Advisory Committee on Senior Level Retention and Compensation

Chair:

Carol Stephenson
Dean
Richard Ivey School of Business

Members:

Gaétan Lussier
President
Gaétan Lussier and Associates

Rose Patten
Special Advisor to the President and CEO
BMO Financial Group

Patrick O'Callaghan
President
Patrick O'Callaghan and Associates

Angela Tu Weissenberger
President
ATW Associates, Inc.

Contents

• Context
• Taking Stock of Senior Level Total Compensation
• Recommendations Regarding Senior Level Total Compensation
• Summary of Recommendations
• Topics of Focus for the Future
• Annex A – Committee Correspondence Concerning a Possible New Incentive
• Annex B – Current and Recommended Cash Compensation for the EX and DM Groups
• Annex C – Current and Recommended Remuneration for Chairs and Directors of Crown Corporation Boards of Directors
• Annex D – Current and Recommended Remuneration for Chairs and Members of Agencies, Boards and Commissions

Context

The Government has taken the following management measures that are to be considered in the positioning of our advice in this report: last year's budget announced a number of government spending restraint measures which put new pressure on government organizations to contain their spending, including the constraints on departmental operating budgets and the concomitant requirement for departments to absorb any wage increases in their existing budgets through to 2012–13. Unlike in previous years, funding will not be added to their budgets to help them absorb these pressures.

Consistent with these budgetary measures, the President of the Treasury Board has emphasized the priority he places on finding efficiencies and savings in government organizations. He has asked us to consider how executive compensation might be positioned to provide them with strong incentives to find savings and efficiencies in the operations they manage.

As the Advisory Committee on Senior Level Retention and Compensation, we are sensitive to Government's need both to reduce the deficit and continue to compensate, attract and retain quality talent to senior leadership positions in the federal public service. It is also timely for this Committee to make recommendations for total compensation increases, given the imminent expiry of the Expenditure Restraint Act in April 2011.

We have noted Budget 2010's indication that, "Given the constraints on departments' operating budgets, the Government will...assess measures taken by other jurisdictions in Canada to ensure that total costs of compensation are reasonable, the organization of work is effective...and the federal public service maintains its reputation for excellence." The recommendations we make in this report address the objectives of maintaining reasonable comparability of executive total compensation with organizations from the broader Canadian public sector and the Canadian private sector, while respecting spending constraints, and aligning total compensation structures with the Government's management objectives. They also support the continued excellence of the federal public service by placing greater emphasis on productivity and performance. As part of the future work of the Committee, we intend to review the evolving nature of executive work, including the composition, size and responsibilities of executives in the federal public service.

Given the need for government organizations to plan ahead and anticipate budget pressures, including salary increases that they will need to absorb themselves, our recommendations cover fiscal years 2011–12 and 2012–13.

Taking Stock of Senior Level Total Compensation

As outlined in our previous reports, our Committee follows a total compensation approach with respect to the senior leaders of the federal public service. Total compensation refers to the sum of the cash values of base salary, at-risk pay, pension, benefits, and perquisites for federal public service executives at the EX–01 level. This cash amount is compared to the sum of the cash values of these same elements for equivalent positions within the Canadian Labour Market.

The following pie charts compare the structure of executive compensation at the first level of executive in the core public administration with that of executives working in an equivalent position in the Canadian Labour Market. They suggest that government executives receive a higher proportion of their total compensation in pension and benefits and a relatively lower amount in short-term incentives, or at-risk pay.*

Structure of Total Compensation

EX-01 level Core Public Administration

EX-01 level Core Public Administration - Text Version

Position Equivalent to EX-01 Canadian Labour Market³

Position Equivalent to EX-01 Canadian Labour Market - Text Version

Source: Hay Group 2010

Notes:

1. performance pay is awarded as at-risk pay in the Core Public Administration and as short-term incentives in the Canadian Labour Market in general.
2. Other benefits include income replacement, health benefits, severance, perks, paid time off and survivor benefits.
3. The Canadian Labour Market includes organizations from the Canadian broader public sector and the Canadian private sector.

*At-risk pay was established in 1999 following the Committee's recommendation that executives should have a financial incentive to perform with excellence. Accordingly, a portion of executive salary was made "re-earnable" based on level of performance. This variable pay includes a component reserved for a limited number of outstanding performers.

On a total compensation basis, the analysis we conducted in December 2010 as indicated below suggests that the first level of executive receives marginally lower compensation than their market counterpart (measured at the median of the market, or the 50th percentile). The gap increases relative to market for higher level executives, such that for a Deputy Minister at the DM-2 level, total compensation is less than half what their counterpart in an equivalent job would make in the Canadian Labour Market.

Core Public Administration (CPA) Total Executive Compensation Comparison to Canadian Labour Market As of December 2010

Core Public Administration (CPA) Total Executive Compensation Comparison to Canadian Labour Market As of December 2010 - Text Version

Recommendations Regarding Senior Level Total Compensation

Better Align Benefits with Market

Benefits for senior level leaders in the federal public service include paid vacation and sick leave, health care and dental benefits, disability insurance, death benefits and severance. This latter benefit accumulates at a rate of one week of salary for each year of service and is paid out on departure from the public service. Unlike for virtually all other organizations, it is paid out for voluntary resignations, including at retirement.

We recommend that the accumulation of this benefit be discontinued for voluntary separations, in order to bring the benefit structure and benefit levels into greater alignment with the comparator market.

The Committee notes that the removal of this benefit has been part of the recent agreement reached between the government and the Public Service Alliance of Canada (PSAC) with respect to three occupational groups, the Program and Administrative Services Group (PA), the Education and Library Science Group (EB) and the Operational Services Group (SV). We recommend that the transition options agreed to with that union also be offered to executives, namely:

1. Immediately cash out the accumulated severance pay; or
2. Cash out the accumulated severance pay only upon resignation or retirement and at the salary they are receiving at that time; or
3. Immediately cash out part of the accumulated severance pay and cash out the remaining amount upon resignation or retirement.

Freeze Base Pay

The Committee is recommending that there should be no economic increases to base pay for the next two fiscal years, that is, 2011–12 and 2012–13. This is in recognition of the constraints on departmental operating budgets over this period and the need to plan compensation accordingly.

Increases to At-Risk Pay

As noted above, the key shortfall between compensation of the senior ranks of the federal public service and the Canadian Labour Market is in short-term incentives or at-risk pay. At the EX-01 level in the federal public service, overall total compensation currently trails the Market by 6.3 percent, base pay lags by 10 percent and at-risk pay is behind by 34 percent. We recommend that all of the increase in total compensation given to the senior levels of the public service over the next two years be focused on at-risk pay.

Maintain Total Compensation at Within Five Percent of Market

The question remains as to what extent this at-risk pay, or short term incentives, should be allowed to increase. Here we want to keep executive total compensation adequately aligned to market.

Recognizing the period of restraint, and for public service leaders to model restraint through their own compensation, the Committee is prepared to accept that executive total compensation will lag that of other organizations for the two-year period of restraint. We would, however, recommend limiting the gap relative to market to approximately five percent.

Table 1 forecasts what the gap would be without increases in total compensation for 2011–12 and 2012–13, and what increase in total compensation is recommended for each year in order to remain within five percent of the benchmark total compensation level.

We are therefore making the following recommendations, applying to the executive group, deputy ministers, and other Governor in Council (GiCs) appointees, with the exception** of those appointed on a part-time basis and those in a quasi-judicial or regulatory role (GCQ):

• In 2011–12, an increase in overall total compensation of 1.8 percent through adjustments to at-risk pay;
• In 2012–13, an increase in overall total compensation of 2.2 percent also through adjustments to at-risk pay.

The impact of the Committee's recommendations on the base pay ranges and at-risk pay percentages are outlined at Annex B.

**Recommendations for these groups will be made later in this Report.

Using At-Risk Pay to Meet Government Objectives

The Committee has previously endorsed the Performance Management Program for executives and GiC appointees as an important part of their total compensation. The program provides for transparent and clear performance expectations, rigorous assessment and meaningful feedback to continually improve performance. It is designed to support the achievement of policy and program objectives, management excellence and effective leadership in the delivery of results.

While the Performance Management Program has traditionally been implemented to reward the performance achievements of individuals, it can also provide for a collective approach in achieving results and responding to the priorities of the Government. The latter approach is often employed in private and public organizations to ensure that performance incentives are tightly matched to corporate objectives.

Accordingly, we recommend that for fiscal years 2011–12 and 2012–13, a portion of at-risk pay be awarded on the basis of achieving departmental results in support of a government-wide, corporate commitment.

We suggest that in tandem with the freeze on base pay, the departmental operating budget constraints and the Government's priority to contain costs, 25 percent of the at-risk pay component of each executive and GiC appointee subject to performance pay should be linked to the demonstration of fiscal savings and efficiencies determined at the departmental level, while maintaining or improving service offerings to Canadians. The remaining 75 percent of at-risk pay would be awarded based on individual achievements pertaining to program and policy commitments, sound management and the display of leadership competencies.

We also recommend that with respect to this collective corporate commitment, all executives and GiC appointees in the same organization be evaluated on the basis of the results achieved by their organization as a whole. The 25 percent portion of at-risk pay would then be awarded proportionately to each eligible individual, according to their group and level.

The Committee will review the effectiveness of this new approach before determining whether it should continue after 2012–13.

In regard to those individuals not subject to performance pay, primarily those in quasi-judicial organizations (GCQs), the Committee suggests that they also be asked to identify savings and efficiencies as part of this collective corporate commitment.

Recommended Revisions to Compensation for Governor in Council (GiC) Appointees to Crown Corporation Boards of Directors and for GiC Appointees to Agencies, Boards and Commissions

In our Twelfth Report of April 2009, we recommended changes to the compensation structure for part-time Governor in Council (GiC) appointees to Crown corporation boards, and to agencies, boards, and commissions. This group has not had a remuneration update since 2000 and, as a result, has fallen significantly behind the comparator group. In April 2009, we acknowledged the government's efforts to manage the economic downturn through The Expenditure Restraint Act. As a result, we recommended implementation of these changes immediately following the expiry of the Act on April 1, 2011.

Given the need for strong corporate governance, the Government must offer reasonable compensation to attract qualified candidates to serve on the boards of these federal entities and to acknowledge their commitment and contribution. We are renewing our recommendation from April 2009 that the remuneration framework be amended as follows:

• For chairs and directors of Crown corporation boards of directors:
  • introduce a compensation framework that is benchmarked against the Canadian public sector market;
  • reduce board compensation categories from ten to four and place the boards in the new categories based on groupings of organizations by industry type and size;
  • replace the current annual retainer ranges with single retainer rates per level;
  • replace per diem ranges with meeting fees consisting of a single rate payable for attendance at meetings. Any additional services would be compensated through the annual retainer; and
  • introduce a retainer premium for directors who are designated as committee chairs.

Boards of directors of federal Crown corporations should be grouped into four broad categories based on the type of corporation, size, complexity of operation, strategic importance to the country, and the degree of knowledge and specialized skills required. Fewer and broader categories recognize that all chairpersons and directors have the same basic skills sets, while acknowledging that those in larger Crowns assume greater risk in relation to today's high standard of corporate governance and oversight. The result is a compensation structure that offers a logical, transparent grouping of organizations into categories which have meaningful monetary distinctions between them.

• For chairs and members of agencies, boards and commissions, we recommend maintaining the current four-level structure, and:
  • replace per diem ranges with single rates in the existing remuneration structure; and
  • update the rates consistent with the proposed compensation for boards of directors.

The current and recommended remuneration tables are provided at Annexes C and D.

Promoting the Health of Executives

As part of our ongoing interest in the linkages between workplace health, productivity and engagement, we have been following the survey reports on executive health produced by the Association of Professional Executives of the Public Service (APEX) over the past decade.

APEX recently reported that executive health issues cost the Government $100 million annually in lost productivity, representing 10 to 15 percent of the executive payroll. At our most recent meeting in February 2011, APEX offered three major recommendations of ways in which this Committee can positively promote the health of executives in the workplace:

1. Support the development of a departmental scorecard for executive health to benchmark, measure and evaluate changes in workplace health for executives;
2. Encourage a culture of health, well-being, performance and productivity in the federal workplace; and
3. Monitor the state of executive health as a part of this Committee's ongoing senior advisory responsibility.

We are very receptive to these recommendations. As a first step, we are supportive of the development of a departmental scorecard for executive health as a way to provide departments with baseline information on health issues against industry standards. With this information, we believe that this Committee would be positioned to take an active role both in monitoring executive health and in recommending ways in which it can be promoted. We would look forward to a progress report on this initiative at our next meeting.

On a related subject, we are also interested in learning more about the Government's Disability Management Initiative, a strategy aimed at promoting a productive public service through improvements to the management of workplace health issues and reductions in the costs associated with workplace disability.

Summary of Recommendations

In this report, we have made the following recommendations:

1. Given the current context of fiscal restraint, the accumulation of severance in the case of voluntary departures should cease with respect to the senior ranks of the Public Service; the provision of options for the immediate or deferred payout of existing entitlements should be as follows:
   1. Immediately cash out the accumulated severance pay; or
   2. Cash out the accumulated severance pay only upon resignation or retirement and at the salary they are receiving at that time; or
   3. Immediately cash out part of the accumulated severance pay and cash out the remaining amount upon resignation or retirement.
2. No economic increases to base pay should be made in 2011–12 and 2012–13 in recognition of the constraints on departmental operating budgets over this period and the need to plan compensation accordingly.
3. To place further emphasis on performance and recognition for results achieved, total compensation for the senior ranks should be increased by 1.8 percent in 2011–12 and by 2.2 percent in 2012–13 through adjustments to at-risk pay, the portion of salary that is held back and must be re-earned each year based on the achievement of objectives.
4. For 2011–12 and 2012–13, in tandem with the freeze on base pay, the departmental operating budget constraints, and the Government's priority to contain costs, we recommend that for fiscal years 2011–12 and 2012–13, in alignment with an Industry "best practice" of pursuing a collective corporate objective and rewarding executives' contribution to their organization's overall efforts in achieving efficiencies and internal savings, the Performance Management Program should be adjusted as follows:
   1. 25 percent of at-risk pay should be linked to the achievement of a collective corporate commitment; and
   2. The collective corporate commitment should be linked to achieving the government's fiscal and management objectives for the next two years.
   The remaining 75 percent of at-risk pay should be awarded for individual achievements pertaining to departmental program and policy commitments, sound management and the display of leadership competencies. The Committee will assess whether this approach has achieved the desired goals before determining whether it should continue following 2012–13.
5. The remuneration frameworks for chairs and directors of boards of directors of Crown corporations, and for chairs and members of agencies, boards and commissions, should be modernized upon the expiry of the Expenditure Restraint Act according to the recommendations made by this Committee in our Twelfth Report and endorsed once again in this Report.
6. Using industry standards, a departmental scorecard for executive health should be developed as a source of baseline information for departments on executive health issues, facilitating the measurement, monitoring and improvement of the health of the executive cadre.

Topics of Focus for the Future

At our next meeting, we would like to be updated on the progress made in the following areas:

• The close monitoring of the total compensation gap at the EX-01 benchmark in comparison to the Canadian Labour Market.

• The health of the executive ranks, including the progress made on the development of a departmental scorecard to benchmark, measure and evaluate changes in workplace health for executives.

• The Disability Management Initiative, a government strategy aimed at promoting a productive public service through improvements to the management of workplace health issues and reductions in the costs associated with workplace disability.

• Work being done to review the evolving nature of executive work, including the composition, size and responsibilities of executives in the federal public service.

• Advancements in leadership development to ensure that the federal public service continues to benefit from effective, productive leaders, now and in the future.

Annex A – Committee Correspondence Concerning a Possible New Incentive

Ms. Carol Stephenson
Dean, Richard Ivey School of Business
Chair, Advisory Committee on Senior Level Retention and Compensation
1151 Richmond Street North
London, Ontario
N6A 3K7

Dear Ms. Stephenson:

Over the past few months, the Government of Canada has taken steps to streamline and reduce expenditures in order to get the deficit under control and ‘get back to black'.

To that end, we announced three measures in Budget 2010: Strategic Reviews (whereby departments are expected to identify 5% of their program expenditures for reallocation); a review of administrative and operational expenditures with a view to optimizing and consolidating our distributed environment (I understand that you are advising us on that initiative); and an operating budget freeze whereby departments are to manage their operating costs (including wages) over the next three years on the basis of their 2010–2011 operating funds.

In addition to these measures, I am interested in knowing if and how our performance management program for executives could be used to incent and reward executives in reducing expenditures while achieving their objectives.

Given your committee's mandate to advise me on senior-level compensation, I am writing to seek your views and your Committee's assistance with respect to the possible use of our performance management program for executives as a means of encouraging innovative approaches to voluntary expenditure reductions. I would be interested in any suggestions you might have for putting this type of measure into effect (including timing, performance metrics, criteria, etc). I am also interested in knowing what approaches might exist in other jurisdictions or in the private sector and what results have been achieved, and what differences there might be between the private and public sectors in applying such measures.

I understand that your Committee is meeting in mid-November, and would ask you to provide me with your advice following that meeting.

I look forward to your views and recommendations.

Signed: Hon. Stockwell Day

The Honourable Stockwell Day
President of the Treasury Board
House of Commons
Ottawa, Ontario
K1A 0A6

Dear Minister Day:

In your letter of October 5, 2010, you requested the advice of the Advisory Committee on Senior Level Retention and Compensation regarding the potential use of the Performance Management Program to incent and reward executives for making voluntary expense reductions. At our meeting of November 18 and 19, 2010, the Committee had an extensive discussion on this subject.

We noted that there are currently a number of important restraint initiatives underway within the federal Public Service, most notably the strategic and horizontal reviews, Budget 2010 restrain measures on departmental operating budgets, and the cross-cutting administrative services review. The magnitude of the cost savings expected from success with these major undertakings is substantial. We concluded that an incentive to reward executives for their contribution to implementing a major government-wide initiative within their respective departments has much potential. We will provide you with our recommendation for a corporate incentive following our next meeting in February, 2011.

Also following our February meeting, we plan to provide you with all of our recommendations, including those concerning other human resources management matters, such as the cessation of severance pay accumulation for executives, compensation for the senior ranks upon the expiry of the Expenditure Restraint Act, and the Performance Management Program.

I look forward to providing you with our recommendations.

Best wishes for a happy holiday.

Signed: Carol Stephenson, O.C.
Dean
Richard Ivey School of Business

Ms. Carol Stephenson
Dean, Richard Ivey School of Business
Chair, Advisory Committee on Senior Level Retention and Compensation
1151 Richmond Street North
London, Ontario
N6A 3K7

Dear Ms. Stephenson,

Thank you for your letter of December 15th, 2010 regarding my request seeking input of the Advisory Committee on Senior Level Retention and Compensation regarding the potential use of the Performance Management Program to incent and reward executives for making voluntary expense reductions.

In this current climate of fiscal restraint, it is important that executives take an entrepreneurial approach to finding internal savings and efficiencies within their organizations.

I look forward to receiving your recommendations for a corporate incentive after your next meeting with the committee on February 14th, 2011. I kindly ask that your report be made available to me for review and consideration by March 15th, 2011.

Thank you for your leadership and work on this important issue.

Signed: Hon. Stockwell Day.

Annex B – Current and Recommended Cash Compensation for the EX and DM Groups

Annex C – Current and Recommended Remuneration for Chairs and Directors of Crown Corporation Boards of Directors

A) Current

B) Recommended

Annex D – Current and Recommended Remuneration for Chairs and Members of Agencies, Boards and Commissions

A) Current:

B) Recommended: