September 2016 Executive Compensation Framework Regulation On September 6, 2016, the government filed Regulation 304/16 (Executive Compensation Framework) ( Regulation ) under the Broader Public Sector Executive Compensation Act, 2014 (BPSECA). This Regulation sets out the process for determining the maximum amount of salary and performance pay that will be available for designated executives of designated employers, including public hospitals, as well as other parameters regarding other elements of the executives compensation. The Regulation also sets out requirements for written executive compensation programs to be developed by each employer. Click here to view Regulation 304/16. To view the OHA s Backgrounder on the BPSECA, click here. (See pages 3-8.) The Ministry has also published a Guide to assist designated employers in understanding the Regulation. This can be found here. It is important to note that this Regulation will supersede the current restrictions on hospital executive compensation set out in the Broader Public Sector Accountability Act when a hospital first posts a new compensation program on its website. At that time, the current freeze on executive salaries and the freeze on an organization s pool of performance pay will cease to be in effect for that organization. For clarity, until a framework is in place the current restrictions remain in effect. Additionally, it is important to recall that the effect of the compensation framework for existing executives is grandfathered for three years under BPSECA. BPSECA provides that, where a designated executive holds his or her position immediately before the effective date of the compensation framework and he or she continues in that position under the same contract or agreement or a renewal of it, the compensation plan in effect immediately before the effective date remains in effect even if it provides for compensation that is greater than that authorized in the framework. However, any increase in an element of compensation provided for in the compensation plan, but that has not been implemented on or before the effective date of the compensation framework, will not be valid or payable to the extent it is inconsistent with the applicable compensation framework. Three years after the framework comes into effect, compensation plans that provide for remuneration inconsistent with the compensation framework will not be valid or payable to the extent the plans do not conform with the compensation framework.
Application and Timelines The Regulation applies to all designated executives and all designated employers under the BPSECA. Designated executives are individuals who meet two criteria. First, the person is the head of a designated employer regardless of title; or is a vice-president, chief administrative officer, chief operating officer or any other executive regardless of title. Second, the person is entitled to receive or could potentially receive $100,000 or more in cash compensation in a given calendar year. If a person works only a portion of a year, their cash compensation is calculated for the whole year as if they would have been paid at the same rate or level at which they were paid for the portion of the year during which they worked. Designated employers include public hospitals. The executive compensation framework set out in the regulation will be effective for the specific designated employer on the date on which the employer first posts the compensation program on its website. This effective date must be clearly indicated on the employer s website. Employers are required to conduct public consultations regarding the manner in which the designated employer determines executive compensation prior to the employer finalizing its compensation program(s). This requirement is effective immediately as of September 6, 2016. Designated employers will be required to post their compensation programs by no later than September 5, 2017. A further description of compensation programs is set out below. Terms and Conditions on Executive Compensation The Regulation sets out a number of conditions and restrictions regarding broader public sector executive compensation. The terms of the compensation framework are: Designated executive salary and performance pay would be capped at the maximum amount calculated under the process set out in section 3 of the Regulation (the formula for calculating the maximum allowable amounts) and the designated employer would not be permitted to exceed this amount. Recalculation of the maximum salary and performance pay amounts would occur as follows: o Recalculation would be required where there is a significant organizational restructuring ; and o Recalculation would be permitted at any other time where it is warranted in the circumstances. Note: the Regulation does not specify what would be considered significant organizational restructuring or the types of situations where a recalculation of maximum salary and performance pay amounts would be warranted. 2
Subject to the Employment Standards Act, the following elements would not be permitted to be provided in designated executives compensation packages: o Payments or other benefits provided in lieu of perks; o Signing bonuses; o Retention bonuses; o Cash housing allowances; o Insured benefits that are not generally provided to non-executive managers; o Termination payments, including payments in lieu of notice of termination, and severance payments that in total equal more than 24 times the average monthly salary of the designated executive (i.e. more than 2 year s termination/severance); o Termination or severance payments that are payable in the event of termination for cause; o Paid administrative leave (except in the college or university sector); o Paid administrative leave that accrues at a rate in excess of 10.4 paid weeks per year; and o Payments in lieu of administrative leave. Note: non-executive managers are defined in the Regulation as employees and office holders who exercise managerial functions and who directly report to one or more designated executives. Other than salary and performance pay, designated employers would not be permitted to provide an element of compensation to a designated executive unless the same element is also provided, in the same manner and relative amount, to non-executive managers generally. This condition would not apply if the element is required for the performance of the designated executive s job or is otherwise required for critical business reasons. Designated employers would not be able to increase the salary it provides to a designated executive except as follows: o Every increase must be approved by the board of directors of the employer; and o The average rate of increase in salary for designated executives in a year cannot exceed the average rate of increase in salary for non-executive managers in the same year. (The average rate of increase does not include increases as a result of the initial calculation of the maximum salary and performance pay or any subsequent recalculations of that amount.) Public consultations would be required in which members of the public have a reasonable opportunity to provide comments on the manner in which a designated employer determines the compensation it may provide to its executives. While the Regulation does not specify any parameters with respect to the public consultation, the Guide released by the government suggests consultations should be 30 days in length and that the feedback submitted should be retained. 3
Calculating Maximum Salary and Performance Pay The Regulation sets out the process by which designated employers may calculate the maximum salary and performance pay for their designated executives. Maximum salary and performance pay would be calculated by selecting at least 8 comparator organizations and performing the calculation set out in the regulation. Selecting Comparator Organizations: Selection of comparator organizations would be required to meet the following criteria: Organizations may be selected as comparator organizations if: o The potential comparator organization has at least one executive who holds a position comparable to the position or class of positions held by the designated executive or class of designated executives; and o The organization is comparable to the designated employer with respect to most or all of the following factors: (a) the scope of responsibilities of the executives; (b) the type of operations; (c) the industries within which the organization competes for executives; (d) size; and (e) location. At least one Canadian public sector or broader public sector organization must be selected as a comparator organization. An organization that is not a Canadian public sector or broader public sector organization may be selected as a comparator organization subject to the Minister s (President of the Treasury Board) approval. The designated employer may apply for approval in writing and shall include a business case and reasons the employer cannot be compared solely to Canadian public sector or broader public sector organizations. Formula for Maximum Salary and Performance Pay: Maximum salary and performance pay would be required to be calculated in one of two ways depending on whether the designated employer selected non-canadian comparator organizations or not. Where all comparator organizations are Canadian public sector or broader public sector organizations, maximum salary and performance pay would be calculated by: Determining the maximum amounts of salary and performance pay that may be paid to the executives in the comparator organizations who hold positions comparable to the position or class of positions held by the designated executive or class of designated executives of the designated employer; Selecting a percentile that is less than or equal to the 50th percentile of the maximum amounts paid to executives of the comparator organizations as determined above; and Determining the amount that is at the specific percentile that has been selected. Where any of the comparator organizations are not Canadian public sector or broader public sector organizations, maximum salary and performance pay would calculated by doing a weighted average of the Canadian public sector or broader public sector organization 4
comparators and all other comparators (e.g. international comparators or private sector comparators). The maximum salary and performance pay would be calculated by: For all the Canadian public sector or broader public sector organization comparators, determining the maximum amounts of salary and performance pay that may be paid to the executives in the comparator organizations who hold positions comparable to the position or class of positions held by the designated executive or class of designated executives of the designated employer; Selecting a percentile that is less than or equal to the 50th percentile of the maximum amounts paid to executives of the comparator organizations as determined above; Determining the amount that is at the specific percentile that has been selected; Performing these same calculations for non-canadian public sector or broader public sector organization comparators; Multiplying the amount determined with respect to the Canadian public sector or broader public sector organization comparators by at least 50% but less than 100%; Multiplying the amount determined with respect to the non-canadian public sector or broader public sector organization comparators by the corresponding percentage. (This would be the percentage for Canadian public sector or broader public sector organization comparators subtracted from 100%.); and Adding these two amounts. Compensation Programs The Regulation would also require designated employers to have a written executive compensation program setting out the compensation that may be provided to its designated executives. The executive compensation program is required to be posted on the employer s website, and must indicate the date on which it was posted. The executive compensation program must follow the compensation framework set out in the Regulation as well as including the following information: The maximum salary and performance pay calculated for each designated executive or class of designated executives. The executive positions and comparator organizations used in each calculation, together with an explanation of how the comparator executive positions and comparator organizations used are comparable with reference to the factors used to identify comparator organizations. The specific percentiles that were selected to calculate maximum salary and performance pay for each calculation. 5
The specific percentage values that were chosen for each calculation where non- Canadian public sector or broader public sector organization comparators were chosen. A description of any other element of compensation available to designated executives that is not generally provided, in the same manner and relative amount, to nonexecutive managers, and the reasons why the element is required. A description of the designated employer s compensation philosophy, including details of, o how the compensation program supports the designated employer s strategic objectives; and o what the compensation program, including its approach to performance pay, is designed to reward. In the government s Executive Compensation Framework Guide, the employer s compensation philosophy is described as a set of guiding principles that drive compensation decision-making in an organization. Designated employers would be required to update their executive compensation programs and post the updated compensation programs where there has been any recalculation of the maximum salary and performance pay. Coming into Force As noted above, the Regulation was filed on and is in force as of September 6, 2016. Hospitals are required to meet the requirements of the regulation when determining compensation moving forward, and are required to post their compensation programs by no later than September 5, 2017. As noted above, the effect of the compensation framework is grandfathered for three years under BPSECA for existing executives. Where a designated executive holds his or her position immediately before the effective date of the compensation framework and he or she continues in that position under the same contract or agreement or a renewal of it, the compensation plan in effect immediately before the effective date remains in effect even if it provides for compensation that is greater than that authorized in the framework. For more information, please contact Alia Karsan, Director, Health HR Policy at akarsan@oha.com or 416 205 1415 or Jeff Bagg, Senior Legislative Advisor at jbagg@oha.com or 416 205 1374. 6