Ontario Government Introduces Compensation Framework for Designated Executives of Broader Public Sector Employers

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On September 6, 2016, the provincial government filed Regulation 304/16: Executive Compensation Framework (the “Framework”) under the Broader Public Sector Executive Compensation Act, 2014 (BPSECA). The Regulation establishes a framework for the compensation of “designated executives” within the broader public sector.  Under the Regulation, designated employers are required to establish written executive compensation programs which will, among other things, cap the salary and performance-related payments payable to “designated executives”.  The Regulation gives these employers a year to develop and implement compensation programs that comply with the Framework, including conducting public consultations.  The Framework established under the Regulation will become effective for a particular employer on the date the employer publishes its compensation program on its website (“effective date”), which cannot be later than September 5, 2017.

On the same day that the Regulation was filed, the government published an Executive Compensation Framework Guide (Guide) which offers further guidance to employers on how the compensation programs required under the Framework are to be developed and implemented.[1]

The Framework in Context

The adoption of Ontario Regulation 304/16: Executive Compensation Framework under the BPSECA is the latest in a series of measures the provincial government has put in place to ensure that executive compensation in the broader public sector in Ontario is accountable and transparent.  The Broader Public Sector Accountability Act, 2010 (BPSAA), put in place a number of controls on compensation, expenses, perquisites, etc.  That Act was subsequently amended in 2012 to implement a freeze on all elements of compensation, including performance pay envelopes, for designated executives and office holders within the broader public sector.  Those compensation restraint measures remain in place and will continue to apply until a compensation framework becomes effective for a particular designated employer.  The BPSECA, which came into force in March 2015, authorized the government to establish compensation frameworks, such as the one adopted by way of the Executive Compensation Framework Regulation.

Under BPSECA, “designated employers” include public hospitals and the University of Ottawa Heart Institute, universities, colleges, school boards, all community care access corporations, Independent Electricity System Operator and Ontario Power Generation, Ornge, and other prescribed public bodies.

As was the case under the BPSAA, the Framework adopted under the BPSECA applies only to “designated executives” who earn at least $100,000 or more in a calendar year and who are:

  • the head of a designated employer, regardless of their title;
  • the Vice-President (VP), Chief Administrative Officer (CAO), Chief Operating Officer (COO), Chief Financial Officer (CFO) or Chief Information Officer (CIO) of a designated employer;
  • a person holding any other executive position or office with a designated employer, regardless of title; and
  • a Director of Education or Supervisory Officer of a school board.

The most significant aspects of the Framework can be summarized as follows:

Compensation Programs

Under the Framework, designated broader public sector employers have one year to put into place a written compensation program for “designated executives”. The programs must comply with the Framework and must include information with respect to the following:

  • the employer’s compensation philosophy – i.e., the guiding principles that drive compensation decision-making within the organization;
  • salary and performance-related pay caps for designated executives;
  • comparative analysis details; and
  • other elements of compensation.

Executive compensation programs are required to be posted on the employer’s website and will become effective as of the date they are first posted, which must be no later than September 5, 2017.

Comparative Analysis Required to Determine Maximum Salary and Performance-Related Pay for Designated Executives

The Framework requires that salary and performance-related pay caps for designated executives must be established by way of a comparative analysis. Employers are required to identify comparable positions within a minimum of eight (8) appropriate “comparable organizations.”  Comparable organizations are ones that are similar to the employer with respect to all or most of the following factors:

  • scope of responsibilities of the organization’s executives;
  • type of operations the organization engages in;
  • industries within which the organization competes for executives;
  • size of the organization; and
  • location of the organization

Comparisons are generally required to be made with other Canadian public sector organizations. Employers are required to seek special permission (based on the submission of a business case) from the President of the Treasury Board in order to include private sector and/or international organizations for purposes of making the required comparisons. At least one Canadian public sector or broader public sector comparator organization must be included in the comparative analysis.

The Framework describes in detail how the comparative analysis that is required in order to establish caps on salary and performance-related pay is to be conducted. A typical analysis will involve two steps:

  1. determine the maximum amount of annual base salary and performance-related pay available to comparable executives from at least eight (8) appropriate comparator organizations; and
  2. determine an amount in the range of comparator compensation values that is no greater than the 50th percentile. This value becomes the “cap” for the position (or class of positions) being evaluated.

Where permission has been granted to include Canadian private sector and/or international organizations in the comparison, a more complicated comparison process is required to be followed. The process that is required to be followed in these cases is described in detail in the government’s Guide.

Other Elements of Compensation Prohibited or Capped

Other than salary and performance-related pay, designated employers are not permitted under the Framework to provide any other elements of compensation to designated executives unless:

  1. that compensation is also generally provided to non-executive managers; or
  2. that element of compensation is required for the performance of the executive’s job or to satisfy a critical business need.

In addition, designated employers are expressly prohibited from providing designated executives with any of the following elements of compensation:

  • payments or other benefits provided in lieu of perquisites
  • signing bonuses
  • retention bonuses
  • cash housing allowances
  • insured benefits not generally provided to non-executive managers.

The Framework establishes the following caps on other types of payments or compensation that might be payable to designated executives:

  1. Severance/termination pay
    • termination pay, including pay in lieu of notice of termination and severance pay, may not exceed a maximum of 24 months’ base salary
    • termination and severance pay may not be provided in the event of termination for cause
  2. Paid administrative leave
    • paid administrative leave may only be provided to the head of a college or university or another designated executive who is part of or will return to the faculty at a college or university
    • paid administrative leave cannot be accrued at a rate that exceeds 10.4 paid weeks per year
    • administrative leave may not be paid out in lieu of time off

Application to New and Existing Executives

The Framework will apply to all newly hired designated executives, and any existing employees who change designated executive positions, from the effective date for that employer. However, for designated executives who are already employed by a designated employer prior to the effective date of the Framework, section 9 of BPSECA provides that any element of their compensation plan that exceeds what is permitted under the Framework will remain valid and in effect for a period of three (3) years following the effective date. After that three (3) year period, any elements of a designated executive’s compensation that do not comply with the Framework will be invalid and not payable.

Public Consultation Requirements

Designated employers are required to engage in public consultations in order to afford members of the public a reasonable opportunity to provide comments on the manner in which the employer determines the compensation that it may provide to its designated executives. Although the Regulation does not specify how this requirement is to be met, the Guide published by the provincial government indicates that designated employers are required to post draft executive compensation programs on their public-facing websites for a minimum of 30 days in order to allow members of the public to comment on them.  Employers are also required to establish a process for collecting feedback for consideration in finalizing their compensation program.  The government’s Guide indicates that any and all public feedback received by an employer must be retained “until the conclusion of the compensation program and two subsequent programs” in the event that it is requested by the overseeing Ministry or the Treasury Board Secretariat.

Next Steps for Designated Employers

Those organizations that are “designated employers” under the BPSECA will want to begin taking some of the steps necessary to comply with the requirements established under the Framework. In particular, designated employers will want to:

  • identify any “designated executives” within their organization, as well as any non-executive managers;
  • chart out the compensation that is currently being paid to executives and non-executive managers within the organization;
  • identify appropriate comparator organizations and positions;
  • determine whether permission might need to be sought to include Canadian private sector and/or international organizations as comparators, and begin developing a business case to support that;
  • determine whether the comparison process required under the Framework will be conducted by someone within the organization or whether an external consultant should be hired to conduct the required comparisons; and
  • begin drafting a written Executive Compensation Program that complies with the Framework.

For further information or assistance in understanding any obligations that may apply to your organization under the Framework, please contact Lynn Harnden at 613-940-2731 or Vicky Satta at 613-940-2753.

 

[1] The government’s Guide can be found here:

https://www.ontario.ca/page/executive-compensation-framework-guide