The Skills Shortage and Federal Compensation

Until the General Schedule is replaced, the problems with government performance will grow progressively worse.

The cost of ignoring the workforce problems attributable to the General Schedule is very real and gets worse year after year. The GS system may well contribute to every government performance problem but the politics downplay its importance. Until it’s replaced, the problems will get progressively worse.  

This column was triggered by two recent reports. First, a new Government Accountability Office report argued that “a lack of technical knowledge presents challenges for effectively planning and executing complex IT acquisitions.” The inadequacy of federal IT skills has been reported a number of times. The second was a new Korn Ferry report, “The Salary Surge”, which argues that a “global shortage of highly skilled workers” will force employers to increase pay for shortage occupations by $2.5 trillion over the next decade. Government’s staffing problems are not occurring in a vacuum.

The need for people with cyber security skills has been in the headlines repeatedly but agencies may well have skill shortages in other job specialties. Assessing the adequacy of essential skills should be done annually as an early step in annual workforce planning. The problem should be expected with an aging workforce and few new hires.  

The skills shortage affects all employers and virtually all occupations that require specialized skills that necessitate specific training or education. But there are also shortages for more mundane industries and occupations. One that is hardly glamorous but essential is prison guard. Restaurants, banks, construction—the list of industries affected by shortages is long. The growing shortage of skilled people in healthcare has been described as a crisis.

With continued job growth and the demographic facts, this problem will get much worse. The skills shortages and the competition will only intensify across all industries and company sizes.  

That inevitably will push up salaries and prompt hiring bonuses. But employers that rely only on higher salary offers—buying talent—could trigger a bidding war for the better qualified workers willing to move from employer to employer. The competition is going to force employers to provide a more positive work experience to retain the best, highest-valued contributors.  

At the same time, there is an oversupply of unskilled workers in many areas. There is also a push to automate many low-level jobs. That argues for increased funding for training programs.

The Problem is the GS System

Maintaining fully competitive salaries will obviously be an important step. However, it’s doubtful anyone truly believes closing the claimed 35 percent pay gap is the answer.

It’s all too clear the GS system will never enable agencies to compete for essential talent. Staying with an inflexible, one-size-fits-all salary system will make hiring increasingly difficult. It may have made sense in 1949, but seven decades later it’s completely out of sync with reality. Even the “special rate” salaries lack the needed flexibility.

In the new environment, across-the-board salary increases are no longer a viable practice. Occupational pay differentials are going to expand. Furthermore, step increases fail completely to recognize the differences in individual capabilities.  

The step increases contribute to the problem of attracting and retaining Millennial workers. The lock-step career progression is contrary to their desire for recognition and growth. (The reasons new graduates are not interested in government jobs was the subject of a recent column by Nicholas Wu.)

Although the facts have never been assembled, at higher salary levels the politics-driven ceiling on federal pay severely limits the pay of the government’s best experts. The ceiling limits the pay of members of the Senior Executive Service, managers and senior professionals. In other sectors, experts are often paid well above the salaries of cabinet members. There have been reports, for example, of artificial intelligence experts being paid $500,000 or more. A badly needed idea is the dual career ladder so government’s experts are not forced to become managers.

The naysayers from both sides of the political equation are likely to oppose it but the common model for managing salaries in larger companies is the most viable answer. It’s simply too important that agencies be able to hire and retain well qualified specialists.

Salary planning starts with an understanding of the employers competing for the same talent along with average pay levels in those organizations. The Census reports there are 5.9 million employers in the United States but less than 1 percent have more than 500 employees and only 2,000 have more than 5,000.  Those mom-and-pop businesses are not competing with federal agencies for talent. From that perspective, the Bureau of Labor Statistics surveys are not valid for determining competitive pay rates.

There is a wealth of surveys that could be used for market pricing. Several agencies already subscribe to the surveys of the Economic Research Institute, for example. The adjustments to the Federal Wage System schedules have been based on local area surveys for years with virtually no criticism.

It’s been over two decades since the last credible analysis of how federal salaries compare with the pay of comparable jobs in other sectors. That’s basic. Assembling the facts should be the starting point in replacing the GS system. The framework for a new system has been discussed in a number of reports.

Larger Companies Also Have Better Benefits

It would also be a mistake to rely on data on the benefits provided to employees of mom-and-pop businesses. The same argument is relevant—they are not competing with government for talent. Most do not provide more than legally required benefits so including them in comparative analyses is misleading.

In contrast, larger companies like those competing for federal contracts typically have benefit packages not significantly different than federal benefits. That is definitely true for older companies in industries where unions still have a presence. A comparative analysis of the value of federal benefits with the package provided by larger companies found only a small difference—5 percent or less. That was the conclusion in a 1998 Congressional Budget Office memorandum summarizing analyses completed by a leading benefit consulting firm. (The value of benefits is more meaningful than the cost because of tax policy.)

Yes, benefit practices have changed a lot over the two decades since the study was done but it’s also true that companies are now more likely to award performance bonuses and stock ownership opportunities. In high-tech firms the stock-based income can be the reason jobs are attractive. Additionally, there is a long list of less common, often unique benefits like paid gym memberships and paid parental leave.  

Comparative analyses are relevant but as with cash compensation analyses, it’s important to focus on the competitors for talent and to value all the elements in a total compensation package.

The Problem Should Not Be Ignored

The shortages are not confined to technology jobs. The Korn Ferry report confirmed the problem is global and extends to virtually all knowledge jobs. Government’s situation is made more serious by the huge number—roughly 600,000—of workers eligible or soon to be eligible for retirement (age 55 or older). Their institutional knowledge will be extremely difficult to replace.  

Despite the academic contention that pay is less important to public sector employees, federal pay is a very contentious issue. Experience under the National Security Personnel System fed employee distrust and dissension. That will have to be addressed before a new program will be accepted.

Other research shows that an employees’ perceptions of their pay and the way it is administered is more influential than the facts. If they think they are paid fairly, great. But if they are convinced it’s unfair, regardless of the facts, it’s a problem, and the longer that continues, the more serious the problem. That makes effective communication a priority.  

The engagement index developed by the Office of Personnel Management does not consider pay issues but employees convinced they are not treated fairly will be less committed. Disengaged employees are less productive and increase operating costs through absenteeism, accidents, mistakes, waste, and other factors. An improved pay system and higher engagement levels will reduce those costs.

The transition will require at least two years and probably much longer. Managers will need to develop new skills. The planning should start soon.