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4.i) Staff Report-Compensation Plans � j , � t ,)r � � .� l���� SCANDIA StaffReaort Date of Meeting: March 12, 2013 To: City Council From: Kristina Handt, City Administrator Re: Compensation Plans Agenda Item#: 4.i.) Background: The Council has struggled recently with how/if to compensate employees after they are hired. This has been difficult because the City lacks a clear, consistent compensation policy. The Personnel Policy only provides the following in regards to a pay plan: 6. a)Pay Plan. Employees of the City will be compensated according to schedules adopted from time to time by the City Council or at a pay rate set at the time of hire.Unless approved by the Council, employees will not receive any amount from the City in addirion to the pay authorized for the positions to which they have been appointed. Expense reimbursement or travel expenses may be authorized in addition to regular pay, in accordance with the city's Expense Reimbursement Policy. While the policy references pay schedules adopted from time to time by the Council there is no guidance in how those pay schedules are developed. Furthermore,there have been inconsistent practices applied among and within the different city departments. For example, in June 2010 the City Council approved a step pay plan for the full-time maintenance worker position but no other position in the City is under a step pay plan. The pay increases by 5-6% for each step. Included in your packet is information from the League of MN Cities HR Reference Manual that offers a number of examples of pay systems the City could choose to implement. Possible systems include the step plan,merit pay,broad banding,performance incentives, skill or competency-based pay, or a combination plan. Issue: Should the city apply a consistent pay system to all departments? If so,what should that system be? Proposal Details/Discussion of Options: 1) Traditional Step Plan. Since the City has already approved a step plan for the full time maintenance worker position that is based on longevity and performance, they could t � decide to continue with that plan but apply it to all positions. Furthermore, the City Council should discuss whether or not the steps should be changed to allow for the first step to occur at the end of the six month probationary period. If the City intends to tell new hires, as it did last year,that it will consider an increase after the six month probationary period then the plan should provide for that option. Alternatively,the steps could start at the one year mark but then the Council should not make any statements to new hires about a possible increase after their six month probationary period is complete. T'here are advantages and disadvantages to this type of plan which are further explained in the materials from the League. Does the City wish to compensate employees solely on the amount of time they've spent in a position? 2) Merit Pay.As mentioned above,the current step plan for the full time maintenance worker is a combination of years of service and performance. The current schedule of steps would be changed under this plan to allow for one increase each year. The current plan allows for those increases in years one,three, five and eight. Rather than just a pass/fail approach another option would be to update the current evaluation forms to make use of a quantitative rating system,rather than the current subjective form. For example,the same 1-5 rating scale that is in the administrator's evaluation could be adopted for all employees. The overall rating then could correspond to a percentage increase i.e. a rating of 3 equals a 2%increase, a 4 would be a 3% increase, and a 5 would be a 4%. The Council could adjust those percentages each year during the budgeting process. 3) Broadbanding. Given the small staff and few job classifications,this plan would not make much sense for the City of Scandia. 4) Performance Incentives. This would require the City to establish goals for employees. It is my intention that during the annual evaluation three specific,measurable goals are established each year for each employee. These goals are currently not tied to an incentive. If the Council would like to reward employees for attaining those goals we would need to have further discussion about how many goals to set and what those goals should be. Also, the Council should be careful in establishing the incentive so that it complies with MN State law as described in the LMC HR Reference Manual. 5) Skill or Competency-Based Pay. This type of pay system is in place for the Fire Department. If the Council wanted to adopt this type of pay plan for other positions,they would need to identify the skills or competencies they wish to reward. The LMN Manual discusses the advantages and disadvantages of this type of system. Cost of Living Increases The LMC Manual also discusses cost of living increases separately from pay plans. If the Council decides to issue cost of living increases they should consider linking it to the Consumer Price Index-Urban Consumers (CPI-U) as suggested. . � . After considering all of this information, the Council should provide direction to staff on how they'd like to proceed and the appropriate changes can be made to the Personnel Policy and brought back to the Council for final approval at a future meeting. � . . . RELEVANT LINKS: Market survey data is typically used to establish a salary range for each job class in the city. This is accomplished in conjunction with an established"pay philosophy"which is generally determined by or in consultation with the City Council. For example,the city might have a pay philosophy that states that employees will be paid right at or near the market rate. In this case,they might establish the midpoint of a salary range at or close to that market rate. Another city might have a philosophy that states it wants to pay employees substantially above the average so that it doesn't lose employees to competitors. In this case,the city might establish the pay rate at the 75�'percentile of the market While the city could simply adjust an employee's wage rate each year to match the market rate,it is far more common for cities to establish salary ranges. The advantage of a salary range is that it can be used to reward employees for longevity or performance. For example,the city may want to establish a practice of hiring employees below the market rate and then rewarding them through pay increases for yeazs of service(andlor performance)until they are eventually paid at or above the market average. 4. Types of Pay Systems There aze several different types of pay systems that are commonly used by cities and several newer types of systems that are just beginning to be used in the public sector. The major different types are discussed in the paragraphs below,but whatever type of pay system the city chooses to implement, it should keep in mind that advance communication to employees and training of supervisors and managers is critical to its success. Also,with employees who are represented by a union,new pay plans generally must be negotiated into the contract. Unions are usually more likely to agee to pay systems that can be shown to be objective and fair. An ideal approach is for the city to establish its goals and mission but then have employees, supervisors,managers and union leaders provide feedback on the components of the compensation plan intended to implement those goals. a. Traditional"step" pay plans In traditional public sector pay plans,movement through the assigned pay range is accomplished by established"steps"(e.g.,each step represents a percentage pay increase,usually between 2%and 5%). Steps are generally given based on longevity with the city(e.g.,the employee receives a step increase for each year of service). Sometimes,the city establishes performance criteria as well. For example,an employee might be eligible for a step increase on his anniversary date if he receives a satisfactory performance review. The advantages of a step plan are predictability for employees and for budgeting purposes. Also, ' this type of plan(especially if based solely on longevity)is often perceived as being fair by employees and union groups. The primary disadvantage of a step plan,especially if based solely on longevity,is that it does nothing to motivate employees to perform at higher levels. Critics of step plans based on longevity say that they encourage employees to simply"put in their time"or work at the minimal levels necessary to retain the job. Another criticism of traditional step plans is that the only method by which an employee can receive significant pay increases or move up a pay grade is through"reclassification"of his position. "Reclassification"refers to an action by which an employee's job class is reviewed for possible assignment to a higher salary grade. For example, a Civil Engineer I might request consideration of a reclassification to Civil Engineer II, a job class which is assigned a higher pay grade. a:za . . RELEVANT LINKS: The basis for reclassification is generally that the employee's duties have changed over time and she is now performing higher level duties generally assigned to the higher job class. Because this is the only method to reward high performing employees(under this type of pay plan), supervisors often seek reclassifications merely for this reason. b. Merit pay Merit pay plans are often set up just like step pay plans(see above),except that the step increases are given only on the basis of"meriY'or performance. For example, in a merit pay plan, an employee may be eligible to receive a step increase once per year but the determining factor is his performance throughout the year. The performance is often measured through a formal performance evaluation process,but it can also be a reward for other things such as completion of a particular project or for assuming additional work duties. Sometimes organizations budget a certain percentage of wages(e.g.,2%of the city's overall payroll)to be allocated among employees based on merit. Supervisors are then asked to make judgments about how the money is allocated among employees. In this type of situation,some employees may receive no"merit pay"or step increase and others may receive more than one step. Merit pay is often criticized as not being objective. In other words,supervisors reward the employees they like and punish the employees they don't like through merit pay. Proponents of merit pay like it because it can be a good motivator for higher levels of performance. c. Broadbanding Broadbanding is a relatively new concept—at least in the public sector. The theory behind broadbanding is that more traditional pay systems do not reward higher levels of performance, competence,or training. In other words,two employees may receive equal pay for equal work under traditional methods even though one of the employees is a far higher performer. When this is the situation,critics argue,the higher performing employee is driven out of the organization to seek an employer that will rewazd her performance. Broadbanding seeks to give the organization greater ability to reward higher levels of performance by creating larger pay ranges. For example,instead of having one pay grade for a Clerk Typist and a different pay grade for Senior Secretary,an organization assigns one larger pay grade for all office support staff that encompasses the market rates for both of these positions. In this way,the Clerk Typist can seek to be paid at the same higher rate as the Senior Secretary if she pursues additional training,acquires new skills or increases her productivity without asking for a formal "reclassification"of her position. d. Performance incentives Some cities establish systems that reward employees through incentive pay. For example,a city may establish goals for each employee,for work teams,for depariments or even for the entire city. If and when those goals are reached,the employee(s)responsible for reaching them receive incentive pay. n.�.op. �o�-A-3�Ja�. performance incentive pay is usually a one-time, lump sum payment made to employees but it zz,t 9ao>. could also be an ongoing pay increase. Cities must be careful when awarding lump sum incentive pay to ensure that the payment is allowable under Minnesota state law. Cities are prohibited from awarding bonus pay because this may be considered a gift, and therefore an unlawful city expenditure. Any compensation must be tied to job performance. In order to avoid problems under Minnesota statutes,the League encourages cities to take the following measures when establishing incentive programs: a:ss . . RELEVANT LINKS: • Establish specific criteria or goals that must be met in order to receive the incentive pay in advance—preferably at the beginning of the year or performance evaluation period; • Have the City Council approve the pay incentives as a formal part of the employee compensation plan for the year; and • Document that employees know about the incentive pay and know how they can go about earning it. e. Skill or Competency-Based Pay Some pay plans reward employees for acquiring new skills or competencies. This type of plan requires that the city develop lists of skills or competencies that it wishes to reward throughout the organization and for each individual job class or position. For example,for clerical job classes,the organization may wish to reward those employees who learn a new software program. Throughout the organization,however,the city may wish to reward any employee who learns how to conduct effective meetings. Once the city has established the skills and competencies it wishes to reward for each job class,then it can establish a pay system that rewazds employees for developing that new skill. For example, an employee who earns a certification in a particular computer software program might receive a step increase. Skill or competency based pay systems have several advantages. They target wage increases to the precise skills and competencies that the organization wishes to encourage,so in this respect it is a very efficient use of funds. They also can be used to encourage employees to develop skills that prepare them for promotions in the city;this ensures that the city has internal candidates ready for promotions when they occur. Finally,this type of pay system is generally accepted by employees as "fair"as long as the criteria for developing the skills and competencies is applied consistently and uniformly and supervisors and managers are well-trained in how to implement the system. One disadvantage of skill or competency based pay systems is that wages can creep up over time as increasing numbers of employees take advantage of the opportunities for pay advancement. However,an argument can be made that the city is reaping the rewards of having a more highly skilled and efficient work force. f. Combination Plans Because there are advantages and disadvantages to every type of pay plan and because different employees aze motivated by different types of reward systems,some organizations choose to incorporate several different types of pay systems into one overall plan. For example,a ciTy's compensation plan might incorporate all of the following: • small longevity-based step increases; • incentive pay based on departmental or team goals; • skill-based pay for certain job classes; and • competency-based pay for managers. While this type of combination plan may meet many different goals,it can be difficult and time-consuming to administer and confusing(or potentially viewed as unfair or discriminatory)to employees. 4:30 . . RELEVANT LINKS: B. Other types of pay increases/issues 1. Retention increases A "retention increase"is usually given to an employee to retain her when she has a job offer with another employer at a higher salary. Retention increases tend to be used more in the private sector than in the public sector. Often public sector pay plans do not have the flexibility to award retention increases, or in some situations,they may only be awarded by the city council. Waiting for city council approval for a retention increase may not be practical when an employee has another job offer waiting. Building the ability to award retention increases into a pay plan can be advantageous in some situations. For example,if an employee is critical to the functioning of a team,a department or the city in general,and if the only reason for the employee to be seeking other employment is his salary,a retention increase may be a good solution. However,retention increases cannot be routinely given out without undermining the integrity of the pay plan. In addition, cities should be careful to ensure uniform treatment of employees based on business needs and avoid decisions that may lead to a disparate impact that could be found discriminatory. For example,males are regularly offered retention increases,and females are not. Also,there are often many reasons beyond just salary for an employee to seek another job. Persuading an employee to stay for more money when they are unhappy with other aspects of the employment may just result in a less happy,less productive employee in the long run who, unfortunately, feels trapped because of the amount of money he is earning. Therefore,while having the ability to award retention increases may be good,it should be used relatively rarely. A better approach is for the city to make efforts to maintain a pay plan that reflects the market rates for each position. See"Maintaining a Compensation Plan"below for more information. 2. Red-circled salaries A "red-circled"salary refers to a situation where an employee is being paid at a rate higher than the maximum of the salary grade assigned to that position. This occurs occasionally when there are labor shortages associated with a particular job class,such as city engineers or nurses,and the city is forced to pay a higher rate in order to recruit qualified candidates for the job. Generally,the employee is treated in the same manner as other employees who are at the top of the salary grade(e.g., eligible for cost-of-living increases but not other types of pay increases until the salary range"catches up.") However, sometimes,the employee's salary is completely frozen -- e.g.,absolutely no salary increases are given—until the salary range again exceeds the employee's wage rate. 3. Out-of-class pay Sometimes, either by union contract or city policy, a city pays an employee for working outside of his or her job class. For example, a Light Equipment Operator might be paid a premium rate of pay when he is asked to operate certain types of equipment generally assigned only to Heavy Equipment Operators. Another example occurs if a manager or supervisor is absent for several months and another employee is asked to"fill in". Sometimes the city will assign the employee to a higher salary grade temporarily or increase her pay by a certain percentage or somehow financially reward her for performing the additional,higher leve]work. 4:31 . . RELEVANT LINKS: Generally,employees aze only given additional pay for working"out-of-class"when they are asked to take on higher-level duties than they usually perform,but some cities give additional pay when an employee is asked to assume substantially lazger workloads than usual,especially if the employee doesn't receive overtime for the additional hours. 4. Across-the-Board or Cost-of-Living Increases In some situations, employees receive across-the-board wage adjustments based on some factor such as"cost-of-living"increases. These are usually given in situations such as the following: • When an employee is paid at a set wage rate(usually an hourly rate)with no assigned salary range; • When negotiated for all employees covered by a collective bargaining agreement(union agreement); • When an employee is paid at the maximum of the assigned salary range; • When an employee is occupying a seasonal or temporary job; co„s�mer p���e tnaeX. If the city wishes to tie across-the-board wage increases to a specific cost-of-living type factor,it's a good practice to select one and use it consistently from year to year. Many employers use the Consumer Price Index(CPI)established by the Bureau of Labor Statistics(BLS). The CPI is the most widely used measure of inflation(how much more goods and services cost today vs.in the past.) The CPI reflects spending patterns for each of two population groups: all urban consumers and urban wage earners and clerical workers. The all urban consumers group represents about 87 percent of the total U.S.population. It is based on the expenditures of almost all residents of urban or metropolitan areas,including professionals,the self-employed,the poor,the unemployed and retired persons as well as urban wage earners and clerical workers.Not included in the CPI are the spending patterns of persons living in rural non-metropolitan areas,farm families,persons in the Armed Forces,and those in institutions, such as prisons and mental hospitals. The price change experience of the all urban consumer group is measured by two indexes,namely the traditional Consumer Price Index for All Urban Consumers(CPI-i�and the newer Chained Consumer Price Index far All Urban Consumers(GCPI-in. The consumer price index for Urban Wage Eamers and Clerical Workers(CPI-W)is based on the expenditures of households included in the CPI-U definition that also meet two requirements:More than one-half of the household's income must come from clerical or wage occupations and at least one of the household's earners must have been employed for at least 37 weeks during the previous 12 months.The CPI-W's population represents about 32 percent of the total U.S.population and is a subset,or part,of the CPI-U's population. In addition to the national data,BLS publishes a CPI-U,C-CPI-U and CPI-W for the Minneapolis- St. Paul metropolitan area twice per year. Cities also sometimes use the CPI to make decisions about how much to adjust salary grades. See the section below on"Maintaining a Compensation Plan." 5. Maintaining a Compensation Plan A compensation plan will deteriorate over time if it is not maintained. In other words, a city cannot establish salary grades for each job class and expect them to remain valid forever. Market rates for various jobs change greatly over time due to changes in the labor market. There are many good examples of this—currently, nurses and civil engineers are in great demand. In the late 1990's, technology staff was in great demand and commanding very high pay rates due to fears about the Y2K problem. These factors drive up market rates for high-demand job classes. 4:32