U.S. Postal Service Set Productivity Bar Low to Trigger Management Bonus Payouts This Year

Issue Brief

An examination of United States Postal Service data reveals that the Postal Service sets a much lower productivity target for its management bonus plan than would be needed for the Service to break even this year. In other words, managers could fall far short of the productivity gains needed for the Service to be financially sound, yet could become eligible for substantial bonus payouts. That, of course, is an unusual way to structure an incentive bonus system, and may account, in part, for the fact that the Service is expected to lose between $1 billion and $3 billion this year.

The Postal Service’s most complete measure of productivity is called Total Factor Productivity (TFP). The Service has set a low 0.7% TFP increase to make managers eligible for substantial bonuses this year, but the data accompanying its request for a rate increase for Fiscal Year 2001, and its operating budget for the year, indicate it would require a substantially higher, 2% or more, TFP for the Service to break even.

Postal management’s bonus program, known as the Economic Value Added Variable Pay Program (EVA), became controversial earlier this year, when it was revealed that management received $280 million in these performance bonuses last year. (The Service lost $199 million last fiscal year.) The EVA Index used to determine eligibility for management bonuses, initiated in the mid-1990’s, included net income as a major component, while TFP was omitted. This year, however, with negative net income a certainty, but with TFP expected to rise, the EVA Index reportedly will ignore net income in favor of this low increase in TFP. While a 0.7% growth in TFP would exceed the Service’s historical average-a low bar, indeed-it appears a TFP increase of 3%-4% would actually be needed to break even financially this year, or next.

In the mean time, the Postal Service will lose a billion or more dollars this year, while management is likely again to see big bonus payouts. At least Postal Management, then, will be able to afford the two rate increases we have seen this year, and the next big one scheduled for 2002.

— Charles Guy, Ph.D., is the former Director, Office of Economics, Strategic Planning, U.S. Postal Service. He is currently Adjunct Fellow at the Lexington Institute. Lexington Institute Adjunct Fellow Michael Paranzino contributed to this report.