Saturday, September 12, 2009

Pay Comparisons

There is an increasing amount of dialog these days about teacher compensation. There are many perspectives on how to evaluate whether teachers are underpaid, overpaid, or being paid about right.

I tend to be a proponent of the free market in determining compensation. The simple description of this viewpoint is that employee pay is the result of a negotiation between an employer and a prospective employee in which the employer would prefer to pay less, and the prospective employee wishes to be paid more. In the course of the negotiation, the employer and prospective employee make personal economic decisions. Does the employer believe the skills of the prospective employee are such that it's worth paying this candidate more, because the employer's profit could be even greater? Will the candidate accept less because the potential for future compensation is much higher?

This is grossly oversimplified of course. The decision is much more complicated, as both parties try to evaluate all kinds of objective and subjective elements during the negotiation. But in the end, the two parties have to decide whether the deal on the table is 'good enough,' or whether it is time to take a walk. In the end, this system works because employers have to compete with each other to hire qualified candidates, and candidates have to compete with each other to find acceptable jobs.

And in the larger sense, this supply and demand operation influences career choices. When I was a young engineering student at Ohio State in the early 1970s, one of the most popular fields was Aerospace Engineering. Kids of my age group grew up watching the development of the space program from Alan Shepard's first short flight to Neil Armstrong's first step on the Moon (I still have an 8mm film of John Glenn's orbital flight). The really smart, engineering-oriented kids were often drawn into dreams of working for NASA or Jet Propulsion Laboratory. It wasn't so much the pay that attracted them as it was the thought of being a part of the first generation of space pioneers.

Then in 1972, the Apollo program ended, and Congress pulled the plug on the Supersonic Transport. The demand for aerospace engineers plummeted, and many graduates in my class had no luck finding jobs in their field. The number of new aerospace engineering majors dropped, and the interest turned to other fields – notably computer science and electrical engineering. There is a similar story to tell about nuclear engineering in the aftermath of Three Mile Island.

But eventually an equilibrium was reached, and the number of majors in the various engineering fields tended to line up with the demand for skills. This state of equilibrium will tend to last until some significant sea change happens in our economy. One of those was in the 1980s, when many of the brightest young students in our country flocked to business majors. Former Ohio State professor Roger Blackwell summed it up this way: In the 1960s, the brightest kids tended to go into engineering; in the 1970s, they went into the social sciences such as psychology and sociology (the hippy days, some would say); and in the 1980s, they went into business majors, especially marketing, finance and real estate. I don't know what he said about the 1990s, but from my ongoing contact with the engineering program at OSU, I think they're headed to engineering again.

Back to the subject of this post…

There is another perspective which says that compensation – at least for some careers - should be based on some notion of societal value. In other words, it doesn't so much matter what the free-market forces are that might influence compensation; the pay rate should be set by what someone, or some agency, determines the pay should be. It matters less what the supply vs demand relationship looks like, followers of this perspective say people doing certain jobs should be paid more or less than people doing other jobs based on other criteria.

Interestingly, this perspective seems to be most prevalent in the public sector. In this case, the employer is a government. Governments aren't meant to generate a profit for their owners, they are service organizations. They do still have to compete for workers however, so they must offer a set of tangible and intangible benefits that make it worth taking a government job versus one in the private sector.

Compared to private sector workers, government workers often have less potential financial upside, at least while they are working. They grind their way up through some civil service pay chart with predetermined pay raises, and little if any chance of individual pay negotiation. Compare that to private sector workers who get paid whatever they can negotiate with their employers, which for the past decade or so often included things like stock options. My last employer was Worldcom – through its acquisition of CompuServe Network Services – and it was their policy to grant stock options to every one of its 30,000 employees. There were many stories of low level employees who paid off their houses and sent their kids to college solely on their profits from stock options. Things like that just don't happen for public sector workers.

But then again, many of those Worldcom employees had their retirement savings tied up in Worldcom stock, so when the company went belly up, they lost not only their jobs, but their retirement savings as well.

One of the benefits of working in the public sector is that public sector jobs almost always have a defined-benefit retirement program attached to them. Work long enough – usually around twenty years – and you are guaranteed a pension for the rest of your life. That seems like a fair trade-off, lesser earnings potential while working in exchange for great retirement benefits. As someone approaching the golden years – without a pension – it looks like a darn good deal to me.

Yes, there are still some private sector pension programs out there. But they are rapidly disappearing, and some have already failed. My older brother spent his life laboring in a hot, dirty, dangerous steel mill, as did a number of other men of our family in generations past. He retired to a livable but not generous pension - right up until the day his company went bankrupt and took the pension plan down with it. Now his retirement benefits are paid by the federal Pension Benefits Guarantee Corporation (PBGC) at a small fraction of his former pension. He also lost his medical coverage at an age too young to be eligible for Medicare. His story is not unique; so many private pension programs have failed that PBGC is running out of funding.

Contrast that to the situation with the State Teachers Retirement System (STRS), which I wrote about previously in Time Bomb and Still Ticking. STRS is controlled by a Board made up of STRS members, who are all teachers or other certified or licensed education professionals. This Board oversees the management of tens of billions of dollars of money which was paid into the system by working teachers (10% of salary) and the school districts (an additional 14% of their salaries), as well as the fund's earnings over the years. They chose to take risks in the stock and real estate markets, and got burned pretty badly. In spite of these risks being entirely the choice of the STRS Board, they now seek to have the State government force school districts (meaning we the payors of property taxes) to increase their contributions in order to restore benefits. Yet another bail-out.

About this time next year, our School Board will be engaged in negotiating new union contracts with the employees of our school district. It is very likely that there will also be a levy campaign underway, asking the people to increase property taxes on the order of 7 mills ($214 per $100,000 of market value). It will a powerful opportunity to 'connect-the-dots' between the rising cost of compensation and benefits and the rate in which our property taxes are increasing (the purpose of this blog). Indeed, more than 90% of any new money raised with an additional levy is applied to the increased cost of compensation and benefits.

A component of this conversation is the question: What is fair compensation for our teachers?

We can't answer that question effectively with free market tools. In a free market, when you have many more qualified applicants for jobs than you have openings, it's a signal to employers that their compensation packages are more than good enough. That tends to drive pay scales down, or at least suggest that pay doesn't have to be raised to hire new employees.

But that's not what we see in the teacher contracts. Regardless of the number of candidates who seek employment in our school system, or the condition of our economy, the pay level has continued to increase on the order of 7% per year for over a decade (when both base pay increases and step increases are taken into account).

If free market methods won't work for determining what is appropriate pay, that seems to leave us with this notion of societal value as the way of setting pay.

How often do see one of bumper stickers which read: "If you can read this, thank a teacher"? Okay, I agree with the notion that the foundation of American society is constructed with some key building blocks, and public education is one of them. In spite of being a free-market economist, I accept that this building block of public education is so important that I'm willing to pay some amount of taxes to support it. While the US Constitution is silent on this matter, the framers of the Ohio Constitution saw fit to call out public education as a necessary good, creating a state funding requirement such that all Ohio children would receive a "thorough and efficient" education (and no, property taxes are NOT unconstitutional).

But there are other roles in the public sector which are pretty important as well. Consider the members of our armed forces.

I ask you to consider the case of a young US Marine, one who also happens to be my nephew. He is now assigned to the Wounded Warrior battalion at Camp Lejeune, being treated for injuries sustained in battle in Iraq which have ended his career as a Marine. He will be discharged sometime next year having never earned much money, no pension, and with permanent disability (which brings a little compensation), but at least he'll have lifetime medical care via the Veterans Administration. Teaching is indeed a tough profession, but I don't think anyone would put it in this category.

Another argument heard for current teacher pay levels is the fact that they must all earn a Masters degree by their 10th year in order to retain their teaching license. That is true, even though there is some disagreement about whether this additional education actually manifests as improved classroom performance. I'm willing to accept that it does, but it is exceeding hard to measure. After all, if the primary argument against performance pay for teachers is that it is difficult to measure individual teacher performance, how can we tell if the achievement of a Masters degree makes any difference either?

But let's map this discussion to the military as well.

With very rare exception, all officers in our military services are required to have a Bachelor's degree. If you go to college, enter Officer's Candidate School, and successfully graduate with a commission as a 2nd Lieutenant (Ensign in the Navy), your starting pay will be $32,000/yr. You will also get a one-time allowance for uniforms, plus $200/month for food and $1,000/month for housing (if government housing is not available, like a tent in Afghanistan) - a total of $46,400.

This compares to a starting teacher salary in Hilliard of $37,245. At a minimum, some allowance would have to be made for the fact that members of our armed services are allowed 30 days of leave each year, compared to the summer vacation enjoyed by teachers. We also have to consider that a military officer can't just quit after a year if he/she decides to try something else. Nor can we forget that many - not all - members of our military will repeatedly put their lives on the line, as has my nephew.

Career military officers are expected to get a Masters degree as well, and it often takes place in the first ten years of their career, just like the teachers. Many go on to earn a second Masters degree (often in military arts), and occasionally doctoral degrees. For many career officers, their 'terminal rank' is Lieutenant Colonel (Commander in the Navy), at between 30 and 35 years of service. At this level, the base pay would be $91,000 plus a housing allowing of $22,500, or $113,500. However, an officer of this grade would have substantial responsibility, for example the command of a Navy destroyer, which has a crew of nearly 300 and nuclear weapons capability.

The top salary for a Hilliard teacher is $87,731 (for Masters + 15 and 23 years of service).

At retirement, such an military officer would be entitled to 87.5% of the average of their highest three years pay, which would work out to about $80,000/yr. Again, this is comparable to a public school teacher who under the current STRS rules would retire at 88.5% of the average of their highest three years.

However, it should be noted that the maximum retirement benefit may be dropped under proposed new STRS rules. Why? Because, as the STRS itself says: "The 35-year enhanced benefit is no longer needed to encourage teachers to work longer and is eliminated." That sounds like a free-market concept to me!

So if societal value is to be used as a basis for setting teacher pay, how do feel about the alignment between teacher pay and military pay?

What if we use effort as the basis for setting pay levels? How does the effort expended by a teacher compare to a military officer?

How about professional freedom? Teachers are granted academic freedom in their contracts, and given tenure to guarantee it. What kind of freedom does a member of our military enjoy? There's a great line in the movie "Crimson Tide" when the commanding officer says to his executive officer: "We are here to defend democracy, not to practice it!"

So what is the appropriate level of compensation and benefits for public school teachers? We are going to have to wrestle with all these issues next year, right here in Hilliard. The discussion is already well underway in other school districts such as Worthington, Olentangy and Westerville.

Don Roberts, Justin Gardner and I feel we have the education, experience and demeanor to lead this discussion as members of our School Board. If you want to learn more about us, visit the website of, a recently-formed Political Action Committee who has endorsed and is supporting our candidacy.

Most of all, we ask for your vote on November 3rd.

1 comment:

  1. Stop the madness! We pay just shy of $10K yearly in school taxes with no children attending school. Another levy adding several hundred dollars a month to an already enormous tax bill is unthinkable. Do people think that when your property taxes are raised you go to your employer and ask for additional income to cover this? My husband has taken a cut in pay and reduction in benefits due to the economy--when will teachers learn the meaning of "tightening their belts". We don't mind paying taxes--if we could sell our house for the "fair market value" accessed by the county we'd be gone!!