Observations and trends

There is variation across councils between those who had a CEO ‘Employment Matters Committee’, undertook performance reviews in conjunction with all councillors, had a councillor-only committee reviewing performance, or engaged an independent facilitator. The Inspectorate considers that a committee working alongside an independent facilitator can provide more effective management of performance reviews.

One of the matters raised with the Inspectorate in the course of this review related to the tenure of the council CEO and whether at the expiration of the contract, the role is advertised publicly or the CEO can be re-engaged without advertising and no limit imposed on the successive number of contracts.

The Inspectorate conducted a high-level review across the sector and found less than 10 per cent were employed at the one council for more than 10 years. Close to 60 per cent were in the position for less than five years and the vast majority were employed on five year contracts.

In essence, the frequency of the reappointment without advertising is minimal in comparison to the CEO workforce across the state. The provision in the legislation may eliminate the organisational lag in a CEO recruitment process, provided the current council current council is satisfied with the CEOs performance. If the employment cycle is completed in a fair and robust manner, then this does not pose an issue.

The issue of the payment of performance bonuses to CEOs was raised by a number of individuals that were consulted. There was general opposition to this payment with the overriding view that these payments did not improve performance.

CEOs are critical to leading our public institutions and supporting the delivery of high quality services for Victorians. It is therefore important that employment arrangements for CEOs reflect best practice and enable them to continue to provide the high quality work and leadership which is expected.

It would be considered unhelpful to offer financial incentives that could potentially encourage CEOs to direct resources to activities related to their performance review rather than areas that benefit the community.

Peak bodies and CEOs indicated that the concept of performance-related bonuses should also be discouraged on the basis of difficulties in administering the process in a way that is consistent and transparent.

The Victorian Public Sector Commission recently conducted a review of current executive officer (EO) arrangements and found that VPS EO bonuses are generally not effective in driving performance and that the global provision of bonuses to public service executives is unique to Victoria amongst the Australian jurisdictions.

Consistent with the VPSC’s review, the Victorian Premier in August 2016 approved the removal of bonuses from the VPS EO employment and remuneration policies. This affected both existing and new VPS EOs.

Case study – Bonus payment made without full council knowledge

A recent Inspectorate investigation found inadequate performance management over a long period of time at a regional council. In this case it was found that councillor expressed reservations about CEO performance but did not have the knowledge or skills effectively performance manage. The organisation was unable to provide independent assistance or advice. The consequences led to a mismanaged organisation and serious governance failures.

Current legislation provides for a process to delegate CEO matters to a committee which may leave councillors unaware of final decisions.

Many respondents considered that the full council needs to approve of all employment matters relating to the CEO. For example if a council delegates to a committee the appraisal of the CEO it must be sent back to the full council for approval.

The work of the Inspectorate over recent years has uncovered examples where the management of the CEO was not transparent to the full council which led to divisions and discontent within the council.

Issues raised relating to CEO contracts included:

• councillors unaware of contract details before CEO appointment
• councillors unaware of performance bonus provisions in the contract
• councillors unaware of payments related to performance or ex gratia payments
• councillors unaware of recontracting for a new term

A view was raised by some stakeholders that the involvement of full council may not be the most effective way of managing the CEO, but the contrary view is that the decisions under delegation avoided full scrutiny and transparency to the community.

Matters relating to the CEO recruitment and selection, contract/tenure/exit, performance evaluation and remuneration are some of the most important decisions a council can make and should be made by a resolution of the full council. It should not be delegated.

The proposed legislative reforms from the Local Government Act Review included that a council must develop, adopt and apply a CEO Employment and Remuneration Policy.

A CEO Employment and Remuneration Policy must provide for the council to obtain independent professional advice in relation to the matters dealt with in the CEO Employment and Remuneration policy; and provide for the recruitment and appointment process, provisions to be included in the contract of employment, performance monitoring and an annual review.

In addition, a council must also ensure that the Chief Executive Officer Employment and Remuneration Policy is consistent with the remuneration policies contained in the Government of Victoria’s Policy on Executive Remuneration in Public Entities.

It is noted that during the course of the review that a number of councils, consistent with their policy, had advertised for independent members for the CEO Employment Matters Advisory Committee.

Acknowledging the reforms did not progress during this parliamentary term, the process can still assist councils and CEOs in dealing with perceived power imbalances.

The current legislation does not mandate that the audit and risk committee monitor and report on a council’s performance against the remuneration policy. An important function of having a remuneration policy is that the oversight of , and compliance with, the policy is monitored.

The Inspectorate supports the audit committee having a role in relation to the remuneration policy, and if not mandated in legislation, it should be incorporated in the audit committee charter or best practice guidelines.

The Inspectorate recognises that many councillors may not have experience in HR employment practices, therefore independent advice is essential to ensure a transparent and accountable process in the employment of their CEO. It is important that advice is provided to the elected council to inform decision making.

A common suggestion from the sector related to the development of best practice guidelines for the CEO recruitment and employment cycle.

The Inspectorate supports the development of sector-led best practice guidelines, coordinated by a central body.

There are benefits that include consistency and standardisation across the state, which provides fairness for all councils.

Both mayors, CEOs and peak bodies indicated that some councils use the advice of internal human resource staff in the appointing, contractual arrangements and performance monitoring of the CEO. This was strongly opposed due to potential conflicts of interest arising from the power imbalance, and should be actively discouraged.

It is acknowledged that council staff have an administrative function in engaging external advisory services and providing governance advice. However it is essential that this is separate from the actual CEO appointment, contract and performance process.

In the course of this review, the Inspectorate found a number of generic contracts with variations in entitlements or separation arrangements.

On the matter of separation clauses, the review found significant variation in separation arrangement, including one example where a council was exposed to serious financial liability of up to $1 million (case study 2).

The review found that separation arrangements ranged from three months to up to 4.5 years. The general view from the sector, given the political risk of the role, is that the suggested range should be 6-12 months. The standard VPS Executive Officer contract has a clause of four months separation payment, noting that the VPS executive remuneration policy states that “under no circumstances may an unexpired portion of the contract be paid out”.

There was broad support for the establishment of a sector specific, minimum standard contract, which would alleviate unnecessary variations to contracts.

There was also support for optional clauses to be made available for implementation at local discretion, such as the remuneration schedule.

As previously stated, the Inspectorate supported the condition that the CEO contract should be available for scrutiny by the full council.

In New South Wales, the state has mandated a standard contract for council CEOs and senior staff since September 2006. The requirements aimed to ensure consistency and certainty in employment relationships and made specific rules on contract termination, in which the employee would be paid the lesser of “a monetary equivalent to 38 weeks’ remuneration” or the amount they would have received if they had been employed to the contract termination date.

The Inspectorate considers that councils should use a standard contract developed by the sector and endorsed by the relevant Local Government Department, leaving CEO remuneration, contract term and separation arrangements (within a specified range) to be decided by the council.

This would assist in solving the problem of leaving the community at risk from excessive termination payments.