Merit Raises Pay Dividends

A water utility in metropolitan Portland, Ore., finds that a switch to a merit pay system produces high-performance employees

Salaries used to give employees plenty to talk about around the water coolers at the Tualatin Valley Water District in metropolitan Portland, Ore.

“We used to get complaints all the time,” says Debbie Erickson, human resource manager. “Managers set pay raises at their own discretion. All our salaries are public record, and people tend to talk.”

Adds general manager Greg DiLoreto: “We’re not unionized, so there were no formal pay grades. With fewer than 50 employees, it was almost like a family business. Raises were handed out at the whim of a manager. When employees saw a co-worker got a bigger raise and they didn’t understand why, it created a lot of frustration. There was a lack of fairness and consistency, which were legitimate concerns.”

Today, things are much different at the utility, which serves about 200,000 customers in parts of three western and southwestern Portland suburbs. More than a decade ago, the utility’s board implemented a merit pay system and made a commitment to become the region’s employer of choice by paying higher-than-average salaries.

As a result, the utility’s turnover rate is 1 percent (not counting retirements), and attracting new employees is rarely a problem, DiLoreto and Erickson say.

Starting from scratch

To revamp its pay system, the utility hired a consultant to help it evaluate every position and assign it a specific grade based on criteria such as job responsibilities, educational requirements, decision-making authority, and experience.

In addition, the utility developed exacting performance standards for each position. “We set the bar pretty high,” Erickson says. “They’re held to a pretty high standard.”

DiLoreto notes, “Each employee knows exactly what’s expected of them. They’re reviewed based on how they measure up to those expectations, and their raises reflect that. An ‘A’ student gets an ‘A’ raise — you don’t just come to work and get a raise. The harder and smarter you work, the more money you make.”

The performance reviews, based on hire-date anniversaries, are very precise. Each employee receives a detailed score based on his or her evaluation, and every employee’s score earns a slightly different raise, even if the scores are only decimal points apart. “That way, even the smallest effort gets rewarded,” Erickson says. “Our spreadsheet for evaluation scores is a mile long.”

Salaries make the grade

The last component of the new system involved putting together salary ranges for each grade. The ranges are adjusted annually, based on the Consumer Price Index (CPI) for western cities. As such, it should take an employee the better part of a career to reach the top of his or her salary range, DiLoreto says.

Employees who meet job expectations receive a merit raise that’s at least equivalent to the CPI. If their review results in a raise greater than the CPI, then they move up in their range. As such, even employees who are in the same job classification can earn different salaries within their range.

In rare cases where employees reach the top of their salary range and get rave reviews, they still receive raises via the CPI adjustment. In addition, they receive the merit portion of their raise as a lump sum.

Consider a top-performing employee who is at the top of a salary range and is slated to receive a 6 percent raise. If the range moved 3 percent because of the CPI, the employee would receive a 3 percent pay bump and a 3 percent lump sum.

“That way, employees don’t get penalized for doing a good job,” DiLoreto says. “It truly rewards employees for their good work and provides an incentive to do good work, unlike many typical public-sector pay plans.”

On the other end of the spectrum, employees who receive a poor job review may not even receive a cost-of-living salary increase, Erickson says.

Beating the average

To compete effectively for the best employees, the district set its pay ranges 2 percent higher than the regional average. “We base the ranges on regional salary scales for utilities in Washington and Oregon of comparable size and nature,” DiLoreto says. “We throw out any salary range that’s more than 10 percent above the others on average. We also review those ranges every five to eight years to ensure we remain competitive. Our employees do quite well. The average raise in 2008 was 6 percent.”

How does the district afford those raises at a time when many utilities are scrambling for revenue? It helps that the utility is entirely self-supported by rates and charges. “It’s not like a water utility that’s owned by a city, which can siphon off [utility revenue] to pay for whatever city officials want,” DiLoreto says.

He also notes that the merit portion of salary increases is restrained by the district’s budget. Moreover, the district doesn’t need to impose exorbitant rates to offer employees competitive pay. “Our rates are pretty much in the middle of the metro Portland area,” he says. “It also helps that we’re enjoying a fairly robust growth rate.”

Delivering results

Overall, employees are much happier with the merit pay system. A good indicator is the district’s rate of employee turnover, which is negligible. “They know their entire careers here are based on being rewarded,” DiLoreto notes. “They’re attracted to a system that rewards them fairly for their efforts. There’s no incentive to work harder when you just get what you get.”

Erickson also points out that the district typically finds it easy to fill open positions. “We recently had an opening for a meter reader and received 100 applications,” she points out. “Some of that may be due to the economy. But that notwithstanding, we rarely have a problem getting enough qualified applicants.”

And there’s a lot less complaining about salaries at the water cooler, too.



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