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75th percentile: Compensation benchmark draws debate

By Staff | Aug 28, 2015



As the Cape Coral City Council readies for public hearings in September on its proposed 2016 budget, the elected board continues to wrangle with a wage “benchmark” proposed by the city’s administration.

Saying the city needs to be able to retain good employees while attracting top-tier talent, City Manager John Szerlag has both proposed and embarked upon a plan to compensate city workers at the “75th percentile” for like positions.

The adjustments within pay ranges to the base of the top quartile, combined with salary adjustments to reflect raises not awarded when tax revenues plummeted due to the housing bust, is estimated to add $25 million per year to the city’s payroll at full implementation, according to staff. This “pay parity” plan is proposed to be phased in over time.

Critics say the benchmark is too high, too expensive and a bad business model that will leave a lingering legacy of escalating costs.

*The background

The city charter requires the city of Cape Coral to conduct a compensation review every five years. Council is not required to implement the findings and, during the lean years following the housing collapse of 2007, Council did not. With revenues dropping as property valuations plummeted more than 60 percent during the real estate bust, the city also did not award employee raises – including those due as per union contracts – as the Cape concentrated on keeping core services.

To that end, there has been Council buy-in for the concept of increasing employee compensation. In the wake of the city holding raises in abeyance and union “give backs,” the elected board agreed last year to catch up a bit with the start of the new fiscal year.

First, City Council approved 5 percent raises for all employees. The board then also approved a second element, with another 5 percent awarded retroactively with the number of weeks for the retroactive raises varying according to when collective bargaining began for the particular bargaining unit.

Police employees, for example, received a 5 percent increase to base wages retroactive to July 1 of 2014 along with the approved 5 percent increase with the start of the new fiscal year, which began Oct. 1.

“I think it was a good start,” said Councilmember Lenny Nesta. “Employees had not had a raise in seven years. We were losing police officers left and right to other agencies.”

The 10 percent bump is intended to be a first step in the city’s wage parity initiative.

To address its compensation issues, the city administration, and bargaining unit and non-bargaining employees, in conjunction with Segal Waters Consulting, early last year began a wage and benefits study that compared Cape Coral’s four primary employee groups – police, fire, general and non-bargaining – with similar groups in the municipalities of Clearwater, Coral Springs, Fort Lauderdale, Gainesville, Hollywood, Pembroke Pines, Port St. Lucie and Tallahassee.

Their findings, presented in group-specific Joint Comprehensive Cost Analysis Reports this May, looked at base pay or direct compensation; compensation other than base pay; core benefits and other benefits; and resources used by the communities “to attract, motivate and retain employees.”

Nearly across the board, the studies showed that the city of Cape Coral compensates at a lower level than its stated benchmark of the 75th percentile.

… “Extensive research was completed on market analysis, total compensation comparison and a thorough review of the City’s job classification system,” Szerlag said in his budget statement to council in July. “All of the information confirmed that City employees in Cape Coral had fallen far down the ladder in comparison to similar cities on compensation. This past year, City Council provided pay increases to City employees for the first time in several years. These increases began what will be a multi-year process toward more fair and equitable pay structure for Cape Coral employees.”

Where the bar is set for “more fair and equitable” remains to be seen. Council has not voted to approve the 75th percentile as a benchmark -and not all agree the top quartile is where the bar should be set.

“I’m opposed to it,” said Councilmember Rana Erbrick. “I’m opposed to paying at that level based on our buildout, our taxable base and what our residents have gone through. It comes down to what burden are you going to place on the taxpayers because they are the one footing that bill. I’m not willing to put that burden on the taxpayers.”

In her experience in the private sector, the 50th percentile within a specific market for a like position was considered competitive with a few percentage points added to make the pot sweeter for a particularly good hire or an employee whose skill set you wanted to retain.

“The city manager just kind of threw the 75th percentile out there,” she said. “Nobody pays at the 75th percentile.”

Councilmember Richard Leon took a similar view.

“The 75th percentile is a goal set by city staff,” he said. “While I think that is a good number, I don’t think it’s a number that is appropriate for the city at this time.”

Others support raising the bar.

“I do,” Nesta said when posed the question. “If you look at the 75th percentile, comparing to market, it puts us in the ball park. We want to retain good employees and not be a training ground.”

The taxpayers benefit, he said.

“We don’t want to train employees to go somewhere else because compensation is too low,” Nesta said. “It doesn’t help the city, and it doesn’t help the taxpayers who are paying for the training.”

* The thinking behind the proposal

During discussions on setting the city wage benchmark, Councilmember Derrick Donnell questioned why the issue was being discussed in the wake of what he called “healthy raises.”

“We haven’t stopped celebrating what we’ve done,” he said during the last Council compensation discussion. “Raising pay by 10 percent in one year was Herculean. We moved them from the 50th to 66th percentile.”

Szerlag, in a memo also signed by Assistant City Manager Michael Ilczyszyn and Human Resources Director Lisa Sonego, staff answered Donnell’s question, “On average, how far away from the 75th percentile to market is each employee group?”

According to the memo, it varies according to employee group, with non-bargaining unit employees lagging the farthest behind and fire union employees lagging the least at the minimum range.

According to the memo:

– Non -Bargaining – On average, the current pay ranges for the non-bargaining positions are 28 percent below minimum and 35 percent below maximum.

There are currently 106 non-bargaining employees. Their ranges were last adjusted on Oct. 7, 2006.

– General Union IUPAT – On average the current pay ranges for the General Union represented positions are 6.8 percent below both minimum and maximum.

General Union pay ranges were last adjusted 1.75 percent on Feb. 14, 2015 and 5 percent on Sept. 27, 2014 .

– Police FOP – On average the current pay ranges for Police FOP represented positions are 8.9 percent below minimum and 10.5 percent below maximum.

Police pay ranges were last adjusted 5 percent on Oct. 1-2014 and 5 percent on July 1, 2014 .

– Fire IAFF – On average the current pay ranges for Fire IAFF represented positions are 2.1 percent below minimum and 14.7 percent below maximum.

Fire pay ranges were last adjusted 5 percent on Oct. 1, 2014 and 5 percent on July1, 2014.

“As shown in the above statistics, recent past measures have been taken to adjust employee groups pay ranges toward the 75th percentile to market, and various groups pay ranges are close to that mark,” the memo states. “Although raises were implemented for individuals at the City, the non bargaining group pay ranges have not been adjusted since 2006. Pay inversion and compression would be accentuated if all employee group pay ranges were not adopted at the same strategic placement to the external market, the 75th percentile.”

There are reasons to move employees, particularly the non-bargaining employees, to the benchmark, the memo states, adding there are some strategic reasons for the philosophy.

One is the issue of attracting the best candidates.

“Lower market placement for higher level roles implies that these roles are less valuable to the City and external individuals will not be attracted to apply, let alone individuals wanting to internally promote to these roles,” the memo states.

Two is retention and the costs associated with losing employees with institutional knowledge and of replacing them with, perhaps, less qualified candidates due to the current wage scale.

The city is already facing a management replacement challenge due to retirements and pending retirements, the memo states

Eight percent of the total workforce is currently enrolled in the pension plan’s DROP program which allows government employees to keep working while “banking” their pension payments for a lump sum payout. The city saves because it stops making pension contributions for “essential” employees in the state defined deferred retirement plan.

Thirty-six percent of the city’s mid- to executive-level employees (current grades 17 and up) are eligible to retire by the end of this year which includes seven of the 10 department directors/chiefs.

“The bottom line is that all employers must choose a placement to market to operate its pay philosophy,” the memo states. “This sends a clear message to the external market and internal employees on how it values its employee workforce and the level of skill, knowledge and leadership it is interested in employing to drive its future and the outcomes from its employee workforce.”

*How other major public employers in Lee are addressing the challenge

Officials with three of Lee County’s largest public employers, Lee County, the Lee County Sheriff’s Office and the Lee County School District, said their agencies do not set wage benchmarks.

Each, like the Cape, has a significant number of unionized employees. Each uses the collective bargaining process to determine compensation levels, officials said.

“Compensation levels are determined by the salary schedules that are established for each position,” said Dr. Angela J. Pruitt, executive director of Human Resources for School District of Lee County. “The salary schedules for instructional and support employees are bargained by the Teachers Association of Lee County (TALC) and the Support Personnel of Lee County and approved by the Superintendent and the Board.”

The district does have issues with hiring qualified teachers but that is part of a national trend, she said.

“The District is currently experiencing challenges with recruiting qualified teachers,” Pruitt said in response to a Breeze email query. “There have been several articles published recently regarding the nation’s teacher shortage.”

The district has 10,323 full-time, regular employees.

Lee Memorial Health System, though, does have a wage benchmark. Its elected board of directors set it at the 50 percentile in 1991 and continues to use that as its standard today. Officials there said the system competes in a very competitive market with the goal of both getting and retaining good employees.

“As our community grows and the population ages, the need for health care workers increases,” said Jon Cecil, chief Human Resources officer for Lee Memorial Health System, in an email response to a Breeze query. “Especially in this environment, it is critical to offer compensation and benefits to attract and retain high quality staff. Lee Memorial Health System’s ‘total rewards’ strategy, which has been in place for many years, balances pay, benefits, a healthy work environment and learning and development opportunities to give a competitive edge in hiring.

“Our staff is at the heart of the care we provide to the community,” he said. “Our employee compensation investment makes up about 50% of our budget each year. Last year it was $598 million, which helps drive the local economy as wages are spent. We are the second largest employer in Lee County, with about 11,500 full and part-time staff, while the Lee County School District is the largest with approximately 12,000 employees. Maintaining competitive wages, a healthy benefits package designed to encourage work-life balance, and offering continuous growth and education opportunities have resulted in about 10% of our current staff reaching employment milestones of 20-45 years of service.”

Its practices have received multiple recognitions.

“Lee Memorial Health System is a three-time designee as ‘Employer of Choice,’ awarded by Employer of Choice International, Inc., in recognition of its dedication to a workplace culture that attracts, engages, and retains high quality employees,” Cecil said. “Lee Memorial Health System’s recent annual employee engagement survey results ranked at the 97.1 percentile nationally compared with other healthcare employers on the survey.”

* What is takes to be competitive in the market – and what constitutes ‘the market’

The city administration’s desire to be competitive in the job market is not at issue among council members; the Cape Council has been in support of that goal for more than a year.

“What we’ve been supportive of is ‘Let’s get that compensation and classification study and see where we line up with others,'” Erbrick said.

At issue, for some, is the benchmark itself, whether the 75th percentile is appropriate and, if it is, whether the city can afford it.

Leon said the city certainly doesn’t want to be last.

In his opinion, the appropriate benchmark is somewhere just above the median

“A little bit above the middle,” Leon said. “Fifty-one to 65 percent, but not 75.”

Others take issue with the report methodology.

“I think the 75th percentile is an irrelevant number,” said Joe Mazurkiewicz, former Cape Coral mayor and president for BJM Consulting, Inc. “I think the city ought to look to where they are losing their employees to, which establishes their marketplace, and match that number. They have to establish different market places for different categories of employees.”

It makes little sense to pick one group of “comparable cities” and then apply the numbers across the board, he said.

“It’s just like any other business, you have to look to your marketplace,” Mazurkiewicz said. “That study is irrelevant if those cities are not the cities you are losing your employees to.”

He was asked how he would define the Cape’s competing market.

“I’ve always defined market as competitors who are taking my valued employees. Those are the markets you look to,” Mazurkiewicz said.

For certain positions such as within the city’s Department of Community Development, that could include the private sector, he added.

Once you’ve identified where your employees are going, it’s relatively easy to determine how to be competitive in terms of compensation, according to Mazurkiewicz.

“My opinion on that is you can’t look at salary only, you have to look at salary and benefit packages to include W2s. If they are taking in a lot of overtime, their base pay is irrelevant. If you’re matching W2s, it’s apples to apples,” he said. “That’s the way I always used to negotiate contracts – it’s W2 to W2. You never had to use an expensive consultant, either, just request the W2s from the markets you are losing people to.”

W2s show both taxable and non-taxable compensation, he added.

“It tells the total picture from an apples to apples comparison,” Mazurkiewicz said.

Steve Riggs, a former member of the city’s now-disbanded Financial Advisory Committee and a senior partner with an international professional services firm that specializes in operations management, also questioned the report methodology.

For one, it winnowed down the number of comparable communities used in earlier studies. For another, it relied heavily on inside fact gathering and analysis.

“I’m always a little concerned when you have the fox guarding the henhouse,” Riggs said. “I’m not going to say they did anything right or wrong but the psychology of it is, you will look at it through your lens, consciously or not.”

A third party, or outside source, would have come in with a fresh eye, he said, adding for example, that two past studies found the city’s benefits package to be “rich” while the current study does not.

What the city needs to do is something that has been suggested since Terry Stewart was city manager, Riggs said.

Stewart served from 2002-2009.

“What they didn’t do, and I thought they were going to do, is look at how the positions were structured and match the salary to the positions,” Riggs said, adding the city has too many job types and classifications.

“The sheer number of job classifications the city has overwhelms all the others,” he said of other communities. “You have a very difficult challenge, then, of matching compensation to the job to be performed from group to group to group.

“I think it’s way overly complicated,” Riggs said. “It always has been.”

It’s not the salaries that are out of wack, it’s the structure of the organization that’s likely out of line, he said.

“The organizational structure needs to be reviewed first, redesigned as necessary and then the job classifications need to be reviewed and redesigned or reclassified as necessary and then the total compensation program – both the direct and indirect -need to redefined with the structure and simplified,” Riggs said. “And they need to do it not only relative to the public sector but the private sector because no matter how they say they are different, there are a lot of similarities. Police and fire are the exceptions.”

There also are exceptions to the one-size-fits-all approach to setting wage benchmarks, Riggs said.

That means paying employees with a more competitive skill set at a higher percentile level, if necessary, than those with more generalized skills or a lesser ability or willingness to perform the duties of the job.

It comes down to developing a classification and compensation system where everyone wins, employees and taxpayers alike, Riggs said

“The test of reasonable and fairness is determined by what the win-win-win scenario is for the tax and fee payers; for the employees; and for the administration, the management,” he said. “You have to meet that win-win-win scenario, and it has to pass the test of reasonable and fairness for everyone.”

Erbrick took a similar view with regards to the across-the-board top-tier percentile philosophy.

The city’s greatest hiring and retention challenges have been position specific. For example, traffic engineers have been hard to hire and keep. Planners are another example, she said.

“Hence planners might be valued more heavily,” Erbrick said. “We have a history of not being able to keep traffic engineers, they say, because of pay.”

But retention is not only an issue of salary, she said.

The police department lost 26 officers. The reasons as to why comprise a number of components.

“Part of it was pay, part of it was how command was treating personnel, part is the culture; 10 years and you’re vetted (for benefits) and yes, that might be the time you want to leave,” Erbrick said.

The bottom line is, Council does want to pay people, more, if necessary, but it has to make sense, it has to be properly justified, Erbrick said.

“After the 5 – 5 (raises) we handed over last year, many of our employees are sitting in a much nicer position than we, as Council, were led to believe,” she said.

Police and general employees are in the 66th percentile in terms of compensation, non-bargaining are at the 50th.

Cape Coral may not have the money to go all the way to the 75th simply because the city does not have the tax base of the comparable cities used in the study, she added.

Cape Coral is at 45 percent buildout, most of the cities to which the Cape wages were compared are fully developed.

“Those cities are all built out,” she said. “They probably have their tax base and it’s not built on vacant land, which pays less.”

“Compare us to North Port. Compare us to Port St. Lucie,” she said.

In addition to having concerns over the short-term costs, Erbrick said the pay parity plan adds significantly to the long term.

The city already has issues with its unfunded pension programs.

Cape Coral pensions are among those that have made the Leroy Collin’s Institute list of poor performers.

In its last Report Card Update: Florida Municipal Pensions Plans report which monitors 491 local government plans, the Florida State University team gave the city’s firefighters pension in 2012 an F for the third year running; its general employees pension a D, up from an F in 2011; and its police pension fund a C, up from a D the year before.

The report was issued in September 2014.

Grades are based on four criteria including recognizing the importance of sound economic assumptions, the ratio of unfunded liabilities to plan size, sharing costs with employees and contributions as a percent of payroll.

“It’s always going to be a reoccurring cost,” Erbrick said with regards salaries, and to pensions and pension obligations.

Costs are compounded as wages grow, she said adding raising the wage bar as proposed means more money across the board.

“If we adopt this study, then everyone has to be bought up to the minimum,” she said