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Advisory Committee on Senior Level Retention and Compensation

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The Honourable Stockwell Day
President of the Treasury Board
House of Commons
Ottawa, Ontario K1A0A6

Dear Minister Day:

The Advisory Committee on Senior Level Retention and Compensation met in November 2009 and April 2010 to discuss a number of current issues affecting human resources management with respect to the senior ranks of the Public Service.

As promised in my letter of December 2009 (at Annex A), we are submitting our Thirteenth Report with recommendations to help the government maintain the excellence that now characterizes the human resources management of its senior levels. In this challenging time of fiscal restraint, we hope that our efforts will provide useful advice.

I would be pleased to have the opportunity to discuss the Committee's views and recommendations with you.

Sincerely,

Carol Stephenson

CC: Wayne Wouters, Clerk of the Privy Council and Secretary to the Cabinet

Chair:

Carol Stephenson
Dean
Richard Ivey
School of Business

Members:

Gaétan Lussier
President
Gaétan Lussier and Associates

Rose Patten
Senior Executive Vice-President
BMO Financial Group

Patrick O'Callaghan
President
Patrick O'Callaghan and Associates

Sarah Raiss
Executive Vice-President
TransCanada Corporation

Contents

Context

The Committee focuses on compensation strategies and other related issues pertinent to the senior levels of the public service, usually making recommendations to the President of the Treasury Board on compensation adjustments for executives, deputy ministers, Chief Executive Officers of Crown corporations and other Governor in Council appointees.

The objective of this report will be somewhat different since we have already made recommendations in our Eleventh and Twelfth Reports for salary increases of 1.5 percent applying to fiscal years 2009-10 and 2010-11. They are in line with the Expenditure Restraint Act, and were made in acknowledgement of the fact that sound fiscal management was needed in a time of economic uncertainty. We remain fully supportive of this approach.

With Budget 2010, the government has made further commitments to control spending and return to a balanced budget position. We understand the need for these further cost containment measures with respect to departmental operating budgets for three fiscal years, 2010-11 to 2012-13. We are pleased to see the leadership flexibility that has been afforded by these measures, which do not directly target hiring or compensation, and which instead provide senior leaders with some manoeuvrability within the three-year timeline established for cost containment.

We believe that in this era of restraint, a critical role for our Committee is to closely monitor compensation in the Canadian Labour Market to ensure that the level of executive compensation relative to the market is not negatively impacted for too long. As the country continues to respond to volatile markets and an uncertain economy, we will focus on total compensation comparisons with an objective of maintaining the government's competitive position in the labour market.

Therefore, in our Thirteenth Report, we have concentrated our efforts on taking stock of the current total compensation levels for senior ranks within the federal Public Service as compared to equivalent groups within the Canadian Labour Market.

Significant Principles Guiding Compensation Management

Before formulating our recommendations, we revisited the significant principles guiding compensation management that this Committee recommended 12 years ago, and which the Government implemented:

  • The total compensation package for the senior levels of the public service should be different from what is paid to collectively bargained employees.
  • The job rate, as the maximum of the fixed component of compensation that is paid for sustained fully satisfactory performance, should be adjusted at intervals using market comparisons of total compensation with appropriate groups within the Canadian Labour Market.
  • There should be a scheme of variable, "at-risk" compensation that will be paid only on the basis of performance measured against agreed-upon targets and the achievement of business plans.
  • The distribution of pay increases and performance awards for the senior ranks of the public service should occur regularly and at fixed intervals.

We continue to endorse these guiding principles.

On the first principle, and as described in previous reports by this Committee, total compensation refers to the sum of the cash values of base salary and at-risk pay, as well as non-cash compensation consisting of pension, benefits, and perquisites for Public Service executives at the EX-01 level. This is compared to the sum of the cash values of these same elements for equivalent positions within the Canadian Labour Market.

The Committee recognizes that the Public Service Pension and Benefits Plans are an important element of the total compensation package, and we intend to explore how best to communicate the value of these programs to prospective and current executives. In particular, we intend to obtain a full description of the valuation of the Public Service Pension Plan from a total compensation perspective.

On the fourth principle, we continue to support the view that the timeliness of compensation increases has a positive impact on engagement and productivity, and recommend that this aspect of good people management continue, with the distribution of pay increases and performance awards for the senior ranks of the public service occurring regularly and at fixed intervals.

Taking Stock

Total Compensation Comparisons

Figure 1 - Projected Base Pay Increases for Executives in 2010 (as of September/October 2009)
Company Name Projected Percentage Increases in Base Salaries
Hay Management Consultants 2.3
William M. Mercer Limited 3.0
Conference Board of Canada 2.4
Watson Wyatt Consulting 3.0
Aon Consulting 2.7
Towers Perrin 2.8

Figures first provided to this Committee at our November 2009 meeting, showed that, with the improvement in the Canadian economy, projected salary increases for the private sector in 2010 were expected to increase by 2.7 percent on average. However, we note from our survey data that while moderate increases in base salaries did occur for executives in the Canadian Labour Market, these increases were more than offset by reductions in short term and long term incentives, especially in the private sector.

Figure 2: Current Total Compensation Comparisons for the EX and DM groups as of March 31, 2010 and April 1, 2010 Versus the Total Canadian Market
Level Core Public Administration (as of March 31, 2010) Core Public Administration (as of April 1, 2010) Total Canadian Market (as of December 2009)
EX-1 164,600 167,100 170,300
EX-2 184,300 187,100 213,000
EX-3 206,000 209,100 284,200
EX-4 251,200 255,000 385,900
EX-5 281,300 285,500 472,200
DM-2 408,900 415,000 742,100

Figure 2 provides public sector total compensation comparisons with equivalent groups within the Canadian Labour Market. In our view, at the EX-01 level, the fact that compensation is lagging behind market by 2 percent is not alarming at this point, but we note that the gaps at higher levels are more pronounced: 50 to 70 percent behind at the EX-04 and EX-05 levels, and almost 100 percent behind at the DM-02 level. However, the Committee acknowledges that there have always been gaps at the higher executive levels.

With the expected recovery of the Canadian economy, it is the Committee's belief that these gaps can only be expected to widen in the medium term. It is difficult to predict what the size of the gap will be upon the expiry of the Expenditure Restraint Act. As the economic recovery gains momentum in the private sector, increases to wages and short term incentives could result in a significantly larger gap between executive compensation and that of the Canadian Labour Market. However, we believe that it is critical for senior level compensation to remain competitive with the Canadian Labour Market, and predict that recruitment, retention and leadership excellence will be affected if compensation is permitted to become less and less comparable over time to similar positions within the Canadian Labour Market.

Performance Management Program

Concerning the Performance Management Program, we arepleased to note that the at-risk component continues to be rigorously applied for achievement against defined performance targets, and recommend that its role within the Performance Management Program be maintained, consistent with industry best practices. We recognize the Government of Canada's Performance Management Program as being a gold standard among such programs and a key component of a high-performing, highly motivated public service.

Talent Management and Leadership Development

The Committee notes that executive talent management is taking root, with this being the second year that departments have conducted annual talent management activities for their full executive cadre, building on the approach implemented for Assistant Deputy Ministers four years ago.  The in-depth analyses of talent management data that has been undertaken will help the Government in assessing learning needs, gaps and opportunities with respect to the executive cadre, public service-wide.  We support the continuation of the work underway, including the development of a more comprehensive questionnaire, a better-aligned talent map and an online support system, to refine executive talent management and ensure better alignment with other human resources initiatives, such as the Performance Management Program.

Regarding leadership development, as indicated in my letter following our November meeting, we see the Government's continuing investment in leadership development initiatives as essential, even in a period of restraint, to ensure that current and new executives will receive the training and development they need to be effective and productive leaders. We applaud the work that has been done to implement a Leadership Development Framework, including proposals for a Workplace Leadership Development Innovation Fund, which would support new and enhanced leadership development approaches and tools in the workplace across the Public Service of Canada.  The Fund will contribute to fostering a Public Service where leading practices will be widely shared and adapted to meet departments' business needs and to support public service priorities.

Public Service Employee Survey

We discussed the Public Service Employee Survey at our April meeting in the context of how to further drive performance, as well as how to sustain performance in changing conditions.  Survey research is increasingly being used by public administrations as a best practice to identify, assess and monitor people management issues and trends. Companies in the private sector, including those of some of us, have been using employee engagement surveys for some time to inform decision making with respect to enhancing productivity and customer service, as well as assess executives' leadership capability.  From the Committee's perspective, the Public Service Employee Survey is a valuable analytic tool for measuring performance, including that of executives.  We therefore recommend that the Public Service Employee Survey continue to be administered every three years to monitor the effectiveness of public service leadership and to enhance productivity.

Poor Performance and Lack of Fit

Unlike in the private sector, deputy heads do not have the flexibility to deal with extraordinary situations that may arise with their executives, such as lack of right fit. Executive separation represents a policy gap for deputy heads, who are vested with the powers to hire, reward, lay off, discipline and terminate executives for cause, but who have no flexibility to manage situations of executive separation without cause, when it is in the best interests of the executive and the Government to terminate the employment relationship. We continue to encourage the Government to implement measures to address this gap.

Summary of Recommendations

In this report, we have made the following recommendations:

  • In the interests of recruitment, retention and leadership excellence, and despite the current need for restraint, the Government should not lose sight over the longer term of the need to consider the competitiveness of senior level total compensation with comparator groups within the Canadian Labour Market.
  • As the gold standard among such programs and as a key component of a high-performing public service, the Performance Management Program should continue to be implemented, as should the rigorous application of at-risk pay.
  • The timeliness of compensation increases has a positive impact on engagement and productivity. This aspect of good people management should continue, with the distribution of pay increases and performance awards for the senior ranks of the public service occurring regularly and at fixed intervals.
  • Continuing to invest in leadership development is essential, even during a period of restraint, to ensure that current and new executives receive the training and development they need to be effective and productive leaders.
  • The Public Service Employee Survey is a valuable analytic tool for measuring performance, including that of executives, and should continue to be administered every three years to monitor the effectiveness of public service leadership and to enhance productivity.
  • We continue to encourage the Government to implement measures that will provide deputy heads with the flexibility required to manage executive separation.

Topics of Focus for the Future

  • We support the Government's priority of workplace renewal, and look forward to seeing the results of this initiative. With respect to the executive group, we plan to give consideration to the evolving nature of executive work, the drivers of growth in the executive cadre and opportunities to find efficiencies and exploit best practices from other jurisdictions. We will review the practice of benchmarking at the EX-01 level to determine if this still represents the most appropriate level for making total compensation comparisons.
  • We recognize that the value of the Public Service Pension and Benefits Plans as a part of the total compensation package is not well understood, and wish to gain more information on the valuation of the Public Service Pension Plan in particular from a total compensation perspective.
  • Concerning our strong interest in the promotion of executive health, we look forward to the results of an analysis performed at our request by the Association of Professional Executives of the Public Service of Canada, following their presentation on the health of executives at our November 2009 meeting, on the costs incurred by the Public Service as a result of executive health issues.

Annex A: Letter to the President of the Treasury Board from the Advisory Committee on Senior Level Retention and Compensation

December 21, 2009

The Honourable Vic Toews, P.C., Q.C., M.P.
President of the Treasury Board House of Commons
Ottawa,ON K1A 0A6

Dear Minister Toews:

The Advisory Committee on Senior Level Retention and Compensation met on November 25 and 26, 2009 to discuss a number of key human resources issues including compensation, knowledge transfer, health, and leadership development. Our focus, as you know, is on strategies and principles pertaining to retention and compensation for senior levels of the public service, namely executives, deputy ministers, other governor in council appointees and chief executive officers of Crown corporations.

As was the case when we met in November 2008, the prevailing economic climate weighed heavily in our discussions. In our report of February 4, 2009 we recommended modest salary adjustments of 1.5% and acknowledged that sound fiscal management in a time of uncertainty necessitated the measures now in place to control economic increases and bonuses in fiscal years 2009-10 and 2010-11. We remain fully supportive of this approach. As the end of the legislated restraint period nears, we believe that a challenge for the government will be to keep its sights firmly set on the competitiveness of senior level compensation in relation to the Canadian Labour Market.

Despite the current economic pressures, we believe that it is critical not to lose sight of the fundamental principles guiding compensation management. Our belief in the total compensation approach remains strong, particularly the importance of market comparability and the critical role of at-risk' compensation. As noted in our Report of February 4, 2009, a rigorous performance management regime is critical to a high performing public service, particularly at the most senior levels. Altering the pay-at-risk performance system would negate much of the progress that has been made in recent years and we therefore feel that this program must remain intact.

Finally, we wish to emphasize the importance of continuing to invest in leadership development. Without question, the new wave of senior leaders will need meaningful training and development on leadership topics linked to the relevancy of today's world and tailored to government priorities and values.

Our intent is to provide a formal report with recommendations to you following our next Committee meeting in April 2010.

I would be very pleased to have the opportunity to discuss with you the Committee's views on the human resources management of senior executives in the public service.

Sincerely,

Carol Stephenson

Annex B: Letter of Response from the President of the Treasury Board to the Advisory Committee on Senior Level Retention and Compensation

Ms. Carol Stephenson
Dean Richard Ivey School of Business
1151 Richmond Street North
London, Ontario
N6A 3K7

Dear Ms. Stephenson:

Thank you for your letter dated December 21, 2009, sent to my predecessor, the Honourable Vic Toews, regarding the results of the latest Advisory Committee on Senior Level Retention and Compensation meeting. I have noted your comments.

I am pleased that the Committee supports the measures taken by the Government to control senior-level compensation in the current context of economic uncertainty, including modest salary adjustments of 1.5 percent and restraints on economic increases and bonuses in fiscal years 200910 and 201011.

At the same time, I recognize your concern that these measures may impact senior-level recruitment and retention in the near future. There are no easy solutions to this situation; however, the Committee's recommendations for surmounting the recruitment and retention challenges, as anticipated in your upcoming report, will be important to the Government's decision making in the longer term.

I look forward to meeting with you and other members of your Committee, and to further benefitting from your knowledge and advice on the human resources management of senior levels within the Public Service.

Again, thank you for writing.

Yours sincerely,

Hon. Stockwell Day

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