Public Sector Compensation in Times of Austerity

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15 Nov 2012
9789264177758 (PDF) ;9789264177734(print)

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Austerity drives are leading governments to reduce operational cuts through the wage bill and staffing levels. A big lesson from past experience suggests that when pay cuts and freezes are necessary, it is essential to assess the savings relative to the costs – the loss of institutional knowledge if key contributors retire or resign, the time lost by managers and employees who have to deal with the issues related to vacancies and reorganizations, the lost productivity while people acquire new skills and learn new jobs, and the falloff in performance among employees who become discouraged or unsatisfied. This assessment does not appear to have taken place in the current crisis.

This report argues that any new approaches to public sector pay must help to: enhance external competitiveness of salaries; promote internal equity throughout the public sector; reflect the values of public organisations; and align compensation with government’s core strategic objectives. It calls for a recognition of the supply and demand for specific expertise.

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  • Foreword
    As part of the work programme of the Public Employment and Management Network (PEMN) of the OECD Public Governance Committee, the OECD Secretariat – through its Public Governance and Territorial Development Directorate – has initiated an examination of the strategies adopted since the onset of the economic and financial crises to manage employee compensation cuts more effectively. Wage and salary programmes represent one of the largest controllable costs for government employers. Changes in the structure and administration of pay programmes are not merely isolated austerity measures but in fact part of broader initiatives to restructure government so as to reduce costs more generally. The crises have made rethinking public sector compensation models imperative, both to meet the immediate need for lower operational costs and to effectively plan for the long term.
  • Preface
    Since the global financial crisis broke in 2008, most OECD member countries have introduced measures intended to restore public finances. Over three quarters of the OECD countries participating in the OECD Fiscal Consolidation Survey 2012 have marked operational expenditures for savings with wage cuts and staffing reductions included in the reform agenda. More than half are introducing wage cuts (e.g. wage freezes in the United Kingdom and the United States, and 5-10% wage cuts and salary freeze in Portugal and Spain) and a quarter are undertaking staff reductions (e.g. 10-12% reduction in staff in the Czech Republic, Ireland and Poland, and up to 10 000 staffing positions to be permanently abolished by 2014 in Germany). These are significant orders of magnitude as governments in OECD countries employ 15% of the labour force, and compensation costs account for 23% of government expenditures, representing 11% of GDP on average. However, the effects of salary cutbacks and freezes on staff motivation and the longer-term consequences on the ‘attractivity’ of the public sector as an employer are not clear yet.
  • Executive summary
    The current economic and financial crises – sometimes referred to as the "Great Recession" – have made compellingly clear the need to reduce payroll costs and manage employee compensation more effectively. These imperatives are in fact part of broader initiatives to restructure government so as to reduce costs more generally. Some countries have proceeded to freeze or reduce salaries; others have yet to make that decision. Plans have also been announced to reduce employee benefits – primarily pensions – but the savings from these changes would only be realised over extended periods.
  • Current trends in the compensation of public employees in OECD countries
    Compensation of public employees – which is key to attracting, motivating and retaining qualified workers – will likely be affected by the budget crisis, through cuts/freezes in pay/benefits or possible reductions in staffing levels. Fiscal consolidation through budget cuts can be a double-edged sword if staff reduction (for short-term needs) is severe, or "rightsizing" initiatives result in a loss of capacity to deliver needed services or a demoralised workforce. Review of measures implemented in OECD countries suggests that it is more the style and practices of management and/or the composition of the public workforce – not its size or the level of operational expenditure – that stand out as causes of budget imbalances in the first place. Involving public employees in decision making regarding salary and workforce reduction measures can be a useful means for ascertaining how far they are willing to go to avoid job losses and accept salary reductions or freezes.
  • Public sector compensation management in a changing world
    Times have changed: faced with the urgency of the "Great Recession", public employers are finally dropping long-standing compensation management methods and adopting alternative ways of setting salaries. Some of these have proved effective but employers generally have little experience with such rethinking, and there is no one textbook answer. Borrowing methods of the private sector, such as performance-related pay, is a strong trend and bound to continue. Other trends are the delegation of responsibility for managing pay from a central office to agencies and ministries, and individualised pay for knowledge jobs. How information is collected for job descriptions is key, since inaccuracies can lead to costly grade inflation. Any restructuring undertaken is now more practical thanks to technology, but each employer must decide on the appropriate balance between internal salary hierarchy (perception of fairness) and external differential increases in occupational pay due to supply and demand in the labour market.
  • Managing compensation in a post "New Public Management" era
    Rather than simply downsize, governments now must determine appropriate salary levels and performance expectations for all jobs affected by their restructuring efforts – and that will require adequate HR staff capacity. Policies that base salary increases on seniority or job tenure send a clear message that downplays the importance of employee performance. Salary banding introduces a dramatically different way of managing employees, since their pay does not depend on their job description – and that can enhance recognition of their worth. There have been difficulties introducing performance-related pay, the success of which depends on managers’ commitment and a review process to ensure fairness. Executive salaries and bonuses are a hugely contentious issue, but it should be recognised that government executive jobs are simply not comparable to executive jobs in the private sector. There have been advances in gender equality in the world of work, but the gender pay gap persists.
  • Policies and practices governing public sector compensation planning
    Compensation planning requires transparency, fairness, and a genuinely inclusive approach – especially during times of austerity. Informed decisions that can be justified to stakeholders require social dialogue. While union involvement would reduce resistance to proposed changes, labour negotiations are normally not the best setting for restructuring pay programmes. Information on labour market trends is central to remaining competitive, although data quality issues, differences in demand, and the frequent lack of counterpart jobs in the private sector must be taken into account. Transition to performance-related pay is perhaps the most difficult change initiative for a public employer, but policy formats such as a "merit matrix" can help facilitate the changeover. Employees need to know as much as possible about plans for the near future and what they can expect. Maximising the total rewards of the work experience can enhance the performance of personnel truly committed to the organisation and its success.
  • Key considerations in reforming the government compensation system
    With agencies now forced to restructure and "do more with less", ensuring continuous employee commitment has become a priority. Given that employees have to perceive changes positively, it may be that a new compensation system should be implemented in stages. It is recommended that projects to replace existing systems involve five phases: i) confirmation of the need for change; ii) collection of evidence for decision making; iii) planning and development of the new system; iv) implementation; and v) evaluation. Prior to implementation, top management should commit to system assessment at the end of each year, and to correcting problems as soon as they are detected.
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