Fundamentals of Human Resource Management 5th Edition by Raymond Noe, John Hollenbeck, Barry Gerhart, Patrick Wright

Exercise 7

Are Phoenix Workers Overpaid?
Recently, the Arizona Republic published the results of an investigation that found a 277% increase over 10 years in the cost of funding pensions for city employees in newspaper report caused an outcry, so the city government promised to investigate. The government commissioned a compensation study that compared the total compensation of Phoenix employees with the total compensation of other government employees in Arizona and with employees holding similar kinds of positions in the private sector.
The study, carried out by the Segal Group, found that base salaries for Phoenix government workers are modest. However, the cost of benefits drives total compensation above what is paid by many of the organizations in the comparison groups. What drove up compensation costs the most were the costs for retirement benefits.
Phoenix offers its workers a variety of benefits. It pays part of their health insurance premiums and offers dental coverage as well. Employees also are automatically enrolled in life insurance policies and may purchase additional insurance for their spouse and dependent children. Employers and employees both make payments to the city's pension plan, and they may contribute a portion of their earnings to a retirement savings plan. They also may have a portion of their pretax earnings deposited in a flexible spending account for health care or day care. For paid time off, employees accrue 8 to 15 hours per month of vacation and 10 hours of sick leave each month they work for the city. There are 11 paid holidays each year as well. The city offers the use of an employee assistance program, elder care services (information and referrals), and a wellness program that includes classes on weight control, stress management, and smoking cessation, among other topics. A nearby child care center offers an employee discount, and low-wage workers may be eligible for subsidies on other dependent care. Other optional benefits include legal insurance, discounts on public transportation, and career counseling.
According to the Segal Group's study, base salaries for Phoenix employees are about equal to those of other government employees in Arizona. Compared with employees who work for private businesses, Phoenix employees earn 19% less. But when the cost of benefits are added in, the compensation expense for Phoenix workers is slightly above the top of the range for comparable jobs. For public-safety workers such as police and firefighters, the pay advantage is greater.
The benefits that gave Phoenix employees the biggest edge over the rest of the labor market were the employees' pension plans.
Other benefits do, however, play a role in keep Phoenix employees' total compensation high. Tuition reimbursement comes to about $9,200 per employee, while other employers typically cap this benefit at $5,000. Paid time off for sick leave, vacation, and holidays tends to be somewhat greater than the combined leave offered by other employers. However, the city's human resource director, Janet Smith, noted that sick pay is not as generous as it seems, because employees use it if they need time off for a short-term disability, and other employees offer separate benefits for a disability. The sick leave policy is nevertheless expensive, because employees may save up their unused sick days and convert them to cash when they retire. The Arizona Republic report claimed that this practice-which is common for state and city government employees but rare in the private sector-cost an average of $11,419 per retiring employee.
Compensation of government employees is an important and sensitive issue because their pay comes from citizens' taxes. Government decision makers have a responsibility to ensure that tax dollars are not wasted and that the government is able to hire and retain qualified workers who deliver important services such as police protection, teaching, and management of public resources. Many of these jobs require a high level of education and training. Even so, at a time when citizens are seeing their own buying power shrink, they are especially concerned that compensation policies meet these objectives without any waste, so questions like the ones that arose in Phoenix are likely to be a feature of public debate in every state and city.
How might the city of Phoenix use online communication to build trust among its employees and citizens that its compensation practices are equitable and reasonable?