Human Capital: Trends in Executive and Judicial Pay Suggest a Reexamination of the Total Compensation Package
Published: 2006-09-20T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: People are critical to the success of the federal government's overall transformation effort. Yet the government has not transformed, in many cases for decades, how it classifies, compensates, develops, and motivates its employees to achieve maximum results with available resources and existing authorities. This is especially the case with the federal government's top leadership and federal justices and judges. Leading organizations understand that they must often change their culture to successfully transform themselves, and that such a change starts with top leadership. Most importantly, senior leaders who are drivers of continuous improvement are needed to stimulate and support efforts to facilitate change and achieve related transformation efforts for the federal government. At the Chairman's request, we recently reported on executive and judicial pay--Human Capital: Trends in Executive and Judicial Pay (GAO-06-708). This testimony highlights information from that report.
section_title: What GAO Found
paragraphs: The pay rates for selected executive-level positions have not kept pace with the growth of wages from 1970 to 2006, as measured by the National Income and Product Accounts wage index for private industries. Wages grew at nearly double the rate of basic pay for Executive Schedule level I positions, such as cabinet secretaries, and the Chief Justice. To remain competitive in the market, organizations, including the federal government, may need to be flexible in the balance between cash and benefits that comprise the total compensation offered to employees. Total compensation includes elements such as cash--basic pay, locality pay, cash awards/bonuses; noncash benefits--annual and sick leave, health insurance; and deferred benefits--retirement (i.e., pension and health), life insurance. Any restructuring of executive and judicial pay should consider basic pay received as one part of the total compensation package. While the types of experiences, responsibilities, required knowledge and skills, type of appointment, and length of service vary both within and across executive-level positions, moving forward, a commission may be an option for reexamining executive and judicial pay and compensation to ensure that the federal government's total compensation is both reasonable and competitive in order for the government to obtain and retain the top talent it needs to address current and emerging 21st century challenges in a responsible and sustainable manner.

section_title: Letter
paragraphs: I appreciate the opportunity to be here today to discuss our recent report  on long-term trends in executive and judicial pay that we prepared at your  request, Chairman Porter. As I have stated frequently, people are critical  to the success of the federal government’s overall transformation effort.  While progress has been made in addressing human capital challenges in  the last few years, significant opportunities exist to improve strategic  human capital management to respond to current and emerging 21st  century challenges. For example, the government has not transformed, in  many cases for decades, how it classifies, compensates, develops, and  motivates its employees to achieve maximum results within available  resources and existing authorities. This is especially the case with the  federal government’s top leadership and federal justices and judges.  Leading organizations understand that they must often change their  culture to successfully transform themselves, and that such a change  starts with top leadership. Most importantly, senior leaders who are  drivers of continuous improvement are needed to stimulate and support  efforts to facilitate change and achieve related transformation efforts for  the federal government.
In our report on executive and judicial pay, we found that generally the  salaries for the federal government’s senior leaders, including political  appointees and federal justices and judges, have not been keeping pace  with inflation or the growth of wages over the past 30 years. Our work is  consistent with the National Commission on the Public Service’s findings  that the salaries for top-level government officials have not been keeping  pace with inflation or maintaining reasonable relationships to the market.  In 2003, the Commission recommended that top-level officials in the  executive, legislative, and judicial branches receive significant increases in  their salaries to ensure a reasonable relationship to relevant professional  positions, such as leaders in not-for-profit and educational organizations  or state and local governments. The Commission also recommended that  Congress break the statutory link, which has been in place since 1989,  between the salaries of Members of Congress and those of federal justices  and judges and senior political appointees. The Commission noted that  this contributes to the salaries of executive-level positions falling  substantially behind cost-of-living increases and trends in the market’s  compensation.
Today, I will focus on three key points. Specifically, I will discuss (1) how  trends in executive and judicial pay have generally not kept pace with  inflation or the growth of wages, (2) how basic pay should be considered  along with other benefits when examining the value of total compensation  in order to remain competitive to the market for executive and judicial  positions, and (3) what principles should guide any possible restructuring  of executive and judicial pay in order to attract the talent needed to  address 21st century challenges. We have also identified illustrative issues  that deserve further reconsideration in moving forward with any executive  and judicial pay restructuring. My statement is based on published GAO  products that were conducted in accordance with generally accepted  government auditing standards.
subsections: section_title: Trends in Executive and Judicial Pay
paragraphs: A key trend we reported is that executive-level pay rates generally have  not kept pace with inflation since 1970, regardless of the inflation index  used. In our recent report, we adjusted the basic pay rates from 1970 for  selected executive-level positions to calendar year 2006 dollars using the  Bureau of Economic Analysis’s Gross Domestic Product (GDP) price  deflator and the Bureau of Labor Statistics’s Consumer Price Index (CPI).  From 1970 to 2006, the CPI has increased at an average annual rate of 4.7  percent, whereas the GDP price deflator has increased at an average  annual rate of 4.0 percent. While each index has its strengths and  weaknesses in measuring inflation, historically inflation as measured by  the CPI has tended to outpace inflation as measured by the GDP price  deflator. For detailed information on the executive-level positions within  the selected pay plans and the differences in their nominal and inflation- adjusted basic pay rates, see appendix I.
Using the GDP price deflator to adjust for inflation, the basic pay for  selected Executive Schedule positions and federal justices and judges has  declined from 1970 to 2006, as shown in figure 1. For example, in 1970,    cabinet secretaries (paid at Executive Schedule level I) were paid  $250,204 (in 2006 dollars) compared to $183,500 in 2006—a decline of  about 27 percent;   deputy secretaries (paid at Executive Schedule level II) were paid  $177,228 (in 2006 dollars) compared to $165,200 in 2006—a decline of  about 7 percent;  the Chief Justice was paid $260,629 (in 2006 dollars) compared to  $212,100 in 2006—a decline of about 19 percent; and    district judges were paid $166,802 (in 2006 dollars) compared to  $165,200 in 2006—a decrease of about 1 percent.
Similarly, the value of the basic pay for selected Executive Schedule  positions and federal justices and judges has declined when adjusted for  inflation using the CPI. Specifically, as shown in figure 2, in 1970,    cabinet secretaries (paid at Executive Schedule level I) were paid  $309,049 (in 2006 dollars) compared to $183,500 in 2006—a decline of  about 41 percent;    deputy secretaries (paid at Executive Schedule level II) were paid  $218,910 (in 2006 dollars) compared to $165,200 in 2006—a decline of  about 25 percent;  the Chief Justice was paid $321,926 (in 2006 dollars) compared to  $212,100 in 2006—a decline of about 34 percent; and    district judges were paid $206,033 (in 2006 dollars) compared to  $165,200 in 2006—a decrease of about 20 percent.
As I previously mentioned, the CPI has tended to outpace inflation as  measured by the GDP price deflator. Thus, the differences in inflation- adjusted basic pay rates from 1970 to 2006 are greater when using the CPI  than the GDP price deflator.
Another trend we reported is that selected executive-level pay rates have  not kept pace with the growth of wages from 1970 to 2006. To measure the  growth of wages, we used the Bureau of Economic Analysis’s National  Income and Product Accounts wage index for private industries. As  shown in figure 3, wages have grown at a greater rate from 1970 to 2006  compared to the basic pay for selected executive-level positions.  Specifically, wages grew at nearly double the rate of basic pay for  Executive Schedule level I positions, such as cabinet secretaries, and the  Chief Justice.
section_title: The Value of Total Compensation for Executive and Judicial Positions
paragraphs: While executive and judicial pay overall has declined in value when  adjusted for inflation, any restructuring of executive and judicial pay  should consider basic pay received as one part of the total compensation  package. We have reported that a competitive compensation system that  provides individuals a mix of base pay plus other incentives can help  organizations attract, motivate, and retain a quality workforce. Total  compensation includes elements such as cash—basic pay, locality pay,  cash awards/bonuses; noncash benefits—annual and sick leave, health  insurance; and deferred benefits—retirement (i.e., pension and health), life  insurance.
It is important to note that the value of the total compensation will differ  given an individual’s choice (e.g., to use child care facilities or purchase  life insurance), each agency’s program decision (e.g., to participate in the  student loan repayment program), and the types of compensation  elements that are offered to different positions. In particular, we found  that the cash, noncash, and deferred benefits vary within and across the  different executive-level positions. For example, at present, selected  Executive Schedule positions, administrative law judges (ALJs),  inspectors general (IGs), and federal justices and judges do not receive  cash awards/bonuses due to the nature of their positions, while career  senior executives may receive them. All of the executive-level positions  may receive noncash benefits, such as health and life insurance and  retirement. However, there are differences in retirement, such as larger  benefits, for federal justices and judges compared to other executive-level  positions.
Organizations, including the federal government, may need to be flexible  in the balance between cash and benefits that comprise the total  compensation offered to employee groups in order to remain competitive  in the market. For example, we recently reported for military personnel  that the current mix of compensation is highly inefficient for meeting near- term recruiting and retention needs. We reported that pay received today  is generally accepted as a far more efficient tool than future cash or  benefits for recruitment and retention of military personnel, especially  given the fact that the active duty workforce is mainly comprised of people  in their twenties. The vast majority of that workforce preferred a lump- sum cash payment versus deferred compensation in the form of an annuity  when given the choice. More generally, in discussing what incentives  attract individuals to public service, the Merit Systems Protection Board  has reported that people come to work for and stay with the federal  government for a variety of reasons besides base pay. Among these  reasons, obviously, is the desire to make a contribution and the personal  pride or satisfaction in their work as well as the variety of benefits  provided to employees.
Thus, the federal government may need to shift the balance of total  compensation between pay and benefits in its pay plans in order to recruit  and retain the needed talent. While we did not determine in our recent  report the balance of total compensation between pay and benefits within  and across executive-level positions, overall federal civilian employees  receive, in broad terms, most of their compensation—about 67 percent— in salary and wages and about 33 percent in the form of benefits or  deferred compensation. For workers in private industries, we recently  reported that their salary and wages made up 71 percent of total  compensation, while benefits accounted for 29 percent. However,  additional analysis would be needed to determine if these ratios  correspond to executive and judicial positions. For example, unlike other  federal employees, federal justices and judges are permitted to retire with  full pay and benefits when the sum of the judge’s age and number of years  on the bench is 80.
section_title: Principles for Restructuring Executive and Judicial Pay
paragraphs: The federal government needs to attract and retain the quality and quantity  of executive leadership necessary to address 21st century challenges. To  help the government remain competitive with the relevant markets, any  restructuring of executive and judicial pay should be guided by a set of  principles. Executive and judicial pay plans should be    sensitive to hiring and retention trends—actual trends, such as  demographic, workforce, and economic trends and their effects on the  federal government’s ability to hire and retain high-quality persons for  these positions are considered;    reflective of responsibilities, knowledge and skills, tenure, and  contributions—the positions are appropriately compensated to  reflect these differences both within and across executive-level pay  plans;    transparent—Congress, leadership, and the public can easily  understand the value of the compensation and contributions;    market-sensitive—the compensation of the relevant markets (e.g.,  private or nonprofit sectors) is appropriately considered; flexible to economic change—changes in the nation’s economy, such  as extraordinary economic circumstances or severe budgetary  constraints, can be accommodated;   sustainable—over the longer term, given known cost trends and risks  and future fiscal imbalances, executive-level pay plans are financially  sustainable; and   competitive—reasonable total compensation and other elements  necessary to attract and retain leadership can help ensure the optimum  use of taxpayers’ dollars and make the most efficient allocation  between cash and noncash benefits.
section_title: Issues for Reconsideration in Executive and Judicial Pay
paragraphs: While the types of experiences, responsibilities, and required knowledge  and skills vary both within and across executive-level positions, as well as  the type of appointment and length of service, there are several illustrative  issues that deserve further reconsideration in possibly restructuring  executive and judicial pay.
Maintaining a reasonable relationship across executive-level  positions. In 1970, there was no overlap in the pay for the Executive  Schedule and the other executive-level positions, such as career senior  executives. Specifically, the lowest pay level of the Executive Schedule  (level V) covering positions such as commissioners or general counsels  of smaller agencies was greater than the maximum basic pay for career  senior executives. By 1990, these pay plans began to overlap so that the  lowest paid political appointees under the Executive Schedule were  making less than the highest paid career senior executives. By 2006, the  pay for Executive Schedule level II covering positions such as deputy  secretaries of cabinet departments equaled the maximum basic pay for  career senior executives not including cash awards/bonuses.
A commission may be an option for reexamining executive and judicial  pay and compensation and exploring ways to maintain a reasonable  relationship across these executive-level positions and to the relevant  markets, such as nonprofit and educational organizations or state and  local governments. This would help ensure that the federal  government’s total compensation is reasonable and competitive in  order for the government to obtain and retain the top talent it needs. In  1967, Congress established the Commission on Executive, Legislative,  and Judicial Salaries (known as the Quadrennial Commission) to study  salaries of political appointees, Members of Congress, federal justices  and judges, and other top-level government officials every 4 years and  report to the President on its recommendations for salary increases.  The Commission—composed of nine individuals appointed from the  private sector—was to recommend salary increases for these positions  in order to maintain a reasonable relationship between these positions  and with private sector salaries. The President accepted the  recommended salary increases for these positions, which went into  effect in 1969. For example, the salary for cabinet secretaries increased  from $35,000 in 1968 to $60,000 in 1969. In 1989, Congress abolished the  Quadrennial Commission, transferring its authority and responsibilities  to the Citizens’ Commission on Public Service and Compensation.  However, this Commission, which was to be appointed during fiscal  year 1993 and then every fourth fiscal year, has never been appointed.  Commission members were to be appointed from private life by the  President, Congressional leadership, and the Chief Justice, among  others.
Recognizing equity issues. At our recent panel on the authorities and  responsibilities of IGs, the majority of panel participants stated that the  pay structure for IGs needed to be addressed given the importance of  providing reasonable and competitive compensation. Currently, there  are differences in the basic pay rates for IGs based on the level of  appointment, even though the powers and duties extended to IGs in  either appointment are essentially the same. Most IGs for cabinet  departments and major agencies are appointed by the President subject  to Senate confirmation (paid at Executive Schedule level IV). However,  IGs for some agencies, such as the National Science Foundation and  the Securities and Exchange Commission, are appointed by the agency  head and paid at varying amounts including General Schedule grade 15  or Senior Executive Service (SES) pay rates. Such equity issues should  be examined in any restructuring of executive-level pay.
Considering performance-based bonuses. There are executive-level  positions that are not eligible to receive bonuses (or awards) due to the  nature of the positions. For example, selected Executive Schedule  positions that are appointed by the President subject to Senate  confirmation (including selected IGs), ALJs, and federal justices and  judges do not. Bonuses awarded within a system that incorporates  appropriate safeguards may be an option for rewarding individuals in  these positions for their contributions. Appropriate safeguards,  including reasonable transparency and appropriate accountability  mechanisms, can help ensure fairness and prevent abuse. Any bonuses  must be performance-based with a mechanism for assessing  individuals’ performance from multiple sources of input. In addition,  checks and balances to help ensure that the positions’ independence is  not compromised are especially important for IGs, federal justices and  judges, and selected other positions.
Recognizing anomalies between comparable pay plans. There are  anomalies between comparable pay plans, such as for the career SES  and senior level/scientific or professional (SL/ST) positions. For  example, as of January 2004, the aggregate pay cap (basic pay plus  awards/bonuses) for SES and SL/ST positions is higher for individuals  whose agencies have performance management systems certified by  the Office of Personnel Management with concurrence from the Office  of Management and Budget. However, the higher basic pay cap only  applies to SES members under certified performance management  systems, not SL/ST positions.
section_title: Conclusions
paragraphs: As I have discussed, leading organizations understand that they must often  change their culture to successfully transform themselves, and that such a  change starts with top leadership. To help attract this talent, restructuring  of executive and judicial pay—guided by a set of principles—may be  necessary to help the government remain competitive with the relevant  markets. However, any restructuring of executive and judicial pay should  consider basic pay received by executive-level positions as one part of the  total compensation package. Further, the federal government may need to  shift the mix of total compensation between pay and benefits in order to  recruit and retain the needed executive-level talent. Moving forward, a  commission may be an option for reexamining executive and judicial pay  and compensation to ensure that the federal government’s total  compensation is both reasonable and competitive in order for the  government to obtain and retain the top talent it needs to address current  and emerging 21st century challenges in a responsible and sustainable  manner.
Chairman Porter, Representative Davis, and Members of the  Subcommittee, this concludes my statement. I would be pleased to  respond to any questions that you may have.
section_title: Contact and Acknowledgments
paragraphs: For further information regarding this statement, please contact Lisa  Shames, Acting Director, at (202) 512-6806 or shamesl@gao.gov. Janice  Latimer made key contributions to this statement.
section_title: Appendix I: Percentage Differences in Nominal and Inflation-Adjusted Basic Pay Rates for Executive-Level Positions from 1970 to 2006
paragraphs: (in dollar) (in dollar) (GDP) (CPI) (GDP and CPI) (GDP) (CPI) (27) (41) (7) (25) (9) (26) (10) (27) (11) (28) (17)  (10) (17) (17) (1) (9) (19) (34) (19) (34) (1) (20) (1) (20) (1) (20)
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