Corporate Report. Bonuses are not part of the compensation package offered to City employees.

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1 Corporate Report Report from Office of the Chief Administrative Officer, Administration Date of Report: May 2, 2015 Date of Meeting: July 6, 2015 Report Number: CAO File: Subject: Salary Freeze for Non-Union Employees Recommendation That Council receive the report Salary Freeze for Non-Union Employees regarding the implications of a three-year wage for non-union employees for information purposes; and That no further action be taken. FORTHWITH Summary The potential costs of freezing salaries for non-union staff outweigh the financial benefits. Low morale, lost productivity among disenchanted employees, increased employee turnover, increased costs and a loss of competitive advantage will be the result of such a freeze. Background At its March 8 meeting, Councillor Haywood requested staff to prepare a report, by the end of July, on the implications if Council imposed a three year salary, benefits, and if applicable, bonus freeze on all non-union staff making greater than $50,000 per year, who are not covered by collective agreements or employment contracts with the goal of implementing the same freeze on staff covered by collective agreements or employment contracts as they come due for re-negotiations. Past practice for non-union employees has been for Council to extend the same salary increases applied to CUPE 157 (inside workers). In the past, this has been done during the in-camera portion of a Council meeting based on a staff report recommending the action. It is typically done immediately after the union contract is ratified by Council. Bonuses are not part of the compensation package offered to City employees. Report There are currently 116 City employees classified as Exempt (EX), meaning they do not belong to any union or association. This group represents a wide variety of positions across all departments which, for a variety of reasons, are not included as unionized positions. Report Page 1 of 6

2 This includes commissioners, department heads, managers and supervisors, as well as administrative and executive assistants, legal secretaries, all human resources staff, and recreation and culture coordinators. A freeze on salaries and benefits would affect all but six employees in this employee group for a total of 110 employees. The lowest paid employee of the 110 affected had a base pay of $50,700 in Imposing a freeze on the current salaries and benefits earned by these residents would result in 2015 savings of $59,000, assuming a 0.5 per cent increase is awarded to CUPE 157 employees, or $118,000, using a one per cent increase. While a pay freeze of this nature may seem like a relatively easy way to save money during times of financial restraint, there is more to consider than the expense the City would avoid from extending cost of living increases to non-union employees. Pay cuts affect employee morale It should be self-evident that employees in any organization who find themselves doing the same job for effectively less money would be unhappy regardless if that reduction is due to a pay cut or a pay freeze in a time of increasing inflation. This is important because low morale results in reduced productivity and greater absenteeism. According to the Harvard Business Review content employees are 31 per cent more productive. Given that City employees across all groups are being challenged to find ways to do more with less any decision that impacts morale and therefore productivity should be carefully considered. Pay cuts hurt succession planning Succession planning, ensuring there are qualified internal candidates to take on higher positions when they become available, is essential to the future of the corporation and one of the priorities of the senior management team. Many non-union employees start their career in unionized positions, working their way to more senior positions contained in the EX employee group. As previous employees with the City they bring with them knowledge of St. Catharines and the corporation, and have a demonstrated desire to take on greater challenges. Employees who take positions with greater responsibility are rewarded with an increase in salary. A cut to the real wages of non-unionized employees while providing unionized employees with salary increase decreases the monetary reward for employees who are promoted. Known as compression, this narrowing makes moving to management positions less attractive for unionized employees forcing the corporation to look outside of its current workforce when recruiting. In extreme cases of compression, it is possible for managers to make less than their employees. This is a likely result among some of the City s operations staff if a pay freeze were implemented on non-union staff and unionized employees continued to work the same level of overtime as in past years. Pay cuts increase employee turnover Everyone regardless of where they are employed wants to be paid what they deem to be a fair wage for the work they do. Report Page 2 of 6

3 When this doesn t happen they become dissatisfied with their workplace and are more likely to look for employment elsewhere. The Society for Human Resource Management estimates employees who are satisfied with their jobs are 87 per cent less likely to change employers. Employees and employers determine a fair wage by comparing the salary paid to employees in other organizations who do similar jobs. Municipalities are no different. A comparison of 2014 wages paid for 12 benchmark jobs at comparable municipalities shows that St. Catharines wages are in the middle, between the highest and lowest paid. However if employees at comparable municipalities receive raises equal to the CPI inflation by 2017, 65 per cent of positions would be paid higher than in St. Catharines. The difference is greater when looking at larger upper and lower tier GTA municipalities within an easy commute for St. Catharines employees. In this case, 68 per cent of positions were paid at a higher level in 2014, a figure that increases to 77 per cent by 2017, with raises equal to CPI inflation. Having the lowest salaries among similar-sized municipalities may be seen as a good thing from a budget perspective, but it makes the City a less attractive employer and increases the number of employees who could look for work elsewhere. In the last six months alone four EX employees have left the corporation for comparable positions in other municipalities that pay higher salaries. This rate is significantly higher than in previous years; one employee left in 2014, and two left in Increased costs due to employee turnover When an employee leaves the City for another position they take the knowledge, training and experience they gained in the corporation with them. In addition to this knowledge loss there are also hard costs related to staff turnover including recruitment services and advertising. The Jack Phillips Centre for Research studied the costs of employee turnover. These costs include exit costs for the previous employee, recruitment, orientation, training, lost productivity, knowledge loss and temporary replacement cost. The study calculated the costs of replacement as a percentage of the annual base salary for different job types: Department manager: 125 to 200 per cent Supervisor: 100 to 150 per cent IT Specialist 200 to 400 per cent Professional: 75 to 125 per cent Clerical/Administrative: 50 to 80 per cent In the first six months of 2015, four EX employees have left the corporation. Using the number of EX employees who have left in the last six months, the median salary of EX employees and assuming the percentage to replace a departing employee is 100 per cent of the annual base salary, the cost to replace departing employees so far this year estimated at $330,734. Report Page 3 of 6

4 Cost to replace single employee: 100 per cent of base salary Median Salary $82,686 Number of Employee Recruitments 4 (first six months of 2015) Total $330,734 Province-wide salary freeze not imposed on municipalities The potential for higher employee turnover exists predominantly when some municipalities impose wage freezes and others do not. Although the Province of Ontario has imposed wage freezes on its staff and those groups who negotiate with them directly in the past couple of years, this has not been mandated for municipalities. As a result few municipalities have taken such measures. Below is a list of wage settlements among municipalities identified as St. Catharines comparators. It shows that Windsor s CUPE 543 and 82 groups received no wage increase in 2013, and The only other group to not receive an increase in these years was St. Catharines CUPE 1287 which represents museum staff. The chart also shows that all unionized employees in all municipalities where contracts have been signed have received or will receive a pay increase in On the low end this increase is 1.25 per cent and on the high end it is two per cent. Summary of Settlements (as of June 16, 2015) Municipality Local St Catharines CUPE % 1.90% 1.90% 1.90% St Catharines CUPE % 1.90% 1.90% 1.90% St Catharines CUPE % 1.90% 0.00% 0.00% Barrie* CUPE % 2.00% 1.90% 1.90% Cambridge CUPE % 1.50% 1.50% 1.50% Guelph* CUPE % 1.90% 1.90% 1.90% 2.00% Guelph* CUPE % 1.90% 1.90% 1.90% 2.00% Guelph* CUPE % 1.90% 1.90% 1.90% 2.00% Kingston* CUPE 1.70% 1.70% 1.70% Kitchener CUPE % 1.35% 1.35% Kitchener CUPE % 1.35% 1.35% Niagara Falls CUPE % 2.00% 2.00% 2.00% Oshawa CUPE % 1.25% 1.50% 2.00% Oshawa CUPE % 1.25% 1.00% Thunder Bay* CUPE % 1.75% 1.75% 1.75% Waterloo CUPE % 1.70% 1.90% 1.90% Windsor* CUPE 543 & % 0.00% 1.00% 1.20% * Indicated single tier municipality Pay freeze puts St. Catharines at a competitive disadvantage A move to institute a pay freeze in St. Catharines when employees at other municipalities are continuing to receive salary increase would put the City at a competitive disadvantage when trying to attract and retain employees. Report Page 4 of 6

5 Like Niagara s private sector employers, local governments are in a fight to attract the brightest minds and talented professionals. Attracting and retaining young minds are critical to the City s ability to be successful in bringing its strategic vision to fruition. To be a community that is a beacon for investment, innovation, sustainability, cultural diversity and creativity, we need to be a leading municipality. To do that we need employees who are leaders in their field who can put the City on the track to success. As a public sector employer there are few tools at the City s disposal to attract and retain employees. There are no signing bonuses or profit-sharing options to offer. Instead recruitment efforts rely on the salary and benefits package offered employees, along with a defined contribution pension plan, to attract employees. A pay freeze would reduce the overall compensation package available to attract and retain skilled employees, thus reduce the City s attractiveness to prospective employees. Wage Freeze: The City of Toronto experience Wage freezes have been tried by municipalities in the past to rein in expenses during times of fiscal restraint. In 2009 the City of Toronto froze all non-union salaries at the previous year s level, followed by a one per cent the flowing year. In 2011, Toronto City Council approved a 2.25 per cent increase, citing concerns over compression, poor morale, employee recruitment and retention as reasons for moving away from the wage freeze. The City of Toronto s experience is a real-life example of the challenges of using pay freezes for fiscal restraint. These challenges are real, but so are the financial challenges facing municipalities today. Citizens increasingly expect higher levels of programs and services, but demand that these be done without placing the burden on property taxpayers. Salary freezes are often seen as an easy alternative. Alternatives to wage freezes Rarely is the easiest solution the best and that is the case when it comes to wage freezes. Instead of simply freezing wages and contending with the negative impacts that accompany it, municipalities should focus on finding operational efficiencies through process reviews. This approach involves reviewing current process and finding new ways to ensure efficient use of resources both financial and employee. Identified savings of both time and money are then used to offset the costs of delivering other services or programs. City employees guided by the Manager of Quality Improvement have embraced this process and are continuing to review existing processes to identify efficiencies. While the nature of this process means the results aren t immediately evident on a budget balance sheet, the result is a corporate culture that embraces continuous improvement and is prepared to meet the challenges of the future. By contrast a wage freeze results is a short-term expense reduction, but does nothing to encourage efficiencies and process improvement that can result in lasting savings. In addition the negative consequences of a pay freeze such as low morale, lost knowledge from departing employees and difficulties recruiting and retaining high-calibre employees can plague a municipality long after a pay freeze has been lifted. Report Page 5 of 6

6 Vacancy reviews assist in prudent management of employee costs In addition to efforts to identify efficiencies through process improvement, City staff are engaged in other ways to ensure the cost of employee salaries is managed prudently. The vacancy review process ensures that no staff vacancy is filled in the corporation until alternatives are thoroughly reviewed. This includes evaluating whether or not that position is required or if the duties of that position can be spread across existing staff, leaving the position unfilled. A similar review process is undertaken when departments request additions to the staff complement. Staff look to accommodate requests for new staff through the existing complement. This can be through shift job duties or not replacing those who have left the corporation either for retirement or to seek other opportunities. This process has proved successful in maintaining the corporation s staff complement, with the exception of the First Ontario Performing Arts Centre, the St. Catharines Kiwanis Aquatics Centre and Seymour-Hannah Sports and Entertainment Centre which required additional complement to support the additional programs and services offered by these new facilities. Financial Implications There are no non-budgeted financial implications as a result of the recommendations in this report. Conclusion Citizens are increasingly expecting higher levels of programs and services from municipalities, but demand that these be done without placing the burden on property taxpayers. While freezing salaries can deliver short-term savings doing so ignores the institutional costs of such a move. Low morale, lower productivity and difficulty retaining employees and expensive recruitment efforts are the likely result. It may be tempting to dismiss these concerns by suggesting that employees who don t like it can leave. In reality only employees with marketable and in-demand skills will leave and they will go to neighbouring municipalities where wages are more competitive and the prospects of cost-of-living increases are better. These employees will take the skills and knowledge gained while working for St. Catharines and leave the City with the costs of finding their replacement. A more effective method for finding operational savings is through process improvements. Although not as immediate as a salary freeze, process improvement has the benefit of creating a corporation that embraces continuous improvement and constantly looks for ways to do better, leaving it prepared to take on the challenges of the future. Prepared by: Cindy Upshall, Manager of Corporate Communications Submitted & Approved by: Dan Carnegie, Chief Administrative Officer Report Page 6 of 6