The Presidential Commission on the USPS has been gathering information - volumes and volumes of information - on the operations of the Postal Service. They're holding hearings, and they have committees, and they're soliciting comments, and now rebuttals. By and large, the Commission's members seem to be interested and engaged in the process. But let's face one very important fact; the Commission, which is comprised of intelligent and well-spoken Bush appointees, has had little, if any, prior exposure to the operations of the postal system. They are being asked to fully understand and thoroughly comprehend the complexities of a centuries- old organization - one that has evolved from horseback mail processing to our modern- day, highly-regulated, service-driven, digital sortation system. And they also are expected to absorb the details of the competitive environment in which the Postal Service operates, to take into consideration the complete culture of the postal workforce, and to respect the work of the postal unions that have struggled endlessly to create a better, safer, and more productive workplace. Mark A. Gardner National Postal Mail Handlers Union Secretary-Treasurer

Pay Comparability (NALC & Professor James L. Medoff, Harvard University)

USPS Chief Financial Officer  Michael Riley addresses Postal Wages-

Statement submitted to Postal Commission by Michael L. Wachter

APWU Responds to Papers by Michael Wachter and Michael LeRoy (pdf)

The Relative Size of Labor Costs AT UPS, FEDEX & USPS -Workplace Economics

U.S. Postal Service productivity and the postal business (NALC)

Testimony of consultant from Watson Wyatt Worldwide-the firm providing report on compensation and incentive system design 

Postal commission considers new agency pay system


Ms. Weizman is a consultant for the company providing report to Postal Commission :

Project #7:
Evaluation of alternative compensation incentive systems engaging all levels of the Postal Service workforce

Consultant: Unisys (Watson Wyatt)
Suite 900
1150 17th Street, NW
Washington, DC 20036

Below is the HTML version of PDF file located at the Postal Commission website: Jane Weizmann , Senior Consultant, Watson Wyatt Worldwide. See APWU Statement






MAY 29, 2003


1717 H STREET, N.W.


(202) 715-7294

Good morning, members of the Commission. I am Jane Weizmann, Senior Consultant and Washington, D.C. Compensation Practice Leader at Watson Wyatt Worldwide. I have led the collaborative Unisys/Watson Wyatt team on this study. Unisys, the prime contractor, is a global leader in providing leading-edge, enterprise-wide solutions on more than 200 current federal contracts. Watson Wyatt Worldwide is a premier human capital consulting firm.

I am here before you today to discuss the compensation and incentive system design study. The Commission sought specialized assistance from Unisys/Watson Wyatt in identifying a compensation incentive system that will engage all levels of the Postal Service workforce in the goal of improving Postal Service productivity, reducing costs, enhancing customer service, and supporting the mission of the Postal Service.

To that end, I will briefly discuss our research methodology, effective incentive plan design and our preliminary findings. The Commission should note that this study is intended to produce a preliminary, high- level feasibility assessment. Our findings will be presented at a conceptual level, will be theoretical in nature and will require further research, development and testing within the USPS before conclusions can be finalized.


Because of a compressed project timeline, our research was limited to interviews at USPS headquarters, postal worker union representatives and randomly selected employee groups from Northern Virginia processing and distrib ution centers. We initially met with finance, human resources and labor relations executives at the Postal Service to gather information on past and current incentive plans, operational data and labor union contacts. Next, we met individually with five labor union and management association presidents (or their designees) to discuss their viewpoints on operational improvement opportunities, the motivational effect of an incentive plan and the overall viability of an incentive plan.

To gauge employee perceptions, we visited the Merrifield, Virginia processing plant to conduct focus group meetings. The purpose of these meetings was to gather employee perceptions and advice on opportunities for improvements within their areas of activity and their reactions to incentive opportunities. We spoke with small, but diverse, volunteer groups of clerks, mail handlers, letter carriers and supervisors. These groups were very forthcoming on issues such as productivity, customer service, employee engagement and incentive compensation.

Finally, we returned to Postal Service headquarters to meet again with finance, human resources and labor relations executives to gather more refined viewpoints and data on improving productivity, reducing costs and enhancing customer service.


We were retained to only examine the role of an incentive plan to engage all levels of the Postal Service, so that is our sole focus this morning although we believe other ingredients for change are equally important to address in this process. Organizations that use incentive plans effectively recognize that an incentive plan is but one tool in the total reward philosophy of the organization. Other essential tools to engage and reward the workforce include wages, benefits and recognition programs, as well as opportunities for skill training, communications, performance management and safe working environments. Rewards are fundamentally communication vehicles, sending messages that are consistent with, and reinforce other messages employees are receiving about business goals, desired behaviors and culture.

As organizations are pressured to achieve higher levels of performance and productivity, they are searching for ways to leverage limited resources. Variable incentive pay is the number one design used to influence short to mid-term business results. Coupled with astute strategy, solid leadership and good working conditions, variable pay incentive designs can:

· Motivate results by creating economic value for changed behaviors

· Communicate priorities to indicate the relative importance of certain objectives and goals of the organization

· Engage employees in business success by sharing the gains realized from changed behaviors

· Reward valued skills and behaviors

· Create business literacy by educating employees on how and why their contributions will benefit them and their organizations

· Create esprit and solidarity through a common cause and renewed energy, and · Contribute to a compelling place to work

Variable incentive designs have increased in popularity and prevalence because they provide a means of controlling costs, supporting long-term cultural change efforts, and directing performance toward the accomplishment of business objectives. According to 2002-2003 Industry Report on Technician and Skilled Trades Personnel Compensation report published by Watson Wyatt Data Services, 68% of survey respondents (or 996 organizations) indicated they currently have a bonus or variable pay program in which technician and skilled trades personnel participate. Additionally, in this same survey, another 593 organizations indicate that they will install new variable pay programs for technician and skilled trades personnel in the next two years.

In highlighting the qualities of an effective incentive plan, it is important to consider what an incentive plan cannot do. An incentive plan cannot:

· Replace trusted, quality leadership

· Create results where barriers exist which inhibit performance (for example, technology deficiencies or process inefficiencies)

· Fix an outdated or ill-conceived business strategy, nor · Meet all of an organization’s human resources objectives

Because the purpose of variable incentive plans is to energize and focus employee efforts, the design needs to "fit" the culture and specifically address the needs of the organization. To this end, the design process is often iterative and complex. An effective plan design must be based on a philosophical underpinning, clearly defined objectives, line of sight metrics, appropriate performance periods, reasonable investment returns and, most importantly, communication, coaching and performance management.


The Postal Service maintains a portfolio of awards and recognition programs to cover career, career bargaining unit, non-career and management employees. The current National Performance Assessment Program is a management compensation plan that provides economic rewards for achievements related to customer, employee and business objectives. It replaces the economic value added ("EVA") plan which was previously available to approximately 84,000 EAS and PCES. According to USPS reports and studies, extraordinary accomplishments were realized while EVA was in place, including significant improvements in:

§ Net income

§ On-time delivery

§ Workday injuries per 200,000 work hours


From Watson Wyatt’s point of view, an organization-wide incentive program with set targets and cascading performance goals designed to motivate individuals and engage all USPS employees in specific behaviors related to improving productivity, reducing costs and enhancing customer service makes very good sense. We believe, if designed correctly, it could result in improved financial performance and help illuminate improvement opportunities between operating units engaged in collection, processing and delivery. We are of the opinion that an organization-wide incentive design would also enhance solidarity among the ranks and serve to create line of sight for employees between their contributions and attainment of USPS’s operating objectives.

Inasmuch as the National Performance Assessment Program has recently been put in place for USPS management, we have focused our recommendations on the creation of a complimentary, cascading design for the remaining 820,000 USPS career employees.

Our preliminary incentive design criteria for EAS and union employees are that it be:

1. Self-funded

2. Calibrated by productivity and mail volumes

3. Triggered by mission achievement.

I will now briefly discuss each of these criteria.

1. Self Funded: The new plan should be self-funded which means that USPS shares a portion of improved economic gains with employees. Although Watson Wyatt has not studied the competitiveness of the Postal Service’s pay and benefits programs, we have been told that employee compensation levels below the management levels are market competitive except in high cost-of- living areas, and that employee benefits are generally market competitive, enhanced by the economic value of job security offered by the Postal Service. For this reason, we recommend that any new plan be self-funded from incremental financial results.

2. Calibration: We believe that metrics that correlate with improved financial results should be used to set targets, track progress and determine award values for employees. From the USPS 2002 Annual Report we calculate that fully 78% of USPS’s 2002 operating costs are related to the provision of compensation and benefits for employees. Therefore, we believe that the best measures for tracking improved financial results are those associated with improved productivity and efficiency. For this reason, we believe that a target set around "PIECES PER EMPLOYEE" that move through the postal service system will appropriately track and report operating efficiencies for employees engaged in mail collection, processing and delivery.

3. Mission: According to USPS officials, failure to achieve guaranteed customer service levels over a period of time is predictive of decreased mail volume and heightened customer disaffection. Inasmuch as achievement of the USPS’s universal distribution mission is financially bolstered by first class mail and package services, customer loyalty is an important component of the USPS business model. As such, our recommendation is to use achievement of customer service guarantees at current national levels as a "proxy" for customer loyalty and satisfaction and to set a performance threshold below which the plan does not pay, regardless of improvements in productivity.


Our final report will address the issues of:

§ Incentive target setting

§ Performance periods, and

§ Processes for determining return on investment and design effectiveness

The key questions to target setting are:

§ Is there a financial benefit to improved productivity?

§ What is the organization willing to pay employees for improved levels of contribution to organizational results?

If performance thresholds are set too high, the plan will be ignored. If targets are set too low, incentive earnings become an entitlement and ultimately employees perceive them to be part of base pay. Additionally, our report will briefly address the environmental and cultural conditions we believe will be necessary for success of an organization-wide design.

Based upon the assignment that we are currently under, our report will not address:

§ Financial modeling and costing

§ Assessment and analysis of current cash compensation

§ Development of plan documents

§ Implementation and employee communications.

We anticipate providing our complete report to the Commission by June 6, 2003.

Thank you.



MAY 28, 2003

The Honorable William L. Clay Sr., Chairman, Consumer Alliance for Postal Services PDF icon

Chairmen Johnson and Pearce, my former colleague Congressman Bob Walker, and Members of the Commission, I appreciate the opportunity to provide testimony on this important issue on behalf of the Consumer Alliance for Postal Services. First, let me tell you a little about my background, and then I will talk about CAPS, its members, its mission, and its concerns.

As many of you know, I was a Member of Congress representing the First District of Missouri for 32 years. During that I time, I served as Chairman of several subcommittees and the full Committee on Post Office and Civil Service, so these issues are something I have been closely involved in for much of my career.

The Consumer Alliance for Postal Services was created earlier this year to keep a close eye on legislative initiatives that may affect how, when, and where Americans get mail—as well as how much we pay for it. Our members represent a broad range of consumers across the political and economic spectrum. They include Consumer Action representing low and moderate income consumers, the National Farmers Union representing rural Americans, the National Committee to Preserve Social Security and Medicare representing older Americans, the American Postal Workers Union and the AFL-CIO representing workers, the A. Phillip Randolph Institute representing African Americans, the Women’s Research and Education Institute, the American Diabetes Association, and a number of other organizations.

Our mission is to insure that the Postal Service’s mandate to provide universal service at uniform rates —that is, affordable, accessible, and dependable mail service—is not weakened. The Postal Service has a rich history of providing a public service that has connected people, communities, and businesses with one another for more than 230 years. CAPS’ members speak on behalf of individuals from all walks of life. But they all have one thing in common—they depend on regular and affordable mail service to deliver prescription drugs, checks, important business and financial documents, cards and letters from family and friends, magazines, catalogues, and everything else that helps keep us healthy, informed, entertained, and in touch. We do not want to see that disappear.

We especially appreciate the Commission’s invitation this morning because, quite frankly, I have been disappointed that consumers have generally not been heard from at your hearings. Prior to today, of the dozens of witnesses that have appeared before the Commission’s three field hearings, only one—Consumer Action—has spoken on behalf of consumers. Another witness from Hallmark Greeting Cards even suggested that he was representing consumers better than any other witness before the Commission. You have heard from vendors, large mailers, marketers, union representatives, and the Postal Service itself, but the voices of individual Americans who rely on the mail during the course of their daily lives have been missing.

On behalf of those individual American consumers that CAPS and its members represent, I have a simple and straightforward message for this Commission: We are opposed to any efforts that would weaken universal mail service at uniform rates. That includes any recommendations that would make it easier to close local Post Offices without significant input from local communities, including any base-closing model that does not involve the community in the decision. We oppose cutting back on how often mail is delivered. We oppose postage rate increases that are not absolutely necessary, do not affect all Americans equally, and do not require all classes of mailers to pay their fair share of overhead costs.

We are delivering this message because we firmly believe that the United States mail is more important now than ever. There is a common perception, for example, that the explosive growth of e-mail over the past decade has somehow made mail service unnecessary. But not every home, small business, community organization or even school is wired to the Internet. The Postal Service aids commerce and communication for all Americans in a way that the Internet cannot.

For some individuals, and it’s anyone’s guess how many, the Internet has taken the place of some regular mail. But a larger number of Americans do not use e-mail. For them, a dependable and affordable mail service is essential to maintaining the present status of their living. A study released by the Pew Internet and American Life Project on April 16 of this year found that 42 percent of Americans do not use the Internet. I would refer you to that study because it has some extremely important information de-bunking the common myth that technology is making mail service obsolete.

For example, 62 percent of Americans with disabilities do not use the Internet. Older Americans are far less connected than younger Americans. The employed have much better access to the Internet than the unemployed. White Americans are more wired than African-Americans and Hispanics. Suburban and urban residents are more plugged in than rural residents. Well-educated Americans use the Internet more frequently than those who only completed high school.

None of this should come as a surprise. But it’s important to understand that there are significant segments of the public for whom the Internet has not replaced regular mail service, and it never will. Unfortunately, the witnesses who have appeared before the Commission have not represented those Americans. We urge you not to forget the basic concerns of these individuals as you develop your recommendations.

I would also like to briefly address another myth—that the current financial situation of the Postal Service is sufficient cause to make drastic changes to the way it serves the American public. I know that this commission has heard that from some of the witnesses. It simply is not true. For the first half of the current fiscal year, the Postal Service has run a budget surplus of $1.65 billion. The Postal Service announced the surplus on April 1, with Chief Financial Officer Richard Strasser attributing the good financial news to gains in productivity, reduced expenses, and rate increases even at a time when mail volume has declined.

In addition, the recently passed Postal Civil Service Retirement System Funding Reform Act of 2003 will save the Postal Service $5.5 billion over the next two years, permitting the Postal Service to maintain stable postage rates until at least 2006. The new law was the result of a government analysis of the Postal Service retirement account that found it would have been vastly over-funded if contributions had continued at the old rate. The large account balance, projected to be more than $70 billion, was primarily a result of higher-than-expected growth from pension fund investments over the past 30 years. Under the new law, the Postal Service can only use the billions of dollars in savings to help pay down its debt and to delay rate increases.

I think these facts demonstrate that the U.S. Postal Service is not in the dire financial shape that some folks believe. And it is hardly in desperate need of the radical changes that some witnesses before the Commission have suggested.

Finally, I would also like to point out that CAPS is concerned with the subsidies that the Postal Service gives to industrial mailers, the big corporations that send discounted first class business mail and bulk advertising mail—some would say "junk mail"—at heavily discounted postage rates. These discounts are given because the mail is pre-sorted by these corporations, and in theory they are discounted their share of overhead costs. It seems that the Postal Service is discounting more than it would cost if they did the work of sorting the mail in-house. If this is true, the least this Commission should do before recommending drastic reorganization of the Postal Service is to conduct an in-depth review of materials available to determine to what extent the bulk advertising mailers aren’t paying their fair share.

The discounted rates mean the Postal Service may be passing substantial costs along to others. For example, consumers who pay the full 37cents for a first class stamp end up subsidizing business. The Postal Service serves all of America, individuals as well as businesses large and small, not just the giants of the mailing industry. To the extent that the Postal Service needs to raise additional revenues, it should start by making these large business mailers pay their fair share.

In conclusion, the members of CAPS are committed to preserving universal mail service. We are concerned about any significant or even subtle changes to the way the United States Postal Service operates if those changes would result in a lessening of universal service.

Postmaster General John Potter recently said it best; "Mail service in this country is a national treasure, and therefore a national responsibility… We all have a stake in maintaining and preserving universal mail service for every American, regardless of where they live, where they work or their economic circumstances."

I thank the Commission, and I look forward to answering any question you might have.


May 29, 2003

Postal commission considers new pay system

Pay-for-performance could be included in a forthcoming plan to reform the U.S. Postal Service, most likely encompassing both employees and managers.

Members of the Presidential Commission on the U.S. Postal Service are debating the concept, though details have not been ironed out. Appointed in December to develop a blueprint for reforming the agency, the commission held the last of seven hearings Thursday in Washington. Very early in the proceeding, commission co-chairman Harry Pearce said several of the nine panel members were focused on building an incentive package into their recommendation to President Bush.

But implementing a pay-for-performance program would be extremely difficult. The agency’s employee unions are vehemently opposed to the idea. William Burrus, president of the American Postal Workers Union, called the last incentive program, negotiated by the union and USPS in the mid-1980s, a failure. Postmaster General John Potter said he would not endorse widespread pay-for-performance without support from the unions.

“The worst thing we could do is to try and force it on the craft employees,” he told Government Executive. “We would need some sort of cooperative agreement before moving forward.”

Currently, the agency has an incentive plan for supervisors. But even that program has come under fire in recent years from congressional overseers and managers. The Postal Service and its supervisors’ association are in the process of developing a new pay-for-performance formula.

As it moves forward, the commission should get a better understanding of the agency’s overall compensation package and see how it compares with the private sector, said David Walker, head of the General Accounting Office.

Walker also told the commission to address how the Postal Service accounts for retiree health care costs, which he estimated at between $40 billion and $50 billion. Currently, the Postal Service views the costs on a cash accounting, or pay-as-you-go, basis. It is an accepted accounting principle used by many companies. But Walker and GAO have for the past several years argued that the Postal Service should track the costs as an accrued expense. This would give the agency a more realistic picture of future health care outlays and allow them to built into rate changes, he said.

Several members of the commission seemed to agree with Walker, but were unsure how the agency could phase in the change.

On a broader level, commissioners did not tip their hands on how far-reaching their recommendations will be. There seems to be a consensus that the agency needs some flexibility in the rate-setting process. Additionally, the Postal Service’s mandate to break even financially each year is likely to be addressed in some fashion. That may include allowing the agency to retain its earnings and reinvest them in operations.

But few postal observers expect a groundbreaking proposal. In fact, many predicted that the commission will retain the current business model, with slight modifications.

That would not be to Walker’s liking. “They need to be bold,” he said. “That’s why you create a commission.”

A final report is due to the president by July 31.

Related Link: House passes pay-for-performance measure-When House lawmakers passed the fiscal 2004 Defense authorization bill late Thursday, they included a provision to create a $500 million fund managers can use to bump up the salaries of high-performing employees. 5/23


Key Postal Transformation


May 29, 2003


Postal Service plan falls short, expert says
Watchdog official reports cost cutting not enough to meet

GAO David Walker Urges Postal Panel To Look At SEC Reporting Rules-


Below are Highlights of GAO Report:

Quick Jump: Workforce Size, Composition, and Costs

Why GAO Did this Study

The President established this Commission to examine the state of the U.S. Postal Service (the Service) and submit a report by July 31, 2003, with a proposed future vision for the Service and recommendations to ensure the viability of postal services. GAO has provided congressional committees with many reports and testimonies on postal matters, and this testimony is based largely on these prior reports and testimonies.

In April 2001, GAO put the Service’s long-term financial outlook and transformation on its High-Risk List for several reasons. The Service was experiencing

• significant deficits,

• severe cash-flow pressures,

• rising debt,

• cost growth outpacing revenue increases,

• limited productivity gains, and

• liabilities in excess of assets.

Under its 1970s-era business model, the Service was relying on raising rates and incrementally reducing costs to carry out its mission. GAO concluded that this business model was not sustainable in today’s competitive environment.

The Commission’s report will be important guide for comprehensive postal transformation. In this testimony, GAO presents key issues the Commission should consider to enhance the long-term financial viability of the Service by making it a more results-oriented and efficient organization.

Key issues for the Commission to consider include the following:

Role and Mission. Over the past 30 years, competition has increased and private-sector firms are performing more traditional postal functions. Customers’ needs have also changed with new communication alternatives.

In determining what universal postal services are needed and the roles for public and private providers, factors to consider are how to enhance customer convenience and create opportunities for least-cost providers.

Governance Structure and Accountability Mechanisms. Qualification requirements for members of the governing board should ensure that appointees possess the experience needed to oversee a large business-like operation, and the board should have sufficient authority in areas such as setting rates and executive pay. Reporting requirements should ensure accountability and transparency of financial and organizational results.

Flexibilities and Incentives to Increase Revenue and Control Costs.

The Service will need appropriate flexibilities and incentives to balance its revenue generation and cost containment capabilities in areas such as allowing retained earnings, closing unneeded post offices, and containing costs related to infrastructure rationalization, workforce realignment, and wage and benefit comparability. Also, the Service’s long-term retiree health and workers’ compensation obligations need to be addressed.

Effective Labor-Management Relations and Support Systems. To improve operational efficiency and enhance performance accountability for all employees, postal managers and unions need better cooperation to realign the workforce for the future and focus performance management and workforce planning systems on organizational goals and results.

What GAO Found

The ability of the Service to remain financially viable is at risk because growth in mail volume has stagnated and its business model is not well suited to operate efficiently in a competitive environment. As the figure shows, growth in the volume of First-Class and Standard Mail, the two largest revenue-producing classes, has declined.

Infrastructure Optimization

The Postal Service’s infrastructure includes a variety of structures, including over 300,000 collection boxes, 38,000 post offices, stations, and branches, 500 mail processing plants, and various other types of facilities.

The Service delivers mail to over 140 million business and residential addresses, including individual mailboxes, cluster boxes, and post office boxes. As of October 2002, it reported having 115 facilities or land parcels that were vacant or underutilized. The federal government’s real property area is a new area that GAO has recently identified as high-risk.6 Longstanding problems with excess and underutilized property, deteriorating facilities, unreliable real property data, and costly space are challenges shared by several agencies. These factors have multibillion-dollar cost implications and can seriously jeopardize mission accomplishment. Rationalization of any excess infrastructure can also result in additional cash from sales proceeds.

Historically, closing and consolidating post offices and processing plants has often been controversial on account of worker, community, and congressional interests. The Service’s current business model includes statutory restrictions that limit its ability to close and/or consolidate post offices. We have reported that the Service has faced resistance to closures because of the potential effects on jobs and mail delivery service to local communities.7 Given the controversy that surrounds closure of postal facilities, some mechanism, such as the military base-closure process, may be needed. Once agreement is reached on closing/consolidating postal facilities, steps would need to be taken to help ensure that unneeded postal properties are promptly and appropriately handled.

Furthermore, safety and security concerns will need to be considered as part of the Service’s network optimizing efforts. At the request of the House Committee on Government Reform, we held a conference on issues related to mail security in December 2001 and issued a report on the concerns and suggestions that resulted from that conference.8 Some of the conference discussion revolved around whether separate processing operations would be needed for mail streams with different levels of risk.

For example, mail from collection boxes is deemed to be higher risk because the sender is unknown, while much of the bulk business mail is considered lower risk because it is from known shippers. The Service will need to determine whether it should place biohazard detection equipment in all processing plants or establish separate processes for various levels of risk in the mail stream. Another related issue is who should pay for costs related to enhancing mail security—ratepayers, taxpayers, or both.

To date, the Postal Service has received $762 million in appropriated funds to cover costs associated with the anthrax and terrorist attacks. The Service requested another $350 million in its fiscal year 2004 appropriations request for emergency preparedness costs.

Workforce Size, Composition, and Costs

In the workforce area, the Service has significant unresolved cost issues related to wage and benefit premiums associated with some of its employees whose compensation is determined through collective bargaining; compensation limitations for executives subject to executive pay caps; impact on Service costs of recent legislation requiring the Service to cover pension costs for the time its employees served in the military; rising health care costs for current and retired employees; impact on Service costs of not accruing its retiree health benefit costs; and growth in workers’ compensation costs.

We recognize that the Service’s recent workforce reductions have resulted in some cost savings. However, achieving more significant savings in total costs will require further reducing the size of its workforce and examining its current compensation and benefits arrangements, including workers’ compensation. Further, the Service should revisit the accounting and funding treatment of its long-term retiree health obligations. In fiscal year 2002, the Service had over 854,000 total employees, and the compensation and benefit costs for these employees amounted to about $53 billion. About 90 percent of the Service’s 750,000 career employees are covered by collective bargaining agreements.

One of the most difficult challenges that the Service faces is making changes to its compensation systems. The Postal Service is required by statute to provide its employees with wages and benefits comparable to those of private-sector employees, but it faces several problems in this area. On the one hand, postal officials have stated that the statutory pay cap for postal executives has limited its ability to provide compensation that is comparable to that in the private sector for selected managerial, executive, and officer level positions. This restriction may make it more difficult for the Service to recruit and retain key executive talent. On the other hand, the Commission heard testimony from Professor Wachter at its hearing in Chicago that postal employees whose pay is set through collective bargaining have a significant wage and benefit premium over comparable private-sector employees.9 This premium was estimated to be 34.2 percent in the 2000-2001 interest arbitration proceeding between the Postal Service and the American Postal Workers Union, which covers approximately 366,000 employees.

The issues of wage and benefit comparability and factors that need to be considered under the collective bargaining process are fundamentally important to the Service’s future transformation efforts. As the Postal Service noted in its testimony before the Commission, the cost of postal benefits has risen about 27 percent more than those of the private sector in the last 20 years. The Service also testified that there are substantial fringe benefit costs (retirement and retiree health care benefits) that are statutorily mandated, and thus outside the scope of collective bargaining. The Commission has also heard that the Service’s costs for some employee benefits within the scope of collective  bargaining—those for health benefits for active employees—are higher than those in the private sector as well as other federal agencies. For example, the Postal Service pays about 85 percent of its employees’ health benefit premiums, while other federal agencies pay up to 75 percent of these costs. Furthermore, we believe the fact that the Service pays a higher percentage of its employees’ insurance premiums and continues to pay a portion of the premiums after retirement is an important consideration in assessing the total wage and benefit comparability of postal employees.

Although the parties disagree about whether a wage and benefit premium exists and about the basis for making these comparisons, the Service’s ability to control costs in this area will be critical to achieving a more efficient organization. One of the limitations in the existing collective bargaining process is that the interests of all postal stakeholders, such as ratepayers, do not appear to have been sufficiently considered. As a starting point, the Commission may want to revisit the guiding principles incorporated into the wage and comparability standard so that it would more fully reflect all stakeholder interests and the Service’s overall financial condition and outlook. These principles could include the full compensation and benefit costs, as well as the relationship of these costs relative to total costs, impact on rates and revenues, and the Service’s overall financial condition. In addition, postal labor and management have disagreed on the benchmarks that should be used in making total compensation comparisons. For example, questions exist as to whether the private-sector comparison group should be unionized workers, nonunionized, or some combination thereof, and whether the total value of benefits has been factored into this comparison. It may be beneficial for any legislation requiring compensation comparability to include specific criteria and factors upon which a comparison must be made.

Workers’ Compensation Costs

Another benefit area where costs have been difficult to control is the Service’s workers’ compensation benefits. This presents a significant challenge to the Service, because these costs totaled $1.5 billion in fiscal year 2002, an increase of over $500 million, or 50 percent, from the previous year. In addition, the Service’s total liability for its workers’ compensation benefits amounted to $6.7 billion at the end of fiscal year 2002. The Service attributed the cost increases to a record number of compensation claims filed and a rise in the average cost per medical claim. While we have not reviewed the reasons for the cost increases, we believe that the significantly increased costs warrant attention by the Service.

In addition, the Commission may want to consider the comparability of the Service’s workers’ compensation benefits as it considers the Service’s total compensation and benefits for postal employees. Several GAO reports have raised issues about benefit payment policies under the Federal Employees’ Compensation Act (FECA), including how these benefits compare to those of other federal and state workers’ compensation laws and changing benefit payments for retirement-aged beneficiaries.10 In April 1996, we reported on our comparison of benefits authorized by FECA with those authorized under the Longshore and Harbor Workers’ Compensation Act and state workers’ compensation laws. 11 We found that, in general, FECA provided the same types of benefits to injured federal workers as those provided under other federal and state workers’ compensation laws; however, there were three principle ways in which FECA benefits were more generous:

FECA’s authorized maximum weekly benefit amount was greater;

FECA provided claimants who had a spouse and/or dependent with an additional benefit of 8-1/3 percent of salary; and

FECA provided eligible federal workers who suffered traumatic injuries with additional salary continuation benefits for a period not to exceed 45 days.

We have also reported on possible changes to FECA benefits for beneficiaries who are at or beyond retirement age.12 We noted that older FECA beneficiaries made up a high percentage of cases on the long-term rolls and accounted for a substantial portion of the FECA benefits paid for long-term compensation. We identified two prior proposals for reducing FECA benefits to those who become eligible for retirement. One would convert compensation benefits received by retirement-eligible injured workers to retirement benefits. However, this approach raises complex issues related to changing workers’ compensation benefits to taxable income and allowing for varying amounts of retirement benefits. The second proposal would convert FECA benefits to a newly established FECA annuity, thus avoiding the complexity of shifting from one benefit program to another. To help address FECA-related cost issues, the Commission and Congress could consider converting from the current FECA benefit structure to a FECA annuity.

Effective Labor-Management Relations and Support Systems Are Key to Improving Operational Efficiency

Thus far, I have focused most of my comments on areas that require statutory or regulatory changes. However, one of the most important factors in the Service’s future success may not depend solely on actions by the Commission, Congress, or other stakeholders. Rather, it will depend to a large extent on the Service’s support systems and its ability to work together with its unions to make the changes needed to improve organizational efficiency and sustain productivity improvements. This may require significant changes in organizational culture and practices, which have historically been difficult to achieve. We have written many reports discussing the long-standing adversarial relationships between postal managers and unions.17 These adversarial relationships have major financial, operational, and human capital implications because personnel related costs represent the largest single element of the Service’s annual expenses, and they are the primary determinant of prices and the key factor in the Service’s overall financial viability. In addition, postal employees represent a valuable asset and are a key element in any overall transformation effort. Disagreements between these groups have included performance management issues, including whether to implement some type of performance-based incentive system for employees covered under collective bargaining, and work rules, such as the deployment and utilization of the workforce. Furthermore, the Service’s ability to realign its workforce may be limited because its workforce planning is essentially designed to support short-term operations rather than assess long-term workforce needs, and it may not have sufficient flexibility to make needed changes in its work rules.

We have found that high-performing organizations often must fundamentally change their cultures so that they are more results-oriented, customer-focused, and collaborative in nature.18 To foster such cultures, these organizations use their performance management systems as a strategic tool to drive change and achieve desired results. The Service will need to modernize its performance management systems to create a clear linkage—"line of sight"—between individual performance and organizational success. First among the key practices high-performing organizations use to develop effective performance management systems is to align individual performance expectations with organizational goals.

Another key practice is to involve employees and stakeholders to gain ownership of the performance management system. Poor relationships between postal managers and employees have made it difficult to develop and implement changes to the Service’s performance management systems. One of the key challenges in developing a more performance-based culture will be for the Service to work in collaboration with its labor unions and management associations to align individual performance with institutional goals and objectives. The Service’s bargaining unit employees, who make up approximately 90 percent of its workforce, do not have performance-based compensation systems and have generally opposed them. Another key challenge will be in addressing those areas where the Service believes it needs additional human capital flexibilities to realign its workforce or modify work rules, but has been or could be hampered through current collective bargaining agreements.19

Modern, reliable, effective, and as appropriate, validated performance management systems with adequate safeguards, including reasonable transparency and appropriate accountability mechanisms, must serve as the fundamental underpinning of any successful results-oriented pay reform. The Service reported that it implemented a pay-for-performance system for its executives, managers, postmasters, supervisors, and other non-bargaining employees in fiscal year 1995, but that this system was discontinued in fiscal year 2002. Congress and the Postal Service’s Office of Inspector General have expressed concerns about certain aspects of this system, such as the payouts made at the same time the Service was incurring huge losses. The Service reported that it implemented a merit-based pay program in 2002 for its executives and officers, under which goals related to the Service’s overall performance goals are set for individuals at the beginning of the fiscal year. The Service also reports that it is in the process of extending a merit-based pay system for the remaining non-bargaining employees later this year. Care should be taken in the design of these systems to ensure that they comply with applicable law (e.g., pension cost savings cannot be used for management bonuses) and that any productivity-based measures result in real savings or more effective utilization of any existing excess capacity.

Addressing challenges in performance management will require the Service’s managers and employees to share a common vision for the future and a mutual responsibility for the Service’s financial and operating performance. Postal managers and employees will need to balance their individual interests with those of the organization, particularly in the performance management and workforce realignment areas. A common vision and a balanced approach should help achieve and sustain productivity improvements that will be necessary to enhance overall organizational effectiveness and individual performance while appropriately protecting workers’ rights.

Another key human capital challenge is to take steps to ensure that an organization has sufficient numbers of people in place with the right skills, tools, and incentives to get the job done. The Service’s ability to make changes in the size, cost, and deployment of its workforce has been hampered by some provisions of the collective bargaining agreements. For example, in our reviews, postal plant managers have told us that because of restrictive job classification rules, the Service has too little flexibility to move employees to locations and positions where they are needed. A postal plant manager told us that because of restrictive workforce rules, many supervisors believe it is too arduous to deal with poor performers and that about 60 percent of grievances were work rule based. Changes to the Service’s operating environment, such as optimizing its mail processing network, may require a different mix in the number, skills, and deployment of its employees. These changes may involve repositioning, retraining, outsourcing, and reducing the workforce.

To deal with these challenges, the Service will need effective human capital strategies. It will also need reasonable flexibility to address certain challenges. However, these additional authorities should include appropriate safeguards to prevent abuse of employees. In previous reports and testimonies, we have emphasized that in addressing these human capital challenges, organizations should identify and use the flexibilities already available under existing laws and regulations and then seek additional flexibilities when necessary and based on sound business cases.20 These additional flexibilities could include (1) more flexible pay approaches, (2) greater flexibility to streamline and improve the hiring process, (3) increased flexibility in addressing employees’ poor job performance, (4) additional workforce restructuring options, and (5) expanded flexibility in acquiring and retaining part-time or temporary employees. The tailored use of such flexibilities for acquiring, developing, and retaining talent is an important cornerstone of strategic human capital management so that organizations become more results-oriented, integrated, and customer focused. To address employees’ concerns that some flexibilities could be unfairly applied, the Service will need to develop clear and transparent guidelines for using flexibilities, and then hold managers and supervisors accountable for their fair and effective use. By more effectively using flexibilities, the Service would be in a better position to manage its workforce, ensure accountability, and transform its culture to become more results-oriented and efficient.

In closing, this Commission’s report will be an important tool to guide comprehensive postal transformation by addressing the major issues related to the legal and regulatory framework of the Service’s business model along with various operational and governance issues. As the Commission considers the future direction of the Service, its efforts will involve balancing the Service’s future role and mission; governance structure, transparency and accountability mechanisms; and various incentives to increase revenues and control costs. More fundamentally, the Commission’s report can provide proposals and mechanisms to help Congress and the President deal with the controversial and long-standing issues that have hampered various postal reform efforts in the past.

For the Service to become a more efficient organization in the 21st century, it will need to

continue implementation of its Transformation Plan and other Commission recommendations aimed at driving down costs and increasing efficiencies;

continue enhancements to its financial transparency, including appropriate recognition of its expenses and obligations for retiree health benefits as well as disclosure of performance information and transformation progress;

provide thoughtful consideration of how its pension cost savings can be effectively used after fiscal year 2004 to enhance the long-term viability of the Service;

develop a comprehensive plan for optimizing its infrastructure and workforce; and

work with its unions and management associations to create a results oriented culture, as well as appropriate work rules and realignment flexibilities, that would help achieve both long-term financial viability for the Service and a fair, positive work environment for employees.

Finally, in many ways, the Service’s transformation issues are an illustration of the types of challenges that many government agencies face in positioning themselves for the 21st century rather than simply building on past practices. The Postal Service plays an important role for our nation and all Americans. It helps to connect our nation both domestically and internationally. However, the world has changed dramatically since the last postal reorganization in 1970. The Service must change to recognize these realities and position itself for the future. The time for action is now.