AGENDA #11

MEMORANDUM

To:                   Mayor and Town Council

From:               Pay Plan Review Committee Members

                        Council Member Cam Hill      Alvin Ward

                        Anita Badrock                        Gary Barnes

                        Neal Bench                             Donald Tiedeman

                        Pikuei Tu                                 Robert Joyce

                        Tracy Dudley                          James Huegerich

                        Iris Schwintzer

Date:               April 24, 2006

Subject:           Report from the Council Committee on Pay Plan Review

In the course of regular meetings during January and February, the Pay Plan Review Committee conducted in depth discussions of the Council’s charge to the Committee, with Committee members expressing their views and comments on each item. The first item discussed was

• “Evaluate the total compensation plan.”  The Committee believes it has completed this assignment, as noted below.

• The next item requested that the Committee “conduct a thorough review of how the current pay plan was developed.”

Members reviewed and discussed materials provided by the Human Resources Department, which cover the time period of 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, such as the fear that employees in the upper half of the pay ranges would 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 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.

• The Committee next discussed the item in the charge which asked that the Pay Plan be “evaluated for an orderly job progression ladder.”

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 progressions 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.

• 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.

• 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:

• 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.

• 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.

• 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.

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.

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.

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).

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 enrolls in the Town plan.

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.

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.

7. Some members of the Committee believe that the current step intervals of 3.78 percent 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.

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.

2. Appropriate three “pots” of money as possible each year for the Pay Plan: a. range increases, b. step increases, and c. merit increases.

3. Allow supervisors to award merit pay using input from merit rankings and their own experience with their employees.

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 childcare and unreimbursed medical expenses can save the employee money).

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.

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.

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.