COMPENSATION

The Gainsharing Gambit

Governments are looking for ways to reward teams of employees who find more efficient ways of doing things.

By JONATHAN WALTERS
Governing, July 1995

When it comes to public-sector pay plans of the future, the biggest cities in America have nothing on the little town of Zebulon, North Carolina, population 3,000.

For the past two years , Zebulon has been distributing a small percentage of any overall end-of-the-year budget surplus equally among it's 48 employees, regardless of their position. Last year, the aggregate bonus was $7,000.

While $146 per person may not seem like a whole lot of money, it helps in a number of ways, says the town manager, Charlie Horne. "As an organization, we have tried to eliminate the artificial barriers of departments, to create a culture where everyone is helping everyone else achieve. So our sanitation people have become the eyes and ears of law enforcement. The police department alerts the public works folks to potholes or missing signs." That all adds up to a broadly efficient organization, he contends. And to year-end bonuses.

Zebulon is way ahead of the packing implementing a much discussed but seldom-tried strategy for getting government employees a little extra cash for peak performance: "gainsharing." It's one of the more positive approaches public managers have come up with to wring efficiencies from personal systems, by far the area of highest cost for state and local governments.

The idea is catching on. Governments from Hampton, Virginia, to Burlington, Iowa, have either been experimenting with gainsharing or looking into it. "In the last six months, we've been getting swamped with calls about team-based pay and gainsharing, "says Jim Fox, a senior partner with compensation consultants Fox Lawson and Associates.

One of the reasons gainsharing hasn't been tried much before now is that states and localities have for the past several years been focusing most of their attention on direct savings in personnel costs, primarily through holding down annual raises or out and out pay freezes. At the same time, governments have been focusing on holding the line on or cutting health insurance and pension costs.

On the health care side of the ledger, states and localities continue to move with tidal-wave speed toward managed care plans. According to the U.S. Department of Labor's Bureau of Labor statistics, the percentage of state and local governments that use some form of managed or preferred-provider care coverage soared from 40 percent in 1990 to 60 percent in 1992, and the figure continues to rise quickly. In a study of state health benefits premiums, the Segal Company found that annual percentage increases in the average cost of medical coverage have been declining steadily over the past five years, from 15 percent in 1990 to just over 8 percent last year for individuals and from 16 percent to 5 percent for family coverage.

On the pension side, public officials are trying to save money in a more traditional way: by tinkering with contributions.

In New Jersey, for example, republican Governor Christine Todd Whitman has changed the way the state funds employee pensions, going from a series of regular , flat contributions each year to a graduated system of payments, with the size of contributions starting off small and increasing down the road. Actuarially, the plan is sound, says Cathie Eitelberg, who tracks pension and benefits policies for the Government Finance Officers Association. "However, there's always been a concern about graduated funding, because you are relying on more dollars in the out years, and there is the question of whether those dollars will be there."

In the Ballot initiative -happy state of Oregon, it was voters who recently took a shot at employee pension benefits. Last November, the state's voters, overturned a key provision of the state's collective bargaining agreement under which the state had agreed to contribute the equivalent of 6 percent of employee salaries to the state pension fund.

while the initiative results are currently in court, to GFOA's Eitelberg the Oregon effort represents the more troubling side of the current compensation and benefits squeeze. although governments do have to rein in costs , some see public employees emerging as too tempting political target. "Everyone is looking to cut budgets, and at the same time there is a lot of public employee bashing going on," says Eitelberg.

POLITICAL RISKS

As straightforward as the idea might sound, however, gainsharing carries some political risks. The concept raises tough questions that government officials have to be ready for if they are serious about trying it.

For example: If public-sector employees can suddenly and significantly boost productivity, then the public - and some public officials- might just start asking whether employees have been holding back. And if savings are achieved , shouldn't they accrue to the taxpayer and not the employees, and shouldn't budgets be cut commensurate with the new, higher performance standard? And finally, won't government or department eventually hit a peak performance level beyond which savings and efficiencies are simply not likely to be found?

So far , Zebulon isn't even close to finding that peak, says Charlie Horne. As for the other problems, both the public and elected officials have been supportive of the bonuses, perhaps because just 5 percent of budget savings is distributed to employees ; 95 percent goes back into the general fund. Nor have budgets been smashed down as savings have been found. "That smacks of manipulating the process, and would create some distrust among employees,"says Horne. And so each year budget levels are set to cover reasonable operating costs, he says. Then employees are turned loose to beat the standard. Savings that are returned to the general fund are used for everything from one-shot tax relief programs to funding capital projects.

One other point is key, says Horne: For a gainsharing effort to work well, it can't be used as a substitute for regular merit or cost-of-living pay increases. Gainsharing bonuses, he says, need to be just that bonuses.

Chipping Away At Benefits

Statistics On The Evolution of state and local government employee benefits between 1990 and 1992, gathered by the U.S. Department of Labor's Bureau of Labor Statistics, show erosion across a wide front: Doctor's Bills The percentage of full-time state and local employees receiving medical care coverage fell from 93 to 90 percent. The percentage of states and localities requiring that employees contribute to the cost of their own health care rose from 38 percent to 40 percent. Deductibles for hospital stays rose from a range of $50 - $200 to $200-$500. Monthly employee contributions for health care insurance rose from an average of $26 for individuals to $29. For family coverage, the contribution rose from $118 to $139. The Golden Years The percentage of full-time employees covered by pensions fell from 96 to 93. Exclusive use of defined-benefit pension plans fell from 90 percent to 87 percent of the governments sampled. Employee contributions to their own pension plans inched up from a range of 3 to 8 percent of earnings to a range of 3 to 9 percent. Time Off Sick leave was cut back by one day, from an average of 13 days to 12. Personal leave was cut from an average of 2.9 days a year to 2.6. Lunch breaks were cut back an average of 2 minutes, from 36 minutes to 34.

GALLING DISPARITY

While programs such as gainsharing mostly focus on the rank and file, some jurisdictions are dusting off an old idea - "pay for performance"- as a way to get some extra money for a group of long-forgotten public employees: upper-level managers. The idea is to address what some see as a fairly galling disparity: While rank and file workers have been seeing at least small raises over the past five years, there are some upper-level public sector managers who haven't had raises in nearly a decade. That has led to situations where some line worker share actually making as much as - or more - than their supervisors.

Unlike gainsharing, pay-for-performance plans to set aside money specifically for individual performance rather than team accomplishments.

While a few jurisdictions have been using pay-per-performance plans for some time, they haven't caught on broadly for the simple reason that they aren't easy to implement. Coming up with objective rating systems can be tough. A bigger roadblock, however, is the fact that the public, along with state and local legislative bodies, tends to look at increasing levels of compensation for upper-level administrators with suspicion, if not derision.

In Massachusetts, for example, site personnel director Robert C. Dumont adapted a pay-for-performance model he's worked on as a human resources executive in the private sector.. The translation seemed to work; managers appeared satisfied with the new program and were certainly looking forward to finally getting some increase in compensation. The problem now is getting the legislature to fund the pay-for-performance plan.

That won't be easy, but denying higher compensation to upper-level management is a penny-wise and pound -foolish strategy, thinks compensation consultant Jim fox. Given the increasing demands and complexities of running a government, Fox says he doesn't see current management pay structures attracting people who are necessarily up to the job.

"I just don't think you're going to get what you need out of people making only $60,000 a year, "says Fox. " You won't find any organization with more complex responsibilities , jobs, functions, missions or initiatives than government. Private-sector organizations are simple by comparison."

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