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

  

  

   

   