LIMA — To understand how an organization spends its dollars, look at its labor costs.
Staffing levels speak to a company’s overall revenue. Compensation rates show the type of market a company is competing in. Even an organization’s hierarchy can be gleaned from a ranking of employee salaries.
But while much can be learned from the data collected in The Lima News’ 27th annual review of government salaries, a little extra context can provide a bigger picture outlook on earnings and how they fit into the larger economy.
For most public entities, like governments, revenue is probably the easiest side of the business equation. Townships, schools, cities, states and the federal government are all largely funded through taxes gathered from citizenry and private businesses, and the many programs that governments push forward often compete with each other for funding.
As a result, government salaries are often closely watched, and governments ensure there’s solid data proving the necessity of a salary as taxpayers are asked to foot the bill.
Take the City of Lima as an example. Lima Finance Director Steve Cleaves said the city sets employee compensation after taking close looks at similarly-sized governments and similar markets to figure out what an employee might expect if he or she ends up hired by the city.
“That’s the key element of the discussion at least on the employer’s side. Of course we are competing for labor resources, and we’re not going to get them if we don’t pay what everybody else is paying,” Cleaves said.
Many private businesses and nonprofits make similar moves when setting competitive salaries.
Market-rate studies, however, are just one part of the equation on the public side. Taxpayers — the source of the city’s revenue — push for low salaries to ensure that compensation isn’t inflated, while employee unions often bargain for better pay and benefits. The final compensation package typically weighs all three of these pressures.
Non-government entities, however, don’t have the same sort of pressures. Because revenue is often more flexible, so too, can be employee compensation.
Cleaves pointed to his past experience with Saudi Aramco as a precedent. Due to its multi-billion dollar revenue streams, the company is able to offer higher compensation packages in order to attract the best workers from around the world.
“We always wanted people that were at the top of the game,” Cleaves said.
Consequently, governments often have a harder time fielding the same salary, but Cleaves said that public entities, instead, create better benefit packages to increase loyalty. More than the private industry, public governments benefit from a steady income due to almost certain revenue, and the stability creates really solid jobs that employees tend to hold for longer. Additionally, incremental wide-ranging annual pay raises throughout a career can turn even low-paying positions into a solid income.
“The public sector is better in that regard. There’s quite more security. You’ll have layoffs and recessions, but you have a pretty good chance of having a long-term job, especially with union contracts,” Cleaves said.
As for a nonprofit businesses — which often function as quasi-governmental entities — revenue comes into the organizations through their services, private donations and, sometimes, public dollars through grants or program allocations.
Linda Hamilton, CEO with the West Ohio Food Bank, explained that nonprofits look to keep their overall administrative and staff costs at a minimum in order to show to those writing the donation checks that the food bank is a responsible steward of funds.
As a result, nonprofit staffs typically aim to keep administrative costs low. At the West Ohio Food Bank, only 7% of revenues are used for salaries. In comparison, Cleaves said the City of Lima spends roughly 80% of its general fund budget on labor and labor-related costs.
Size and complexity
No matter where an organization ends up getting its funds, they all follow at least one general rule: The larger and more complex the organization, the higher the salaries of its employees.
For governmental entities, the pattern can be seen in federal and state pay rates, which, on average, are higher than local positions. Similarly, cities in major metropolitan areas often have stronger financial muscles to set expanded priorities and hire a wider range of specialized positions.
The same big-to-small rule can be seen when comparing local governmental entities, like the City of Lima, with some of the smaller villages and townships in the region. Typically, employees of smaller municipalities in the region look to the city when they start seeking a better pay scale.
One of the reasons behind such compensation differences between large and small companies is due to complexity. Ohio Northern University’s dean of the James F. Dicke College of Business Administration, John Navin, explained how a company’s infrastructure and hierarchy tends to be more complicated and specialized the bigger a business becomes.
For example, not every small business has a person devoted to human resources. Normally, such duties are undertaken by the business owner in the early stages of a business, or an outside consultant is hired.
Those specialized positions increase as a business grows, and while an early focus of small businesses may be securing revenue streams, bigger companies often need to hire marketers, finance experts and human resource specialists — among others — to maintain profitability and juggle the additional responsibilities that come with managing a larger and larger team of employees.
“With corporations, they hire professional management teams. They bring in people who have specialized in financing,” Navin said.
Similarly for nonprofits, a larger organizational size and revenue stream can allow nonprofits to hire the same management positions, which opens up executives and directors into having more time for a wider approach. Out of the initiatives undertaken by the West Ohio Food Bank, Hamilton said she has been able to set forward-thinking programs and expand the bank’s offerings by not getting stuck fulfilling the day-to-day programming activities.
“If you don’t have the right people in place to ensure that you can grow, then that’s where I think nonprofits struggle to survive,” Hamilton said.
On the local level, the West Ohio Food Bank would qualify as one of the larger standard nonprofits in the region. Covering 11 counties with annual revenue nearing $9 million, the staff only numbers 13. Smaller nonprofits, however, have even less flexibility to open up such bandwidth, and many nonprofit employees have to be jacks-of-all-trades as a result, Hamilton said.
Unsurprisingly, nonprofit employees are often paid at lower scales as the markets tend to reward high-demand specialists with higher compensation.
Outside of size, high organizational complexity can also result due to industry sector. A good example, in that aspect, is healthcare, Navin said. The large hospitals in the area often offer some of the best-paying jobs in the region because not only are they employ large workforces, but the bevy of laws and oversight involved in running a hospital can also be very complex. Consequently, executives need to have a working knowledge of many different moving parts to decide which initiatives to undertake to be successful. Such abilities are rare, and the market often rewards such executives with compensation packages unseen in the public sphere.
Public and private dollars
While making government salaries available offers insight into how local governments are run, the larger picture can be just as illuminating. Simply put, tax dollars aren’t concentrated solely in the budgets of government municipalities.
Private businesses can benefit from tax abatements. Governments provide bonds and financial products to local markets. Nonprofits and contractors receive public dollars through running programs and providing services. State dollars fund large community projects. Some nonprofits function entirely on the taxpayer’s dime. Infrastructure projects are completed after requests from individual companies.
Consequently, almost everyone gets a piece of the government pie, and knowing some of the ins-and-outs of how salaries are set can help explain the why behind the numbers.
Reach Josh Ellerbrock at 567-242-0398.