Fed Plans to Hike Its Pay Scale to ‘Market’ Levels

The Federal Reserve Board plans to peg the salaries of its 1,500 employees to “market” levels, instead of to the government pay scale as it does now.

The move, which was disclosed to Fed employees last week in a memorandum, is aimed at attracting and retaining high-quality staff. It could affect the pay of everyone working at the Fed’s Washington headquarters except the seven board members, whose salaries are set by law.

As an independent agency whose budget isn’t subject to congressional approval, the Fed is one of only a handful of government institutions that has the power to determine the salary scale for its employees.

Former Chairman Paul A. Volcker elected to keep the Fed pay scale at levels comparable to the one used for federal workers because he believed the central bank should set an austere example, given his frequent admonitions against budget deficits and inflation.

But the new chairman, Alan Greenspan, has embraced the idea of boosting pay at the Fed, a concept that was pushed also by the board member responsible for administration, Edward Kelley.

Lag Private Sector

Before implementing the plan, Fed officials gained private approval from members of Congress responsible for overseeing the Fed, sources said. The lawmakers include Sen. William Proxmire (D-Wis.), chairman of the Senate Banking Committee, Rep. Fernand J. St Germain, (D-R.I.), chairman of the House Banking Committee, and the ranking minority members of those panels, Sen. Jake Garn (R-Utah) and Rep. Chalmers P. Wylie (R-Ohio).

The Fed’s decision reflects growing dissatisfaction with federal pay scales, which lag more than 20% behind salaries in the private sector, according to annual surveys. When adjusted for inflation, the pay of top government officials has declined 30% since 1970.

Numerous schemes to increase pay for selected groups of federal employees are before Congress, and the Office of Personnel Management has authorized special pay rates for thousands of government positions after certifying that the jobs could not be filled with qualified people at the current rates.

But controversies have arisen over the pay policies of some independent agencies. For example, the Federal Home Loan Bank Board has circumvented federal pay scales by putting some of its Washington employees on the payrolls of the local Federal Home Loan Banks, which are private institutions and offer higher salaries.

Constance Horner, director of the federal Office of Personnel Management, said the Fed’s plan is “another reflection of the need for pay reform in the federal government.”

Horner said that unless Congress passes an Administration-backed bill to overhaul civil service pay, “we will see continued erosion of quality.” The bill allows federal agencies considerably more discretion than they have now in setting pay for employees.

Horner observed that the National Institutes of Health, the Federal Bureau of Investigation and other agencies are seeking permission to set separate pay scales.