Understanding Federal Pay Compression: Key Issues & Solutions

Federal employees, especially those in higher grades, often expect their pay to reflect their years of experience and the responsibilities they shoulder. Yet many find that their paychecks remain frustratingly similar to those of colleagues in lower grades. This phenomenon, known as federal pay compression, has become increasingly common in recent years. It’s a challenge not just for the employees feeling squeezed by these constraints, but also for government agencies that need to attract and keep top talent. As federal workers look ahead to retirement, proper planning becomes even more vital. That’s why our team at PlanWell—home to professionals holding the Chartered Federal Employee Benefits Consultant (ChFEBC), CERTIFIED FINANCIAL PLANNER™ (CFP®), and Accredited Investment Fiduciary (AIF®) designations—has spent over three decades guiding federal employees to more confident retirements through our proprietary Fed-Expert Financial Blueprint.

This article explores how federal pay compression happens, why it matters, and what legislative proposals or agency measures might help address it. We’ll also examine how compression can affect your retirement plan under the Federal Employees Retirement System (FERS). Our goal is to offer a practical perspective that senior federal employees and retirees can use to protect and plan for their financial futures.

What Is Federal Pay Compression?

The term “federal pay compression” refers to a narrowing pay gap between employees at different GS (General Schedule) grade levels. In an ideal scenario, an experienced GS-15 employee—managing large teams or budgets—would be compensated well above those in lower grades. However, various statutory rules limit how high GS pay can climb. In high-cost areas, salaries for GS-15 and even GS-14 employees can hit the same cap, ultimately tightening the pay gap between them and more junior staff.

It’s important to note that while private-sector pay compression typically arises from market forces or internal policies, the federal version is shaped by legally imposed pay caps. According to government pay experts, these caps can lead to “salary stasis” for senior employees in many metropolitan areas. In other words, even if a higher-level employee receives a performance-based step increase or a cost-of-living adjustment, their actual take-home pay may remain stuck if they’ve hit the statutory limit.

Key Causes of Federal Pay Compression

Statutory pay caps are the central driving force. Above a certain threshold—known as Executive Schedule Level IV—GS salaries stop increasing, even if step raises or locality adjustments would normally push them higher. This cap changes over time, but it still constrains many employees at the GS-15 level (and sometimes GS-14) in high-cost locality pay areas. For instance, data from the Federal Salary Council has shown that top-step GS-15 employees in areas such as San Francisco, Washington, DC, or Seattle easily bump against the cap.

Compounding this issue are annual pay raises and cost-of-living adjustments (COLAs). These across-the-board increases can push lower-grade employees’ pay upward, closing the gap. Meanwhile, the senior employee at the highest pay grade may see no meaningful raise if their salary is already capped. Market forces also play a role. When agencies offer competitive entry wages to attract specialized talent—often in technology or scientific fields—they can inadvertently bring new hires’ pay closer to those of long-tenured employees.

Effects of Federal Pay Compression

For senior employees who feel that their compensation no longer reflects their high-level responsibilities, morale can suffer. Disillusionment might cause them to consider an earlier retirement, taking invaluable institutional knowledge with them. Meanwhile, potential applicants to crucial leadership roles could look elsewhere if they see no distinction in compensation. This shortfall has been underscored by representatives from employee unions and noted by the Office of Personnel Management (OPM), who warn that agencies may lose their competitive edge compared to the private sector.

In some instances, wage inversion can occur, where a subordinate ends up making nearly as much or more than the person supervising them. While this doesn’t automatically break any laws, it can generate tension and a sense of unfairness across teams. Over time, this dynamic can also feed into broader pay equity concerns.

Recent Legislative and Policy Developments

Addressing pay compression isn’t a new concern, but it has garnered renewed attention with the introduction of the Pay Compression Relief Act. This proposed legislation aims to let federal employees over the cap receive more of the annual raises and locality pay increases they would otherwise lose. It stops short of removing the cap altogether, but it seeks to bring some relief to federal employees in highest-cost regions.

On the administrative side, the President’s Pay Agent has acknowledged the issue, recognizing that compression jeopardizes the very principle of rewarding experience and responsibility fairly. While solutions are under discussion, they will likely require both legislative fixes and updates to OPM guidelines.

Solutions and Strategies to Address Federal Pay Compression

There are several short- and long-term tactics that both agencies and employees can employ. While systemic reform is the ultimate answer, these interim measures can mitigate some frontline effects:

Short-Term Measures often include thorough pay equity analyses. Agencies that regularly audit compensation structures can pinpoint areas where compression is most severe. Some departments look for creative ways to offer merit-based raises or off-cycle adjustments for stellar performers, though the statutory cap remains a limiting factor. Additionally, ensuring open and transparent communication about how pay is set can help employees feel more respected, even if they’re impacted by constraints beyond an agency’s control.

Long-Term Approaches revolve around modernizing the GS pay system itself. Many experts propose revising or removing current caps, a change requiring legislative action. Budgeting for systematic equity adjustments can also preserve the intended pay differentials across GS grades. Another strategic move is fostering internal mobility and career development, so employees have more opportunities to move into less-capped positions or earn high-value credentials that justify advanced pay categories.

At PlanWell, our perspective is that federal employees need a holistic understanding of how pay compression feeds into retirement readiness. When top steps and locality pay are capped, higher final salaries are not guaranteed—potentially affecting the “high-3 average” used in FERS pension calculations. By mobilizing a comprehensive plan, like our Fed-Expert Financial Blueprint, employees can avoid unpleasant surprises and be ready for contingencies that compression creates.

Illustrating the Pay Cap: A Quick Look at GS-13 to GS-15

Examining the interplay of base pay, locality adjustments, and the statutory pay ceiling helps explain why compression can be so pervasive in some regions. Below is a sample table that highlights how these factors converge. Exact figures vary each year and by location, but the pattern remains consistent: once an employee’s total pay hits the legally mandated maximum, raises cease.

*Ranges are approximate and rounded for illustrative purposes. **This cap can vary each year and may apply across multiple steps in high-cost localities.

From this table, it’s clear how annual adjustments and higher locality pay can push lower-grade salaries closer to or even above an effectively capped GS-15 salary in many regions. This pattern has been noted in places like the San Jose-San Francisco locality pay area, where many steps of the GS-15 pay scale see no significant increase beyond the top limit.

Implications for Retirement Planning

Because FERS pensions are calculated using an employee’s “high-3” average basic pay, capping salary growth can directly lower retirement income. Senior employees often plan to have a few peak-earning years to boost their pension, but compression places a hard ceiling on how high those peak earnings can go. Delaying retirement might help in some cases if cost-of-living increases eventually raise the cap. However, there’s no guarantee that Congress will pass legislation removing or significantly raising these limits.

We’ve seen cases where a dedicated GS-15 manager worked for decades, only to find their final basic pay did not climb much in their last few years of service because of the cap. Over time, this stunted growth can reduce monthly pension checks—money that employees were counting on after decades of public service. For individuals who meet PlanWell’s age and service thresholds, it’s especially crucial to start comprehensive retirement planning early.

Taking the Next Step

If you want to explore how pay compression might affect your own financial outlook, consider attending one of our free Federal Retirement Planning Workshops. These sessions, led by our experienced planners, provide a deeper look into federal pay trends and how benefits like the Thrift Savings Plan, Social Security, and FERS pensions can be optimized. We understand the federal pay structure at every level, and we’re here to help you make sense of it all. Our Fed-Expert Financial Blueprint builds a detailed roadmap toward retirement confidence, regardless of the pay constraints you’re currently facing.

FAQ

How common is federal pay compression? It’s increasingly widespread among higher-level GS grades in many high-cost locality areas. According to OPM and Federal Salary Council data, it impacts employees in over 30 different locales—including major metro regions—where top steps are often hitting the statutory limit.

Does pay compression affect retirement benefits? Yes. Since FERS pensions are calculated on your highest three years of basic pay, a salary cap can keep that average lower. Even if you receive promotions or annual raises, if you’ve hit the cap, you won’t see the corresponding boost in your pension calculations.

What if my agency offers no immediate relief? Many federal employees cope by leveraging available step increases, merit bonuses, or by pursuing additional certifications that open doors to positions outside traditional GS pay constraints. Proactively managing your personal finances and retirement plan can help offset the effects of a static salary.

Conclusion

Federal pay compression goes beyond the frustration of seeing your step increases negated by a pay cap. It affects morale, recruitment, and in many cases, the overall potential to grow your nest egg for retirement. By understanding the mechanics behind pay compression and recognizing how it can hit your long-term financial plans, you can make more informed decisions about your career and retirement timing. Whether Congress takes further legislative steps or agencies implement incremental changes, federal employees should remain proactive about their own financial futures.

Our team at PlanWell stands ready to guide you through these complexities with our Fed-Expert Financial Blueprint. If you’re curious about how to align your retirement targets with your current compensation realities, we invite you to attend one of our free Federal Retirement Planning Workshops or speak with a dedicated financial advisor for federal employees. Boosting your confidence in retirement starts with understanding every piece of the pay and benefits puzzle, and we’re here to help you every step of the way.