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IPMA-HR Annual Conference

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					IPMA-HR Annual Conference
   Pay For Performance
   Jim Fox, PhD, IPMA-CP
Bruce Lawson, CCP, IPMA-CP
  Gary O’Bannon, IPMA-CP
    Tom Briggs, IPMA-CP
 Michael Kitchen, IPMA-CP

      October 11, 2006
               PRESENTATION OVERVIEW

• Pay Philosophy
• Merit Pay
• Performance Evaluation
• The Kansas City Experience
• Questions and Discussion
            WHY PEOPLE WORK



• People work for rewards -monetary
  and other
• Rewards must be internally
  equitable and externally
  competitive
             PAY PHILOSOPHY



• Base Pay
• Pay Progression
• Variable Pay
                  BASE PAY

Purpose:
• To provide Employees with
  compensation that reflects the
  fundamental value of the job to
  the organization.
                 BASE PAY QUESTIONS


• What pay level do you target as your level
  of competitiveness with the market? Do you
  lead, lag, or match the market?
• Do you manage pay around an established
  job rate or market guide?
• Is base pay maintained with automatic
  increases for market value, cost-of-living, or
  a combination?
            PAY PROGRESSION QUESTIONS

• Does the current pay system reward
  employees for performance, longevity, or a
  combination of both?
• Does the City consider productivity, new
  skills, or knowledge acquired in
  determining additions to base pay?
• Does the current pay system include base
  building rewards for both individual and
  team performance?
• How are salaries treated for employees that
  have reached the maximum of the pay
  range?
             VARIABLE PAY QUESTIONS

• Do you offer short and long-term
  incentives in addition to base pay?
• Do you offer non-base building cash
  incentives?
• Do you offer employees non-cash
  recognition programs?
                   MERIT PAY

Purpose:
• Align performance with business
  objectives.
• Recognize and reward top performers.
• Achieve higher levels of individual,
  team, and organizational performance.
                 MERIT PAY

Trends:
• Strategic Focus
• Changing Values
• Pay Delivery
                     STRATEGIC FOCUS

• Alignment of compensation with the goals
  and objectives of the organization.
• Creating “ownership” value.
• Flatter organizational structures – focus on
  performance of the whole, not just its parts.
• Establishing higher standards for
  performance and rewards.
  – Clearly defined goals.
  – Differentiation in pay based on performance.
• Management discretion and accountability.
                    CHANGING VALUES
• Public sector movement away from
  automatic, “entitlement” pay.
• Pay for job skills and qualifications – flexible
  hiring practices.
• Management desire to recognize and
  reward outstanding performers.
• Organizational demographics.
   – Shorter term employees – loyalty to career, not
     the organization.
   – Aging workforce and decreasing talent pool.
   – Entry-level work skills and experience.
                       PAY DELIVERY

Considerations:
•   Mix of reward vs. entitlement pay.
•   Base pay and salary structure(s).
•   Individual vs. team/group incentives.
•   Performance measurement.
•   Plan administration and management.
•   Employee perceptions.
                                    PAY DELIVERY
                                  Merit Pay*

                                  General Increase

                Base Pay          Progression Steps
                                  Skill-Based Pay*
Individual                        Other
  Salary

                                  Gain Sharing*
                                  Goal Sharing*

               Variable Pay       Skill-Based Pay*
               Also called:       Recognition/Achievement*
               Incentive Pay
               Alternative Pay    Bonus Plans*

*Pay for performance-type plans                Source: Seminar PS201, “New Strategies & Applications for
                                                Public Sector Compensation,” WorldatWork/IPMA, 2000.
             REQUIREMENTS FOR SUCCESS



• Budgeting Strategies
• Management Commitment
• Communication
• Training
                  BUDGETING STRATEGIES
• Zero-based vs. “fixed” budgets.
  – Eliminate automatic pay increases.
  – Flexibility appropriate to business needs.
• Funding meaningful rewards to distinguish
  levels of performance.
• Budgeting market vs. actual salaries -
  managing pay around a market control
  point.
• Alternative rewards.
  – Non-cash incentives.
  – Lump-sum bonuses.
                       COMMITMENT
• Alignment of business goals, performance
  measures, communication and feedback,
  and rewards for performance.
• Developing the performance appraisal
  process.
  – Organization wide objectives.
  – Common criteria and standards for measuring
    employee performance.
• Review and revision of performance
  appraisal process to ensure consistent
  outcomes and performance improvements.
                   COMMUNICATION

• Performance management is an on-going
  process, not a one-time event.
• Requires clear definitions of goals and
  expectations.
• Linking measurements to rewards and
  consequences – requires consistency and
  follow-through.
• On-going communication and feedback.
                         TRAINING

• A successful performance management
  system takes time;
• A clear understanding of business
  objectives as they relate to employee
  performance;
• Ability to set goals and measure
  achievement;
• A review of measures to assure reliability
  and appropriate balance of all objectives;
• Training, training, and more training.
                      PAY SYSTEM DESIGN

Examples:
• Alternative reward approaches.
  – Broad banding
  – Skill based pay
  – Individual incentives
  – Group based incentives
Advantages           BROAD BANDING

• Flatter organizational structure – collapses
  multiple salary ranges into fewer broad bands.
• Wider ranges – supports recognition of
  different levels of employee contributions.
• Greater flexibility in employee resources to
  meet organizational goals – encourages
  broadening of skills.
• Less focus on titles and grades – supports team
  approach.
• Greater responsibility of managers to
  “manage compensation.”
Disadvantages           BROAD BANDING
• Less traditional cost control measures.
   – Elimination of control points (midpoints).
   – Higher salary range maximums.
• More responsibility for administration by
  Human Resources and management.
• Requires effective communication/education
  of the system relative to individual pay.
• Doesn’t work if current incentives and benefits
  are tied to pay grade.
• Requires new job evaluation and market
  orientation.
Advantages           SKILL BASED PAY

 • Pay is directly related to definable and
   measurable skills acquired and applied in
   the work setting.
 • Individually based pay vs. job based pay.
 • Encourages skill and career development.
 • Encourages cross training and creates
   staffing flexibility.
 • Reinforces teamwork and employee
   involvement.
 • Higher output and quality over the long-
   term.
Disadvantages          SKILL BASED PAY
  • Skill blocks can be difficult to define and
    price.
  • Best for trades jobs, can be effective for
    public safety jobs.
  • May result in paying for skills not used.
  • Requires established certification process.
  • Requires time and money for training.
  • More employees can “top out.”
  • Greater administrative complexities.
Advantages     GROUP BASED INCENTIVES

• Encourages employees and management to
  work together in solving problems of cost,
  quality, and efficiency.
• Rewards documented improvements.
• Emphasis on teamwork and employee
  involvement.
• Encourages higher productivity and quality.
• Lower staffing levels needed.
• Measures of improvement can be financial,
  operational or a combination.
Disadvantages    GROUP BASED INCENTIVES

 • Difficulty in setting measurable objectives.
 • Rewards may not be large enough to
   motivate change in behavior.
 • Public distrust of pay for improvements.
 • Bonus formulas can be overly complex.
 • Requires significant time to set up.
 • Requires good baseline performance
   measures.
Advantages       INDIVIDUAL INCENTIVES
 • Emphasis is on individual performance or
   contribution.
 • Consistent with historical values of pay and
   performance.
 • Includes a variety of recognition programs.
 • Relatively easy to install.
 • Can establish clear measures for success.
 • Top performance can be distinguished from
   regular duties.
 • Encourages on-going communication and
   feedback.
                   INDIVIDUAL INCENTIVES
Disadvantages
  • Difficult to set measurable performance
    criteria for many jobs.
  • Encourages individual performance at
    expense of group.
  • May be perceived as unfair because of
    subjective nature.
  • Fails if managers do not distinguish between
    different levels of performance.
  • Fails if organization does not allocate funds for
    meaningful rewards.
  • Administrative systems must be monitored.
THE CITY OF KANSAS CITY’S
      Variable Pay Plan
                         Variable Pay Plan



Phase I     Phase II       Phase III         Phase IV




          Negotiating      Implementation     Challenges
          the Variable     of the Variable    and
          Pay Plan         Pay Plan           Lessons
                                              Learned
                  PHASE I: Pre-Negotiations

• Began laying the ground work during previous
  (2003/04) negotiations

• Previous MOU (2003/04) included a provision
  acknowledging the parties intent to move to a
  P4P system.
                PHASE I: Pre-Negotiations

2003-2005 Agreement included a provision
which:
  Stated that the parties would begin separate VPP
  negotiations.
               PHASE I: Pre-Negotiations

2003-2005 Agreement included a provision which:
 Outlined the basic structure of plan
     Combination of “longevity” and performance
    increases added to employees’ base pay.
                 PHASE I: Pre-Negotiations

2003-2005 Agreement included a provision which:
Basic structure of plan
  • Incentives for attainment/demonstration of KSC
  • Gain-sharing
             PHASE II: Negotiating the Plan

Reviewed previously agreed upon VPP language.

Select members of both negotiating teams attended
a Gain-Sharing Conference sponsored by
AFSCME.
             PHASE II: Negotiating the Plan

Searched for “Low Hanging Fruit” and common
areas of agreement.

Avoided discussing monetary increases.
                 PHASE II: Negotiating the Plan

Searched for “Low Hanging Fruit” and common areas of
  agreement.

Both sides desired a system that would:

  Reward high achievers.

  Reward employees who attain/demonstrate valued
  knowledge, skills and competencies
             PHASE II: Negotiating the Plan

  Both sides desired a system that would:

Encourage and reward employee input.

Allow employees to share in savings/increased
revenue resulting from employee input
                PHASE II: Negotiating the Plan

                        Hurdles
What to call the new system (Variable Pay vs. Pay for
Performance)

Areas to be included in incentive plan

Standards
               PHASE II: Negotiating the Plan

                       Hurdles
Based pay increases vs. one-time payments

Amount of base pay increases

Amount of cash incentives
                PHASE II: Negotiating the Plan

                        Hurdles
Union’s concern regarding pay systems utilized for other
bargaining units and employee groups

Fairness

VPP Incentive period
                  PHASE II: Negotiating the Plan
                         Increases
Provided Union with financial information
 Had budget Officer attend a negotiation session to discuss
financial picture and answer questions
Failure to reach agreement could result in loss of positions
                 PHASE II: Negotiating the Plan
                          Increases
Submitted offer that would allow outstanding employees to
attain previous merit increase amount
 Had budget Officer attend a negotiation session to discuss
financial picture and answer questions
Failure to reach agreement could result in loss of positions
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            PHASE III: Implementing the Agreement


Communication/Training to
managers/supervisors

Communication to Front-line employees
              PHASE III: Implementing the Agreement


Traditional classroom type training

Posted training on intranet

Developed Supervisory guide book with
handout materials
              PHASE III: Implementing the Agreement


Traditional classroom type training

Posted training on intranet

Developed Supervisory guide book with
handout materials
             PHASE IV: Lessons Learned

Plan Ahead

Look for Ways to “give” Union a perceived
win

Keep elected Officials informed
             PHASE IV: Lessons Learned

Control Information

Be Flexible but Firm

Identify Champions of your Goals
(Management & Union)
         Kansas City, Missouri:
   Market Adjustments & Job Banding


(Hourly L & M-Class Employees excluding
          firefighting positions)
                                      History

•   A Resolution was passed by the City Council in the Fall of
    2004

•   Directed the City Manager to position salaries competitive
    within the relevant market

                         Expected results:
1. increase the City’s ability to compete in the market
2. attract
3. retain employees
                                  Methodology
 Spring of 2005, established subcommittee,            which   included
  representation by AFSCME Local 500 leadership

 Prepared a RFP to gather survey and market data, hired Fox Lawson
  and Associates

 Agreed on what would constitute the survey market: 37 public/private
  agencies responded

 Results showed that City job classes were an average of 14.6% below
  the market minimum

 Joint recommendation was to apply this % to the majority of the hourly
  job classifications
              Phase 1—Effective September 3, 2006



Increased the minimum salaries for the majority of
 the hourly job classifications by a minimum of
 14.6%

Average percentage below surveyed market (37
 organizations participated in the survey prepared
 by Fox Lawson & Associates)
                    New Minimums Based on Market Adjustments

Grade   Min    New Min   Max     Grade   Min    New Min   Max


L-A     1099    1259     1309     M-D    1731    1984     2588


L-B     1352    1549     1941     M-E    1958    2244     3163

L-C     1514    1735     2278
                                  M-F    2055    2355     3347

L-D     1731    1984     2588
                                  M-G    2271    2603     3656
L-E     1958    2244     3163
                                  M-H    2488    2851     4050
L-F     2055    2355     3347

                                  M-I    2640    3025     4274
L-G     2271    2603     3656


L-H     2488    2851     4050     M-J    2985    3421     4837


L-I     2640    3025     4274     M-K    3407    3904     5456


L-K     3407    3904     5456     M-L    3952    4529     6430
                       Effect of Market Adjustments on Incumbent
                                       Employees


 All hourly employees currently below the new minimum salaries
  moved to the new minimum of their respective pay range on September
  3, 2006

 Impact ranges from $16 to $624 per month

 Employees that move to the new minimum salary, but received less than
  a 2% base increase, will receive an additional increase bringing their
  total increase up to 2%

 Therefore, the minimum impact for all affected employees will be a 2%
  base increase in addition to any other due increases.
                     Market Adjustments Impact on
                        Pay Anniversary Dates


 New pay anniversary dates were established for those
  employees that moved to the new minimum and
  received at least a 2% increase

 Pay anniversary dates for others will remained the
  same

 This process will mitigate the ability of a lesser
  tenured employee from “leap-frogging” a more senior
  incumbent
                        Examples of Job Banding

  Current Title                      New Title
Equipment Operator I
Equipment Operator II   =     Equipment Operator

Equipment Operator III =      Senior Equip Operator

Accounting Clerk I
Accounting Clerk II     = Accounting Clerk

Accounting Clerk III        = Senior Account Clerk
                          Examples continued



Current Title                  New Title
Maintenance Worker I
Maintenance Worker II     =    Maintenance Worker

Maintenance Repairer I
Maintenance Repairer II   =    Maintenance Repairer
                         Impact of on Minimum
                            Qualifications
  The Minimum Qualifications for the banded jobs will be the
  lower minimum qualifications.

Examples:

 Banded job               Revised MQs
Accounting Clerk I
Accounting Clerk II       (former) Accounting Clerk I

Equipment Operator I
Equipment Operator II     (former) Equipment Operator I
                             Impact on Incumbents
                               Example #1:
Current Equipment Operator I making $1,800 per month…
 will now be an Equipment Operator;
 Make a new salary of $2,244 per month; and
 Will have a new pay anniversary date.

                                Example #2:
Current Equipment Operator III making $2,200 per month…
 Will now be a Senior Equipment Operator;
 Make a new salary of $2,355 per month; and
 Will have a new pay anniversary date.
                     Impact on Incumbents


                   Example #3:
Current Equipment Operator III making $3,300 per
  month
 Will now be a Senior Equipment Operator;
 Make a new salary of $3,366 per month; and
 Will not have a new anniversary date
                         Phase II & III
                       Market Adjustments


Phase 2 - May 2007:
  Increase the majority of the hourly job
   classifications maximum salaries by 5.4%.


Phase 3 - Fall 2007:
  Re-survey hourly positions and make additional
   market adjustments as necessary.
               Part I
        Base Pay Compensation

A. Performance Appraisal Increases

B. Variable Base Pay Incentive Awards
                Merit Increases


 Based on attaining an overall rating mark of Meets
  Expectations

 Paid as merit increase

 Pay anniversary date remains the same
                 Variable Base Pay
                 Incentive Awards

                Award Period

          December 1 to November 30

* First award period will begin February 1, 2006
   through November 30, 2006.
            Variable Base Pay
            Incentive Awards

1. Sick Leave        4. Citizen Satisfaction

2. Safety/Customer   5. Exceeds
   Service              Expectations

3. Cross–Training
              Variable Base Pay
              Incentive Awards

 Must “Meet Expectations” overall to be
  eligible for additional incentives to the base.

* A Meets Expectation in any trait does not
  guarantee the receipt of an incentive award.
             Sick Leave Incentive
• Eligible if use 41 hours or less of scheduled or
  unscheduled sick leave

• Employees who work significant amounts of
  overtime are entitled to use more sick leave
  (Appendix SL in MOU)
Sick Leave Incentive – 41 hours

OT Hours       Add’l S/L      Total S/L
160-319        4              45
319.1-479      8              49
479.1-639      12             53
639.1-799      16             57
799+           20             61
                          Safety Incentive

Employee is eligible for Safety Incentive award if:
 In a position designated as Safety Incentive Eligible
  by HR
 Had no Safe Work Practice Violations
 Had no preventable vehicular or non-vehicular
  accidents
 Had no incidents of failing to report accidents and
  injuries immediately in accordance with Safety
  Handbook
        Customer Service Incentive
Eligible if:
 Not in a Safety Incentive Position
 Received a rating mark of “Exceeds Expectations” in
  Customer Service trait
   (Non-Exempt rating form to be revised to CS)
 Had no substantiated complaints during the award
  period
 Had no discipline or written counseling regarding
  customer service performance during the award period
                        Cross-Training Incentive
Eligible if:
    Demonstrates ability to perform regular job duties of at least
     one other position/assignment of an equal or higher level in a
     proficient manner
    Performs those duties when requested

Note: Employees must meet the MQs of the position in which
    they are cross-trained to perform.
                      Cross-Training Incentive

 Each employee must be         Length of training should
  offered at least one cross     be of reasonable duration
  training opportunity
                                Remain eligible in
 Training may be formal or      subsequent years if remain
  informal                       proficient and performs
                                 duties when requested
 Previous cross-training
  experience may qualify
                 Citizen Satisfaction Incentive


Eligible if:
 Increase of 3% or more in the “Overall Quality of
  Customer Service” trait in the City Auditor’s Office’s
  Annual City Services Performance Report

*All eligible employees will receive this award if met.
                   Base Pay Incentive Award

               Exceeds Expectations
Awarded to employees who meet at least three of the
 four incentives.
•   Sick Leave
•   Safety/Customer Service
•   Cross Training
•   Citizen Satisfaction
      Part II



Cash Incentive Awards
                        Cash Incentives


1. Education Recognition

2. Workers’ Compensation Reduction
    [AFSCME Only]

3. Department Approved Certifications
                           Education Incentive

Eligible if:
 Overall performance appraisal rating of at least “Meets
  Expectations”

 Possess educational level beyond that which is required for
  their position

 Degree is reasonably related to their position or enhances
  promotability
                    Education Incentive

 Incentive is paid monthly

 Monthly Education Incentive Award begins
  May 1, 2006.

 Awards paid during first pay period for
  previous month
 Not included in employee’s base pay
                     Monthly Educational
                           Award

• Employees who possess      • H.S. Diploma/State-
  a diploma/degree while       issued GED
  in a job class that does          $25
  not require a
                             • AA Degree
  diploma/degree, or does
  not allow for the                  $50
  substitution of a          • BA/BS Degree
  diploma/degree may               $100
  receive:                   • Master’s Degree
                                  $150
 Cash Awards


Workers’ Compensation
AFSCME Group Award
                       Reduction in Workers’
                        Compensation Costs


Eligible if:
 Worked for City                No preventable vehicular
  continuously for at least 1     or non-vehicular accidents
  year prior to end of award
  period.                        No Safe Work Practice
                                  violations
 Received a rating of
  “Meets Expectations” in        Not found to have failed
  Safety on last                  to report an
  performance appraisal           accident/injury
                  Reduction in Workers’
                   Compensation Costs


 City shares each 20% reduction with eligible
  bargaining unit employees

 Reduced expenses split 50/50 between City
  and eligible employees

 Divided equally among all eligible employees
Department Approved Certifications, Licenses and
                Registrations
  Eligible If:

   Possesses certifications, licenses and/or registrations
    not required for their position

   Deemed beneficial to their position by the Department
Department Approved Certifications, Licenses and
                Registrations

   Awarded at the employee’s annual
    performance appraisal

   Remains eligible each year as long as
    certification, license or registration is
    maintained and deemed relevant

  Note: Appendix C2 in MOU lists currently
        approved certifications
Overview of Compensation Plan

             Year One
 May 1, 2005 through April 30, 2006
                    Base Increases- 1st Year

               Not at Top of Range
 First Year=3.25% paid out on pay anniversary date

                 At Top of Range
 First Year = 2.5% paid out on pay anniversary date
                  or
 One time cash bonus of $1750.00
Overview of Base Compensation Plan

            Year Two &Three
    May 1, 2006 through April 30, 2008
   Employees Not at the Top of Their Pay Range – Years 2
                           &3
              May 1, 2006-April 30, 2008


  Annual Salary
                                   Incentive Pay to Base Salary
     Increase



                                                                               Maximum
                                                                                Annual
                              Safety /                               Exceeds     Base
Overall     Base      Sick                Cross –       Citizen
                             Customer                                Expect-   Increase
Rating    Increase   Leave                Training    Satisfaction
                              Service                                 ations    Possible




Meets       2.25     0.50      0.33         0.46          0.46        0.25       4.25
                    Base Increase


        Not at Top of Range

Second & third year = 2.25% plus any
  earned incentives
Employees at the Top of Their Pay Range – 2nd
           Year of the Agreement
        May 1, 2006-April 30, 2007
Annual Salary Increase             Incentive Pay to Base Salary
                                                                            Maximum
                  Base                                                       Annual
                Increase              Safety /                                Base
   Overall                  Sick                 Cross –       Citizen
                  OR                 Customer                               Increase
    Rating                 Leave                 Training    Satisfaction
                  Cash                Service                                Possible
                 Bonus



   Meets          1.00     0.50        0.40        0.40           0.46        2.76




Note: No additional increase for meeting at least 3 of the incentives or
“exceeds expectations”
  Employees at the Top of Their Pay Range – 3rd
             Year of the Agreement
          May 1, 2007-April 30, 2008

Annual Salary Increase              Incentive Pay to Base Salary
                                                                              Maximum
                   Base                                                        Annual
                 Increase              Safety /                                 Base
   Overall                   Sick                  Cross –       Citizen
                   OR                 Customer                                Increase
   Rating                   Leave                  Training    Satisfaction
                   Cash                Service                                 Possible
                  Bonus



    Meets          1.00     0.50        0.50         0.50          0.46         2.96




 Note: No additional increase for meeting at least 3 of the incentives or
        “exceeds expectations”
 These increases will not increase the maximum of the pay range.
                YEAR 2 REVIEW PERIODS


Year 2 – Performance Appraisal
May 1, 2006-April 30, 2007
  – Paid on anniversary date


Year 2 – Variable Pay Incentives
February 1, 2006-November 30, 2006
  – Paid in January 07
     • (Pay anniversary dates between May and December 06)
       YEAR 3 REVIEW PERIODS

Year 3 – Performance Appraisal
May 1, 2007-April 30, 2008
  – Paid on anniversary date


Year 3 – Variable Pay Incentives
December 1, 2006-November 30, 2007
  – Paid in January 08
     • (Pay anniversary dates between May and December 07)
      Documentation/Tracking

Tracking for annual incentives starts February 1,
  2006 and ends Nov. 30, 2006.

Departments must report to HR which incentives
 employees met by December 8, 2006.
                                Supervisors Need to:

• Set annual performance goals for      • Document cross training,
  “Meets Expectations” for all traits     including:
  and “Exceeds” for Customer
                                           – Who was trained
  Service
                                           – What training included
• Tell employees to submit                 – When training was held
  documentation of education levels
                                           – Who was asked to
  to HR Consultants/Liaisons for
  entry into PeopleSoft
                                             perform tasks for which
                                             they were cross-trained
                                             & employee’s response.
                       Supervisors Need to:

• Document incidents of:    • Document Customer
  – Safe Workplace            Service Complaints:
    Violations                – What was the complaint
  – Preventable Accidents     – How was it investigated
  – Failure to report           and substantiated (or not)
    accidents or injuries


• Track OT hours
                 Documentation:
      Licenses, Certificates & Registrations


Departments should:
• Compile a list of relevant licenses, certificates
  and registrations
HR will:
• Compile a list of standardized award amounts
  for various licenses, certificates and
  registrations (i.e. CDL, CPR/First Aid)
Questions?

				
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