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.