Human Capital: Trends in Executive and Judicial Pay Suggest a	 
Reexamination of the Total Compensation Package (20-SEP-06,	 
GAO-06-1116T).							 
                                                                 
People are critical to the success of the federal government's	 
overall transformation effort. Yet the government has not	 
transformed, in many cases for decades, how it classifies,	 
compensates, develops, and motivates its employees to achieve	 
maximum results with available resources and existing		 
authorities. This is especially the case with the federal	 
government's top leadership and federal justices and judges.	 
Leading organizations understand that they must often change	 
their culture to successfully transform themselves, and that such
a change starts with top leadership. Most importantly, senior	 
leaders who are drivers of continuous improvement are needed to  
stimulate and support efforts to facilitate change and achieve	 
related transformation efforts for the federal government. At the
Chairman's request, we recently reported on executive and	 
judicial pay--Human Capital: Trends in Executive and Judicial Pay
(GAO-06-708). This testimony highlights information from that	 
report. 							 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-06-1116T					        
    ACCNO:   A61188						        
  TITLE:     Human Capital: Trends in Executive and Judicial Pay      
Suggest a Reexamination of the Total Compensation Package	 
     DATE:   09/20/2006 
  SUBJECT:   Comparative analysis				 
	     Executive compensation				 
	     Human capital					 
	     Judicial compensation				 
	     Pay rates						 

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GAO-06-1116T

     

     * Trends in Executive and Judicial Pay
     * The Value of Total Compensation for Executive and Judicial P
     * Principles for Restructuring Executive and Judicial Pay
     * Issues for Reconsideration in Executive and Judicial Pay
     * Conclusions
     * Contact and Acknowledgments
          * Order by Mail or Phone

Testimony

Before the Subcommittee on the Federal Workforce and Agency Organization,
Committee on Government Reform, U.S. House of Representatives

United States Government Accountability Office

GAO

For Release on Delivery Expected at 2:00 p.m. EDT

Wednesday, September 20, 2006

HUMAN CAPITAL

Trends in Executive and Judicial Pay Suggest a Reexamination of the Total
Compensation Package

Statement of David M. Walker Comptroller General of the United States

GAO-06-1116T

Chairman Porter, Representative Davis, and Members of the Subcommittee:

I appreciate the opportunity to be here today to discuss our recent report
on long-term trends in executive and judicial pay that we prepared at your
request, Chairman Porter.1 As I have stated frequently, people are
critical to the success of the federal government's overall transformation
effort. While progress has been made in addressing human capital
challenges in the last few years, significant opportunities exist to
improve strategic human capital management to respond to current and
emerging 21st century challenges. For example, the government has not
transformed, in many cases for decades, how it classifies, compensates,
develops, and motivates its employees to achieve maximum results within
available resources and existing authorities.2 This is especially the case
with the federal government's top leadership and federal justices and
judges. Leading organizations understand that they must often change their
culture to successfully transform themselves, and that such a change
starts with top leadership. Most importantly, senior leaders who are
drivers of continuous improvement are needed to stimulate and support
efforts to facilitate change and achieve related transformation efforts
for the federal government.

In our report on executive and judicial pay, we found that generally the
salaries for the federal government's senior leaders, including political
appointees and federal justices and judges, have not been keeping pace
with inflation or the growth of wages over the past 30 years. Our work is
consistent with the National Commission on the Public Service's findings
that the salaries for top-level government officials have not been keeping
pace with inflation or maintaining reasonable relationships to the market.
In 2003, the Commission recommended that top-level officials in the
executive, legislative, and judicial branches receive significant
increases in their salaries to ensure a reasonable relationship to
relevant professional positions, such as leaders in not-for-profit and
educational organizations or state and local governments.3 The Commission
also recommended that Congress break the statutory link, which has been in
place since 1989, between the salaries of Members of Congress and those of
federal justices and judges and senior political appointees. The
Commission noted that this contributes to the salaries of executive-level
positions falling substantially behind cost-of-living increases and trends
in the market's compensation.

1GAO, Human Capital: Trends in Executive and Judicial Pay, GAO-06-708
(Washington, D.C.: June 21, 2006).

2GAO, 21st Century Challenges: Reexamining the Base of the Federal
Government, GAO-05-325SP (Washington, D.C.: February 2005).

3The National Commission on the Public Service, Urgent Business for
America: Revitalizing the Federal Government for the 21st Century
(Washington, D.C.: January 2003).

Today, I will focus on three key points. Specifically, I will discuss (1)
how trends in executive and judicial pay have generally not kept pace with
inflation or the growth of wages, (2) how basic pay should be considered
along with other benefits when examining the value of total compensation
in order to remain competitive to the market for executive and judicial
positions, and (3) what principles should guide any possible restructuring
of executive and judicial pay in order to attract the talent needed to
address 21st century challenges. We have also identified illustrative
issues that deserve further reconsideration in moving forward with any
executive and judicial pay restructuring. My statement is based on
published GAO products that were conducted in accordance with generally
accepted government auditing standards.

                      Trends in Executive and Judicial Pay

A key trend we reported is that executive-level pay rates generally have
not kept pace with inflation since 1970, regardless of the inflation index
used. In our recent report, we adjusted the basic pay rates from 1970 for
selected executive-level positions to calendar year 2006 dollars using the
Bureau of Economic Analysis's Gross Domestic Product (GDP) price deflator
and the Bureau of Labor Statistics's Consumer Price Index (CPI). From 1970
to 2006, the CPI has increased at an average annual rate of 4.7 percent,
whereas the GDP price deflator has increased at an average annual rate of
4.0 percent. While each index has its strengths and weaknesses in
measuring inflation, historically inflation as measured by the CPI has
tended to outpace inflation as measured by the GDP price deflator.4 For
detailed information on the executive-level positions within the selected
pay plans and the differences in their nominal and inflation-adjusted
basic pay rates, see appendix I.

4For more information on these inflation indexes, see the full report on
trends in executive and judicial pay, GAO-06-708 .

Using the GDP price deflator to adjust for inflation, the basic pay for
selected Executive Schedule positions and federal justices and judges has
declined from 1970 to 2006, as shown in figure 1. For example, in 1970,

           o  cabinet secretaries (paid at Executive Schedule level I) were
           paid $250,204 (in 2006 dollars) compared to $183,500 in 2006-a
           decline of about 27 percent;
           o  deputy secretaries (paid at Executive Schedule level II) were
           paid $177,228 (in 2006 dollars) compared to $165,200 in 2006-a
           decline of about 7 percent;

           o  the Chief Justice was paid $260,629 (in 2006 dollars) compared
           to $212,100 in 2006-a decline of about 19 percent; and

           o  district judges were paid $166,802 (in 2006 dollars) compared
           to $165,200 in 2006-a decrease of about 1 percent.

Figure 1: Basic Pay Rates for Selected Executive-Level Positions Adjusted
for Inflation Using the Gross Domestic Product Price Deflator (in 2006
Dollars)

Similarly, the value of the basic pay for selected Executive Schedule
positions and federal justices and judges has declined when adjusted for
inflation using the CPI. Specifically, as shown in figure 2, in 1970,

           o  cabinet secretaries (paid at Executive Schedule level I) were
           paid $309,049 (in 2006 dollars) compared to $183,500 in 2006-a
           decline of about 41 percent;

           o  deputy secretaries (paid at Executive Schedule level II) were
           paid $218,910 (in 2006 dollars) compared to $165,200 in 2006-a
           decline of about 25 percent;

           o  the Chief Justice was paid $321,926 (in 2006 dollars) compared
           to $212,100 in 2006-a decline of about 34 percent; and

           o  district judges were paid $206,033 (in 2006 dollars) compared
           to $165,200 in 2006-a decrease of about 20 percent.

Figure 2: Basic Pay Rates for Selected Executive-Level Positions Adjusted
for Inflation Using the Consumer Price Index (in 2006 Dollars)

As I previously mentioned, the CPI has tended to outpace inflation as
measured by the GDP price deflator. Thus, the differences in
inflation-adjusted basic pay rates from 1970 to 2006 are greater when
using the CPI than the GDP price deflator.

Another trend we reported is that selected executive-level pay rates have
not kept pace with the growth of wages from 1970 to 2006. To measure the
growth of wages, we used the Bureau of Economic Analysis's National Income
and Product Accounts wage index for private industries.5 As shown in
figure 3, wages have grown at a greater rate from 1970 to 2006 compared to
the basic pay for selected executive-level positions. Specifically, wages
grew at nearly double the rate of basic pay for Executive Schedule level I
positions, such as cabinet secretaries, and the Chief Justice.

5This wage index provided a continuous series of wage data from 1970 to
2006. Wage and salary data pertaining to a more narrowly defined sector of
the nonfederal workforce (e.g., white collar workers) was not available
during this time period.

Figure 3: Cumulative Growth of Selected Executive-Level Pay Rates Compared
to Prices and Wages

Notes: Cumulative growth when normalized to 1970 values (1970=1). Price
growth is based on the GDP price deflator and the CPI. Wage growth is
based on the Bureau of Economic Analysis's National Income and Product
Accounts wage index for private industries.

      The Value of Total Compensation for Executive and Judicial Positions

While executive and judicial pay overall has declined in value when
adjusted for inflation, any restructuring of executive and judicial pay
should consider basic pay received as one part of the total compensation
package. We have reported that a competitive compensation system that
provides individuals a mix of base pay plus other incentives can help
organizations attract, motivate, and retain a quality workforce.6 Total
compensation includes elements such as cash-basic pay, locality pay, cash
awards/bonuses; noncash benefits-annual and sick leave, health insurance;
and deferred benefits-retirement (i.e., pension and health), life
insurance.

6GAO, Human Capital: Symposium on Designing and Managing Market-Based and
More Performance-Oriented Pay Systems, GAO-05-832SP (Washington, D.C.:
July 27, 2005).

It is important to note that the value of the total compensation will
differ given an individual's choice (e.g., to use child care facilities or
purchase life insurance), each agency's program decision (e.g., to
participate in the student loan repayment program), and the types of
compensation elements that are offered to different positions. In
particular, we found that the cash, noncash, and deferred benefits vary
within and across the different executive-level positions. For example, at
present, selected Executive Schedule positions, administrative law judges
(ALJs), inspectors general (IGs), and federal justices and judges do not
receive cash awards/bonuses due to the nature of their positions, while
career senior executives may receive them. All of the executive-level
positions may receive noncash benefits, such as health and life insurance
and retirement. However, there are differences in retirement, such as
larger benefits, for federal justices and judges compared to other
executive-level positions.

Organizations, including the federal government, may need to be flexible
in the balance between cash and benefits that comprise the total
compensation offered to employee groups in order to remain competitive in
the market. For example, we recently reported for military personnel that
the current mix of compensation is highly inefficient for meeting
near-term recruiting and retention needs.7 We reported that pay received
today is generally accepted as a far more efficient tool than future cash
or benefits for recruitment and retention of military personnel,
especially given the fact that the active duty workforce is mainly
comprised of people in their twenties. The vast majority of that workforce
preferred a lump-sum cash payment versus deferred compensation in the form
of an annuity when given the choice. More generally, in discussing what
incentives attract individuals to public service, the Merit Systems
Protection Board has reported that people come to work for and stay with
the federal government for a variety of reasons besides base pay. Among
these reasons, obviously, is the desire to make a contribution and the
personal pride or satisfaction in their work as well as the variety of
benefits provided to employees.8

7GAO, Military Personnel: DOD Needs to Improve the Transparency and
Reassess the Reasonableness, Appropriateness, Affordability, and
Sustainability of Its Military Compensation System, GAO-05-798
(Washington, D.C.: July 19, 2005).

8U.S. Merit Systems Protection Board, The Federal Workforce for the 21st
Century: Results of the Merit Principles Survey 2000 (Washington, D.C.:
September 2003).

Thus, the federal government may need to shift the balance of total
compensation between pay and benefits in its pay plans in order to recruit
and retain the needed talent. While we did not determine in our recent
report the balance of total compensation between pay and benefits within
and across executive-level positions, overall federal civilian employees
receive, in broad terms, most of their compensation-about 67 percent-in
salary and wages and about 33 percent in the form of benefits or deferred
compensation.9 For workers in private industries, we recently reported
that their salary and wages made up 71 percent of total compensation,
while benefits accounted for 29 percent.10 However, additional analysis
would be needed to determine if these ratios correspond to executive and
judicial positions. For example, unlike other federal employees, federal
justices and judges are permitted to retire with full pay and benefits
when the sum of the judge's age and number of years on the bench is 80.

            Principles for Restructuring Executive and Judicial Pay

The federal government needs to attract and retain the quality and
quantity of executive leadership necessary to address 21st century
challenges. To help the government remain competitive with the relevant
markets, any restructuring of executive and judicial pay should be guided
by a set of principles. Executive and judicial pay plans should be

           o  sensitive to hiring and retention trends-actual trends, such as
           demographic, workforce, and economic trends and their effects on
           the federal government's ability to hire and retain high-quality
           persons for these positions are considered;

           o  reflective of responsibilities, knowledge and skills, tenure,
           and contributions-the positions are appropriately compensated to
           reflect these differences both within and across executive-level
           pay plans;

           o  transparent-Congress, leadership, and the public can easily
           understand the value of the compensation and contributions;

           o  market-sensitive-the compensation of the relevant markets
           (e.g., private or nonprofit sectors) is appropriately considered;

           o  flexible to economic change-changes in the nation's economy,
           such as extraordinary economic circumstances or severe budgetary
           constraints, can be accommodated;

           o  sustainable-over the longer term, given known cost trends and
           risks and future fiscal imbalances, executive-level pay plans are
           financially sustainable; and

           o  competitive-reasonable total compensation and other elements
           necessary to attract and retain leadership can help ensure the
           optimum use of taxpayers' dollars and make the most efficient
           allocation between cash and noncash benefits.

9 GAO-05-798 .

10GAO, Employee Compensation: Employer Spending on Benefits Has Grown
Faster Than Wages Due Largely to Rising Costs for Health Insurance and
Retirement Benefits, GAO-06-285 (Washington, D.C.: Feb. 24, 2006).

            Issues for Reconsideration in Executive and Judicial Pay

While the types of experiences, responsibilities, and required knowledge
and skills vary both within and across executive-level positions, as well
as the type of appointment and length of service, there are several
illustrative issues that deserve further reconsideration in possibly
restructuring executive and judicial pay.

           o  Maintaining a reasonable relationship across executive-level
           positions. In 1970, there was no overlap in the pay for the
           Executive Schedule and the other executive-level positions, such
           as career senior executives. Specifically, the lowest pay level of
           the Executive Schedule (level V) covering positions such as
           commissioners or general counsels of smaller agencies was greater
           than the maximum basic pay for career senior executives. By 1990,
           these pay plans began to overlap so that the lowest paid political
           appointees under the Executive Schedule were making less than the
           highest paid career senior executives. By 2006, the pay for
           Executive Schedule level II covering positions such as deputy
           secretaries of cabinet departments equaled the maximum basic pay
           for career senior executives not including cash awards/bonuses.

           A commission may be an option for reexamining executive and
           judicial pay and compensation and exploring ways to maintain a
           reasonable relationship across these executive-level positions and
           to the relevant markets, such as nonprofit and educational
           organizations or state and local governments. This would help
           ensure that the federal government's total compensation is
           reasonable and competitive in order for the government to obtain
           and retain the top talent it needs. In 1967, Congress established
           the Commission on Executive, Legislative, and Judicial Salaries
           (known as the Quadrennial Commission) to study salaries of
           political appointees, Members of Congress, federal justices and
           judges, and other top-level government officials every 4 years and
           report to the President on its recommendations for salary
           increases. The Commission-composed of nine individuals appointed
           from the private sector-was to recommend salary increases for
           these positions in order to maintain a reasonable relationship
           between these positions and with private sector salaries. The
           President accepted the recommended salary increases for these
           positions, which went into effect in 1969. For example, the salary
           for cabinet secretaries increased from $35,000 in 1968 to $60,000
           in 1969. In 1989, Congress abolished the Quadrennial Commission,
           transferring its authority and responsibilities to the Citizens'
           Commission on Public Service and Compensation. However, this
           Commission, which was to be appointed during fiscal year 1993 and
           then every fourth fiscal year, has never been appointed.
           Commission members were to be appointed from private life by the
           President, Congressional leadership, and the Chief Justice, among
           others.

           o  Recognizing equity issues. At our recent panel on the
           authorities and responsibilities of IGs, the majority of panel
           participants stated that the pay structure for IGs needed to be
           addressed given the importance of providing reasonable and
           competitive compensation.11 Currently, there are differences in
           the basic pay rates for IGs based on the level of appointment,
           even though the powers and duties extended to IGs in either
           appointment are essentially the same. Most IGs for cabinet
           departments and major agencies are appointed by the President
           subject to Senate confirmation (paid at Executive Schedule level
           IV). However, IGs for some agencies, such as the National Science
           Foundation and the Securities and Exchange Commission, are
           appointed by the agency head and paid at varying amounts including
           General Schedule grade 15 or Senior Executive Service (SES) pay
           rates. Such equity issues should be examined in any restructuring
           of executive-level pay.

           o  Considering performance-based bonuses. There are
           executive-level positions that are not eligible to receive bonuses
           (or awards) due to the nature of the positions. For example,
           selected Executive Schedule positions that are appointed by the
           President subject to Senate confirmation (including selected IGs),
           ALJs, and federal justices and judges do not. Bonuses awarded
           within a system that incorporates appropriate safeguards may be an
           option for rewarding individuals in these positions for their
           contributions. Appropriate safeguards, including reasonable
           transparency and appropriate accountability mechanisms, can help
           ensure fairness and prevent abuse. Any bonuses must be
           performance-based with a mechanism for assessing individuals'
           performance from multiple sources of input. In addition, checks
           and balances to help ensure that the positions' independence is
           not compromised are especially important for IGs, federal justices
           and judges, and selected other positions.

           o  Recognizing anomalies between comparable pay plans. There are
           anomalies between comparable pay plans, such as for the career SES
           and senior level/scientific or professional (SL/ST) positions. For
           example, as of January 2004, the aggregate pay cap (basic pay plus
           awards/bonuses) for SES and SL/ST positions is higher for
           individuals whose agencies have performance management systems
           certified by the Office of Personnel Management with concurrence
           from the Office of Management and Budget. However, the higher
           basic pay cap only applies to SES members under certified
           performance management systems, not SL/ST positions.

11GAO, Highlights of the Comptroller General's Panel on Federal Oversight
and the Inspectors General, GAO-06-931SP (Washington, D.C.: Sept. 11,
2006).

                                  Conclusions

As I have discussed, leading organizations understand that they must often
change their culture to successfully transform themselves, and that such a
change starts with top leadership. To help attract this talent,
restructuring of executive and judicial pay-guided by a set of
principles-may be necessary to help the government remain competitive with
the relevant markets. However, any restructuring of executive and judicial
pay should consider basic pay received by executive-level positions as one
part of the total compensation package. Further, the federal government
may need to shift the mix of total compensation between pay and benefits
in order to recruit and retain the needed executive-level talent. Moving
forward, a commission may be an option for reexamining executive and
judicial pay and compensation to ensure that the federal government's
total compensation is both reasonable and competitive in order for the
government to obtain and retain the top talent it needs to address current
and emerging 21st century challenges in a responsible and sustainable
manner.

Chairman Porter, Representative Davis, and Members of the Subcommittee,
this concludes my statement. I would be pleased to respond to any
questions that you may have.

                          Contact and Acknowledgments

For further information regarding this statement, please contact Lisa
Shames, Acting Director, at (202) 512-6806 or [email protected]. Janice
Latimer made key contributions to this statement.

Appendix I: Percentage Differences in Nominal and Inflation-Adjusted Basic
Pay Rates for Executive-Level Positions from 1970 to 2006

Notes: We provided the maximum basic pay rates for the Senior Executive
Service, senior-level/scientific or professional, administrative law
judge, and Board of Contract Appeals positions and included locality pay
for the Washington, D.C./Baltimore area in the basic pay rates for the
senior-level/scientific or professional, administrative law judge, Board
of Contract Appeals, and General Schedule grade 15, step 10, positions in
2006.

(450532)

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Highlights of GAO-06-1116T , a testimony before the Chairman, Subcommittee
on the Federal Workforce and Agency Organization, Committee on Government
Reform, U.S. House of Representatives

September 20, 2006

HUMAN CAPITAL

Trends in Executive and Judicial Pay Suggest a Reexamination of the Total
Compensation Package

People are critical to the success of the federal government's overall
transformation effort. Yet the government has not transformed, in many
cases for decades, how it classifies, compensates, develops, and motivates
its employees to achieve maximum results with available resources and
existing authorities. This is especially the case with the federal
government's top leadership and federal justices and judges.

Leading organizations understand that they must often change their culture
to successfully transform themselves, and that such a change starts with
top leadership. Most importantly, senior leaders who are drivers of
continuous improvement are needed to stimulate and support efforts to
facilitate change and achieve related transformation efforts for the
federal government.

At the Chairman's request, we recently reported on executive and judicial
pay-Human Capital: Trends in Executive and Judicial Pay (GAO-06-708). This
testimony highlights information from that report.

The pay rates for selected executive-level positions have not kept pace
with the growth of wages from 1970 to 2006, as measured by the National
Income and Product Accounts wage index for private industries. As shown
below, for example, wages grew at nearly double the rate of basic pay for
Executive Schedule level I positions, such as cabinet secretaries, and the
Chief Justice.

Cumulative Growth of Selected Executive-Level Pay Rates Compared to Prices
and Wages

To remain competitive in the market, organizations, including the federal
government, may need to be flexible in the balance between cash and
benefits that comprise the total compensation offered to employees. Total
compensation includes elements such as cash-basic pay, locality pay, cash
awards/bonuses; noncash benefits-annual and sick leave, health insurance;
and deferred benefits-retirement (i.e., pension and health), life
insurance.

Any restructuring of executive and judicial pay should consider basic pay
received as one part of the total compensation package.

While the types of experiences, responsibilities, required knowledge and
skills, type of appointment, and length of service vary both within and
across executive-level positions, moving forward, a commission may be an
option for reexamining executive and judicial pay and compensation to
ensure that the federal government's total compensation is both reasonable
and competitive in order for the government to obtain and retain the top
talent it needs to address current and emerging 21st century challenges in
a responsible and sustainable manner.
*** End of document. ***