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What Lloyd Cutler could learn from Acme Widget; target pay increases to jobs that are hard to fill.

Imagine yourself the vice president in charge of personnel for Acme Widget, a large corporation with some 10,000 mid-level and senior employees. Looking over reports, you realize that Acme has consistently been losing some of its top research and development people to other widget companies. To make matters worse, you stumble over a similar pattern in accounts receivable: Acme can't seem to keep the few good accountants it manages to attract.

Suppose you hired a consultant who told you that the way to solve the problem would be to give all your mid-level and senior employees a 50 percent pay hike. You'd fire him.

As obviously bad as this consultant's advice is, Congress almost took it in January when it flirted with the recommendation of the presidential commission headed by Lloyd Cutler to dole out a 50 percent pay raise to some 10,000 federal employees. The Cutler commission's conclusion was the latest in a long tradition of responding to pay issues in some areas of government by calling for pay raises across the board. The problem stems at least in part from emphasizing the wrong aspects of government pay. Blue-ribbon pay commissions tend to think of government salaries primarily as indicators of status - their idea seems to be that congressmen, senior members of the executive branch, and judges deserve raises that bring their earnings closer to those of the businessmen and litigators they consider to be their social peers. This skewed reasoning has helped create a situation where 142,000 federal employees earn at least $50,000 per year. (Which in turn partially explains why more than 47,000 Washington households - nearly 19 percent - earn at least this much.) While a severe income differential between peer groups in and out of government can lead to a decline in the quality of government work, it's any such decline, rather than the peer considerations, which should be the guiding concern. When it comes to dispensing salaries, government's first consideration should be to put the money where it will do the most good - into jobs that are hard to fill or have high turnover rates.

To some extent, the government already uses salaries surgically. One-ninth of the government workers in the Washington area are currently drawing a higher-than-scale salary because they are in slots with a shortfall. And federal workers have long had their salaries adjusted for local variances in cost of living. In light of this, it's hard to understand why differential raises haven't been embraced as the correct answer to questions of government pay.

The tendency to overlook the vagaries of recruiting and retention obstructs understanding which of the federal job sectors could really benefit from extra wages. For instance, pay commissions should certainly recognize that the unique opportunities to affect policy some government jobs provide are rewards that considerably outstrip financial considerations. And when pay raise advocates claim that "the best people are leaving the government in droves," they rarely admit that many do so not because the salaries are so lousy but because the pensions are so good. The government-wide attrition rate - which includes retirements - is 8.7 percent, and that sounds serious, but the government-wide quit rate - which does not includes them - is only 4.6 percent, hardly the stuff of crisis. In Washington circles the weapon of choice in salary discussions is the broad brush. It should be the fine point.

Health clubs and town cars

Now that we're clearer about how to think about government pay raises, we can turn to the question of where to think about them. In contrast to that across-the-board government quit rate of 4.6 percent, the quit rate in the federal judiciary is four-tenths of 1 percent, as is the quit rate for Congress (and that's including two congressmen who left not because the pay was so poor but because they had to go to jail). On the other hand, the quit rate at the Internal Revenue Service is 14.3 percent.

It's noteworthy that an April General Accounting Office report on federal slots vacant for 120 days or more cited difficulty in recruiting "particularly for those [positions] involving a high level of specialized technical or scientific expertise."

In other words, there is ample reason to think that while federal lawmakers, judges, and bureaucrats are paid a fair, even generous wage, there are clerical, technical, and scientific positions where pay raises make sense.

When members of Congress complain about the cost of living in Washington, they're right. In a recent survey of 19 major cities, Washington ranked as the fourth most expensive place to live. The same survey put the cost of health care in Washington at roughly 30 percent above the national average. And if you want to buy a house in the nation's capital, expect to pay 68 percent more than the average price for a house throughout the rest of the country.

So don't our boys in pinstripes and paisley deserve a raise? Well, not really. While the overall cost of living in D.C. is 27 percent above the national average, a member of Congress makes four times the average salary. And that's if you don't count the perks. But you should count the perks. After all, most Americans spend a lot of money every year on the things that senators and representatives receive gratis: medical care, parking, meals, postal service, newspapers, foreign travel, use of a health club, and long-distance telephone calls. Each member of Congress can have a WATS line installed in his or her home for free.

Congressmen can also dip into their campaign funds to pay some not-so-campaign-related expenses. For example, The Washington Post recently reported that Sen. Alfonse D'Amato used $684 a month from his campaign funds to lease a Lincoln Town Car. The Post also revealed that Sen. Patrick Leahy used $379 a month in campaign money to lease a car and another $1,323 for insurance premiums.

Each year at tax time members of Congress can deduct $3,000 from their incomes for the expense of living in Washington. And when they retire, congressmen can enjoy the fruits of their legislation: one of the most generous pension plans ever devised. A congressman with 25 years' service can retire today with an annual pension of $55,000, whereas his counterpart in private life ( a lawyer, say, making the same salary, whose firm has a privately managed pension fund) would typically retire on $24,000 per year - less than half as much. In light of these hidden plusses, some estimates put the real compensation of members around $135,000.

Even without a congressional pay raise, the current salary of $89,500 means a raise for most of 1988's new congressmen. According to the Capitol Hill newspaper, Roll Call, 22 of the 33 newly elected representatives earned salaries below that figure before their election.

While Congress has been showing us its empty pants-pockets, federal judges - who receive the same salary as congressmen - have been elbowing their way into the act too. In early March, only five weeks after the 50 percent pay raise proposal died, Chief Justice William Rehnquist called for a 30 percent pay increase for his colleagues on the federal bench. Admittedly, top-of-the-heap trial and commercial lawyers make much more than judges; but the federal judiciary draws heavily on government attorneys and academics, who do not. And having immense prestige, while wielding power unavailable in the private sector, is another powerful attraction. That's surely a big part of the reason that the federal judiciary is not losing judges at anywhere near the rate that, for example, our science agencies are losing researchers.

Plus, federal judges enjoy a little-known lucrative benefit. Rather than resigning, or even retiring, a federal judge can simply apply for "senior status," which means that he can continue to draw his full salary while never hearing another case. The real impact of this arrangement is not well understood. A lawyer in private practice who decides at age 60 to stop working while drawing an annuity as lavish as that available for free to a judge on senior status would have to pay at least $950,000 for it. What's more, if a judge on senior status hears one case a year, he receives any pay raises given to the fully active federal judiciary.

But even if judges were leaving the federal bench in significant numbers, there are lawyers lined up to replace them. In 1988 there were more than 700,000 lawyers in the United States. And they have plenty of motivation to move to the bench. According to the American Bar Association, the median annual salary for a lawyer in the U.S. is $68,900 - $20,000 less than federal judges make.

Ph.D.s take phlight

Contrast this with situation of the government's top scientists. Last year, Dr. Marc Lippman, the country's guru of breast cancer research, left the National Institutes of Health to become director of Georgetown University's Lombardi Cancer Center. And recently Robert Gallo, one of the codiscoverers of the HIV virus that causes AIDS, let it be known that he was shopping around after 22 years at NIH. Gallo was persuaded to stay, but his threats to leave were like a heart attack at NIH - not fatal but a symptom of a larger problem. An earlier sign of trouble was in 1981, when Dr. Philip Leder, a talented geneticist, left NIH to become professor and chairman of genetics at Harvard Medical School. Since 1983, NIH has lost a Nobel Prize-winning biochemist, a leading neurological researcher, and a number of leading cancer researchers and immunologists. In all, 42 senior scientists from NIH have gone to academia, industry, or private research labs in the past five years - getting salary increases ranging from 80 percent to 276 percent. And they've taken key laboratory personnel years of research with them. When Lippman went to Georgetown he walked off with roughly 30 NIH scientists and technicians.

A recent study of why scientists leave government conducted by the National Institute of Medicine mentioned as reasons poor laboratory and office space, and a bureaucratic chain of command that discourages travel to international conferences. But most of all, the study cited the pay - it viewed the general salary pay cap of $77,500 for senior government researchers as a significant problem. The more senior the researcher, the larger the pay gap between government on the one hand and academia and industry on the other. At NIH, the senior research scientists with M.D. degrees make $89,000 a year. Compare that with their academic counterparts: according to the latest figures from the Association of American Medical Colleges, the chairman of a clinical science department with an M.D. degree averages about $193,000. Leder and Lippman, who made $50,000 and $80,000 respectively at NIH, now each make upwards of $200,000 in their university jobs.

Losing such top scientific talent might not be so bad if top scientific talent were as easy to come by as good lawyers and administrators. But that' s not the case. Testifying before the Cutler commission, Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases and director of the NIH's office of AIDS research, complained that "over the last decade, NIH has not been able to recruit a single senior scientist" from industry or academia to work in clinical or basic research programs.

As things stand now, NIH finds itself playing expensive games to attract those hard-to-get top scientists. Often the agency is forced to contract out for them. In these deals, NIH reimburses scientists' employers for their typically much higher salaries, and also pays for the frequently exorbitant overhead charged by their home institutions. This costs Uncle Sam much more than it would if he could hire these scientists directly at a realistic pay rate.

Many of NASA's top specialists also take off for private industry. Testifying before the Cutler commission, Dr. Noel Hinners, an associate deputy administrator at NASA, said the agency has for two years been trying unsuccessfully to recruit a director for a program in its space science and applications office. Because of this, NASA has been forced to rely on an exchange program with the private sector. The director they've brought in this way makes twice the salary NASA can offer.

Entry-level positions, too, are becoming more difficult to fill. The best science and engineering graduates are being lured by the booming biotechnology industry NIH fostered and by the aerospace industry NASA spawned. The highest entry-level professional salary NASA can offer - just under $24,000 - falls significantly short of the salaries private companies can offer new graduates. In 1976, NASA got two out of every three job candidates it went after. Ten years later, that was down to one in three.

To make matters worse for a government with shallow pockets for science salaries, the American scientific labor pool is shrinking. The National Science Foundation has predicted a shortage of 20 percent to 30 percent for aeronautical engineers and computer specialists, and the Bureau of Labor Statistics predicts that future demand for aeronautical engineers will rise by 41 percent, for electrical engineers by 65 percent, and for computer specialists by 85 percent.

Revenge of the nerds

At the crux of this situation sits the National Institute of Standards and Technology (formerly the National Bureau of Standards). Charged with the evolving task of setting standards of measurement for new technologies, NIST is probably one of the major battlegrounds in what last year's presidential candidates liked to call "the fight to maintain this country's technological edge."

The scientific manpower shortage has hit NIST hard. For about a decade, the institute has struggled to attract and keep first-rate scientists. As at NASA, electrical engineering and computer science are two persistent problem areas. Since about 1980, NIST salaries for new PH.D.s in these fields have lagged $5,000 to $10,000 behind private industry.

Because of the severity of this situation, NIST is being used as a model for how government could use salary incentives to improve performance. Last year Congress approved a five-year experiment that exempts the institute from a fixed government pay schedule, giving it some autonomous hiring and pay-raise authority. The project frees NIST from the lengthy employee clearance procedures and seniority pay system that most of government is wedded to. NIST recruiters can, without managerial approval, offer a potential employee up to the 75th percentile of the national salary range for many jobs. Once in, an employee receives raises based on performance rather than some seniority criterion. "The project's given us flexibility in setting pay and making offers," reports Dr. John Lyons, director of the National Engineering Laboratory, which conducts almost half of NIST'S technical work. According to him the experiment has considerably improved NIST's recruiting.

Where the project has not helped, though, is in efforts to keep people who have already reached the government pay ceiling for scientists (or in retaining members of the Senior Executive Service, who are not included in the experiment). It is at this point that industry and university salaries start to pull ahead of government salaries. Last December NIST lost a division chief whom Lyons called "the conceptual driving force" behind NIST's factory automation work - one of the institute's major projects. He went on to a university physics department as a full professor "for a package that included over $100,000 in salary, plus a lot or perks, and the ability to consult." such non-salary benefits are a special attraction for government scientists, because unlike congressmen or White House staff members, employees under federal civil service are subject to extremely severe limitations on, say, expense accounts and the use of government transportation.

Having the opportunity to do exciting work is an extra-monetary incentive to stay in a job. Getting to work on government planning and policy may provide challenges and satisfactions not found anywhere else. For jobs of that sort, salary raises are probably not that important. But such jobs should be carefully distinguished from two other sorts - those where the public and private sector variants are equally rewarding, and others where the work, while absolutely essential, is tedious and endlessly trying. It's with government employees in these latter categories that money can really matter.

Consider for example the Internal Revenue Service. Low wages and the high turnover and poor morale they cause have a lot to do with the widely reported IRS foul-ups. The accountants and other skilled personnel there do some of the government's most unpleasant, but important, work. When case examiners don't perform, both the government and private individuals suffer immensely. Who, for instance, has not read about the millions of tax documents the IRS loses annually, or about the error rate in the agency's telephone taxpayer assistance program? (GAO says it's 40 percent, IRS says 30 percent, but both agree it's too high.)

Tax examiners - the first workers in the IRS to check the millions of returns filed annually - receive a starting salary of $13,000 to $15,000. This for a job that requires familiarity with corporate and individual tax regulations and with the IRS'S computerized master file system. The position is restricted to those with either a minimum of two years of college or equivalent office experience.

A College Placement Council survey conducted last year put the average starting salary for accounting graduates in the private sector at $24,120. In comparison, the federal government offered $19,008. Over 90 percent of the offers from private firms to accountants exceeded the government's average offers. A starting salary for an accountant at one of the Big Eight firms is around 35 percent higher than a federal starting salary.

Windbag bureaucrats

Can this wage disparity be unrelated to the results of a 1985 achievement test given to new hires at the IRS and to entry level accountants in large firms, in which over 80 percent of the private sector accountants scored higher than those at Internal Revenue? According to former IRS Commissioner Roscoe Egger, "It takes three years to develop a tax examiner," yet during his tenure, the IRS was keeping less than 25 percent of its people for three years. Last year, the turnover rate among workers assigned to the taxpayer services division had reached dizzying heights: 39 percent in New York and 100 percent in Boston. Do you want to be audited by someone who doesn't know his job and won't stay to learn it? Do you want him auditing Michael Milken, with millions in government revenues at stake? The government is full of windbag bureaucrat jobs where we could drastically cut the salaries and the cause of good government would never miss a beat. But that doesn't apply to most IRS jobs.

Speaking before a House subcommittee in April, Robert M. Tobias, president of the National Treasury Employees Union, put his finger on one reason why IRS jobs should get special salary treatment: "The revenue-producing agencies of the federal government should be treated differently from other agencies ... because they are different: they are revenue-producing and cuts simply lose revenue." Estimates about how much money the IRS collects for every dollar it spends vary wildly - from $8 to $220. But it's beyond dispute that the IRS is the federal government's largest single revenue raiser. Better salaries for those who process and audit returns would undoubtedly put a dent in the tax gap - the difference between taxes owed and taxes collected - which currently stands at $114 billion. Continuing to "save" on IRS salaries is costing us a bundle.

Doling out an across-the-board pay hike would cost us a bundle, too. Acme Widget would never double the salaries of its sales reps, of whom it has plenty, in order to solve the problem in its accounts receivable department. It's absurd that this is precisely the solution that the Cutler commission and other Washington oracles recommend. A government that can target rockets to the moon can surely target pay increases to the jobs that need them. No one's predicting a shortage of legislators, undersecretaries, or judges; instead, everyone's decrying the shortage of accountants, scientists, and others with technical know-how. We don't need another blue-ribbon commission to know where the smart money should go.

Barbara Frye is a reporter for The Laurel Leader. Research assistance for this story was provided by Barbara Goffman, John Larew, Daniel Mirvish and Eric Senunas.
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Author:Frye, Barbara
Publication:Washington Monthly
Date:Jul 1, 1989
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