COMPENSATION AND BENEFITS

Compensation and benefits were $431 million, or 0.8%, less than 2008, mainly due to an unprecedented reduction of 115 million workhours. This achievement is discussed in further detail in the “Workhours” section of this report.

We have contracts with our four largest labor unions which include COLA-based raises. There were no COLA increases in 2009, but the carryover effect from the record high COLAs in 2008 was significant. The total impact of COLAs was $1.1 billion in 2009 compared to $562 million in 2008.

Non-bargaining employees receive pay increases through a pay-for-performance program that makes meaningful distinctions in performance. These employees do not receive automatic salary increases, nor do they receive COLAs or locality pay.

Compensation costs decreased by $1,425 million, or 3.5%, due to a record decline of 115 million workhours. This was partially offset by a 6.2% increase in the average hourly labor rate, consisting mainly of COLA. Also offsetting a portion of the savings generated by the decrease in workhours was a $197 million accrual for incentive payments for 13,400 APWU and Mail handler employees who elected by September 30, 2009, to retire or resign from the Postal Service. These incentives, included in compensation expense, will be paid in two installments in Quarter I, 2010, and Quarter I, 2011. An additional 6,750 employees elected to retire or resign in October 2009; the expense for their incentives will be expensed in Quarter I, 2010.

Retirement expenses, which consist primarily of employer contributions to the Federal Employees Retirement System (FERS) and Social Security, increased by $18 million, or 0.3%. Other expenses increased by $62 million, or 13.8%, due mainly to rising unemployment expenses driven by extended benefits granted by many states. Additional information on workhours, retirement, health benefits and workers’ compensation expenses are provided on the following pages.

Current employees’ health benefits expense decreased $82 million, or 1.5%, primarily due to the reduction in personnel.

Workers’ compensation expenses increased $996 million, or 81.2%, mainly due to a non-cash charge of $718 million related to a change in estimated discount and inflation rates used to calculate the liability for future payments. This increase in the estimated liability did not affect our cash outlays for 2009. See Note 12, Workers’ Compensation, in the Notes to the Financial Statements for more information.

In 2008, total personnel compensation and benefits costs of $53,585 million were $601 million, or 1.1%, less than 2007. The decrease was mainly due to reductions in workhours.

Compensation expenses were $1,062 million, or 2.5%, lower in 2008 compared to 2007, in spite of COLA increases that added $562 million to compensation expenses. These increases were offset somewhat by a decrease of 50 million workhours. In 2008, workers’ compensation increased by $347 million.