BUDGET WORKING PAPER
TO: W. Calvin Horton, Town Manager
FROM: Pam Eastwood, Director of Human Resources
SUBJECT: Discussion of the Pay Plan Review Committee Report
DATE: April 24, 2006
PURPOSE
This report provides discussion and comments on the report of the Town Pay Plan Review Committee from the Human Resources staff.
BACKGROUND
The Human Resources Director and the Assistant Director attended all meetings of the Pay Plan Review Committee, provided written and oral information to the members about the history, structure and function of the current Town Pay Plan and participated in the discussions.
DISCUSSION
In the Pay Plan Review Committee’s report, members responded and commented on each item in the Charge to the Committee from the Mayor and Council. On a number of these issues, Committee members did not reach consensus, and thus differing views and perspectives are presented. Some of these opinions were put forward by a single member, others represent the views of several persons in the group.
In this working paper we have listed each item in the charge to the Committee, then the committee’s response to the Council, then additional information or comments which we believe might be helpful to the Council in their considerations. The comments from Human Resources are in italics for clarity.
ITEMS FROM THE COUNCIL CHARGE TO THE COMMITTEE
1. “Evaluate the total compensation plan.”
Excerpt from Pay Plan Review Committee Report: “The committee believes it has completed this assignment.”
Comments from Human Resources: We agree that the committee’s discussions were thorough and comprehensive.
2. “Conduct a thorough review of how the current pay plan was developed.”
Excerpt from Pay Plan Review Committee Report: “Members reviewed and discussed materials provided by the Human Resources Department which covered the time period from the Council’s decision to revise the Town’s pay plan and which detailed the events and processes involved in this activity. The Committee members felt that the process which led to the creation of the Town Pay Plan was thorough, inclusive and comprehensive. Members felt that the Town’s Pay Plan is effective in achieving the goals of recruiting and retaining well-qualified employees.”
Some employee members of the Committee explained employees’ concerns about the way the Pay Plan is applied in Council decisions, including the fear that employees in the upper half of the pay ranges might receive smaller increases than those in the lower half of the range for the same job. Other concerns included anxiety that pay ranges will not be kept competitive with the labor market, and that pay compression would creep back over time.
Some Committee members felt that employee perceptions and misunderstandings about the Pay Plan may lead to frustration and dissatisfaction with the Pay Plan, and that the department heads and the Human Resources staff need to continue and expand efforts to help employees understand how the Pay Plan works and how well it compares to the pay and benefits programs of other area employers.”
Comments from Human Resources: The Human Resources staff actively seeks and utilizes regular opportunities to communicate with Town employees to help increase their understanding of their pay and benefits programs. This begins in New Employee Orientation and continues throughout the year in individual meetings, group meetings, and through written communications to all Town employees. We also ask for the support and assistance of Town department heads, managers and supervisors in these activities. These efforts notwithstanding, some Town employees do not have a clear understanding of the Town’s Pay Plan and their pay and benefits programs. We understand the Committee members’ belief that more education is needed and we will seek to develop additional ways to get the message to employees.
3. “The committee next discussed the item in the charge which asked that the Pay Plan be evaluated for an orderly job progression ladder.”
Excerpt from the Pay Plan Review Committee Report: “This topic was discussed during several meetings and members expressed their judgment that for those jobs for which a progression ladder can be established or makes sense, these appear to be reasonable and effective in their function. The group recognized that not all types of work lend themselves to this structure. The group concurred that job progression series should be used whenever practical.”
In discussing merit pay, the group considered several points: that if a merit plan exists, it must contain criteria which are specific and measurable, that subjectivity is not effective. The fact that employee performance ratings obtained without a forced ranking or allocation limits have tended to be very flat and therefore did not lead to an effective differential in pay was also recognized.
Comments from Human Resources: We agree that career progression ladders are an effective method of recognizing changes in job duties and responsibility levels over time; we will continue to identify opportunities to develop these and will submit them for Council review.
The issue of an effective and fair merit pay system is complex, particularly considering the broad spectrum of types of work represented in the Town’s jobs. Identifying criteria for use in performance evaluation which are specific and measurable to each job is a continuing challenge for Town departments. When the current pay plan was developed, one of the messages from the employee group interviewed was that they disliked the forced ranking process then in practice and requested that it be abolished, which was done.
In the current pay plan, the compiled performance ratings for the longer-term group of employees in the upper part of the pay ranges (referred to as the open range) are used to determine the monetary amount which will be awarded to each rating level, after the Council has approved the total funding amount. This has not been entirely satisfactory as a means of differentiating between levels of employee performance. We agree that further effort is needed to improve this system of recognizing performance, and will continue working to accomplish this goal.
Excerpt from the Pay Plan Committee Report:“ 4. The next item the group discussed was “evaluate the plan for sufficient salary for the lowest paid employees.”
The group reviewed information provided by the Human Resources Department on how salaries of Town employees compare to cost of living levels in the local area. The members discussed the meaning of the term “sufficient salary” and concluded that this was a subjective term, which made it difficult to respond to the Council on this issue.
Committee members gave their views on what salary levels for Town employees should achieve; one was that the Town has no obligation to set pay above the median for the local market for comparable jobs, but that it is important to maintain reasonably competitive salaries to assure that competent employees are recruited and retained to carry out the Town’s service needs.
The members concluded that, in their judgment, the Town’s Pay Plan and the annual reviews and adjustments which are made to pay levels maintains reasonably competitive salaries for all Town jobs, including those at the lowest levels.
The group also discussed and determined that the Town’s Pay Plan provides for regular adjustments to the pay of employees at all levels (in the lower and upper parts of the pay ranges) in a fashion which should prevent salary compression.
After considering and discussing information about the Town’s Pay Plan in comparison to those of other municipalities and major employers, the Committee members agreed that the Town’s pay plan provides means and methods for maintaining comparability and competitiveness with area employers in both the public and private sectors.”
Comments from Human Resources: Based on analysis of survey data, we believe that the Pay Plan is effective in achieving its goal, which is to recruit and retain employees who are able to deliver Town services to citizens in an effective manner. We agree that the Council actions on pay each year have maintained competitive pay levels for jobs, including those at the lowest levels. We believe it is important for the Town to continue these efforts by annual review and adjustment to pay ranges and employee pay as justified by market data.
Excerpt from the Pay Plan Committee Report: “5. “The next item in the committee’s charge was recommendations on possible changes to the Town’s pay plan and that these be simple and easy to understand,” the committee provided the following suggestions:
A. That the Council consider dropping the practice of merit pay (based on job ratings) for those jobs in which objective or measurable levels of achievement are not possible.”
Comments from Human Resources: We believe that it is possible and practical to develop and use objective measurable criteria for evaluation of each Town job. We do not recommend dropping merit pay for any Town jobs. We recommend that Human Resources staff offer continuing support and assistance to the department heads as they develop and implement these criteria.
B. “That the Council consider replacing merit pay with other forms of recognition for exceptional performance, such as one-time bonus payments, spot bonus payments, or non-monetary rewards for individuals or teams.”
Comments from Human Resources: We believe it is essential for the Council to consider increases in employees’ base pay on a regular basis. Spot awards or other one-time payments fail to provide employees a basis for long-term planning for their families’ financial needs, and we do not recommend this as a substitute for merit pay.
C. “Some members recommended that the current value between the steps in each pay range (currently 3.78 percent) be changed to a smaller amount to make it easier for the Council to fund a regular step movement for employees each year and to also ensure the ability to provide funding to make needed changes to the pay ranges each year as needed to reflect changes in the labor market. The suggested changes discussed for step values were 3 percent and 2.5 percent. The Committee did not reach consensus on this recommendation, with the majority of members stating that the Pay Plan should continue without change.”
Comments from Human Resources: We believe that it is possible and practical for the Council to consider other options available to accomplish their goal of ensuring flexibility in funding employee pay increases each year as needed in response to changing economic conditions. We do not recommend altering the Pay Plan toward this goal, and believe that it can be accomplished through other means. We have provided recommendations on how this could be accomplished in our Budget Working Paper on Pay Recommendations, which is contained in the Manager’s Recommended Budget.
Excerpt from the Pay Plan Review Committee Report:
“GENERAL OBSERVATIONS:
1. “Town employee salaries are competitive in comparison to the 13 organizations in the 2004 survey group. The data from the 2005 survey was not available at the time the committee was meeting.”
Comments from Human Resources: We generally agree with the Committee’s observation on this topic for last year; data from the 2005 Pay and Benefits Survey, which is included in the Manager’s Recommended Budget information, indicates that pay ranges for Town jobs have fallen behind the labor market following pay changes by surveyed organizations during the past year. We have recommended to the Council in that document that we believe a market range adjustment is needed.
2. “Over the past 17 years, the pay increase for town employees exceeded the cost of living as measured by the Consumer Price Index in all but one year (1992). Over this period of time pay increased by 95.7 percent while the CPI increased by 63.5 percent. Therefore the pay for long-term Town employees has been advanced beyond the cost of living over this period of time.”
Comments from Human Resources: The recommendations to Council for pay adjustments each year are not based on the changes in the Consumer Price Index, although that information is provided. Recommendations are based on analysis of the local labor market and the goal of maintaining pay for Town jobs at a level which allows the Town to recruit and retain qualified employees to carry out the work of delivering services to citizens at a high level of quality and timeliness. It is not unusual for pay rates in the Triangle labor market to move at a rate that exceeds the change in the general cost of living.
3. “The value of employee benefits for Town employees expressed as a percentage of pay is slightly greater for the Town of Chapel Hill (46.35 percent) than in State Government (41.66 percent) and in local private industry (40 percent).”
Comments from Human Resources: The comparison of employee benefits between the Town and the State Government as a percentage of base pay is a summary which is less comprehensive than the data compared in the Town’s annual benefits survey. We believe the information provided in the Town benefits survey is a better method of understanding these issues.
The benefits level in local private industry varies considerably, based on the type and size of organizations surveyed. Small employers in this area (less than 50 employees) would fall below the 40% level cited by a committee member, while large national and international organizations in this region would exceed this level to a considerable degree. We do not believe this figure is an accurate representation of the benefits levels of those private employers in this labor market area with whom the Town competes for employees. Significant differentials in program areas such as tuition and scholarship stipends, incentives and bonus programs were not addressed in the above comparison statements.
4. “Medical insurance for Town retirees who have 20 years of service is provided by the Town up to age 65. For retirees with five or more years of service, the Town pays a proportion of the cost of medical insurance if the retiree continues in the Town plan.”
Comments from Human Resources: At age 65, the Town requires the retiree to sign up for coverage under Medicare, which becomes primary, with the Town as secondary insurer. After that point in time, claims costs for these individuals are generally lower than for active employees; thus the overall group utilization has not been adversely affected by their inclusion. We believe this insurance program has been effective in retaining the services of long-term employees to the benefit of the Town.
5. “Retirement contribution by the town is 9.9 percent (local government system and 401K contribution combined) with a mandatory six percent contributed by the employee. This seems adequate and more generous than some other plans, notably the State’s.”
Comments from Human Resources: The Town of Chapel Hill makes the standard contribution (4.9 percent required) by the Local Government Retirement System, in which municipalities in North Carolina participate. Each eligible employee is required to make a 6 percent contribution from their pay.
The Town of Chapel Hill makes a 5% contribution for each employee to the State 401K Plan, which is also a common practice for municipalities and counties. Some contribute more than 5% and some contribute less, but the norm is 5%. Thus the Town’s retirement contributions for employees are typical when compared to other cities and counties in North Carolina.
6. “The Human Resources department staff currently provides informational material and training sessions to Town employees about the Pay Plan. Despite this, some employees do not appear to grasp the concepts and application of the Pay Plan accurately.”
Comment from Human Resources: We have addressed this issue in item 2 above.
7. “Some members of the committee believe that the current step intervals of 3.78% may be too high given the current labor market. Others feel that the steps should remain as they are and that other actions should be used as needed to maintain affordability of pay changes each year.”
Comment from Human Resources: We have addressed this issue in Item 5C in the first section of this report.
Excerpt from the Pay Plan Committee Report:
“SUGGESTIONS TO THE COUNCIL:
As noted, the Committee did not reach consensus on a set of recommendations to the Council. Some of the ideas presented by one or more members are listed below, for the Council’s consideration. These are not listed in priority order.
1. Give first funding priority each year to any range increases needed for specific job classes or groups to maintain the market position and equity of the Town’s Pay Plan.”
Comments from Human Resources: We agree that range or pay grade changes for specific job classes based on market comparisons need attention each year; a proposal on this has been the standard practice in the Human Resources recommendations on employee pay each year. These are referred to as Special Pay adjustments and usually involve no more than 3 or 4 job titles. Making these special adjustments annually has avoided the need for large and expensive increases to job groups which had not been adjusted as the market change over a multi- year period.
2. “Appropriate three ‘pots’ of money as possible each year for the pay plan: a. range increases, b. step increases, and c. merit increases.”
Comments from Human Resources: Each year, we have first identified and recommended those few areas justifying Special Pay adjustments, then have recommended either a step increase or a range increase, based on the survey findings. The Council’s actions to approve step or range increases annually in the past several years have accomplished the goal of maintaining competitive ranges and employee pay levels in the labor market.
3. “Allow supervisors to award merit pay using input from merit rankings and their own experience with their employees.”
Comments from Human Resources: Under current policies, supervisors complete evaluations for each employee they supervise, based on their observation of that employee’s performance over the prior year. Based on these rankings, merit pay is awarded to eligible employees in the amount approved by the Council. These rankings are not altered by levels of management above the supervisors.
4. “Ask the Human Resources staff to continue and expand the education and materials used for informing all employees about the way in which the Pay Plan works and their choices of benefit programs, the types of benefit programs available and their dollar value to the employee, and how to evaluate what benefit program(s) will best meet an employee’s need (for example, how using the Section 125 flex plan to pay for child care and unreimbursed medical expenses can save the employee money.)”
Comments from Human Resources: As discussed in the first part of this report, we agree that further efforts and programs to help employees understand the value and best use of their benefits programs would be useful, and will continue to work steadily on this goal.
5. “Give employees some choice in choosing health coverage, including extra pay if coverage is declined because it is provided by a spouse or other. The current full coverage seems to be the best possible one. If the Town starts to divide into different plans, this action might drastically reduce its group bargaining power for negotiation of rates.”
Comments from Human Resources: The Human Resources staff provided information to the Committee on the issues and ramifications of altering the medical insurance plan. Potential adverse selection could make the group a less desirable one for potential insurers, the probability of premium rate increases and the risk for the organization and the community of allowing uninsured employees to choose cash over coverage were considered in the committee’s discussions. Following these, the Committee did not recommend that the current plan be altered.
6. “Alter the step intervals to a lesser amount to add steps to the Pay Plan and increase the flexibility of budgeting for the plan. Alternately, consider other options such as Cost of Living Increases or market range adjustments for years when a step increase is not necessary or affordable.”
Comments from Human Resources: We believe there is no perfect pay structure which would address this challenge. We believe the Council’s needs for flexibility on funding for employee pay increases can be met within the structure of the present Pay Plan by considering the following options:
In some budget years, depending on survey data and economic conditions, a range increase only might be recommended by Human Resources. (The Council has moved the pay ranges once during the past four years and voted to provide employees a step increase in three of the past four years.)
Survey data for this year indicates that the pay ranges now need adjustment to keep the Town’s ranges competitive with the area labor market. (Detail on this is provided in the Manager’s recommended budget.)
By choosing to approve a step increase in some budget years and solely a range increase in other budget years, the Council would have the flexibility desired to respond to variations in economic conditions from year to year. This approach would also be consistent with the recommendations of the Pay Plan Review Committee. Should circumstances occur in a future year which might justify consideration of both types of increase in combination, the Council would have this option also.
If the Council accepts this philosophy of varying employee pay actions each year based on available funds and economic conditions, it would not be necessary to alter the Pay Plan. We are not in favor of altering the Pay Plan, for reasons of additional expense required (see Budget Working Paper on 2.5% Steps) and negative employee perceptions of unfairness, and we believe it would render the Pay Plan less effective overall.
7. “Begin to research the costs of retiree medical insurance coverage and participate in group consortiums addressing this issue and seeking viable options to maintain affordability of this benefit.”
Comments from Human Resources: The Finance Director has agreed that this research will be conducted, based on recent changes in governmental accounting rules, and has developed a plan to carry out this work in collaboration through municipal and county consortiums. This should achieve significant savings in actuarial and other studies needed to define and address this issue for future budget planning.