REWARD IN LOCAL GOVERNMENT

27 April 2012

RECENT DEVELOPMENTS

MERCER 3

Local flexibility

with stronger governance

and disclosure

requirements

CLG Guidance:

• Requires disclosure of all salaries over £58,000, together with salary structure and pay bands;

• Full council should approve salary packages over £100,000;

• The pay multiple between the highest salary and the median should be published;

• Local authorities should “consider” Will Hutton’s Earn Back proposals;

• And more helpfully:

“Each local authority is an individual employer in its own right and has the autonomy to make decisions on pay that are appropriate to local circumstances and which deliver value for money for local taxpayers”.

Recent developments

The Localism Act 2011

• Requirement to produce a “Pay Policy Statement” from 2012/13

• The policy statement must be approved by a resolution of the full council before it comes into force

• In doing this authorities must “have regard to” any guidance issued by the Secretary of State

Treasury

• Strongly pushing the “regional pay” agenda

• Emphasis on controlling costs

Will Hutton’s Fair Pay Review

• Recommends performance-related pay through an “earn back” arrangement

• Supports “gainsharing” for all employees

• Recommends use of Remuneration Advisory Committees where decisions are made by elected politicians

MERCER 4

How does local government pay compare with the private sector?The examples below shows how the total package for local government jobs compares with those of comparable size in the private sector:

Notes:• Comparisons are made using Mercer’s IPE job evaluation system. The Housing Officer is assessed as being in IPE

Position Class 45 and the Chief Executive in IPE Position Class 66.• Local government pension is valued at 20% of base salary.• Other direct compensation includes the value of bonus and long-term share incentives.• Private sector data are drawn from Mercer’s Total Reward Survey which has data from around 70,000 UK positions.

Housing Officer v private sector role of comparable size

Chief Executive v private sector Head of Organisation

For most roles the local government

package is competitive with

the private sector, but less so for more senior

positions£0

£5,000

£10,000

£15,000

£20,000

£25,000

£30,000

£35,000

Local government Private sectorcomparator

Pension and benefits

Other direct compenstion

Base salary

£0

£50,000

£100,000

£150,000

£200,000

£250,000

£300,000

£350,000

£400,000

Local government Private sectorcomparator

DEVELOPING A STRATEGIC APPROACH TO REWARD

MERCER 6

The future challenges for reward in local government

External drivers

Local government

• Single status largely completed

• Three years of pay freeze

• Pension reforms reducing value of pension

• More commissioning of services and less delivery

• Pressures on costs and performance

Political

• More emphasis on regional pay

• Additional disclosure requirements

• Continuing “anti-bonus” rhetoric

Labour market

• An aging workforce

• A younger workforce with different values

• Increasing competition (if/when the economy recovers)

The challenges

The HR challenge:

How can we improve employee performance whilst maintaining control of costs?

The reward challenge are to:• Integrate reward as part of the

wider Employment Value Proposition

• Have more segmentation of reward for different types of jobs

• Align reward with performance/contribution

• Adapt reward for transformed organisations

MERCER 7

Reward Strategy

– What reward system is needed to make this happen ?

A better approach

Business Strategy

– What does the organisation need to achieve ?

HR Strategy

– What people skills are needed to do this ?

– What is the Employment Value Proposition that will obtain these?

The usual approach

Reward Policy

– What can we afford?

– What is the latest “best practice” and guidance we can copy?

HR Policy

– What recruitment and retention issues need fixing?

– How can we integrate the reward policy with other HR policies and processes?

– Inflexible complex systems providing poor value for money Likely

Outcome

Moving to a “top down” approach in developing reward strategy

MERCER 8

Reward systems are comprised of three elements: job size, market rate and performance:

Alignment of the value of skills with the external market

Taking account of:• The achievement of

annual objectives,• Levels individual

skills and competencies

The responsibilities and impact of the job, and the levels of knowledge and skills required

Job size Market rate

Performance

Rewardsystem

All organisations need to decide on the appropriate balance between these elements, depending on their culture, business and the employment markets in which they operate.

Private sector organisations tend to place a greater emphasis on the market rate, whereas in the public sector job size is more important.

In the future local authorities will need to place a greater emphasis on:

– Performance or contribution, to align reward strategy with the broader HR objectives;

– Market rates to recognise that the diverse types of jobs and professional groups within the organisation.

The components of a reward system

Managed and communicated as part of an integrated Employment Value Proposition

THE FUTURE CHALLENGES FOR REWARD IN LOCAL GOVERNMENT

MERCER 10

Reward as part of an Employee Value Proposition (“EVP”)

Employee gives:

• Time

• Knowledge

• Engagement

• Passion

Employee wants:

• Pride in their work

• Respect

• Material rewards

• Personal Development

Some facts:

• Highly engaged employee are 87% less likely to leave their jobs than their disengaged counterparts (The Conference Board)

• Private sector companies with high levels of engagement are more profitable (ISR)

• Higher levels of employee engagement have been proven to increase customer satisfaction levels (Oakley)

• Engaged employees are far more likely to suggest or develop ways to solve customer problems and to improve management or business processes (Gallup)

Generally reward in local government:

• Is dealt with in isolation, disconnected from the less tangible aspects of the EVP

• Does not recognise the wants and aspirations of different groups of employees

• Does not recognise either individual or organisational performance/contribution

• Has a history of negative messages: equal pay claims, pay freezes etc

And in summary does not make a positive contribution to the overall EVP!

What is an EVP?

MERCER 11

Where does reward fit in the overall EVP?

81

73

71

71

71

70

66

56

54

52

47

46

44

% Extremely / Very Important

Being treated with respect

Providing good service to others

Quality of leadership in organisation

Base pay

Flexible working opportunities

Long-term career potential

Learning and development

Benefits

Promotion opportunities

Incentive pay/bonus (if applicable)

Work life balance

The type of work you do

Quality of people you work with

Source: Mercer What’s Working™ UK 2010

How important are the following factors in influencing your motivation and engagement at work?

Mercer’s research shows that 66% of employees think base pay is important or very important in influencing their motivation at work

but

Being treated with respect scores 81%!

MERCER 12

Segmentation of reward

• Most local authorities have a highly diverse workforce and reward systems need to:

– Reflect the nature of the different types of work being carried out;

– Support the different career development patterns for different roles;

– Be connected with the wider talent management processes.

• Different approaches for different groups of employees will not result in Equal Pay issues if they are managed properly. For example:

£0

£5,000

£10,000

£15,000

£20,000

£25,000

£30,000

Employee A Employee B

Stretch bonus

On target bonus

Base salary

The example shows two different jobs with employees carrying out work of equal value.

Employee B would not succeed in an Equal Pay Claim with Employee A as a comparator because on target earnings are the same.

(Provided that the incentive scheme is managed properly!)

MERCER 13

Reward for performance/contribution

• Performance-related pay has had limited success in the public sector

• The reasons for this are:

– Schemes have tended to have over-ambitious/unclear objectives leading to poor design, and then disillusionment;

– A “one size fits all” approach to individual performance-related pay does not work;

– And (more recently) the political noise about bonuses!

• Two simple questions can determine whether performance-related pay is appropriate:

– Can the pay system be fair without recognising different levels of performance within the organisation?

– Can the organisation achieve high levels of performance if this is not reflected in and communicated through the reward system?

MERCER 14

When designing performance related pay systems it is important to be clear about the objectives that are to be achieved:

Objective Comment

1. Reflect market practice and recruit and retain talent

Many bonus and incentive schemes in the private sector (including much of Boardroom pay) are designed to achieve this limited objective.

2. Align reward with organisational performance and communicate priorities

Ensures people are paid more if the business is successful and that employees understand the priorities. Share incentives, profit sharing / gain sharing and team bonuses fall into this objective.

3. Reward employees fairly, based on their individual contribution

Provides reward based on individual contribution. This works best for jobs where a) individual performance can be easily differentiated and b) where there is the capability to measure performance.

4. Create an incentive for improved performance

Pay is genuinely used as a lever to enhance individual and organisational performance (sales incentives fall into this grouping). In addition to the requirements in 3. above it suggests that individuals are motivated by financial reward.

Leve

l of

diff

icu

lty

Easy

Difficult!

Getting clarity on the objectives for performance-related pay

Performance-related pay in the financial services sector is at level 1, in that its primary purpose is to compete and to support the retention of key staff. Local government should focus on levels 2 and 3: aligning reward with organisational performance and enabling a system that distinguishes between stronger and weaker performers where the job is suitable for individual performance-related pay.

MERCER 15

Limited Substantial

Extent to which performance can be differentiated

Ea

sy

Eas

e w

ith

wh

ich

per

form

ance

can

b

e m

easu

red

Dif

fic

ult

• Teachers and doctors

• Waiters and similar customer service roles

• Managers (without a profit centre)

• Professional services roles

• Manufacturing/production jobs (where outputs are complex)

• Postal workers

• Bus and train drivers

• Manufacturing/production jobs (which require team working)

• Cleaners and most other manual jobs

• Simple back office administrative/ customer service roles

• Police constables and security staff

• Members of the Armed Forces

• Sales roles

• Manufacturing/production jobs (where outputs are simple)

• Managers (with a profit centre)

• Senior executives

Sometimes individual performance can be differentiated but it is very hard to measure.

High levels of performance management

capability are needed to link pay to

performance for these types of jobs.

For some jobs it is simply not possible to differentiate individual performance - these

jobs are better suited to team bonuses/gainsharing arrangements.

Individual performance-related pay is best suited to these types of jobs

where individual performance can be easily differentiated

and measured.

Individual performance-related pay depends on the type of job

MERCER 16

Traditional local government reward

Future local government reward

Costs managed through national pay frameworks

Costs managed by each organisation to fit with unique circumstances

Pay systems administered through complex and inflexible processes

Pay systems actively managed to respond to the needs of the business

Reward managed in unconnected professional groups

Reward aligned with an integrated approach to talent management

Emphasis on equal pay compliance

Achieving equal pay compliance alongside greater flexibility

Fixed costs, including incremental costs that have limited connection with performance

More flexible reward models which are tied in more closely with performance

Reward for tenureReward for contribution and performance

Each term and condition of employment managed separately

An integrated “Total Reward” approach to all terms and conditions, including pensions

Reward dealt with in isolation as a specialist technical area

Reward integrated with the wider “Employment Value Proposition”, linked to HR and business strategies

Adapting reward for transformed organisations

The past:

Traditional delivery organisations with a large workforce organised around departmental services

The future:

Smaller leaner organisations with fewer directly commissioned services

How reward is central to the transformation journey

CONCLUSIONS

MERCER 18

Some conclusions

• We now have a reasonably settled policy position on the management of reward:

– Local flexibility and accountability;

– Underpinned by more onerous governance/disclosure requirements.

• In the future local authorities will need to develop more strategic approach to reward including:

– Making reward part of an Employment Value Proposition;

– Adapting reward for different types of roles (segmentation) and linking to talent management;

– Rewarding for performance/contribution;

– Adapting reward for transformed organisations.

MERCER

QUESTIONS AND DISCUSSION

MERCER 20

Daniel Hibbert PrincipalMercer | Tower PlaceLondon EC3R 5BUUnited Kingdom+44 (0) 20 7178 5520 +44 (0) 7557 031371daniel.hibbert@mercer.com

Mercer contacts

Christopher Johnson Senior PartnerMercer | Tower Place London EC3R 5BU United Kingdom+44 (0) 20 7178 7343 +44 (0) 7920 261226christopher.johnson@mercer.com

MERCER 21

The role of the market in pay determination

National, regional or local?

The question of whether there is a national or local pay market is primarily determined by the number of positions that are available nationally and the size of the job as shown opposite:

Other factors, such as supply and demand and the strength of local transport links, also have an important role in determining whether the job has a local, regional or national market.

Local government, wider public sector or private sector?

• For many jobs both markets are relevant and should be considered;

• The private sector market is much less relevant for more senior and specialist roles.

Many FewNumber of national positions

Siz

e o

f th

e jo

b

Local markets

Lar

ge

Sm

all

National markets

Many FewNumber of national positions

Siz

e o

f th

e jo

b

Local markets

Lar

ge

Sm

all

National markets

Market rates of pay should inform pay decisions and this requires careful consideration as to the different markets that should be applied to different types of jobs