Budget Working Paper

AGENDA #8

TO: W. Calvin Horton, Town Manager

FROM: Pam Eastwood, Human Resources Director

SUBJECT: Pay Plans with Steps 2.5% Apart and 3.0% Apart

DATE: June 13, 2005

PURPOSE

The Council requested information on the costs of possible alternate pay plans containing steps 2.5% apart and 3.0% apart. This report presents information on alternate pay plans, including the process by which these were developed and a brief summary of the outcomes of implementing an alternate pay plan for Town employees.

BACKGROUND

Review of Present Structure of the Town Pay Plan

The current Town pay plan has 31 pay ranges to which various position classes are assigned. Each pay range has a minimum rate, a job rate at approximately the middle of the range, and a maximum rate. (See Attachment 1 for a copy of the current Town pay plan and of the plan as proposed eliminating the probationary increase.)

The portion of the pay range from the minimum to the job rate is organized into six steps. The difference between the minimum and the first step is 6%. The next four steps are 3.78% apart. Employees in the lower half of the pay range have salaries on one of these steps.

The portion of the pay range from the job rate to the maximum is called an open range; it is without steps. Employees in the upper half of the pay range may have salaries at any point between the job rate and the maximum rate.

BRIEF REVIEW OF RECENT RECOMMENDATIONS

Elimination of the Probationary Pay Increase Policy and Practice

We have recommended that the Council approve the elimination of the policy and practice of giving new hires an additional pay increase after six months probation. If the Council approves this recommendation, the pay plan would be changed so that all steps from the minimum rate to the midpoint or Job Rate are the same distance apart. This recommendation was presented to the Council in a meeting on May 9. (see Attachment 2 for copy of materials.)

Special Pay Adjustments

After analysis of the December 2004 Town Pay Survey, three groups of jobs fell significantly below the area labor market with job rates or employee average pay of 15% to 20% below the market average. (See Attachment 2) The annual cost of these adjustments would be $112,300 and the cost for nine months would be $84,200.

DISCUSSION

Creating An Alternate Pay Plan

A decision by the Council to change to an alternate pay plan with steps that are 2.5% apart or 3.0% apart would require adding more steps than are in the current Town pay plan. In any such alternate plan, we recommend that the relationships between the minimum, the midpoint or Job Rate and the maximum of the ranges remain the same as the current pay plan. As mentioned above, the distance between all steps would be set at equal intervals.

In the current plan, the Job Rate is approximately 25% greater than the minimum and the maximum is approximately 50% greater than the minimum of each range. This "range spread" of slightly more than 50% is at the lower end of the standard for range spreads in the local labor market. Others are as broad as 65% from minimum to maximum of the range, and none are narrower than 50%. We believe that pay ranges which are narrower than the current ranges would create an adverse situation in terms of pay compression and market competition for Town jobs.

Actions Required to Create An Alternate Pay Plan With Steps 2.5% Apart or 3% Apart

Creating an alternate pay plan with steps 2.5% apart for the Town would require a total of 10 steps between the minimum and the midpoint of the ranges, 4 steps more than the current pay plan. (Attachment 3 shows a 2.5% steps plan.) A pay plan with 3.0% steps would require 7 steps, one more than the current Town pay plan. (Attachment 4 shows a 3% steps plan.)

If the Council decides to replace the current pay plan with a new plan with different percentages between steps, we would recommend that all current employees be placed on the salary step which represents the amount closest to but not less than their current annual salary.

These adjustments would be necessary to maintain the relative pay relationships between current employees. Employees value these internal relationships as an important indicator of equity in recognition of differences in length of service with the Town.

To illustrate actions needed and additional costs involved, we provide an example of a Construction Worker II employee, whose job is assigned to Pay Grade 27, and whose pay is at Step 1, with an annual salary of $24,327.

Example of Costs To Give Pay Increase to Construction Worker II in Pay Plans with 2.5%, 3% and 3.78% Steps. All costs shown are without benefits.
Pay Plan	Current Salary	Cost to put on New Step	Cost of Step Increase	Total Cost of Increase	Total % Increase	New Salary
2.5% steps	$24,327	$387	$618	$1,005	4.10%	$25,332
3 % steps	24,327	$20	$731	$751	3.08%	$25,078
3.78% steps	24,327	0	$919	$919	3.78%	$25,246

In changing to a new plan with 2.5% steps, the job would remain at Pay Grade 27 and the employee's salary would be assigned to the equivalent Pay Step in the new range (the step closest to but not below the present salary) which would result in a new annual salary of $24,714.

The cost to place this employee on the equivalent new step would be $387 annually ($455 including benefits). This cost to place each employee on the equivalent step in the new pay plan would vary among employees depending on the amount of difference between the pay step in the present plan and the closest step in the new plan.

Once the Construction Worker II employee in our example moves to the equivalent step in the new plan, the cost of awarding a step or merit increase of 2.5% would be $618 ($726 including benefits). Thus the total cost of moving this employee to a new pay plan with 2.5% steps would be $1,005 without benefits. ($1,181 with benefits) This represents a total increase of 4.1 % without benefits.

In this conversion to a new pay plan, we would recommend an average merit adjustment equivalent to the step percentage for those longer-term employees in each pay grade who are at or above the job rate, to prevent further narrowing of the differences between newer and longer-term employees in the same job. This reduction of pay differences between employees with significant differences in service or experience is referred to as pay compression and generally has a negative effect on employee morale and retention.

Employees feel their service and higher level of knowledge and/or expertise is not valued when their pay is close to that of more recently-hired employees in the same job. These longer-term employees bring more depth of experience and understanding about their jobs and also often serve as mentors or lead workers for more junior employees.

If the Council approves conversion to a new pay plan with 2.5% steps, estimated costs would be as shown below:

	Below Job Rate		Above Job Rate
	Cost to place on step	Cost of 2.5% step increase	Cost of 2.5% average increase	12 month cost	9 month cost
General Fund*	89,434	221,435	389,976	700,845	525,634
Transportation	34,738	95,373	76,822	206,933	155,200
Housing	3,762	10,493	10,370	24,625	18,469
Parking	3,996	8,630	3,995	16,621	12,466
Stormwater	-	-	8,322	8,322	6,242
Total	131,930	335,931	467,861	957,346	718,010
*Includes Vehicle Maintenance

In converting to a 3% step plan, the Construction Worker II in our example at Pay Grade 27, Step 1, annual salary of $24,327, would be placed on the equivalent step of $24,347 at a cost of $20 ($23.52 including benefits). The cost of awarding a 3% step increase would be $731 ($860 including benefits). Thus the total cost of converting this employee to a plan with 3% steps and awarding a merit step would total $751 ($883.52 with benefits). This represents a 3.08 % increase without benefits. As in the example for the 2.5% steps plan, these costs would vary by employee, depending on the difference between the current steps and the amount needed to place each employee on an equivalent step. We again would recommend an average merit adjustment equivalent to the step percentage for those employees at or above the job rate for the same reasons as cited above.

If the Council approves converting to a pay plan with 3% steps, estimated costs would be as shown below:

	Below Job Rate		Above Job Rate
	Cost to place on step	Cost of 3.0% step increase	Cost of 3.0% average increase	12 month cost	9 month cost
General Fund*	92,848	363,557	365,008	821,413	616,060
Transportation	37,086	121,784	91,323	250,193	187,645
Housing	4,020	12,589	12,434	29,043	21,782
Parking	1,236	10,193	4,713	16,142	12,107
Stormwater	16	1,401	7,527	8,944	6,708
Total	135,206	509,524	481,005	1,125,735	844,301
*Includes Vehicle Maintenance

Cost of a 3.78% Merit Increase in the Present Pay Plan

The cost to authorize eligible employees below the Job Rate a one step merit increase and employees at or above the Job Rate increases that would average of 3.78% for merit pay is described below.

	Below Job Rate		Above Job Rate
	Cost to place on step	Cost of 3.78% step increase	Cost of 3.78% average increase	12 month cost	9 month cost
General Fund*	-	396,271	504,771	901,042	675,782
Transportation	-	142,891	113,661	256,552	192,414
Housing	-	12,106	19,051	31,157	23,368
Parking	-	12,769	5,910	18,679	14,009
Stormwater	-	-	11,241	11,241	8,431
Total	0	564,037	654,634	1,218,671	914,003
*Includes Vehicle Maintenance

Comparison Costs

The total cost for implementing either of the alternate plans in comparison to the Manager's recommendation is shown below.

	2.50%	3.00%	3.78%
General Fund*	700,845	821,413	901,042
Transportation	206,933	250,193	256,552
Housing	24,625	29,043	31,157
Parking	16,621	16,142	18,679
Stormwater	8,322	8,944	11,241

Annual Cost	957,346	1,125,735	1,218,671
9 month Cost	718,010	844,301	914,003
*Including Vehicle Maintenance Fund

The tax rate equivalent for the costs of pay increases for each plan in the General and Transportation Funds are shown below.

9 Months Cost	2.50% Steps Plan	3.00% Steps Plan	3.78% Steps Plan
General Fund*	525,634	616,060	675,782
Transportation	155,200	187,645	192,414
Special Pay Adjustments	81,780	81,780	81,780
*Including Vehicle Maintenance

Total	762,614	885,485	949,976
Tax Rate Equivalent	1.24 cents	1.43 cents	1.55 cents

CONCLUSION

Adding steps to the current pay plan would significantly slow the movement of employees through the range to the midpoint or job rate. In the 2.5% plan, the length of time required for an employee to reach the job rate or midpoint for the job would increase from 5 years to 9 years.

This would create an uncompetitive position for the Town in the local labor market and would, we believe, cause difficulty in recruitment and retention of good employees, as they would see a considerably slower rate of advancement here than in the same job with other area organizations with whom the Town competes for employees.

In the Town Pay Plan, the midpoint or job rate is presently the goal for Town employees with 5 years of service in their job. As the midpoint represents the average market pay level for the job in the Town's labor market, we believe employees will be more likely to leave for other jobs with greater advancement opportunity, as their pay moves up at a slower rate in the Town and falls behind pay at other organizations for the same job.

This reduction of differences in steps in the range would also result in newer employees being hired at pay rates closer to those of longer-term employees, which would cause the problems of compression to resurface as discussed above.

RECOMMENDATION

When the new Pay Plan was approved in 1999, the intention was that eligible employees would receive a step increase annually and that new employees would reach the job rate within five years. The Council expected to be able to fund both a step increase and a range increase for employees each year. This has not been possible in all recent years. For Fiscal Year 2002-03, the Council approved a 3.78 % merit increase, for 2003-04 a 3% range increase and for 2004-05, a 3.78 % merit increase.

We recognize that the Council is faced with a challenging budget year and therefore we are not recommending any increase to the current pay ranges this year. If the special pay adjustments recommended for some jobs in the Police, Fire and Engineering departments are approved, the number of Town jobs falling more than 5% below the market average will be reduced from 10 to 6. This change will assist in maintaining effective recruitment and retention for these jobs. We are hopeful that economic conditions will allow consideration of range movements in future years, to keep the ranges competitive in the labor market.

We recommend that the Council maintain the pay plan with 3.78% steps, change the 6% difference between step 0 and step 1 to 3.78% (eliminating the new hire and promotion probationary increases), and approve the Manager's recommendation to award merit pay of 3.78% for all eligible employees below the job rate and an average of 3.78% for those employees at or above the job rate.

If these recommendations are approved, we believe the Town's pay ranges and average employee pay will maintain the excellent workforce which delivers the high-quality service levels expected by the citizens of Chapel Hill.

ATTACHMENTS

Present Pay Plan with a 3.78% Steps and Probationary Rate.

1b. Present Pay Plan with No Probationary Step.