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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 AnaSla Inres nul a ry c ae Inetiv Pyto aeSla cn e a Bs a ry aimm Mx u a ty Sfe / ae Bs ic uto e ros S k Cs mr C s - C eitiz n vr ll a g c ae xed ev e ic in g a fatio Oea Rtin Inres Eces Lae Srv e tra in Stis c n a Me Filsto et .0 00 .0 .0 00 00 00 .0 .0 00 .0 00 .0 00 ets Me .2 25 .2 .5 05 00 03 .3 .4 06 .4 06 .2 45 ah wr s Cs Aad eatm Dpr etn pr vd Apoe dctio a pt Eua n Gin So o o p etif a n WkCm Cr ictios r /Dloly= E(Mnm 2 hr g wr s GDiptha$5 Sain Aad o ) 0 t at 10 o 2% Ales$5 T soia 's$0 Asc te =5 eut n e e r ind r dcio = b dteme ahlo's$0 Bce r =10 p Uto 00 p y et 5/5 slit b Dp . a r =10 B 20 s M te's$5 TD $5 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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