Managing the employment cycle of a council CEO

The role of a Chief Executive Officer in Victorian local government is essential to the delivery of council services for the community. Successful appointees to the position are accountable to the councillors who are their employer, to ratepayers, the media and local industry and to staff. They are also a crucial player in the council’s interaction with other levels of government.

Often the role of council and CEO are misunderstood. The council are elected under the Local Government Act to undertake their duties in the best interests of the people in the municipality by providing the overall policy and strategic direction. One of the most important decisions a council makes relates to the employment cycle of their CEO, who is the only person council employs. CEOs manage council's operations and business including its delegated functions and powers, employ staff, deliver projects and implement council decisions including the budget and council plan. This is a unique and complex role given the political nature, service delivery and business imperatives.

The Local Government Inspectorate has reviewed existing arrangements between councils and CEOs, including the complete employment cycle of recruitment, performance management, tenure and separation. This was completed for the purpose of identifying opportunities to strengthen employment practices and performance management, with the overall goal of ensuring the best overall outcome for the community.

Previous work by the Inspectorate together with the Local Government Act review has identified a number of issues with the employment relationship between CEOs and councils. The way in which both new and reappointed CEO contracts are negotiated, prepared and executed has at times been problematic, prompted in part by a misunderstanding by councillors of their roles and obligations in this process and/or limited experience or capability in human resource management.

Instances have occurred in which the proposed contract has not been subject to proper consultation with councillors; the proposed appointment and contract may not be subject to a proper report and recommendations to the council; or the council has not formally adopted or executed the contract. Each of these circumstances could pose an unintended financial risk for the council.

The Inspectorate is aware of instances where CEO performance reviews have not been appropriately conducted or where review outcomes were not formally reported and adopted by the council. There was also many examples of a lack of capability among the employer in managing the CEO review process.

The Inspectorate consulted a cross section of current and former CEOs and mayors and the peak representative organisations and reviewed relevant reports and publications on the topic. In particular their views were sought on the way in which both new and reappointed CEO contracts are negotiated, prepared and executed and on performance management of CEOs by councils. Views were also sought on the appropriate length of CEO contracts and the termination process.

The role and responsibilities of a council Chief Executive Officer are largely set out in relevant sections of the Local Government Act and within individual contracts but the position presents many unique challenges.

Some of the challenges relate specifically to the operation of a local council as a business but whose CEO is directly managed by a democratically elected body of people who form a representative tier of government. A CEO’s responsibilities under the Occupational Health and Safety Act 2004 (OH&S Act) also broaden and add complexity to the role.

Political risk for the role of CEO

One of the key issues across the sector was the political risk inherent in local government politics. It was commonly considered that a CEO is not fairly judged on their performance.

In an academic paper¹, Stephen Jones observes that the contractual and performance arrangements established by the elected councillors can considerably impact on a CEO’s ability to successfully undertake their role. Their performance indicators served as the basis for the performance of senior managers and the organisation as a whole.

Victorian CEOs prefer the presence of third parties, primarily legal advisers or HR consultants, throughout the performance assessment process to ensure councils do not make unprecedented or unconfirmed demands.

Jones reported that effective CEOs that are given management discretion with little political interference from councillors led to better performing councils. Poor performing councils, in his opinion, are politically fractious.

The ability for CEOs to separate themselves from electoral politics while remaining politically sensitive is the most common factor contributing to CEOs successfully doing their job. A key challenge for councils is to establish contractual and performance management systems that allow CEOs to achieve their objectives, to deal more effectively with challenges facing communities and contribute to more sustainable local governments.

It is argued that CEOs performance is not the major determinant of success in the role; rather the capacity to engage councillors was identified as the most critical issue in gaining successful outcomes.

The CEO must be policy oriented but not political. Without this balance there can be serious consequences. Several empirical studies have suggested that political disputes can be a significant cause of CEO turnover contributing to resignations prior to contract completion.

Chief Executive Officer responsibilities under workplace safety legislation

Recent events at Melbourne City Council raised the challenges for a CEO in respect to their obligations as an employer under workplace safety legislation and the relationship with councillors. The Melbourne case was made more complex due to the involvement of the Lord Mayor and allegations of sexual harassment.

One of the responsibilities of the CEO, as specified under section 94A(1)(e) of the current Act, is the carrying out of the council’s responsibilities as a deemed employer of councillors. Under this section, they are considered as deemed workers in relation to any matters which arise under or with respect to the Accident Compensation Act 1985 or the Workplace Injury Rehabilitation and Compensation Act 2013.

The Act refers to section 14AA of the Accident Compensation Act (which was repealed in 2013) and clause 15 of Schedule 1 to the Workplace Injury Rehabilitation and Compensation Act.

Under this legislation, the council of which the councillor is a member, while the councillor is carrying out the duties of their role, is deemed to be their employer. In effect those Acts define a councillor as a worker.

Similarly, under the Occupational Health and Safety Act 2004 (OH&S Act), the council as an entity is the employer but it is the CEO as the ‘officer’ who manages and controls the workplace. The CEO has a responsibility, along with employees, to ‘the extent that is reasonably practical’ to ensure that the workplace is safe and without risks to health and safety. The council also has an obligation to persons other than employees under the OH&S Act to ensure they are not exposed to risks to their health and safety. This obligation extends to members of the community, contractors and, in this case, councillors.

Having established the CEO’s responsibilities under workplace safety legislation, it is necessary to understand the practical challenges faced by a CEO in managing issues where there is a potential risk to health and safety as a result of actions by a councillor, who is in effect their employer.

It is important to mention that this does not include allegations of assault, sexual assault or threats of assault, which in all cases ought be directed to Victoria Police who then have mechanisms in appropriate circumstances to intervene. And also, setting aside minor behavioural or conduct matters that councils are expected to resolve through their councillor conduct process, the difficult space for the CEO and councils exists particularly where allegations relate to bullying and harassment including sexual harassment and where health and safety may be at risk.

In the case of a significant allegation such as harassment by a councillor is reported to the CEO, it is incumbent on the CEO to take steps so far as reasonably practicable to ensure the workplace is safe. There are a range of steps a CEO could take in these circumstances and a number of pathways to deal with these allegations under the existing framework in the Local Government Act and other Acts, as well as referring matters to bodies including Worksafe, Victoria Police and the Victorian Equal Opportunity and Human Rights Commission.

However, unlike council employees, the CEO has no powers to direct a councillor to take certain action, not to attend certain places or not to contact certain people. Any of the intervention steps a CEO may take can exacerbate the political risk of their role. This may depend on the political or personal affiliations of the councillors who make up the employer, and the people involved.

In the Inspectorate’s view, this anomaly where the CEO has primacy to a degree over elected councillors raises expectations of the CEO and uncertainty on their part. Acknowledging the complexity of this issue, this is an area where consultation with sector stakeholders will identify opportunities to improve awareness and understanding of workplace safety responsibilities.

¹ Jones, Stephen (2011) “Superheroes or Puppets? Local Government Chief Executive Officers in Victoria and Queensland,” Journal of Economic and Social Policy: Vol. 14 : Iss. 2 , Article 6.

Under section 94 of the Act, a council must appoint a chief executive officer and fill that position as soon as reasonably practicable, after a vacancy occurs. Applications for the CEO position must, as a minimum, be invited by notice in a newspaper circulating generally throughout Victoria. The exception occurs when the council wishes to reappoint its existing CEO without advertising the position. In this circumstance the council must give public notice two weeks in advance of its intention to put a resolution to reappoint. Details of the reappointed CEO’s total remuneration under the new contract must then be made public.

A council may not re-contract its incumbent CEO earlier than six months before his or her current contract is due to expire. Prior to a general election, the council is prohibited from cutting short its CEO contract and then entering into a new contract to extend the CEO’s employment beyond that election. Nor can a council make any decisions with regard to CEO employment during the caretaker period before a general election.

A CEO’s contract cannot extend beyond five years but there is no limit on how many times a CEO can be reappointed and enter into a new contract. The CEO’s contract must specify performance criteria, and the council must review the CEO’s performance at least once a year.

The Minister may exempt a council from employing a CEO under contract, and may also forbid a council from employing a CEO or entering into a new contract with an incumbent CEO.

What do the arrangements mean?

The current arrangements give full discretion to councils on how they employ their CEOs and under what conditions, with minimum regulation based around ensuring that the public is notified if a reappointment is to occur and that the CEO’s performance criteria are specified and regularly assessed by the council.

There are other prescriptive elements such as limits on a CEO’s contract terms, timelines for renewing a CEO’s contract and requirements for councils to monitor their CEO’s performance. These provisions reflect the interest of local communities about what is an important public office.

It is also argued that the existing provisions fall short in two important respects. Firstly, they attempt to regulate for responsible employment practices in a prescriptive way, rather than specifying high-level objectives. It is argued this promotes a compliance culture, where councils and CEOs can seek to achieve what they want by ticking the necessary statutory boxes.

Secondly, while councils are responsible for employing and monitoring their CEOs performance, councillors sometimes do not have the expertise to do so (for example, expertise to set appropriate remuneration and contractual conditions and to conduct effective and timely performance monitoring). Councillors have expressed concern that CEOs have a disproportionate advantage in negotiating their own contractual conditions and that there is insufficient oversight of their performance.

Proposed legislative reforms

In 2016 the State Government set about a process of reforming the Local Government Act. This resulted in a Bill before Parliament in 2018.

The proposed Local Government Act reforms required all councils to have a CEO remuneration policy that broadly aligns with the Remuneration Principles of the VPSC Policy on Executive Remuneration for Public Entities in the Broader Public Sector. A council was to be required to publish its CEO remuneration policy on its website.

The reforms also enable the audit and risk committee to monitor and report on a council’s performance against the remuneration policy but this is not mandated.

There were also reforms proposed that required the Mayor and/or council to obtain independent advice in overseeing CEO recruitment, contractual arrangements and performance monitoring.

This will be discussed later in the report, noting that the proposed legislation lapsed during the 2018 parliamentary term.

The Inspectorate spoke to current and former mayors seeking their views on the employment cycle of their CEOs.

Key issues that arose from discussions included:

Independent advice

Mayors that were interviewed agreed that gaining independent advice was critical to assist them in the CEO appointment and remuneration process.

Effective performance management

Mayors considered effective performance management of the CEO was vital and needed to be an ongoing process, not a ‘tick and flick’ at the end of each year. Independent assistance in this process was seen as advantageous.

Bonus payments

While mayors rejected the need for bonus payments, they considered the transparency of the CEO contract and developing standard contracts in conjunction with peak bodies was beneficial to the sector and the community.

Council HR departments

Mayors strongly advocated for council HR departments to be removed from the appointment, contracting and performance monitoring processes due to the perception of an inherent conflict of interest.

Mayors did not see a need to change the current maximum contract term of five years for a CEO or further restrict the reappointment terms. They believed relevant measures in the proposed legislative reforms would negate the need for further restrictions.

Overall, mayors emphasised the need to develop professional respectful relationships between the CEO, the mayor and the council as a whole.

All decisions involving the CEO need to be made by the full council. They should not be delegated. All councillors need to be made aware of the specifics of the CEO contract.

What must be remembered is there is enormous variability in the level of skills of councillors particularly in relation to performance monitoring the CEO.

- Metropolitan council mayor

CEOs raised several key issues related to employment matters, from contract negotiation and termination payments to the need for councillors to seek independent advice throughout the contracting and performance management processes.

CEO appointments and ongoing performance monitoring - whether you like it or not - are often political. However there is also a lack of interest and capability to manage the relationship. Often, for example, over 15 years you might only have two out of the nine councillors making any comment during the performance process.

- Former metropolitan council CEO

Recruitment

Regarding CEO recruitment and selection, their contract, tenure and departure, and performance evaluation and remuneration, one CEO said council decisions on these matters “are some of the most important decisions a council can make and should be made by a resolution of the full council – [they] should not be delegated”.

Contracting

Several CEOs were supportive of industry-led aims on management of CEO contracts and the need for councillors to receive training and regular guidance in managing the relationship. One former CEO noted that an independent chair of committee should be appointed to advise the council on contract preparation and negotiation. As a general rule, they stated there should be no performance bonuses included as part of the package.

Best practice guidelines and remuneration policy

CEOs were in general agreement with the direction of the proposed legislative reforms regarding CEO remuneration/performance management policy, audit committee oversight and an independent advisory capacity for the mayor.

There was also general support for a set of best practice guidelines for the CEO remuneration/performance management policy to be developed by the sector.

The mayor and councillors as a rule do not have the capacity to oversee/monitor the CEO recruitment, contractual arrangements and performance monitoring. Independent advice to assist in this is crucial.

- Regional council CEO

Independent advice

All agreed that smaller councils and those in regional and rural areas require the most assistance. At issue is organisational capability, particularly in overall governance, and a budget to manage the CEO contract cycle.

Current and former CEO recommendations

• With appropriate redactions, the CEO contract should be available online
• Six month maximum payout gives an individual time to adjust ‘and is not too onerous for the community’
• No need to advertise contracts every 3-5 years if other safeguards such as proper performance management are implemented
• Audit committee oversight of remuneration policy is a good step forward.

The maximum payout [on termination] should be six months but the overriding factor is transparency. This should extend to payouts and the council, particularly the mayor, should have access to the CEO’s contract. There should be no dispute about this.

- Former metropolitan council CEO

The Inspectorate sought views on a range of topics related to the employment cycle of the CEO from the three Victorian peak bodies that represent councils: LG Professionals (LGPro), Municipal Association of Victoria (MAV) and Victorian Local Governance Association (VLGA).

As part of the review, the Inspectorate asked the peak bodies to give their views on any current gaps in the employment cycle process and improvements that could be made. In particular, the Inspectorate sought views on the method in which new and reappointed CEO contracts are negotiated, prepared and executed and on the current performance management of CEOs by councils. Peak bodies were also asked about the appropriate length of CEO appointments without the requirement to formally advertise the position.

LGPro gave a detailed response to inform all aspects of the Inspectorate’s review, while the VLGA provided a summary of its key issues and recommendations. MAV indicated the relevance of its submissions ^{a, b} to the directions paper for the new Local Government Act and Local Government Bill exposure draft to the issues raised.

In its response, LGPro considered the relationship between CEO and council to be critical and any legislative change or sector improvements put in place need to strengthen the relationship and help to improve, or at the very least safeguard, the perception of the sector.

It was recognised by LGPro that this relationship is potentially more difficult where there is a perceived power imbalance; inexperienced and unskilled councillors (non-professional or skilled backgrounds) and an experienced CEO. The same could be said to apply where long serving councillors appoint an inexperienced CEO. It was indicated that while the issues identified by the Inspectorate are significant, there was a prevailing view that they are prominent rather than prevalent.

---

a.

Submission to the Local Government-Act review Directions Paper-Sep 2016

Word 200.38 KB

(opens in a new window)

b.

Submission on Local Government Bill Exposure Draft-Mar 2018

Word 376.58 KB

(opens in a new window)

This respondent made some similar points to the CEOs presented above, including the recommendation that guidelines on remuneration should be developed by the industry and “need to be particularly robust and not too vague”.

They also agreed with the direction with proposed reforms of the Act in regard to CEO remuneration policy, audit committee oversight and independent advice for the mayor.

Councils, in their opinion, should introduce a specific delegated power for the Mayor to obtain advice in matters pertaining to the CEO where required.

While [I] support training, it needs to be ongoing and recognise that the vast majority of councillors are amateurs while CEOs are professionals. It is very difficult for councillors to obtain a sufficient level of capability to recruit a CEO, manage the contractual arrangements and performance monitor.

- local government sector law practitioner

Other key points included:

• no further restrictions on the appointment or reappointment of the CEO, if supported by robust guidelines
• termination payments to be in the range of 6-12 months, with full transparency to the community especially if a council decides to pay more than the industry standard
• full CEO contract, or at least key contract terms, should be on council website

Comparison to Victorian Public Service (VPS) executives

The VPS has a standard contract that sets out the terms and conditions for executive employment. There is a remuneration policy set out by the Secretary and Executive Remuneration Panel. The Inspectorate compared the published salaries and reports on CEO remuneration to VPS executive salary packages and found the majority had a remuneration package within the ranges of the VPS executive bands EO1 to EO3. The data indicates that there is significant overlap between the reported CEO remuneration levels and the VPS executive officer salary ranges. The comparison suggests that current remuneration levels within the local government sector for CEOs is comparable to an executive level VPS position. While this was compared strictly in remuneration terms, there is an equivalent level of responsibility and financial risk but often a higher level of public accountability, and the inherent political risk, in a council CEO position.

Total remuneration

Of the councils reviewed, the average CEO remuneration was $295,000 with the range across the state between $200,000 to $400,000. There was a strong relationship between remuneration and population of the municipality.

(Salary figures and averages taken from VPSC and Inspectorate data)

Group 1: Small to medium rural council
Group 2: Large rural, regional or small metro council
Group 3: Large regional to large metro council

Issue: Variation in the terms and conditions of individual contracts can leave councils open to financial risk.
Recommendation 1: Development and mandating of a model contract, which includes employment terms, timeframes, separation arrangements, and excludes bonuses.

Issue: There is inconsistency in remuneration arrangements across the state and many instances of a lack of transparency to the full councillor group in decisions on remuneration.
Recommendation 2: Legislate the requirement for a CEO remuneration policy, with any changes to remuneration made by a resolution of the full council.

Issue: Audit Committees may be given the power to oversee adherence to the remuneration policy conditions but the lack of statewide legislation enforcing their role dilutes the effectiveness of this important oversight measure.
Recommendation 3: Legislated function of the Audit Committee to oversee the adherence of council to the remuneration policy.

Issue: Inconsistency with recruitment, contracting, performance management and separation arrangements for CEOs leading to adverse outcomes for the community.
Recommendation 4: Development of best practice guidelines by the local government sector, coordinated by Local Government Victoria, and supported by appropriate training.

Issue: Advertising, readvertising or not advertising council CEO roles.
Recommendation 5: No necessary change to current provisions.

Issue: CEOs have the difficult position of being the employee of a councillor group but also responsible for their health and wellbeing as the person in charge of the council as an organisation.
Recommendation 6: Increase awareness of CEO workplace safety responsibilities in respect to councillors through consultation with Local Government Victoria, WorkSafe, VEOHRC, peak bodies and councils.

Act: Local Government Act 1989

Council/full council: democratically elected council

CEO: Chief Executive Officer

CMI: Chief Municipal Inspector

Inspectorate: Local Government Inspectorate

Employment cycle: encompassing the full CEO employment process from advertising to contract negotiation, employment, performance management and end of tenure.

Peak bodies: Local government representative bodies comprising Municipal Association of Victoria, Victorian Local Governance Association and LG Professionals.