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April 2013 · Volume 95 · Number 3

Departments

Management Minute

Compensation Trends

ICMA survey tracks current practices

How much money should I make as a local government manager and what benefits should I receive? These are questions that ICMA seeks to help answer through its annual Compensation Survey for Local Government Chief Appointed Officials, which was reinstated in 2011 after a compensation scandal in Bell, California.1

The 2012 survey had a 42 percent response rate; 2,974 chief administrators from across the United States responded. Significant findings include:

  • Regarding salary, no national survey can answer the question about how much a specific manager in a specific local government should make.
  • Where managers and staff have the same type of benefits, the calculation for determining those benefits is generally the same.
  • Most managers appear to take seriously the issue of full disclosure and transparency regarding their compensation.

A detailed discussion of ICMA’s survey can be found in the 2013 edition of The Municipal Year Book; survey results are also posted on the ICMA website with data from other ICMA surveys about local government programs and practices.2 This article is intended to summarize what every manager should know about current practices.

Salary Factors

ICMA recommends that salary be determined based on six factors:

  • Scope of services provided by the local government.
  • Job requirements.
  • Experience necessary for successful performance.
  • Market pay for comparable public sector executives.
  • The local government’s financial position (i.e., what it can reasonably afford).
  • The credentials, experience, and expertise of the chief appointed official (CAO).

Among the most important of these principles is the pay survey of comparable public sector executives in the specific market where a local government is located. Pay practices and the cost of living varies so much that national data can only provide very broad parameters, with the emphasis on “very.”

The ICMA 2012 data show a median salary of $103,000 for all managers serving in local governments with populations ranging from less than 2,500 to those with populations exceeding 1 million. When local governments are divided into population categories, there is an observable correlation between median salary and the size of the jurisdiction as shown in Figure 1.

The highest salary reported was $368,282 and the lowest salary was$26,000. Figure 2 shows the distribution of salaries reported.

Calculating Benefits

There is a legitimate argument that a manager and other executives in a local government should receive an executive benefits package consistent with their added responsibilities, as is common in the private sector. In local governments, however, the ICMA survey shows that there are few exceptions in the manner in which benefits are calculated when the manager and staff receive the same benefit.

This is not to say that managers do not receive some benefits that other staff do not. But when the benefits are the same, the calculation methods for determining the benefits are also the same. If, for example, the health insurance premium paid by the employee is a percentage of salary, then that holds true for both the CAO and staff.

Nonetheless, differences in calculation of benefits do occur in numbers that are not insignificant. Areas where differences emerge in more than 20 percent of the respondents are retirement, both 457 and 401(a) contributions, and in terminal leave payouts. Differences in these areas are logical and perhaps should occur more frequently considering that manager jobs are “at will” positions.

Higher retirement payments and terminal leave payouts can mitigate the risks inherent in the position. In addition, annual leave is calculated differently for 22 percent of respondents. This approach reflects the practice in the federal government for the Senior Executive Service, in which each staff member accrues eight hours per pay period regardless of tenure. All other federal employees have annual leave determined by years of service.3

Provisions That Mitigate Risk

The most important way to mitigate risk in at-will positions is through a formally adopted severance provision in the manager’s employment agreement. The survey shows that most managers have an agreement and a severance provision; however, this is not universal, especially among chief administrative officers in mayor-council forms of government.

Among the managers who have severance provisions, the most common provision is six months of pay, although ICMA recommends one year of severance. The higher level is more prevalent among larger local governments, while smaller jurisdictions show higher percentages limiting severance to only three months.

Transparency Matters

The excesses that occurred in Bell, California, based on subsequent indictments, were the result of a conspiracy among people of bad intent. What permitted the perpetrators to get away with excessive compensation for so long was the total lack of transparency to the public. Once the Los Angeles Times exposed the fraud, Bell residents were outraged and have subsequently changed the way in which the city operates.

Data from the 2012 survey affirm that most managers understand the importance of transparency. A number of recommended practices, as illustrated in the accompanying charts, are nearly universal. The adoption of the practices tends to be lower in small jurisdictions (population less than 2,500) and in local governments with the mayor-council form of government. A practice that has not yet become common is posting the manager’s salary and employment agreement on the web.

In local governments with populations 50,000 and over, however, more than half post the manager’s salary on the web. The largest percentage that posts the employment agreement is only 24 percent and is found in local governments with populations between 50,000 and 99,999.

Increased Responsibility

The events in Bell and a few other cities tarnish the reputation of all professional managers. The bad actions of a few place a greater responsibility on the many to demonstrate publicly their commitment to honesty and integrity and to the ICMA Code of Ethics, which is at the core of professional local government management.

ICMA’s policies state that managers should be compensated fairly, consistent with the executive responsibilities entrusted to them and consistent with the pay of such other public officials as school superintendents and heads of commissions and public authorities. The only way that the public can be certain that compensation is fair is through full disclosure.

This includes documentation of the manager’s full compensation package, its adoption in public session, and making sure that the details are fully accessible. A taxpayer may take an exception to the package, but not because the information was not available.


Endnotes

1 Refer to archived March 2012 PM article “Bell California: Where Our Profession Is Making a Difference.”
2 http://icma.org/en/icma/priorities/surveying/survey_research_overview (Accessed 1/22/2013).
3 http://www.opm.gov/oca/leave/html/annual.asp (Accessed 1/16/2013).

Evelina Moulder is director of survey research, ICMA, Washington, D.C. (emoulder@icma.org). Ron Carlee is chief operating officer, ICMA, Washington, D.C. (rcarlee@icma.org). On April 1, he begins service as city manager of Charlotte, North Carolina.

Controlling Credit Card Fees

Three tips to help manage these costs

Are you increasingly taking credit cards as a form of payment from your residents for tax payments, traffic violations, utility payments, recreation classes, and so forth? Have you ever wondered what the real cost of accepting credit cards is and where that money goes?

In this article, we present a brief overview of credit card fees and the actions that can be taken to help ensure that local governments are paying the lowest fees possible. These fees, which can range from less than 2 percent to more than 4 percent, go to three primary players, although they are all collected by the processor as a single set of charges:

1. The processor (your bank or such an independent organization as First Data, Elavon, TSYS, PayPal, and others) moves the data and the money around and collects the fees on behalf of all of the parties. This organization transmits sales transaction data to the issuing bank for authorization by VISA, MasterCard, and Discover networks. Note: To keep things simple, AMEX is not being addressed here since the company operates under its own set of rules.

The processor’s piece of the fee can be a percentage of the sale amount (10 or 20 basis points); a per-transaction fee for authorizations and/or settlements ($0.10); or, as is usually the case, a combination of these. There also may be some monthly or account-related charges.

The processor’s fees typically range from 5 to 15 percent of the total fees charged. While these fees are negotiable, they often do not represent the biggest savings opportunity.

2. The credit card networks (VISA, MasterCard, and Discover) connect the processor to the relevant issuing bank for each transaction. Their fees are typically around 5 percent of the total fees and are not negotiable. VISA, MasterCard, and Discover set the rules and interchange fees for processing their cards.

There are more than 500 different price points, based on the manner of processing the card (swiped, online, or by postal mail); the type of merchant (business, government, not-for-profit, or educational); the type of card being used (corporate or consumer, credit or debit, rewards); and other elements, including transaction size, data collected, and timing.

3. The issuing bank (the bank that issued the credit card to the individual using it) gets the largest part of the fees, averaging 80 to 90 percent of the fees charged. The issuing bank is taking the credit risk, covering fraud, and paying for the rewards given to the card holder. It passes these costs to the merchant through the interchange fee. Tip No. 1: Interchange fees are not negotiable but can often be reduced if the processing rules are properly understood and managed; they offer the greatest savings opportunity to local governments.

Pricing Models

The credit card world has two pricing models: bundled fees and interchange plus. Tip No. 2: Interchange plus is the preferred pricing model for most organizations. It brings full transparency to the fees charged and helps you better manage your processing to achieve lower fees; this article focuses on interchange plus.

To reduce these costs, it is imperative that you review and understand your merchant card statement and all fees charged. Each processor’s statements are different, and there is no uniform set of codes or abbreviations used.

Ask a knowledgeable representative of your processor to explain each charge on your statement. “Knowledgeable” is a key word here because many sales and account representatives in the credit card industry have a limited understanding of the complex rules and fee structures. A large trade association, for example, was recently assisted with reducing its fees by having the organization reclassified from a not-for-profit merchant to a business-to-business (B2B) merchant. Although this association is a not-for-profit for tax purposes, for credit card purposes, it saved money as a B2B merchant because the preponderance of cards being used by its members were corporate cards and the special rates for not-for-profits only apply to certain types of consumer cards.

Since every situation is different, there is no simple set of guidelines to reduce a local government’s fees. Tip No. 3: The best process to follow is to have the processor explain each fee you are being charged, then ask, “What can we do to reduce this fee?”

Are you, for example, classified properly? Are you following all of the fraud prevention rules? Are you providing all of the data (e.g., the address information) that VISA and MasterCard require to prevent unnecessary surcharges?

If your community doesn’t have the time or expertise to undertake this process, help is available. Some expense reduction advisers work on a contingent-fee basis, getting paid based on savings realized so there is no upfront cost to the client.

Philip Gross is a managing director, Expense Reduction Analysts, Rockville, Maryland (pgross@expensereduction.com), and Steve Bunker is a managing director and practice lead for merchant card fees, Expense Reduction Analysts, Lebanon, New Jersey (sbunker@expensereduction.com).