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4.2 ERMUSR 12-12-2017 Elk River Municipal Utilities UTILITIES COMMISSION MEETING TO: FROM: ERMU Commission Theresa Slominski - Finance & Office Manager MEETING DATE: AGENDA ITEM NUMBER: December 12, 2017 4.2 SUBJECT: Performance Metrics and Incentive Compensation Policy ACTION REQUESTED: Approve the Performance Metrics and Incentive Policy Score Card for 2018. BACKGROUND: The Commission adopted the Performance Metrics program in December 2012 and then revised it in 2016. This is a company performance based program designed to incentivize employee commitment towards the company's success. Divided into categories representing core values of the company and again into sub-categories that are quantifiable, this program is designed to track goals that require companywide support of the employees to continually achieve. When the employees work together as a team to achieve these goals, the company recognizes a corresponding increase in value to our customers. DISCUSSION: Per our Governance Policies, the metrics for measurement of the designated year need to be determined before the start of the designated year. This allows for changes to be made and communicated timely before performance measurement begins. The policy and the current scorecard are attached for reference. No changes are recommended for year 2018. We have identified changes to incorporate (customer service survey change and rate comparisons) and will be working on those in 2018 to finalize for measurement in year 2019. FINANCIAL IMPACT: None, until awarded the following year. ATTACHMENTS: • ERMU Policy—P.13 —Performance Metrics and Incentive Compensation Policy • ERMU Policy—P.13a—Performance Metrics and Incentive Compensation Policy Score Card - 2018 Page 1of1 7n Elk River Municipal Utilities P.13—Performance Metrics and Incentive Compensation Policy 1.0 Purpose and Summary The successful performance of the ERMU is measured in terms of the Utilities' ability to meet our strategic goals and mission. By improving our efficiency and level of performance in meeting our strategic goals and mission we can improve the delivery of value to our customers. To create incentives for employees to take personal responsibility for accomplishment of the Utilities' strategic goals and mission, the Utilities has established a Utilities Performance Metrics-based Incentive Compensation system ("UPMIC"). Through UPMIC the employees of ERMU will have an opportunity, as a group, to earn annual incentive compensation for each qualifying employee by contributing individually to the overall success of ERMU on a daily basis. Under UPMIC, either all qualifying employees will earn an incentive compensation distribution in a given year, or none will. And not only will incentive compensation under UPMIC in that sense be an all or nothing proposition each year,but there will be an equal percentage share basis for all on which the incentive compensation will be paid out if earned. This appropriately reflects the reality that we all succeed, or fall short, together as a team. To administer the UPMIC and measure objectively the level of performance that must be achieved for qualifying employees to earn incentive compensation, the attached UMPIC Performance Metrics Policy Score Card ("Score Card") has been created. The Score Card will be subject to revision annually based on the performance metrics adopted by the Commission annually for the coming year ("Performance Metrics"). By tracking and measuring the Performance Metrics and creating incentive for employees to achieve the goals the Metrics embody, the Utilities believes it will be better able to focus efforts and resources on becoming more efficient and successful in meeting our strategic goals and mission and delivering improved value to our customers. 2.0 Utilities Performance Metrics Score Card As reflected on the Score Card, the Performance Metrics are divided into the following three categories: Safety, Reliability and Quality of Utility Services; Customer Service and Employee Page 1 of 3 71 Development; and Financial Goals. These categories are used to characterize the overall strategic goals and mission of ERMU. Under the Performance Metrics, these three main categories are then divided into various weighted factors, or sub-categories. These sub-categories,their percentage weight, and the goal or target for each, shall be established by the Utilities Commission annually. The Performance Metrics as adopted are reflected in the attached Score Card. As discussed above, the Performance Metrics and thus the Score Card are subject to modification and adoption by the Commission annually, which will normally occur during the Utilities' budgeting process. 3.0 Utilities Performance Incentive Compensation Distribution Criteria Under the UMPIC a Performance-Based Compensation Incentive, if earned, will be distributed to Qualifying Employees annually. The total amount available to be earned by Utilities employees as a Performance Based Compensation Incentive each year will be an amount up to 2% of the Utilities' total gross wages paid to Qualifying Employees during the Measurement Period. The measuring period used to calculate how much, if any, of the Performance-Based Compensation Incentive the Utilities employees have earned will be the calendar year(the "Measurement Period"). After the Measurement Period is complete and the Commission has received its audit in the spring of the year following the Measurement Period,the Performance Metrics will be applied to determine whether the Performance-Based Compensation Incentive has been earned for the Measurement Period. In doing so, the performance of the Utilities in each sub-category will be reviewed. If the sub-category performance meets or exceeds the established goal, the sub-category will be scored with the designated percentage that will contribute to a total Performance Metrics Multiplier to be used as a factor in calculating the distribution earned, if any, as shown in the Score Card ("Multiplier"). The Multiplier has a maximum factoring effect of 100%. The Multiplier is used to determine how much, if any, of the amount established by the Commission for the UMPIC Performance-Based Compensation Incentive has been earned in the Measurement Period. (For example if the Multiplier equals 100%, the distribution would equal 2%. If the Multiplier equals 75%,the distribution would equal 1.5%.) In other words, the amount established by the Commission may be earned on an annual basis by the group of Qualifying Employees (as defined below in Section 4.0) in whole, in part, or not at all. After the Multiplier is calculated on the Score Card, the Performance Based Compensation Incentive earned, if any, will be distributed to Qualifying Employees. The total amount to be distributed as the Performance Based Compensation Incentive will be the product of: a) the Multiplier; and b) 2% of the Utilities' total gross wages paid to Qualifying Employees during the Measurement Period. The percentage of the Performance Based Compensation Incentive awarded to each Qualifying Employee will be based on the gross wages of each Qualifying Employee during the Measurement Period. To each Qualifying Employee, the distribution would be allocated in a lump sum equal to the product of: a)the Multiplier; and b) 2% of that employee's gross wages P.13 UTILITIES PERFORMANCE Page 2 of 3 Approved December 12, 2012 METRICS AND INCENTIVE COMPENSATION POLICY 77 paid during the Measurement Period. (For example, if a Qualifying Employee's gross wages earned during the Measurement Period were equal to $50,000 and the Multiplier was equal to 100%, the total distribution to that employee would be equal to: $50,000 x 2%x 100% = $1,000.) If the Utilities' margins are negative due to sudden and unforeseen material changes to the industry or customer base,the Commission reserves the right to withhold distribution of the Performance Based Compensation Incentive in any given year. 4.0 Employee Qualifications and Distribution of the Incentive Compensation An employee of the Utilities will be eligible for participation in the Performance Metrics Incentive Compensation distribution if the employee meets the following eligibility requirements and is therefore a"Qualifying Employee" for purposes of this policy. a. The employee is in good standing with the Utilities. An employee would not be eligible while on disciplinary probation or a performance improvement action plan. b. The employee was a Full Time or Part Time employee during the Measurement Period. Seasonal, and Temporary employees are not eligible. The UMPIC Performance Based Compensation Incentive distribution will be made to Qualifying Employees on the first payroll date after the thirty day period following the date on which the Commission formally receives its annual auditor's report in an open meeting. GP:3300714 v4 P.13 UTILITIES PERFORMANCE Page 3 of 3 Approved December 12, 2012 METRICS AND INCENTIVE COMPENSATION POLICY 7'.1 Elk River Municipal Utilities P.13-a - Performance Metrics and Incentive Compensation Policy Score Card - 2018 Awarded Category Percent Sub-Category Sub-Percent Goal Score Multiplier Percentage Meet Water Quality Standards 5 Requirements Lead and Copper quality 5 90th percentile 0 positive Bacteria Detection 5 samples Safety, Reliability CAIDI 5 <120 Min and Quality of 40 Utility Services SAIDI 5 <90 Min SAIFI 5 <0.5 Line Loss 5 <5% Water Loss 5 <12% Customer Satisfaction 5 >90% Customer Service Employee Turnover 10 <7.5% and Employee 25 Development Participation in Recommended and Mandatory Trainings 10 >95% Margins/Net Profit 20 >Budget Financial Goals 35 Reserves 10 >Target Inventory Accuracy 5 >95% Total Multiplier: Adopted December 12,2012 Revised October 11,2016 74