OCPA Memorandum

Oklahoma Council of Public Affairs, Inc.An Independent Think Tank Promoting Free Enterprise and Limited Government Since 1993

1401 N. Lincoln Boulevard � Oklahoma City, OK 73104 � (405) 602-1667 � FAX: (405) 602-1238

www.ocpathink.org � ocpa@ocpathink.org

December 11, 2012

Considerations for Public Employee CompensationInformation from this document was presented in an interim study of state employee compensation by the Okla-

homa House Representatives on October 23, 2012.

By Jonathan Small, CPA

Policymakers are currently considering the pay of state government employees. This exercise is not new, but

previous attempts to address the pay of state employees were more influenced by politics than good policy. The

political nature of pay raises is evident: Simply consider that elected officials in the legislature typically grant pay

raises to all state employees (regardless of performance) in election years. As a former state employee with more

than six years’ experience working for the state, I know firsthand that, to adequately address the pay of government

employees, several issues must be considered.

All compensation must be considered

Advocates of increases in pay for all state government employees regularly cite the statistic that state employees

are paid “19 percent below market.” Considering only pay or wages is a flawed way to evaluate pay for govern-

ment employees. This view is flawed because state employees receive more than just salary or wages; employees

receive health benefits, retirement benefits, and other compensation that exceeds the level of private or “market”

employees. In fact, the total compensation cost of a state employee is just 7.45 percent less than that of a “market”

employee, according to the FY-2011 Compensation Annual Report1 prepared by the State of Oklahoma Office of

Personnel Management (OPM). While a state employee, my total compensation regularly exceeded my similarly

situated and degreed colleagues in the private sector.

State employment excess benefit allowance is a unique benefit

According to the FY-2011 Compensation Annual Report prepared by OPM, 89.7 percent of active state employ-

ees and their families have 100 percent of their core benefits paid for, plus they receive an additional $173 per

month, on average, in excess benefit allowance that can be used to pay for optional benefits and/or added to pay-

checks. The excess benefit allowance is a significant benefit, and, according to OPM, the excess benefit is not in-

cluded in the calculation of state employee compensation comparisons. As evidenced in the report, the vast major-

ity of private or “market” employers offer no such benefit, which on average increases compensation by $2,073 for

those receiving the benefit. While a state employee, my family received an excess benefit allowance over this aver-

age amount.

State employment more secure than private or “market” employment

Advocates of increases in pay for all state government employees regularly attempt to selectively compare the

pay of state employees to the pay of private or “market” employees. This comparison is flawed. The employment of

state employees is governed by state law, including, for example, Title 74 Section 840-1.1-840-6.9, the “Oklahoma

Personnel Act.” This law has strict guidelines for the hiring, firing, and treatment of state employees, especially

classified or “Merit” employees. State law provides significant protections for classified state employees, requiring

a lengthy process for the firing of non-performing employees. Private or “market” employers can easily (i.e. without

a lengthy bureaucratic process) hire, fire, and discipline non-performing private or “market” employees. This job

security for state employees is not valued by compensation studies, but is reality and a significant benefit to state

employees. I worked for the state during high- and low-revenue years, but, as a state employee, I was never con-

cerned that I would be fired because revenues were down nor did I experience the same performance pressure. As

a private employee, I am regularly aware that a down economy could affect my employment status and that my

continued exemplary performance is the sole reason I am able to maintain private employment.

State employment turnover not unique, impacted by far more than pay

Advocates of increases in pay for all state government employees regularly cite the turnover rate for state em-

ployees. These advocates constantly cite the total state employee turnover rate of 13.0 percent as evidence pay is

insufficient. To evaluate turnover, however, a deeper analysis is necessary. According to the Oklahoma Employ-

ment Security Commission2, for the period covered by the OPM report, total employee turnover for all of Oklahoma

was 10.6 percent. Based on these statistics, state employee turnover is not significantly higher than the turnover

experience for all employers. Turnover is a natural and necessary part of a free-market economy and turnover can

never be eradicated. Total turnover includes resignations, retirements, discharges and deaths. Considering some

of these variables in the analysis of the impact of pay on turnover is flawed. Generally employers cannot control the

death of employees. Given the onerous standards of the Oklahoma Personnel Act, discharged employees were

justifiably released and there is a cost avoidance benefit to the state of no longer employing a non-performing

employee. Arguably the most lucrative and rare benefit offered by the state is its costly, forced defined-benefit re-

tirement plan. For many state employees, the retirement plan and the prospect of retirement are the most signifi-

cant reasons for entering state employment and remaining a state employee. The structure of defined-benefit

plans is a direct inducement to retire, as soon as possible, to draw benefits as long as possible. Considering these

factors, state employee retirements cannot be blamed on pay. Although some resignations are because of pay,

others are not. People change employment for some of the following reasons:

• Spouse accepts a job requiring a move

• Employee decides to make a career change

• Employee differences with management unrelated to pay

• Employee differences with fellow employees unrelated to pay

• Employee determines to take care of dependents full-time

• Multiple other factors

Based on the OPM report and limited detail reporting on resignations of employees, it is generally difficult to

ascertain the specific reason for resignations. Assuming all resignations are because of pay (again, they are not,

but data documenting differences is unavailable), and extracting clearly non-pay variables included in total turn-

over, actual turnover for state employees is 8.1 percent.

State employees can receive annual leave despite discipline actions

Compensation is for the purpose of reimbursing employees for services they provide to the state. When employ-

ees are undergoing disciplinary action, under-performing or non-performing, current state law provides protec-

tions that do not exist for many private or “market” employees. For example, based on communications with state

agencies, regardless of an employee’s disciplinary or performing status, they must receive the annual longevity

payment. Several unsuccessful attempts to obtain records from the state regarding the number of employees un-

der disciplinary action or in an under-performing status suggest no such report is currently available.

Solutions for state employee pay

1. Policymakers, agency managers and state employees must recognize state employment at its foundation in-

cludes a “service” component. Improvements to pay should be made, but all government pay and compensa-

tion should never exceed or equal private or “market” pay and compensation.

2. Policymakers and agency managers must recognize that salary and wage decisions must be viewed indepen-

dently, on a per-job and a per-employee basis, and not “across the board.” All employees do not perform the

same and all jobs are not equal. It is impossible that all employees deserve a raise, and it is also true that some

employees have performed in a way to earn a raise, but not received it.

3. State law must be amended to allow state agency managers to construct tailored, performance-based salary

structures, independent of the bureaucratic and “one-size-fits-all” styled classified pay bands. These statutory

changes can be made without increasing state appropriations.

4. State law must be amended to allow state agency managers the flexibility to create performance-based bonus

structures, allowing agencies to pay performance-based bonuses of up to 10 percent of salary. These statutory

changes can be made without increasing state appropriations. Employees and the nature of the economy and

workforce require mobile and performance-based structures, which are largely absent from current state em-

ployment policy.

5. Policymakers must modernize the current approach to employee compensation by shifting away from central-

ized, burdensome and costly defined-benefit plans, and implement full defined-contribution plans including a

defined-contribution retirement plan for all new state employees.

6. State law must be amended to remove bureaucratic barriers in personnel statutes that prohibit state agency

managers from efficiently and effectively managing state agencies.

Endnotes1 http://www.ok.gov/opm/documents/FY11CompensationAccessible.pdf2 Total turnover of 10.6 percent for all employees (public and private) in Oklahoma was obtained in response to an information request of the Okla-

homa Employment Securities Commission by OCPA. The OESC provided the information on 7/30/2012.