Total Compensation Comparisons

By Jim Fox and Bruce Lawson, Fox Lawson & Associates, A Division of Gallagher Benefit Services, Inc.


Question: Over the past couple of months, we have been reading about all of the efforts by state legislatures in certain states to impose major changes in the way public sector benefits, including pensions and health insurance, are funded (in terms of the employer/employee contributions). While this is a critical issue, it raises some problems within our organization since we continually struggle with defining “total compensation.” Our agency attempts to compare total compensation paid to our employees with the labor market (both public and private sectors), but no matter what we do, it is never right and we are criticized for trying to hide the truth. How can we compare total compensation so that we can defend our numbers?

CompDoctorTM: The term “total compensation” reminds us of something a former president once said—“It depends on the definition of ‘is.’” Over the years, the term “total compensation” has taken on several different meanings. Most commonly, it means base compensation, any variable compensation, and the economic value of benefits offered by the employer to the employee. Unfortunately, that is where things start to go south since we have yet to hear two parties really agree on what constitutes an employee benefit since one person’s comp element “treasure” is another person’s comp element “trash.” In fact, there have been factfinding and arbitration cases that have dealt with this specific issue. For example, is something as basic as “workers’ compensation” or “unemployment insurance” an employee benefit or are they simply state mandated employer costs. An employee could argue that since they will likely never need to avail themselves of the coverage, the cost should not be included. On the other hand, if they were not on your payroll, you would not be incurring the cost.

For purposes of our discussion here, we are going to address tangible and direct costs to employers that they would not have to pay if the employee were not on the payroll. These costs would include stability (Social Security, pension, life insurance, disability insurance, worker’s compensation insurance, and unemployment insurance) paid time off (vacation, sick leave, holidays, and other time for which an employee is paid but for which they are not actually working) health (medical, dental and vision insurance) variable pay and, last but certainly not least, base pay. Recently, we have seen organizations that want to include job security in the mix given a perception that public sector employees have a greater degree of job security than private sector workers. However, differentiating between job security related to risk of termination for cause and loss of job due to lay off can be more than problematic. Historic job security data/assumptions will not reflect the current privatization initiatives involving entire functions/departments.

Guess they haven’t been paying attention to the number of public sector jobs that have been eliminated around the county and the projections for several hundred thousand more over the next

couple of years. Theoretically, job security could be measured by calculating the probability of termination from government vs. private sector employment. We also recognize that, historically, public sector employment was perceived to be more secure than private sector employment. As a result, public employees were often paid below private sector rates as a trade off. While we acknowledge the perceived value job security may have on the employment relationship, the subjective nature of this and related employment criteria do not support the development of defensible quantitative measures.

Besides, we (comp professionals as a whole) can barely agree on how to provide consistent total comp values when dealing with benefits that have clear monetary values (i.e. health, PTO, etc.), so how well is it going to work when we are dealing with third and fourth level causal connections of theoretical research? As you can see from our comments, comparing total compensation values is a great goal but easier discussed than achieved in the real world. Consequently, it is beneficial to identify what elements are going to be included up front so that you can at least compare the apples to the apples.

Fundamentally, we agree that total compensation is the best way to compare compensation levels but only when there is a consensus about what is included in the definition. Without getting too detailed, insured benefits are relatively easy to calculate since you can take the total premium cost and determine what percentage of payroll the amount represents. Social Security is simple since the federal rate is known and can simply be reported as such. Retirement plan contributions (be they for defined contribution type plans or defined benefit type plans) can also be easily calculated since we generally know what the required contributions are for the employer and the employee shares. Organizations have debated whether the unfunded liability contributions should be added to the employer contribution amount since that portion is not a reflection of the current compensation level but is usually based on benefits that were promised but have not yet been funded and not included in the current mandatory contribution rates. This debate begs the question of who bears credit for the funding of unfunded future liability. From the employee’s perspective, the benefit was identified and accepted for eternity at point of hire.

Another aspect of pension costs relates to the issue of “double dipping.” In some instances, employees have been allowed to “double dip,” or take retirement from one pension plan while accepting the same or comparable employment under another system. This subject has raised questions about whether the public agency is paying twice for the same body of work. Unfortunately, in our judgment, this is a much more complicated system. Clearly, public safety employees often retire and then take on a second career in a nonlaw enforcement capacity. Since the public safety pension was for services provided under that system, we do not believe that accepting a civilian job that is different is costing the employer any

more than if they hired anyone else to do the job. Where this gets sticky is when the employee retires and then comes back to the same job but in a civilian capacity. The same issue arises when an educator retires and then comes back in a contract capacity to perform the same work but outside of the retirement system. Clearly, there are cases where the public interest may not be best served but there are other instances where the cost should be no different than if another person were employed.

Paid time off can be calculated by taking the total cost to the employer for days off related to various categories of leave and then calculating the value in terms of a percentage of payroll. Some agencies have attempted to get this level of detail by job classification or employment category. While that information may be useful to the specific employer, getting the comparable information from other employers (even if they are public sector employers and subject to public records requests) can be costly, time consuming and problematic. The cost for retiree medical insurance is also relatively easy to calculate or estimate. First

it is an actuarial estimate of life span, then an actuarial estimate of cost of health insurance over that period of time. What you get is a best case/worst case estimate. You could take the middle for a reasonably accurate estimate. However, unless an organization has had an actuarial assessment completed for this particular benefit, there is no simple way to calculate the value. Variable pay and base compensation are also fairly easy to quantify.

Calculating the elements of total comp of interest assumes that the employers that you wish to compare to will provide you with the information you are seeking (yes—they are often public agencies who are required to share but that doesn’t mean that they will do it willingly or graciously). Even if they do provide you with data, verifying its accuracy is often problematic unless you are willing to incur substantial expense in doing so. Getting this information from private sector employers is more complex since they are under no obligation to share that information. As a result, most organizations draw from published survey data that will contain some of the desired data elements but not all. As a result, making accurate comparisons between the public and private sectors should be done only when those doing so recognize that the comparisons are not based on the same factors.

Hopefully, our comments will provide you with information that will be useful to you as you attempt to compare your compensation levels to the labor markets in which you complete.


Executive Council Meets in Alexandria

The IPMA-HR Executive Council met March 12 in Alexandria, Va. The meeting was chaired by IPMA-HR President Sam Wilkins, IPMA-CP. The Executive Council voted to schedule the 2013 International Training Conference in Las Vegas, Nev. The Executive Council also approved adding a virtual conference component to the International Training Conference as part of a three-year pilot project that will begin with the 2011 conference. The Executive Council agreed to form an Information Technology Taskforce that would undertake a survey to determine how the chapters and regions are meeting their information technology needs and to see if there could be a pooling of resources that might better meet the technology needs of the chapters and regions.

The Executive Council discussed how the president-elect is selected and decided to keep the current process of having the IPMA-HR membership vote for the president-elect. The Executive Council reviewed the 2010 financial statement and discussed the impact that the economy is having on the Association. Reports on membership, professional development, certification, HR research, assessment, and international activities were reviewed. IPMA-Canada President Rick Brick, IPMA-CP, provided an update on IPMA-Canada. The four regional representatives shared information about recent activities within their respective regions. The Executive Council was provided with an update on recent government affairs activities.

The next meeting of the Executive Council will be held Sept. 24 in Chicago. Please contact Neil Reichenberg, IPMA-HR executive director, at nreichenberg@ipma-hr.org for additional information about the Executive Council meeting.


The Comp Doctor™ is the team of Jim Fox and Bruce Lawson of Fox Lawson & Associates, a Division of Gallagher Benefit Services, Inc., a compensation, benefits and human resources consulting firm that specializes in assisting governments in fixing their compensation, benefits and classification systems. You may find them on the Web at www.foxlawson.com. If you have a question, you would like to have them answer, please write to them at james_fox@foxlawson.com or bruce_lawson@foxlawson.com. They will try to include it in the next issue of Comp Doctor™.