In Armenia, the official wage bill excludes staffing in education and health, since these sectors are funded through block grants. Due to the decentralized financing models used in these sectors, the respective ministries also do not track exact wage expenditures, which are subsumed in the “Goods and Services” budget line item. Since education and health workers constitute about two-thirds of Armenia’s civilian government employment, wage bill analysis relying only upon government budget figures runs into major limitations.

In light of these accounting vagaries as well as the variation in the mandate and organization of the public sector, cross-country comparisons of wage bill indicators—a standard component of wage bill evaluations—are likely to yield few robust insights. They are most useful as an indication that a country may be an extreme outlier and, even then, should only be viewed as a sign that closer examination is warranted.

As a further step in wage bill analysis, financial modeling of potential pay and employment reforms is also possible. The World Bank has undertaken such an approach in a number of countries and regions.<sup>11</sup> These types of modeling exercises have proved very effective at laying out the fiscal tradeoffs among conflicting policy objectives—such as raising civil service salaries across the board to meet basic living costs at the bottom end of the pay scale versus salary decompression to attract more highly qualified staff—and hence the real price and opportunity costs of potential reform initiatives. The Cambodian government, for example, faced a fiscal constraint on its wage bill but also pressure to raise salaries to enhance recruitment and performance. A wage bill model was constructed on the basis of detailed pay and compensation analytical work, laying the basis for a discussion on the basis of empirical evidence instead of on assumed tradeoffs. Due to the accounting issues mentioned above, as well as the stage of the counterpart’s deliberations, the Lao PDR analysis did not attempt this type of modeling. The Armenia Public Expenditure Review chapter created a customized pay model, using a sample of civil service employees, with a variety of scenarios illustrating the impacts of decompressing the base salary scale or reducing employment numbers, and discussing the substantive implications of these commonly-raised yet simplistic proposals. At the time of writing, the modeling report was being reviewed by counterparts and had been received with interest from the Minister of Finance.

# **_Civil Servant Earnings Analysis_**

Two common back-of-the-envelope calculations that usually serve as an entry point for analyzing civil service earnings are the compression ratio and the ratio of average civil service earnings to per capita GDP. Since these are commonly used, we feel it is important to present them with caveats: these statistics provide only limited insights, can easily be misleading, and are not a suitable basis for policy deliberations unless they are tied to more sophisticated analyses.

Compression ratios—which compare earnings at the top of the pay scale as a multiple of earnings for entry-level posts—are often used to measure the formal financial incentives for individuals to accept positions of greater responsibility.<sup>12</sup> A compression ratio depends on the nature of the input data and 11 See “Modeling Pay and Employment,” PREM Note Number 105 (Washington DC: The World Bank, February 2006). In addition to custom-built models tailored to the specific shape and issues of a country’s public employment, the Bank’s East Asia and Pacific Region developed a standardized analytical tool, the Civil Service Financial Model that is applicable in many countries and allows users to insert pay and employment data and related parameters into the software.

12 A corresponding term, decompression, refers to expanding the differential between earnings at the top and bottom ranks of the pay scale.

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