Public vs. Private Sector Employment Compensation and Benefits

Abstract

Employees have the ability to make or break a company. The labor force and the products and services a company offers make up the most important parts of a company or agency. Both public and private sector entities invest in the employees in benefit and compensation plans. Public sector agencies typically have a base compensation package that is offered to any and all company employees, which includes bas pay, retirement, sick, vacation, and holiday pay, and partial or full tuition reimbursement. Private sector entities sometimes offer base pay plus commissions and bonuses as well as fitness programs, paid leave, company parties, company perks, and a mechanism for moving up within the company. Public sector jobs are often seen as more secure than private sector jobs, but private sector often pays better than public sector.  Depending on a person’s desires, dreams, hobbies, family demographics, education, employment history, and location, an employee typically knows whether they want to make a career in public or private sector jobs. Depending on the compensation and benefits package, an employee then determines which entity they wish to work at. Compensation and benefits are part of a company’s overall business strategy.

Public vs. Private Sector Employment Compensation and Benefits

 Employers seek to hire the best candidates and most qualified employees. Because of this, they offer compensation and benefits to attract the best employees. Public sector agencies are often not able to offer as much money as private entities, however, are sometimes more secure employers and offer better retirement and benefits packages. Private sector companies sometimes offer commissions in order to provide incentive for employees to perform at optimal levels. Employees weigh their employment choices based on their goals, beliefs, needs, and desires. Compensation, benefits, and incentives are some of the most important determinations that are considered in deciding whether to work for a particular employer. The total compensation an employee receives includes pay, insurance, sick and annual leave, paid holidays, tuition reimbursement, retirement, training, and any other incentives employees receive in exchange for working for an employer. Some employers offer meals, fitness programs, retreats, and many other incentives as well.

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 Private sector employers are often able to offer better compensation packages than public sector employers. This is because public sector employers have to answer to their benefactors, which include the citizens of the city, state, or nation which provides funding for the organization. Every dollar must be justified. Although public sector employers do not pay as much or offer as many benefits, they typically pay for all employees to have holidays off, generous sick and annual leave, and affordable insurance programs. They also offer tuition reimbursement at a lot of public sector jobs. Some private sector jobs offer these benefits as well as bonuses, company picnics, Christmas parties, and attractive benefits such as company cars and use of a company jet. Employers invest into attractive compensation packages in order to attract and retain the specific types of employers they want and need according to their objectives as a company. A tool to becoming and remaining competitive in any sector or industry is the retention of the best employees. Employees are a company’s best asset.

 Without reliable, hard-working, loyal employees that perform at the level necessary for the success and continuity of the company, the company will not survive regardless of the products or services offered. Both private and public sector employers know the value of a good workforce. “Compensation programs based on the performance of an entire organization (i.e., organization-level incentives such as profit sharing and gain sharing) have been found to be able to improve employee morale, increase productivity and contribute positively to company financial performance” (Chen & Wang, 2018). A company’s performance is directly correlated to the employees’ morale, productivity, and performance. One incentive that is often adopted by both private and public sector companies is flex scheduling to allow for a good work-life balance.

 When individuals have a healthy work-life balance, they are more likely to operate at ideal performance levels. When employees operate at optimal performance levels, the company benefits. Part of a business strategy in a restaurant operation for example, is to increase sales and turnaround time for all customers and food orders. The more orders that are processed in a small amount of time, the more money a company makes and ideally, the more customer loyalty that will be gained. Speed and accuracy are both important within the restaurant industry. The same, however, is true in public sector agencies such as tax collection agencies. Employees must be very accurate and process a large amount of work and data in small amounts of time. Both in the restaurant and the public tax collection agency, speed, accuracy, and loyalty is necessary.

Turnover costs a company recruiting, training, and retention costs. Research has shown that it costs a company more to lose employees than to retain them. Turnover costs must be avoided whenever possible to save a company money (Michael, Davidson, Timo, & Wang, 2010). Job satisfaction and organizational commitment have a lot to do with turnover rates. “Pay, communication, social integration, routinization, role overload, promotional opportunity, training, supervisor and co-worker support, and distributive justice also have a significant impact upon turnover” (Michael, Davidson, Timo, & Wang, 2010). The key to employee retention is to initially offer and implement a compensation and benefits package with is desirable and then to equip the employees with all the tools necessary to do their job well. All of this is part of a company’s strategic plan initiation and execution. Employees use the same reasons to accept employment, stay at a particular employer, and quit a job. If they are happy and feel adequately compensated, they typically perform well and stay at a job. If they feel they are not being compensated adequately, they will not perform well and will not stay employed (Michael, Davidson, Timo, & Wang, 2010).

Restaurants typically pay salary to cooks and managers, whereas servers, hosts, bartenders, and bussers are paid hourly. Managers may also receive bonuses for meeting sales levels. Servers typically make a few dollars less than minimum wage because they also receive tips, although this may vary among companies. As long as between the hourly pay and tips, employees make at least minimum wage, employers are within their rights. There are federal and state labor laws which every employer must abide by (Antwi, Moriya, & Simon, 2013).  Within the last US President’s time in office, there have also been laws implemented regarding an employer’s mandatory offering of company health insurance. Employers are also sometimes required to offer unemployment insurance and overtime pay (Antwi, Moriya, & Simon, 2013). As with many laws, there are restrictions, rules, laws, and exclusions pertaining compensation. In public sector jobs, a license may determine the compensation for individuals. If an individual holds and Engineering or Surveying license and works for a Federal job, they make more money by law than when they are working in other jobs.

“A thorough understanding of internal incentive structures is critical to developing a viable theory of the firm, since these incentives determine to a large extent how individuals inside an organization behave” (Baker, Jensen, & Murphy, 1988). Although the article cited is dated from the 1980’s, it still rings true today. Employees behaviors directly reflect how they feel about their work environment and compensation at work. A lot of individuals work long hard hours and the only thing that keeps them working is knowing they feel needed and appreciated through compensation and intrinsic as well as extrinsic incentives.

Intrinsic and extrinsic incentives have been studies for many years. These are a large part of Human Resource Management and compensation at entities both in the private and public sectors. Restaurants offer free food and flexible shifts as well as pay based on performance. The faster and friendlier a server is and the more shift they decide to work, the more money they will make. Some public entities offer free clinics to employees as well as paid voting time and use of company cars and resources. These benefits could be classified as intrinsic or extrinsic in nature. Intrinsic incentives are incentives that are classified as being motivation to do something based on internal beliefs (Benabou, & Tirole, 2003). Extrinsic incentives are rewards such as bonuses, flexible schedules, days off, and profit sharing. Extrinsic incentives are often offered to ensure employees strive for greatness (Benabou, & Tirole, 2003). Intrinsic incentives are internal goals within individuals that are rooted in education, training, and values. The Human Resource staff are trained to utilize both intrinsic and extrinsic motivation and incentives to ensure employees operate at optimal performance. The ability to strategically implement incentives into compensation and benefits packages is part of the overall plan a company must have in the overall company strategic plan.

In the absence of pay for performance plans, such as at public sector jobs, there are other incentives that are part of compensation, though not monetary in nature. These include praise from superiors and co-workers, implicit promises of future promotion opportunities, exclusive training opportunities, travel, feelings of self-esteem that come from superior achievement and recognition, and current and future cash rewards related to performance (Baker, Jensen, & Murphy, 1988). Compensation, as previously mentioned, takes many forms.

The ability to lead groups and make a difference is also a compensation mechanism in public sector jobs. For an individual to feel as though they are making a big difference and impacting the lives of others for the better is non-monetary incentive to work for an entity. Companies, such as non-profit or public sector use this as a recruiting mechanism to obtain highly qualified individuals who believe in intrinsic rewards. It is important to look at the bigger picture when comparing compensation and benefits within an organization. This may lead to better retention of quality employees. When there are committees within companies and employees have the ability to lead these committees, this is also incentive to work hard and become leaders of others. This is imperative to a company’s success (Michael, Davidson, Timo, & Wang, 2010).

Research programs, technology, equipment, and support from management are also benefits which employees see as incentives to work for various programs and entities. For example, a scientist is more likely to work for less pay if they have access to research programs they are interested in and equipment that will allow them to grow and succeed in their positions. When employees are not equipped with the necessary tools they need to be successful in their positions as part of their benefits in employment, they are less likely to stay in their positions and more likely to look for employment elsewhere (Benabou & Tiroule, 2003). Training is also a benefit in that employees want growth and promotion and the best way for them to acquire this is through employer provided training. Some employers pay for employees to stay up to date with the continuing education credits.

Both private and public sector employers know the value of compensation and benefits in attracting and retaining employees which will support their values, mission, beliefs, and protocol. Finding licensed qualified employers is a difficult task. In order to effectively acquire and retain these employees, their needs and wants must be met. Employment is essentially a contract. The employee receives pay and benefits in exchange for hard work and dedication. Employees have the ability to boost sales, retain customers, meet goals, and engage in practices which are aligned with the company. A company’s success is highly dependent on the employees’ morale and hard work.

When an employee feels valued and adequately compensated for their work and contributions, they will do their best and assist in the overall success of the company. Tools, training, equipment, and materials all contribute to whether or not an employee will be successful in their position and these are all non-monetary compensation for an employee. Bonuses and commission are pay for performance mechanisms. Paid vacation and sick leave are monetary benefits which are offered to both public and private sector jobs. Compensation and benefits are of utter importance in the strategic planning of the Human Resource Management aspect of any company regardless of the sector in which they operate.

References

Antwi, Y. A., Moriya, A. S., & Simon, K. (2013). Effects of federal policy to insure young adults: Evidence from the 2010 affordable care act’s dependent-coverage mandate. American Economic Journal: Economic Policy, 5(4), 1-28. doi:10.1257/pol.5.4.1

Baker, G. P., Jensen, M. C., & Murphy, K. J. (1988). Compensation and incentives: Practice vs. theory. The Journal of Finance, 43(3), 593-616. doi:10.1111/j.1540-6261. 1988.tb04593.

Benabou, R., & Tirole, J. (2003). Intrinsic and extrinsic motivation. The review of economic studies, 70(3), 489-520.

Chen, L., & Wang, J. (2018). Business strategy, compensation policy and innovation performance: A behavioral perspective. Compensation & Benefits Review, , 88636871879842. doi:10.1177/0886368718798423

Michael C.G. Davidson, Timo, N., & Wang, Y. (2010). How much does labour turnover cost? International Journal of Contemporary Hospitality Management, 22(4), 451-466.