The Highest Paid Federal Employee Is Not the President


The Highest Paid Federal Employee Is Not the President

It's time for policy makers to revisit TVAâ??s existence as a federal agency

If you think the president of the United States-our country’s chief executive officer and commander-in-chief-is the most highly-compensated federal employee, you would be wrong…by a long shot. While the president is paid an annual salary of $400,000-plus over $150,000 in non-taxable spending accounts and perks like free housing-the president’s compensation package pales next to the compensation package of the Tennessee Valley Authority’s Chief Executive Officer Bill Johnson. The Tennessee Valley Authority (TVA) recently disclosed it increased Johnson’s total compensation by nearly 50 percent in 2013 to $5.9 million, more than 14 times the president’s salary.

TVA is a federally owned power company yet it pays its executives at the private sector level. If retaining an executive to head a federal agency requires this high level of compensation (as TVA asserts), it is time for policy makers to revisit TVA’s existence as a federal agency and make the entire entity, not just its pay scales, comparable to private firms to which its executives’ compensation packages are compared.

Like other federal employees, Johnson’s base salary of $708,000-close to double the president’s salary-was frozen last year under the federal pay freeze but remains a hefty amount by most standards. And his base salary accounts for just 12 percent of his total compensation last year; most of what was paid to Johnson last year came from performance incentives of nearly $2.6 million and deferred compensation payments of $2.06 million, according to the Chattanooga Times Free Press.

Johnson is not the only TVA employee to out-earn the president. TVA’s chief financial officer, John Thomas, was paid $2.1 million in 2013, and its chief counsel, Ralph Rogers, was paid $1.9 million. Preston Swafford, TVA’s chief nuclear officer, earned $1.9 million through August when he left TVA (plus an additional $552,488 as severance). Swafford will also be eligible for executive bonuses and incentive awards paid to top managers this year.

But for Tennessee Valley Authority being an agency of the federal government, there is nothing objectionable about TVA’s Board of Directors compensating its executives at these high levels. Executive compensation is an essential element of managing risk and providing incentive. With $10.9 billion in operating revenues and $44 billion of assets on its balance sheet, TVA’s CEO and other leaders have major responsibilities in this large, complex organization. TVA is close to, if not, the biggest producer of electricity in the nation, as measured by megawatt hours produced. According to its latest annual report, TVA operates six nuclear plants (with a seventh being built) and a range of other power-generating facilities, has roughly 16,000 miles of transmission lines, manages and services $26 billion in debt, and employs 12,600 people.

In fact, if TVA was a Fortune 500 utility, Johnson could be considered underpaid relative to CEOs of other utility companies comparable in size and complexity. In its recent Securities and Exchange Commission filing, the Tennessee Valley Authority stated that Johnson’s pay of $5.9 million is still below average in the industry. According to the Times Free Press, compensation consultants Towers Watson said the average CEO of a comparable size utility was paid nearly $6.8 million in total compensation last year.

So if Johnson’s compensation at TVA is reasonable, even less than other executives in similar positions, what’s the issue? The problem is that TVA is an agency of the federal government. If the federal government needs to pay the agency’s CEO at that level, it is but another reason why TVA should no longer be part of the federal government, something the Obama administration is exploring.

There are two ways to rectify the issue of TVA-a public sector service-offering private sector compensation. The first option is to align its executive compensation with other federal executive employees by utilizing the federal government’s Executive Schedule. TVA’s chief executive officer would be compensated the same as the secretary of energy, for example, as they would both be classified as Executive Level 1 employees. As of January 1, 2012, an Executive Level 1 federal employee’s annual salary is $199,700. It is interesting to note that when the Alaska Railroad was owned by the federal government, much like TVA, its executives were paid under the federal government’s General Schedule, which offers lower compensation levels than the Executive Schedule. And when Conrail, a freight railroad based largely in the Northeast and Midwest, was owned by the federal government, its chief executive officer was paid $200,000 ($420,000 in today’s dollars), with no bonus-a fraction of Bill Johnson’s base salary. That said, the likelihood of either Congress or the TVA Board of Directors reducing the CEO’s compensation this significantly is nil, which leads to consideration of a second option.

The second-and better-option is to make the Tennessee Valley Authority become more like the utilities it compares itself to when determining its executives’ compensation. Divesting the TVA-just as the federal government divested both the Alaska Railroad and Conrail-thereby subjecting the compensation of TVA’s CEO and other executives to board members elected by and accountable to shareholders, is the sensible path to pursue. TVA executives should not only be compensated like executives at comparable utilities, but also should operate in the same environment as comparable utilities and be subject to the same economic forces as other utility executives, be it investor-owned utilities or non-federal public power utilities.

William B. Newman, Jr., is Senior Adviser to HC Project Advisors in Washington, DC. He is a former executive of Conrail and worked on Conrail’s successful sale by the federal government. Conrail was sold in an initial public offering in 1987, then the largest initial public offering in history.