New Framework for Executive Compensation in Broader Public Sector Organizations

Ontario is implementing a new framework for executive compensation in the broader public sector. While removing the current compensation freeze, it caps salaries and performance-related pay at no more than the 50^th percentile of the appropriate comparators; prohibits certain elements like signing bonuses; and requires designated employers to have an executive compensation program that will be posted on the web and subject to public consultation.

The Executive Compensation Framework (the "Framework") came into force on September 6, 2016, pursuant to Ontario Regulation 304/16 (the "Regulation") under the Broader Public Sector Executive Compensation Act, 2014 (the "Act").[1] The Act authorizes the government to establish such compensation frameworks by regulation.[2]

Application of the New Framework

The Framework sets out requirements that designated employers must meet when setting compensation for designated executives.[3] "Designated employers" include (among others):[4]

• public hospitals;
• community care access corporations;
• school boards;
• universities and colleges; and
• public bodies under the Public Service of Ontario Act, 2006 (other than Commission public bodies).

The term "designated executives" includes employees and office holders of designated employers who are entitled to receive cash compensation of $100,000 or more in a calendar year and who also are:[5]

• the head of a designated employer (i.e. the chief executive officer or president);
• the vice president, chief administrative officer, chief operating officer, chief financial officer or chief information officer; or
• a person holding any other executive position or office, regardless of title.

Requirements of the Framework

The Framework sets out the following requirements for designated executive compensation:

• salary and performance-related pay must be capped at no more than the 50th percentile using appropriate comparators and calculated in accordance with the criteria set out in the Framework (the organizations selected must be comparable to the designated employer, there must be at least 8 comparators, organizations other than Canadian public or broader public sector organizations can only be used as comparators with Ministerial approval and, in any case, at least one must be a Canadian public sector or broader public sector organization);
• certain elements are prohibited including:
  • signing bonuses, retention bonuses, cash housing allowances, insured benefits not generally provided to non-executive managers, payments or other benefits provided in lieu of perquisites;
  • pay in lieu of notice of termination and severance pay, that exceeds 24 months' base salary and;
  • termination or severance payments that are payable on termination for cause.
• increases in salary must be approved by the board of directors or the equivalent governing body or officer;
• the average rate of salary increases for designated executives in a year cannot exceed the average rate of increase for non-executive managers in that year; and
• the employer must engage in public consultation in which members of the public have a reasonable opportunity to provide comments on the manner in which compensation is determined. A reasonable opportunity means that draft executive compensation programs must be posted on a public-facing website for a minimum of 30 days and there must be a process for collecting feedback for consideration when finalizing any executive compensation program. It is also important to note that public feedback must be retained as it may be requested in the future by the Ministry of Health and Long-Term Care or by the Treasury Board Secretariat.[6]

Designated employers must develop a written executive compensation program. The program must include information about:

• compensation philosophy of the designated employer;
• maximum salary and performance-related pay for each designated executive or class of designated executives;
• details about the comparative analysis (including which comparators were selected and why); and
• other elements of compensation.

The Framework will become effective when the designated employer posts a compliant executive compensation program on its website. Such programs must be posted no later than September 5, 2017.

Compliance Directive

Later in September 2016, the President of the Treasury Board will be issuing a compliance directive. This compliance directive will require that the board chair or highest ranking officer attest that their compensation program is in compliance with all terms of the Framework. Further, designated employers will be required to submit reports indicating that the compensation for their designated executives in that year complies with the Framework. Failure to complete this process could lead to penalties under the Act.

Interaction with Part II.1 of the Broader Public Sector Accountability Act

The Frameworks, once effective, will take the place of current restraints under Part II.1 of the Broader Public Sector Accountability Act, 2010 ("BPSAA") to the extent a designated employer is subject to those BPSAA requirements.

Taking Action

As a first step, designated employers should familiarize themselves with the requirements of the Framework. The Ministry of Health and Long-Term Care has published a "Executive compensation framework guide" which provides more information about the Framework.

The process of developing an executive compensation program will involve identifying designated executives, non-executive managers and, critically, appropriate organizational comparators. If a designated employer wishes to use comparators other than Canadian public and broader public sector organizations, approval will need to be sought from the President of the Treasury Board. This will be done through the development and submission of a business case using the 'Request For Approval To Use Private Sector and/or International Comparators form.' These forms will be available from the Treasury Board Secretariat.

Existing compensations plans will need to be reviewed to determine whether they comply with the new prohibitions and limitations under the Framework.

In developing a work plan, designated employers should allow sufficient time for the minimum 30 day public consultation. That should be done before the new compensation program becomes effective.

Many public sector organizations are anxious to revise their executive compensation to reflect market conditions after several years of freezes. The Framework imposes significant requirements to be fulfilled before that can be done. And, with a one-year deadline of September 5, 2017, we expect this process will prove a formidable one so we recommend getting started as soon as possible.

[1] Broader Public Sector Executive Compensation Act, 2014, S.O. 2014, c. 13, Sched. 1

[2] O. Reg. 304/16: Executive Compensation Framework

[3] Executive Compensation Framework Guide

[4] Broader Public Sector Executive Compensation Act, 2014, S.O. 2014, c. 13, Sched. 1 (at section 3)

[5] Executive Compensation Framework Guide

[6] Executive Compensation Framework Guide