The U.S. Postal Service, $300 Million in Executive Bonuses, And Some Funny Accounting

Issue Brief

President Bush has spoken banefully of CEOs who receive tens of millions of dollars in bonuses as their companies incur large-scale losses. “Corporate officers who benefit from false accounting statements should forfeit all money gained by their fraud,” he warned. But meanwhile, the Postal Service continues to pay its executives hundreds of millions in performance bonuses, amidst billion-dollar losses, through accounting formulas that seem to change to produce the most desirable effect.

The USPS recently announced that it will abolish its controversial “economic value added” (EVA) management performance awards system. However, Postmaster General Jack Potter told the Washington Post that $300 million of banked, but unpaid, award funds will be still paid out. While these payments will not increase this year’s deficit (the unpaid awards were charged in prior years), the cash must be siphoned from the desperately-needed cash generated by June’s accelerated postage rate increase.

Equally troubling is the fact that these unpaid “bonuses” are solely a consequence of the EVA’s “inflation adjustment factor,” that the USPS Inspector General deemed inappropriate in its December 2001 audit report. The proposed payment of these unpaid awards must still be approved by the Postal Board of Governors.

As the Lexington Institute has discussed repeatedly in papers and news stories over the past two years, these bonus payments rely on a formula that any reasonable observer could call ‘suspicious.’ The “Economic Value Added” (EVA) index originally included net income as a major factor in determining eligibility for bonuses, but omitted productivity. Then, in 2001, with negative net income a near-certainty, USPS revised the index to omit net income but include Total Factor Productivity, which was expected to improve.

As the nation’s markets are rocked by repeated reports of inappropriate accounting practices in the private sector, Postal Service executives should not be permitted to benefit from questionable accounting of their own. The Postal Service should be held to the same standards as businesses in the private sector.

Does the USPS plan to replace this system by another that will simply produce rewards without encouraging real management improvements? The objective of management awards is to encourage actions that a management confronted with competition would execute. Ending the current system is a positive step. But the present break-even mandate of the Postal Service, and the absence of head-to-head competition in its core business, delivering letter mail, seriously limits the options for any future awards system.

– Charles Guy, Ph.D., is Adjunct Fellow with the Lexington Institute and former Director, Office of Economics, Strategic Planning, U.S. Postal Service.