Reducing or Flattening Payroll Costs in a Post Pandemic World

Many of our local governments have been impacted negatively from a financial standpoint as a result of the pandemic. We have seen reductions in 2020 and expect to see more in 2021 and beyond. We have been told that 2021 may be worse than last year too as the revenue losses are being sustained for a longer period of time than originally anticipated. It is very likely that the effect of the pandemic on local government budgets will be felt in 2022 and beyond.

Because the majority of local government budgets are made up of personnel costs, consider the following items to help reduce or flatten costs.

Pay plan designs:

Three are three types of pay plans – Defined Increment, Open Range, and Hybrid.

  • Defined Increment Plan: This is a Compensation Plan that has salary ranges with a minimum and a maximum with defined percentage increments (e.g., 3%) in between, also known as steps.
  • Open Range Merit Plan: This is a Compensation Plan that also has salary ranges with minimums and maximums, but without defined percentage increments in between.
  • Hybrid: This is a Compensation Plan that uses techniques from both a Defined Increment Plan and an Open Range Merit Plan. At the minimum pay, there are defined increments and then the remainder of the plan is open range.

Many local governments use defined increment plans, especially for non-exempt employees. In the past increments ranges from 4% to 6%, with 5 or 6 steps in a pay range. Over time, local governments have lowered the percentage between the defined increments to 1 to 3%, with 10 to 20 defined increments in a pay range.

Many local governments also use an open range plan for exempt, supervisory, and managerial employees. By using this approach, the percentage increase can vary from year to year depending upon the jurisdiction’s ability to pay.

The use of a hybrid plan provides benefits in two ways. First, it may help transition the organization from defined increments to open range depending upon the goal to be achieved. Second, it allows for a defined increment increase in the early years of employment when the learning curve is steep.

In considering which Plan to use, it is important to understand that employees at various levels of responsibility may react differently toward, and be motivated differently by, the Compensation Plan they work under. Supervisory and management personnel that are goal-oriented may have a higher acceptance of the Open Range Plan, with a merit component, and thus tend to be more comfortable with this method of compensation.  Mid to lower-level positions may want the assurance of a defined salary increase.

GovHR also recommends the use of a merit component when determining if pay increases are warranted. Lastly, the pay plans discussed would be adjusted annually by the jurisdiction’s general increase if one were given.

Benefits review:

In addition to base pay, many local governments are estimating up to 50% per employee for a full benefits package. When conducting classification and compensation studies, many jurisdictions include a comparative review of benefits. There are several benefits that have been changed over time:

Health Insurance – Having employees pay a percentage of the cost of coverage as opposed to a flat dollar amount is preferred, as the contribution rates change automatically with coverage premiums, and most local governments take this approach. However, many jurisdictions charge less than 20% of the premiums charged, which is very low in today’s environment. Also, many employers offer Dental and vision insurance, with employees paying 100% of the cost.

Longevity – About 50% of the employers surveyed during our studies continue to provide longevity and most have changed to a flat dollar amount instead of a percentage of salary. The number of employees still providing this benefit had decreased significantly over the past ten years.

Vacation and Sick Banks – These benefits are very costly to local governments, especially if employees have long tenures and get payouts at the end of employment on much higher salaries from when they started in their positions. Moving to sick leave with a maximum accumulation and no payout is preferred. It allows employees to save some time in the event of an illness and does not guarantee a payout when the employee leaves the jurisdiction. Annual sick leave payouts are also expensive. They deter employees from taking leave when they are ill, which may have an impact on other staff members if employees come to work with illnesses. Further, if an employee is regularly using all of his/her sick leave in a given year then the employer should require documentation for the illness if the leave is determined to be excessive.

For Vacation leave, a cap on carryover and days earned can be instituted. Vacation of two weeks for the first year of employment is customary, especially if the employee is not permitted to take time off in the first six months. However, once the employee completes the first year of employment, that amount can be increased to three weeks. It is very difficult to only have two weeks off per year. Employees should be required to take time off for wellbeing. A carryover of up to five days can be permitted with a timeframe for use attached, such as a carryover on December 31st must be used by March 31st. More tenured employees can earn up to twenty vacation days but that should be the limit, with no vacation payout when an employee leaves employment with the jurisdiction.

What is preferable is a paid time off (PTO) approach, rather than different buckets for different types of leave. For example, a new employee may be given 15 days of PTO. After one year, 20 days, 5 years 25 days, and at 10 years 30 days. A PTO program can be combined with a voluntary short- and long-term disability program. Combined with workers’ compensation and disability pension benefits that are usually offered, employees should be covered should a medical issue arise. A PTO program can also have a not payout component should an employee choose to leave the employment with the jurisdiction.

It is understood that state laws differ, and some jurisdictions work with collective bargaining units. These suggestions to reduce or flatten labor costs and a strategy to implement changes, especially in a collective bargaining environment, is to grandfather existing employees and institute changes for new employees only. It may take a little longer but over time savings will be achieved.

By Joellen Cademartori, CEO