20150729AVU to Staff 34.docx

AVISTA CORP.
RESPONSE TO REQUEST FOR INFORMATIONJURISDICTION:IDAHODATE PREPARED:07/23/2015CASE NO.:AVU-E-15-05/AVU-G-15-01WITNESS:M. Thies/E. AndrewsREQUESTER:IPUCRESPONDER:Annette BrandonTYPE:Production RequestDEPARTMENT:State & Federal RegulationREQUEST NO.:Staff - 034TELEPHONE:[phone]REQUEST:
To the extent not previously included in Request No. 33, please provide access to copies of all studies used to determine employee compensation, including executive compensation, and explanations of how the Company applied them in the years 2010-2015 to date.RESPONSE:
Please see Avista's response 034C, which contains TRADE SECRET, PROPRIETARY or CONFIDENTIAL information and exempt from public view and is separately filed under IDAPA 31.01.01, Rule 067 and 233, and Section 9-340D, Idaho Code, and pursuant to the Protective Agreement between Avista and IPUC Staff dated June 4, 2015.See confidential attachments included with this response as Staff_DR_034C - Confidential Attachment A. Due to the voluminous nature of the material provided, this information is provided electronically only.The Company conducts and participates in numerous salary studies each year to aid in the determination of salary levels as part of the overall compensation package. These studies are used in various ways depending upon the type of information collected in the study. In addition, the benchmarking methods and resources used are slightly different for each group or classification of employee; officer, non-union, and union, as described further below. Benchmarking may be conducted annually or as needed depending on the group of employees. The types of resources used may change over the years depending on cost, relevance, and availability of the resource as well as changes in pay practices.
We use these resources for different purposes, for example we may use a survey to benchmark a specific position or job type by region, to gather intelligence on overall anticipated salary increases and pay structure changes, and/or to compare our pay practices to other companies and overall regional trends.
The Company compiles the results of these surveys and targets overall compensation levels (base and short-term incentive) to be within +/- 15% of the median. Typically the Company targets the utility industry for merit increases and changes to midpoints. Regional peers are also reviewed in an effort to obtain intelligence on trends within the region. Ultimately the goal is to appropriately position the overall compensation package to recruit and retain qualified employees.
While benchmarking is an important component of the setting of overall compensation levels, it is not the sole criteria. Pay components may vary higher or lower than the median depending on an individual’s role, responsibilities and performance within the Company.Officers GroupThe Compensation Committee of the Board makes all compensation decisions regarding the executive officers, including the level of cash compensation and equity awards. Each year the Compensation Committee works with their independent compensation consultant to conduct a benchmark study on the total compensation program for the officers. The studies typically include base salaries, short-term cash incentives and long-term incentives. The Compensation Committee believes it is important to provide a compensation structure that is competitive with compensation paid to comparable executives of companies within the energy/utility industry to ensure the Company attracts and retains quality employees in key positions to lead the Company. Since Avista is an investor-owned utility it is also best practice to benchmark our officers’ compensation against other investor-owned utilities by focusing on compensation as disclosed in proxy statements. Proxy statements focus on only the top 5 paid positions which means other sources must be used to benchmark the remaining officers’ compensation. The Compensation Committee uses the Towers Watson Energy Services Executive Compensation database for additional compensation data.Benchmarking best practices also suggest narrowing the range of companies to compare to that which better reflect your own business and size. Avista’s Compensation Committee compares market data from a customized group of utilities we call our Proxy Peer Group. The Proxy Peer Group better represents our Company’s business, size and competitive market for talent. By using publicly disclosed data from proxy statements, Form 8-Ks, and Form 4s it allows the Company to maintain a consistent peer group without being restricted by private survey participation which varies year to year. The Committee uses companies from the S&P 400 Utilities Index in the Proxy Peer Group. The median revenues and market capitalization of the Proxy Peer Group run between $2.3 billion and $3.1 billion, respectively. The data is not adjusted to reflect the differences in size because the Committee generally targets overall compensation within +/- 15% of the median of the peer group.As mentioned above, the Committee also uses the Towers Watson Energy Services survey as a secondary resource for the top 5 but a primary resource for the other officers’ compensation. The survey provides additional compensation data on comparable diversified energy companies with revenues between $1 billion and $3 billion. The advantage of using a survey is that it provides competitive data for all of our executive officer positions. The Compensation Committee uses all of these sources of data to help it make informed decisions about market compensation practices. The Compensation Committee periodically will have the consultant prepare a special report on best pay practices for executive officers. Non-Union GroupThe executive officers of the Company in collaboration with management make all compensation decisions related to the level of cash compensation and equity awards for the non-union employee population. We rarely pay an independent compensation consultant to conduct special studies or research best pay practices for our non-union population because our HR staff conducts these studies and complete the research, keeping costs down for our customers. Each year Avista staffconducts benchmark and pay practice studiesfor the non-union group. The studies typically include base salaries, short-term cash incentives and long-term incentives. The Company believes it is important to provide a compensation structure that is competitive with compensation paid to comparable positions of companies within the energy/utility industry as well as regional and local areas in which we compete for talent. By keeping an eye on the market we ensure the Company attracts and retains quality employees in key positions to run the business efficiently and within reasonable costs. The benchmarking process for the non-union group is different from the officer group in that we do not have a specific Peer Group for the entire non-union group. Our definition of market is the organizations in which we compete for labor. For example, we may use a national utility survey to benchmark an electrical engineer or a local general industry survey for an administrative assistant position because that is the labor market in which we compete for talent. Outlined below are the types of labor market competitors we compare ourselves to for the following job groups.Labor Market CompetitorsManagementAdministrative/ ProfessionalTechnicalSupportIndustryGeneralEnergy/UtilityGeneralEnergy/UtilityGeneralEnergy/UtilityGeneralGeographyNationalRegionalNationalRegionalRegionalLocalLocalOrganization Size$1 - $3 billionAll sizesAll sizesAll sizesAll sizesAnd relative to our competitor group, we monitor market rate data as follows:ManagementAdministrative/ ProfessionalTechnicalSupportCompensation DataBase SalaryTotal CompensationBase SalaryTotal CompensationBase SalaryTotal CompensationBase SalaryTotal CompensationStatistical DataMedian (50th percentile)75th percentileMedian75th percentileMedian75th percentileMedian75th percentileThe surveys we select support our philosophy by reporting data in the categories described above. Outlined below is a list of salary surveys we have participated in over the years as well as their general focus.SurveyIndustryLocationTypes of PositionsType of DataTW - American Gas AssociationUtility Natural GasNation-wideExec, Mgmt, Prof, Tech & CraftBase salary, incentives, pay practicesMilliman - NW UtilitiesUtility ElectricPacific NorthwestMgmt, Prof, Tech & CraftBase salary, pay practicesTW - Energy Services ExecutiveUtility Gas, Electric & AlternativeNation-wideExecBase salary, incentives, pay practicesTW – Energy Services MAPUtility Gas, Electric & AlternativeNation-wideMgmt, Prof, Tech & SupportBase salary, incentives, pay practicesMilliman – NW Mgmt & ProfAll IndustriesPacific NorthwestMgmt, Prof, & TechBase salary, incentives, pay practicesMilliman – Spokane AreaAll IndustriesSpokane & Kootenai CountiesProf, Tech & SupportBase salary, incentives, pay practicesMilliman – NW TechnologyTechnologyPacific NorthwestMgmt, Prof, Tech & SupportBase salary, incentives, pay practicesEAPDISUtility Gas & ElectricNation-wideTech, Craft & SupportBase salary, incentives, pay practicesAONHewitt – Marketing & TradingNon and regulated UtilitiesNation-wideExec, Mgmt, Prof, & TechBase salary, incentives, pay practicesTW – General IndustryAll IndustriesNation-wideExec, Mgmt, Prof, Tech & SupportBase salary, incentives, pay practicesACR – Investor RelationsAll IndustriesNation-wideInvestor Relations – Exec, Mgmt, Prof & TechBase salary, incentivesOur benchmarking process is generally done on an annual basis. It starts with completing questionnaires for the different surveys then analyzing the data when the results are returned to us. As part of the analysis Avista matches its internal jobs to the jobs in the survey sources to establish an Estimated Market Value. We try to match our jobs to the jobs in at least two survey sources which we believe better represents the competitive labor market. When establishing an Estimated Market Value we use the 50th percentile or median data to better estimate the “typical” pay for the job. Avista’s compensation philosophy for the non-union group is to targetcompensation levels within +/- 15% of market median. Avista has a pay structure with established pay ranges that are divided into thirds. The middle third represents the “market” (+/- 15%) and the midpoint is used for market comparison, compa-ratio calculations and adjusting the structure. Our pay structure is a lead-lag position relative to the targeted marketplace. A lead-lag philosophy positions our pay structure midpoints so they match the market in mid-year (July). Basically our midpoints lead the external market for the first half of the year and lag the market for the second half. This enables us to keep our actual pay levels directly competitive with our targeted marketplace for each identified job group.Each survey has its own effective date for the data collected and since we try to use at least two survey sources for each job in our benchmarking process, we age date or “trend” the survey data to one point in time which is July 1. As mentioned above we want to lead-lag the market and this process allows us to make accurate and consistent market comparisons between the market and internal average pay. This benchmarking process is time consuming and complex. In order to simplify the process we currently use a software product called REWARD 3.0 (copyright by Towers Watson). The software is a modeling and reporting tool that houses employee and survey data. Each year we import specific employee and job data into REWARD as well as survey source data. This software enables us to match an internal job to the survey job to determine an Estimated Market Value. Once an Estimated Market Value is determined we can calculate the ratio of internal pay to market by dividing the actual salary by the market rate. This helps us determine if our current wages are competitive within the labor markets we compete in for talent. We also calculate the ratio of actual pay to the pay structure midpoints. This compa-ratio calculation helps us to determine how much we should adjust our pay structure to stay competitive. The benchmarking process described above is one method we use to help control our payroll growth and individual pay progress. We also participate in salary planning surveys. These surveys collect data on salary practices such as actual and projected base salary increase budgets, whether organizations are awarding pay increases or freezing pay, what is the average pay increase for different job groups and performance levels, what was the actual and projected pay structure adjustment, what types of incentive plans are being used, and what other pay practices organizations are considering. These surveys focus on overall changes in employee compensation for the calendar year and current projections for the following calendar year. We use these studies to help us make informed decisions on market compensation practices with regards to compensation spending and budgeting. Our merit-increase program is a key vehicle through which non-union employee pay is adjusted on an annual basis.In order to plan and budget for the following calendar year, we collect the following data from several surveys and compile it into a spreadsheet. Although we collect and monitor the different markets (national, regional, local, utility), we target the utility industry since most of our labor is utility specific. Non-ExemptExemptExecutiveOverallActual & Projected Salary Increase BudgetsNationalRegionalEnergy/UtilityLocalNationalRegionalEnergy/UtilityLocalNationalRegionalEnergy/UtilityNationalRegionalEnergy/UtilityActual & Projected Structure AdjustmentsNationalRegionalEnergy/UtilityLocalNationalRegionalEnergy/UtilityLocalNationalRegionalEnergy/UtilityNationalRegionalEnergy/UtilityWe provide preliminary salary increase budget projections to the Compensation Committee of the Board each May (current year) and recommend a minimum salary increase budget for the following calendar year. Then in November (current year) we provide them with final projections and recommend the actual salary increase budget for the merit-increase program for the following calendar year.The salary structure adjustment data is reviewed and considered but the actual adjustment is determined based on the compa-ratio analysis conducted during the benchmarking process described above. The processes described above are used to help us control our labor costs and keep them reasonable for our customers and yet enables us to recruit and retain the labor force we need to run the business and provide reliable levels of service.Union GroupThe benchmarking process for the union group is again different from the other groups. The studies are conducted during or before the contract negotiations. They are not done on an annual basis. The studies typically collect average base rate for lineman from other west-coast utilities (investor-owned, PUDs, municipalities, Co-ops, etc.) and average increase from other west-coast IBEW local contracts. All wage rates and increases are negotiated.