A 5 step guide to saving $2.5M (offer an Early Severance Incentive)

By: David Gaus, President GausSystems.com

Offer an Early Severance Incentive

As a former school business official, there were two main discussion points when the topic of employee compensation came up with the board and administrators. The first discussion always revolved around pay increases that would be given to employees for the new school year. The second discussion was could we afford these pay increases with the current staff. And if not, would we need to offer an early retirement incentive. The goal of the early retirement incentive was to pay people who were eligible for their state pension and give them a “bonus” on the way out the door. The retiring employees had normally “bottomed out” on the salary schedule and the goal was to hire teachers at a lower cost. This initially made sense, a “bottomed out” teacher whose salary and benefits equaled $100,000 would be replaced by a new teacher. The new teacher’s total salary and benefits would be $60,000, this would result in a savings of $40,000. But here is what I quickly found out. There was normally only a handful (5 to 10) employees who would take this plan. So, the savings would be $200K to $400k, when we needed the savings to be $1.5M. Let me introduce the Early Severance Incentives. In Gaus Systems this ESI calculation took less than 30 minutes. 

An Early Severance Incentive (ESI) is a monthly payout to those employees on the salary schedule who are near the bottom of the salary schedule, and may or may not be state pension eligible. An ERI (early retirement incentive) is only for those who are pension eligible, while the ESI focus on those who are near the “bottom” of the salary schedule. You may hear administrators refer to those at the “bottomed out” stage at “topped out”. But visually most salary schedules work in a downward format which we will illustrate later on, hence why I use the term “bottomed out”. 

What is the goal of an ESI? Well as a school business official my goal was twofold. Goal Number 1: Reduce the general fund budget by offering an ESI. Why not reduce other expenses? Because salaries and benefits make up 80% or more of the General Fund budget. In order to make an impact and see greater general fund savings, you need more employees to participate in the ESI. Goal Number 2: Reduce the general fund but over a 3 to 4 year period and not all at once. If you offer an ESI and pay it out as a lump sum “bonus” then the impact on your budget is immediate and often you won’t be able to afford it. The benefits to the school district are simple, reduce the general fund expenses while paying for it over a 3 to 4 year period. 

What are the benefits for the employee? The employee who participates in the ESI will see a few benefits. First, a monthly stream of income for a 3 to 4 year period. Second, they can collect on this stream of income while continuing to work. Third, a small lump is often given in the first or second year to help incentives more people to participate in the ESI. 

How can your school district launch a successful ESI (early severance incentive)? Here are a few steps. 

  1. Planning a year before is vital. Identify how many staff you will need for the new school year. Identify the total expenses you are trying to reduce from the general fund. Use Gaus Systems to calculate those savings using our projection model, and by using the scattergram to identify who has “bottomed out” on the schedule. 
  2. The ESI should be a one-time incentive offered every 5 to 7 years. Do not put this in your collective bargaining agreement because it loses its effectiveness. Call me to discuss why you should not do this. 419-721-5000
  3. Have your tax professional and labor attorney draft releases and waivers for those participating in the ESI
  4. Begin your recruitment at local universities to attract top talent a year before they graduate. This helps attract top talent as “bottomed out” employees participate in the ESI. 
  5. Have an outside representative explain the ESI to eligible employees. Don’t do it alone as the employee thinks there is a “gotcha” game going on. 
  6. Most import, make sure the ESI is attractive and there is an actual monthly benefit to the employees. If the plan is not attractive it will fail. With Gaus Systems you can model what is attractive based on the total savings using our “quick compare” feature. 

Here is how Gaus Systems handles calculating the savings from an Early Severance Incentive. 

First, use the scattergram to identify the eligible employees. You need to pick the step(s) that will be eligible for the ESI. 

identify early severance eligibility

Second, use the scattergram to sum the FTE and then multiply the maximum amount of savings. Normally, a well planned Early Severance Incentive will attract between 30% to 40% of the eligible group. This district could see $2M to $3.2M in payroll costs reduced just by 39 employees participating in the ESI. Now, remember that you must replace those 39 employees who left with new employees and calculate the early severance incentive for a 3 to 4 year period. 

Third, add an Early Severance Incentive compensation schedule to the projection in Gaus Systems. You can modify the ESI and plan as much as you like in our system, so don’t be afraid to try different amounts. For this illustration, I simply plugged in $1,500 per month ($18,000 annually). 

ESI compensation schedule

Fourth, add 39 employees to this ESI incentive and remove their old compensation. This is quickly done on those 39 employees. Remember, you can run an estimated ESI incentive then once employees begin to sign up for the ESI you can apply the actual ESI compensation schedule to their employee profile for the fiscal year the ESI applies to. We are happy to show you how to do this. 

early severance incentive on employee profile


Fifth, add “new employees yet to be hired” to replace those 39 employees. This is very simple as we are just mocking this up to see the total savings. We are happy to do this with you. 

Now, calculate and compare in Gaus Systems to see the savings from a projected Early Severance Incentive. Remember, once employees begin signing up for the ESI you can run a new projection and begin to implement those changes so we can feed the new data to your payroll system for that fiscal year. 

calculate early severance incentive savings

By using Gaus Systems, I calculated this ESI in less than 30 minutes. This Early Severance Incentive for FY18 would save this district $2.5M dollars in year one alone. This is just a projection, and with Gaus Systems you can run a new scenario and apply the ESI to the actual employees who sign-up for the ESI to see your true savings. Our data is then formatted and ready for your payroll system. We are always happy to assist as you begin calculating your General Fund savings by implementing an Early Severance Incentive for your school district. To learn how to do this for your school district visit us at GausSystems.com or call us at 419-721-5000. 

Your Extra Day of Pay Calculation (Per Diem or Daily Rate)

Calculating the “Extra Day of Pay Calculation” for many employees is very important. These additional days of compensation will impact your budget and it will modify an employee’s payroll. Therefore, properly modeling these extra days of pay will be important for your organization.

Items needed:

  • Spreadsheet or google sheet
  • Employee database
  • Employee ID associated with each employee
  • Index Match Formula
  • Extra Day of Pay Formula

 

Daily Rate Step 1.

The spreadsheet or a google spreadsheet will be required to run this. The goal when building a daily rate calculator is to have a consistent dataset from bargaining, payroll or an HRIS system. I prefer google spreadsheets to track who is using the spreadsheet and to collaborate quickly with other team members.

 

Daily Rate Step 2.

Consistent data or “raw data” is key for this calculator to always perform accurately. Know where this data will consistently be pulled from to ensure that proper calculations are always performed. Set up a “raw data” tab where you can copy and paste the raw employee data.

 

Daily Rate Step 3.

Make sure that you have a unique ID that is tied to each employee in the database. This will allow you to run Steps 4 and 5 accurately.

 

Daily Rate Step 4.

Vlookup formulas do not look to the left. If your unique employee ID is to the left of your data, then perfect. If it is not then run the following formula. =index(data you want to lookup,match(the ID #, to the ID# in the raw data,0)). Run this formula for each column of data you need to perform step 5.

per diem match index formula

 

Daily Rate Step 5.

The extra day calculation is straightforward. Total Salary (divided by) Number of Workdays = Daily Rate (multiplied by) FTE (multiplied by) Number of Extra Days. Many times the FTE does not apply as a full day is given and the FTE column will be blank. Therefore, we need to write a quick =if statement. The formula below states, “if the FTE column is blank then make it appear as a 1.0 FTE for this calculation.”

Hope this helps! Remember that GausSystems.com can do this in one easy click and makes your spreadsheet nightmares go away!

How can Gaus Systems streamline your compensation modeling? Contact us today. 

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Teacher Pay Does Not Equal Teacher Performance

“An enlightened citizenry is indispensable for the proper functioning of a republic. Self-government is not possible unless the citizens are educated sufficiently to enable them to exercise oversight. It is therefore imperative that the nation see to it that a suitable education be provided for all its citizens.” -Thomas Jefferson

Compensation Debate

There is a debate about compensating teachers in the public schools of America. Teacher compensation is often made into a political issue as if the teacher in the classroom should be used as a political pawn in a larger political game. Many politicians believe in pay for performance, while others believe that negotiating a higher salary will solve all problems. What we fail to focus on in our society is that education is the foundation on which our country stands. And the foundation of education in our society are teachers.

Societies Value

We put value and prestige on physical accomplishments. An olympian who breaks the world record or an athlete who leads their team to a championship are accomplishments by which our society measures success. Athletic accomplishments drive financial rewards based on the athlete’s performance for the team or sport. We’ve monetarily valued physical accomplishments, but our society often overlooks the foundation of a “proper functioning republic.”

Foundation of Education

Education is the foundation for us to “self-govern” and exercise oversight on the society as a whole. Yet those who educate our citizens are often used as pawns during political campaigns. The politics of education in our country has placed the priority on “test scores” and “teacher performance”, while a suitable education for all citizens has been ignored often by both parties. We have placed monetary incentives on performance evaluations as if monetary incentives drove teachers into that career. Teachers don’t begin their careers thinking about achieving monetary incentives. Their focus is on educating students and watching their students achieve success while becoming a productive citizen in our country. We have allowed politics to drive compensation policies that do not impact student achievement. We have allowed compensation to stand in the way of dialogue about education “for all its citizens”.

Handling Poorly Performing

Poorly performing teachers should be fired, just like any other low performing employees. We need the best teachers educating our students. An educated, thinking and productive student will drive our country forward. Performance metrics that focus on driving compensation are often twisted over time for monetary gain rather than improving student achievement. Performance metrics should be tied to student achievement outcomes, that lead to poorly performing teachers being fired, and not monetary gain. We have allowed politics to focus performance metrics on the allure of monetary gain, while the focus of performance metrics should be placed upon student achievement alone. Poor student achievement over time with no corrective action by the teacher should result in “you’re fired.”

Top Priority

Compensating our teachers fairly should be a top priority in this country, period. Allow teachers to focus on education, not compensation, so that our country can be built on a foundation of education and respect for one another. Without an education “for all” in our country, it will not be possible for citizens to sufficiently exercise oversight nor self-government. Politicians can continue to scheme about funding mechanisms and ways to manipulate “test scores”, while the true metrics should be a “suitable education for ALL its citizens.”

The Power of Countif Sumif

Human beings are faced with counting and summing on a daily basis. The complexity of counting in the human resources world comes when you begin to count the number of positions that contain a certain element. The additional layer of complexity comes when you then need to sum those that you just counted. Gone are the days of printing a data file and manually counting these unique positions and then summing a correlating payroll figure. You need two simple formulas to accomplish this task.

Countif

The countif formula is great. Count this column (data range) of data that contains this description. The problem with the basic countif formula is that it limits you to counting only the employees that contain that exact description. What if you need to count all employees that contain a phrase of text within the full description. Here is my example. You need to know how many teachers are working in your high school. The words “high school” are inserted within the position description for our illustration. How many of our employees have a position with the text of “high school” embedded somewhere in the string of text? Here is the formula.

=counif(range,”*High School*”)

This formula simply means to if the range contains a cell with a portion of the text containing “High School” then count it. The illustration below shows there are 5 employees working in the high school building.

Sumif

The sumif formula is even better because it takes your logic to the next step. We know that we have 5 employees working in the high school building. Yet, what is the impact that their salaries have on our budget? Enter the sumif formula because it will allow you to write a formula exactly like the countif but will sum all of the salaries associated with that text. In our example, we want to sum the salaries of all employees whose position descriptions contain the text “High School”. Here is the formula.

=sumif(range,”*High School*”, sum which range)

This formula simply states if the range identified contains the text of “High School” than sum the corresponding salary with all the others.

Confidence

Now you can go with confidence and quickly state. We have 5 teachers in the high school building that cost our organization $314,882.50 in salaries. Or you could use GausSystems.com where the analytics, calculations, and counts are completed for you in a simple to read format.

 

Dangers When Forecasting Compensation Supplemented by Categorical Funds.

Categorical funding is common in public schools and government organizations. First, we must define categorical funding. Many states define categorical funding as financial revenue or support from a federal or state source. Categorical funding is specifically aimed to assist in an exact category, program or purpose. There is often restrictions on how a government organization can use these funds.

Let’s review a few pitfalls that categorical funding may have on your organization’s general fund when forecasting employee costs. Often when a government organization is forecasting employee costs the district knows that portions of the revenue will come from categorical funds. When discussing pay increases it is always wise to know which employees are tied to the general fund versus categorical funds, so that accurate compensation increases can be given in a balanced manner.

Discontinued Funding

The first pitfall that is common is building an additional layer of compensation for all teachers with a categorical fund. Often a district will give all teachers a flat amount annually based on a categorical fund that becomes available. Some states will issue a categorical funding mechanism instead of giving a per pupil revenue increase. Beware when setting up compensation using categorical funding. Employees must be aware that categorical funding is being used to give them the flat salary increase you are proposing. Communication is key when compensation employees using categorical funds. Why? The state or federal source of the categorical fund can end this categorical fund when budgets are tight. When categorical funding ends and a district has been using it for compensating employees, there are two paths forward. The first path forward is ideal. Communication has been open and transparent with all employees receiving the categorical funding. Removing the compensation will cause complaints, but there should be open dialogue from the beginning that the funds were temporary. When categorical funds are removed, even if clear communication practices are in place, will often cause for a tougher negotiations cycle. The second path is when communication has not been open. The district can’t just rip away thousands of dollars of compensation for the simple reason of, “Sorry, we lost funding.” Normally what happens is the district swallows the categorical funding loss and the General Fund bears the burden of the additional costs. Normally negotiations with these employees will still be difficult as you must explain what happened and the limits your General Fund can withstand. Always clearly communicate with employees about how categorical funds are being used, and the temporary nature of the funds.

Excess Expenditures

The second pitfall is excessively spending more than the categorical fund permits. Categorical funds are supposed to be viewed as supplementing expenses. Not properly projecting your employee costs for that categorical fund will leave the General Fund picking up the remainder. While this is common sense, the proper categorical and General Fund compensation projections were not completed prior to the start of the fiscal year. When employee expenses are then tied to each categorical fund, the district is often left with “picking up” the categorical deficit. Most districts have 10-15 categorical funds, and if each categorical fund has a deficit, then the General Fund must pick up the expenses. As was stated earlier, categorical funds are supposed to supplement expenses, not supplant expenses.

Categorical Projections

When you begin building your employee costing model for the new fiscal year, look beyond the General Fund and begin projecting how employee costs will impact your categorical funds.


 

Your employee projections may contain rejections.

Often, when an analyst is working with employee benefits data, the HRIS or Payroll systems will give a benefit code instead of the actual benefit name. When the Finance Department is trying to run projections on compensation, benefits, pension and tax costs they will run into these benefit codes. The finance team will need to know three high-level things about each benefit. Here are the three items to pay attention to when forecasting benefit costs and what formulas you may apply.

Benefit Name

The first thing the benefits code should reveal is the benefit name. Which benefit is tied to this unique code? There are often unique codes the correlate to the benefit type and FTE associated with that benefit. When you begin writing your vlookup formulas you will need to apply the formula to all the rows in the column. When you apply the formulas, the rows with no benefit identification will show up with a #NA. There is often no benefit identification because the employee has not selected or does not qualify for that benefit type. The #NA becomes a problem when you need to load the employee data into your projection model, such as Gaus Systems workforce engine. We will show you below how to remove the #NA without needing to sort-filter and delete all the #NAs in the column.

Benefit Amount

The second item that should be revealed by the benefit identification is the employer’s contribution towards the benefit plan. This is important when you are forecasting your employer costs. Forecasting your employer costs normally allows you to budget for the new fiscal year, run collective bargaining scenarios, or early retirement scenarios. Make sure the benefit identification reveals the employer’s contribution towards that unique benefit plan.

Benefit FTE

The last item that should be revealed is the FTE associated with the benefit identification. The FTE is vital in order to stay in compliance with the Affordable Care Act. Being in compliance with offering benefits to employees who qualify for benefits based upon their FTE status. The FTE will also reveal why the benefit plan name might be the same as other employees but the employer's contribution is less than the full-time employees. Many employers contribute toward an employee’s benefits based upon their FTE status. An illustration would be, an employee working a 1.0 FTE (full time) would receive 100% of the employer's contribution towards those benefit plans. An employee working .75 FTE would receive 75% of the employer’s contribution towards those benefit plans.

ISNA Formula

Often when running a vlookup you will encounter #NA results where an employee does not have a benefit plan. This makes summing or forecasting data in a workforce model very difficult to accomplish. These #NAs should be removed. ISNA stands for the “is” formula family. “Is the cell returning a #NA?” Yes, the cell is returning a #NA in our vlookup. Now, what? Run an “IF” statement with an ISNA indicator. =if(isna(vlookup(cell,database,column,false)),” “,vlookup(cell,database,column,false)). This formula states that if a #NA is found return it as a “ “ blank cell. If a #NA is not found run a vlookup and pull in the proper benefit value or name.

 

Formula

 

Blank Formula

 

Blank Result

Building a strong salary schedule starts with deconstruction.

Many cities, counties and school districts have a “row and column” format that many refer to as a salary schedule. The logic behind a salary schedule is simple. A row often correlates to the amount of time or the years of experience within the organization. A column often correlates to the education or credentials that the employee holds. As we’ve discussed in other posts, for every row and lane there is a corresponding rate of pay that is tied back to the base salary for those roles. When looking at a teacher’s salary schedule you will see columns with headers such as BA, MA or Ph.D., and corresponding rows for years of experience in the organization. The amounts that you see on paper are normally totals and should be broken down to understand the full compensation story.

Pull out the basic salary schedule

Deconstructing a salary schedule normally starts with understanding the basic salary schedule. The basic salary schedule does not contain any other compensation layers. This basic salary is normally funded by the General Fund for the organization. Most organizations fail to communicate the various layers of a salary schedule. This leads employees confused and expecting pay raises that are not funded. Deconstructing each layer of compensation is imperative for administrators to have an open dialogue about budget limitations with their employees. Step one, pull out your basic salary schedule and reveal how the budget funds this salary schedule.

Pull out each unique layer of compensation

The second step, pull out unique layers of compensation that are not tied to the basic salary schedule. This can come in many forms, but we will reveal two common salary layers. The first layer that is often overlooked is longevity. Many organizations give a flat or per diem amount for employees with an organization after a certain number of years. The funding source might be the General Fund, but there are special funds to incentives tenured employees to retire. Pull out the longevity compensation, and communicate how the budget funds the longevity compensation layer. The other common compensation layer if Federal funding. Often, the Federal government will have incentives or specialized funds for specific duties performed. This is often a set amount of money for each organization. It is then up to the organization to split this compensation out to employees performing those required duties. These federal funds must be accounted for and reported back to the Federal government. The trick with Federal funds is to spend the maximum, without overspending. How does overspending hurt? If you overspend Federal funds you are not reimbursed. Rather, your General Fund that is supported by local taxpayers will end up footing the bill for these additional expenses. Many Federal sources of revenue are limited by a President’s term in office, and will expire every 4 to 8 years. Therefore, don’t mix federal funding sources into the permanent basic salary schedule.

Key takeaways

  1. Deconstruct your salary schedule by pulling out each layer of compensation

  2. Know the funding sources for each layer of compensation

  3. Run accurate projections so that you don’t overspend a layer of compensation

  4. Communicate with employees how each layer of compensation is funded and the limits to the funding source

The Plight of Pension Funds Plundered by Retirees

By: David Gaus

Pension Funds in America is a subject most of us ignore. Why do we ignore the occasional headline or NPR story about the rising liability of pension funds? My quick answer is because we believe public pension liabilities do not impact our lives. How many family members or friends do you know that contribute a portion of their earnings into a state operated pension fund? My quick count is two. Two of the family members that I know, both of whom work in education, contribute a portion of their monthly earnings towards pension funds. Now depending on your line of work, this number may fluctuate. Pension funds are becoming rare because life expectancy over the past 100+ years has steadily grown. The more retirees the pension funds must support means the more money the pension fund must take in. Let us begin by looking at a few factors that will impact you due to pension fund liabilities.

 

Number of Retirees

The State of Washington recently released a report on the condition of its public pension fund. A key factor jumped out as I read through the report. The average age of employees contributing to the pension fund was 46.6 years old. Over the next 15 years, a large portion of the pension fund contributors will be retiring. This does not mean that those jobs will go away. Younger workers will fill these vacancies and begin contributing to the pension fund. How much will these younger workers need to pay into the pension fund in order for the pension fund to pay the retirees their guaranteed wage? As baby boomers retire the pressure on pension funds will continue to grow. In the chart below the projected benefit payments will double in the next 15 years, due to the factors I described above. There are three ways to grow the assets in a pension fund. Yield, Employee or Employer Contributions, and Tax Payer Bailouts.

 

Pension Fund Yield

The report from the State of Washington reviewed the Pension Funds yield. This simply means that the pension fund invested the fund’s money and the money grew based upon those investments. Most pension funds in the 90’s and early 2000’s had a nice growth rate of 4% to 6%. Since the Great Recession in 2007, the growth rates of pension funds are at 2% or below. Therefore, as pension fund yields have been cut in half the fund does not grow as rapidly leaving the fund with more liabilities than assets.

Liabilities in a pension fund are the payments made to the retired workers who contributed to the pension fund for 20, 30 or 40 years.

An asset in a pension fund is money that has grown due to investment, and current workers contributing monthly towards the pension fund.  

Employer & Employee Contributions

A quick recap shows a bleak picture. More baby boomers will retire in the next 10-15 years. Therefore, more liabilities, payments to these retirees, will continue to grow. The yield from the pension fund’s investments has been cut in half. This leaves current workers holding “the bag” and they must contribute to the pension fund in order to keep the pension fund solvent (solvent = not going broke!). Most pension funds don’t broadcast this but the projections show that for every $1.00 the pension fund takes in (assets), the fund will pay out $1.38 to retired workers (liabilities). The chart below shows that employees must contribute an additional $885,000,000,000 towards the pension fund in order to keep the fund from going broke. Look at the strain on the Chicago Public Schools. http://www.chicagotribune.com/news/local/breaking/ct-chicago-public-schools-pension-payment-0701-20160630-story.html

 

The Mess Summed Up

More employees will retire in the next 10 to 15 years which will put a tremendous strain on pension funds in America. The yield or investments of these pension funds are showing returns half of what they used to receive. Therefore, public employers and employees will need to contribute more annually to these pension funds in order to keep them solvent. What happens when employees have had enough taxation on their paycheck by the pension fund? What happens when the public employer (schools, cities, counties) can’t afford to hire because pension fund payments are out of control? ….you step in. The taxpayer.

 

Time is a commodity spent for you. Control your time.

Busy schedules often keep a School Business Official (SBO) running from meetings to tasks. A recent conversation with a business associate about time led to this post. What is the primary role of a School Business Official? There are many points of view, but today I’m going to focus on the time spent forecasting financial data. You can run from meetings to tasks and fail as an SBO. What is often not contemplated is the balance between time spent forecasting data versus daily “busy tasks”. Daily, every SBO has tasks that need to be executed and meetings that must be attended. The busyness of tasks and meetings often leads the SBO from their primary focus. The primary focus should be to analyze financial data and forecast the future impact it will have on your organization.

 

Tasks that keep you busy are not always the most important tasks. How often do you get caught up in mundane tasks that keep you jumping from one fire to the next? Do you often spend your days, “juggling the flaming pots”? Your time should be spent as the Chief Financial Officer. One who gives guidance and relevance to how money should be handled and spent. You should be giving guidance on the future impact of today’s spending decisions so that your organization can make wise decisions. Time is a commodity that is spent for you. Time keeps ticking without your permission. Time is not stopped by your busy schedule, tasks, and meetings. How do you control your time?

 

The balance for every SBO is between the tasks and forecasts. Tasks are busy work. Financial forecasts completed properly give guided structure so that the organization can make wise decisions. You were hired to be the SBO, not a juggler. Strategically plan on how you will handle the “flaming pots”. Focus on what is most important. Keep the focus on financial analysis and forecasts so that you can give wise financial counsel to those within your organization.

 

How your payroll system has 1,500 opportunities for errors.

Just the thought of a payroll error brings a furrowed brow to many payroll clerks and directors. Working with organizations we often hear two payroll comments.

My Natural Reaction

The first comment is a natural reaction to protect one’s career and reputation. We often hear, “payroll errors are rare in our organization.” I understand this answer, if I was handling payroll for an organization my first reaction would be the same. My natural reaction would be a follow-up statement, “here is the dual control and audit process for updating a payroll record.”

The natural reaction is only as good as the systematic controls that your organization has implemented and follows. Within this reaction is self-preservation. Your career is at stake when it comes to payroll errors. The natural reaction should always be able to rely on and follow the systematic controls that you have implemented to eliminate unnecessary payroll errors.

The Manual Intervention

The second comment we often hear is, “we manually update payroll on an annual basis.”

The organizations we work with often have complicated and multi-layered salary schedules to pay a single employee. These salary schedules are updated annually when pay raises are calculated. These updated salary schedules update each layer of compensation for each employee. An organization with 100 employees that has a simple 3 layered salary schedule, now has 300 salary components to update in their payroll system. Often these organizations print these updated salaries from a spreadsheet. The payroll director takes the spreadsheet or the printout and then manually updates each line of the payroll system.

Quick math because we love math! 300 salary data entries (x) 5 numeric characters = 1,500 chances for errors. The 1,500 number is only for organizations who pay all of their employees less than 99,999 (5 numeric characters). Wait, the 1,500 chances for errors only deals with an individual’s salary. Think about the opportunity for errors with benefits, pension and tax amounts. Hopefully, pension and tax amounts are automated in your payroll system.

My Natural Reaction and Manual Interventions

There I sit in front of the computer updating employees for the new fiscal year. My natural self believes that payroll errors in our organization are rare. We have systematic controls setup which prevents payroll errors from occurring. We have 300 data entries to update our 100 employees.

  • Who will miss that “0”? I will miss that “0”!
  • Who will catch my error?
  • How can I eliminate the manual intervention of updating payroll?
  • What systematic controls do I have in place that will allow our team to catch these payroll errors?
  • Have we engaged with a payroll auditor to check our controls and processes?

Don’t allow your natural reaction and manual interventions to control your life. Take control with systematic updates to payroll that require no manual intervention.

Your health insurance contributions could negatively impact your pension!

A topic of debate in many government and state-run organizations is, how much should an employee contribute to their insurance premiums. There are good points of view on both sides, but often the rhetoric is not backed up by math. So, I pulled out the old spreadsheet to run an analysis on two options. Here is what we are trying to learn. Which employee comes out better financially at the age of 82? Option 1 or Option 2.

OPTION #1 - A school district will increase the salary schedule by 1% every year for 30 years. The employee will pay 50% of the insurance premiums.

OPTION #2 - A school district will increase the salary schedule by a .5% or (½%) each year for 30 years. The employee will pay only 10% of the insurance premiums.

 

Rules:

  1. The employee must take a step on the salary schedule every year for 30 years.
  2. The employee must change lanes in years 10, 20 & 25.
  3. The insurance premium must increase by 2% a year.
  4. The pension plan is calculated as the average of the highest 5 years gross salary.

Which option above would you select?

Why these two options?

Option number one is a school district that is willing to pay their employees more but is focused on managing their health insurance costs. Many employers are moving to plans that require more contributions by the employee to control long-term health insurance costs. Many employees don’t understand the value of their benefit plans until they begin sharing in the cost. This employer normally points out the future benefit of having a higher pension payout annually in retirement.

Option number two is a school district that is willing to bear the burden of rising health insurance costs. To justify this rising expense the employer increases the salary schedule at a slower rate. Many of these employees will look around at other school districts and state, “they get paid more over there.” What they don’t realize is the total reward that they are receiving from the employer’s higher contribution towards their insurance expenses. These employees normally have a higher take home pay than other districts but don’t realize it. Why? Because all that is published is the gross wages for each position.

  1. A few key questions to consider while reading:
  2. Who will take home more pay over the life of 30 years?
  3. Who will have a larger take home pay annually?
  4. If the employee were to invest the difference between the two options, would it offset the pension difference in retirement?
  5. Who will have a larger pension?

 

Theoretical data set used for this test.

For this test to work, we must examine that the control works properly. We are using a traditional teacher salary schedule increased by 1% and a ½% for a 30 year period. In the GIF below you can see the salary schedules updates based upon the 1% increase or the ½% increase.

 

A traditional teacher salary schedule above operates based on three key factors. The first factor is the base. This is the base pay the district sets or the lowest amount a teacher employed at this district will earn. The second factor is education or the degree you hold. As a teacher works on renewal credits to maintain their state license they naturally obtain additional credit hours. The additional credit hours result in the teacher changing lanes and being paid at a higher rate based upon their advanced degree work. The third factor is time or the aging of the employee. The district rewards teachers who continue working at the district by paying at a higher rate on an annual basis. An administrator will often talk about the cost of “aging or stepping” the salary schedule. What is meant by this is, how much does it cost the district for every teacher to simply take a “step or age” on the salary schedule.

Next, for the test to be accurate, we must examine that the employee changes lanes in the above salary schedule at the same time. In order for the test to work properly, the salary schedule base must be increased annually, the employee must take a step on the salary schedule annually, and third the employee must change lanes in the same year. This allows us to compare between a 1% annual base increase and a ½% increase and see the results.


 

The difference in take-home pay. The impact of insurance.

The next step is to evaluate the impact that the employee’s contribution to insurance premiums has upon take home pay. Here is a quick review of the two options.

OPTION #1 - A school district will increase the salary schedule by 1% every year for 30 years. The employee will pay 50% of the insurance premiums.

OPTION #2 - A school district will increase the salary schedule by a .5% or (½%) each year for 30 years. The employee will pay only 10% of the insurance premiums.

The formula is simple for both options. Total annual salary (-) employee’s contribution = take home pay. We can add FICA and Pension rates, but for this test, we will stick with the above approach. The test has the insurance premium cost at $14,000. Option #1 has the employee paying $7,000 a year and each additional year the costs grows by 2%. Option #2 has the employee paying $1,400 a year and each additional year the costs grows by 2%.

Even though the 1% increase is higher, the employee’s contribution towards health insurance reveals that the take home pay is less than a mere ½% increase annual. The ½% annual increase shows a higher take home pay for the next 18 YEARS! By year 19 the 1% annual increase has a slightly higher take home pay. Over 30 years, a 1% increase takes home $49,613.70 less than the ½% annual increase model. This is due to the higher insurance premiums the employee is paying in option #1.

This is a big what if, but if the Option #2 employee had the foresight to invest the difference at a mere 3% rate of return the difference would have grown to $117,869.30

 

Pension Payout from 62 to 82.

Pension plans are great for public employees and normally operate in this manner. The fund takes the average of your highest 5 years of income, and then they multiply that average by a rate of return. For our test, the pension fund pays the retiree 60% annually of the average of their highest 5 years of wages. The formula is simple. Average the employee’s gross wages for the top 5 wage earning years. Then take that average and multiply it by 60%. That is how much the retiree will receive annually. I simply picked a 20 year period from 62 to 82 to run this test.

 

The high 5 average of Option #1 (1% increase on the base annually) times 60% was $58,753.55. While Option #2 (½% increase on the base annually) times 60% was $51,381.71.

The annual difference in retirement payout is $7,371.85. Over a 20 year period, the Option #1 employee would be paid $147,436.95 more than the Option #2 employee.

If the option #2 employee invested the difference in take-home pay, which is highly unlikely, the option #1 employee would still come out ahead by over $30,000.

 

Conclusion

Compensation and benefits are tricky when it comes to seeing the future impact of making one single decision. Paying more or paying less towards your health insurance premiums impacts your pension payout in the future. The goal of having a higher pension payout is placing more money on the salary schedule today while contributing more towards a health insurance plan. A higher salary schedule means a higher pension payout in the future, even though an employee’s take-home pay will be less over the next 18 years.


Short term pain for a long term gain is hard to see today. So do the math!

Pay for Performance versus a Traditional Teacher Salary Schedule

By David Gaus

The past few years many school districts have discovered performance pay compensation schedules for teachers. The normal talking points are charts showing that over a 30 year period a teacher on a pay for performance schedule has the opportunity to earn more than a traditional teacher salary schedule. In a world where a teacher is “highly effective” every year for 30 years that teacher will earn more than being on a traditional teacher salary schedule. I took a salary schedule of a district that has both a traditional and a performance schedule. Then I gave the employee a 4% performance increase every year for 30 years. That was easy! Previous year’s salary increased by 4%, repeat for 29 more years.

 

The trick comes when you compare a pay for performance schedule to a traditional teacher salary schedule.

Here are the steps that I took to calculate a traditional salary schedule employee:

  1. Every year the employee took a step or “aged” on the salary schedule
  2. The employee changed lanes from the BA to the BA+15 in year 6
  3. The employee changed lanes from BA+15 to MA in year 10
  4. The employee changed lanes from MA to MA+30 in year 21
  5. The salary schedule base was increased by 1% every year for 30 years.

***Jargon used above:

  • BA = Bachelor Degree
  • BA+15 = Bachelor's Degree plus 15 credit hours towards a Masters Degree
  • MA = Earned a Master's Degree
  • MA+30 = Master's Degree plus 30 hours beyond a Master's Degree

 

A traditional teacher salary schedule calculates pay increases in 3 ways. First, In the above 5 points, pay increases are given every time the employee ages or “takes a step” on the salary schedule. Second, the employee receives a higher rate of pay by changing lanes. Third, the entire salary schedule is increased annually by increasing the base.

Note: I’ve simplified the teacher salary schedule calculations for this post. We can get into calculating the base times an index over several layers of compensation. I digress.


 

Yikes! Calculating a traditional teacher salary schedule is more complicated than a 4% increase annually. Why was the traditional teacher’s salary schedule put into place? Equity. The goal was to equitably compensate teachers in public schools. The equity of a traditional teacher salary schedule can be found in two key areas. First, a teacher builds equity by staying with the school district, so every year working at the district the teacher’s ages or “takes a step” on the schedule. This results in more compensation because as the teacher “ages” the index value or compensation increases. Second, a teacher also builds equity by advancing their degree and putting time and energy into becoming a highly educated teacher. A teacher salary schedule normally has “lanes” or a column. For each degree obtained the teacher earns the index values or compensation increases associated with that lane. Therefore, as we described above a teacher’s pay is equitably increased by 3 compensation factors.


A pay for performance model is less complicated to calculate and is based upon how the teacher “performs.” The “performs” in performance pay is the most complicated, disputed, and debated portions of this pay model. What makes a teacher a “highly effective” teacher who deserves a 4% pay raise every year for 30 years? The debates between equity and performance will continue to occur. So, stayed tuned and stay informed.

 

Creating inspired learning environments one broom at a time.

John was an engineer working at a nuclear power plant as a night manager. He told the story of being interviewed for the night manager position and the story never left me. He had been working at the plant for several years and believed he was doing a great job. When the night manager position opened he applied and was called in for an interview. During the interview, they began discussing custodial duties and began to walk through the executive offices. As they walked John simply reached down and picked up a scrap of paper on the floor and threw it in the trash. The interviewer stopped asking questions and stuck out his hand. “John the job is yours.” A minuscule piece of paper had been left purposefully during every interview and John was the first to pick it up. The smallest details should never be overlooked at a nuclear power plant, not even a scrap of paper on the floor. 

That story brings back memories of conferences and school board meetings where individuals would describe what an inspired learning environment would look like. What I’ve rarely heard was praise and recognition for those who create inspired learning environment every school day, custodians. The smallest of details are looked after daily such as trash being taken out, floors swept, bathrooms cleaned, and a scrap of paper being picked up. Custodians at school districts impact the educational environment just as much as a teacher, principal or a superintendent. A custodian impacts what the student sees smells and feels on a daily basis. A school district’s buildings don’t magically become clean overnight. How do you reward your custodians for jobs well done? 

During the slow dog days of summer as kids play, the hardest work for custodians begin. The stacking of desks, sweeping, mopping, and endless hours of waxing. What are they doing this for? They are creating a clean, visually appealing environment for students when they return to school in August. Thank a custodian for the small things that no one else notices, because they notice every detail. Inspired learning environments start with a broom and mop. Thank You, Custodians. 

Common potholes spanning payroll years

Negotiating with employee groups at your school district can often be challenging. Yet, financial models for negotiations stop once a pay increase is agreed upon. The school board will approve the pay increases for all employee groups near the end of a school year. This gives the business office the summer to put in place the pay increases for the new fiscal year. Spreadsheets don’t factor in the difference between the board approved pay increases and the new payroll costs.

Does your spreadsheet compensation model account for these potholes?

  1. The board approved the total package compensation increases for all employees. Will this be the exact payroll costs in the fall?
  2. Employees resign from their positions during the summer and the district fills the open positions.  How does your spreadsheet model reveal the impact these employee changes have on the budget?
  3. Who handles comparing the new fiscal year’s payroll data back to the board approved compensation increases?
  4. How do you communicate the difference between the board approved compensation increases and the actual payroll costs?

Pay raise or you're fired!

School districts face funding dilemmas every school year which impacts the community, administrator’s reputations, and the environment of the school district. Communicating funding dilemmas is often a difficult challenge. Start with the community, they want their school district to provide a high-quality education while staying fiscally responsible. Your Board of Education wants to improve upon a high-quality education that promotes a positive reputation with stakeholders. Yet the vital component is the students, every student deserves a classroom environment of respect among the community, teachers and administrators in order to personally achieve a high-quality education.

Often, when funding challenges hit a community school district the classroom environment erodes as the students watch the community, board, and staff members clamor over what should be reduced from the budget. 80% of the General Fund is spent on employee payroll costs such as compensation, benefits, pension, and taxes. When a school district is facing declining enrollment and funding reductions, what is the impact of a pay raise? How are you communicating the impact of a pay raise with your board and community members?

When employee representatives begin negotiating compensation increases with the Board of Education or the administrative team, both parties need to begin discussing six key questions that impact the district’s budget.

First: Does our fiscal condition allow for us to grant a pay raise?

Second: With funding for the new fiscal year, will the funding change increase or decrease revenue for the district?

Third: With funding and student enrollment changes, how much new money (additional revenue) will the district receive?

Fourth: What impact will insurance premiums have on the district’s budget?

Fifth: What impact will tax and pension rate increase have on the district’s budget?

Sixth: If we grant compensation increases, what is the impact on the district’s budget?

As management works with employee representatives through the above questions, the biggest question still remains. “If, we grant a pay increase to this employee group, will this require a reduction in the workforce?” This is vital because administrators and the board must be willing to face the employees and the community and effectively communicate the plan.

When the majority of stakeholders are in agreement that a pay raise should be given, then the administrators must put forth the greatest question. “How will this reduction in workforce impact our school district in delivering a high-quality education?” The dilemma between giving a pay raise and delivering a high-quality education is a balancing act. The questions above must be answered and transparent communication effectively completed in order to ensure the community that a high-quality education will be delivered to all students.

 

The Greatest Financial Mistake a School Could Make

 

School administrators and Boards of Education are always under scrutiny in regards to how taxpayer’s money is spent. Why does a school district exist? The basic answer would be to educate students, so every school district comes up with a unique mission statement about educating students. When educating students, who normally carries out this duty? The basic answer would be teachers, and then you would also be correct to state that the bus drivers, custodians, aides, food service workers, electricians, and plumbers. All employees impact the school’s environment so that students can receive a high-quality education. A school district is not a building, a school bus or the Board of Education, but rather a school district is people. People of your community make up your school district’s environment, learning experience and the delivering of a high-quality education to the students living in your community. What is the greatest financial mistake schools make? Forecasting people.

The General Fund is the largest financial resource, a school can utilize to achieve a high-quality education. Why? Because Payroll expenses are paid from the General Fund. 80% of all General Fund expenses are normally directed towards compensation, benefits, pension and tax costs.

The liability of inaccurately calculating or forecasting payroll costs could be devastating to a school district. When you think of who educates a communities students, we normally think of teachers. Around 45% of the General Fund will be spent on the payroll for teachers, so they are an easy starting point. Your district’s funding comes from the number of pupils in attendance and every state has a unique funding formula. The basic structure is a cost or funding amount per pupil in attendance, and when this daily average or pupil count fluctuates the district’s funding fluctuates. The business office is normally at the center of calculating the compensation, benefit, pension and tax increases for all employees. Let’s examine a common mistake in forecasting the payroll costs for teachers.

A financial mistake a school can make is to take the total payroll costs for teachers and simply increase the total costs by a generic rate. For the illustration below lets increase payroll costs by 3.5%.

Payroll total costs = $10,000,000 (x) 1.035 which makes the forecasted payroll cost $10,350,000.

A school district does not give the same pay raise to every teacher! A traditional teacher salary schedule gives higher increases to staff members who have tenure (years of experience) and education (Bachelors, Masters or Doctorate). A 1% increase on the teacher’s salary schedule will result in a 3–4% increase for those who have tenure and a higher degree. Second the 3.5% forecasted increase does not take into account the employer’s contribution towards the taxes of social security or medicare. As you increase your teacher’s compensation the employer’s contribution towards social security and medicare also increases. Last, is the pension fund. Every state has a different pension system for state employees, but normally the employer contributes a higher rate towards these pension funds every year. The employer must factor in the higher pension fund rate, and factor in the higher wages paid to those employees. Here is the difference between the two formulas.

The financial mistake way: Total Payroll Cost (x) 3.5% = New Payroll Costs

The proper way: A Teacher’s Total Salary (x) Tenure/Degree % Increase = New Teacher Salary (+) New Teacher Salary (x) Tax Rate (+) New Teacher Salary (x) Pension Fund Rate = Total Compensation, Pension & Tax Costs for 1 teacher. Now, repeat the above step for all teachers and sum for a Total Cost Increase.

While it is common for school district’s to discuss that payroll costs increased by 3.5%, that should not lead the community to assume that payroll costs will simply increase by 3.5% every fiscal year. Why? Because as your enrollment fluctuates so will your funding, and as your funding fluctuates a district will need to make difficult financial decisions. The decisions will normally be centered around people and it will impact your communities wish to deliver a high-quality education. In our next post, we will begin to reveal the impact of payroll increases while eliminating teachers from staff in order to maintain a balanced budget.