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Locality Pay Surveys

Under FEPCA, we must use salary surveys conducted by the Bureau of Labor Statistics (BLS) to set locality pay. Commencing with the 1996/97 surveys, BLS implemented a new survey design for its salary surveys. The new survey program, called the National Compensation Survey (NCS) program, was used in all BLS salary surveys started after September 1996. NCS uses probability sampling of occupations within survey establishments, rather than a fixed job list with detailed job descriptions, as had been used in the past.

The new survey process was not immediately accepted for use in the locality pay program. In fact, the Federal Salary Council recommended that the original NCS methods not be used to set Federal pay. The Pay Agent also concluded that certain major aspects of the NCS program would have to be improved before it would be prudent to use NCS data for making pay comparisons under the locality pay program. In 2002, Pay Agent and BLS staff implemented three of the five planned improvements in the NCS program, and the Federal Salary Council recommended that we begin to phase in the use of NCS data to set locality pay. Since the 2005 report (for locality pay in 2007), we have used only NCS data for the locality pay program.

Four of the five NCS improvements are fully incorporated into surveys used this year:

1. The linkage of Federal and non-Federal jobs by developing a crosswalk between General Schedule occupations and the Standard Occupational Classification (SOC) System to permit weighting data by Federal employment.
2. The development of methods to identify and exclude survey jobs that would be graded above GS-15 in the Federal Government.
3. The development of an econometric model based on survey data to estimate salaries for jobs not found in the probability samples.
4. The development and implementation of better methods for grading supervisory jobs selected by probability sampling.

BLS continues to phase in the last improvement, which is the use of a four-factor job grading system with job family guides, as it replaces a portion of its establishment sample each year. BLS replaces all of its State and local government sample at the same time approximately every 10 years, and the private industry sample is replaced over a 5 year period. This improvement is included in about 64 percent of the data this year and will be completed in all survey establishments in surveys delivered in 2011. It is designed to improve grade leveling under the NCS program. All of the improvements are described in the 2002 Pay Agent's Report to the President.

Industrial and Establishment Size Coverage

As required by FEPCA, BLS salary surveys used for the locality pay program include the collection of salary data from private industry and State and local governments, which have large numbers of workers, especially in certain occupations that are unique to government functions. Before FEPCA, BLS surveys for the pay comparability process covered only private sector goods-producing and service-producing industries.

BLS delivered data covering establishments of all employment sizes again this year. BLS collected data from a total of 21,830 establishments. In the 30 separate metropolitan locality pay areas (excluding Raleigh), BLS collected data from 11,370 establishments. The Rest of U.S. (RUS) locality pay survey covered 182 areas, including 77 additional metropolitan areas, 22 micropolitan areas, and 83 non-metropolitan counties or county clusters. In the RUS area, data were collected from 10,460 establishments. The Raleigh survey was discontinued in 2004, but is being reinstated during BLS' six-year transition to a new sample of areas.

The number of areas surveyed in the Rest of U.S. locality pay area remained at 182 areas. The NCS program is undergoing a six-year transition from a sample of areas based on the Office of Management and Budget (OMB) December 1993 metropolitan area definitions to a new sample of areas based on the December 2003 OMB area definitions. The NCS program is phasing in new metropolitan and micropolitan areas as defined by OMB and county clusters defined specifically for the NCS; at the same time, some areas under the December 1993 OMB definitions are being phased out of the sample. A new government sample was completed for the July 2008 delivery, and new private industry sample members will be completed for the July 2013 delivery. See Appendix IV of the 2002 Pay Agent's report for a summary of the BLS data collection cycle.

The industry scope of the surveys includes private goods-producing industries (mining, construction, and manufacturing); private service-providing industries (trade, transportation, and utilities, information, financial activities, professional and business services, education and health services, leisure and hospitality, and other services); and State and local governments. Agriculture, forestry, fishing and hunting, and private households were excluded.

Occupational Coverage

Under the NCS program, BLS uses random sampling techniques to select occupations for survey within an establishment. The occupations are selected and weighted to represent all non-Federal occupations in the location and, based on the crosswalk published in Appendix VII of the 2002 Pay Agent's report, also represent virtually all GS employees. OPM provided the crosswalk between GS occupational series and the Standard Occupational Classification (SOC) system used by BLS to group non-Federal survey jobs. OPM also provided March 2008 GS employment counts for use in weighting survey job data to higher aggregates. (BLS completed delivery of the most recent NCS surveys in July 2009, before March 2009 GS employment data became available.)

Matching Level of Work

In the NCS surveys, BLS field economists cannot use a set list of survey job descriptions because BLS uses a random sampling method and any non-Federal job can be selected in an establishment for leveling (i.e., grading). In addition, it is not feasible for BLS field economists to consult and use the entire GS position classification system to level survey jobs because it would simply take too long to gather all the information needed. This would also place an undue burden on survey participants.

To conduct grade leveling under the NCS program, OPM developed a simplified four-factor grade leveling system with job family guides. These guides were designed to provide occupational-specific leveling instructions for the BLS field economists. The four factors were derived and validated by combining the nine factors under the existing GS Factor Evaluation System. The factors were validated against a wide variety of GS positions and proved to replicate current grade levels.

The job family guides cover the complete spectrum of white-collar work found in the Government. BLS has been using the guides in its ongoing surveys and roughly 64 percent of the data this year are leveled under the new approach.¹ Fully implementing the new leveling system will take several more years because of BLS' data collection cycle. Appendix VI of the 2002 Pay Agent's report contains the job family leveling guides.

Jobs above GS-15

For the NCS program, it was necessary to develop generic instructions for identifying white-collar jobs in the random surveys that would be graded above GS-15 (above the highest grade in the General Schedule) if they existed in the Federal Government so that the data could be excluded from pay gap measurements. BLS developed and tested the guidance with assistance from OPM. Appendix V of the 2002 Pay Agent's report explains the process for identifying these jobs in the NCS program.

Grading Supervisory Positions

Grading supervisory jobs presented another problem for the NCS program because the Government does not use the FES approach to grade supervisory jobs. OPM occupational classification specialists suggested an approach for most supervisory jobs based on the highest level of work supervised. Under this approach, BLS grades the highest level of work supervised using the appropriate four-factor leveling guide, not the supervisory job itself, and then adds one grade for a first-level supervisor, two grades for a second-level supervisor, and three grades for a third-level supervisor.

Missing Data

While BLS surveys all white-collar jobs under the NCS program, it does not find all jobs at all work levels in each survey area. This is a serious problem with the NCS program because survey results and pay disparity measures can vary considerably based on which jobs are included. The Pay Agent asked BLS to develop an econometric model to provide estimates for jobs not found in NCS. The model is described later in this report and in Appendices II and III.

Establishment Size

In previous years, BLS had delivered data for both establishments with 50 or more workers (large establishments) and all establishments, i.e. including establishments with as few as one employee (small establishments). Establishments with no employees (single entrepreneur owners) are not covered by the surveys. In the past, we had used data only from large establishments in the locality pay program. Beginning in 2008, we use data from all establishments for the locality pay program.

Incentive Pay

Last year, incentive pay became an issue because it resulted in a 45 percent increase in the estimate for the GS-12 administrative category in the Rest of U.S. (RUS) locality pay area. This increase was unusual because it involved the RUS area, which includes the largest sample since it is a composite of many surveys. Based on information provided by BLS, the estimate increased by 45 percent mainly because it included a job in one of the many surveys conducted for the RUS locality pay area that received uncommonly high earnings (base salary plus incentive pay) of more than $1 million. This year, BLS delivered data both including and excluding jobs receiving incentive pay.

BLS excludes bonuses and other payments such as premium pay from the survey results used for the locality pay program. However, incentive pay, defined by BLS as payments for meeting job goals where the formula is clearly known by both the employee and the employer beforehand, is included in our estimates for any job where it's the practice of the surveyed establishment to determine pay based on a production driven formula. To the extent such payments were used in jobs surveyed, incentive payments have been included in BLS data used for setting GS pay since the 1970s. These payments are generally included as income for tax purposes, sometimes included as income for annuity computations, and generally not included as base pay for subsequent years. Employees under the General Schedule are eligible for bonuses but generally do not receive payments equivalent to incentive pay in the private sector.

Table 1. Pay Disparities with and without Incentive Pay

As can be seen in table 1, including incentive pay results in a somewhat higher pay gap in 17 locations, ranging from +0.02 points in New York to 3.69 points in Miami; and a somewhat lower pay gap in 13 locations, ranging from -0.03 points in Detroit to -2.38 points in Denver. We do not have data without incentive pay for the Raleigh locality pay area. Including incentive pay significantly changes the pay gap only in the Rest of U.S. locality pay area where there is a 13.95 point difference due entirely to incentive pay of over $1 million in a single establishment for a GS-12 administrative job.

Effect of Incentive Pay on the Rest of U.S. Pay Gap

While incentive payments have been included in the surveys for years, 2008 was the first time a large swing in survey results had been attributed to incentive payments. Large fluctuations such as this one cause instability in the pay measures, and for 2008, would have resulted in pay gaps in five locality pay areas (Cincinnati, Dayton, Indianapolis, Raleigh, and Richmond) below that for the RUS locality pay area. This year, eleven locality pay areas and Honolulu would be below the Rest of U.S. pay gap if the million dollar incentive pay were included. (Buffalo, Cincinnati, Cleveland, Columbus, Dayton, Huntsville, Indianapolis, Milwaukee, Pittsburgh, Raleigh, and Richmond.)

Last year, OPM staff recomputed the RUS pay gap using the data supplied by BLS for GS-12 administrative jobs for the prior year. The pay gap with the GS-12 incentive pay was 35.32 percent, while excluding the GS-12 administrative data affected by incentive pay resulted in a pay gap of 29.34 percent. This year, the RUS pay gap is 41.25 percent including the GS-12 administrative category affected by incentive pay and 27.81 if the uncommonly high incentive pay is excluded.

Chart 1
Comparison of 2009 RUS data with and without incentive pay for GS-12 A

As in 2008, the Council recommended that we should use the data as delivered by BLS, including the incentive pay data. We respectfully disagree with the Council about including the incentive pay data for GS-12 administrative jobs found in the RUS survey this year.

The data and survey results are clearly influenced by an extreme outlier that represents salary levels that are more than ten times the typical salary found at the grade. Including this outlier will result in extreme fluctuations in the RUS pay gap if the establishment no longer makes the payments or when it cycles out of the BLS establishment sample. Eleven separate locality pay areas and Honolulu have measured pay gaps below that for the RUS area if the data are included and the RUS locality rate authorized for 2011 would be substantially higher than otherwise warranted if these data are included. Such a higher locality rate for the RUS area would be at the expense of locality pay rates that could otherwise be approved in the other, generally higher paying, locality pay areas.

Therefore, we instructed our staff to replace the GS-12 administrative data for the RUS area with this year's data excluding incentive pay for that category only. These data and this technique were discussed with the Council at its meeting of October 19, 2009.

The President will have the benefit of the Council's recommendations, which are shown in Appendix I, and include the incentive pay data as delivered by BLS. But, as in 2008, it is our recommendation to the President that the GS-12 administrative data for this year's RUS survey not be used in the pay comparisons.