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October 19, 2017

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Employee incentives in public, private sectors are poles apart

The career track is often the same at America’s elite law and auditing firms, investment banking houses, technology start-ups and biotechnology companies. Young, talented newcomers are paid princely sums, but it’s understood that only the most innovative and hardworking will last more than a few years.

They trade job security for six-figure salaries. They know that three years at McKinsey & Company or Goldman Sachs can lead to a fine career elsewhere.

The result: A workforce that is highly competitive and constantly refreshed.

Compare that with the human resource model for college-educated government workers, including teachers: Relatively low starting pay, a compressed salary structure with fairly tame merit incentives, job security — workers are rarely fired — and a guaranteed pension.

So what type of person does each compensation structure attract? And should government be more entrepreneurial in its pay and benefits?

Fair questions, said Gary Burtless, a labor economist for the nonpartisan Brookings Institution, a think tank in Washington, D.C.

“What’s the private sector do?” Burtless said. “They offer good salaries when they’re young, but give them no job security. They make a tough choice at five to seven years and often dismiss half, two-thirds or, at the best law firms, as many as nine-tenths.

“They keep only the most productive.”

By comparison, state and federal governments do nearly the opposite. “The salary isn’t great for beginners. Top pay isn’t great, but we do offer these two saving graces: First, it’s hard to get fired. And two, if you stick it out for 30 or 35 years, you have a more-secure pension.

“Why do we do it this way?”

Matthew Murray, a University of Tennessee labor economist, had an answer: “The incentive structure is intended to create loyalty and continuity.”

Turnover is the enemy. “You keep trained, skilled people on the job and don’t need to go out do a costly search, and you might find a worse employee,” he said.

Murray acknowledged the implications. “What you get with government employees, by virtue of these steady jobs, you get risk-averse people. They may be good solid employees, but they may not be very innovative. Safe jobs attract people who want a safe environment.”

In times of crisis, however, perhaps boldness should outweigh safe and steady, says Katherine Barrett, a consultant on government management and co-author of Governing Magazine’s “Grading the States 2008.”

“The idea of looking at all the assumptions that have gone into public sector compensation systems seems like a good one,” Barrett said. “Because I don’t know that the rich benefit structure is well thought out as a way to attract young people.”

Does a talented young college graduate — alight with ambition and living in the fierce urgency of now — really care about a cushy pension he can collect if he works in government for 30 years?

Is an alternate compensation structure possible for government?

The idea of paying teachers or social workers high starting salaries seems wishful thinking. But what if long-term pension liabilities could be sharply reduced by forcing those young workers, many or most of whom won’t make the cut after a few years, into a defined contribution plan, say a 401(k) with an employer match? The savings could go to higher salaries.

One key difference between the private and public arenas, however, is labor unions. They protect workers from getting fired, even though it might be precisely what is needed. And union leaders are often mid- or end-of-career veterans, for whom pensions are a top concern.

Democrats are in a position in Nevada and Washington to reform the compensation structure for government workers. Unions are big Democratic supporters.

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