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Item 9DITEM 9D 15CITY OF SOUTHLAKE MEMORANDUM August 2, 2013 TO: Shana Yelverton, City Manager FROM: Stacey Black, Director of Human Resources SUBJECT: Approval of Employee Compensation System Action Requested: Approve an Employee Compensation System. Background Information: The City has been operating under the current compensation system since 2006. This program was developed around three tenure based step pay plans and a desired market position of 103% of the weighted market average. This system needs to be modified in order to support the City's strategic approach, provide for a financially sustainable model, and ensure a fair and predictable method of career progression and compensation for employees. As such, a compensation study was conducted to establish a new strategic framework by which compensation will be managed for the City. Included in your packet is an audio PowerPoint presentation that discusses the compensation study and proposed compensation system in detail. Also attached is the Employee Compensation System Guide which provides formal documentation of the strategic compensation framework and administration guidelines. A summary of study and compensation system recommendations are provided below. Study Summary The City of Southlake retained Evergreen Solutions in March, 2013 to conduct the compensation study. The study utilized best practice methodology to assess the relative position of the organization in comparison to its peer organizations. The study also included an assessment of the procedures and practices that define how employees obtain salary adjustments over time. The consultant developed the proposed compensation system by meeting with City leaders, reviewing the current environment and the City's strategy, conducting a market study, developing a pay plan structure, and presenting implementation options. • Meeting with City Leaders. The consultant met with members of the City Council to obtain feedback at the start of the project and again at the midpoint. The feedback received was very helpful in developing the compensation system recommendations. Shana Yelverton, City Manager ITEM 9D August 2, 2013 Page 2 • Current Environment Review. A critical component of this process is an assessment of the present conditions within the City. A review of our current environment revealed that the City's workforce is comprised of individuals who come from a qualified, educated, and diverse background. It also showed that the City's turnover rate is trending higher than last year. For FY 2012 the City's turnover rate was 5.9% and, as of July 1, 2013, the turnover rate is 7%. Based upon a review of exit interview survey data, it was found that 60% of exiting employees stated compensation was a primary reason for seeking alternative employment. Understanding the mechanics of the present pay plan and how employees are placed in their ranges with respect to their tenure is important in diagnosing how the environment integrates with the City's strategy. The City currently has three tenure based, step pay plans which place employees into pay grades. The plans are designed to provide annual 3% step increases, however, due to economic conditions, the step increases have been suspended since FY 2009. A review of the City's strategy map indicates a desire to recognize and reward high performers. One way this is accomplished is through pay for performance. Since the currently adopted system does not include this component, the system does not align well with this portion of the City's strategy. • Market Study. The first step of the market study is to establish the labor market. A labor market is who the City competes with for employees. The City is located in the heart of the DFW Metroplex and competes with a large number of organizations for employees. As such, it is critical to select the right labor market. Currently, the City's labor market consists of 12 comparison cities. The consultant has recommended expanding the labor market to 18 cities. This will ensure that organizations of all sizes and geographic location are included to capture a broad representation of the labor market. The second step of the market study is to determine the market philosophy. The current philosophy is to target 103% of the weighted market average. The weighted market average looks at actual salaries in market cities in comparison to the City's pay plan midpoint. Because it is based upon actual salaries, this is a very aggressive and unpredictable philosophy that can be very costly. An alternative philosophy, and the recommended philosophy, is to target the 60tn percentile of the market. A percentile is the value below which a percentage of a job classification's pay range midpoint is found. This strategy compares the 60t" percentile of the labor market midpoint to the City's pay plan midpoint. At the 60t" percentile, on average, the City would pay higher than 60% of the labor market, and would pay less than 40% of the labor market. This is a more stable and predictable method because it compares pay ranges and pay ranges tend to move more slowly than actual salaries. By changing the strategy, the City will no longer need to survey the market every year Shana Yelverton, City Manager ITEM 9D August 2, 2013 Page 3 and can move to a longer period between market surveys. This is a more financially conservative method for evaluating the City's market competitiveness, but still strives to maintain a competitive market position. It is a more sustainable option and should require less market adjustment in the future than the currently adopted plan. The final step of the market study is to survey the labor market. The market survey was conducted using the 18 recommended comparison cities with a targeted market position of the 60t" percentile. Overall, the findings of the study were generally favorable. When compared to the labor market, the City's pay range midpoint was, on average, 1.3% below the 60t" percentile. • Pay Plan Structure Development. The next step in the compensation study is to develop the pay plan structure. Four different structures were evaluated: a tenure based step plan, a hybrid step and open range plan, a broadband pay plan, and an open range plan. The step plan focuses on providing pre- determined tenure based raises and provides little flexibility. A hybrid plan combines steps and open ranges. The broadband pay system collapses numerous jobs classifications with similar duties into broad occupational categories. The final pay plan structure reviewed was the open range concept. This is a flexible system with no predetermined steps and integrates easily with pay for performance. Based upon the City's strategy to be an employer of choice, reward high performers and attract and retain a skilled workforce, it appears the open range plan structure is the best fit for the City's compensation system. Once an open range is selected, the next step is to build the pay structure. Using the open range concept, four pay plans are recommended: a non-exempt, exempt, public safety and executive. Determining how employees move through the pay range is the next step of structure development. Currently, the system is designed for employees to move through the pay ranges based upon tenure. After analysis and discussion, a hybrid approach may best meet the needs of the City. The hybrid option combines a base adjustment with pay for performance. Over time, the City can phase out the hybrid approach and transition to a full pay for performance system. The phased in approach will allow employees to become accustomed to merit based pay. Additional flexibility exists with the ability to award pay adjustments as base pay increases, one-time lump sum payments, or a combination of the two. This style of system provides the largest amount of flexibility and ensures that the plan is financially sustainable for years to come. • Implementation Options. There are three common implementation strategies and all three were considered as part of this project. After review, it was determined that the bring -to -minimum option is the most conservative and the best approach for the City. With this option, each employee's current pay is compared to his or her new pay range minimum. If the employee's Shana Yelverton, City Manager ITEM 9D August 2, 2013 Page 4 current base pay falls below the new minimum rate, the employee receives a pay adjustment to bring him or her up to the new minimum of the pay range. Employees with pay rates above the minimum receive no pay adjustment. The estimated total implementation cost for this option is $145,560 and it impacts 50 employees. It is important to know that this request only approves the overall compensation system framework. Final implementation costs will be included for City Council consideration in the proposed FY 2014 budget. Compensation System Recommendations • 18 Market Cities • 60t" Percentile • Open Ranges • Hybrid: Base Adjustment & Pay for Performance Financial Considerations: The estimated cost of implementation of the compensation system is $145,560. The proposed implementation costs will be included for City Council consideration in the proposed budget for Fiscal Year 2014. Strategic Link: Performance Management and Service Delivery: attract, develop and retain a skilled workforce. CBO2: Become an employer of choice by developing a plan to recruit, develop and retain employees committed to excellence. Citizen Input/ Board Review: N/A Legal Review: N/A Alternatives: Deny the proposed compensation system and continue operating under the currently adopted program. Supporting Documents: The following supporting documents are attached: Shana Yelverton, City Manager August 2, 2013 Page 5 ITEM 9D • Employee Compensation System: A guide to employee compensation strategic framework and administration. • Establishing a Strategic Employee Compensation System Audio PowerPoint. Staff Recommendation: Approve the proposed Employee Compensation System as presented. ,0151 1:I WA& Employee Compensation System A guide to employee compensation strategic framework and administration. Employee Compensation System A guide to employee compensation strategic framework and administration. The purpose of this guide is to establish the compensation philosophy and ongoing compensation system administration. The previous employee compensation system was adopted in 2006 and was in place for seven years. This program was developed around three tenure based step pay plans and a desired market position of 103% of the weighted market average of market position actual salaries. As economic conditions evolve and change, compensation programs can become unsustainable. This requires periodic evaluation and may involve a comprehensive review. Over the last seven years, the nation experienced an economic downturn that changed the way many organizations address compensation. The City of Southlake was no different. During this period, employee step increases were frozen and, in an effort to provide employees pay raises, the City chose to provide cost of living pay increases. However, this approach rendered the existing step based pay plan structure obsolete. It became evident that the plan in force no longer met the needs of the City. With the City's desire to be an "employer of choice", a compensation consultant was retained to assess the relative market competitiveness and structure of the compensation plan. The City of Southlake retained Evergreen Solutions in March, 2013 to conduct the compensation study. The study utilized best practice methodology to assess the relative position of the organization in comparison to its peer organizations. The study also included an assessment of the procedures and practices that define how employees obtain salary adjustments over time. The consultant developed the compensation system by meeting with City leaders, reviewing the current environment and the City's strategy, conducting a market study, and developing a pay plan structure. A competitive compensation system allows the City to be an effective recruiter in the marketplace, contribute to a reduction in employee turnover, set the precedent to offer comparable base salaries for positions, and give employees ample room for upward growth and motivation for professional development. Each of these factors support the City's effort to be an employer of choice. The City's compensation philosophy is to establish and administer an equitable program that provides for consistent treatment for all employees. The purpose of the City's compensation program is to support the City's desire to be an employer of choice by attracting and retaining a skilled workforce, rewarding high performers and motivating employees by offering pay opportunities commensurate with their position's internal and external value. The objective of the system is to support the City's strategic approach, provide for a financially sustainability model, and ensure a fair and predictable method of career progression and compensation for our employees. The compensation system philosophy includes the criteria listed below. Position Classification The Compensation System utilizes a point factor job evaluation methodology to determine the relative value of jobs based on job content. A point factor job evaluation system measures job classifications in terms of the degree to which several compensable factors are present in a given position. Compensable factors are measurable qualities, features, requirements or Compensable Factors constructs that are common to many different kinds of Formal Education jobs. Each factor has defined levels and the levels Experience Management &Supervision provide a measurement scale for rating each factor. Human Collaboration Skills This allows points to be assigned to each factor, Freedom to Act creating a total numerical value in which positions can Technical Skill be ranked. This creates an orderly method for Working Conditions measuring each job relative to every other job and Fiscal Responsibility creates a hierarchy of positions. The City has established a committee of department directors and key managers who are assigned to rank positions in order to determine their relative internal value to the City. This committee is known as the Job Evaluation Team. Positions are divided into exempt and non- exempt categories and, by using this method, each group has a set of weighted compensable factors which determine their placement on the pay plan. The market salary for the position is also surveyed and is a component of the evaluation. It is important to note that sworn public safety positions (police officers, firefighters, etc.) have an existing internal formal ranking structure. This structure is used to develop a hierarchy of positions for the public safety pay plan. Labor Market A labor market is the market in which workers compete for jobs and employers compete for workers. The City has designated eighteen cities as the labor market. Those cities include: • Allen • Farmer's Branch • North Richland • Arlington • Flower Mound Hills • Bedford • Frisco • Plano • Carrollton • Grapevine • Richardson • Colleyville • Hurst • University Park • Coppell • Keller • Euless • McKinney These eighteen cities represent a balance of organizations in size and geographic location. Market Position The City has chosen a market position that is slightly above average at the 60th percentile. By targeting the 60th percentile, on average 40% of the labor market will pay higher than the City, while 60% of the market will pay lower. This strategy supports recruiting efforts as it leads to an increase to both the quantity and quality of candidates. It also has a positive impact on employee retention by positioning the City competitively among its peers. Pay Structure An organized pay structure provides employees a predictable method of career progression and sets future salary expectations. The City has established four pay plans: • Non -Exempt and Exempt: The non-exempt and exempt pay plans have established pay grades that include a 50% spread between the minimum pay and maximum pay with a 5% progression between each pay grade. • Public Safety: The public safety pay plan has established pay grades that include a 10% to 30% spread between the minimum pay and maximum pay with no overlap between pay grades. • Executive: The executive pay plan has established pay grade that include a 50% spread between the minimum pay and maximum pay with a 13% progression between each grade. Range Movement An important factor that defines a compensation system is how employees move through the range. With an open range system, the City is able to implement a hybrid approach that combines base pay increases with pay for performance. Additional flexibility exists with the ability to award pay adjustments as base pay increases, one-time lump sum payments or a combination of the two. The percent increase and type of adjustment will be recommended as part of the proposed annual budget and is subject to change each year. For example, if City Council approves a 3% compensation adjustment, half could be allocated to base adjustment and half to pay for performance. In this scenario, an employee could receive a 1.5% base adjustment and a 1.5% merit increase. The 1.5% merit could be awarded as a 1.5% one-time lump sum payment instead of a base pay increase. Employees hired during the year will receive the designated pay adjustment on a pro -rated basis. Over time, the City can opt to phase out the hybrid approach and transition to a full pay for performance system. The Human Resources Director manages and administers the compensation system. The Director is responsible for recommending changes in the basic philosophy and objectives of the compensation policy; ensuring that job descriptions are current and accurate; ensuring that new positions are placed appropriately on the pay plan and that all positions are reviewed periodically; and conducting salary surveys to recommend structure adjustments. More detail about each of these functions can be found below. Job Descriptions Ajob description is a written document that describes the essential functions of a position, focusing on the general purpose and the principal duties and responsibilities of the position. Each position title in the City should have a written job description. The description is intended to describe the major functions of the position, not to provide a complete listing of all possible tasks and responsibilities. Job descriptions are reviewed on an as needed basis and each time a vacancy occurs to ensure the description accurately reflects the essential functions of the position. Ongoing Job Evaluations Each position in the City was placed in a pay plan at a grade level and accompanying salary range utilizing the point factor evaluation methodology and market data. The Job Evaluation Team is responsible for evaluating new position requests for placement on the pay plan. In addition, the Job Evaluation Team will meet periodically to complete a comprehensive review all classifications to ensure proper placement on the pay plan and to maintain internal equity. Market Survey Once every two to three years, Human Resources will conduct a market salary survey. Using the established labor market and benchmark positions, the survey assesses the City's relative position to the market. Data is collected directly from the labor market. Since the market is dynamic, it is important to maintain a competitive position once it is achieved. The City strives to maintain the 60th percentile of the market. The 60th percentile establishes a comparison point for benchmark positions and determines a percentage by which compensation may lag or lead the market. If it is determined that the City's pay structures lag the desired market position, a market adjustment may be recommended. If approved by City Council, the market adjustment is implemented by moving the entire structure by the recommended percentage and, if necessary, bringing employees to the new minimum. Pay Increases With the exception of market considerations, it is expected that employees will move through their pay ranges over time by receiving pay increases. Pay increases can be a combination of base pay adjustments and pay for performance adjustments. They can also be base increases, one-time lump sum payments or a combination of the two. Recommendations to City Council During the normal budget process, the City Manager, Human Resources Director, and Chief Financial Officer will review the market and financial status of the City to make recommendations regarding structure adjustments and employee salary increases to City Council. The recommended compensation budget should be based upon the City's financial position and available funding. If funding is not available, pay increases should be frozen until such time that funding becomes available. As these recommendations reflect the compensation policy of the City, the final budget allocation rests with the City Council, and should be made in the context of the total financial outlook for the organization. New Hires Employees newly hired to the City will normally start at the minimum of the pay range of their position. Individuals that exceed the minimum qualifications of the position may be placed higher in the pay range commensurate with their experience and education level. Such placement should take into consideration internal equity and is subject to approval from Human Resources and the City Manager (or his or her designee). Promotions Employees who are promoted to a higher pay grade classification shall receive a minimum of a 5% pay increase or shall be placed at the minimum of the new pay grade, whichever is greater. Other Policy Considerations Employees should not be paid less than the minimum of the pay grade established for their position. Further, increases should not provide for employee salaries to exceed the maximum of the pay range for their position. Employees at the maximum of their pay range may be eligible for lump sum payments that are not included in the base pay of the employee. Funding a competitive pay plan is critical in attracting and retaining top talent. However, the plan must be internally equitable, externally competitive, fiscally responsible, easy to understand and administer, and aligned with the City's Strategic Management System. This compensation system incorporates each of these qualities by establishing a competitive market position, adopting flexible pay strategies, and incorporating pay for performance. Prepared and presented to City Council on August 6, 2013 by: 4 Evergreen Solutions. LLC Evergreen Solutions, LLC Brian Wolfe, Project Manager CITY OF SOUTHLAKE 19 City of Southlake Stacey Black, Director of Human Resources Chad Minter, Human Resources Manager