Ontario public sector execs could see pay cap

But austerity won’t attract the best, brightest: Experts
By Liz Bernier
|Canadian Payroll Reporter|Last Updated: 02/04/2014

It’s certainly not the first time Ontario’s public sector compensation has become a hot-button political issue. (It won’t be the last time, either). But soaring salaries for the province’s top-level executives have dominated headlines, political debate and water-cooler chatter in recent months.

In November, Ontario NDP leader Andrea Horwath introduced a proposal to cap public sector executives’ salaries at $418,000 — twice the premier’s annual salary. The bill failed, but Ontario’s ruling minority Liberal government has vowed to present its own wage restraint legislation this spring.

But imposing arbitrary hard caps on public sector salaries may not be the best solution, according to Hugh Mackenzie, economic consultant at Hugh Mackenzie and Associates, based in Toronto.

"I don’t think it makes sense just to arbitrarily pick a number and say, ‘If you’re working in a schedule one agency or in the direct public service, your salary is going to be capped at X,"’ he said.

"I really don’t think that makes a lot of sense. I think it does make sense for the provincial government to take some direct responsibility for levels of compensation in the broader public sector that it controls."

Public vs. private sector compensation

When considering public sector compensation, it can be useful to see how salaries stack up against similar senior executive roles in the private sector. The general trend? High-level executives in the public sector tend to make less than their private sector counterparts.

"The general conclusion from a number of studies, some of them based on public data and some of them private studies… tend to show that at the bottom of the pay range, the public sector tends to pay more than the private sector. In the middle, it’s sort of even. And at the top of the pay range — the top third to top quarter — the private sector compensation tends to exceed public sector compensation," said Mackenzie.

"On a like-to-like comparison, senior leaders in the public sector are paid less than senior leaders in the private sector. That tends to vary a lot from place to place. Where there is direct competition for talent — for example, where the public-sector employees are involved in the investment business — those differences tend to be a little narrower. In other areas, they tend to be quite wide."

Despite these sometimes dramatic pay differences, the two sectors do not operate in a vacuum.

"If you look back at the history of Ontario Hydro, the biggest impetus for increases in compensation… was the effort to fix the industry up for privatization under the Harris government in the late 90s," said Mackenzie, adding the private sector tends to put pressure on public-sector wages.

"(This) speaks to the role that private-sector compensation has in putting upward pressure underneath the compensation of senior leaders in the public sector."

Salary caps ‘Band-aid’ solution

There’s certainly political pressure to impose some type of salary caps, said Jason Clemens, executive vice-president at the Fraser Institute in Vancouver.

The public sector actually goes through a boom-bust cycle, he said.

"Right now, we are coming out of a pretty marked recession and a very slow recovery… so you see pressure to constrain public-sector wages. If you fast-forward three or four years or (whenever) you assume that things are booming again… most of us would assume you’re going to see very generous contracts in the public sector, because that’s what we’ve seen in the past."

But using caps to control for that might not be the best solution, said Clemens.

"The salary caps are a Band-aid that you do in the period when you have to constrain wages. As soon as things pick up… you’ll see the salary caps are gone and you’ll see more generous contracts being negotiated."

Instead, public sector compensation should be linked to the market so workers don’t face such marked changes during boom-bust cycles, said Clemens.

"Almost all of the compensation in the public sector could be linked to the private sector… what that means is you’re going to get less increases during good times, but you’re also going to get less decreases in bad times," he said.

"Because of the way we set wages in the public sector, it actually makes public-sector workers worse off because they have to live through these boom-bust cycles. Whereas if we had a more disciplined method to set wages and compensation that was linked to the market, then you wouldn’t have these kind of boom-bust cycles to the degree we do in the public sector."

Salary caps are also a less-than-perfect solution because they don’t account for variations across different labour markets, said Mackenzie.

"I have a real problem in principle with one-size-fits-all fixes, which governments seem to like to do because they’re easy," he said.

"I just don’t think it makes any sense to say, ‘If you draw a salary from the public purse, you’re going to be subject to these absolute limits’ — without regard to the nature of the labour market that those organizations operate in."

Another important consideration is the impact salary caps could have on the public sector’s ability to attract top talent, according to Julie Giraldi, CHRO and vice-president, health human resources leadership at the Ontario Health Association (OHA) in Toronto.

"Ontarians have high expectations for their public-sector services, and rightly so. They deserve the very best. To have the best-run programs and services, we need top-notch leaders," she said. "As an HR professional, I am concerned about the effects of devaluing leaders in the public sector — leaders who represent significant skill sets (and) are managing, in many cases, very large, complex organizations, and whose work carries heavy responsibilities."

It’s certainly fair for taxpayers to ask questions about compensation, she said. But, at the same time, a lot of those questions stem from a lack of transparency, which the OHA aims to address through its Executive Compensation Framework for Hospital Executives.

"In most cases, the public’s concerns about executive compensation have been raised because of a lack of transparency when it comes to how compensation decisions are being made. That’s all very fair," she said. "But capping salaries carries some serious risks, and these are often left out of the discourse."

Those risks include impacts on recruitment, retention and Ontarians who rely on effective public services, said Giraldi.

"Think about… the future of the public sector. Can we afford to have B players in a time where the province really needs A players?" she said. "You attract excellent leaders to organizations in any sector by compensating them appropriately and supporting the work they do — not by treating them as political targets. In the absence of such support, many of our best and brightest will follow a different path, and that helps no one."

PUBLIC vs. PRIVATE

Salaries of top executives

Highest paid public sector executives in Ontario

1. Thomas Mitchell, president and CEO, Ontario Power Generation: salary of $1,720,000; benefits of $6,768.

2. Laura Formusa, president and CEO, Hydro One: salary of $1,036,740; benefits of $2,561.

3. Wayne Robbins, chief nuclear officer, Ontario Power Generation: salary of $935,236; benefits of $4,683.

4. Albert Sweetnam, executive vice-president, nuclear projects, Ontario Power Generation: salary of $843,095; benefits of $4,752.

5. William Moriarty, president and CEO, University of Toronto Asset Management Corporation: salary of $773,830; benefits of $1,835.

Highest paid private sector CEOs in Canada

1. Hunter Harrison, CEO of Canadian Pacific Railway: base salary of $1,045,069; total compensation of $49.1 million.

2. James Smith, CEO of Thomson Reuters: base salary of $1,549,566; total compensation $18.8 million.

3. John Manzoni, CEO of Talisman Energy: base salary of $947,000; total compensation of $18.6 million.

4. Paul Wright, CEO of Eldorado Gold: base salary of $1,456,000; total compensation of $18.6 million.

5. Donald Walker, CEO of Magna International: base salary of $324,909; total compensation of $16.8 million.

Source: Ontario Public Wage Disclosure/Canadian Centre for Policy Alternatives/The Globe and Mail