under a Social Security

plan.

Actuarial Cost Comparison of Retirement Programs

Table 12 shows the actuarial cost of the Federal Wage System

retirement program to be equivalent to 1.4 times the combined cost

kj Office of Personnel Management, "Standardized Cost Estimates

of 'Typical1 Benefit Plans" (June 19, 1979; processed), p. 3.

Using a somewhat different set of actuarial assumptions than

employed by 0PM, the Social Security System has developed an

actuarial normal cost estimate of 13.7 percent of pay for

OASDI entrants. This 13.7 percent estimate implies 8.3

percent of pay for time worked as the employer's (federal

government's) share. See Joseph Applebaum, "Some Effects of

Fully Funding OASDI," U.S. Department of Health, Education,

and Welfare, Social Security Administration, Office of the

Actuary, Actuarial Note No. 97 (September 1979).

_5/ See Congressional Budget Office, Compensation Reform for

Federal White-Collar Employees; The Administration's Proposal

and Budgetary Options for 1981, Background Paper (May 1980)

for additional details on this. Note that, under civil

service and private retirement programs, the IRS considers

disbursement of employee contributions (if any) in the form of

an annuity as nontaxable, since the income earned and then

contributed to the retirement fund was already taxed. Under

the civil service program, annuity payments are not taxed

until the amount paid out exceeds the employee's contributed

capital. This point usually occurs about two years after

retirement.

39
of a typical private plan plus Social Security retirement. This

disparity in costs implies a more valuable retirement program for

FWS employees than the combined private and Social Security

retirement plans. 6/

TABLE 12. COMPARISON OF ENTRY-AGE NORMAL COST VALUATIONS OF

RETIREMENT PROGRAMS a/

Social Security

Federal Wage System Private Plan Retirement

33.7 10.6 13.8

a/ Employer share expressed as a constant percentage of pay for

time worked.

DISPARITIES IN PAID LEAVE

FWS employees would experience an improvement in paid

holidays if private-sector practices were adopted, but would lose

compensation for sick leave, resulting in a net decline in paid

leave benefits (Table 13). Moreover, adoption of private industry

practices would eliminate the provision allowing annual sick leave

6/ As noted earlier, individual cases can be developed that, from

the FWS employees1 perspective, place them at a disadvantage

relative to their private-sector counterparts in terms of

retirement annuities. These estimates are sensitive to

interest and inflation rates assumed in long-run projections.

Also, the structure and ultimate cost of a benefit package to

some extent reflects the demographic composition of the

respective work forces. Since private-sector workers are

typically younger and less tenured than FWS employees in

similar occupations, the emphasis on retirement relative to

other benefits should differ between the two groups.

40
accumulation and its credit toward retirement. The value of sick

leave as a retirement credit benefit has not been calculated in

this study.

TABLE 13. DISTRIBUTION OF AVAILABLE WORKDAYS BY LEAVE CATEGORY

FOR BLUE-COLLAR AND FWS EMPLOYEES

Federal Wage

Blue-Collar System

Workdays per Year 260.0 260.0

Leave Days per Year

Holidays 11.0 9.5

Vacation days 22.0 22.0

Sick days (paid) 3.5 10.0

Sick days (unpaid) 3^_5 0.0

Subtotal -40.0 -41.5

Total Days at Work per Year a/ 220.0 218.5

Paid Leave Days as a Percentage

of Total Days at Work 16.6 19.0 W

a/ Workdays per year minus leave days per year.

b/ This figure was adjusted upward by 5.8 percent in Table 9 to

reflect not only the difference in leave practices as shown on

this table but also the additional basic pay value for the

leave attributed to the computed FWS pay premium.

Paid Holidays

Like most federal workers, FWS employees receive nine paid

holidays annually, although additional time is sometimes granted

at the discretion of the Administration. The estimate in this

41
report assumes an average of 9.5 paid holidays annually for

federal workers.

Surveys of benefits for blue-collar workers conducted in

1976 indicate that private employers typically grant 10 paid

holidays annually. 7/ Given the relatively rapid growth in

private-sector benefits, however, an additional holiday was

included, raising the estimate to 11 holidays annually for

blue-collar workers.

Paid Vacations

As in the private sector, federal workers' paid vacation

time is computed on the basis of time in service. FWS employees

with less than three years of federal service (including military) receive 13 vacation days annually; those with three to

fourteen years1 service receive 20 days; and those with fifteen

or more years earn 26 days 1 vacation. An examination of the

years-of-service profile for FWS employees in the Department of

Defense revealed that 46 percent were eligible for the maximum

26 days1 vacation. The weighted-average vacation amounted to

22.1 days.

CBO applied the years-of-service distribution of FWS workers

(DoD only) against 1976 data on vacation plans taken from the

BLS Area Wage Survey and computed an average of 19 days' vacation if private-sector practices were adopted. Given the rapid

growth in benefits over the past few years, this figure was

raised to 22 days to reflect a more current estimate. Thus,

no material difference in paid vacation would result if the

federal government adopted private-sector practices, although more

rapid growth in the length of vacations in the private sector

could actually raise federal employee compensation costs in the

future.

TJ Ten holidays represent the modal value based upon an examination of two BLS reports: Characteristics of Major Collective Bargaining Agreements, Bulletin 2013 (July 1, 1976),

p. 8.; and Area Wage Surveys; Metropolitan Areas, United

States and Regional Summaries, 1976, Bulletin 1900-82 (August

1979), p. 100.

42
Paid Sick Leave

Sick leave provisions in the private sector appear to

be less generous than those for FWS employees. The federal

government provides FWS (as well as General Schedule) employees 13

daysf annual sick leave with full pay and the right to accumulate

unused leave indefinitely.

In 1976, less than one-fourth of plant workers in manufacturing industries were covered by sick leave provisions offering full

pay and no waiting period before coverage begins. Another 8

percent were entitled to sick leave with partial pay and/or with

some waiting period required. In contrast, about three-quarters

of white-collar employees in manufacturing industries participate

in a company-sponsored sick leave plan, usually at full pay with

no waiting period. JJ/

While sick leave benefits are less common in private industry, some of the potential lost income can be offset by employerfinanced sickness and accident insurance, available to about

60 percent of plant workers in manufacturing. _9/ The most

common policy, termed a "1-8-26 plan," provides a fixed periodic

payment beginning on the first day for a non-work-related accident

and on the ninth day for any illness. This short-term disability

pay usually amounts to two-thirds of an employee's base pay and

extends for a period of up to 26 weeks. 10/

During fiscal year 1978, the latest year for which such data

are available, FWS employees in DoD used an average of 10 sick

8/ Bureau of Labor Statistics, Area Wage Surveys, 1976 Summary,

p. 107.

9/ Ibid.

10/ Information provided to CBO by staff of the Health Insurance

Association of America. Long-term disability insurance

that extends coverage beyond 26 weeks is also available, but

benefits under OASDI usually take effec t after the first

five months of disability. Work-related accidents are

covered by workmen's compensation insurance, governed by state

regulations.

43
leave days, ll/ Given that federal employees1

 sick leave benefits

amount to 13 days annually, one can assume that, on average,

all sick leave used was compensated at full pay. When participation rates and benefit levels are taken into account for

both formal sick leave provisions and employer-financed health

insurance plans, it would appear that one-half of the sick leave

taken by private-sector blue-collar workers was compensated at

full pay.

HEALTH BENEFITS

Both private industry and the federal government provide

similar forms of health insurance for their employees. The

major difference appears in the cost-sharing ratios of the

respective employers. Surveys indicate that the vast majority

of health plans offered to blue-collar workers in the private

sector are employer-financed, noncontributory programs. On

average, employers pay about 90 percent of health plan costs for

blue- and white-collar employees in manufacturing. Under the

Federal Wage System, the federal government pays 57 percent of

medical insurance premiums, with the remainder contributed by

the employee.

In fiscal year 1978, federal payments for health insurance

under the Federal Employees1 Health Benefits Act constituted 2.8

percent of basic payroll. 12/ This figure would rise to 4.5

percent of basic payroll if private-sector practices were adopted

wherein the employer paid 90 percent of the program's cost. To be

consistent with other calculations, the cost of these benefits as

a percentage of pay for time worked would rise to 5.3 percent.

ll/ Information provided to CBO by the Office of Personnel

Management. Separate breakdowns by pay plan for sick leave

used were not available. Sick leave data for DoD were chosen

because 80 percent of all FWS workers are employed by the

Defense Department. By comparison, unpublished tabulations

from the 1978 Health Interview Survey of the Public Health

Service show that blue-collar workers in private industry

claimed an average of seven days' leave for sickness or

injury during 1978.

12/ Information provided to CBO by the Office of Personnel

Management.

44
CHAPTER OVERVIEW

This chapter sought to integrate the general findings of the

two previous chapters on pay and benefits by developing an index

of total compensation from available data sources on privatesector blue-collar practices. The analyses show that adoption of

private-sector pay and benefit practices for FWS employees would

lower this total compensation index by about 9 percent. About

two-thirds of the total compensation premium implied by the index

can be attributed to statutory provisions that give FWS employees

hourly rates above the comparability norm.

In the area of benefits, FWS employees have an advantage

over their private-sector counterparts in only two instances:

retirement and paid sick leave. The FWS retirement program is

much more generous than the typical private-sector plan. FWS

employees have vacation programs similar to those of their

private-sector counterparts, but receive fewer holidays. In

addition, FWS employees pay a larger share of their health and

life insurance costs than those in the private sector.

The weight of the evidence suggests that FWS employees

receive a total compensation premium. Yet current data leave

considerable room for debate about the precise size of the

premium. The measures selected in this report reflect CBO's best

judgment. Future evidence, especially that collected by BLS,

could change these estimates, but the fact of a total compensation

premium would likely withstand the test of new data.

45

CHAPTER V. OPTIONS TO ALTER FEDERAL WAGE SYSTEM COMPENSATION

This chapter presents several options that illustrate the

range of policy choices available to the Congress in deciding upon

FWS compensation. The options (summarized in Table 14) reflect

varying judgments on how best to interpret the present comparability standards and on whether it would be desirable to include

benefits as well as pay.

Table 14 shows that, depending upon the option chosen,

FWS payroll costs could be reduced between 4 and 10 percent over

the next five years as compared to what current law would provide

(in the absence of pay caps). Relatively modest savings—ranging

from $240 million to $370 million—could be expected in the first

year under each option. This would occur because the new pay

provisions (or caps) would not go into effect in all wage areas

at the same time, but rather would await completion of the

compensation surveys in each of the 135 wage areas.

Benefit provisions would remain untouched during the first

five years, with only hourly pay rates subject to adjustment.

Under each option, average pay raises over the five-year period

would fall about one to three percentage points below what

they would otherwise be (see Table 15). The Carter Administration's total compensation proposal, presented in Option IV,

would result in the greatest variation in FWS pay raises over

the first five years—holding them down to about one-half the

nonfederal-sector comparability raises in the first two years but

pushing them above those projected in fiscal years 1984 and 1985

to offset advances in benefit provisions likely to occur in the

nonfederal sector.

OPTIONS TO ADDRESS PAY COMPARABILITY

For the most part, the federal government bases FWS comparability on prevailing rates for similar private-sector work in a

local area. One would expect this to accord the FWS employee

an equitable and competitive rate while having a neutral effect

on the local wage structure. From the start, however, the

Carter Administration has contended that certain provisions of the

law prevent pay from being made truly comparable.

47
TABLE 14. SUMMARY OF PAYROLL COSTS AVOIDED UNDER VARIOUS FWS EMPLOYEE COMPENSATION

OPTIONS (In millions of dollars, by fiscal year)

1981-

1981 1982 1983 1984 1985 1985

Total Payroll Budget

Under Current

FWS Statutes a/ 9,850 11,000 12,100 13,260 14,470 60,680

Options to Address

Pay Comparability

I. Amend/repeal

disputed FWS

pay-setting

provisions b/ -335 -800 -990 -1,090 -1,195 -4,410

II. Amend/repeal

FWS step

provision only c/ -240 -480 -550 -600 -660 -2,530

III. Cap pay at 9.1

percent in fiscal

year 1981 only d_/ -290 -550 -600 -660 -720 -2,820

Options to Address

Both Pay and Benefits

IV. Adopt Carter

Administration

 fs

total compensation

proposal -370 -970 -1,450 -1,700 -1,780 -6,270

V. Cap pay at 7.8 percent

through fiscal year

1985 to offset total

compensation premium -350 -790 -1,080 -1,260 -1,660 -5,140

a/ Payroll levels absent any pay caps and assuming a constant size work force with

no further shifts in employee distribution among the grades and steps.

b/ Adopts that portion of the Carter Administration's total compensation proposal

amending or repealing the. pay-setting provisions of the Federal Wage System

statutes. Assumes a three-step "average-to-average" within-grade advancement

system.

c_/ Savings reflect a return to a three-step system with the comparability norm

retained at step two as an alternative.

d_/ The pay raise adopted for fiscal year 1981; excludes 5.7 percentage points in

raises due to prior pay caps.
TABLE 15. COMPARISON OF CBO-PROJECTED FWS EMPLOYEE PAY RAISES

UNDER VARIOUS OPTIONS (In percent, by fiscal year) a/

1981 1982 1983 1984 1985 1981-1985

Under Current

FWS Statutes,

With No Pay Caps 14.8 b/ 9.9 9.9 9.3 9.0 10.6

Option

Option

Option

Option

Option

I

II

III

IV

V c/

7.

9.

9.

7.

7.

7

8

1

4

8

6.7

9.2

9.9

5.0

7.8

8.

9.

9.

7.

7.

9

9

9

0

8

9.3

9.3

9.3

9.6

7.8

9.

9.

9.

9.

7.

0

0

0

9

8

8

9

9

7

7

.3

.4

.4

.8

.8

aj Data show only the projected annual comparability raise and

exclude consideration of possible pay increases through

within-grade step advancement or promotion to a higher grade.

b/ Includes 5.4 percentage points as a catch-up for prior pay

caps in fiscal years 1979 and 1980. CBO projects the normal

comparability pay raise in fiscal year 1981 to be 9.4 percent.

c_/ Equivalent to the average annual pay raise over five years

under Option IV.

The first two options in this report seek to meet all or part

of these pay criticisms. By choosing either option, the Congress

would uphold the traditional interpretation of pay comparability,

and remove pay restraints imposed legislatively over the past two

fiscal years.

The third option would not undertake to change the comparability process. It would simply cap pay in fiscal year 1981, on

the premise that most FWS employees receive a rate premium under

the current law and that capping pay offers a legislatively

expedient way of narrowing, if not eliminating, the average gap

between FWS and private-sector pay.

49
Option I; Amend or Repeal All Disputed Pay-Setting Provisions of

the Federal Wage System

The changes proposed here, and summarized in Table 16,

correspond to the Carter Administration's recommendations.

Chapter II of this report examined the available evidence on each

of these recommendations and concluded that most of them would

bring FWS pay-setting practices more in line with private-sec tor

practices. CBO estimates that, when compared to what current FWS

statutes would provide, these changes could avoid over $4.4

billion in cumulative pay raises between fiscal years 1981 and

1985.

TABLE 16. PAYROLL COSTS AVOIDED THROUGH AMENDING THE FWS PAYSETTING STATUTES UNDER OPTION I (In millions of

dollars, by fiscal year)

Total

Proposal 1981 1982 1983 1984 1985 1981-1985

Reversion to

Three-Step

"Average-toAverage" System 240 600 740 810 890 3,280

Elimination of

Out-of-Area

Wage Data 30 70 100 120 130 450

Introduction of

State and Local

Government Data 60 120 130 140 150 600

Adjustment of

Shift Differential

to Conform to

Prevailing

Practices 5 10 20 20 25 80

Total 335 800 990 1,090 1,195 4,410

50
Most Savings Attributed to "Average-to-Average" Step Proposal . Over 90 percent of the payroll costs avoided under

Option I would result from repeal of the five-step within-grade

advancement system and its replacement with an "average-toaverage" three-step system—the most likely substitute step

arrangement being considered by the Administration. Pay rates

would be set so that the average hourly rate for FWS employees

would equal the average rate computed from the area wage surveys

of the nonfederal sector. Employees now in steps four and five

would revert to step three, and the 4 percent hourly rate premium

above the comparability norm would no longer be universally

applied to those in step three.

Lower Entry Wages Under the Alternative Step System. The

step system being considered by the Carter Administration raises

the risk that recruiting problems could develop within the

next few years because entry-level (step one) wage rates will

remain about 7 percent below average private-sector rates for

comparable jobs. JY Moreover, a continuation of depressed

entry wages comes at a time when the Administration may confront

an increase in recruiting requirements resulting from shifts

in the age and experience mix of the FWS work force. Since

the Vietnam War, the FWS work force has declined in size by

about 45 percent—mostly through normal attrition (that is,

retirement and voluntary departures) and concomitant hiring

freezes. This has resulted in an older work force characterized by unusually low turnover, but with a high proportion of

employees eligible for retirement. We may now have reached the

point where work force levels have stabilized and recruiting

requirements will grow to sustain constant employment levels

and replace the large population having achieved retirement

eligibility status. The step system being considered by the

Carter Administration fails to address this fundamental long-term

problem of higher turnover and a commensurate growth in recruiting

requirements.

Gradual Phase-In of Pay Changes Through the Half-Raise

Provision. After changes in the FWS pay-setting provisions

\J The uncapped five-step system provides entry rates 4 percent

below the comparability norm as determined by FWS surveys.

Due to successive pay caps, however, entry-level (step one)

rates have fallen 8 percent below the private-sector average

rate.

51
under this option, employees found earning an hourly rate premium

would be limited to no less than half the normal annual comparability pay raise each year until their hourly rates equaled

those of their counterparts in the nonfederal sector. This

transition provision has several advantages. Aside from the

fact that hourly rate increases normally differ across the

135 local wage areas, this "half-raise" provision would also

permit pay increases to vary among the five steps. If the

Congress believes that FWS employees earn an unjustified hourly

rate premium, the half-raise provision represents a logical and

more equitable approach to achieving pay comparability than the

continued use of nonselective pay caps, a matter discussed under

Options III and V.

In fiscal year 1981, for example, those still in steps four

and five, who presently comprise two-thirds of the FWS work force,

would be entitled to half the normal comparability raise resulting

from the local area wage survey. Including a catch-up raise for

prior caps, this would amount to 7.4 percent for those now in

steps four and five and to about 8.3 percent for the remaining

one-third of the FWS work force in steps one through three. Thus,

all FWS employees would be subject to a restrictive raise provision averaging 7.7 percent in the first year (see Table 15).

In fiscal year 1982, the two-thirds of the FWS work force

originally in steps four and five would continue on a restricted

wage schedule, receiving 6.9 and 5.0 percent rate increases

respectively. Those in steps one through three would no longer be

on a restricted wage schedule and would receive the full 9.9

percent comparability increase projected by CBO. In fiscal

year 1983, more than half the FWS work force—those originally in

step five—would continue on a restricted wage schedule and

receive an 8 percent raise, while all others would receive the

full comparability raise, an average 9.9 percent increase. By

fiscal year 1984, all FWS employees would have made the transition

to new wage schedules with normal comparability increases.

Option II; Amend or Repeal the FWS Step Provision Only

Since the bulk of the savings under the Carter Administration's pay-setting proposal stems from a change in the step

advancement system (see Table 16), the Congress may wish to make a

less complex change and amend or repeal only Title 5 U.S.C.

5343(e), which prescribes the step advancement system for FWS

employees. This action would leave in place the other disputed

52
pay-setting provisions, but still grant the Administration

substantial autonomy in setting pay rates for FWS employees.

Drop Steps Four and Five as an Alternative. The "averageto-average" approach being considered by the Carter Administration, while saving considerable money, does pose certain

potential problems, as noted in the discussion of Option I. As an

alternative, the Congress could direct a return to the arrangement

in effect prior to enactment of the FWS statutes in 1972—a

three-step system with step two retained as the comparability

norm. This alternative would limit entry wages to 4 percent

below the comparability norm and provide a premium at step

three of no more than 4 percent above the norm. As compared

to the current uncapped five-step system, this would narrow the

range of within-grade advancement and more closely conform to

private-sector practices.

Savings would not be as great under this step system as

under the three-step "average-to-average" alternative presented

in Option I. Rather than generating about $3.3 billion in

cumulative five-year payroll savings (see line one, Table 16),

it would offer $2.5 billion in savings between fiscal years

1981 and 1985 (see Table 14). Savings would be less because

those FWS employees now at or above step three (equivalent

to more than 85 percent of the entire FWS work force) would

remain in step three, earning a 4 percent premium. Thus, while

this alternative offers a more favorable entry wage than Option I,

a broad segment of the work force would continue to earn an hourly

rate premium. As noted in Chapter IV, the pay caps of the past

two years have in effect reduced the average hourly rate premium

under the five-step system from 7.8 percent to about 3.8 percent. Option I would eliminate this remaining premium, while

Option II would only reduce it another percentage point, to 2.8

percent.

Other Alternative Step Systems Need to be Explored. In

sum, neither alternative offers an entirely satisfactory solution

to the dual problem of how to offer a competitive entry wage

yet provide wage premiums on a more selective basis. Should

the Congress favor the approach described in Option II, it

might wish to explore with the Administration a broader range

of pay advancement alternatives, examining not only the number

of steps, but also the pay differentials between steps and the

time required to progress from one step to the next. Moreover,

the advancement system should be designed around a concept

of the kind of FWS work force that will be needed to meet the

53
federal government

 fs future needs for laborers and skilled

craftsmen—a matter not explicitly treated in the Carter Administration's proposal.

Option III; Cap Pay Raise in Fiscal Year 1981 at 9.1 Percent

In fiscal years 1979 and 1980, the Congress inserted language

in various appropriations bills limiting annual FWS employee

pay raises to no more than 5.5 and 7.0 percent, respectively.

In fiscal year 1981, the Congress has again chosen to cap FWS

pay raises at the 9.1 percent level recommended by President

Carter. 2J

Continuation of pay caps offers a legislatively expedient

way to reduce further or eliminate entirely any compensation

premium now accorded FWS employees. In fact, CBO estimates that

the pay caps in fiscal years 1979 and 1980 have already reduced

the average FWS employee's hourly rate premium from 9.8 percent to

about 5.8 percent. _3/ A third pay cap of 9.1 percent in fiscal

year 1981, followed in later years by normal comparability raises,

would avoid over $2.8 billion in cumulative pay raises through

fiscal year 1985.

Like Option II, a 9.1 percent pay cap in fiscal year 1981

under this option would not entirely eliminate the average hourly

rate premium accorded FWS employees. They would still average

about 4.8 percent above the comparability norm, according to CBO

estimates. Obviously, this premium could eventually be eliminated

by smaller raises or by the continuation of pay caps in future

years.

Distortions in the Comparability Process Created by Pay Caps.

While pay caps are legislatively expedient, they create a number

of difficulties:

2J The joint resolution providing continuing appropriations for

fiscal year 1981 (P.L. 96-369) contained language prohibiting

annual increases in FWS hourly rates from exceeding the

increase authorized for General Schedule employees.

3/ These figures reflect the difference between average FWS pay

and the nonfederal-sector comparability norm as determined by

the FWS area wage survey after including wage data on state

and local government workers. (See Chapter IV for a further

discussion of this.)

54
o Across-the-board pay caps can distort the principle of

locality pay by giving disproportionate shares of the

full comparability raise to different wage areas. kj

For instance, a 9.1 percent pay raise may represent a full

comparability raise in one region but only three-quarters

of the comparability amount in another. 51

o Unlike selective use of the half-raise provision under

the Carter Administration's proposal, pay caps limit wages

at all steps. This can adversely affect recruiting if

entry rates in the lower steps drop well below the

comparability norm. For instance, while the FWS paysetting statutes place step one entry rates at 4 percent

below the comparability norm, a third consecutive pay

cap would depress the entry rate to 6.5 percent below

the norm. Moreover, even though the first three steps

would remain below comparability under this option,

with the bulk of the work force in steps four and five,

an average FWS hourly rate premium of 3.7 percent would

continue.

o The budgetary consequences of failing to approve a

pay cap grow each year. For example, should the Congress

fail to impose a pay cap or amend the FWS pay-setting

statutes in fiscal year 1981, a $280 million increase

beyond the normal comparability raise would ensue.

Because of the compounding effect of past caps on future

raises, the Congress would find the cost of failing

to cap pay beyond the normal comparability raise surpassing $650 million by fiscal year 1985. The need

for including pay caps in appropriation bills every

year might be avoided by the enactment of permanent

kf Hourly rates for FWS employees are established by surveys

in each of the 135 wage areas. Because the hourly wage is

set locally, rates for the same grade and step can vary

considerably from one area to another. This is not true of GS

pay rates.

5/ For instance, DoD analyzed the effect of pay caps in fiscal

years 1979 and 1980 for a sample of FWS employees in Grade 10,

step two across 40 wage areas. It found the loss in pay due

to the caps to be over 6 percent in one-fourth of the areas

and under 3 percent in another fourth.

55
authorizing legislation that would lower the comparability payline to reflect past pay caps. Since federal

pay raises remain a politically charged issue, this

approach would eliminate the risk of failing to introduce

restrictive pay language in some future appropriation

bill.

Probably the most telling criticism of pay caps lies in

their rigidity. Pay caps fail to provide the necessary

flexibility to adjust compensation in response to local

labor market conditions. Thus, they deny the Administration opportunities to develop a compensation system

that would enable better management of the FWS work

force.

OPTIONS THAT AFFECT BOTH PAY AND BENEFITS

Options IV and V propose to extend the principle of comparability to benefits as well as pay. The Carter Administration asserts that, because benefits now comprise such a

large share of compensation, any attempt to improve the comparability process must take account of them. Option IV would

adopt the Carter Administration's legislative proposal. Option V

would take benefits as well as pay into account and reduce

or eliminate the compensation premium by offering continued

pay caps.

Option IV; Adopt the Carter Administration's Total Compensation

Proposal

This option represents a significant step beyond Option I,

since it would incorporate some measure of benefits in the

comparability equation. As Chapter III described, the Carter

Administration proposes to use surveys to construct standardized

national costs of adopting major nonfederal-sector benefit

provisions for the federal work force, and compare those results

to the costs of current federal benefit provisions. Should the

comparison reveal a benefit premium for FWS employees, the Carter

Administration would adjust federal pay, using the half-raise

mechanism described under Option I. No downward revision in

benefit provisions would be permitted in the first five years, and

the retirement program would be permanently exempted from any

change in provisions.

56
Significant Savings, but Problems. CBO estimates this option

would avoid about $6.3 billion in pay raises over the next five

years (Table 14). While it would offer the prospect of saving

over 10 percent in FWS payroll costs in the next five years, it

might have certain undesirable effects:

o In order to bring total compensation into rough conformance with the nonfederal sector, FWS employee pay

would have to lag behind prevailing rates in the nonfederal sector during the first four years (see Table 15).

Although CBO estimates that FWS employees earned a 5.8

percent hourly rate premium in 1980, by 1985 their pay

would average 5 percent below comparable nonfederal pay

rates. Moreover, entry wage rates at step one, now 8

percent below the comparability norm (partly because of

pay caps), would fall to 14 percent below prevailing

nonfederal hourly rates. This would raise the risk of

serious recruiting and retention problems, especially

among younger workers for whom benefits such as retirement

are less appealing.

o While FWS employees would continue to maintain an advantage in retirement benefits, they would likely fall

behind their private-sector counterparts in almost

every other major benefit category over the next five

years. Of the seven major benefits examined in this

report, FWS employees most probably maintain an advantage in only two—retirement and paid sick leave.

For the remaining five, they are slightly behind or

equal to their private-sector counterparts. The federal

retirement program would act as a financial drag on the

entire compensation system for FWS employees under the

Carter Administration's proposal; pay rates as well

as six of the seven major benefits would have to lag

behind the private sector to offset the retirement

advantage.

o While significant savings could accrue under this proposal

during the first five years, FWS employee compensation

costs might rise more rapidly than private-sec tor costs

in later years. This is because both pay and benefits

(except retirement) would then become subject to adjustment, and the Administration would face significant

pressure to restore pay to comparable levels and enhance

the benefit provisions.

57
Why Not Adjust Benefits in the First Five Years? It seems

logical to ask why the Congress should not choose to adjust both

pay and benefits at the outset, instead of granting benefits a

five-year grace period before any downward adjustment. J6/ Over

the near term, such an action would effectively eliminate the

additional five-year savings of approximately $2 billion resulting

from the inclusion of benefits. Savings under this approach would

actually be slightly less than under the pay adjustment changes

proposed in Option I, unless the Congress decided to reduce

retirement benefit payments to current annuitants. Since the more

generous federal retirement program constitutes the predominant

reason for the net advantage in benefit provisions enjoyed by FWS

employees, even a modification in its provisions would not produce

any savings in outlays until those now employed reach retirement.

Moreover, almost all private-sector retirement programs are

noncontributory, and a change in the federal program to make it

noncontributory would raise agency retirement costs in the short

run.

Option V; Cap Annual Pay Increases at 7.8 Percent Through Fiscal

Year 1985 to Offset Total Compensation Premium

This option implicitly recognizes the premium in both pay

and benefits, and seeks to offset it through pay caps. A capped

raise of 7.8 percent annually was chosen because this equals the

estimated average raise that CBO calculates would be granted over

the five-year period under Option IV, the Carter Administration's

total compensation proposal.

The cumulative five-year savings amount to about $5.1

billion, $1.2 billion less than under Option IV (see Table 14).

Larger savings under the Carter Administration's proposal can be

attributed to the compounding effect of a sharp decline in pay

raises at the outset of the five-year transition.

The criticisms leveled at the use of pay caps under Option

III carry even greater weight under this option because it would

_6/ The Administration would retain the authority to improve

benefit provisions during the first five years, although such

an action would further depress pay levels because of the

requirement to bring total compensation into line with the

nonfederal sector.

58
establish a long-term policy of across-the-board limits on pay.

As under Option IV, average pay would fall 5 percent below

prevailing nonfederal rates by fiscal year 1985, and entry-level

step-one rates would slide to 15 percent below the comparability

norm. Unless authorizing legislation permanently froze pay levels

at the new capped rate each year, the risk of failure to impose a

pay cap each year through the appropriations process would carry

very significant budgetary consequences; these could jeopardize

the entire $5.1 billion in savings generated over the first five

years.

o

59