Getting It Right: How and Why We Should Compare Federal and Private Sector Compensation

• Date: 01 November 2012
• DOI: http://doi.org/10.1111/j.1540-6210.2012.02664.x
• Author: Rex L. Facer,Jared J. Llorens,Stephen E. Condrey
• Published date: 01 November 2012

Perspective

Stephen E. Condrey is presi-

dent of Condrey and Associates, Inc.,

president-elect of the American Society

for Public Administration, and chair-

man of the Federal Salary Council. His

publications have appeared in Public

Administration Review, Journal of

Public Administration Research

and Theory, American Review of

Public Administration, and elsewhere.

He is editor of the Handbook of

Human Resource Management in

Government (3rd ed.) and editor-in-chief

of the Review of Public Personnel

Administration.

E-mail: steve@condrey-consulting.com

Rex L. Facer II is associate professor

of public f‌i nance and management at

Brigham Young University. He is a member

of the Federal Salary Council. His research

on human resource and local government

issues has been broadly published.

E-mail: rfacer@byu.edu

Jared J. Llorens is assistant professor

in the Public Administration Institute at

Louisiana State University. Before beginning

his academic career, he served as human

resource specialist with both the U.S. Off‌i ce

of Personnel Management and the U.S.

Department of Labor. His research interests

include public sector compensation,

human resources automation, and civil

service reform. He received his doctorate in

public administration from The University of

Georgia in 2007.

E-mail: jared1@lsu.edu

784 Public Administration Review • November | December 2012

Public Administration Review,

Vol. 72, Iss. 6, pp. 784–785. © 2012 by

The American Society for Public Administration.

DOI: 10.111/j.1540-6210.2012.02664.x.

Stephen E. Condrey

Condrey and Associates, Inc.

Rex L. Facer II

Brigham Young University

Jared J. Llorens

Louisiana State University

In recent years, the debate concerning the status of

public sector compensation has grown at all levels

of government. At the state and local levels, this

debate has largely bypassed the issue of pay and cen-

tered on jurisdictions’ ability to maintain traditional

def‌i ned-benef‌i t retirement systems in light of declin-

ing tax revenues. At the federal level, the primary

focus has been the extent to which federal employee

pay is comparable to private sector pay, and much

of this discussion is driven by the requirement in the

Federal Employees Pay Comparability Act of 1990 for

an annual comparison of federal employee pay with

the private sector. Further, this debate has captured

broader questions surrounding proper goals for federal

pay comparability policy.

Grounded in research and practice, conventional

wisdom has held that the ability of an employer to

of‌f er competitive pay rates directly af‌f ects a number

of critical human resource management metrics,

from employee retention to job performance.

However, while most researchers and practitioners

would agree on the broad inf‌l uence of competitive

pay, there is considerable disagreement over proper

approaches for determining and setting competitive

pay levels.

Making Comparisons

Broadly speaking, compensation is composed of

both wage and nonwage benef‌i ts such as health care

coverage, vacation leave, retirement benef‌i ts, and child

care assistance. While making accurate comparisons

of total compensation packages in the public and

private sector can be dif‌f‌i cult because of the range and

diversity of nonwage benef‌i ts available to employers

and employees, researchers and practitioners have

commonly relied on pay rate comparisons, as wages

and salaries have historically represented the major-

ity of employer compensation costs.1 Additionally,

research has also shown that nonwage benef‌i t expen-

ditures are strongly inf‌l uenced by employer size, with

larger employers paying proportionally higher costs

for nonwage benef‌i ts.2

Sector-based pay comparisons can generally

be divided into two primary methodological

approaches. First, comparisons can be made between

the pay rates of equivalent occupations in the

public and private sectors. Using the position of an

accountant for illustrative purposes, this approach

requires an organization to compare its pay for an

accountant with the prevailing pay rate for account-

ants in their labor market.  is method is currently

utilized by the federal government in estimating

annual pay comparability between federal and pri-

vate sector employees, and historically, this approach

has shown that more professionally oriented federal

occupations tend to be underpaid when compared

to their private sector counterparts.  is is also the

generally accepted approach used in private f‌i rm

compensation setting.

 e second methodological approach entails the com-

parison of pay rates for individuals in the public and

private sectors while controlling for common human

capital characteristics such as age, education, gender,

and marital status (i.e., the human capital approach).

Although not used for setting pay rates, economists

frequently utilize this method to understand patterns

of compensation across organizational settings. In

sum, this method essentially compares the pay rates

of individuals with similar human capital character-

istics to determine overall pay comparability, and,

in contrast to overall results using the occupational

based method, historical comparability estimates have

shown federal employees, in the aggregate, to be paid

higher than private sector employees.

While there are inherent strengths and weaknesses

with both approaches to estimating pay comparability,

one consistent f‌i nding is that federal employees work-

ing in higher-graded positions requiring advanced

education and training typically earn considerably less

than their private sector counterparts, and as such,

federal compensation policy should seek to address

this disparity to the best extent possible within exist-

ing policy constraints.

Getting It Right: How and Why We Should Compare

Federal and Private Sector Compensation