AGENDA #2a

BUDGET WORKING PAPER

TO:                  W. Calvin Horton, Town Manager

FROM:            Pam Eastwood, Human Resources Director

SUBJECT:       Report on Labor Market Surveys of Public and Private Sector, Analysis of Data and Recommendations for Pay Adjustments for Town Employees

DATE:             April 24, 2002

• The Human Resources staff recognize that the unforeseen and severe fiscal constraints facing the Town in the next fiscal year will require difficult decisions about funding and pay adjustments. The information and recommendations which follow are presented with full understanding of this situation, and are respectfully offered as material for consideration at a time when the situation has improved.

• The Town’s Human Resources staff conducted a survey of selected benchmark Town positions in comparison with public sector employers and compiled data in March 2002. Participants included Town of Carrboro, Town of Cary, City of Durham, Durham County, Orange County, City of Raleigh, UNC Health Care System, Wake County, OWASA and UNC-Chapel Hill.

• For evaluation of the local private sector, the primary data source was the annual survey conducted by Capitol Associated Industries, a Raleigh company recognized for conducting a broad-based and well-organized survey of 418 companies and North Carolina State Government. Information on base salary comparisons was used, no comparisons or analysis was done on employee benefits, bonus or incentive pay, nor was any adjustment made for the factor of differing work weeks.

• Based on the data, it appears that the local labor market in the private sector is moving at an average of 4% per year at the 50^th percentile or market average, with some variation of pay movement between lower, middle and upper segments or job categories, and variation among job titles. It appears that market movement at the 75^th percentile is more significant, with an average change over one year for the benchmark jobs of 6.3%.

• We believe that it is not practical for the Town to compete with the private sector market at the 75^th percentile of pay. It would be sufficient to make comparisons at the market average or 50^th percentile of this market sector and to focus more directly on the local government/educational Triangle labor market and on those larger local employers who are most directly competing with the Town for qualified employees.

• It appears that for the public sector as well as the private sector, pay for work at the lower end of the labor market is increasing at a lesser rate than pay at the middle and upper levels of work. The result for the Town is that some jobs surveyed are substantially above the labor market for the 75^th percentile of pay in the public sector, while other Town jobs fall significantly below the labor market at this time.

• Accepting this variation in pay increase rates as valid would mean that the Town practice of adjusting all pay ranges annually by a uniform factor may not be the most valid or effective means of maintaining pay equity with the labor market. It is more likely that Town jobs will need to be evaluated in detail on an annual basis and that a more segmented approach to range adjustments may be required. This information strongly suggests that a review be conducted in the next six months to align each job title appropriately with the labor market before any action on system-wide pay changes is considered.

• Recognizing the constraints facing the Town during the coming budget year, the Human Resources staff has developed some cost estimates for pay adjustments. These estimates are based on past patterns of practice and are provided for discussion and in the hope that in time the situation will improve. Competitive pay is a key element in the Town’s continued success in meeting the needs of the citizens, and as such, is an issue of great concern to all.

• Our proposed plan of action is: if any pay adjustments can be provided on the regular schedule of October 1 of the budget year, that these be implemented as step adjustments of 3.78% for those employees below the Job Rate of their pay range and  performance increases averaging 4.5% for those employees who are at or above the Job Rate of their pay range. We propose that funding be set aside to provide a 2.5% pay range adjustment to be effective as of January 1, 2003, for those employees below the Job Rate of their pay range. This would allow the Human Resources staff time to review each job title in detail and recommend any range changes required to maintain parity with the public sector market at the 75^th percentile. No employee would receive a decrease in pay as a result of this review. This proposal would cost $792,201 for the 2002-2003 Budget Year.

• If funds do not allow for a mid-year range adjustment, the second option is to implement the step increases and performance increases as described above, complete the in-depth job review and identify recommended changes to be effective in the 2003-2004 budget year. This proposal would cost $453,644 for the 2002-2003 Budget Year.

SUMMARY REPORT ON PUBLIC SECTOR PAY SURVEY

Spring 2002

The Human Resources staff recognize that the unforeseen and severe fiscal constraints facing the Town in the next fiscal year will require difficult decisions about funding and pay adjustments. The information and recommendations which follow are presented with full understanding of this situation, and are respectfully offered as material for consideration at a  time when the situation has improved.

Introduction

The Town’s Human Resources staff conducted a survey of selected benchmark Town positions and compiled data in March 2002. Participants included Town of Carrboro, Town of Cary, City of Durham, Durham County, Orange County, City of Raleigh, UNC Health Care System, Wake County, OWASA and UNC-Chapel Hill. (see Appendix- Attachment 1 for benchmark title list and survey detail)

Results are mixed, and indicate that some job titles compared fall above the average pay for the organizations surveyed while others fall below the average pay as compared to those surveyed. When Town hiring rates and average pay are evaluated against the 75^th percentile of those surveyed, the disparities become even more mixed and significant.

Data Analysis

The information was sorted into two categories, those Town jobs which are below market average and those which are above. (see Appendix-Attachment 2) When this information is further grouped as shown below, it paints a picture which is consistent with the findings from the Capitol Associated Industries survey of the private market sector. (see Appendix-Attachment 3) That report outlined the labor market movement as occurring at differing rates for different groups of jobs, which CAI refers to as “hourly, salaried and executive”. (see Appendix-Attachment 3 for definitions)

Those groups, when considered in terms of Town jobs, would fall into these approximate categories :

Group 1. Hourly (non-exempt):             equates to Town jobs in grades 25 to 34

Group 2. Salaried (exempt):                              equates to Town jobs in grades 35 to 44

Group 3. Executive (managerial):                      equates to Town jobs in grades 45 and above

(see Appendix-Attachment 4 for complete Town Pay Plan)

The Capitol Associated Industries analysis found that during the period 1997-2000 the labor market was moving at an annual rate of 3.9% for group 1, at an annual rate of 4.2%

for group 2 and at the annual rate of 4.8% for group 3. When projected increases were adjusted for the actual increase trend shown over the past three years, (see Appendix-Attachment 3) this would have resulted in an estimated market movement over the past year (FY 2001) of:

Group 1:           4.2 %

Group 2:           4.6 %

Group 3:           5.3 %

Analysis of Data on Hiring Rates at the 50^th Percentile of the Public Sector Survey

( see Appendix-Attachment 2 for detail)

The theory that average pay for jobs surveyed has shifted in the labor market at different rates is borne out in the public sector survey. The benchmark titles for Town jobs which fall in group 1 ( grades 25 to 34) were predominately above the market (greater than 75% of the group) in terms of hiring rates at the 50^th percentile of the market or market average.

The jobs in group 2 ( grades 35 to 44) were almost equally divided in terms of the hiring rates of the market information at the 50^th percentile, with about 60% falling below and about 40% falling above the average hiring rate of the surveyed organizations.

The jobs in group 3 (grades 45 and above) had hiring rates which fall above the average hiring rates or 50^th percentile for the survey comparisons. This group, which is comprised of management officials and senior staff, contains jobs which are less likely to be filled at the hiring rate, as substantial experience and qualifications are required. Therefore, this hiring rate data is less compelling than for the other groups.

Analysis of Town Hiring Rates Versus Survey Hiring Rates at the 75^th Percentile of the Survey (See Appendix-Attachment 2 for detail)                                                      

When the Town benchmark titles are evaluated in terms of the hiring rate for the 75^th percentile of the labor market surveyed, the findings are:

For jobs in group 1 ( grades 25 to 34), only about 60% fall above the survey hiring rate, as opposed to the  substantial advantage found at the 50^th percentile for this group.

For jobs in group 2 (grades 35 to 44) less than 20% of the Town jobs fall above the average hiring rate of the survey.

In group 3 ( grades 45 and above) Four out of five of the titles fall above the average hiring rate.

Analysis of Data on Average Pay Versus Town Job Rates at the 75^th Percentile of the Survey  (see Appendix-Attachment 2 for detail)

Group 1 (grades 25 -34) indicates that more than half of Town benchmark jobs have a Job Rate which falls above the average pay of the survey organizations.

Group 2  (grades 35-44) indicates a very different picture with only one of the seven   benchmark titles falling above the market average pay of the surveyed organizations, and that one only by 1%.

Group 3 (grades 44 and above) Only one of the five benchmark Job Rates falls above the average pay of the survey data at the 75^th percentile.

Interpretation of  Data Analysis

It appears that for the public sector as well as the private sector, the trend shown in the Capitol Associated Industries survey holds true, that is, that pay for work at the lower end of the labor market is increasing at a lesser rate than the pay at the middle and upper levels of work. The result for the Town is that the jobs in Group 1 of the analysis are in the majority of cases substantially above the labor market for the 75^th percentile of pay, while jobs in Group 2 and Group 3 are in the majority below the labor market in this comparison.

These differing rates of movement are to be expected, as the supply factor is likely to be more steady for jobs with lower educational and experience requirements, whereas jobs in fields requiring more formal education, training and/or experience are likely to be more difficult to fill, resulting in more pay pressure as employers compete for fewer qualified candidates.                                                                                    

Turnover is also likely to be more regular in jobs at the lower stratum of the market, as employees gain experience, training or education and advance to jobs in the higher levels of their field. Turnover also results in new employees often beginning work at lower salaries than those of the individual replaced, again maintaining a lower average pay for the group.

Conclusions / Recommendations

Accepting this hypothesis as valid would mean that the Town practice of adjusting all pay ranges annually by a uniform factor may not be the most valid or effective means of maintaining pay equity with the labor market. It is more likely that Town jobs will need to be evaluated in detail and that a more segmented approach to range adjustments may be required.

This information strongly suggests that a review be conducted in the next three to six months to align each job title appropriately with the labor market before any action on system-wide pay changes is considered. The Town Human Resources staff would review each job title in detail and identify those jobs which would need a change of pay range to achieve parity with the local public sector market at the 75^th percentile. These recommendations if approved by the Council would form the basis for a new Pay Plan.

It would make sense to implement step adjustments and performance adjustments for employees at the usual time in the budget year if possible ( October 1) and to implement any range changes which could be funded after this review was complete, possibly for the second half of the budget year ( January 1). These approaches are contained in the summary of recommendations to the Council which prefaces this document.

ISSUES AFFECTING INTERPRETATION OF RESULTS FROM PUBLIC SECTOR SURVEY

Maintenance and Updating of the Town Pay Plan

A. Movement of Average Pay and Hiring Rates

Average pay and the hiring rate of specific jobs in different areas of the labor market are changing at differing rates. This is to be expected, as pay depends on a variety of factors, including supply and demand, the overall economy and what other options are available at any point in time, the number of new entrants into the pipeline from high schools and colleges, organizational initiatives (opening a new program or facility requiring intensive hiring) and the like.

B. Status of Town Pay Plan

Because the current Town Pay Plan which assigns each job to a specific grade has not been altered since October 2000 (except to increase all pay grades by a uniform factor), the specific pay relationships among the various jobs within the Pay Plan and the labor market have shifted to varying degrees over this two year period.

C. Evaluation of Average Pay Surveyed To Town Job Rates for Benchmark Jobs

The average pay of some of the benchmark jobs surveyed is primarily dependent on the relative tenure or time in job of the group of current employees occupying the positions. The Town Pay Plan provides for a specific Hiring Rate followed by defined step increases until the Job Rate is reached. This normally takes several years following employment. Therefore a job title containing many new hires will normally result in a lower average pay figure than a job title which has experienced little recent turnover or growth and therefore contains many long term employees. Therefore it is difficult to determine without further analysis whether the Town’s Job Rate requires adjustment.

D. Evaluation of Single Incumbent Positions

For positions where there is a single incumbent, the average pay is a specific factor of the time in job of the current incumbent. In these cases, it is a simple matter to evaluate the market comparison by considering the qualifications/tenure of the Town’s single incumbent in comparison to the Hiring Rate and Maximum of the pay range.

E. Potential Impact of Hiring Practices of Surveyed Employers

In situations where the job title holds a group of employees, the average pay may be difficult to evaluate accurately and there is added value to considering the comparison of Town hiring rates with those surveyed. One difficulty of treating this information properly is the lack of available knowledge of specific hiring practices in each organization (e.g., how faithfully are hiring rates used versus how often new employees are brought in above the hiring rate?)

ISSUES FOR THE COUNCIL’S CONSIDERATION

Continuation of the Town Pay Philosophy

F. The Town Council has resolved that employee salaries for the Town shall be competitive with the labor market at the 75^th percentile of pay for the local area. This decision has achieved several important goals, including reduced turnover and enhanced recruitment success.

G.  As a part of continuing this pay philosophy, it is important that accurate market alignment for all job titles be maintained on at least an annual basis. We believe that the prior practice of reviewing job grade assignments only once every four years will not accomplish this goal, particularly in the rapidly-changing labor market in the Triangle area.

H. As indicated in the section of this report addressing pay in the private sector, we believe it is not practical for the Town to compete with this private sector market at the 75^th percentile of pay. It would be reasonable to maintain parity with the 50^th percentile of the private sector for comparable jobs, and to focus on comparisons at the 75^th percentile of pay for the public sector as defined by municipal and educational/non-profit large employers in the Triangle area. These are the major competitors with the Town for the majority of its jobs.

Plan and Practice for Monitoring The Labor Market

I. The current practice in most area organizations ( public and private) is to monitor the labor market through several means, including regular surveys of competitor organizations, use of purchased regional and national surveys, ongoing assessment of employee turnover, time required for recruitment, quality of applicant pools developed, number of offers declined and analysis

of exit interview materials.  The minimal monitoring period is typically no less than every twelve months and optimally more often.

Potential for Pay Adjustment Activity Among Public Sector Area Competitors

J. It is important to note that the several large area employers, Duke University and Medical Center (which includes Durham Regional and Raleigh Community Hospitals), UNC Health Care System, and UNC-Chapel Hill will all be making pay adjustments in the next few months. Although no

Board decisions have been made at this time, the Duke system has proposed a 2.5% to 3.5% pool for raises in the University side, and the proposed amount at UNC Health Care is 4.5%, with some unusual adjustments as they implement a new pay system

K. Even though the State likely will not allow the University to give across-the-board increases, they will continue to use the many current methods of altering pay for one or more groups of jobs. Examples of these options are: in-range pay adjustments, reclassifications of single jobs or groups of jobs, retention offers and equity adjustments for single jobs or groups of jobs. These approaches will result in pay changes which will affect hiring rates as well as average pay of current employees. Further, all the above-named employers have policy provisions which allow new hires or promoted employees to be placed above the hiring rates for the jobs they occupy. This will create continuing market pressure on the Town to compete.

Consequences of Falling Behind The Market on Pay

L. The use of a market-based pay system is a means of supporting the organization in recruiting and retaining qualified and able employees for all its jobs. Failure to establish an adequate level for each job will result over time in longer vacancy periods, generally lesser qualified and lesser experienced applicants which, if hired in significant numbers causes a lowering over time of the quality of work performed and in lower productivity per job.

Once minimally-qualified applicants who are hired have worked in the job for a sufficient period to qualify for similar work at higher pay with other organizations, they will generally become aware of the pay difference, will seek employment elsewhere and be hired with a pay increase by other employers.

This results in a work group without seniority, a lack of organizational history, a lesser capacity to train and mentor and further deterioration of work and productivity. This scenario repeated over time becomes very difficult for an organization to recover from, as a negative reputation develops in the area.

The Town of Chapel Hill currently enjoys a positive reputation as a fair and family-friendly employer with progressive and competitive pay practices. This reputation provides the opportunity to select from a well-qualified group of applicants, to minimize turnover, and to achieve the effective public service which the Town employees provide to citizens. These accomplishments have been built carefully over a long period of time and would not be easily or quickly recovered if lost. Competitive pay is a major factor for continued success.