Postal Service defends bonuses for executives

The Postal Service on Monday defended a compensation program that rewards senior managers for meeting annual productivity goals, even though the agency is experiencing a financial downturn. Earlier this month, Postmaster General Jack Potter sent a memo to senior managers telling them they may be eligible for cash bonuses because productivity has improved over the past year. The suggestion that the agency would be offering bonuses at a time of huge projected losses raised eyebrows in the media and among some Postal Service observers. With growing debt, declining revenues and increasing costs, the Postal Service could lose as much as $3 billion this fiscal year. In April, the agency's financial status prompted the General Accounting Office to add the Postal Service to its "high risk" list, which identifies agencies and programs vulnerable to fraud, waste, abuse and mismanagement. The agency has already raised its rates twice this year. Greg Frey, a Postal Service spokesman, said the agency has used a pay-for-performance system for a number of years to motivate and reward managers who meet productivity goals. "It [the memo] was written in the vein of an annual letter, telling executives that as they near the end of the fiscal year, if they are achieving their goals, they can max out at a certain percentage," said Frey. The memo was sent to Postal Career Executive Schedule managers, Frey said. These executives are comparable in rank to those in the Senior Executive Service. Frey said that since the Postal Service is not a for-profit organization, employee compensation should not be based on profits or losses. He said Congress did not create the Postal Service to be a profit-making organization. "When it comes to productivity goals, we look at delivery standards, the rate process, employee safety standards," Frey said. "Profit-making is not a goal." Since 1996, the Postal Service has used a pay-for-performance system based on an industry financial model to reward senior managers with cash bonuses if they meet the agency's productivity goals for the year. The pay-for-performance program is based on the economic value added (EVA) formula, developed by Stern Stewart & Co., a financial consulting firm. Economic value added is a financial performance measure that takes into account the cost of capital in estimating an organization's profits or losses during a certain time frame, providing what is thought to be a more accurate picture of how well the company is performing financially. Paying bonuses to managers as an incentive when they meet the organization's productivity goals is a key part of the EVA model. According to Robert McLean, executive of the Mailers Council, an Arlington, Va.-based trade association, the EVA model does not allow the Postal Service to hand out bonuses arbitrarily. "There are explicit rules for determining how much managers at every level receive. There are national, area and district objectives that must be met before anyone receives an EVA check," he said. The Postal Service has 11 areas and 85 districts. McLean said the Postal Service's overall productivity is improving, so it "makes perfect sense" for managers to receive bonuses based on the economic value added model. The Mailers Council released its second quarterly report card on internal productivity at the Postal Service Tuesday, showing marked improvement in several areas. "Productivity goals are set at the beginning of each fiscal year, and managers are given aggressive objectives," McLean said. "Why shouldn't they be rewarded for meeting those objectives?" But Michael Riley, a former Postal Service executive who now owns a financial consulting firm, questioned the wisdom of handing out bonuses during a year when the agency could lose nearly $3 billion. "It is not possible to run a place that only breaks even; that is just not a sustainable position," he said. Instead of handing out bonuses now, the agency should "save the money for a year, calculate the amount owed, and put it in the bank to give to managers when the Postal Service turns profitable," he said. Riley criticized the Postal Service's pay-for-performance system, saying it rewards even mediocre managers. "The pay-for-performance system really needs a tune-up. It is not fair to those employees who are doing a wonderful job," he said.