The Restructuring of Public Sector Compensation

Jamaica is experiencing a rapid economic recovery from the sharp and historic COVID-19-induced economic contraction of 2020/21. For economic growth to continue at levels higher than our historical average, however, it will be necessary for the Government of Jamaica (GOJ) to continue to implement reforms that reduce the cost of business, improve labour and capital productivity and increase resilience.

TRANSFORMATION OF THE PUBLIC SECTOR

One of the central reforms aimed at boosting productivity is the transformation of the public sector. An efficient public sector is essential to sustained economic expansion. The GOJ is pursuing reforms to improve public sector efficiency through five pillars: (i) rationalisation of public bodies; (ii) introduction of enterprise systems for human resource management; (iii) implementation of shared services; (iv) digitising public sector services; and (v) restructuring of public sector compensation.

Through the GOJ’s public body rationalisation exercise, the number of public bodies has been reduced from approximately 190 in 2016 to 140 at the beginning of 2022. There have been mergers, divestments and closures of public bodies, as well as reintegration of some public bodies into parent ministries with net fiscal savings of approximately $2 billion annually. Jamaica still has too many public bodies relative to the size of our economy and public body rationalisation needs to continue.

Our human resources represent the most important asset of the GOJ yet we continue to rely on manual, paper-based HR systems. This compromises strategic decision-making at the policy level, leads to poor people decisions at the operational level and results in suboptimal employee experiences at the individual level. As such, the GOJ is implementing My HR+, a web-based integrated human resource management and payroll system across 200 ministries, departments and agencies (MDAs). This will bring synergies and efficiencies across MDAs, improve resource allocation and produce better outcomes.

Jamaica risks falling further behind if we do not accelerate digitalisation. We either seize the opportunities for leapfrogging offered by this fourth industrial revolution or risk being outcompeted by other nations. Improving public sector efficiency, and therefore Jamaica’s productivity, will require that public services are accessible online, through digital and mobile platforms. The Jamaican citizen will then be able to file taxes, apply for and receive licences and permits, and trade across borders in less time, boosting productivity. To achieve this, the GOJ is investing in communication infrastructure to connect MDAs. This network, GovNet, will provide the platform for processes within the GOJ to be automated. 

The GovNet infrastructure will also facilitate the implementation of shared services in the GOJ. Today, human resource administration, IT, internal audit, procurement and other services are replicated across all MDAs. With the technologies available today, this replication is unnecessary and costly. The opportunity exists to make the required investments to organise the delivery of these internal services more efficiently. Standalone shared service centres will specialise by service, eg HR, and will deliver this service across MDAs. This will offer greater professional scope for the service professional and better-specialised service for his/her customer in a GOJ MDA.

These are all critically important reforms that form part of the public sector transformation initiative. A most ambitious and challenging aspect of public sector transformation is the restructuring of public sector compensation.

EXISTING SYSTEM UNSUSTAINABLE

We know, anecdotally, that many nurses, teachers, doctors, police and others migrate annually, seeking better terms overseas. In addition, we have technical, analytical and managerial jobs across MDAs that are difficult to fill, and remain vacant for extended periods of time, due to uncompetitive compensation.

A modern state needs to attract and retain first-class management, IT, accounting, engineering, legal, public policy, data analysis and other professionals. Among other staff needs, our hospitals need critical care nurses, our schools need math and science teachers and our police force needs detectives and patrol officers. We have shortages in these areas largely on account of remuneration levels.

Our public sector compensation system is burdened by 325 salary scales that evolved from using multiple job evaluation tools. By comparison, there are seven grade levels in the UK civil service. In addition, our compensation system incorporates 185 allowances! This is utterly unmanageable.

This structure also leads to glaring real and perceived inequities, which are the source of much discontent. Our compensation system lacks transparency and employees need spreadsheets to calculate their total income. Given the complexities, the GOJ has difficulty determining its total wage bill and, during periods of negotiation, it is challenging to keep track of the aggregate increase in the wage bill implied by claims and responses. The system exposes Jamaica to fiscal risks and is untenable.

We did not get here overnight or by design. Decades of tinkering with the systems, putting in place short-term measures to offset wage freezes and appeasing bargaining units through the use of allowances have contributed to this cumbersome compensation system.

The compensation system we have today is unsustainable and needs to be restructured.

To the credit of public sector unions, they have long realised and advocated for this. However, the two-year wage cycle, which had its origins in Jamaica’s history of chronic economic instability, high inflation, and lack of fiscal prudence, worked against such substantial reform. Historically, by the time the GOJ concluded its engagement with 40 unions and bargaining groups the two-year period would have long expired and we would be halfway through, or at the end of, a new two-year cycle.

Again, to the credit of Jamaica’s public sector unions, they agreed to a four-year wage settlement with the understanding that the GOJ would use the time to hire the required consultants and build the internal capacity to undertake the necessary analysis, data mining, costing and planning towards a completely restructured compensation system.

GUIDING PRINCIPLES

There are four key principles that have guided this work:

First, the new compensation system must be simple and easily understood. This means that we make compensation as clear, clean, and coherent as possible, so that public sector employees can easily see the value of their total compensation package. This requires that we move away from a system based on allowances and towards a new structure that transparently contemplates total compensation. No longer will there be a basic salary and a plethora of allowances layered on top. That structure has not served the best interests of public sector employees nor the GOJ.

Second, the new compensation system must be fair and equitable. This means we must have a consistent way of determining pay across the public service which reflects the value we place on the work our public officers do. Consistency across the service requires that we significantly reduce the number of salary scales, eliminating the duplicity of scales that relate to what is essentially the same job function or jobs of equal value.

Third, it must recognise and reward performance. There should be a clear link between performance and pay progression with transparent mechanisms for recognising and rewarding good, and especially excellent performance. So, we must move away from incremental progression based on length of service to progression based on performance that is grounded in the provision of increased incentives to perform.

Finally, the system must be sustainable and affordable. While it is important to maintain competitive compensation levels, in order to build a strong public sector, we cannot defeat ourselves and throw away the fiscal sustainability we have achieved from 10 years of sacrifice. A restructured compensation system must therefore be fiscally consistent with the debt reduction objectives enshrined in our fiscal rules, which underpin the stability we enjoy, without compromising the levels of capital spending required to catalyse growth and improve the quality of life.

IMPLEMENTATION TIME FRAME

We had originally committed to begin implementation of this reform in April 2021. However, COVID-19 intervened and the severe economic contraction and health crisis decimated and diverted resources. The GOJ therefore proposed a one-year delay to public sector unions with a modest increase in the interim.

The 2022-23 budget will be tabled in a few days. While the GOJ will continue to focus on economic recovery, restoring education and improving security, this year’s budget will prioritise implementation of restructured public sector compensation.

We plan to complete consultations with unions and other stakeholders and to engage in sensitisation and information sessions with public sector employees. Thereafter implementation will begin, as soon as possible in the new fiscal year, with an effective date of April 1, 2022. It cannot all be achieved in one year, however, and will, in all likelihood, need to be phased in over three years.

WAGE/GDP

This reform is happening in a context where Jamaica is not yet out of the woods. Our debt is still very high and our economy remains vulnerable to potential shocks.

The implementation of restructured public sector compensation will lead to a significant rise in the wage bill which will likely breach the nine per cent wage/GDP target in Jamaica’s fiscal responsibility law unless growth surprises on the upside. However, if one were to incorporate the subset of allowances, (eg travel upkeep), which have not been previously included in the wage bill based on legal definitions, the breach would be smaller.

It is important to note that from debt sustainability modelling and analysis, the higher wage bill associated with the planned restructured public sector compensation will not compromise Jamaica’s debt targets under the fiscal responsibility law. Furthermore, capital investments as a proportion of GDP will increase in the upcoming fiscal year and continue to increase across the medium term.

However, notwithstanding the above, the higher wage bill will significantly diminish fiscal buffers and room for error. The reduced fiscal flexibility implied by a higher wage bill makes it imperative that we accelerate the implementation of other pillars of the transformation agenda, among other initiatives, inclusive of the pursuit of higher growth, that can bring compensation as a percentage of GDP to more sustainable levels across the medium term.

The restructuring of public sector compensation is an ambitious, complex yet necessary reform. I hope to elaborate further in my upcoming budget presentation.

Published in the Gleaner – Feb 6, 2022