The vast majority of postmasters were paid under the Service’s EAS, which has 26 pay grades and covers essentially all supervisory and management employees. Postmasters were in grades 11, 13, 14, 15, 18, 20, 21, 22, 24, and 26. The few remaining postmasters were covered by the Postal Career Executive Service pay schedule, which is comparable to the Civil Service’s Senior Executive Service. The Postal Service classified a little more than half of its postmasters as nonexempt from the requirements of the Fair Labor Standards Act and, as such, they are eligible for overtime pay at time- and-one-half. The remaining postmasters were classified as exempt employees and thus not eligible for overtime pay at time-and-one-half. According to the Service, these postmasters were classified as exempt because, among other things, they supervised two or more craft employees. During 1999, postmaster pay had four major components—basic pay, variable pay, merit awards, and premium pay. Basic pay consisted of salaries and wages paid directly for duties performed during the regular workweek. Variable pay—Economic Value Added (EVA)—was pay-for– performance cash rewards for achieving specific organizational goals and targets. Merit awards were lump-sum payments to recognize achievements beyond what was normally expected. Premium pay was supplemental pay for overtime, nights, and holidays worked. Basic pay, variable pay, and merit awards and/or premium pay made up about 95 percent, 4 percent, and 1 percent, respectively, of postmasters’ gross pay. Using the results of a 1995 Hay Management report that compared EAS and private sector compensation, the Service said that in 1996 it made substantive changes to EAS pay. Among other changes, the Service lowered the basic pay minimums of the 26 EAS grades. This change resulted in the basic pay minimums of EAS-15 and EAS-16 exempt supervisors being less than the basic pay maximum of a grade 5 clerk, which was the most populated grade and pay level of the largest bargaining unit. To compensate for this lack of a pay difference and comply with the requirement of the 1970 Act to provide adequate and reasonable pay differences, the Service established an SDA policy for its EAS-15 exempt supervisors and above. The Service stated that it chose grade EAS-15 exempt supervisors as the starting point of eligibility for the SDA because most exempt first-line supervisors were in grades EAS-15 and EAS-16. (There were no EAS-16 postmasters, only supervisors.) The SDA policy provided that EAS-15 exempt supervisors and above were to be paid no less than 5 percent more than the basic pay maximum of a grade 5 clerk. The Hay Management report indicated that of the private sector companies that maintained a formal salary differential between supervisors and their subordinates, the salary differential typically ranged from 10 to 15 percent. The Service said it made a management decision to set the SDA at 5 percent because it believed this amount would provide a visible difference between the minimum pay of supervisors and the maximum basic pay of a grade 5 clerk. However, since implementing the SDA, the Service had not conducted the analyses necessary to fully determine the implications of its SDA policy on postmasters, including which postmasters should be eligible for, and the amount of, the SDA. Because the 1970 Act did not specify whether the pay difference between supervisors and their craft employees should be determined using basic or gross pay, we analyzed both to determine the differences in pay between craft employees and their local postmasters. From a basic pay perspective, our analyses showed that 2 of the 48,272 clerks earned more in basic pay than their local postmasters, as shown in table 1. No city carriers earned more in basic pay than their local postmasters. From a gross pay perspective, 727 of the 191,694 craft employees (about one-half of 1 percent) earned more than their local postmasters. These craft employees earned, on average, about $2,400 more than their local postmasters. Overtime paid to clerks and city carriers was the primary reason why they earned more than their local postmasters. According to the Service, the inclusion of overtime in rural carriers’ basic pay was the most probable reason why they earned more. Of the 727 craft employees earning more than their local postmasters, 562, or 77 percent, were rural carriers. With respect to postmasters, about 6 percent (624 of 10,177) supervised at least 1 craft employee who earned more than they did in gross pay, as shown in table 2. Of the EAS-15 nonexempt postmasters and below, about 16 percent (430) supervised at least 1 craft employee who earned more in gross pay than they did. These postmasters were not entitled to the SDA because they were either nonexempt or in grades below EAS-15. Of the EAS-15 exempt postmasters who could receive the SDA, about 5 percent (104) supervised at least 1 craft employee who earned more in gross pay than they did. Of the EAS-18 exempt postmasters and above, about 2 percent (90) supervised at least 1 craft employee who earned more in gross pay than they did. These postmasters were not entitled to the SDA because their basic pay was more than 5 percent greater than the maximum basic pay of a grade 5 clerk. A further analysis of postmaster pay showed that an additional 6 percent of postmasters (618 of 9,553) supervised at least 1 craft employee whose earnings were within 5 percent of their postmasters’ gross earnings. The five organizations we selected to discuss pay practices indicated that the potential exists for their craft employees to earn more than their immediate supervisors, but this rarely occurs because of how their pay policies were designed. Four of the five organizations indicated that they used market-based pay systems that generally resulted in their organizations setting the basic pay for their supervisors high enough to prevent almost all craft employees from earning more than their supervisors. As a general guide for determining supervisory pay scales, the organizations relied heavily on surveys of prevailing salaries and other compensation practices used by other organizations in similar markets. According to the consulting firm Watson Wyatt, most private sector companies use a market-based approach to set basic pay and other compensation policies. Watson Wyatt reported that about one in three companies it surveyed (about 30 percent) had policies in place to help ensure that supervisors earn more than their employees. Watson Wyatt also reported that these companies used a combination of approaches, such as ad hoc salary increases for supervisors and SDAs, to accomplish this outcome. Our review of the Postal Reorganization Act of 1970 showed that the Service is required to provide a program of consultation with organizations representing supervisors and postmasters under which the organizations are entitled to participate directly in the planning and development of pay policies and other programs relating to their members. The 1970 Act, as amended, specifies additional procedures and protections for organizations representing supervisors with regard to the consultation process. For example, organizations representing supervisors are entitled to monthly meetings with the Service; if they are not satisfied with the Service’s decisions, they may request a fact-finding panel to consider the matter. Organizations representing postmasters are not entitled to these additional procedures and protections. The proposed Postmasters’ Fairness and Rights Act was introduced in the 107th Congress and would provide new rights to organizations representing postmasters. Most notably, the proposed act would provide organizations representing postmasters with the right to binding arbitration with regard to pay policies and other programs affecting their members. The Service is opposed to the proposed act because it believes that it is unnecessary, that it will do irreparable damage to the Service, and that it is inconsistent with the 1970 Act and basic labor law. The two postmaster organizations support the proposed act and participated in its development. They believe the proposed act will restore equity to the pay and benefits of postmasters and provide a more level playing field for their organizations in planning and developing other programs. Although the Postal Reorganization Act of 1970 requires that supervisors and other managerial personnel be paid salaries that provide them an adequate and reasonable difference in pay over that of clerks and carriers, the act did not specify what constitutes an adequate and reasonable difference or whether the difference should apply to basic or gross pay. In 1996, the Service lowered the basic pay minimums of the EAS and established an SDA of 5 percent to provide a pay difference for certain postmasters and other supervisors in order to address this statutory requirement. However, since implementing the SDA, the Service had not fully evaluated the impact of the differential on postmasters and other supervisors. Our review showed that in 1999, very few craft employees earned more than their postmasters did in basic pay. However, for gross pay, about 12 percent of the postmasters we studied supervised craft employees who either earned more than they did or earned within 5 percent of what they earned, apparently due to overtime. Our review also showed that most postmasters who earned less than their craft employees were lower graded postmasters and not eligible for the SDA. Given the lack of specificity in the 1970 Act, we are not in a position to conclude whether or not the results we found represent an adequate and reasonable outcome regarding the pay differences for postmasters. However, prior to our providing the results of our review to the Service, it had only limited data to evaluate the impact of its SDA policy on postmasters, including which postmasters should be eligible for, and the amount of, the SDA. Without such information, the Service was not in the best possible position to factually assess the adequacy and reasonableness of the Service’s SDA policy or other pay differences. Now that some data are available and an approach has been developed to analyze the Service’s payroll data, the Service should have the capability to do the analyses necessary to put it in a better position to make fact-based decisions on the adequacy and reasonableness of its SDA policy and pay differences. In order to be in a better position to evaluate its SDA policy and the pay differences between postmasters and their craft employees, we recommend that the Postmaster General use postal payroll and any other comparable data to periodically (1) determine the extent to which clerks and carriers may be earning more than their local postmasters, and the reasons why, if applicable; and (2) reassess the adequacy and reasonableness of the pay differences between postmasters and the clerks and carriers they supervise. We received written comments on a draft of this report from the Postmaster General dated August 27, 2001; the President of the National Association of Postmasters of the United States (NAPUS) dated August 15, 2001; and the President of the National League of Postmasters of the United States (the League) dated August 21, 2001. These comments are summarized below and are reprinted in appendices IV, V, and VI. Officials from the Service and the Tennessee Valley Authority provided oral technical and clarifying comments. Also, officials from Federal Express and the Federal Aviation Administration provided technical and clarifying comments by e-mail. All technical and clarifying comments were incorporated, where appropriate. The Postmaster General, and the presidents of NAPUS and the League, indicated general agreement with our findings and recommendations. They believed that the findings supported their views, which conflicted, regarding whether adequate and reasonable differences in pay existed between postmasters and craft employees. That is, the Postmaster General believed the findings supported the Service’s contention that adequate and reasonable differences in pay exist. Conversely, the presidents of the postmaster organizations believed that the findings supported their contention that adequate and reasonable differences do not exist. Specifically, the President of the League stated that although the Congress did not legislate the amount of the differential, the Congress considered a 25-percent differential to be reasonable and adequate. We continue to believe that given the lack of specificity in the 1970 Act, we are not in a position to conclude whether or not the results we found represent an adequate and reasonable outcome for postmasters. With respect to the League president’s comment that the Congress considered a 25-percent differential to be reasonable and adequate, we did not find any support for that view. Although the legislative history indicated that the Congress considered establishing a specific pay difference, the history also indicated that the Congress chose not to do so because it did not want to bind the Service to a fixed difference to be maintained in the future. We also note that a comment that there should be a minimum differential of at least 25 percent was made by a former Assistant Postmaster General for Personnel at a public hearing before enactment of the 1970 Act, not by the Congress. The President of the League also expressed three concerns regarding the data, methodology, and analyses used in our work. First, he said the 1999 payroll data that we used in our analyses were outdated and did not accurately reflect current pay conditions. Second, the president was concerned that we, for various reasons, excluded over 200,000 craft employees and postmasters from our study group. Third, the president was concerned that we did not perform a thorough analysis of the earnings of certain lower graded postmasters and their craft employees. Specifically, he noted that the lack of pay difference was most prevalent for EAS-15 postmasters and below. He stated that we diminished the seriousness of the pay inadequacies experienced by these lower graded postmasters when we combined their earnings with those of higher graded postmasters to create various statistics. He said that a study of the pay differential should be limited to EAS-18 postmasters and below and their craft employees. He went on to say that the magnitude of the lack of an adequate pay differential cannot be accurately determined without comparing the pay of all craft employees, including rural carriers, and postmasters. We agree with the President of the League that it would be helpful to have more current data and additional analyses of the data, but this was not possible to do in our review. First, we used calendar year 1999 payroll data because, at the time we started our work, these data were the most current available. Second, in order to have a level-playing field for our analyses, we excluded certain craft employees and postmasters from our study group for the following reasons. As stated in the letter, we excluded all employees who were not postmasters, clerks, city carriers, or rural carriers. We also excluded those clerks, carriers, and postmasters who were not full-time permanent employees for the entire year, or were detailed to other jobs or changed their duty stations during 1999. Next, we eliminated those clerks and carriers whose locations did not match with a postmaster. Also, we eliminated those postmasters whose locations did not match with at least one clerk or carrier. Third, due to complexities associated with the payroll file and because of time constraints, we were unable to do a more exhaustive analysis. Finally, we were asked to review the pay of all postmasters and not just EAS-18 postmasters and below. We recognize that combining the earnings of various grades of postmasters does not provide specific data by grade; however, we believe that the data that we do provide offer some insight into the pay of postmasters that was not previously available. Also, we recognize that more exhaustive analyses of payroll data need to be done, and we believe the Service is in the best position to do these analyses. This recognition and our findings helped form the basis for our conclusions and recommendations. We are sending copies of this report to the Chairmen and Ranking Minority Members, Senate Committee on Governmental Affairs and its Subcommittee on International Security, Proliferation and Federal Services; and to the Chairman and Ranking Minority Member, House Committee on Government Reform. We are also sending copies of this report to Representative Constance Morella because of her expressed interest in postmasters’ pay; the Postmaster General and Chief Executive Officer, U.S. Postal Service; the National President, National Association of Postmasters of the United States; and the President of the National League of Postmasters of the United States. Major contributors to this report included Don D. Allison, Gerald P. Barnes, Roger L. Lively, Anne Rhodes-Kline, George H. Quinn, and Charles F. Wicker. If you have any questions about this letter or the appendices, please contact me or Mr. Barnes on (202) 512-8387 or at ungarb@gao.gov or barnesgp@gao.gov. Our objectives were to (1) describe the Postal Service’s pay practices for postmasters, including how the Service determines and applies its supervisory differential adjustment (SDA); (2) determine whether any craft employees earned more than their local postmasters during 1999 and, if so, why and to what extent; and (3) determine other organizations’ practices for establishing pay for supervisors whose craft employees can earn more than they do, as well as determine prevalent industry practices. To address our objectives, we reviewed the Postal Reorganization Act of 1970, its legislative history, legal decisions regarding postmasters’ pay, the Service’s pay policies, proposed legislation to change the consultation process used to determine postmaster pay, and studies of supervisory compensation practices within private industry. We discussed pay practices for supervisors with officials from the Service, postmaster organizations, Hay Management Consultants, Watson Wyatt, and other selected organizations—the Federal Aviation Administration, Federal Express, the Tennessee Valley Authority, United Parcel Service, and the Washington Metropolitan Area Transit Authority. We selected these organizations by using a combination of factors, including (1) exemption from the pay provisions of Title 5 of the U.S. Code, (2) substantial overtime usage, (3) supervision of bargaining unit employees by nonbargaining unit managers, and (4) competitiveness with the Service. We also obtained the views of the Service and the postmaster organizations regarding the proposed legislation. Additionally, because the Service did not have current data on whether, or to what extent, craft employees earned more than their postmasters, we obtained the Service’s payroll files for 1999, the most recent year for which data were available when we started our review. These files contained the biweekly pay records of over 1 million employees who worked for the Service at some point during that year. Because we focused our work on postmasters, clerks, city carriers, and rural carriers, we excluded all employees who were not in one of these four occupations or were not full- time permanent employees for the entire year. We also excluded employees who, during the year, were detailed to other jobs or changed their duty stations. After these exclusions, a total of 443,942 postmasters, clerks, and carriers remained. We then matched clerks and carriers with their local postmasters according to postal facility locations and eliminated those clerks and carriers whose locations did not match with a postmaster’s. We also eliminated those postmasters whose locations did not match with at least one clerk or carrier. This created a study group of 201,871 employees, consisting of 191,694 clerks and carriers and the 10,177 postmasters who supervised them. Next, we computed the basic and gross pay of the employees in our study group to determine if any clerks or carriers earned more than their local postmasters, or if any postmasters supervised clerks or carriers who earned more than they did. For purposes of this report, we defined gross pay as all pay received during calendar year 1999, excluding severance payments, settlements, prior years’ pay adjustments, annual leave sell-back payments, and terminal leave payments. We did not assess the reliability of the Service’s 1999 payroll files. However, audits performed by Ernst & Young LLP on the Service’s financial statements for 1998, 1999, and 2000 did not identify any material weaknesses in the Service’s payroll system. Describe the Postal Service’s pay practices for postmasters, including how the Service determines and applies its Supervisory Differential Adjustment (SDA). Determine whether any craft employees earned more than their local postmasters during 1999 and, if so, why and to what extent. Determine other organizations’ practices for establishing pay for supervisors whose craft employees can earn more than they do, as well as determine prevalent industry practices. Hay Management and Watson Wyatt Worldwide consulting firms’ compensation experts. the Service’s 1998, 1999, and 2000 annual financial reports and comprehensive statements; and prior GAO reports and testimonies on compensation and related issues. Analyzed postmaster and craft employee pay. Obtained the Service’s payroll files for calendar year 1999 containing pay records for over 1 million full- and part-time employees who were paid at least once during the year. Identified 443,942 postmasters, clerks, and carriers who were full-time permanent employees for all of 1999 and did not change occupation or duty station. Matched clerks and carriers with the local postmasters who supervised them, creating a study group of 201,871 employees (191,694 craft employees and 10,177 postmasters). Computed the basic and gross pay of postmasters, clerks, and carriers for 1999. Gross pay was defined as all pay received during calendar year 1999, excluding severance payments, settlements, prior year pay adjustments, annual leave sell-back payments, and terminal leave payments. Clerks’ and carriers’ pay included basic pay, overtime and other premium pay, bonuses, and awards. Postmasters’ pay included basic pay; variable pay; merit awards; and premium pay, including overtime. Identified (1) the clerks and carriers who earned more than their local postmasters and (2) the postmasters who supervised clerks and/or carriers who earned more than they did. Performed various statistical and comparative analyses of the matched postmasters, clerks, and carriers. Although we did not assess the reliability of the Service’s payroll file, the audits done by Ernst & Young LLP on the Service’s financial statements for 1998, 1999, and 2000 did not identify any material weaknesses regarding the payroll system. included about 798,000 career employees and about 38,000 post offices, stations, and branches in 1999. Craft employees accounted for the vast majority of career employees. These employees included about 292,000 clerks, 242,000 city carriers, and 55,000 rural carriers. Their pay is set through collective bargaining or binding arbitration, when needed, to resolve bargaining deadlocks. Postmasters accounted for about 26,000 of the 78,000 supervisory and management employees. Administrative Schedule (EAS), which covers about 78,000 noncraft employees, including executives, managers, and supervisors. The EAS has 26 grade levels for pay. EAS postmasters were in grades 11, 13, 15, 18, 20, 21, 22, 24, and 26. Postmasters not paid under the EAS are paid under the Postal Career Executive Service (PCES) pay schedule, which is comparable to the Civil Service’s Senior Executive Service. Service classified about 14,000 postmasters as nonexempt, and, as such, they were eligible for overtime pay at time-and-one-half. The remaining postmasters were classified as exempt employees and thus not eligible for overtime at time-and-one-half. According to the Service, these postmasters were classified as exempt because, among other things, they supervised two or more craft employees. The 1970 Act requires that the Service pay wages comparable to private sector wages and provide an adequate and reasonable difference in pay for supervisors and managers over that of the clerks and carriers they supervise. difference between postmasters and their craft employees. The 1970 Act’s legislative history indicates the Congress considered imposing a pay difference formula but chose not to. The Congress did not want to bind the Service to a fixed difference to be maintained in the future. Instead, the Congress wanted to provide Postal Service management with maximum flexibility and control over its costs. Service, claiming that the Congress intended a 25-percent difference in pay between postmasters and craft employees. The Court ruled in favor of the Service, citing that the Congress did not set a fixed difference nor require that the Service set a fixed difference. postmasters in 1999. About one-half of 1 percent of craft employees earned more in gross pay than their local postmasters. With regard to postmasters, about 12 percent supervised at least 1 craft employee who earned more than they did in gross pay or earned within 5 percent of what they earned. Overtime was apparently the reason why these employees earned more or within 5 percent of what their postmasters earned. Most postmasters who supervised at least 1 craft employee who earned more than they did were not eligible to receive the SDA. These postmasters could not receive the SDA because they were either eligible for overtime at time-and-one-half or were in grades below EAS-15. instances of craft employees earning more than their supervisors. The five organizations indicated that craft employees will occasionally earn more than their supervisors, but this is the exception and not the norm. Four of the five organizations indicated that they used market-based pay systems that generally resulted in their organization setting pay for supervisors high enough to prevent almost all craft employees from earning more than their supervisors. According to Watson Wyatt, private sector companies use market-based pay for nonbargaining unit positions, and about 30 percent of the companies had various policies in place to help ensure that supervisors earned more than their employees. Basic pay consisted of salaries and wages paid directly for duties performed during the regular workweek and accounted for, on average, 95 percent of a postmaster’s pay. Variable pay, Economic Value Added (EVA), was pay-for- performance cash rewards for achieving specific organizational goals and targets and accounted for, on average, 4 percent of a postmaster’s pay. Merit awards were lump-sum payments to recognize achievements beyond what was normally expected. Premium pay was supplemental pay for overtime, nights, and holidays worked. Merit awards and premium pay accounted for, on average, 1 percent of a postmaster’s pay. The Service said it used the results of a 1995 Hay Management report that compared EAS and private sector compensation as a guide in making substantive changes to the EAS pay system in 1996. Among other changes, the Service lowered the basic pay minimums of the 26 EAS grades. That change resulted in the basic pay minimums of EAS-15 and EAS-16 exempt supervisors being less than the basic pay maximum of a grade 5 clerk--the most populated grade and pay level of the largest bargaining unit. To compensate for this lack of a pay difference and comply with the 1970 Act’s requirement to provide adequate and reasonable pay differences, the Service instituted an SDA policy. This policy provides that EAS-15 exempt supervisors and above will be paid no less than 1.05 times the maximum basic pay for the most populated grade in the largest bargaining unit (grade 5, step O, clerk). The Service stated that it chose EAS-15 exempt supervisors as the starting point of eligibility for the SDA because most exempt first-line supervisors were in grades EAS-15 and EAS-16. (There were no EAS-16 postmasters, only supervisors.) and above at 5 percent more than the maximum basic pay of a grade 5 clerk (i.e., grade 5, step O). In 1995, Hay Management reported to the Service that a quarter of the private sector companies maintained a formal salary differential between supervisors and subordinates. Of these companies, the differential was typically 10-15 percent. In 1996, the Service made a management decision to set the SDA at 5 percent because it believed this amount would provide a visible difference between the minimum pay of exempt supervisors and the maximum basic pay of a grade 5 clerk. However, since implementing the SDA, the Service has not conducted the analyses necessary to fully determine the implications of its SDA policy on postmasters, including which postmasters should be eligible for, and the amount of, the SDA. SDA does not apply to EAS-15 nonexempt supervisors or EAS- 14 supervisors and below. Although the SDA rate of 5 percent does not change, the SDA salary does change as the maximum basic pay of a grade 5 clerk is adjusted for cost-of-living-allowances (COLA) and for other general pay increases. Until November 1998, the SDA did not apply to exempt supervisors above EAS-16 because their basic pay minimums provided a pay difference that exceeded the 5 percent SDA rate. From 1996 through 1999, the SDA salary increased nine times due to various increases in the maximum basic pay of a grade 5 clerk. $39,329 Clerk General Increase $40,517 Clerk General Increase $41,491 Clerk General Increase *All references to a clerk refer to one at grade 5, step O. In November 1999, the maximum basic pay for EAS-15 and EAS- 16 was 19 percent and 28 percent, respectively, higher than the maximum basic pay of a grade 5 clerk. In November 1999, basic pay for EAS ranged from $20,875 to $82,349; clerks ranged from $21,602 to $45,990; city carriers ranged from $28,539 to $40,526; and rural carriers ranged from $8,031 to $48,518. The EAS has 26 grades and associated pay ranges. Clerks have 10 grades with up to 18 steps. City carriers have 2 grades with 15 steps. Rural carriers are salaried employees. *The SDA produced a minimum salary of $ for EAS-15 through 17 exempt supervisors. The basic pay for a, grade 5, step O clerk was $39,515. above the midpoint salary for that grade. consider the following four factors in establishing the pay of its supervisors and managers. The Service’s explanation of how it considered each factor also follows. Provide supervisors and managers with compensation that is comparable to the private sector. In considering this factor, the Service contracted with Hay Management for a comprehensive comparison of postal supervisory/management and private sector pay. That comparison showed that 25 percent of private sector companies maintained a formal salary differential between employees and their supervisors. For those companies that maintained a formal salary differential, it ranged from 10 to 15 percent. Set pay at a level that will attract and retain qualified and capable supervisors and managers. The Service did not consider this factor as critical as other factors because EAS employee turnover was low, and many people sought to fill any vacant EAS positions. Promote supervisors’ and managers’ leadership status compared to the workers they supervise. Because the EAS pay system closely resembled that of craft employees, the Service changed the EAS pay system in 1996 to enhance its status and make it more similar to the PCES pay system. Also, an SDA was established to help ensure that exempt supervisors’ and managers’ salaries would be higher than those of the craft employees they supervised. Provide prompt, reliable, and efficient service. To reward supervisors and managers for improvements in providing prompt, reliable, and efficient postal services, the Service also added a variable pay program (EVA) to their EAS pay system. According to the Service, EVA and other changes to the EAS pay system made in 1996 were carefully analyzed, before implementation, to assess the operational and economic impact of the changes, particularly because personnel costs account for over 75 percent of the Service’s total expenses. earned more than their local postmasters. The two clerks were grade 5s who earned the maximum basic pay; one worked for an EAS-11 postmaster, and one worked for an EAS-13. No city carriers earned more in basic pay than their local postmasters. Rural carriers were excluded from our basic pay analysis because their basic pay included overtime, which could not be identified and excluded. craft employees earned more than their local postmasters. Overtime was the primary reason why clerks and city carriers earned more than their local postmasters. Overtime could not be isolated for rural carriers; but according to Service officials, overtime was the most probable reason why rural carriers earned more than their local postmasters. Craft employees earning more averaged about $2,400 more than their local postmasters. Rural carriers accounted for 77 percent (562) of the craft employees who earned more than their local postmasters. Of the remaining 165 (23 percent) craft employees who earned more than their local postmasters, 92 were city carriers and 73 were clerks. postmasters, 409 (56 percent) earned less than $2,000 more, with 4 earning less than $10 more. Nine of the 727 (1 percent) craft employees earned $10,000 or more than their local postmasters. One craft employee earned over $18,000 more than the local postmaster. postmasters, 854 (0.4 percent) earned within 5 percent of what their local postmasters earned. Of these 854 craft employees 132 earned within 1 percent of what their local postmasters earned. 333 earned within 1 percent to 3 percent of what their local postmasters earned. 389 earned within 3 percent to 5 percent of what their local postmasters earned. Number in study group 48,272 *Unlike clerks and city carriers, rural carriers are salaried employees whose basic pay includes overtime. 10,177) supervised at least 1 craft employee who earned more in gross pay than they did. About 16 percent of EAS-15 nonexempt postmasters and below (430 of 2,616) supervised at least 1 craft employee who earned more in gross pay than they did--these postmasters were not entitled to the SDA because they were either EAS-15 nonexempt or in grades below EAS-15. About 5 percent of EAS-15 exempt postmasters (104 of 1,946) supervised at least 1 craft employee who earned more in gross pay than they did--these postmasters could receive the SDA. About 2 percent of EAS-18 to EAS-26 exempt postmasters (90 of 5,588) supervised at least 1 craft employee who earned more in gross pay than they did. These postmasters were not entitled to the SDA because their basic pay was more than 5 percent greater than the maximum basic pay of a grade 5 clerk. None of the 27 PCES postmasters had a craft employee who earned more in gross pay than they did. earned less than they did, 618 (6.4 percent) supervised a craft employee whose earnings were within 5 percent of their pay. 103 postmasters supervised craft employees whose earnings were within 1 percent of their pay. 241 postmasters supervised craft employees whose earnings were within 1 to 3 percent of their pay. 274 postmasters supervised craft employees whose earnings were within 3 to 5 percent of their pay. national pay practices, as reported by Watson Wyatt from the results of its 2000-2001 survey of supervisory management compensation practices. pay practices to minimize the occurrence of employees’ earning more than their supervisors: market-based pay, variable pay, supervisory differentials, overtime for exempt employees, ad hoc payments, and increased variable pay opportunities. salaries used by other organizations in similar markets. They said the market-rate differences were usually sufficient to prevent most craft employees from earning more than their supervisors. FedEx used a market-based pay system for all its employees (craft employees were not unionized). TVA, WMATA, and UPS negotiated craft pay and used market- based pay for supervisory and managerial employees. FAA negotiated pay with the air traffic controllers’ union and used it to set pay for its nonunion air traffic control supervisors and managers. According to Watson Wyatt, private sector companies typically use market-based pay for nonunion positions. supervisors and managers and/or craft employees. Supervisors and managers and craft employees at TVA, FAA, and FedEx were covered by variable pay programs linked to the organization’s performance. Exempt supervisors and managers at all five organizations and craft employees at FAA were included in variable pay programs linked to the individual’s job performance (e.g., merit pay and pay for performance). Watson Wyatt reported that about 70 percent of companies provided at least one type of bonus or other variable pay plan for supervisors (e.g., profit sharing, spot awards, and merit pay) representing an increase of about 28 percent since 1995. supervisor’s minimum pay rate) All five organizations had differences in their pay structures for craft employees and supervisors; two used a differential, but they varied on which supervisors were covered and the differential’s rate. WMATA provided its foremen (mostly nonexempt) a 6-percent differential over the highest pay rate for the craft occupation supervised. FedEx provided its managers (all exempt) a 20-percent differential over the highest hourly rate of employee supervised. differential commonly apply it to the rate of the highest paid employee supervised. The average supervisory differential is 11 percent. Application varies (i.e., exempt supervisors only, nonexempt supervisors only, or both). Since 1995, use of supervisory differentials by private sector companies has decreased by more than 60 percent. FAA had a policy authorizing overtime (and/or compensatory time off in lieu of overtime pay) for its exempt employees. Air traffic control supervisors and managers were eligible for overtime pay at time-and-one-half rates. According to Watson Wyatt, private sector practices included cash- only payments, compensatory time off, and a combination of cash and time off. Overtime compensation rates varied from straight time to time-and-one-half. TVA used an ad hoc approach to address situations where craft employees earned more than their supervisors. TVA may authorize a lump-sum cash payment to nonbargaining unit supervisors at any time to recognize their performance and extra hours worked for periods when their craft employees are paid overtime. According to Watson Wyatt, the ad hoc approach was the most popular approach used by private sector companies to address situations where employees earned more than their supervisors. The flexibility of this pay practice allows companies to make compensation decisions on a case-by-case basis. variable pay opportunities to address situations where employees earned more than their supervisors. According to Watson Wyatt, private sector companies that increased supervisors’ opportunities for variable pay used one or more variable pay programs, such as bonuses, spot awards, gainsharing, and/or lump-sum merit pay (added to basic pay or not). them an adequate and reasonable difference in pay over that of clerks and carriers. However, the 1970 Act did not specify what constitutes an adequate and reasonable difference or whether the difference should apply to basic or gross pay. In 1996, the Service lowered the the basic pay minimums of the EAS. It also established an SDA of 5 percent to provide a pay difference for certain postmasters and other supervisors in order to address this statutory requirement. However, since implementing the SDA, the Service has not fully evaluated the impact of the differential on postmasters and other supervisors. postmasters supervised craft employees who either earned more than they did or earned within 5 percent of what they earned. Also, most of these postmasters were lower graded and not eligible for the SDA. Given the lack of specificity in the 1970 Act, we are not in a position to conclude whether or not the results we found represent an adequate and reasonable outcome regarding pay differences for postmasters. However, prior to our providing the review results to the Service, it had only limited data to evaluate the impact of its SDA policy on postmasters, including which postmasters should be eligible for, and the amount of, the SDA. Without such information, the Service was not in the best possible position to factually assess the adequacy and reasonableness of the Service’s SDA policy or other pay differences. developed to analyze the Service’s payroll data, the Service should be in a better position to make fact-based decisions on the adequacy and reasonableness of its SDA policy and pay differences. In order to be in a better position to evaluate its SDA policy and the pay differences between postmasters and their craft employees, we recommend that the Postmaster General use postal payroll and any other comparable data to periodically: determine the extent to which clerks and carriers may be earning more than their local postmasters, and the reasons why, if applicable; and reassess the adequacy and reasonableness of the pay differences between postmasters and the clerks and carriers they supervise. Under the Postal Reorganization Act of 1970, the Service is required to provide a program of consultation with organizations representing supervisors and postmasters under which the organizations are entitled to participate directly in the planning and development of pay policies and schedules, fringe benefits, and other programs relating to their members (39 U.S.C. 1004(b)). Under this act, the Service must discuss its proposed policies with postmaster organizations before they go into effect; and such discussions must be conducted in a meaningful, good faith manner. However, the Service cannot be forced to accept the postmaster organizations' proposals on polices or even be compelled to negotiate those policies with them. As a result of amendments to section 1004 in 1980, organizations representing supervisors are entitled to additional protections and procedures regarding the planning and development of pay policies and other programs affecting their members. For example, unless otherwise mutually agreed to by both the Service and the organizations, the Service is required to provide monthly meetings regarding the planning and development of pay and benefit programs to organizations representing supervisors. In addition, if organizations representing supervisors are not satisfied with the Service’s decisions, they may request the Federal Mediation and Conciliation Service to convene a fact-finding panel to consider the matter. Organizations representing postmasters are not entitled to these protections and procedures. The Postmaster Fairness and Rights Act (the proposed act), H.R. 250 and S. 177, introduced in the 107th Congress, would provide new rights to organizations representing postmasters with regard to the consultation process. Most notably, if the Service and postmasters were unable to resolve any differences they might have regarding proposals on pay policies or other programs, either party could refer the dispute to binding arbitration. We requested the views of the Service and the postmaster organizations on the proposed act. The Service is opposed to the proposed act and believes that it is unnecessary and will do irreparable damage to the Service’s mission. The Service believes that the proposed act will create a labor union relationship with supervisory and managerial employees, which is inconsistent with the intent of the Postal Reorganization Act of 1970. According to the Service, supervisory unions are also inconsistent with the intent of the National Labor Relations Act, which is the foundation for union-management relations in the United States. The National League of Postmasters of the United States (the League) strongly supports enactment of the proposed act and participated in its development. The League told us that over the last several years, postmasters have seen a continuous erosion of pay and benefits, including diminished pay differentials, the loss of cost-of-living adjustments, and reductions in convention and administrative leave. According to the League, under the Postal Reorganization Act of 1970, postmasters have no recourse when consultations with the Service produce unsatisfactory results. The League believes that the proposed act will help restore equity to the pay and benefits of postmasters and will encourage fair and true negotiation. The National Association of Postmasters of the United States (NAPUS) also participated in developing the proposed act. According to NAPUS, in recent years, postmasters have been denied the ability to play a constructive and productive role in discussions with senior postal management over compensatory and programmatic issues. NAPUS believes that the proposed act will provide a more level playing field. It pointed out that in a number of instances outside the Service, management- level personnel are afforded opportunities to participate in a more equitable discussion over pay and program issues. According to NAPUS, school administrators in a number of states and municipalities and airline pilots are provided with these opportunities. 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Summary: The Postal Reorganization Act of 1970 requires the Postal Service to pay wages comparable to those of the private sector. It also requires the Service to provide adequate and reasonable pay differences between clerks and carriers and their supervisors, such as postmasters, although the act does not specify what constitutes adequate and reasonable differences. Furthermore, the act requires the Service to consult with supervisor and postmaster organizations when planning and developing pay policies and other programs affecting their members. Since the mid-1970s, two postmaster organizations have voiced concerns that adequate and reasonable pay differences do not exist between postmasters and the clerks and carriers they supervise. Recently, the organizations took their concerns to Congress. The resulting Postmasters' Fairness and Rights Act would make substantive changes in the way postmasters' pay is determined. Most postmasters are now paid under the Service's Executive and Administrative Schedule (EAS), which is the salary schedule that applies to nearly all supervisory and management employees. Generally, postmaster pay consists of basic pay; pay-for-performance; lump-sum merit awards; and supplemental pay, such as overtime. In 1996, the Service lowered the minimum basic pay of the 26 EAS grades. This resulted in the minimum basic pay of EAS-15 and EAS-16 supervisors being less than the maximum basic pay of a grade 5 clerk, which was the most populated grade and pay level of the largest bargaining unit. Because of this and the 1970 Act's requirement that an adequate and reasonable pay difference be maintained, the Service established a Supervisory Differential Adjustment (SDA) policy for EAS-15 and above supervisors who are not eligible to receive overtime pay. This policy provides that these supervisors will be paid no less than five percent more than the maximum basic pay of a grade 5 clerk. GAO's analyses showed that two craft employees earned more in basic pay than did their local postmasters in 1999, and about one-half of one percent of craft employees earned more in gross pay than did their local postmasters. The five organizations that GAO selected to discuss pay practices had pay policies to minimize instances of craft employees earning more than their supervisors. These organizations indicated that craft employees only occasionally earned more than their supervisors.