Salary caps hit Ontario’s broader public sector

But critics question logic behind framework
By Sarah Dobson
|Canadian HR Reporter|Last Updated: 10/03/2016

Looking to ensure executive compensation in the broader public sector is “accountable and transparent,” the Ontario government is implementing a new framework that includes salary caps and performance-related payments for hospitals, universities, colleges, school boards and government agencies.

But the move is receiving mixed reviews, with experts questioning the impact on boards, compensation strategies and recruitment.

“Do we need it? Honestly, I don’t think so because I think this kind of regulation is sold as an answer to high-profile scandals… with the underlying assumption there is a systemic issue in top executives in public institutions in Ontario related to their compensation. And I think this is wrong — there is no evidence of any systemic issue,” said Bertrand Malsch, associate professor and distinguished faculty fellow in accounting at the Smith School of Business at Queen’s University in Kingston, Ont. “I tend to believe that there are only a few bad apples.”

And the change seems to question the expertise of boards.

“Theoretically speaking, conceptually speaking, organizationally speaking, the board is in charge of determining the compensation of top executives, so when you have this kind of regulation, the signal which is sent is that the board has done a relatively poor job in the design of compensation policies,” said Malsch.

It’s all the more worrying since some board members were appointed by the government, he said. 

“If we are really unhappy with the compensation policies, it means we are unhappy with the work performed by directors and it means we should remove them… or at least change the way we hire them or train them differently… Otherwise, this is just the government saying it doesn’t trust the people it has appointed itself or it doesn’t trust the people that are in charge.”

The Ontario government changes also don’t reveal the “millions of dollars” paid to private contractors and lawyers “hidden in the shadows,” according to Warren (Smokey) Thomas, president of the Ontario Public Service Employees Union (OPSEU) in Toronto. “We’d like that disclosed.”

But it’s a step in the right direction since this involves taxpayers’ money so they should be aware of what’s being paid, in addition to the Sunshine List, he said.

“It’s high time that somebody had some oversight as to what people are making.”

Executive compensation is really uneven, he said.

“You’ll have somebody in a small agency making $350,000 a year, and some make more than that, and we think it’s just way too much money. You’ll have a hospital CEO making three-quarters of a million (dollars) and somebody in a large corporation in another part of the province making $500,000 a year… so it’s all over the map.”

Workers really resent it when their boss is making $500,000 a year and they’re making $40,000 and the boss is saying, “Oh, you have to make do with less, we can’t afford to give you a raise,” he said. “You go, ‘How does that work?’ and it makes it tough on bargaining. So it’s long overdue to have some guidelines.”

Details of framework
The executive compensation framework came into force on Sept. 6 and applies to all employers under the Broader Public Sector Executive Compensation Act, 2014. The framework is guided by the principles of standardization (providing a consistent, evidence-based approach to setting compensation based on research and consultation), balance (managing compensation costs while allowing organizations to attract and retain talent) and transparency.

It caps salary and performance-related payments for designated executives at no more than the 50th percentile of appropriate comparators. At least eight comparator organizations must be used, including at least one Canadian public sector or broader public sector organization. 

The framework also prohibits several elements of compensation, including signing bonuses, retention bonuses, cash housing allowances, pay in lieu of perquisites, insured benefits that are not generally provided to non-executive managers, and certain types of paid administrative leave. Termination payments, including payments in lieu of notice of termination, and severance payments that equal more than 24 times the average monthly salary of the designated executive re also not allowed. The same goes for termination or severance payments that are payable in the event of termination for cause.

Employers will also be required to consult with the public when determining executive compensation programs and post program details on their websites. They will also have to submit reports attesting that the compensation for their executives complies with the framework.

Affecting about 340 employers, the act covers “designated executives” who receive $100,000 or more per year, including CEOs, presidents, vice-presidents and directors and supervisory officers at school boards.

The framework is a continuation of the compensation restraint philosophy the Ontario government has had in place since 2010, according to Paul Broad, a labour and employment lawyer at Hicks Morley in London, Ont.

“It’s consistent with how they addressed executive compensation for a long time, consistent with the Sunshine List… their view is this is public funds and the public has a right to (see that)… and that creates accountability for the general public.”

When it comes to caps, employers will have to both identify the cap and explain how they got there, said Broad. Employers will also have to develop a reasonable range of comparable organizations.

“In some areas, that’s going to be relatively straightforward, but you can imagine for certain key, very large organizations, there may be very few comparable organizations within Ontario or Canada, for that matter,” he said.
So, employers will have to get the minister’s approval before they can use other comparators, making for “a complex process,” said Broad.

The Ontario government also said the framework would mean employers “are able to attract the necessary talent to deliver high-quality public services while managing public dollars responsibly.”

But some employers might say this will hamper their ability to attract people, said Broad.

“That’s going to vary significantly by organization. Large organizations that have international competitors or a lot of comparable organizations who may be at an international level in the U.S. or Europe may find this is more limiting than they’d like.”

The framework is not going to help the broader public sector find people, said Malsch.

“It’s going to make the task more complex for board members, for institutions, for organizations who recruit talented people… The market is mobile and you can’t have a local way of thinking when you want to regulate top executive compensation in public institutions,” said Malsch. 

“This regulation will hurt, especially in the context of a weakening dollar and high tax rate in Ontario… even when we offer lots, we are still far below what they can make in the U.S.”

Setting executive compensation is quite a complex process so, at a certain level, it has to be pushed back into the organization, said Broad.

“Just like any sector in Ontario, you’ve got organizations that range from mammoth organizations with international stature to very small ones, so how do you develop a single standard for all of that?”

There’s no need for a one-size-fits-all regulation, said Malsch.

“Board members know that the labour market for a hospital is not the same for a university and is not the same for school board so that’s why we have those people who supposedly have the knowledge and the expertise and the thinking to make the right decision.”

With new complexities and risks, employers often bring in an external person to help, he said.

“I won’t be surprised that the money that the government hopes to save with respect to the caps put, for instance, on executive salaries will be lost on the cost that all those consultants will present for these organizations,” said Malsch.

“They will have to recruit consultants or professionals to help them frame the rationale behind just the choice of the comparable.”

As for consulting with “the public,” it’s not quite clear what that means, he said. For a hospital, for example, does it mean patients, the community or the province at large?

The regulation simply says “consult with the public” and doesn’t really say much beyond that, said Broad. 

“There doesn’t appear to be an obligation to change it in response to the feedback.”

But public consultation is still a good idea, said Thomas. 

“If (employers) put it out there and don’t do nothing with the feedback, then there’s one more way to hold government accountable, so guys like me can chase after them and say, ‘Hang on a second, here’s what the public said, here’s what you did, and they’re not even close.’”

For now, the framework is here to stay as it’s unlikely any politician will risk the headline: “Government decides to remove cap on executive compensation,” said Malsch.

“Maybe in the coming years, they will find ways to relax the standards, to relax the constraints, and I also suspect directors and boards and institutions will find a way also to not bypass — this is a strong word — but to adapt and be creative and remain competitive, so it’s not all black and white.”

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