White Paper Executive Summary
In the American workplace, it is common to find a formalized structure of pay by position with a substructure or lanes of compensation that within a position or lane pays for experience and longevity with the employer. Progression in pay also occurs across lanes for individuals with increasing skills, certification, or job responsibilities. Within the teaching profession, this is known as the “single salary” schedule that came into general use following World War I. In describing the origin of the single salary system, Cuban and Tyack observed:
“teachers themselves fought to install in schools, from World War I forward, a single salary schedule for all public school teachers. While supporting salaries calibrated to training and years of experience teachers opposed “class distinctions” in pay based on position or sex and endorsed the fundamental intrinsic equality of all good teaching. To ensure that all teachers were, in fact, professionals–they worked to require special training and certification as prerequisites for employment in teaching.”
Universal Single Salary System
Today, the system is almost universal in school districts across the country. The single salary system is also frequently referred to as the increment or step system. Herein, it will also be referred to as “progressive pay” (or by the acronym ILL to refer to the Increment, Longevity, and Lane change). This system is also common in government at the local, state, and federal levels but also exists in some form in some corporate structures. In recent years, due to the economic downturn, jurisdictions facing budget shortfalls, have chosen to curtail the pay adjustments of positions associated with progressive pay along with withholding Cost of Living Adjustments (COLAs). In the process of rationalizing this course of action financial officers and government
officials frequently use what the author calls a “rule of thumb” where the claim is made that progressive pay costs, at whatever percentage, (e.g. 3% for the increment component), will lead directly to a 3% increase in payroll costs (in terms of additional new money needed ) if granted.
The Logical Mind Trap
I have heard this claim made for years, observed that it arises from an intuitive
“logical mind trap” (LMT) arising from the concept of focusing on individuals and their salaries as opposed to tracking positions, the numbers of individuals at each position, and the aggregate salaries for each position while at the same time accounting for the normal cyclical process of retirees, dropouts and new hires. As a result of seeing how teachers in my local area were denied both COLAs and progressive pay for four of the last five years, I set out to formally study the concept through a computer-based mathematical model. The model, employing Harford County, Maryland Public School (HCPS) data as input, to represent a typical educational workforce, explicitly confirms the following:
- The rule of thumb is totally invalid as a predictor of follow-on new money costs added to preceding base year costs when increments, longevity, and lane change (ILL) pay adjustments are provided to the workforce. Even in a wholly unlikely case of no retirees, no dropouts, and no new hires, providing a 3% ILL pay adjustment leads to a nominal 1.7 % to 1.9% increase due to the fact that top of the pay scale staff receives no increments and infrequent or no longevity and lane change pay adjustments. A parametric study for a range of parameters likely to span the possible scenarios indicates that providing the ILL adjustment during a period with the current level of retirees, dropouts, and new hires, leads to a nominal change in payroll costs of -.27 %, with variations rarely expected outside the range of (-.5% to .5%).
- Withholding the ILL pay is not cost-neutral. In a given year when ILL is withheld (along with a normal situation of retirees and new hires) the payroll cost (all other factors being equal) is actually reduced by – 2.0% from the previous year with variations between -1.5% and -2.2 %. This results in salary component budget surpluses (from salary costs) which are usually attributable to good fiscal management without explicitly acknowledging or understanding that the result was from an actual pay cut when based on positions rather than individuals or alternatively the funds are used to cover budget shortages elsewhere.
- The cost differential associated with progressive pay is strongly affected (drops strongly) with an increased number of retirees. The cost drops strongly with an increasing average level of the dropouts but at a significantly lower level than retirees due to the difference in salary levels.
- The extension of the rule of thumb, which leads to the suggestion that a COLA increase and progressive pay are additive, (e.g. a 5% COLA added to a so-called average 3% ILL increase leads to a needed 8% budget increase) is also totally invalid. Typical parametric calculations using the model show that the true cost of a 3% ILL, as described in 1. above, adds the range of “true ILL cost” increase in the absence of a COLA plus the COLA plus a negligible amount (product of the “true ILL cost”, times the COLA fraction).
- Failure to include Turnover in budgeting for ILL costs leads to a gross overestimation of budgeted “fixed charges” associated with employer-paid social security, medicare, and pension system withholdings. See Appendix B of the full white paper for a description of how the HCPS system adds these erroneous fixed charges to the erroneous estimation of the ILL cost.