The current management compensation system, established in 1999, has not been successful in meeting City wide objectives. It lacks the mechanisms to facilitate the administration and maintenance of the compensation plan to ensure appropriate internal and external equity. In addition, the system does not adequately address pay compression that exists on a large scale. Therefore, as part of the management compensation program development, the City hired the Hay Group in 2002 to develop a management job evaluation system which included a two-phase review and development of a management compensation plan. Phase I included evaluating and ranking all management jobs based on a point-factor job evaluation system for internal equity, and developing a salary grade structure. Phase II included conducting a salary survey and developing salary ranges for the grade structure. Due to budgetary constraints and staffing issues, implementation was delayed. In 2005 Hay consultants were asked to update the job evaluation system to include new and revised job classifications. The market survey was updated by City staff and is reflected in the new management salary structure being proposed.

The outcome of this methodology is a measurement of job size in terms of points. A sample illustration of the jobs and total points is included in Attachment A. The job evaluation process also enables the City to link internal job values to the external market data.

External equity or market competitiveness deals with market rates for jobs. A major goal of the management compensation program is to provide compensation which is consistent with the external labor market in order to attract, retain and motivate a sufficient number of qualified employees. A salary survey provides the primary data for use in setting salaries, analyzing trends among similar jobs, and for determining the appropriate market position (target). Before beginning the process of collecting labor market data, an organization must first consider what data to gather from the surveys: total compensation (base pay, retirement contribution, benefits, etc.), salary only, or a combination of these. The next choice is selecting which jobs to survey. Generally, salary surveys contain benchmark jobs that are common to many public agencies. Deciding the relevant labor market is the third step. Generally, this includes other employers in the same industry (i.e., other local government agencies), performing comparable work or municipal services, those who compete for workers within a common recruiting area, and a balance of organizations of varying size (population and number of employees).

As referenced in the Background section above, Phase II of the management compensation program development was the collection of market data. The elements of the data included 1)the maximum monthly base salary, and 2)the maximum agency monthly contribution of the employer paid employee contribution to retirement. Salary data is collected for each of the 28 benchmark jobs which are representative of City departments and functions.

The Labor Market for Sunnyvale’s management jobs consists of the following agencies: Alameda, Berkeley, Concord, Daly City, Fremont, Hayward, Milpitas, Palo Alto, Redwood City, San Jose, San Leandro, San Mateo, and Santa Clara.

The City’s external pay policy for management employees is expressed in terms of a percentile; the targeted market pay is the 75^th percentile. The proposed management salary structure is influenced by this market pay level.

Integrating Internal Equity and Market Rates

Effective administration of a compensation program requires a balance between the pay levels of employees inside the organization (internal equity) and the pay levels in the external labor market (external equity). The proposed management salary structure is designed to provide a framework for managing this balance. As referenced above, the Hay Group developed a grade structure based on job evaluation - evaluating every job and identifying groups of jobs that cluster together by having similar point values. The job hierarchy forms the basis for grouping jobs of similar point value (job size) and to establish a grade structure where each grade represents a different pay level. Salary ranges are then created by evaluating the average market difference for all benchmark jobs and determining the appropriate top step value for each grade. This process incorporates both the external value and the City’s internal value for all jobs in relationship to each other. In addition, the differential from one grade to the next is determined to resolve any inconsistencies between internal equity and market competitiveness, including salary compression.

Salary compression is the narrowing, over time, of the pay differentials between positions in different jobs in an organizational hierarchy (usually in a supervisor/subordinate relationship). This problem is most evident between the classifications of Public Safety Captain and Public Safety Lieutenant. A factor contributing to salary compression is the fact that the average salary increase for management has typically been less than that negotiated by the represented employees. The last increase given to management employees was in FY 03/04. The salary increase for management employees was 3%, while the salary increase for SEA was between 3.43% to 9.55%; PS Officers was 7.70%, PS Lieutenants was 7.19%, and COA was 7.75%. A comparison of the prior 7-year salary increases by employee group is included in Table 1 (Exhibit 1 to Attachment A).

A total of eleven salary grades are recommended to be established. Grades 15 through 21 make up the Middle Management salary grades. Grades 22 to 25 make up the Executive Management salary grades. Grade 21 is established at 18% below the Executive grade 22. A 12% differential is used between grade 21 and 20, and between 20 and 19; a 10% differential is used between grade 19 and 18, and between grade 18 and 17; an 8% differential is used between grade 17 and grade 16, and between grade 16 and 15. The successive increases of 8%, 10% and 12% for the Middle Management group is proportionate to larger increments of job evaluation points as illustrated in Table 2 (Exhibit 2 to Attachment A). A similar differential concept is also used for the Executive Management’s salary grade, except a 3% differential is used to set apart the Executive salary grades 22, 23, 24 and 25.

Due to unique market conditions, sworn management positions (Director of Public Safety, Deputy Chief and Captain) and unclassified positions in Category K (positions directly appointed by the City Attorney) have been assigned a pay grade based upon job content, but the actual base salary is paid at a higher pay grade based on market adjustment. For Public Safety, the current top step salary for Lieutenant is used as the anchor from which a 15% differential is added to create the top step salary for the Captain. Then, a 12% differential is used to set the Captain apart from the Deputy Chief, and the Deputy Chief from the Director. Pay in-lieu of holiday for designated Public Safety Deputy Chiefs and Captains is included in the proposed base salary ranges. Top step salaries for City Attorney Staff (Category K) are adjusted to reflect market rates.

Although market factors are considered in developing the pay ranges for the management salary structure some adjustments are necessary to address the internal relationships, such as the compression issue referenced above. The top step salary for two middle management positions, Assistant City Engineer and Recycling Supervisor, are adjusted to yield a 15% differential above the subordinate non-management classification. The actual market 75^th percentile is used to establish the Top Step for grade 18. The new grade structure, based on internal equity, also resulted in the grade assignment for some positions to a salary grade that has a lower salary than their current Top Step. Staff recommends y-rating these incumbents at their current pay rate until the lower-paid salary grade becomes equal in pay as a result of cost-of-living adjustments and/or other increases over time. In accordance to the City’s Salary Resolution, Section 5.048, if the current salary of the employee is more than the maximum of the new classification/salary grade, the employee may be y-rated and he/she will continue to receive the former rate of pay until the maximum salary of the new classification/grade is raised to an amount higher than the rate of pay in the former classification/grade.

A clear goal of the new management compensation program is to integrate variable compensation in order to achieve optimum performance, encouraging organizational cooperation and collaborative pursuit of Citywide goals and objectives by engaging managers to monitor their own performance. Pay for performance is a system that has a recognized potential in improving quality and increasing efficiency, which benefits the customers, the employer and the employees. The system links pay and performance by rewarding managers for consistent and exceptional job performance in the form of a bonus; managers are expected to set and achieve challenging performance goals and are held accountable for poor performance. Linking pay to performance requires a management system that is easy to grasp and perceived as fair by employees. The current individual bonus system has not met those objectives. To ensure a fair, measurable, and challenging program that meets Citywide objectives, staff recommends that the bonus component of the management compensation program be suspended while City staff continue to work on a team bonus concept for future consideration that will meet Citywide objectives.

Today’s competitive business environment creates many challenges for managing a compensation program. A competitive compensation philosophy requires a well-rounded approach that may include non-financial factors such as benefits, leave time and flexible scheduling. Rapid changes in technology have resulted in new ways of working. It is becoming more evident that the availability of a flexible work schedule influences an employee’s behavior in deciding whether or not to accept an employment offer. Ten of the City’s thirteen benchmark agencies currently offer alternative work schedules to management employees, and nearly 50 other California cities that responded to our recent survey have some form of flexible work schedules. In order to remain competitive and attract highly qualified managers, and to the extent feasible and without impact on City services, staff recommends adoption of a 9/80 flexible work schedule for management employees. In addition, staff recommends a revision to the current Administrative Leave Program which provides 24 base leave hours plus 36 discretionary leave hours to a program which provides 40 leave hours for Middle Management, and 60 leave hours for all Executive Management. This will bring Sunnyvale’s administrative leave program closer to our benchmark agencies, where the practice is to provide between 40 to 120 hours.

FISCAL IMPACT
The proposed management compensation structure will result in an average salary increase of 6.77% over the course of the implementation period, which ranges from one to three years. This equates to a $745,500 increase in total management salaries. Additional costs for benefits related to salaries (retirement costs and deferred compensation costs) would be $191,300, for a total fiscal impact of $936,800.

To minimize the fiscal impact, the required adjustments of the proposed management compensation structure will be implemented in two phases. In the first phase, salaries of classified and unclassified management employees will be adjusted to equal the new top step or the next step in range of the new salary structure that provides a minimum of 5% increase above their current salary rate. This adjustment will be effective the pay period that includes January 1, 2006. In the second phase, another step increase is provided effective the pay period that includes January 1, 2007. Subsequent increases, if any, to bring salaries of classified and unclassified management employees to equal the top step of the new salary structure, will be based on merit and will occur on a fiscal year basis.

Under the recommended implementation plan, the fiscal impact for FY 2005/2006 is $721,336. The budget for salaries and benefits would be adjusted for various programs and projects. The fiscal impact will affect several City Funds, based on where the management employees are budgeted. The impact by major Funds is outlined in the table below. Funds related to the General Fund are inter-related to or receive a subsidy from the General Fund. These include the Community Recreation Fund, Youth and Neighborhood Services Fund, Redevelopment Fund, and General Services Fund.