1. REWARD IN LOCAL GOVERNMENT
27 April 2012

2. RECENT DEVELOPMENTS

3. Recent developments
CLG Guidance:
The Localism Act 2011
• Requires disclosure of all salaries
• Requirement to produce a “Pay Policy Statement” over £58,000, together with
from 2012/13 salary structure and pay bands;
• The policy statement must be approved by a • Full council should approve
resolution of the full council before it comes into force salary packages over £100,000;
• In doing this authorities must “have regard to” any • The pay multiple between the
guidance issued by the Secretary of State highest salary and the median
should be published;
Local
flexibility
• Local authorities should
Will Hutton’s Fair Pay Review “consider” Will Hutton’s Earn with stronger
• Recommends performance-related pay through an Back proposals; governance
“earn back” arrangement • And more helpfully: and
• Supports “gainsharing” for all employees “Each local authority is an
disclosure
• Recommends use of Remuneration Advisory individual employer in its own requirements
Committees where decisions are made by elected right and has the autonomy to
politicians make decisions on pay that are
appropriate to local
circumstances and which
Treasury
deliver value for money for
• Strongly pushing the “regional pay” agenda local taxpayers”.
• Emphasis on controlling costs
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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:
Housing Officer v private sector Chief Executive v private
role of comparable size sector Head of Organisation
£35,000 £400,000
Pension and benefits
£30,000
Other direct compenstion
£350,000 For most roles the
Base salary
£25,000
£300,000
local government
£250,000
package is
£20,000
competitive with
£200,000
£15,000 the private sector,
£10,000
£150,000
but less so for
£100,000
more senior
£5,000
£50,000 positions
£0 £0
Local governm ent Private sector Local governm ent Private sector
com parator com parator
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.
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5. DEVELOPING A STRATEGIC
APPROACH TO REWARD

6. The future challenges for reward in local government
External drivers The challenges
Political
The HR challenge:
• More emphasis on regional pay
How can we improve
• Additional disclosure requirements
employee performance whilst
• Continuing “anti-bonus” rhetoric
maintaining control of costs?
Local government
• Single status largely completed
• Three years of pay freeze The reward challenge are to:
• Pension reforms reducing value of • Integrate reward as part of the
pension wider Employment Value
• More commissioning of services and Proposition
less delivery
• Have more segmentation of reward
• Pressures on costs and performance
for different types of jobs
• Align reward with
Labour market performance/contribution
• An aging workforce • Adapt reward for transformed
• A younger workforce with different values organisations
• Increasing competition (if/when the economy
recovers)
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7. Moving to a “top down” approach in developing reward strategy
A better approach
– Inflexible complex – What does the
systems providing organisation need
Likely Business to achieve ?
poor value for money
Outcome Strategy
– What recruitment and – What people skills are
retention issues need needed to do this ?
fixing? HR
– What is the
HR – How can we integrate the Strategy
Policy Employment Value
reward policy with other Proposition that will
HR policies and obtain these?
processes?
– What can we afford? – What reward system
Reward Reward
– What is the latest “best is needed to make
Policy Strategy
practice” and guidance this happen ?
we can copy?
The usual approach
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8. The components of a reward system
Reward systems are comprised of three  All organisations need to decide on
elements: job size, market rate and performance:
the appropriate balance between
these elements, depending on their
culture, business and the employment
Job size Market markets in which they operate.
rate
Reward Alignment of
 Private sector organisations tend to
system the value of place a greater emphasis on the
skills with the market rate, whereas in the public
external market
Performance sector job size is more important.
 In the future local authorities will need
Taking account of:
to place a greater emphasis on:
The responsibilities • The achievement of – Performance or contribution, to
and impact of the job, annual objectives,
• Levels individual
align reward strategy with the
and the levels of
knowledge and skills skills and broader HR objectives;
required competencies – Market rates to recognise that
the diverse types of jobs and
professional groups within the
Managed and communicated as part of an organisation.
integrated Employment Value Proposition
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9. THE FUTURE CHALLENGES FOR
REWARD IN LOCAL GOVERNMENT

10. Reward as part of an Employee Value Proposition (“EVP”)
Employee gives: Employee wants:
• Time • Pride in their work
What
• Knowledge • Respect
is an • Engagement • Material rewards
EVP? • Passion • Personal
Development
Some facts: Generally reward in local government:
• Highly engaged employee are 87% less • Is dealt with in isolation, disconnected from the
likely to leave their jobs than their less tangible aspects of the EVP
disengaged counterparts (The Conference
Board) • Does not recognise the wants and aspirations of
• Private sector companies with high levels of different groups of employees
engagement are more profitable (ISR) • Does not recognise either individual or
• Higher levels of employee engagement have organisational performance/contribution
been proven to increase customer
• Has a history of negative messages: equal pay
satisfaction levels (Oakley)
claims, pay freezes etc
• Engaged employees are far more likely to
suggest or develop ways to solve customer And in summary does not make a positive
problems and to improve management or contribution to the overall EVP!
business processes (Gallup)
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11. Where does reward fit in the overall EVP?
How important are the following factors in influencing your
motivation and engagement at work?
% Extremely / Very Important
Being treated with respect 81
Mercer’s research shows Work life balance 73
that 66% of employees The type of work you do 71
think base pay is
Quality of people you work with 71
important or very
important in influencing Providing good service to others 71
their motivation at work Quality of leadership in organisation 70
Base pay 66
but Long-term career potential 56
Flexible working opportunities 54
Being treated with
Learning and development 52
respect scores 81%!
Benefits 47
Promotion opportunities 46
Incentive pay/bonus (if applicable) 44
Source: Mercer What’s Working™ UK 2010
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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:
The example shows two different jobs £30,000 Stretch bonus
with employees carrying out work of equal On target bonus
Base salary
£25,000
value.
Employee B would not succeed in an £20,000
Equal Pay Claim with Employee A as a £15,000
comparator because on target earnings
are the same. £10,000
(Provided that the incentive scheme is £5,000
managed properly!)
£0
Employee A Employee B
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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?
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14. Getting clarity on the objectives for performance-related pay
¢When designing performance related pay systems it is important to be clear about the
objectives that are to be achieved:
Easy Objective Comment
1. Reflect market practice and Many bonus and incentive schemes in the private sector
recruit and retain talent (including much of Boardroom pay) are designed to achieve
this limited objective.
1. Align reward with Ensures people are paid more if the business is successful
organisational performance and that employees understand the priorities. Share
evel of difficulty
and communicate priorities incentives, profit sharing / gain sharing and team bonuses
fall into this objective.
1. Reward employees fairly, Provides reward based on individual contribution. This works
based on their individual best for jobs where a) individual performance can be easily
contribution differentiated and b) where there is the capability to measure
performance.
1. Create an incentive for Pay is genuinely used as a lever to enhance individual and
improved performance 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.
Difficult!
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
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stronger and weaker performers where the job is suitable for individual performance-related pay. 14

15. Individual performance-related pay depends on the type of job
Ease with which performance can
• Postal workers • Sales roles Individual
• Bus and train drivers • Manufacturing/production jobs (where performance-related
outputs are simple) pay is best suited to
• Manufacturing/production jobs (which
Easy
these types of jobs
require team working) • Managers (with a profit centre)
where individual
• Cleaners and most other manual jobs • Senior executives performance can be
be measured
easily differentiated
and measured.
• Simple back office administrative/ • Teachers and doctors
customer service roles
• Waiters and similar customer service
• Police constables and security staff roles
Difficult
• Members of the Armed Forces • Managers (without a profit centre)
Sometimes individual
• Professional services roles
performance can be
• Manufacturing/production jobs (where differentiated but it is
outputs are complex) very hard to measure.
High levels of
Limited Substantial performance
management
Extent to which performance can be differentiated capability are needed
to link pay to
For some jobs it is simply not possible to performance for these
differentiate individual performance - these types of jobs.
jobs are better suited to team
bonuses/gainsharing arrangements.
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16. Adapting reward for transformed organisations
The past: How reward is central to the transformation journey The future:
Traditional local government
Future local government reward
reward
Costs managed through national Costs managed by each organisation
pay frameworks to fit with unique circumstances
Pay systems administered
Traditional delivery through complex and inflexible
Pay systems actively managed to
respond to the needs of the business
organisations with processes
Smaller leaner
a large workforce Reward managed in unconnected Reward aligned with an integrated
professional groups approach to talent management
organisations
organised around
with fewer
departmental Emphasis on equal pay Achieving equal pay compliance
compliance alongside greater flexibility
directly
services
Fixed costs, including incremental More flexible reward models which
commissioned
costs that have limited connection are tied in more closely with services
with performance performance
Reward for contribution and
Reward for tenure
performance
An integrated “Total Reward”
Each term and condition of
approach to all terms and conditions,
employment managed separately
including pensions
Reward integrated with the wider
Reward dealt with in isolation as
“Employment Value Proposition”,
a specialist technical area
linked to HR and business strategies
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17. CONCLUSIONS

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.
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19. QUESTIONS AND DISCUSSION
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20. Mercer contacts
Christopher Johnson Daniel Hibbert
Senior Partner Principal
Mercer | Tower Place Mercer | Tower Place
London EC3R 5BU London EC3R 5BU
United Kingdom United Kingdom
+44 (0) 20 7178 7343 +44 (0) 20 7178 5520
+44 (0) 7920 261226 +44 (0) 7557 031371
christopher.johnson@mercer.com daniel.hibbert@mercer.com
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21. The role of the market in pay determination
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
National, regional or local?
Large
National markets
The question of whether there is a national or
local pay market is primarily determined by
Size of the job
the number of positions that are available
nationally and the size of the job as shown
opposite:
Local markets
Other factors, such as supply and demand
and the strength of local transport links, also
Small
have an important role in determining whether
the job has a local, regional or national
Many Few
market. Number of national positions
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.
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