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The true cost of a 5-year pay freeze

May. 1, 2011 - 03:18PM   |  
By HOWARD RISHER   |   Comments

The five-year pay freeze proposed in the House-passed budget plan drafted by Rep. Paul Ryan, R-Wis., could easily cost more than it saves, especially with high-demand jobs like those in technology, engineering and health care. It will assuredly trigger increased turnover among the best-qualified high performers who can easily move to new jobs the people government can least afford to lose.

In 40 years of consulting, I have seen only one instance when pay was frozen for five years. That was for Bill Ford, the chairman at Ford, and he of course was able to fall back on family money. When companies freeze pay, it is usually for a year or two at most. They either recover or go out of business.

Companies would also make those decisions year to year, depending on changing circumstances.

The net savings for government will be modest. Based on current salary increases, salaries might grow 16 percent over those five years for knowledge workers in the private sector. With the freeze, the payroll savings for the average federal worker would be roughly $35,000. But the savings need to be balanced with the anticipated costs.

Total costs of turnover

The costs of employee turnover can be staggering, with estimates ranging from half of their pay at the lowest levels to five times their compensation for executives. That means the loss of an experienced, solid performer could exceed $200,000.

Those costs include the "hard" costs the direct expenses associated with recruitment and hiring, such as background checks, relocation, training, temporary help and benefits continuation. They also include the "soft'' costs the time spent by everyone involved in the hiring and training process along with lost productivity until a replacement is performing at the same level. It can take months before production is back to the same level.

The cost of losing a star performer in a knowledge field can be much higher. Leaders of technology companies have argued that a star performer's value is more than double that of the average employee. That is attributable to their creativity and problem-solving ability.

The costs should also include the impact on performance when employee morale deteriorates. There is no question the proposed freeze will severely damage the morale of those who continue in employment. All of the studies of employee engagement have a lesson here when employee engagement falls, performance declines. When employees become "actively disengaged," to use the phrase from Gallup's research, they become disruptive and undermine the performance of others.

Here there is likely to be a cost that has never been studied. A five-year freeze will send a clear message to every job seeker many will refuse to consider federal careers. Parents of new graduates will advise their children not to apply. The freeze along with the proposed cuts in benefits will badly damage the reputation of government as an employer.

The fallback will be increased reliance on the employees of contractors. Surveys show contractor salaries are not appreciably above market levels but added overhead costs raise their cost substantially. A prominent federal human resources executive estimates that contract personnel in professional fields cost 50 percent more than full-time employees.

The goal of high performance

There was a time when workers were viewed as easily replaced cogs in a wheel. Then, workers were managed as a cost to be minimized. Now the focus, possibly in every industry, is on creating a high-performance culture. Studies have shown that with different work management practices, employees are capable of performing at significantly higher levels.

Those higher levels of performance could generate savings far beyond the net savings from the freeze. The changes would make government a better place to work. We know how to accomplish that.

Howard Risher is a consultant and writer on federal pay and performance issues. He was the managing consultant for the studies leading to the 1990 Federal Employees Pay Comparability Act. He is the author of "Planning Wage and Salary Programs."

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