Most federal agencies are not making meaningful distinctions in performance ratings and bonuses for senior executives

See Federal Workers: Performance, Pay, and Firing by Chris Edwards of Cato.

"Americans are concerned about the performance of the federal bureaucracy. Many people think that federal workers are overpaid and underworked. Some recent news stories provide fresh input to the debate. 

A story yesterday at GovExec.com regards pay and performance. The federal pay structure is less efficient than private pay structures because it is generally based on seniority, not job performance. But GovExec.com finds that attempts to introduce federal performance pay have not worked very well either:

Most federal agencies are not making meaningful distinctions in performance ratings and bonuses for senior executives, according to a new watchdog report. About 85 percent of career senior executives received “outstanding” or “exceeds fully successful” ratings in their performance reviews between fiscal years 2010 and 2013, at the same time that agencies have made smaller distinctions in the amount of individual bonuses, the Government Accountability Office found. This has created a system where nearly everyone is considered outstanding…

The level of federal pay is the focus of another recent story. GovExec.com reports on the large number of workers who enjoy high pay:

More than 16,900 federal employees took home in excess of $200,000 in base salary in 2014, according to a partial database of federal salary data.

The report is based on data from FedSmith.com, which is an excellent source of federal workforce information. Fedsmith’s database can list employees and their salaries by agency. For example, there are 159 people at the Small Business Administration who made more than $150,000 in wages in 2014. That’s 159 too many in my view, as the agency should be closed down.

Another recent article regards federal firing. The Federal Times confirms the extraordinarily low firing rate in the federal government compared to the private sector:

Even as lawmakers press for greater accountability within government, agencies have fired fewer employees than at any time in the last 10 years, according to data from the Office of Personnel Management.

Agencies fired 9,537 federal employees for discipline or performance issues in fiscal 2014, down from 9,634 in 2013 and down from a high of 11,770 in fiscal 2010, according to the data. The firing rate held at 0.46 percent of the workforce in both fiscal 2013 and fiscal 2014 — the lowest rate in 10 years.

The private sector fires nearly six times as many employees — about 3.2 percent — according to the Bureau of Labor Statistics, and whether the government fires too few people or just not the right people is the subject of continued debate.

For more on the federal workforce, see here."

Guess Who Makes More Than Bankers: Their Regulators

In 2012 at the Federal Deposit Insurance Corp. the average pay was $190,000. At the Federal Reserve? It won't say.

Click here to read the WSJ article. Excerpts:

"the average annual salary of a bank employee was $49,540 in 2012, not much higher than the average annual across all occupations, $45,790.'

"Before the Dodd-Frank Act, the average employee of a federal bank regulatory agency received 2.3 times the average compensation of a private banker. By 2013 this ratio increased to more than 2.7—and in some cases considerably more.

The average compensation at the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corp. (FDIC) and the Consumer Financial Protection Bureau (CFPB) exceeded $190,000 in 2012. "

"At the OCC, secretaries make on average $79,182 per annum. Motor vehicle operators (the agency's limo drivers) at the FDIC earn $82,130. Human resources management trainees at the CFPB make $110,759 a year."

"In 2012, 68% of FDIC and CFPB staff—and 66% at the OCC—earned above $100,000 a year. Nearly 19% of the CFPB and OCC staff earn more than $180,000 a year. At the OCC, 10.5% of workers earn above $200,000 a year, at the FDIC 9.3%.

Fewer than 7% of employees in any of these regulatory agencies earned less than $50,000. In other words, 93% of the employees in these federal bank regulatory agencies earned more than the average banker's salary in 2012."

"The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 permitted federal bank regulatory agencies to establish their own compensation and benefits without the approval of the Office of Personnel Management."

"Salary premiums are especially large for easy-to-fill jobs that require no specialized, hard-to-hire skills."

"all federal bank regulatory agencies (except the Fed) are now allowing employee unions to negotiate compensation. Only a few other, small, government agencies can set employee pay independent of the government's general scale."

"Who pays for these generous salaries? Bank shareholders pay directly through insurance premiums on deposits and examination fees levied by the bank regulatory agencies."

"The runaway labor costs of these regulator agencies are not subject to congressional control, and they add up. Employee compensation accounts for about 80% of the operating costs of bank regulatory agencies. If the average regulatory employee's compensation were equalized between bankers and regulators, the direct cost of bank regulation would fall by more than 50%."

"The 99%" of Us Get Fined and Go to Jail for Insider Trading, But the Exempt "Political 1%" Can Get Rich

Great post by Mark Perry of "Carpe Diem."

"(CBS News) -- "Martha Stewart went to jail for it. Hedge fund honcho Raj Rajaratnam was fined $92 million and will go to jail for years for it. But members of Congress can do the same thing -use non-public information to make stock trades -- and there's no law against it. Steve Kroft on "60 Minutes" reports on how America's lawmakers can legally make tidy profits on information only they know, simply because they won't pass a law against themselves. The report will be broadcast on Sunday, Nov. 13 at 7 p.m. (watch preview above).

If senators and representatives are using non-public information to win in the market, it's all legal says Peter Schweizer, who works for the Hoover Institute, a conservative think tank. He has been examining these issues for some time and has written about them in a book, "Throw them All Out." "Insider trading laws apply to corporate executives, to Americans...If you are a member of Congress, those laws are deemed not to apply," he tells Kroft. "It's really the way the rules have been defined... lawmakers have conveniently written them in such a way as they don't apply to themselves," says Schweizer.

Efforts to make such insider trading off limits to Washington's lawmakers have never been able to get traction."



MP: Maybe the OWS protests should direct some outrage at the greed of the political class "who get rich off insider stock tips, land deals and cronyism that would send the rest of us to prison" (from the front cover of Peter Schweizer's book)?



Update 1: A 2011 research article in the journal Business and Politics ("Abnormal Returns From the Common Stock Investments of Members of the U.S. House of Representatives") found that the stock portfolios of House of Representative members outperformed the overall stock market by 55 basis points per month, or 6.6% on an annual basis between 1985 and 2001, suggesting that lawmakers have a "substantial informational advantage" over the general public and even over corporate insiders.



Update 2: The chart below illustrates how an additional return of 6.6% per year for House Members would have affected an investment in the stock market between 1985 and 2001. A $1,000 investment in the S&P500 at the beginning of 1985 would have grown to $6,043 by the end of 2001, earning an annual return of 11.16%. In contrast, adding a 6.6% premium for lawmakers due to their informational advantage would have generated an annual return of 17.76%, and a $1,000 investment in 1985 would have grown to $16,172, or roughly 2.7 times as much as an investment in the S&P500. Not bad. Insider trading has its advantages."

Liberal Indifference to the Jobless in the Private Sector

Great post by Hans Bader of the Competitive Enterprise Institute Blog.

"Senate Majority Leader Harry Reid claims that joblessness is not a problem in the private sector, where huge numbers of people have lost their jobs, and that it’s the public sector — where unemployment is much lower — where it is a problem. This nonsense could only come from someone like Reid, who has been a government official for decades, and is supported by liberal government employee unions.

Reid claimed, “It’s very clear that private sector jobs have been doing just fine, it’s the public sector jobs where we’ve lost huge numbers, and that’s what this legislation is all about.” (“Reid Says Government Jobs Must Take Priority Over Private Sector Jobs,” The Hill, 10/19/11).

Reid was defending Obama’s costly American Jobs Act proposals, which would spend billions more on state government employees, who are already much better compensated than the average American worker, and who have generous pension benefits that have resulted in trillions in unfunded pension benefits at taxpayer expense.

Contrary to Reid’s claims, 1,503,000 jobs, almost all of them in the private sector, have been lost during the Obama Administration (see figures for February, 2009 – September, 2011 (U.S. Dept. Of Labor, “Employment, Hours, And Earnings,” Accessed 10/19/11)). The official unemployment rate is 9.1 percent, and some unofficial figures put it closer to 20 percent. (“The Unemployment Situation – September 2011,” Bureau Of Labor Statistics, 10/7/11). By contrast, the unemployment rate for government workers is a mere 4.7%. (See Table A-14).

(Fox News gives a slightly higher figure for lost private sector jobs, saying that “since the president’s January 2009 inauguration, total private sector employment has dropped by 1.6 million.” Government jobs have gone down from their peak in the Obama Administration primarily because the 2010 Census came to an end. The Census temporarily inflated the number of federal employees).

As the private sector and high-tech industries have suffered, the government has expanded. One result is that the top average income in the U.S. is now in the Washington, D.C. Area, not California’s Silicon Valley. “The U.S. capital has swapped top spots with Silicon Valley, according to recent Census Bureau figures, with the typical household in the Washington metro area earning $84,523 last year. The national median income for 2010 was $50,046. … . The unemployment rate in the Washington metro area in August was 6.1 percent, compared with 10 percent in San Jose, according to Labor Department figures.” (“Top Income In U.S. Is…Gasp!…Wash. D.C. Area,” Bloomberg, 10/19/11)"

More Evidence That Federal Employees Are Overpaid

Great post by Andrew Biggs of AEI.

"In my AEI working paper on federal employee compensation with Jason Richwine of the Heritage Foundation, we compare the salaries, benefits, and job security of federal employees to that received by private-sector workers with similar earnings-related attributes—that is, similar education, experience, region, race, gender, and so on. These calculations, which are performed using regression analysis, show that federal workers receive salaries around 14 percent higher than similar private-sector workers. The federal pay premium is largest for employees with less education, and increases as workers gain experience. (So, for instance, a less-educated federal employee with long job tenure would get a larger pay premium than a newly hired PhD).

Almost no economist really disagrees with this approach, so much so that studies on federal salaries—after a spurt during the 1970s and 1980s—are pretty infrequent today. In other words, most labor economists seem to consider the pay premium issue more or less settled.

But some people find this kind of statistical analysis unconvincing, probably because they don’t think it’s really possible to control for all the relevant differences between different kinds of workers. While regression analysis can control for whether a person has, say, a bachelor’s or master’s degree, it doesn’t control for the quality of the school attended or the grades the person received. Likewise, maybe federal employees are unusually hard-working or creative, such that they create more value than private employees who look the same on paper. I doubt it, but you can’t prove that it’s impossible.

What these folks want to know is how much the exact same person would be paid in the federal government versus the private sector. And Jason Richwine’s new paper released by Heritage answers that question. Instead of comparing pay for different people at the same point in time, it follows the same people over time as they shift into and out of different jobs. If a given person earns more in a federal job than a private-sector job then we can be pretty sure it’s the job that’s making the difference, since the person himself barely changes over time. (And Jason controls for the limited instances where the person’s characteristics do change, say by getting an additional educational degree or by gaining an extra year of experience.)

What does this analysis show? As Jason states, “Private-sector workers who switch to federal jobs receive an average real wage increase of 9 percent, while private workers who find another private job earn just an additional 1 percent, implying an 8 percent federal premium.” These are the same workers, with the employer and job being the only difference. Similarly, most people who leave federal employment take a pay cut, undercutting the common claim by federal employees that they could earn much more on the outside.

But does this study, which finds an 8 percent average pay premium for people switching to federal jobs, undercut our previous estimate of a 14 percent pay premium? Not at all. Remember that our analysis found that the federal pay premium is smallest in the initial years after a worker has been hired, and Jason’s new paper calculates the pay premium only in the first year of employment. So it’s actually fully supportive of the cross-sectional results we generated.

If there’s a convincing rebuttal to all this from the Office of Personnel Management and the public employee unions, who in the past have pooh-poohed federal-private pay comparisons, I’d like to hear it."

Update On Compensation Of Private Workers Vs. Government Workers

See How to Save $1 Trillion by Andrew Biggs of AEI.

"Jason Richwine of the Heritage Foundation and I have published a new revision of our working paper “Comparing Federal and Private Sector Compensation” that includes improved estimates of compensation differences between federal and private-sector employees through salaries, benefits, and job security. We made significant improvements in all three areas, using better data and methods to produce more precise estimates.

The basic approach was to compare compensation for federal employees to private-sector employees with the same earnings-related attributes, principally education and experience but also controlling for gender, race, immigration and marital status, region, and broad occupational categories. This approach tries to calculate what a federal employee would earn were he or she to work in the private sector, thereby isolating the federal pay penalty or premium.

We begin with salaries, where we find that federal employees receive salaries around 14 percent higher on average than similar private-sector workers. Less educated federal workers received the largest pay premium and the premium rises as job tenure increases. We supplemented our basic salary calculations with a “fixed effects” approach, which follows single individuals as they shift in or out of federal jobs. This method shows that the same person will tend to earn a higher salary in federal employment than in the private sector. And it debunks the often-heard claim that federal employees could earn more on the outside—in fact, most people who leave federal employment experience a salary cut, while most who enter federal employment receive a pay increase.

But the premium in salaries pales next to that paid through benefits. Federal workers receive 76 percent more paid time off than similar private-sector workers and twice as much supplemental pay, which includes overtime and holiday pay and bonuses. But the biggest difference is in terms of retirement benefits: improved methodology for calculating the value of defined-benefit pensions, data on a hidden $2 billion annual subsidy to the defined contribution Thrift Savings Plan, and calculations of the value of federal retiree health benefits show that overall compensation through retirement benefits is 5.6 times higher for federal workers than in the private sector. Once all benefits are included, the federal compensation premium rises to around 35 percent.

On top of this, federal workers have far better job security than private-sector employees. Once a federal employee has passed his probationary period, his annual probability of being terminated for cause is only around 0.27 percent, while the chance of being laid off is only around 0.02 percent. This job security has value. We found, for instance, that congressional staff—who don’t have the job protections of other federal employees—are given significantly higher pension benefits in explicit compensation for lower job security. And federal employee job security becomes even more valuable when it is protecting a position that pays higher salaries and benefits than an employee would receive in the private sector. Adding the value of job security, the total federal compensation premium rises to 61 percent. In other words, most federal employees would accept significant reductions in pay before they would quit and look for a private-sector position.

Overall, the federal pay premium in 2011 comes to around $77 billion. Over ten years, paying federal employees at market rates could save the budget almost $1 trillion. Overcompensation of the federal workforce isn’t the biggest problem facing the federal budget, but when you’re as deep in the hole as we are, we need to look for savings everywhere."

Gary Becker On Public Unions

See Government Sector Unions-Becker. Excerpts:

"Whatever the source of their power, unions have managed to obtain better compensation than is available to comparable workers in the private sector. The best evidence supporting this is the much lower turnover of most public employees compared to that of private sector employees. For example, in January 2011, turnover rates among private sector workers were about 2 1/2 times those among government workers. Clearly, workers in any sector are less likely to quit if they are doing better than what they expect to get in alternative jobs. Also reducing turnover is that public employees cannot be laid off easily because they usually receive tenure after only one or two years of employment.

The higher compensation of public employees is heavily weighted toward deferred benefits in the form of favorable medical plans, and especially early retirement ages with generous retirement incomes. Retirement income is usually calculated not as a function of lifetime earnings, but of earnings during the last few years before retirement. Employees can artificially raise these earning by concentrating most of their overtime hours during the pre retirement years. Early retirement ages and generous benefits when retired are found not only at various governmental levels in the United States, but also among public employees in Europe and many other countries as well.

Presumably, in setting this form of compensation, politicians all over the world have responded to their (apparently correct) belief that voters and the media pay greater attention to earnings of government employees than to their deferred benefits. There is so much public attention to earnings that it is difficult to pay high-level government employees anything close to what they might earn in the private sector. This explains why turnover is much greater among top government employees than among the average government worker. Deferred compensation has sometimes been excessive in the private sector as well- demonstrated by General Motors’ financial difficulties- but for the most part the private sector has avoided very early retirements and other extremes of deferred compensation received by public employees.

Unfunded retirement liabilities of many state and local governments are so large that it is highly unlikely that they will ever be paid. For example, according to Joshua Rauh’s calculations in the Milken Institute Review, First Quarter, 2011, unfunded retirement liabilities of the state of Illinois are more than 5 times the state’s annual tax revenue, while the unfunded liabilities of Chicago are more than 7 times that city’s own annual revenue. This explains the recent efforts by governors and mayors of many states and cities to confront government unions and force a change in the system of retirement for state and local workers. The city of Los Angeles recently reached an agreement with its unions to increase significantly the contributions of union members to their retirement benefits. I anticipate that other cities and states will force similar, and sometimes more drastic, changes in their retirement systems."

The Economist On Public Sector Unions

See (Government) workers of the world unite! Public-sector unions have had a good few decades. Has their luck run out? Excerpts:

"This private-public shift has transformed the trade union movement. In the 1950s unions were solidly working class, dominated by men who had left school at 16 and leant left on economics but right on social issues. Today they are much more middle-class: more than a quarter of American unionists have college degrees, and even more have liberal views on social and environmental issues.

The shift has also created tension between the public and private sectors. The private sector is dominated by competition and turbulence. Performance-related pay is the norm, and redundancy commonplace. The public sector, by contrast, is a haven of security and stability. Many people have jobs for life and performance measures are rare. The result is a paradox: the typical public worker is better off than the people he is supposed to serve, and the gap has widened significantly over the past decade. In America, pay and benefits have grown twice as fast in the public sector as they have in the private sector."

"Public-sector unions are some of the world’s most powerful interest groups. Many of them have large memberships and comparably large wallets: the American National Education Association, the main teachers’ union, has 3.2m members, an annual budget of over $300m and a vibrant tradition of political activism. But their influence goes much deeper. In many countries unions prop up the left. In Britain Ed Miliband, the leader of the Labour Party, owes his job to trade-union votes. In America Andy Stern, the head of the Service Employees International Union, was the most frequent guest at the White House in the first six months of Barack Obama’s presidency.

Public-sector unions enjoy advantages that their private-sector rivals only dream of. As providers of vital monopoly services, they can close down entire cities. And as powerful political machines, they can help to pick the people who sit on the other side of the bargaining table. Daniel DiSalvo, the author of an excellent essay on America’s public-sector unions in National Affairs, points out that the American Federation of State, County and Municipal Employees was the biggest contributor to political campaigns in 1989-2004. He also notes that such influence is more decisive in local campaigns, where turnout is low, than in national ones.

Even if they fail to elect “their” candidates, public-sector unions have a relatively easy time negotiating with politicians. Private-sector bosses are accustomed to playing hardball with unions because they know they can go bankrupt if they don’t. Politicians have no such discipline: they can always raise taxes or borrow from future generations. Those who have challenged the unions have often regretted it. California’s former governor, Arnold Schwarzenegger, tried to fight the unions in the court of public opinion, only to be outgunned. Others have attempted a more stopgap approach, only to get the blame when services are disrupted.

Economists still debate exactly what impact public-sector unions have on pay. Evidence from the American Bureau of Labour Statistics support the conservative argument that they have used their power to extract a wage premium: public-sector workers earn, on average, a third more than their private-sector counterparts. Left-leaning economists reply that public-sector workers are, on average, better educated. Whatever the merits of this argument, three things seem clear. Unions have suppressed wage differentials in the public sector. They have extracted excellent benefits for their members. And they have protected underperforming workers from being sacked."

"The unions’ influence extends to the size and nature of the public sector. Private-sector unions have learned to exercise self-restraint when it comes to pushing for more manpower: they realise that more workers may reduce the wages of their members and that a higher wage bill may drive their employers out of business. But public-sector unions are relentless in demanding more resources and more personnel, which conveniently translate into more members and more dues.

Their most dramatic success has been in Britain. When Britain’s union-backed New Labour government came to power in 1997, public spending accounted for almost 40% of GDP. When it left power in 2010 public spending was nearly 50% of GDP (partly, to be fair, as a result of recession), and 1m workers had been added to the public-sector payrolls."

"Buffalo, in New York state, has as many public workers in 2006 as it did in 1950, despite the fact that the city has lost half its population."

"It is impossible to calculate the cost of the unions’ inflexibility. But several recent studies provide some indications. Policy Exchange, a conservative think-tank, calculates that people in the British private sector work 23% more hours than their public-sector counterparts over their lifetimes, thanks to public-sector strikes, sick days and early retirement. Barry Bluestone, a left-wing economist, calculates that the price of America’s public services increased by 41% in 2000-08, while that of private services rose by 27%. Eric Hanushek, an economist at Stanford University, argues that replacing the bottom 5-8% of American teachers with merely average performers could move the United States from near the bottom to near the top of the international maths and science rankings."

"Even people on the left are beginning to echo these complaints. Andrew Cuomo, the incoming Democratic governor of New York, is rattling his sabre against public-sector unions despite the fact that they make up an important part of his base. Davis Guggenheim, an impeccably liberal film director whose credits include Al Gore’s “An Inconvenient Truth”, subjected the teachers’ unions to a merciless critique in “Waiting for Superman”, flagellating them for perpetuating a broken system and presenting Randi Weingarten, the head of the American Federation of Teachers, as “something of a foaming satanic beast”, as the Variety reviewer put it."

"Joshua Rauh, of the Kellogg School of Management at Northwestern University, reckons that seven American states will have exhausted their pension assets by 2020."

Do Federal Workers Get Paid More Than Comparable Private Sector Workers?

Maybe. See Are Federal Workers Underpaid by Andrew Biggs at AEI. It has a link to some congressional testimony he gave. He says that adjusting for the usual differences that labor economists take into account, they get paid a little more.