Of the thousands of public sector agencies at the federal, state and local levels of government in the United States, a very small percentage are in economic, political or legal situations that allow them to be a community, state or regional leader in terms of employee pay. Organizations that have adopted a pay or compensation philosophy as a market pay "leader" have generally come, not surprisingly, from the private sector. It is generally difficult for public sector organizations to adopt "market leader" pay philosophies since such a philosophy would generally translate to a greater tax burden for citizens, who can be expected to harbor reservations, at the very least, about the "appropriateness" of a "market leader" pay strategy. In fact as the 1976 ICMA text on personnel administration notes, "It is doubtful that taxpayers would tolerate public employees' salaries exceeding those of their counterparts in industry."(1)
Many or perhaps most public sector organizations are committed to a commonly accepted concept in public compensation theory, that is, to pay public sector employees at "prevailing wages." The concept of "prevailing wages" is generally defined as wages that match the external market for similar positions at approximately the 50th percentile, meaning approximately fifty percent of similar jobs in the community have lower pay ranges and fifty percent have higher pay ranges. This pay policy is also commonly referred to as a "neither lead nor lag" policy. Community pay leaders, on the other hand, go well beyond the prevailing wage concept and typically set employee pay ranges in the 70th through 90th percentile.
Are there advantages that accrue to an organization that adopts a community pay leader position? According to Edward E. Lawler III, there may indeed be certain payoffs from pursuing a policy of being a top-notch payer.(2) Lawler notes that, "Such organizations as IBM and Hewlett-Packard have for a long time recognized that if they pay well, they will have very little turnover and be able to pick from among a large number of job applicants."(3) Would public sector organizations realize any benefits if they were able to be community pay leaders? The following paragraphs describe the results for one public sector pay leader.
A Pay Leader from the Public Sector
As noted earlier, few public agencies are in a position to be a community, state or regional pay leader, but there are exceptions. One such exception is the municipal water utility in Denver, Colorado. This non-union organization, with approximately one thousand employees, is an independent agency of the City and County of Denver with its own policy-setting Board of Commissioners and its own civil service system. The agency serves water to over 900,000 people, more than a quarter of the state's population, through 250,000 water taps. Its operations are funded through water rates and other fees. Essentially the agency is financially structured as an enterprise fund that does not rely on property taxes.(4) For several years this agency has been a community pay leader and has positioned itself at approximately the 75th percentile of market pay rates.
The pay leader position has brought expected and unexpected results for the agency. As expected and as private firms have found, being a pay leader has resulted in a very low employee turnover rate and has contributed to a large pool of applicants vying for job openings. The most important unexpected result has been the low level of job satisfaction expressed by the agency's employees.
In January of 1992 the Mountain States Employers Council, Inc. conducted an Employee Opinion Survey of all agency employees. The response rate for the Survey was 86 percent.(5) The Mountain States Employers Council had previously conducted many similar Employee Opinion Surveys in the Denver metropolitan area, therefore, the Survey used at the agency contained 34 standard questions with norms developed by previous participants. …