and employee performance by using incentives and disincentives, and by opening the possibility of removal from position. However, as the following studies will show, instituting the idea of merit pay in the public sector is not without difficulty. Using private sector theories and private sector economic frameworks for compensation against public sector employment is not always a direct comparison. Each sector has its own unique circumstances, and as such, deserves individualized consideration. The real question for how public sector compensation is administrated is one of equity and of public responsibility.
4Public vs. PrivateWhy is there a difference when it comes to employment compensation in the private versus the public sector? First, they use vastly different sources of funds. Private sector wages are usually based off of an employee’s ability to create revenue for a company. Since the United States’ private sector is based off a capitalist system, profit motive is the primary driver of economic decisions. Therefore, most, if not all, of the decisions made in the private sector will be related to increasing the overall profitability of the firm. Contrast this against the public sector. The public sector is concerned with providing government services to the public at large. Public sector wages are mostly derived from taxes, and as such, the public needs to feel as if their taxes are being wisely spent. Each public employee, from the agency administrator to grounds custodian are public figures in their own right, and the public has an interest in seeing that public funds spent on compensating these employees is managed carefully. However, as one might draw from the descriptions above, looking at these compensation methods is not a direct comparison. Each draws its value from different sources. Its funds are also drawn from different sources. However, it has become the norm to compare public against private compensation in order to derive whether the public salaries are “fair.” There are numerous methods that are used to derive this comparison, and the rest of this paper will delve into several studies done on public vs. private compensation and critique their various analyses. Human Capital TheoryOne way in which public compensation is described is through the human capital theory. This economic theory began with Adam Smith’s 1776 idea of a man’s talent being an asset to himself and to society (Goldin, 2016). However, it was not until the 1950’s that human capital
5became a more common concept after economist Mincer (1958) wrote a paper that challenged the old idea that a man’s intelligence was the main determinant in overall income, and that actually, training and experience added value that influenced income.