This state is shrinking the public-private pay gap for state workers

Few people take a government job with the goal of striking it rich. But in Tennessee, a concerted effort to make state employees’ pay competitive with the private sector has paid off—for both employees and the state, officials say. 

The effort required changing the state’s theory on how public workers should be compensated, said Kim Thau Yap, assistant commissioner for the Tennessee Department of Human Resources.

The old theory was, “We're going to accept a low market pay, but we'll have above-market benefits,” Yap said. “We changed the philosophy to say, ‘Okay, we're going to have competitive pay to market … and we want to retain our above-market benefits.’”

After the first year of what the state called “compensation modernization,” turnover dropped and the number of people applying for state jobs increased by more than half, according to state data. 

A Compensation Gap

Before the COVID-19 pandemic, state and local government employees earned, on average, about 10% less in total compensation—including pay and benefits—than their private-sector peers, according to an analysis from the Economic Policy Institute, a nonpartisan think tank that receives some funding from labor unions. Post-COVID, that gap has only widened to about 14.5% less.

States nationally struggled to fill vacancies during the pandemic and in the immediate aftermath. With vacancy rates higher than 40% in some areas, states labored to staff health care facilities, prisons and even IT services. In late 2021, as COVID-19’s reported death toll passed 800,000, about 40% of state and local government employees surveyed by the MissionSquare Research Institute said they were burned out; just over half said they were considering leaving their job. 

The picture has brightened recently. The share of state and local human resources officials who said they struggled to hire for jobs in public safety, health care, corrections and “hard-to-fill” other areas dropped by at least 10 percentage points over the past two years, according to a 2024 survey. Just over half of survey respondents reported providing broad-based pay increases in the past year. And other states, in addition to Tennessee, have increased pay closer to market levels; in 2022, Indiana, for example, set pay for many state employees equal to the median salary for similar roles locally, increasing state salaries statewide by an average of 15%.

Still, in one sign of the pressure on public sector wages—at least in states where it’s legal for public workers to strike—more than 90,000 state and local workers walked off the job last year, according to federal data, the highest number in the past 30 years but for the 2018-2019 teacher strikes. And those figures don’t reflect smaller work stoppages, those with less than 1,000 workers affected.

Laying the Groundwork

In Tennessee, a series of legislative changes laid the foundation for the 2022 pay increases, starting with the 2012 Tennessee Excellence, Accountability and Management, or TEAM, Act that significantly reformed the state’s civil service system, moving from a focus on seniority to performance. The state adopted performance pay in 2015.

“If the TEAM Act hadn’t happened in 2012, we wouldn't have been able to do what we were doing,” Yap said.

The shift to a performance-based system has benefited from strong political support, and the pandemic hiring crunch threw an additional spotlight on the need for more competitive pay, Yap said.

“In addition to the pressure of competing in a dynamic market, you put COVID on top of it. So the state was feeling it. The legislature was feeling it from multiple levels. And it so happened we were able to have a solid revenue for the state even in the midst of all that disruption,” he said.

How They Did It

Tennessee didn’t just hand out raises across the board. Instead, the state worked with consultants to figure out private-sector pay for key roles, adjusted state pay ranges accordingly and then figured out how existing employees fit into those pay bands based on their skills and performance. All told, the state spent $115 million in the first year for the pay increases and less than $2 million for consulting and project management services. 

Although no employee saw a pay decrease as a result of the changes, not everyone has been happy. Some less-experienced employees now earn close to, or more than, those with more years on the job. 

"This can create a sense of unfairness, and [the Tennessee State Employees Association]  has been actively advocating for solutions to address this issue,” said LaTanya McAdoo, the association’s executive director, in a written statement.

The 2022 salary range changes did make it easier for employees at the top of their salary brackets to earn performance-based raises to their base pay. That boosts the future value of their state retirement benefits, McAdoo noted.

“More needs to be done to alleviate salary compression, but it's a positive step that allows long-serving employees to continue growing their compensation over time,” she said.

Still, most employees have embraced the changes, Yap said. Managers reported employees being able to quit second jobs; other employees said they put plans to quit in search of higher pay on hold; and applicants said they wouldn’t have considered a state job before the pay increases. 

Tennessee, like many other states, is expecting flattening revenues in the coming year. The state isn’t planning systemwide pay hikes, Yap said, but will focus on developing employees and planning for the future. 

“We feel that we've really hit the sweet spot for the moment,” he said.