April 4, 2012 – In a new column for the Vancouver Sun, MLI’s Jason Clemens says now is the time to fundamentally and radically rethink public sector compensation. He recommends a two-part reform that would allow for both balancing the budget and establishing a better foundation for public sector compensation and performance in the future. First, Clemens recommends introducing a formal process within government to quantitatively compare public sector and private sector compensation on a regular basis. Second, he adds that public sector unions should be empowered to determine both the composition of the compensation as well as the management of non-wage benefits. The full column is copied below.
Compensation should be based on the entire package, so a gold-plated pension should result in lower salary
By Jason Clemens, Vancouver Sun, April 4, 2012
Public sector compensation is a proverbial punching bag in politics. In good times they almost inevitably receive unsustainable increases, which are then reversed (to some extent anyway) when times are bad. Public sector pay and benefits are again in the crosshairs of governments across the country as spending is restrained to achieve balanced budgets. It’s time to fundamentally and radically rethink public sector compensation.
Let’s first dispel a myth about the public sector. By and large the public sector is hard-working and committed to providing value-added services to citizens. It is encumbered by incentives and rules unique to the public sector.
However, this does not necessarily mean that workers in the public sector are any less diligent or hard-working than their private sector equivalents.
The radical rethink in public sector compensation is premised on a couple principles. The first is that total compensation in the public sector, including wages, benefits, and job security should basically proximate that of the private sector.
In other words, the goal should be to match the wages, benefits, and job security public sector workers would obtain in the private sector, where competition imposes discipline on worker compensation.
Principal two is that the composition of compensation shouldn’t matter. What matters is total compensation. An employer doesn’t care about the individual components of an employee’s compensation. What the employer cares about is the employee’s total cost.
If public sector workers prefer generous pensions, including fully funded defined benefit pensions, it should not be a problem for the employer, namely government. It only becomes a problem when the full cost of the pension, when added to other forms of compensation such as wages, exceed the total compensation of private sector equivalents.
And third, public sector unions need to be part of the solution rather than a barrier to reform. By bringing the unions into the process as partners rather than adversaries, government can achieve a more comprehensive, sustainable solution to public sector compensation.
These principles lead to a two-part reform for public sector compensation. The first component is to institute a formal process within government to quantitatively compare public sector and private sector compensation on a regular basis.
These comparisons would establish a total annual compensation amount for workers in the public sector based on their private sector equivalents. Such a process would ensure fairness and competitiveness between the public and private sectors.
The second element is that the public sector unions should be empowered to determine both the composition of the compensation as well as the management of non-wage benefits. This part of the recommended reforms is how and why governments can get public sector unions more involved. This is important because nearly three out of four federal public sector workers are unionized. (Rates in the provinces range from 70 per cent in New Brunswick to 82.4 per cent in Quebec; the rate in B.C. is 76.8 per cent).
The unions, as the elected representatives of employees, would be in a position to determine the wage-benefits preferences of their members. If workers want gold-plated pensions, then fine, but it means a reduction in their wages and other benefits.
Alternatively, workers could receive all their compensation in wages and forego other benefits. Remember that it’s the total cost of compensation that is constrained.
Unions could choose to contract out the management of such benefits or internalize their provision. This would mean an end to squabbles over the ownership of pension deficits and surpluses.
It would also better balance the risk of such plans since any deficits would have to be paid for by the workers from their existing compensation.
In other words, no more taxpayer bailouts if pensions and other benefits are under-funded.
Given the deficits across the country and the more than likely reforms to be undertaken in the public sector, now is an opportune time to profoundly remake how valued public sector workers are compensated in a sustain-able, competitive manner. That would allow for both balancing the budget and establishing a better foundation for public sector compensation and performance in the future.
Jason Clemens is the director of research at the Macdonald-Laurier Institute in Ottawa.