ARCHIVED - Expenditure Review of Federal Public Sector - Volume Two - Compensation Snapshop and Historical Perspective, 1990 to 2003

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13. Compensation in Federal Business Enterprises and Other Crown Corporations

Our interest in compensation in this domain is limited for several reasons. First, Crown corporations generally operate with significant autonomy from the federal government. Their broad strategy and financial plans need to be approved through submission to the Treasury Board of periodic corporate business plans, and the President/Chief Executive Officers and Boards of Directors are appointed by the Governor-in-Council. Consultation on key policy decisions may also occur with the responsible minister or deputy minister. Within this framework, however, the federal government shareholder leaves the management of the Crown Corporation, under the direction of its Board, to get on with running its business.

Second, many Crown corporations operate with little or no direct funding (i.e. appropriations) from the federal government; in fact, some pay dividends to the shareholder. To the extent that they are self-financing, we feel it is inappropriate to count their compensation costs as part of federal compensation.

Finally, as a consequence of their substantial independence, Crown corporations report relatively limited compensation-related information to the Treasury Board Secretariat.^[145] Some information of this type can be gleaned from public annual reports but it is generally not extensive. Gathering comparable information would be a much more time-consuming task than we could undertake.

Accepting these realities, this section takes only a very brief and selective look at compensation in the federal business enterprises and other Crown corporations domain.

Attribution of compensation costs

The Treasury Board Secretariat's 2003 Annual Report to Parliament—Crown Corporations and other Corporate Interests of Canada provides an overview on 43 parent Crown corporations and three wholly owned subsidiaries directed to report as parent Crown corporations for the purposes of the Financial Administration Act. Among the 45 entities reporting, about half (22) received no funding through federal government appropriations. Among the remaining 23 entities, six accounted for over three quarters (78%) of total funding from Canada. These organizations were:

• the Canada Mortgage and Housing Corporation (CMHC),
• the Canadian Broadcasting Corporation (CBC),
• the Canadian Air Transport Security Authority,
• VIA Rail, 
• Canada Post, and
• the Canada Council.

Looking at these organizations, it is evident that relatively little of their compensation costs are effectively charges on the federal government. CMHC, for example, had an appropriation in 2002–03 of about $1.9 billion. However, 96% of this amount was allocated to assist Canadians with their housing needs. CMHC's revenues that year from non-appropriation sources amounted to about $2.2 billion. In this context, the Corporation's reported 2002 personnel costs of $124 million (for 1,772 staff-years) cannot really be considered as financed from the taxpayers.

This situation is even more evident in the case of the largest federal Crown Corporation, Canada Post. Revenues in 2002 totalled just over $5 billion;^[146] appropriations were about $240 million. This federal government subsidy was provided for specific public policy objectives, most notably mail for the blind and free mail to and from parliamentarians, as well as an instalment of the multi-year transfer of pension funds from the public service plan to the Post Office's own plan. Personnel costs (salaries and benefits) for Canada Post (only) in 2002 amounted to about $3.07 billion. Again, it would be unrealistic to count Canada Post's personnel costs as a federal government expense.

On the other hand, some Crown corporations such as the CBC and VIA Rail are significantly funded through appropriations. For the CBC, 2002 expenditures amounted to just under $1.5 billion, with appropriations at nearly $1 billion. Salaries and benefits stood at close to $780 million at the end of March 2003. In effect, about two thirds of this (about $520 million) can be thought of as funded by the taxpayer. At VIA Rail, expenditures in 2002 were about $444 million, and appropriations for 2002–03 around $257 million. Even allowing for the misalignment of information based on the calendar year and the fiscal year, it is evident that something in the order of 60% (about $112 million) of the $193 million spent in 2002 on compensation and benefits could be thought of as provided by Parliament.

We do not have sufficient information to specify confidently the total amount spent from appropriations by federal Crown corporations on their compensation arrangements. Nevertheless, using what fragmentary data is available (much of which we have summarized above), we suggest that an amount in the range of $600 to $750 million in salaries expended by Crown corporations can be considered to be federal spending from tax revenues. The remaining approximately $3.2 to $3.3 billion of Crown Corporation compensation spending was spent from commercial or other non-appropriation revenues.

Some Observations

Despite the reality that only a minority of Crown corporation compensation costs can be considered federal expenditures, compensation practices among the Crowns resonate within the broader federal public service, with influence flowing in both directions.

Starting at the top, the regular salaries and performance pay ranges, and the actual pay rates, for the President/Chief Executive Officers of all Crown corporations are determined by the Governor-in-Council. The pay ranges are normally set each year on the recommendation of the Advisory Committee on Senior Level Retention and Compensation (know as the Stephenson Committee), through a process similar to that used for setting Deputy Minister and Executive pay ranges, as described in Chapter 3 of Volume One. For the CEOs of Crowns, Hay Associates compares the remuneration of Group 1 (the lowest level) positions with the median, (i.e. 50^th  percentile), compensation for a set of private sector jobs at the same level in order to propose any appropriate salary range adjustment (prior to 2005, it was the 25^th percentile). Salaries for higher groups are based on relativities among the Crown corporations. Between 10% and 25% of salary may be earned as at-risk pay.

For 2002–03, the salary range for group 1 CEOs was from $98,400 to $115,800, with up to 10% for at-risk pay; at the top level (level 10), the pay range was from $339,100 to $398,900, with up to 25% in at-risk pay. The actual salaries of any individual CEO could be lower than the range for their position. The Board of a Crown Corporation may decide to provide benefits other than remuneration, although they are required to inform the responsible Minister and the Clerk of the Privy Council.

Remuneration for Crown corporation vice-presidents and other executives is the responsibility of the Board of Directors, although it may be delegated to a Board committee or to the President. Concerns expressed about "pay inversion" (i.e. vice presidents earning more than CEOs) led to a review whose results were reported in the May 2003 report of the Stephenson Committee. According to a December 2002 Auditor General report, inversion occurs in some cases because the variable pay for vice-presidents is not limited as for CEOs, but follows more closely the higher levels found in the private sector.

Overall, the Committee reaffirmed the established policy, noting that recruitment of qualified CEOs had generally been possible within that policy. The Committee also concluded that the existence of some pay compression or inversion was not out of line with experience for public sector corporations in other countries or jurisdictions. Nevertheless, in the course of our work, we did hear some continuing disquiet on this subject.

More general information on Crown corporation employee salaries and wages is not readily available. Approaches clearly vary according to the nature of the various institutions. The largest Crown corporation, Canada Post, is about three‑quarters unionized. Its compensation philosophy is to pay at the market average in order to balance costs with the need to attract and retain the required talent. For example, Canada Post defines its comparator market as a group of about 20 large, profitable employers that operate nationally.

Other corporations are essentially non-unionized. Canada Mortgage and Housing Corporation (CMHC), for example, composed largely of professional staff, aims to set total cash compensation at the 75th percentile of the base pay line of the Hay Associates All Organizations survey, which covers over 400 public and private employers across Canada. The Bank of Canada generally targets the median of established comparison markets. However, to ensure it can attract and retain the specialized staff it needs to carry out its work, the Bank provides special market adjustments on a temporary basis to specified occupational groups who are in high demand in the market and can draw significantly higher salaries externally. 

Practices in the area of variable or performance pay go much further in some Crown corporations than in the rest of the federal public sector. For executives and non-unionized staff, there are several cases of a two-tier incentive pay structure, recognizing both overall corporate (or team) and individual performance. At CMHC, the corporate incentive award rewards employees for the achievement of specific objectives as set by the Board and published at the beginning of each year. For 2002, the payment was up to 3% of salary for employees with a performance rating of at least "succeeds." In addition, a lump sum individual incentive award can be earned based on an employee's performance rating and position level. Maximum awards for an outstanding rating range from 10% at lower levels of the organization to up to 15% at the Vice President rank. In addition to these two potential lump sum amounts, employees may receive a general salary adjustment incorporating a market adjustment, if applicable, and a progression increase for employees below the range maximum for their position.

Canada Post's plan for executives and non-unionized staff provided a corporate team incentive based on overall Canada Post performance, as well as individual awards based on performance against pre-set objectives. The corporate performance component is based on an assessment of three factors:

• profit vs. financial targets, 40%;
• service levels against standards, 30%; and,
• customer satisfaction survey results, 30%.

For senior executives, the combined value of these two awards could be as much as 25% to 40%.

Starting in 2003, Canada Post agreed with two of its unions, the Public Service Alliance of Canada (about 2,400 employees) and the Association of Postal Officials of Canada (about 3,050 staff) to apply the corporate team incentive to these employees. This incentive could be up to 3% of salary (or more, if targets are exceeded) based on results on the three components described above, which were specified for staff in advance.

Pensions

Pension arrangements vary among Crown corporations, but are broadly similar to that of the core public service. All offer defined benefit plans, with benefits based on years of service and average salary over a specified period. In some cases, the terms are more favourable for executives, for example using the three instead of five consecutive best years as the basis for calculating average salary. The larger Crowns manage their own pension plans, which are funded. Accumulated contributions are invested in the market. At a given time, such funds may have an actuarial surplus or deficit. CMHC and the Bank of Canada, for example, reported pension surpluses in their annual reports for 2002. Canada Post and the CBC, on the other hand, reported a deficit as a result of adverse market results over the year. Many smaller Crowns, including all the cultural Crown corporations, participate in the plan that applies to the core public service and the separate employers.

The CBC offers Flexplan, an interesting retirement investment option for its employees. Under CCRA rules, the plan allows the difference between 9% of compensation and the employee's required contribution to the CBC Pension Plan to be invested each year. These contributions are deductible from taxable income, and do not interfere with the employee's Registered Retirement Savings Plan (RRSP) contribution room. These savings can be invested in a variety of vehicles across the risk spectrum. At retirement these savings can be used to augment the employee's lifetime pension earnings.

Employee benefits

Employee benefits are an area of significant cost pressure for the Crown corporations. At Canada Post, for example, benefit costs rose in 2002 by 5.6% to $548 million, mainly because of increases in the Canada/Quebec Pension Plan employer contributions and in post-retirement benefit costs. Canada Post succeeded in negotiations with its main union, the Canadian Union of Postal Workers (39,900 workers) to reduce benefit cost pressures in several ways. For example, a new multi-tiered formulary will distinguish life-sustaining drugs from less vital offerings. There will be incentives to use less costly generic drugs. Employees will also pay a share of the drug and dental plans.

Severance pay

Severance pay is generally paid to eligible departing employees in a manner similar to the policy of the core public service. However, at least two Crown corporations have taken steps to limit eligibility to severance pay in relation to future service. Beginning in March 2003 for new management and exempt employees, Canada Post has ended the accumulation of entitlement to severance pay, and in 2004, existing employees in these groups would accumulate no additional severance eligibility. The options offered include a payout of the existing entitlement in 2004, or a deferral of the payment until retirement, reflecting their salary at that time. As part of the tradeoffs in Canada Post's most recent CUPW collective agreement, the union also agreed to eliminate the further accumulation of entitlement to severance pay for its members.

The Bank of Canada also took steps to limit eligibility to severance. As of 2003, in lieu of these benefits, new employees are provided an allotment of benefit dollars (equal to 1% of pay), which they can use on an annual basis toward the purchase of benefits. Current employees' accumulations were protected and they were given a one-time choice to continue accumulation of the benefit or end accumulation to begin receiving 1% of salary.

Retrospective—Federal business corporations

The basic story for federal business corporations over the period between 1990–91 and 2002–03 was decline in employment and salary expenditures.

The portfolio of federal business enterprises and other Crown corporations has evolved substantially over the years since 1990. For example, in the 1990–91 Treasury Board President's Annual Report to Parliament on Crown Corporations and other Corporate Interests of Canada (then published with the Public Accounts), there were reported to be 58 parent and three acting parent Crown corporations with a total employment of 135,000 people. By the 2002–03 Report, there were only 43 parent and three acting parent Crown corporations, with total employment of about 71,800. During the intervening years such major enterprises as Canadian National Railways, Petro-Canada and Teleglobe were privatized. The first two of these alone employed nearly 47,000 workers in 1990–91.

With such vast changes in the nature of the workforce employed by the portfolio of Crown corporations over the years, it is not pertinent to this study to undertake any further analysis of trends in Crown corporation compensation. We reiterate as well that half of Crown corporations receive either nothing in appropriations, or very little in relation to their personnel costs and revenues. In 1990–91, for example, of 61 parent or acting parent Crown corporations, 22 had no budgetary funding from the federal government, and 8 more had funding worth less than one quarter of their revenues. Of 135,000 employees reported as employed by parent Crown corporations in 1990–91, about 104,000 were employed by enterprises that had little or no budgetary funding.

It would be interesting to calculate more precisely the evolution of that portion of salary spending in this domain that can reasonably be considered to have been funded through parliamentary appropriations. However, our estimate that in 2002–03 only about $600 to $750 million in salaries expended by Crown corporations can be thought of as federal spending from tax revenues, is in the order of only about 3% of total federal salary spending from appropriations. The analytical investment required for the exercise of determining the comparable amounts in earlier years is beyond the scope of this study.

It would also be intriguing to explore compensation policies and practices within Crown corporations, and how these have changed over the past decade. Again, however, it would take extensive research to compile such an overview. Unfortunately, with available resources, we could not undertake such an examination. 

CEO Compensation

One area that does demand our attention in this study is the salary level of Chief Executive Officers of federal Crown corporations.

Prior to 1990, Crown corporations were assigned to one of three groupings based on the nature of their mandate: Government Services (public service corporations), Quasi-Commercial, and Commercial.

CEO positions of smaller organizations and those providing government services, such as the Pilotage Authorities, the Canada Council, and the Standards Council, were generally classified within the GIC (Governor-in-Council) 1 to 11 structure. The salary ranges of these levels were roughly equivalent to the rates for PM 5 to DM 3 positions in the regular public service, depending on the entity's mandate.

The salary ranges for CEOs of Quasi-Commercial (e.g. Marine Atlantic, or the Canada Mortgage and Housing Corporation) and Commercial (e.g. Canada Post, or Petro-Canada) corporations were set individually, taking into account the recommendations of the Advisory Group on Executive Compensation in the Public Service.

When the Strong Committee was established in 1997, the issue of salaries for CEOs of Crown corporations figured prominently in the Committee's work. In their first report, in January 1998, the Committee observed that the general freezing of federal public sector salaries over most of the first half of the decade had had a perverse effect on internal relativities within these enterprises, and "in many cases among the larger corporations, …led to retention and recruitment difficulties."^[147] As an interim step, the Committee proposed, and the Government agreed that CEO job rates be increased by 17%, the same proportion recommended for DM 2 positions.

As a result, a comprehensive review was undertaken of these key jobs. With the assistance of Hay Associates, the Crown corporation CEO jobs were allocated to one of ten groups, corresponding to their level of responsibility. William M. Mercer surveyed compensation among three groups: provincial public services, the broad public sector (e.g. municipalities and universities), and the private sector. However, this survey was weak on comparisons for larger, more commercial Crown corporations. The Committee then called on Hay Associates to furnish the needed data.

The results indicated that existing total cash compensation for the 10 groups lagged well behind the Hay medians for analogous jobs with financial/industrial employers. The compensation approach that was adopted on the basis of the Strong Committee recommendations was the policy described in Chapter 3 of Volume One. In essence, this involves benchmarking the group 1 CEO salary range to the 25th percentile of actual salaries of incumbents of private sector jobs of equivalent scope in the Hay position evaluation database. Higher group job rates are then set at a fixed differential ranging from 12% for the lower- to 20% for the upper-level groups. At-risk pay would be paid in addition, based on performance, to a maximum of 10% of salary for the lower groups, to 25% for the one group 10 Crown corporation.

The job rates established in 2000 were, for example, $107,400 for group 1, $150,900 for group 4, $169,000 for group 5 (groups 4 and 5 together comprise about one third of the CEO positions covered), and $370,200 for group 10 (which includes only Canada Post).^[148] The Strong Committee recommended 5.39% increases for 2001 based on an update of the Hay Associates comparison of total compensation at group 1 to comparable private sector positions in financial/industrial organizations.

For 2003, the proposed increase was 2.3%. Comparing the job rate of the smallest Crown corporation CEO job in 1991 with that of 2003, we observe an increase of 41.5% in current dollars, and 14% in constant 2002–03 dollars. Looking only at the post-freeze period (1997–98 to 2002–03), we see a current dollar increase of 37.4% and 21% in constant 2002–03 dollars. For the highest ranked CEO position the job rate grew by 61.3% from 1997–98 to 2002–03 in current dollars and 42% in constant 2002–03 dollars.

In their report of March 2003, the Stephenson Committee reported on further comparative work carried out by the Privy Council Office on the Committee's behalf. Overall, "the survey found that the compensation policy objectives and the compensation regime for CEOs of Canada's federal Crown corporations are consistent with other public sector practices, whether in Canada or abroad."^[149]

 

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