Why a New Compensation Study Misses the Mark City Expenses are Outpacing Revenues
Courtesy of George Weiss’ Substack, a reader-supported publication. To receive new posts and support George’s work, consider becoming a free or paid subscriber.
On January 13th, the City Council held a study session with an HR consultant to review findings on staff compensation and job classifications. Although the City has not conducted such a study in twenty years, the findings were surprisingly positive. The consultant confirmed that Laguna Beach is well-positioned: midpoint salaries are at 100% of the market average, and maximums are at 104%.
As a result of increasing staff size from 2015-25 by 35% and increasing staff compensation the city budget is approaching a financial tipping point. For the second year in a row, expenses will outstrip funding, largely driven by increases in staff wages and compensation. Furthermore, our unfunded pension liabilities currently sit at over $88 million, and if current trends hold rise to $114 million by 2031 or higher if no remedial action is taken.
Given these financial realities, we must ask: Does a well-compensated workforce translate to superior service? In my humble opinion, it has not.
The Risk of “Market Adjustments”
History suggests that adopting compensation studies overwhelmingly results in significant, multi-million dollar increases to budgets. Realigning positions to market rates often necessitates an overall increase in personnel costs, even when the goal is simply “internal equity”. Since the City is already at 100% of the market average, we can only hope that further compensation hikes will not be the outcome when the recommendations return for a vote in late February or March. Attend if you can.
How Employees are Paid Now: (from the staff report)
It is important to understand that City employees already obtain higher pay and enhanced benefits through several robust processes:
● Collective Bargaining: Legally binding MOUs set specific terms for wages and benefits.
● Merit-Based & Promotional Increases: Employees typically receive annual step increases, with potential for faster advancement or a 5% raise upon promotion.
● Performance Pay: Management can award up to 5% of gross salary for exceptional performance.
● Add-ons & Stipends: Public safety roles earn extra for certifications, and employees receive stipends for cell phones ($80), internet ($50), and tuition reimbursement.
● Market Adjustments: Periodic studies ensure salaries remain competitive, such as the Council’s determination that Police officers be in the top quartile of Orange County.
The Debate at the Study Session:
During the session, at the request of Councilman Alex Rounaghi, the consultant suggested a “Hybrid Model”. Under this system, employees would advance via steps to the midpoint of their job pay scale, (market rate) based on time and competency, but any increases beyond the midpoint would be strictly performance-based.
While Rounaghi favored this model, Councilmember Sue Kempf pushed back. She warned that merit pay often devolves because “management just wants everybody to get something,” arguing instead that ambitious standards and culture drive performance more than complex pay schemes.
Councilmember Kempf is right. Research shows that without proper leadership and training, complex performance systems are risky and prone to failure. Currently, our HR Department and City management have not demonstrated the professional rigor required to manage such a system effectively.
The Unaddressed Problem is Leadership:
We have a clear example of how high pay fails to solve workplace issues. Irvine has the highest compensation plan for police officers in OC, with Laguna Beach second. Despite high compensation, LBPD has struggled to recruit from other Orange County cities for over 30 years. This recruitment challenge is not about money; it is due to a substandard workplace culture. Securing two horses for police service will not fix it.
We have not often enough attracted the “best and brightest” because the City’s work environment is substandard and suffers from poor leadership at City Council and Sr. Management at City Hall. As Councilmember Kempf argued persuasively, high standards and culture drive performance, not just compensation.
Conclusion:
“Cultural change precedes political and social change. You need a shift in thinking before you can have a shift in direction. You need a different spiritual climate, one grounded in humility, institutional wisdom and energy.” David Brooks, NY Times
If we focus on leadership and creating a healthy workplace culture, performance will improve, attrition will slow, and efficiency will rise. City Hall must become a better m place to work if it is to retain and attract talented employees that believe in public service. This must be the priority before we spend more money on consulting studies or risk adopting complex pay models, we are ill-equipped to manage.
The City’s financial situation is not healthy and action must be taken to forestall a financial crisis. New taxes were discussed at the City Council’s Strategic Planning session too. That won’t be accepted by voters considering that city’s general fund (local taxes) increased incrementally from by 36.5 million from 2015 to 2025. Every year the City Council finds ways to spend all the money and additional staffing accounts for a significant share. This is an election year and the members of the city council got us into financial difficulties need to be held accountable.