Earlier this week, the Ontario government issued a new Compensation Framework Regulation (O. Reg. 406/18) (the "New Regulation") under the Broader Public Sector Executive Compensation Act.
The New Regulation freezes executive compensation as of August 13, 2018 for most designated employers (including public hospitals, public bodies under the Public Service of Ontario Act, 2006, and others). It revokes the prior Compensation Framework Regulation (O. Reg. 304/16) (the "Prior Regulation") and replaces the executive compensation restraints under the Broader Public Sector Accountability Act, 2010 ("BPSAA").
The government has opted to impose simple freezes based on executives' current levels of compensation. Although the New Regulation is much easier to understand than the complicated Prior Regulation, it will disappoint many in the sector who hoped for some limited compensation increases (frozen for the most part since 2010) and for greater retention and recruitment opportunities for senior staff. Considerable work had also been done in the sector over the last couple of years to comply with the Prior Regulation. That said, the revocation of the Prior Regulation might be a relief for some who could have been subject to or required to implement compensation cuts under that regime.
The President of the Treasury Board is required to review the New Regulation again before June 7, 2019.
Who is affected?
The New Regulation imposes requirements that designated employers must meet when setting compensation for designated executives. "Designated employers" include (among others):
- public hospitals;
- community care access corporations;
- school boards;
- universities and colleges; and
- public bodies under the Public Service of Ontario Act, 2006 (other than Commission public bodies).
The term "designated executives" includes employees and office holders of designated employers who are entitled to receive cash compensation of $100,000 or more in a calendar year and who also are:
- the head of a designated employer (i.e. the chief executive officer or president);
- the vice president, chief administrative officer, chief operating officer, chief financial officer or chief information officer; or
- a person holding any other executive position or office, regardless of title.
Understanding the new framework
(a) Salary
The salary[1] for a designated executive is capped at his or her existing salary as of the effective date (which, for most organizations, will be August 13, 2018).
The cap is set according to the salary the executive is actually earning at that time. It cannot be determined with reference to, for example, a higher amount in the employee's salary range or raises that were planned or promised to take effect after the effective date.
If a position is currently vacant, the salary cap is set with reference to salary of the last occupant of the position as of the date the position was last occupied. If a new position is created after the effective date, the salary cap for that position will need to be less than or equal to the cap for the most similar designated executive position at the organisation and must be approved by the board of directors (or equivalent governing body).
(b) Performance Pay
The total performance-related pay[2] that can be paid in a given pay year to designated executives will be limited to a "performance-related pay envelope" (this concept will be familiar to those previously subject to the executive compensation restraints in BPSAA).
Under the New Regulation, the performance-related pay envelope is the total amount of performance-related pay disbursed to designated executives during the most recent pay year before the effective date, for positions that were occupied during that pay year[3] (the "Reference Pay Year"). If, for example, a designated employers' pay year is:
- April 1 to March 30 — Reference Pay Year for the organization should be April 1, 2017 to March 30, 2018.
- January 1 to December 31 — Reference Pay Year for the organization should be January 1, 2018 to December 31, 2018.
The New Regulation allows for pro rata adjustments to the envelope if (1) a designated executive position that was vacant during the Reference Pay Year is later filled, or (2) a new position is subsequently created. Correspondingly, if a position later becomes vacant or is eliminated, the employer will be required to reduce the performance-related pay envelope on a prorated basis.
(c) Other elements of compensation
Elements of compensation that are not salary or performance-related pay are also capped. The cap relates back to each employer's "effective date", a concept described below. The cap is set as follows:
- for a position occupied on the employer's effective date, the cap is what the element of compensation is for the position as of the effective date;
- for a position vacant on the employer's effective date but that was previously occupied, the cap is what the element of compensation was for the position as of the day it was most recently occupied; and
- in all other circumstances, the cap is an amount determined by the board of directors that is less than or equal to the cap for the element of compensation for the most similar designated executive position in the employer.
A designated employer is prohibited from providing any element of compensation other than those in effect on the employer's effective date.
As under the Prior Regulation, this New Regulation prohibits the following elements of compensation outright:[4]
- Payments or other benefits provided in lieu of perquisites.
- Signing bonuses.
- Retention bonuses.
- Cash housing allowances.
- Insured benefits that are not generally provided to non-executive managers.
- 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.
- Termination or severance payments that are payable in the event of termination for cause.
- Paid administrative leave—unless 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 that accrues at a rate in excess of 10.4 paid weeks per year.
- Payments in lieu of administrative leave.
(d) Exceptions
For most designated employers, the "effective date" for the freeze will be August 13, 2018 (the date of filing of the New Regulation). The New Regulation includes certain provisions and modifications if a designated employer:
- did not exist on September 6, 2016;
- as of August 13, 2018, (i) did not exist, (ii) was not a designated employer, or (iii) did not have any designated executives; or
- during the employer's most recent pay year before August 13, 2018, (i) was not at all times a designated employer, or (ii) did not at all times employ at least one designated executive.
If your organization falls into one of these categories, certain aspects of the New Regulation summarized above (including reference dates for the performance-related pay envelope) might be slightly different.
[1] The term "salary" is defined to mean: "compensation that is the fixed or ascertainable amount an employee or office holder is entitled to be paid for each pay period".
[2] The term "performance-related pay" is defined to mean: "short-term incentive pay, long-term incentive pay, other re-earnable pay that is not provided as salary or as a raise in salary, and any other pay that is not salary or a raise in salary and that is provided in respect of an assessment of an executive's performance".
[3] The term "pay year" is defined as follows: "in relation to a designated employer, means a period of 365 consecutive days, or if the period includes February 29, 366 consecutive days, in respect of which the employer determines the salary and performance-related pay to be provided to its executives".
[4] Subject to any entitlement to the element under the Employment Standards Act, 2000.
