ETHICS MATTER! Negotiating Employment Agreements and Compensation

Achieving success with your reputation intact

By Martha Perego, ICMA-CM | Feb 1, 2021 | ARTICLE

Since the local government manager is the most highly compensated employee, the pay offered to attract, retain, or sever ties with them, when appropriate, is a highly visible, sensitive, and sometimes political issue. For that reason, managers want to ensure that their efforts to obtain the compensation they deserve are reasonable, transparent, and conducted in a fair manner.

Thanks to the hard work of a member task force, ICMA has an updated model employment agreement for managers to use in negotiating their compensation and terms of employment with either a current employer or a new one. As noted in the preamble, ICMA believes that an employment agreement between the chief executive/administrative officer and a municipality is an effective tool in ensuring a stable relationship between the governing body and the manager.

In 1969, when the ICMA Executive Board approved the concept of employment agreements, they noted that “agreements of employment negotiated between managers and administrators and their employing municipalities are within the spirit of the Code of Ethics provided that such agreements do not violate the principle that the managers or administrator serves at the pleasure of its mayor and/or council.” The first formal recommendations from ICMA were created in 1983, and focused on the importance of having a comprehensive agreement and the need for a minimum of six months of severance protection.

The board was prescient to view agreements through the lens of the Code of Ethics. Many aspects of the process are intertwined with ethical commitments. What financial analysis was done and how was it all disclosed? Was it reasonable? When all is said and done, whose interests are being served?

Fast forward to 2021, the new model employment agreement was substantially rewritten to streamline the agreement itself and to offer members the opportunity to customize provisions based on regional and organizational norms through a suite of options available in an appendix.

Negotiating an Agreement

Here are some important aspects of negotiating compensation and a few of the changes to the model agreement:

Due Diligence

The manager bears responsibility to conduct appropriate due diligence when negotiating aspects of compensation. In any negotiation, one party may place a request on the table for consideration that may seem unusual to the other party. There is nothing inherently unethical about asking for a provision or benefit based on your needs. However, do your homework. Do not ask for compensation or a benefit that is far beyond the norm for the area, size of community, complexity of the work, and/or the organization’s ability to pay. One organization was hugely disappointed that the finalist, to whom they offered the position following the usual exhaustive search process, asked for a starting salary that was 75% higher than the budgeted salary. The city ended the negotiations and offered the position to the second finalist.

Keep it Evergreen

The recommended approach regarding the term of the agreement is to have it evergreen. The agreement stays in place until the employer terminates the employee under the appropriate provisions, or the employee voluntarily leaves. The opposite approach, a fixed-term agreement, which is the norm in some states, requires both parties to renegotiate under timeframes that are not always conducive to reaching a positive outcome. If you must use a fixed-term contract, make it long enough so that you have time as the new manager to demonstrate your worth to the organization. A new manager with a one-year agreement will find it challenging to begin negotiations nine months into the role.

Severance

Prior editions of the model employment agreement recommended one year of severance as the preferred option. The new version recommends a range between six and twelve months in recognition of the employer’s unique circumstances. Average severance, based on a survey ICMA conducted in 2018, is six months. Consistent with the revised severance language, post-employment benefit continuation was changed from one year to six months. All that said, the severance you desire will be influence by two factors: the law and the organization’s track record. Some states, such as Florida, regulate how much severance can be paid. Some places are just more political and volatile than others. A history of high turnover may support negotiating a larger severance.

Ethical Commitments

The model agreement includes a provision that the manager will adhere to the ICMA Code of Ethics. New to the agreement is the commitment by the employer that refusal of the manager to comply with a directive that violates the Code of Ethics is not cause for termination.

Challenges with the Process, Roles, and Principles

The lack of established practices for negotiating public sector executive compensation, combined with the transparency threshold that must be met, makes an otherwise difficult task almost daunting. Roles and responsibilities may be clear on paper, but not in action.

The decision makers—that is, the governing body—are not always experienced with the process. The beneficiary—that is, the manager—sometimes is the one who is more knowledgeable, skilled, and, shall we say, savvy. That imbalance can create a conflict of interest. The result can be compensation packages or benefits negotiated in good faith that later appear to be inappropriate, unfair, and just too costly.

The principles of the profession have long been the driver for personnel and compensation matters. The standard for establishing executive compensation is that it be fair, reasonable, and transparent. But what’s “fair” is subjective and debatable.

Based on the principles, ICMA established formal guidelines for negotiating executive compensation that set standards for benchmarking using comparable public sector salaries on regional and national bases. The guidelines more clearly define roles and responsibilities, and they address issues that relate to all employees as well.

To establish fair and reasonable compensation, the governing body should either operate as a committee of the whole or designate an evaluation and compensation subcommittee. This group should design and implement the methodology for setting the compensation of the local government manager and any other appointees of the governing body.

Compensation benchmarks should be established based on compensation in comparable local government and public sector agencies. The governing body should engage experts, whether contracted or in-house, to provide the information required to establish fair and reasonable compensation levels.

All decisions on compensation and benefits, whether a first-time agreement or modification, must be made by the entire governing body in a public meeting.

Takeaways

• The governing body has a governance role to play. They should create a compensation committee of the governing body or committee of the whole to design and implement the framework for setting the manager’s compensation.

• Compensation must be benchmarked to comparable local government or public sector agencies.

• Expert advice is important. While the manager may be that expert, it’s a conflict of interest to serve in that role when you are the beneficiary of the outcome. Engage experts, whether contracted or in-house, as necessary to provide information.

• Decisions on compensation and benefits must be made by the entire governing body in a public meeting. In the interests of transparency, the salary plan and salary ranges for local government positions, including for the manager, should be publicly accessible on the agency’s website.

In closing, do not put your personal compensation interests before the good of the overall organization and that of the citizens. Local government managers have an ethical responsibility to be clear about what is being requested and to avoid excessive compensation. Greed is not good.