USPS Incentives

June 13, 2018

90/80 USPS Reality

Any discussion of the future of the United States Postal Service, and the way it should be regulated, must focus on an important reality.  The reality is that 90 percent of USPS revenue is paid by organizations and businesses, and 80 percent of Postal Service cost goes to employees.

Because the USPS is a government-owned legal monopoly, it must have a regulatory structure that provides incentives to operate as a self-sustaining entity.  In the private sector of businesses and organizations, when customers do better, employees do better.  Successful businesses align the incentives for customers and employees.  When customers win, employees win.

Win-Win Incentives

The 2006 Postal Accountability and Enhancement Act was set up to move our postal system toward win-win incentives.  It did so by, for the first time in our postal history, allowing the making and retention of unlimited profits by USPS.  And with no shareholders to distribute profits to, employees and customers would be the beneficiaries (see 80%/90% reality).

To incent the making of profits as successful businesses do, PAEA requires that USPS learn to live within limited pricing power faced by virtually all competitive business.  The law specifically limits postal price increases to the general rate of inflation in the economy, using the CPI-U index.  Anything the Postal Service makes within this constraint, it can reinvest in the business and distribute to employees.

In the immediate aftermath of PAEA, USPS management hailed the new incentive system as something that it could work with and be successful.  Indeed, for several years, productivity grew and Postal Service management touted the $15 billion in cost it took out of the system.

USPS Turns Against the Incentive System

Three “black swan” (unexpected, major impact) events occurred that led USPS management and labor unions to turn against the incentive system.  A historic recession and a large acceleration of electronic diversion of mail knocked down volume, and the lowest inflation rates in a long time limited postal price increases.

The “solution” proposed by the recipients of USPS revenue has been to jettison the incentive system.  We would be asked to trust management to manage efficiently and not gouge customers, and labor to not negotiate excessive raises.  In other words, place your trust in the private negotiations among USPS employees who determine future increases in the costs to be covered by customers.

The only incentive or “governor” left would be to avoid the possibility of a disaster scenario in which mail volume reacts to price increases by going into a freefall.  No one knows where that tipping point is; it could be right around the corner or a bit father in the distance.  But setting up a situation in which the operators are free to experiment with the location of the death spiral tipping point is no way to run a government enterprise that so many depend on.

And these operators’ incentives are further weakened by working for a “to big to fail” government agency employing over half a million people.  They know that if they step over the tipping point line, Uncle Sam will step in and rescue what is left.  But many customers would be left holding the bag.

Current System is Actually Working

The current incentive system set up by PAEA has actually passed the biggest stress test it is ever likely to face.  If USPS management, unions and the Postal Regulatory System would operate in tandem with customers it can continue to work very well.  The system made it through the biggest recession, most concentrated diversion period, and lowest inflation rates, all at the same time.

Customers contributed over $4.6 billion of extra revenue (2014-2016), through the mandated exigent surcharge, to help USPS recover from the impacts of the recession.  And customers made these postage sacrifices at the very time they themselves were trying to survive the recession, with their own layoffs, pay cuts, mergers, publication closures, asset sales, whatever it took.  (None done by USPS.)

Concurrent with the very generous customer assistance, USPS mail volume has settled into the 150 billion range for six straight years (2012-2017).  This is not bad and should be sustainable, as our postal system’s mail volume has exceeded 150 billion in only 25 years of its 229-year history (11 percent).  If USPS productivity had continued to grow at only 1 percent a year during 2014-2017, it would have realized a healthy profit in 2017.

If we all embrace, rather than continuously fight, the current incentive system, it will work very well.

A Board of Governors Could Help USPS Succeed

The lack of a Board of Governors also is preventing the USPS from making the current incentive system work.  The nine Presidentially-appointed Governors gradually dwindled down to none in December 2016.  Postal management needs Governors, not only to pass resolutions for rate increases and incentive programs, but also to make the hard decisions necessary for and business-like organization to operate in today’s environment.

Everybody else is making difficult decisions.  Competition is fierce everywhere; revenues are at risk everywhere.  Survival requires risk-taking and continuous commitment to a long-term strategy.

The fastest, most effective change the Trump administration can make is to nominate and gain Senate confirmation for nine qualified Governors for USPS.  The Board of Governors could then work with management to make the current system work.  The emphasis should be on cost control, sizing the network for 150 billion pieces, and doing everything within reason to retain the existing customer base that has stayed with USPS through thick and thin.

Proposals for Higher Rates Would Weaken Incentives and Backfire

Higher rates proposals, whether in legislation, the PRC recommendation, or suggestions made to the President’s Task Force, would decimate the business-like incentives and the mail volume that USPS needs to survive and prosper.  It would move the system is exactly the wrong direction and would be on the wrong side of history.  It would enable inefficiency and timidity in preparing for the future.

If Anything, Stronger Incentives are Needed

We support the current system and do not advocate major changes.  But if participants are bound and determined to improve it, they should advocate stronger incentives for efficiency, customer retention, and growth.

For example, one could change the CPI cap to a target. The 80 percent cost of labor could be tied to the level of success in meeting the CPI price increase target.  If postal prices go up 1 percentage point below the increase in CPI, then pay for management and unions could go up by 1 percent.  If USPS chooses to raise postage 1 percentage point more than CPI, then postal pay goes down 1 percent across the board.  That way, incentives are stronger and they are aligned between USPS employees and their customers.  It becomes a win-win proposition, rather than the proposed ‘postal employees win-customers lose’ ideas at the PRC and in legislation.  And postal incentives would be much more like they are in the real world.

Again, we do not think such as change is necessary if a strong Board of Governors works with USPS labor and management to make the current incentive system work.  When they accept as a motivator that they can make and retain profits, postal managers will allow the incentives to take hold and drive behavior.

Giving up and asking for business-like incentives to be jettisoned is not the right answer.