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