U.S. Postal Service: Few Craft Employees Earned More Than Their Postmasters, But Adequacy and Reasonableness of Pay Differences Remain Unclear (13-SEP-01, GAO-01-1025). The Postal Reorganization Act of 1970 requires that the Postal Service pay wages comparable to the private sector. It also requires that the Service provide adequate and reasonable pay differences between clerks and carriers and their supervisors, such as postmasters, although the Act does not specify what constitutes adequate and reasonable differences. Furthermore, the Act requires the Service to consult with supervisor and postmaster organizations when planning and developing pay policies and other programs relating to their members. Since the mid-1970s, two postmaster organizations have voiced concerns that they do not believe an adequate and reasonable pay difference exists between postmasters and the clerks and carriers they supervise. Recently, the organizations took their concerns to Congress, resulting in the Postmasters' Fairness and Rights Act, to make substantive changes in the way postmasters' pay is determined. Most postmasters are paid under the Service's Executive and Administrative Schedule (EAS), which is the salary schedule that applies to nearly all supervisory and management employees. Generally, postmaster pay consists of basic pay; pay-for-performance; lump-sum merit awards; and supplemental pay, such as overtime. In 1996, the Service lowered the minimum basic pay of the 26 EAS grades. This resulted in the minimum basic pay of EAS-15 and EAS-16 supervisors being less than the maximum basic pay of a grade 5 clerk, which was the most populated grade and pay level of the largest bargaining unit. Because of this and the 1970 Act's requirement that an adequate and reasonable pay difference be maintained, the Service established a Supervisory Differential Adjustment (SDA) policy for EAS-15 and above supervisors who are not eligible to receive overtime pay. This policy provides that these supervisors will be paid no less than five percent more than the maximum basic pay of a grade 5 clerk. GAO's analyses showed that two craft employees earned more in basic pay than their local postmasters in 1999, and about one-half of one percent of craft employees earned more in gross pay than their local postmasters. The five organizations that GAO selected to discuss pay practices had pay policies to minimize instances of craft employees earning more than their supervisors. These organizations indicated that craft employees will occasionally earn more than their supervisors, but this is the exception and not the norm. -------------------------Indexing Terms------------------------- REPORTNUM: GAO-01-1025 ACCNO: A01785 TITLE: U.S. Postal Service: Few Craft Employees Earned More Than Their Postmasters, But Adequacy and Reasonableness of Pay Differences Remain Unclear DATE: 09/13/2001 SUBJECT: Postal service employees Compensation Minimum wage rates Income statistics Seniority ****************************************************************** ** This file contains an ASCII representation of the text of a ** ** GAO Testimony. ** ** ** ** No attempt has been made to display graphic images, although ** ** figure captions are reproduced. Tables are included, but ** ** may not resemble those in the printed version. ** ** ** ** Please see the PDF (Portable Document Format) file, when ** ** available, for a complete electronic file of the printed ** ** document's contents. ** ** ** ****************************************************************** GAO-01-1025 A Report to the Honorable John M. McHugh, House of Representatives September 2001 U. S. POSTAL SERVICE Few Craft Employees Earned More Than Their Postmasters, But Adequacy and Reasonableness of Pay Differences Remain Unclear GAO- 01- 1025 Letter 1 Results in Brief 3 Pay Practices for Postmasters 5 Comparison of Craft Employees? and Postmasters? Pay 6 Selected Organizations? Pay Practices for Supervisors 8 Comparison of Current Law to the Proposed Postmaster Legislation 9 Conclusions 9 Recommendations for Executive Action 10 Agency and Postmaster Organizations? Comments and Our Evaluation 10 Appendixes Appendix I: Objectives, Scope, and Methodology 14 Appendix II: Briefing on Comparison of Postmasters? and Craft Employees? Pay During 1999 16 Appendix III: Comparison of Current Law to the Proposed Postmasters? Fairness and Rights Act and Views on the Proposed Act 78 Appendix IV: Comments From the U. S. Postal Service 80 Appendix V: Comments From the National Association of Postmasters of the United States 81 Appendix VI: Comments From the National League of Postmasters of the United States 82 Tables Table 1: Number of Craft Employees Who Earned More Than Their Local Postmasters in Basic and Gross Pay in 1999 7 Table 2: Number and Percentage of Postmasters Who Supervised at Least One Craft Employee Who Earned More Than They Did in 1999 8 Abbreviations COLA Cost- of- Living Allowances EAS Executive and Administrative Schedule EVA Economic Value Added FAA Federal Aviation Administration FedEx Federal Express NAPUS National Association of Postmasters of the United States PCES Postal Career Executive Service SDA Supervisory Differential Adjustment TVA Tennessee Valley Authority UPS United Parcel Service WMATA Washington Metropolitan Area Transit Authority Lett er September 13, 2001 The Honorable John M. McHugh House of Representatives Dear Mr. McHugh: This report responds to your request for information on the U. S. Postal Service?s (Service) pay practices for postmasters who supervise craft employees, including information on the Service?s use of a Supervisory Differential Adjustment (SDA) that the Service applies to the pay of firstline supervisors to help ensure that they earn more than their craft employees. 1 As you know, the Postal Reorganization Act of 1970 (1970 Act) 2 requires that the Service pay wages comparable to the private sector. It also requires that the Service provide adequate and reasonable pay differences between clerks and carriers and their supervisors, such as postmasters, although the 1970 Act does not specify what constitutes adequate and reasonable differences. Furthermore, the 1970 Act requires the Service to consult with supervisor and postmaster organizations when planning and developing pay policies and other programs relating to their members. Since the mid- 1970s, the two postmaster organizations (the National Association of Postmasters of the United States and the National League of Postmasters of the United States) have voiced concerns that they do not believe an adequate and reasonable pay difference exists between postmasters and the clerks and carriers they supervise. Officials from the organizations stated that they have long sought changes to increase the pay difference and modify the consultation process. They said they were particularly concerned about extensive changes the Service made in 1996 to their pay and benefits, including the implementation of the SDA policy, and the Service?s nonacceptance of many of the recommendations the organizations made during the consultations. Recently, the organizations 1 Craft employees are bargaining unit workers, which include employees such as clerks, city carriers, rural carriers, and mail handlers. 2 P. L. 91- 375. took their concerns to the Congress. As a result, Senator Daniel Akaka and Representative Constance Morella introduced legislation- the Postmasters? Fairness and Rights Act (H. R. 250 and S. 177)- to make substantive changes in the way postmasters? pay is determined. To assist you in your consideration of this issue, we agreed with your office to address the following objectives: Describe the Postal Service?s pay practices for postmasters, including how the Service determines and applies its SDA. Determine whether any craft employees earned more than their local postmasters during 1999 and, if so, why and to what extent. Determine other organizations? practices for establishing pay for supervisors whose craft employees can earn more than they do, as well as determine prevalent industry practices. We have also included information in this report (1) comparing the Postal Reorganization Act of 1970 to proposed legislative changes in the Postmasters? Fairness and Rights Act and (2) describing the Service?s and the postmaster organizations? views on the proposed act. On June 11, 2001, we briefed representatives from your office and others on the preliminary results of our work. This letter summarizes our findings. Appendix II contains updated slides from the briefing, as well as additional information on the pay practices of the other organizations that your office requested. Appendix III contains a detailed comparison of the current law with the proposed Postmasters? Fairness and Rights Act, as well as the views of the Service and the postmaster organizations on the proposed act. In completing our work, we reviewed the Postal Reorganization Act of 1970, its legislative history, and legal decisions regarding postmasters? pay. We discussed pay practices for supervisors with officials from the Service, postmaster organizations, and other selected organizations- the Federal Aviation Administration, Federal Express, the Tennessee Valley Authority, United Parcel Service, and the Washington Metropolitan Transit Authority. Additionally, because the Service did not have data on whether, or to what extent, craft employees earned more than their postmasters, we obtained the Service?s payroll files for 1999, the most recent year for which data were available when we started our review. These files contained the biweekly pay records of over 1 million employees. We focused our work on 443,942 full- time permanent postmasters, clerks, city carriers, and rural carriers who had not been detailed to other jobs or changed their duty stations during 1999. We then eliminated those clerks and carriers whom we could not match with their local postmasters, as well as postmasters whose locations did not match with at least one clerk or carrier. This created a study group of 201,871 employees, consisting of 191, 694 clerks and carriers and the 10,177 postmasters who supervised them. The 1970 Act did not specify whether basic or gross pay should be used in determining adequate and reasonable differences in pay between clerks and carriers and their supervisors. As a result, we computed both basic and gross pay for the employees in our study group to determine if any clerks or carriers earned more than their local postmasters. For purposes of this report, we defined gross pay as all pay received during calendar year 1999, excluding severance payments, settlements, prior years? pay adjustments, annual leave sell- back payments, and terminal leave payments. Basic pay was salaries and wages paid directly for duties performed during the regular workweek. A detailed explanation of our objectives, scope, and methodology is presented in appendix I. We conducted our review at the Postal Service Headquarters in Washington, D. C., from March 2001 through August 2001, in accordance with generally accepted government auditing standards. We requested comments on a draft of this report from the Postmaster General and the presidents of the postmaster organizations. Their comments are discussed at the end of this letter and are reprinted in appendices IV, V, and VI. Results in Brief Most postmasters are paid under the Service?s Executive and Administrative Schedule (EAS), which is the salary schedule that applies to nearly all supervisory and management employees. Generally, postmaster pay consists of basic pay; pay- for- performance; lump- sum merit awards; and supplemental pay, such as overtime. In 1996, the Service lowered the minimum basic pay of the 26 EAS grades. This resulted in the minimum basic pay of EAS- 15 and EAS- 16 supervisors being less than the maximum basic pay of a grade 5 clerk, which was the most populated grade and pay level of the largest bargaining unit. Because of this and the 1970 Act?s requirement that an adequate and reasonable pay difference be maintained, the Service established an SDA policy for EAS- 15 and above supervisors who are not eligible to receive overtime pay at time- and- one- half. This policy provides that these supervisors will be paid no less than 5 percent more than the maximum basic pay of a grade 5 clerk. Although a 1995 Service- contracted study reported that differentials ranged from 10 to 15 percent among private sector companies that maintain formal differential policies, the Service made a management decision that a 5- percent SDA would provide a noticeable difference in pay between the minimum pay of supervisors and the maximum pay of a grade 5 clerk. However, since implementing the SDA, the Service has not conducted the analyses necessary to fully determine the implications of its SDA policy on postmasters, including which postmasters should be eligible for, and the amount of, the SDA. Our analyses showed that two craft employees earned more in basic pay than their local postmasters in 1999, and about one- half of 1 percent of craft employees earned more in gross pay than their local postmasters. With respect to postmasters, about 12 percent supervised at least 1 craft employee who earned more than they did in gross pay or earned within 5 percent of what they earned. Overtime was apparently the reason why these employees earned more or within 5 percent of what their local postmasters earned. Most postmasters who supervised at least 1 craft employee who earned more than they did were not eligible to receive the SDA. They could not receive the SDA because they were either eligible for overtime at time- and- one- half or were in grades below EAS- 15. The five organizations we selected to discuss pay practices had pay policies to minimize instances of craft employees earning more than their supervisors. These organizations indicated that craft employees will occasionally earn more than their supervisors, but this is the exception and not the norm. Four of the five organizations indicated that they used market- based pay systems that generally resulted in their organizations setting pay for supervisors high enough to prevent almost all craft employees from earning more than their supervisors. According to a 2000/ 2001 nationwide survey of supervisory management compensation by the Watson Wyatt consulting firm, most private sector companies use market- based pay for nonbargaining unit positions, and about 30 percent of companies had various policies in place to help ensure that supervisors earn more than their employees. We are making recommendations to the Postmaster General to evaluate the Service?s SDA policy and the pay differences between postmasters and the craft employees they supervise. The Service and the two postmaster organizations generally agreed with our findings and recommendations. However, they each believe the findings support their conflicting views of whether postmaster and craft employee pay differentials were adequate and reasonable. Because of the lack of specificity in the 1970 Act, we are not in a position to conclude whether or not our findings represent an adequate and reasonable outcome regarding pay differences for postmasters. Pay Practices for The vast majority of postmasters were paid under the Service?s EAS, which Postmasters has 26 pay grades and covers essentially all supervisory and management employees. Postmasters were in grades 11, 13, 14, 15, 18, 20, 21, 22, 24, and 26. The few remaining postmasters were covered by the Postal Career Executive Service pay schedule, which is comparable to the Civil Service?s Senior Executive Service. The Postal Service classified a little more than half of its postmasters as nonexempt from the requirements of the Fair Labor Standards Act and, as such, they are eligible for overtime pay at timeand- one- half. The remaining postmasters were classified as exempt employees and thus not eligible for overtime pay at time- and- one- half. According to the Service, these postmasters were classified as exempt because, among other things, they supervised two or more craft employees. During 1999, postmaster pay had four major components- basic pay, variable pay, merit awards, and premium pay. Basic pay consisted of salaries and wages paid directly for duties performed during the regular workweek. Variable pay- Economic Value Added (EVA)- was pay- for- performance cash rewards for achieving specific organizational goals and targets. Merit awards were lump- sum payments to recognize achievements beyond what was normally expected. Premium pay was supplemental pay for overtime, nights, and holidays worked. Basic pay, variable pay, and merit awards and/ or premium pay made up about 95 percent, 4 percent, and 1 percent, respectively, of postmasters? gross pay. Using the results of a 1995 Hay Management report 3 that compared EAS and private sector compensation, the Service said that in 1996 it made substantive changes to EAS pay. 4 Among other changes, the Service lowered the basic pay minimums of the 26 EAS grades. This change resulted in the basic pay minimums of EAS- 15 and EAS- 16 exempt supervisors being less than the basic pay maximum of a grade 5 clerk, 3 Hay Management Consultants, Comparison of United States Postal Service Nonbargaining- Unit Salaries and Benefits to Private Sector Market Data, Feb. 21, 1995. 4 The Service hired Hay Management to compare the salaries, pay practices, and benefit practices of nonbargaining unit employees to those available in the private sector. In 1995 and 1999, Hay Management issued reports of its comparative analyses to the Service. which was the most populated grade and pay level of the largest bargaining unit. To compensate for this lack of a pay difference and comply with the requirement of the 1970 Act to provide adequate and reasonable pay differences, the Service established an SDA policy for its EAS- 15 exempt supervisors and above. The Service stated that it chose grade EAS- 15 exempt supervisors as the starting point of eligibility for the SDA because most exempt first- line supervisors were in grades EAS- 15 and EAS- 16. (There were no EAS- 16 postmasters, only supervisors.) The SDA policy provided that EAS- 15 exempt supervisors and above were to be paid no less than 5 percent more than the basic pay maximum of a grade 5 clerk. The Hay Management report indicated that of the private sector companies that maintained a formal salary differential between supervisors and their subordinates, the salary differential typically ranged from 10 to 15 percent. The Service said it made a management decision to set the SDA at 5 percent because it believed this amount would provide a visible difference between the minimum pay of supervisors and the maximum basic pay of a grade 5 clerk. However, since implementing the SDA, the Service had not conducted the analyses necessary to fully determine the implications of its SDA policy on postmasters, including which postmasters should be eligible for, and the amount of, the SDA. Comparison of Craft Because the 1970 Act did not specify whether the pay difference between Employees? and supervisors and their craft employees should be determined using basic or gross pay, we analyzed both to determine the differences in pay between Postmasters? Pay craft employees and their local postmasters. From a basic pay perspective, our analyses showed that 2 of the 48, 272 clerks earned more in basic pay than their local postmasters, as shown in table 1. No city carriers earned more in basic pay than their local postmasters. 5 From a gross pay perspective, 727 of the 191, 694 craft employees (about one- half of 1 percent) earned more than their local postmasters. These craft employees earned, on average, about $2,400 more than their local postmasters. Overtime paid to clerks and city carriers was the primary reason why they earned more than their local postmasters. According to the Service, the inclusion of overtime in rural carriers? basic pay was the most probable 5 We could not determine whether any rural carriers earned more in basic pay than their local postmasters did because rural carriers? basic pay included overtime, which we were unable to identify and exclude. Unlike clerks and city carriers who are paid on an hourly basis, rural carriers are salaried employees whose basic pay includes estimated overtime. reason why they earned more. Of the 727 craft employees earning more than their local postmasters, 562, or 77 percent, were rural carriers. Table 1: Number of Craft Employees Who Earned More Than Their Local Postmasters in Basic and Gross Pay in 1999 Number of craft employees Number of craft employees Number of craft employees in who earned more than their who earned more than their Type of craft employee the study group local postmaster in basic pay local postmaster in gross pay Clerks 48, 272 2 73 City carriers 111,608 0 92 Rural carriers 31, 814 a 562 Total 191, 694 2 727 a Rural carrier basic pay includes estimated overtime, which we were unable to identify and exclude. Source: GAO analysis of pay data from the Postal Service?s payroll file for 1999. With respect to postmasters, about 6 percent (624 of 10,177) supervised at least 1 craft employee who earned more than they did in gross pay, as shown in table 2. Of the EAS- 15 nonexempt postmasters and below, about 16 percent (430) supervised at least 1 craft employee who earned more in gross pay than they did. These postmasters were not entitled to the SDA because they were either nonexempt or in grades below EAS- 15. Of the EAS- 15 exempt postmasters who could receive the SDA, about 5 percent (104) supervised at least 1 craft employee who earned more in gross pay than they did. Of the EAS- 18 exempt postmasters and above, about 2 percent (90) supervised at least 1 craft employee who earned more in gross pay than they did. These postmasters were not entitled to the SDA because their basic pay was more than 5 percent greater than the maximum basic pay of a grade 5 clerk. A further analysis of postmaster pay showed that an additional 6 percent of postmasters (618 of 9,553) supervised at least 1 craft employee whose earnings were within 5 percent of their postmasters? gross earnings. Table 2: Number and Percentage of Postmasters Who Supervised at Least One Craft Employee Who Earned More Than They Did in 1999 Number of postmasters who Percentage of postmasters supervised at least one craft who supervised at least one Number of postmasters in the employee who earned more craft employee who earned EAS grade levels study group than them more than them EAS- 15 nonexempt and below 2,616 430 16% EAS- 15 exempt 1,946 104 5% EAS- 18 exempt and above 5,615 90 2% Total 10, 177 624 6% Source: GAO analysis of pay data from the Postal Service?s payroll file for 1999. SelectedOrganizations? The five organizations we selected to discuss pay practices indicated that Pay Practices for the potential exists for their craft employees to earn more than their immediate supervisors, but this rarely occurs because of how their pay Supervisors policies were designed. Four of the five organizations indicated that they used market- based pay systems that generally resulted in their organizations setting the basic pay for their supervisors high enough to prevent almost all craft employees from earning more than their supervisors. As a general guide for determining supervisory pay scales, the organizations relied heavily on surveys of prevailing salaries and other compensation practices used by other organizations in similar markets. According to the consulting firm Watson Wyatt, most private sector companies use a market- based approach to set basic pay and other compensation policies. 6 Watson Wyatt reported that about one in three companies it surveyed (about 30 percent) had policies in place to help ensure that supervisors earn more than their employees. Watson Wyatt also reported that these companies used a combination of approaches, such as ad hoc salary increases for supervisors and SDAs, to accomplish this outcome. 6 Watson Wyatt annually surveys employers within the United States to obtain information on their compensation, benefits, and employee practices. Comparison of Current Our review of the Postal Reorganization Act of 1970 showed that the Law to the Proposed Service is required to provide a program of consultation with organizations representing supervisors and postmasters under which the organizations Postmaster are entitled to participate directly in the planning and development of pay Legislation policies and other programs relating to their members. The 1970 Act, as amended, specifies additional procedures and protections for organizations representing supervisors with regard to the consultation process. For example, organizations representing supervisors are entitled to monthly meetings with the Service; if they are not satisfied with the Service?s decisions, they may request a fact- finding panel to consider the matter. Organizations representing postmasters are not entitled to these additional procedures and protections. The proposed Postmasters? Fairness and Rights Act was introduced in the 107 th Congress and would provide new rights to organizations representing postmasters. Most notably, the proposed act would provide organizations representing postmasters with the right to binding arbitration with regard to pay policies and other programs affecting their members. The Service is opposed to the proposed act because it believes that it is unnecessary, that it will do irreparable damage to the Service, and that it is inconsistent with the 1970 Act and basic labor law. The two postmaster organizations support the proposed act and participated in its development. They believe the proposed act will restore equity to the pay and benefits of postmasters and provide a more level playing field for their organizations in planning and developing other programs. Conclusions Although the Postal Reorganization Act of 1970 requires that supervisors and other managerial personnel be paid salaries that provide them an adequate and reasonable difference in pay over that of clerks and carriers, the act did not specify what constitutes an adequate and reasonable difference or whether the difference should apply to basic or gross pay. In 1996, the Service lowered the basic pay minimums of the EAS and established an SDA of 5 percent to provide a pay difference for certain postmasters and other supervisors in order to address this statutory requirement. However, since implementing the SDA, the Service had not fully evaluated the impact of the differential on postmasters and other supervisors. Our review showed that in 1999, very few craft employees earned more than their postmasters did in basic pay. However, for gross pay, about 12 percent of the postmasters we studied supervised craft employees who either earned more than they did or earned within 5 percent of what they earned, apparently due to overtime. Our review also showed that most postmasters who earned less than their craft employees were lower graded postmasters and not eligible for the SDA. Given the lack of specificity in the 1970 Act, we are not in a position to conclude whether or not the results we found represent an adequate and reasonable outcome regarding the pay differences for postmasters. However, prior to our providing the results of our review to the Service, it had only limited data to evaluate the impact of its SDA policy on postmasters, including which postmasters should be eligible for, and the amount of, the SDA. Without such information, the Service was not in the best possible position to factually assess the adequacy and reasonableness of the Service?s SDA policy or other pay differences. Now that some data are available and an approach has been developed to analyze the Service?s payroll data, the Service should have the capability to do the analyses necessary to put it in a better position to make fact- based decisions on the adequacy and reasonableness of its SDA policy and pay differences. Recommendations for In order to be in a better position to evaluate its SDA policy and the pay Executive Action differences between postmasters and their craft employees, we recommend that the Postmaster General use postal payroll and any other comparable data to periodically (1) determine the extent to which clerks and carriers may be earning more than their local postmasters, and the reasons why, if applicable; and (2) reassess the adequacy and reasonableness of the pay differences between postmasters and the clerks and carriers they supervise. Agency and Postmaster We received written comments on a draft of this report from the Organizations? Postmaster General dated August 27, 2001; the President of the National Association of Postmasters of the United States (NAPUS) dated August 15, Comments and Our 2001; and the President of the National League of Postmasters of the United Evaluation States (the League) dated August 21, 2001. These comments are summarized below and are reprinted in appendices IV, V, and VI. Officials from the Service and the Tennessee Valley Authority provided oral technical and clarifying comments. Also, officials from Federal Express and the Federal Aviation Administration provided technical and clarifying comments by e- mail. All technical and clarifying comments were incorporated, where appropriate. The Postmaster General, and the presidents of NAPUS and the League, indicated general agreement with our findings and recommendations. They believed that the findings supported their views, which conflicted, regarding whether adequate and reasonable differences in pay existed between postmasters and craft employees. That is, the Postmaster General believed the findings supported the Service?s contention that adequate and reasonable differences in pay exist. Conversely, the presidents of the postmaster organizations believed that the findings supported their contention that adequate and reasonable differences do not exist. Specifically, the President of the League stated that although the Congress did not legislate the amount of the differential, the Congress considered a 25- percent differential to be reasonable and adequate. We continue to believe that given the lack of specificity in the 1970 Act, we are not in a position to conclude whether or not the results we found represent an adequate and reasonable outcome for postmasters. With respect to the League president?s comment that the Congress considered a 25- percent differential to be reasonable and adequate, we did not find any support for that view. Although the legislative history indicated that the Congress considered establishing a specific pay difference, the history also indicated that the Congress chose not to do so because it did not want to bind the Service to a fixed difference to be maintained in the future. We also note that a comment that there should be a minimum differential of at least 25 percent was made by a former Assistant Postmaster General for Personnel at a public hearing before enactment of the 1970 Act, not by the Congress. The President of the League also expressed three concerns regarding the data, methodology, and analyses used in our work. First, he said the 1999 payroll data that we used in our analyses were outdated and did not accurately reflect current pay conditions. Second, the president was concerned that we, for various reasons, excluded over 200,000 craft employees and postmasters from our study group. Third, the president was concerned that we did not perform a thorough analysis of the earnings of certain lower graded postmasters and their craft employees. Specifically, he noted that the lack of pay difference was most prevalent for EAS- 15 postmasters and below. He stated that we diminished the seriousness of the pay inadequacies experienced by these lower graded postmasters when we combined their earnings with those of higher graded postmasters to create various statistics. He said that a study of the pay differential should be limited to EAS- 18 postmasters and below and their craft employees. He went on to say that the magnitude of the lack of an adequate pay differential cannot be accurately determined without comparing the pay of all craft employees, including rural carriers, and postmasters. We agree with the President of the League that it would be helpful to have more current data and additional analyses of the data, but this was not possible to do in our review. First, we used calendar year 1999 payroll data because, at the time we started our work, these data were the most current available. Second, in order to have a level- playing field for our analyses, we excluded certain craft employees and postmasters from our study group for the following reasons. As stated in the letter, we excluded all employees who were not postmasters, clerks, city carriers, or rural carriers. We also excluded those clerks, carriers, and postmasters who were not full- time permanent employees for the entire year, or were detailed to other jobs or changed their duty stations during 1999. Next, we eliminated those clerks and carriers whose locations did not match with a postmaster. Also, we eliminated those postmasters whose locations did not match with at least one clerk or carrier. Third, due to complexities associated with the payroll file and because of time constraints, we were unable to do a more exhaustive analysis. Finally, we were asked to review the pay of all postmasters and not just EAS- 18 postmasters and below. We recognize that combining the earnings of various grades of postmasters does not provide specific data by grade; however, we believe that the data that we do provide offer some insight into the pay of postmasters that was not previously available. Also, we recognize that more exhaustive analyses of payroll data need to be done, and we believe the Service is in the best position to do these analyses. This recognition and our findings helped form the basis for our conclusions and recommendations. We are sending copies of this report to the Chairmen and Ranking Minority Members, Senate Committee on Governmental Affairs and its Subcommittee on International Security, Proliferation and Federal Services; and to the Chairman and Ranking Minority Member, House Committee on Government Reform. We are also sending copies of this report to Representative Constance Morella because of her expressed interest in postmasters? pay; the Postmaster General and Chief Executive Officer, U. S. Postal Service; the National President, National Association of Postmasters of the United States; and the President of the National League of Postmasters of the United States. Major contributors to this report included Don D. Allison, Gerald P. Barnes, Roger L. Lively, Anne Rhodes- Kline, George H. Quinn, and Charles F. Wicker. If you have any questions about this letter or the appendices, please contact me or Mr. Barnes on (202) 512- 8387 or at ungarb@ gao. gov or barnesgp@ gao. gov. Sincerely yours, Bernard L. Ungar Director, Physical Infrastructure Issues Appendi Appendi xes x I Objectives, Scope, and Methodology Our objectives were to (1) describe the Postal Service?s pay practices for postmasters, including how the Service determines and applies its supervisory differential adjustment (SDA); (2) determine whether any craft employees earned more than their local postmasters during 1999 and, if so, why and to what extent; and (3) determine other organizations? practices for establishing pay for supervisors whose craft employees can earn more than they do, as well as determine prevalent industry practices. To address our objectives, we reviewed the Postal Reorganization Act of 1970, its legislative history, legal decisions regarding postmasters? pay, the Service?s pay policies, proposed legislation to change the consultation process used to determine postmaster pay, and studies of supervisory compensation practices within private industry. We discussed pay practices for supervisors with officials from the Service, postmaster organizations, Hay Management Consultants, Watson Wyatt, and other selected organizations- the Federal Aviation Administration, Federal Express, the Tennessee Valley Authority, United Parcel Service, and the Washington Metropolitan Area Transit Authority. 1 We selected these organizations by using a combination of factors, including (1) exemption from the pay provisions of Title 5 of the U. S. Code, (2) substantial overtime usage, (3) supervision of bargaining unit employees by nonbargaining unit managers, and (4) competitiveness with the Service. We also obtained the views of the Service and the postmaster organizations regarding the proposed legislation. Additionally, because the Service did not have current data on whether, or to what extent, craft employees earned more than their postmasters, we obtained the Service?s payroll files for 1999, the most recent year for which data were available when we started our review. These files contained the biweekly pay records of over 1 million employees who worked for the Service at some point during that year. Because we focused our work on postmasters, clerks, city carriers, and rural carriers, we excluded all employees who were not in one of these four occupations or were not fulltime permanent employees for the entire year. We also excluded 1 The Service hired Hay Management to compare the salaries, pay practices, and benefit practices of nonbargaining unit employees to those available in the private sector. In 1995 and 1999, Hay issued reports of its comparative analyses to the Service. Watson Wyatt annually surveys employers within the United States to obtain information on their compensation, benefits, and employment practices. In its 1995 and 1999 compensation studies, Hay Management referenced Watson Wyatt?s survey results relating to supervisory differentials. employees who, during the year, were detailed to other jobs or changed their duty stations. After these exclusions, a total of 443,942 postmasters, clerks, and carriers remained. We then matched clerks and carriers with their local postmasters according to postal facility locations and eliminated those clerks and carriers whose locations did not match with a postmaster?s. We also eliminated those postmasters whose locations did not match with at least one clerk or carrier. This created a study group of 201,871 employees, consisting of 191,694 clerks and carriers and the 10, 177 postmasters who supervised them. Next, we computed the basic and gross pay of the employees in our study group to determine if any clerks or carriers earned more than their local postmasters, or if any postmasters supervised clerks or carriers who earned more than they did. 2 For purposes of this report, we defined gross pay as all pay received during calendar year 1999, excluding severance payments, settlements, prior years? pay adjustments, annual leave sell- back payments, and terminal leave payments. We did not assess the reliability of the Service?s 1999 payroll files. However, audits performed by Ernst & Young LLP on the Service?s financial statements for 1998, 1999, and 2000 did not identify any material weaknesses in the Service?s payroll system. 2 In making these computations we noted that the basic pay of at least 873 postmasters (8.6 percent) exceeded the maximum basic pay for their grades. Additionally, we noted a similar situation for at least 526 craft employees (0. 3 percent). According to the Service, these anomalies were primarily due to situations where employees had gone from higher to lower graded positions but retained the higher pay from their previous positions- a situation known as ?saved- pay.? Briefing on Comparison of Postmasters? and Appendi x II Craft Employees? Pay During 1999 U. S. Postal Service: Few Craft Employees Earned More Than Their Postmasters, But Adequacy and Reasonableness of Pay Differences Remain Unclear 1 Briefing Contents Objectives Scope and Methodology Background Results in Brief Objective 1: Postal Service?s Pay Practices for Postmasters Objective 2: Comparison of Postmasters? and Craft Employees? 1999 Earnings Objective 3: Other Organizations? and Industry Pay Practices for Supervisors Conclusions Recommendations for Executive Action 2 Objectives Describe the Postal Service?s pay practices for postmasters, including how the Service determines and applies its Supervisory Differential Adjustment (SDA). Determine whether any craft employees earned more than their local postmasters during 1999 and, if so, why and to what extent. Determine other organizations? practices for establishing pay for supervisors whose craft employees can earn more than they do, as well as determine prevalent industry practices. 3 Scope and Methodology Conducted work at Postal Service Headquarters, Washington, D. C. Interviewed Service officials responsible for compensation, finance, labor relations, payroll processing, and legal issues; postmaster organizations? presidents, officers, and members; Federal Aviation Administration (FAA), Washington Metropolitan Area Transit Authority (WMATA), and Tennessee Valley Authority (TVA) compensation officials because these organizations were exempt from Title 5 of the U. S. Code and had high overtime usage; Federal Express (FedEx) and United Parcel Service (UPS) compensation officials because these organizations were competitors of the Postal Service; and 4 Scope and Methodology (cont.) Hay Management and Watson Wyatt Worldwide consulting firms? compensation experts. Reviewed the following relevant documents: Postal Reorganization Act of 1970 and its legislative history; National Association of Postal Supervisors v. United States Postal Service, 602 F. 2d 420 (D. C. Cir. 1979); USPS Employee and Labor- Relations Manual; Hay Management Consultants? 1995 and 1999 comparisons of USPS? nonbargaining- unit salaries, pay, and benefits to those in the private sector; Watson Wyatt Worldwide?s ECS Industry Report on Supervisory Management Compensation, 2000/ 2001; 5 Scope and Methodology (cont.) the Service?s 1998, 1999, and 2000 annual financial reports and comprehensive statements; and prior GAO reports and testimonies on compensation and related issues. Analyzed postmaster and craft employee pay. Obtained the Service?s payroll files for calendar year 1999 containing pay records for over 1 million full- and part- time employees who were paid at least once during the year. Identified 443,942 postmasters, clerks, and carriers who were full- time permanent employees for all of 1999 and did not change occupation or duty station. 6 Scope and Methodology (cont.) Matched clerks and carriers with the local postmasters who supervised them, creating a study group of 201,871 employees (191,694 craft employees and 10,177 postmasters). Computed the basic and gross pay of postmasters, clerks, and carriers for 1999. Gross pay was defined as all pay received during calendar year 1999, excluding severance payments, settlements, prior year pay adjustments, annual leave sell- back payments, and terminal leave payments. Clerks? and carriers? pay included basic pay, overtime and other premium pay, bonuses, and awards. Postmasters? pay included basic pay; variable pay; merit awards; and premium pay, including overtime. 7 Scope and Methodology (cont.) Identified (1) the clerks and carriers who earned more than their local postmasters and (2) the postmasters who supervised clerks and/ or carriers who earned more than they did. Performed various statistical and comparative analyses of the matched postmasters, clerks, and carriers. Although we did not assess the reliability of the Service?s payroll file, the audits done by Ernst & Young LLP on the Service?s financial statements for 1998, 1999, and 2000 did not identify any material weaknesses regarding the payroll system. 8 Background The Service had a nationwide delivery and retail infrastructure that included about 798, 000 career employees and about 38,000 post offices, stations, and branches in 1999. Craft employees accounted for the vast majority of career employees. These employees included about 292,000 clerks, 242,000 city carriers, and 55,000 rural carriers. Their pay is set through collective bargaining or binding arbitration, when needed, to resolve bargaining deadlocks. Postmasters accounted for about 26,000 of the 78,000 supervisory and management employees. 9 Background (cont.) Postmasters are generally paid under the Executive and Administrative Schedule (EAS), which covers about 78,000 noncraft employees, including executives, managers, and supervisors. The EAS has 26 grade levels for pay. EAS postmasters were in grades 11, 13, 15, 18, 20, 21, 22, 24, and 26. Postmasters not paid under the EAS are paid under the Postal Career Executive Service (PCES) pay schedule, which is comparable to the Civil Service?s Senior Executive Service. 10 Background (cont.) Following the provisions of the Fair Labor Standards Act, the Service classified about 14,000 postmasters as nonexempt, and, as such, they were eligible for overtime pay at time- and- one- half. The remaining postmasters were classified as exempt employees and thus not eligible for overtime at time- and- one- half. According to the Service, these postmasters were classified as exempt because, among other things, they supervised two or more craft employees. The 1970 Act requires that the Service pay wages comparable to private sector wages and provide an adequate and reasonable difference in pay for supervisors and managers over that of the clerks and carriers they supervise. 11 Background (cont.) The 1970 Act provides the Service broad discretion in setting a pay difference between postmasters and their craft employees. The 1970 Act?s legislative history indicates the Congress considered imposing a pay difference formula but chose not to. The Congress did not want to bind the Service to a fixed difference to be maintained in the future. Instead, the Congress wanted to provide Postal Service management with maximum flexibility and control over its costs. 12 Background (cont.) During the late 1970s, the postmaster organizations sued the Service, claiming that the Congress intended a 25- percent difference in pay between postmasters and craft employees. The Court ruled in favor of the Service, citing that the Congress did not set a fixed difference nor require that the Service set a fixed difference. 13 Results in Brief Generally, postmaster pay consists of basic pay, variable pay, lump sum merit awards, and supplemental pay, such as for overtime. In 1996, the Service lowered the basic pay minimums of the 26 EAS grades. This resulted in the basic pay minimums of EAS- 15 and EAS- 16 exempt supervisors being less than the maximum pay of a grade 5 clerk, which was the most populated grade and pay level of the largest bargaining unit. Because of this and the 1970 Act?s requirement to maintain an adequate and reasonable pay difference, the Service established an SDA policy for EAS- 15 exempt supervisors and above who are not eligible for overtime pay at time- and- one- half. The policy provides that these supervisors will be paid no less than 5 percent more than the basic pay maximum of a grade 5 clerk. 14 Results in Brief (cont.) Although a 1995 Hay Management study reported that differentials ranged from 10 to 15 percent among private sector companies that maintain formal differential policies, the Service made a management decision that a 5- percent SDA would provide a noticeable difference in pay between the minimum pay of supervisors and the maximum pay of a grade 5 clerk. However, since implementing the SDA, the Service has not conducted the analyses necessary to fully determine the implications of its SDA policy on postmasters, including which postmasters should be eligible for, and the amount of, the SDA. 15 Results in Brief (cont.) Two craft employees earned more in basic pay than their local postmasters in 1999. About one- half of 1 percent of craft employees earned more in gross pay than their local postmasters. With regard to postmasters, about 12 percent supervised at least 1 craft employee who earned more than they did in gross pay or earned within 5 percent of what they earned. Overtime was apparently the reason why these employees earned more or within 5 percent of what their postmasters earned. Most postmasters who supervised at least 1 craft employee who earned more than they did were not eligible to receive the SDA. These postmasters could not receive the SDA because they were either eligible for overtime at time- and- one- half or were in grades below EAS- 15. 16 Results in Brief (cont.) The five organizations we selected had pay policies to minimize instances of craft employees earning more than their supervisors. The five organizations indicated that craft employees will occasionally earn more than their supervisors, but this is the exception and not the norm. Four of the five organizations indicated that they used market- based pay systems that generally resulted in their organization setting pay for supervisors high enough to prevent almost all craft employees from earning more than their supervisors. According to Watson Wyatt, private sector companies use market- based pay for nonbargaining unit positions, and about 30 percent of the companies had various policies in place to help ensure that supervisors earned more than their employees. 17 Objective 1: Postal Service?s Pay Practices for Postmasters During 1999, postmasters? pay had four major components: Basic pay consisted of salaries and wages paid directly for duties performed during the regular workweek and accounted for, on average, 95 percent of a postmaster?s pay. Variable pay, Economic Value Added (EVA), was pay- forperformance cash rewards for achieving specific organizational goals and targets and accounted for, on average, 4 percent of a postmaster?s pay. Merit awards were lump- sum payments to recognize achievements beyond what was normally expected. 18 Objective 1: Postal Service?s Pay Practices for Postmasters (cont.) Premium pay was supplemental pay for overtime, nights, and holidays worked. Merit awards and premium pay accounted for, on average, 1 percent of a postmaster?s pay. The Service said it used the results of a 1995 Hay Management report that compared EAS and private sector compensation as a guide in making substantive changes to the EAS pay system in 1996. Among other changes, the Service lowered the basic pay minimums of the 26 EAS grades. That change resulted in the basic pay minimums of EAS- 15 and EAS- 16 exempt supervisors being less than the basic pay maximum of a grade 5 clerk-- the most populated grade and pay level of the largest bargaining unit. 19 Objective 1: Postal Service?s Pay Practices for Postmasters (cont.) To compensate for this lack of a pay difference and comply with the 1970 Act?s requirement to provide adequate and reasonable pay differences, the Service instituted an SDA policy. This policy provides that EAS- 15 exempt supervisors and above will be paid no less than 1.05 times the maximum basic pay for the most populated grade in the largest bargaining unit (grade 5, step O, clerk). The Service stated that it chose EAS- 15 exempt supervisors as the starting point of eligibility for the SDA because most exempt first- line supervisors were in grades EAS- 15 and EAS- 16. (There were no EAS- 16 postmasters, only supervisors.) 20 Objective 1: Postal Service?s Pay Practices for Postmasters (cont.) The SDA set a floor for the salaries of EAS- 15 exempt supervisors and above at 5 percent more than the maximum basic pay of a grade 5 clerk (i. e., grade 5, step O). In 1995, Hay Management reported to the Service that a quarter of the private sector companies maintained a formal salary differential between supervisors and subordinates. Of these companies, the differential was typically 10- 15 percent. In 1996, the Service made a management decision to set the SDA at 5 percent because it believed this amount would provide a visible difference between the minimum pay of exempt supervisors and the maximum basic pay of a grade 5 clerk. However, since implementing the SDA, the Service has not conducted the analyses necessary to fully determine the implications of its SDA policy on postmasters, including which postmasters should be eligible for, and the amount of, the SDA. 21 Objective 1: Postal Service?s Pay Practices for Postmasters (cont.) SDA does not apply to EAS- 15 nonexempt supervisors or EAS14 supervisors and below. Although the SDA rate of 5 percent does not change, the SDA salary does change as the maximum basic pay of a grade 5 clerk is adjusted for cost- of- living- allowances (COLA) and for other general pay increases. Until November 1998, the SDA did not apply to exempt supervisors above EAS- 16 because their basic pay minimums provided a pay difference that exceeded the 5 percent SDA rate. 22 Objective 1: Postal Service?s Pay Practices for Postmasters (cont.) From 1996 through 1999, the SDA salary increased nine times due to various increases in the maximum basic pay of a grade 5 clerk. 23 Objective 1: Postal Service?s Pay Practices for Postmasters (cont.) SDA Salary Increases Through 1999