ARCHIVED - Expenditure Review of Federal Public Sector - Overview

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Some observations on comparability

Difficulties in assessing comparability

Comparability seems to be a simple concept, but it is not. Some issues that require consideration include:

• What is being compared, salaries or all aspects of compensation?
• How are we to compare, on the basis of value to the employee or cost to the employer?
• To whom do we compare, all employers, some average standard, or large, unionized employers only?
• To what extent do regional differences matter, or the variation in compensation across different types of business for the same occupation?
• Over what timeframe are we comparing, just the past year, or do we track multi-year trends?
• What data sources should we use, available macro data or only specific surveys matching particular jobs?

In our view, the best approach to comparability is to examine all the available evidence and weigh it together to formulate an overall judgement. No one study can be expected to tell the whole story. Working for the largest employer in Canada, federal public servants will naturally compare their compensation to that offered by other large, unionized employers. However, the majority of taxpaying workers in Canada do not work for such organizations. So we need to take a broad view of the evidence to develop credible comparisons.

An interesting way to gauge the attractiveness of the federal public sector as an employer would be the number of qualified candidates who apply for competitions open to the public. Available statistics do not permit us to measure this rigorously. However, anecdotal evidence suggests that there is no trouble attracting more than enough good candidates, except for certain specialized jobs, or those in occupations in high demand in the private sector. Conversely, the rate of attrition is an indicator of the attractiveness of employment and compensation in the federal public service. In the core public service in the early 2000s, for example, separations for reasons other than retirement were about 1.5% of the full-time indeterminate population, a level that suggests reasonable acceptance of the current compensation levels.

Significance of changes in the relative size and occupational composition of the federal public service

Among the interesting points of comparison we examined was the proportion of total Canadian employment provided by the federal public sector. From 2.7% in the early 1990s, this proportion declined to 1.9% in 1999–2000, and increased only marginally to 2.0% in 2002–03.

At the same time, the occupational composition of the combined core public service and the separate employer domains has been shifting importantly towards greater relative focus on occupations associated with high knowledge content, at the expense of administrative and operational jobs.

Both points, especially the second, suggest that the relevant comparisons for the federal public service may be shifting. The types of workers now filling an increasing share of public service jobs are less likely to work for traditional unionized employers than those groups that are declining within the public service.

General conclusion on comparability

Comparability in the end must consider all aspects of compensation and working conditions. Overall, employees in the lower ranks of the federal public service enjoy advantageous compensation, especially if they work outside major metropolitan areas. They combine salaries that are well ahead of the private sector on average, an exceptional pension plan, and solid benefits, as well as strong job security. For middle-level public servants, salaries are more likely to be in line with those of private sector counterparts. In any case, when the public service pension plan, other benefits, and relative job security are taken into account, their overall compensation is attractive.

For top officials, compensation lags what private sector colleagues earn. The excellent pension plan and suite of benefits both during employment and in retirement mitigate the comparison only in part. Consequently, the more senior the public service executive, the less competitive is the total compensation package, and the more attraction and retention must depend on motivational factors such as the opportunity to influence the future of the country.

Recommendations on managing federal compensation

Our essential message is that this whole area of federal compensation should be managed in a unified and strategic manner in support of ensuring we have the public service we need at an appropriate cost. This is for two reasons: first, compensation cost about $25 billion in total in 2002–03, a large sum certainly, and more than one third of discretionary spending; and second, the components of compensation are closely interrelated, and movement in one part of the system will almost certainly affect other parts.

Work on this Report has underlined how piecemeal our current management regime remains, despite recent efforts to promote greater coherence. Even the data needed to answer basic questions in this field are subject to confused definitions and inconsistent reporting. Given the magnitude of the sums involved, and their importance to the well-being of the public service, there must be clear reporting and accountability for federal government compensation costs. Sound public management demands it.

Trends evident in the broader Canadian society that the federal public service serves will require us to rethink aspects of our compensation regime. An ageing and increasingly diverse population, omnipresent information technology, globalization, and the inescapable interconnectedness of issues all point to an intensifying need for the government of Canada to anticipate, interpret and adapt to rapid and unexpected change. It will be challenged to absorb, understand and lever increasingly vast and complex information. It must become nimble at reconfiguring itself in order to respond rapidly as demands shift.

These phenomena suggest ways in which our management of people must evolve. Among the main implications are these:

• greater need for specialized expertise,
• emphasis on continuous learning,
• balancing of specialist and generalist competencies,
• encouraging long careers while welcoming temporary engagements,
• more flexible structures and assignments, and
• less hierarchy.

In compensation terms, these tendencies suggest a greater need, for example, to:

• allow for people to enter and leave the public service easily, perhaps several times in a career;
• tailor their benefits to increasingly varied family situations;
• create organizations that can adjust readily to altered work requirements;
• compensate for knowledge and skills in high demand; and to
• ensure that the federal public sector can access its fair share of the best and the brightest.

In the years ahead, whatever the demands on us, compensation must continue to be driven by such principles as external comparability and internal equity–fairness to both employees and to taxpayers. We must apply these principles to ensure that we can meet our future business needs and operational realities. Our compensation arrangements must be generous enough to attract, retain and motivate the talent we need, and modest enough to ensure fiscal prudence, while reflecting our collective commitment to remaining a socially progressive employer. Such a balance can never be easy, and will always require us to make choices. Better information and more systematic management will permit us to juggle these trade-offs in the best way possible.

The Report sets out 77 proposals grouped into 17 sets of substantive recommendations, under five broad themes:

• transparency and accountability;
• coherent management of compensation;
• specific substantive compensation issues relating to salaries;
• specific compensation issues relating to pensions and other benefits; and
• possible areas for updating the legislative framework for managing compensation.

These proposals vary widely in the difficulty, impact and feasibility of their implementation. Many are interconnected, and would need to be sequenced appropriately. Although the bulk of the recommendations fall under the responsibility of the President of the Treasury Board or the Treasury Board Secretariat, several are addressed to other organizations such as the Public Service Human Resources Management Agency, the Department of Finance, or public service managers generally. Substantially complete implementation of our main proposals would demand sustained attention over many years, in some cases a decade or more.

In effect, we are calling for a fundamental rethinking and modernizing of the compensation regime governing the federal public service. In our view this is overdue. No such thorough-going review has been undertaken since the Glassco Commission over 40 years ago, before preparations were made for the implementation of collective bargaining in 1967. Yet the Canadian workplace and the Canadian federal public service have changed dramatically in the intervening years, and we can expect continued transformation as such phenomena as information technology, citizen expectations, and globalization intensify their impacts. To remain successful in serving Canadians, the federal public service needs to ensure that its compensation policies and practices support the flexibility and increasing knowledge intensity demanded by changing business needs and methods.

Transparency and accountability

The single most effective step toward better management of federal compensation would be to collect, analyze and publicize the principal data routinely. An annual report on federal compensation would serve as the most visible product, as well as the main driver, of an improved regime for transparency and accountability for federal compensation. Among the major indicators the annual report would track are these:

• employee population,
• total spending on salaries and total compensation,
• average salaries,
• changes in workforce composition,
• reclassification,
• performance pay,
• value of negotiated and managed salary increases,
• pension contributions,
• insurance and health expenditures,
• other paid compensation, and
• contributions to statutory programs.

These indicators would be tracked separately for the core public service, the separate employers, members of the Canadian Forces, regular and civilian members of the RCMP, federally appointed judges, and parliamentarians. For the core public service, the annual report would examine changes affecting unionized employees, executives, and other unrepresented employees.

To support this central recommendation, it would be important to repair the unsatisfactory state of data relating to federal compensation. Consistent definitions, compatible reporting systems, and careful management of the field would provide the technical underpinning needed to ensure the credibility of the annual report. Consideration could also be given by the Department of Finance to including in the annual federal budget an expected track for total spending on Personnel in the federal public sector (except for Crown corporations), aggregating planned spending changes for more or fewer employees, changes in average salaries from all causes, and changes in benefits of all kinds.

Presenting this information clearly each year would raise questions and provoke debate about the appropriateness of federal compensation trends, in the context of the evolution of the broader Canadian labour market. There is, of course, a danger of selective reading and unjust attacks resulting from the recommended reporting. All transparency entails the risk of misuse of the information provided. However, a full presentation that is updated annually is itself the best defence against unbalanced critiques.

Coherent management of federal compensation

Coherence in managing federal public sector compensation requires a clear compensation policy framework, careful management of changes in the size and composition of the public service, a more unified approach to managing various elements of total compensation, a central analytical and strategic leadership capacity to oversee the application of the policy framework, and a more workable policy on relations among separate federal government employers. In essence, the government needs to see compensation as one subject, with each of the pieces influencing the others, and therefore demanding systematic management of the whole.

No compensation policy can prescribe what an employer should do in a given situation. But by clarifying what factors must be weighed in deciding what to do, such a policy is indispensable. For the federal public sector, the first set of considerations are those motivating any employer:

• alignment with relevant external labour markets in order to attract and retain needed talent;
• internal fairness between related groups of employees,
• encouragement of individual and group performance, and
• affordability.

But as a very large public institution with national leadership responsibilities, the federal government must also take account of broader public policy objectives such as curbing inflation, encouraging desirable social policy outcomes, complying with relevant laws, and responding to public expectations. Blending these factors wisely, in an environment dominated by collective bargaining, is clearly more art than science.

Employee population change is an important driver of compensation costs. Accordingly, attentive management of both the size and composition of the workforce is crucial. While the Treasury Board approves most increases or decreases in population, a substantial portion is financed through department-initiated transfers from non-salary to salary budgets. The mark-up on such transfers needs to be increased to reflect the full ancillary costs to the employer.

The existing fragmented approach to determining the various components of federal public service compensation works against cost control and discourages an appropriate weighing by both unions and the employer of trade-offs among elements. It would therefore be advantageous to broaden the effective scope of collective bargaining so that negotiations draw both parties into responsibility for the overall level and balance of compensation components.

To ensure a unified employer outlook will require a central strategic capacity to conduct comprehensive analysis and provide coordinated direction and advice. Several agencies, and distinct groups within these agencies, currently manage parts of the compensation puzzle, without systematic coordination. Reorganization to consolidate all these players into one entity is almost certainly infeasible. So the more realistic option is a central planning and coordination unit reporting to the Secretary of the Treasury Board. The Secretary should chair a Compensation Council comprised of the most senior leaders of those parts of the federal public service with substantial responsibilities in the compensation field, to assist in ensuring the needed coherence.

The emergence of large separate employers in the late 1990s, most notably the Canada Customs and Revenue Agency (CCRA)^[20], has rendered management of federal public sector compensation more complex. There is evidence of "ratcheting" between collective bargaining outcomes at CCRA and in the core public service, for which the Treasury Board is the employer. To reduce the prospect of such an effect, it would make sense either to create additional separate employers, or to coordinate collective bargaining more closely among the existing large federal employers. The option of additional separate employers^[21], provided they have relatively focused mandates and homogeneous workforces, would be to permit collective bargaining to link compensation negotiations to issues of productivity and work rules, as commonly occurs between private sector employers and their unions.

Specific substantive compensation issues relating to salaries

The Report suggests reforms in many specific areas of salary policy.

Modernize the occupational group structure

Most importantly, we recommend that each federal employer modernize the occupational group structure into which its employees are organized for classification and collective bargaining or pay determination purposes. The existing structure, introduced in 1999, is in effect a consolidation into 29 groups of the 70 groups established when collective bargaining was first introduced in 1967. Too many groups combine sets of employees with little or no common interest; conversely, closely allied sets of employees in some cases find themselves in different occupational groups. Getting the basic structure of the workforce right in terms of current realities is fundamental to sound compensation and human resources management, including both comparisons to the external labour market, and sensible collective bargaining. While the needed restructuring should take account of union perspectives, existing union boundaries should not be allowed to prevent designing the soundest possible structure for the coming years.

Modernize classification standards

As a complement to this recommendation, we reiterate the need to modernize our classification standards, both to minimize any gender bias, and to ensure the standards reflect current workforce realities. The current effort to renew the standards began in 2002, and has resulted in two completed standards: the Foreign Service (FS) group, and the Border Services (FB) group. As the lengthy process of modernization of standards proceeds, interim steps to improve classification include: direction to use short job descriptions, increased use of generic descriptions, updating of key benchmarks, and guidance on how to classify jobs with reference to the benchmarks. Recent initiatives to introduce risk-based auditing of classification decisions need to be reinforced.

Compensate executives comparably to the private sector

We offer as well recommendations on pay determination for special groups. For executives and deputy ministers, we argue that we should pay compensation closer to that offered in the private sector for similar responsibilities, especially at the level of Assistant Deputy Minister and Deputy Minister. At the same time, we should limit the Executive group to positions that involve managing significant resources or high-level advice, and make it explicit in Executives' terms and conditions of work that they can be dismissed for unsatisfactory performance. In effect, we are proposing real executive pay for real executives, by making federal public service executives more accountable for the performance of their organizations in return for higher compensation, consistent with the principle of comparability with the private sector. Success in this would improve the overall performance of the public service.

The future of executive pay for performance needs to be considered in light of what is decided on overall compensation. In the private sector, bonuses or variable pay based on performance (often a substantial proportion of annual pay) are generally used to reward success. In the federal public sector, relatively small levels of pay that are re-earnable based on performance–generally not more than 10% of pay–have proven to be controversial.

Critics cite the fact that over 90% of executives receive some performance pay. It has not been well understood that this is built into the design of the current system, which holds back 7% on average from the comparison of total compensation with the private sector (at the first level of the Executive group) with between 0% and 10% to be paid depending on performance. Only those receiving more than 7% (about one-third in 2002–03) can really be considered to have been awarded a bonus.

From the point of view of encouraging strong performance, it would be sensible to reserve a greater proportion of total pay than at present (especially if it is decided to raise Executive group pay, commensurate with private sector counterparts), which is available to be re-earned each year based on performance. Any performance pay at this level should be available only to a small portion (perhaps 20%) of executives, but could be substantial where outstanding performance warrants it.

Canadian Forces Compensation Advisory Committee

For the Canadian Forces, our main recommendation is to establish a Canadian Forces Compensation Advisory Committee, modelled generally on the United Kingdom Armed Forces Pay Review Body. Such a transparent approach would reassure members of the armed forces that remuneration decisions affecting them take full account of their circumstances and needs, as well as increase the credibility of the process with Parliament and the general public. The Committee would be required to weigh desirable increases in military compensation against the need to ration public funds wisely, within appropriate fiscal limits. The expectation would be that well-supported proposals would be implemented by the Government, although final decisions on Canadian Forces compensation would remain with the Treasury Board to ensure fiscal prudence.

Ensure that matching of RCMP pay to comparator forces is sound

Compensation for regular and civilian members of the Royal Canadian Mounted Police has been set for several years now with the benefit of advice from the RCMP Pay Council. While this process has generally worked well and should continue, it would be wise to ensure that the method for comparing RCMP total compensation with that of major Canadian police forces remains sound. Further work is required on how to deal with situations where compensation increases for one or more key comparator police forces are unusually high.

Address issue of comparators for judges

In regard to federally appointed judges, successive Quadrennial Commissions (an ad hoc body set up every four years to advise on the adequacy of judicial compensation) have wrestled with the value and relevance of various possible comparators in setting judges' pay and benefits. The next Commission should be asked to address this basic issue in more depth.

Independent commission for parliamentary salaries and benefits

Now that compensation for parliamentarians has been de-linked from that of federally appointed judges, there will be pressure to find another way to review salaries and benefits for Members of Parliament and Senators from time to time. An independent commission every four or five years, such as that used in regard to judicial compensation, is likely to be the most effective option.

Use pay design to foster excellence

We also examine several issues relating to the design of pay in the federal public service:

• pay for performance for groups beyond the executives,
• pay for knowledge,
• special pay for exceptional expertise,
• recruitment and retention allowances,
• the structure of pay bands, and
• regional pay.

In most cases, unions view such approaches with suspicion at best. We argue, however, that each of these ideas has merit, and would deserve to be experimented with, in the context of attracting essential talent and fostering individual excellence. Particularly if the recommendation to restrict the Executive group to those with substantial management responsibilities is accepted, it would make sense to provide for more cases where specialist pay overlaps with that offered Executives.

Restore reasonable pay bands

For several groups, the structure of pay bands has strayed far from reasonable norms of progression from level to another. Such anomalies can distort human resource management and the career paths of individuals. Care is needed to restore and maintain an appropriate pattern of pay bands across the public service.

Replace regional pay with cost-of-living differentials

For a national employer, regional differences in cost of living and in pay levels for certain occupations are a challenge. Mobility from low to high cost areas is impeded, and local employers in relatively low wage regions complain about high public service salaries distorting the local labour market. Through successive rounds of collective bargaining, the federal public service has all but eliminated regional differences in pay, so reversing direction would be problematic. In the long run, use of a cost-of-living differential such as adopted in 2000–01 by the Canadian Forces (and used by the United States Civil Service) could make sense. This would require, however, careful consideration of the issue of what is the reference region for base salary.

Specific substantive compensation issues relating to pensions and other benefits

Address pension suitability

On the subject of federal public sector pensions, the most important step has already been approved by the Treasury Board: gradually raising the level of employee contributions to cover at least 40% of current service costs. Steps are also planned to ensure that the integration of the Public Service Pension Plan and the Canada and Quebec Pension Plans at age 65 does not disadvantage public servants, especially those with relatively low incomes. An excellent public service pension plan is sound public policy in that it encourages loyalty and honest dealing, as well as compensating for the inability to invest freely as private sector workers can. However, for such a plan to be sustained, employees must pay a fair share of the costs.

More broadly it is time to take a new look at the contemporary suitability of the existing design of the Public Service Pension Plan. Among the issues warranting attention are these:

• Should the Plan continue to encourage long-service employees to retire as early as age 55?
• Should there be more flexibility in survivor benefits?
• Is the Public Service Pension Plan sufficiently adapted to facilitating career movement into and out of the public service over many years?
• Is the balance of Plan financing and benefits equitable for different groups of employees?

Moreover, governance of the Plan deserves attention. Unlike many other large pension plans in Canada, employee representatives have no formal role, and hence no responsibility, for the Plan's financial health. Consideration should be given to establishing some form of joint governance between the employer and employee representatives, taking account of lessons learned in recent years with such pension governance models.

Consider a flexible "benefits allowance"

In the area of other public service benefits, especially insurance against death and disability, and health and dental benefits beyond those generally available to Canadians, a fundamental rethinking is overdue. The present set of benefit plans and their financing arrangements have emerged over many years, without the benefit of a strategic assessment of needs and costs. With the nature of families in Canada changing profoundly, with a likely increase in the proportion of employees who move into and out of the public service over the course of a career, and with rapidly escalating costs in areas such as drugs, the proposed rethinking should assess the feasibility of offering employees a set of choices for coverage that best suits their needs and preferences.

In parallel with this rethinking, and in the context of broadening the scope of collective bargaining, the Treasury Board Secretariat should discuss with the public service unions the possibility of establishing an annual "benefits allowance" that would be used to purchase benefits from a jointly defined menu. Such an allowance would be set to permit employees to maintain their current level of protection. For the future, collective bargaining would determine how fast the allowance would grow, as a trade-off against salary increases. Obviously, there would be cost issues to manage if universal programs were replaced in whole (or more likely, in part) by a variety of benefit options. However, the principles of employee choice, and of managing overall salary and benefit costs, push powerfully toward developing an approach along these lines.

Sickness and disability programs

The continuum of programs dealing with sickness and disability deserves particular attention. Consideration should be given to replacing the existing sick leave policy with a combination of non-accumulating sick leave for brief illnesses, and a form of short-term disability insurance. Under the existing scheme, long-term employees are tempted to use up their accumulated sick leave as they approach retirement, while short-term employees with serious illnesses find themselves with inadequate protection unless they meet the onerous criteria for long-term disability income support.

The governance of federal public service benefit plans should be consistent with accountability for financing the plans. Thus, joint union-employer management should apply only in the cases of plans for which both the employer and the employees (through their representative unions) share in responsibility for their financial health.

Ensure all overtime is paid

One surprising finding on the evolution of compensation between 1990–91 and 2002–03 is that the level of expenditure on overtime did not grow, despite substantial increases in most other categories of compensation spending. This does not jibe with anecdotal evidence of increasingly longer hours of work in many parts of the public service. Public service managers should ensure that employees receive the overtime pay for which they are eligible. Along a similar line, managers should encourage employees to use the annual leave to which they are entitled. This makes good sense both from the perspectives of individual well-being and organizational effectiveness.

 

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