Cities in metro Phoenix are paying millions of dollars in retention bonuses as they lay off employees, cut pay or raise taxes amid the recession.
Compensation experts question the wisdom of retention bonuses as the state’s 9.3 percent unemployment rate has drastically reduced turnover. Cities defend the bonuses as an incentive to retain employees and make up for stagnant wages.
Mesa will pay about $4 million in bonuses this year as employees took a 2 percent pay cut.
Fewer than one-fifth of Mesa’s nearly 3,500 employees get the bonuses, according to Deputy City Manager Bryan Raines. They qualify if they’ve worked at the city for more than 17 years and get a bonus equal to 5 percent to 10 percent of their pay once or twice a year, depending on their position.
In Phoenix, about half of the city’s nearly 14,000 employees will receive a total of $14.3 million in retention bonuses this year. Workers qualify for bonuses once they hit the maximum pay for their job and have six years with the city.
Deputy Human Resources Director Kathy Haggerty said the bonuses help retain those with deep job knowledge.
To balance the current budget, the City Council cut $270 million, or 22 percent, from Phoenix’s general-fund budget, including $156 million from programs and services.
The council cut 1,000 positions in the last round of cuts; most were vacant due to a yearlong hiring freeze. The budget shortfall this fiscal year has widened by as much as $95 million, so more cuts are certain.
In Goodyear in recent months, the city increased the local sales tax, tapped reserve funds and laid off 27 workers to close a $13.9 million budget gap. But on Dec. 1, the city issued $104,000 in longevity bonuses to about 200 of its roughly 500 employees.
“It just seemed to me that since it’s budgeted, since the employees are anticipating it, and since we have not talked about this as not coming forward … that we should continue to pay it,” said City Manager John Fischbach.
In Glendale, more than 400 employees will receive a combined $300,000 this year as the city holds 178 jobs open and forecasts a $15 million budget gap going into fiscal 2010-11.
Targeted, temporary retention bonuses can be effective in retaining a specific skill set, but permanent, across-the-board bonuses are problematic, said Jeffery Coles, finance department chairman at Arizona State University’s W.P. Carey School of Business.
“I think that sort of abdicates responsibility for thinking carefully about your human capital,” Coles said.
National consultant Alan Pennington, a former longtime human-resources director, cautions that employees can start to expect a bonus as regular pay, without having to go above and beyond. Further, the bonuses don’t take into account what’s happening in the larger job market, now an employer’s market.
“A decade ago, people were chasing the dollar,” said Pennington, a vice president at Matrix Consulting Group, of Palo Alto, Calif. “Right now, people are looking for things like stability and flexibility. And those things mean a lot more than smaller salary differentials.”