Trends in Public Sector Compensation

1. Trends in Public Sector Compensation Presentation to the Colorado Municipal League February 8, 2008 Bruce Lawson, Partner & Annette Hoefer, Senior Consultant Fox Lawson & Associates, LLC

2. About Fox Lawson & Associates • Compensation and classification solutions for the government • 20+ years of experience • Nationwide clients • Leading edge methods • Practical solutions • www.foxlawson.com • blawson@foxlawson.com, 602-840-1070 • ahoefer@foxlawson.com, 319-377-3771 2

3. Topics • Trends in the Colorado public sector • National trends in public sector compensation • Opportunities and pitfalls for each trend • Open Discussion 3

4. Colorado Trends • Significant changes in the last decade • Economic driven • Before: Mountain view was worth a tradeoff in salary • Now: High cost of living area and significant growth • Comparison with US • 4Q ERI: 98.1 with the State as the base • 4Q ERI: 92.9 with Denver as the base 4

5. Colorado Trends • Public Sector Challenges • TABOR • Public sector slowed for a few years after 9/11 • Some recent budget crunches • Cities appear to be hurt more than counties • Public sector initiated change in pay systems 5

6. Colorado Trends • Market Driven Pay • Movement away from internal equity driven systems • Market has become primary in establishing job hierarchy and pay structures • Greater access to public sector data • Data sharing • Availability of local surveys • Movement away from COLA as primary factor in pay budgets 6

7. Colorado Trends • Market Driven Pay • Consideration given for private sector • Focus is primarily on other public sector organizations • Keep up with other Public Sector organizations • Has caused a spiraling effect on wages in the past 7

8. Colorado Trends • Pay for Performance • Elected Official initiative • Reduce entitlement mentality • Increase performance • Put limited pay dollars toward the best performers • Not funding old step systems • Focus on keeping ranges competitive 8

9. Colorado Trends • Managers and Employees are conflicted • Market adjustment should be automatic, instead of earned • No one wants to be a “Meets” performer • Still focused on range maximum • Compression issues are prevalent • Use other means for increasing individual pay • Employees becoming more vocal about pay • Varying degrees of success • Continuing interest/emphasis on making PFP work 9

10. National Public Sector Trends • Four Significant Trends • Pay for Performance • Market Based Pay Structures • Resolution of Pay Compression • Broader Ranges 10

11. Pay for Performance (PFP) • Hottest compensation item on the agenda of: • Elected Officials • Management and Administrators • Employees • Unions • Much larger impact nationwide 11

12. PFP-Basic Message • Those that perform should be rewarded • Policy makers are tired of increasing the pay for those that are not contributing • Desire to control costs 12

13. PFP-Pitfalls • Process is subjective • Managers are not trained to: • Set realistic goals • Evaluate Performance • Distinguish different levels of performance • Convey the message to employees • Are managers capable and committed? 13

14. PFP-More Pitfalls • Belief that many existing pay systems are below market • Managers (who are also employees) and employees believe that any money available should go to employees to “keep them whole” • Managers are in a conflicted situation • Employees support them to get their work done • Organizations don’t know how to manage employee pay movement 14

15. PFP-Still More Pitfalls • Budgets are set after performance is demonstrated--sets up a potential “gotcha” • Zero sum game--for someone to win, another has to lose • Contrary to public sector perspective • Managers believe that ALL of their employees are performing above average • County found that 90+% of their employees’ performance was rated “exceptional” • Manager’s fail to take action on low performers 15

16. PFP-Pitfall Avoidance Strategies • Get employees, managers and elected officials involved in the design • Develop a process that is simple, job specific and multidimensional • Do not assume that you can measure everything in exact detail 16

17. PFP-Pitfall Avoidance Strategies • Train, counsel, coach employees, managers and everyone else in its use • Test the plan • Hold managers responsible for good evaluations • Audit the results every year • Plan on redesign • Do not get hung up on the form--it is the process that is important! 17

18. PFP-Pitfall Avoidance Strategies • Measure objective goals tied to job (The Ends) • Measure competencies (The Means) • Weight objective goals higher than competencies in the final evaluation score • Set up a small number of performance levels • Expect and enforce the performance distribution 18

19. PFP-Pitfall Avoidance Strategies • Provide for two pay mechanisms • A small amount for general increases • An additional amount for top performers • Budget the amount before the performance year, not after 19

20. PFP-Results • Uneven results • Private and public organizations both have difficulty in making the systems work • But few want to abandon the idea that it could work 20

21. PFP-Alternatives • Spot awards for top performance • Gainsharing or goal sharing • Rare in Colorado • Skill based pay 21

22. Market Based Pay • Pay structures that reflect the market • Consistent with use of broadband pay models • Desire to get away from internal pay adjustments • Requires more frequent assessment of market data 22

23. Market Pay-Basic Message • We pay at the market rate • We will adjust pay based on the market 23

24. Market Pay-Pitfalls • Very few really want to pay at the market forever • Markets move up, down and sideways • If you follow the market, then some job families will move ahead faster than others, and some may even go down 24

25. Market Pay-Pitfalls • Government pay philosophies will normally not allow this much disruption in their pay systems • Internal equity is still a very powerful force 25

26. Market Pay-Pitfall Avoidance Strategies • Organize jobs by job families • Organize job families into occupational groups • Assess market every year • By job family • By occupational group 26

27. Market Pay-Pitfall Avoidance Strategies • Blend internal ranking of jobs with market data • Pay a market contingency for market sensitive jobs rather than adjusting base pay 27

28. Pay Compression • When a more experienced employee is paid less than a less experienced employee in the same job • Caused by lack of pay movement within the pay range • Caused by new hires starting at a higher rate than existing employee • Caused by too many levels within a pay structure 28

29. Pay Compression • Caused by lack of pay policy guidelines • Caused by pay ranges that are not keeping up with the market • Caused by across the board increases • Caused by flat dollar increases for all employees 29

30. Pay Compression-Pitfalls • Poor employee morale • Generates unneeded and unjustified reclassification requests • Causes some turnover 30

31. Pay Compression-Pitfall Avoidance Strategies • Move employees faster than the range movement • Keep pay ranges consistent with the competitive market • Pay policy guidelines to pay new hires in the appropriate salary range • Reduce future issues 31

32. Pay Compression-Pitfall Avoidance Strategies • Bite the bullet--adjust pay compression • Reduce number of job classes and levels • Develop pay structures where midpoints/job rates of ranges are at least 8% apart • Allow for in-range adjustments up to the job rate/midpoint • Don’t adjust the ranges each year, but allow employees to move in the range 32

33. Pay Compression-Alternatives • Special pay structures • i.e. IT pay structures • Engineering pay structures • Police and Fire pay structures • Found in many Colorado municipalities 33

34. Broader Ranges • Salary ranges of 50-100% width • Colorado has increased pay range width • Classification descriptions need to be broader • Requires a different job evaluation system • Requires different assessment of the market • Requires range movement policies 34

35. Why Broader Ranges? • More managerial flexibility in assignments without constant reclassifications • Recognize individual contributions • Reward performance 35

36. Broader Range-Pitfalls • Takes some “control” of salary growth away from HR and places it with managers • Managers may not be capable of handling new freedom • Difficult to determine the correct pay level of job 36

37. Broader Range-Pitfall Avoidance Strategies • Establish ranges based on job families • Establish practices to govern job growth and pay growth • Performance • Skill enhancement • Competency growth • Link survey data to place in range based on “range of consideration” 37

38. Future Trends • Struggle to get Pay for Performance right • Desire for progressive compensation methods • How to handle traditional public sector perspectives • Unions 38

39. Trends • Discussion 39