Opinion/Research
On May 18th, Treasury Board President and Finance Minister Joe Ceci introduced Bill 19. Ceci stated that the “purpose of this legislation is to address consistency and fairness in executive compensation levels for the public agencies, boards, and commissions that are subject to the Alberta Public Agencies Governance Act.” The tabling and passage of this Bill garnered virtually no attention in the media. And yet, this Bill promises to be one of the most fundamental pieces of legislation for the government in an session that features major initiatives on climate change, taxation, predatory lending, environmental monitoring, and law enforcement.
To understand this Bill, one also needs to examine Bill 5, the Public Sector Compensation Transparency Act passed last November which came into force on 11 December 2015. This Act requires the public service, offices of the Legislative Assembly, about 150 ABCs subject to the Alberta Public Agencies Governance Act (APAGA), and other agencies designated, to disclose significant amounts of information about salaries, other monetary benefits, severance payments, position or appointment held, and classification for the current and previous fiscal year. The threshold for disclosure was set at $125,000 in total compensation. The Act also applies to board members of ABCs whose per diem normally would not come near the threshold, as well as physicians.
The Act also requires the disclosure of contracts for deputy ministers, ministerial staff, and Order in Council appointees paid directly by the Government. However, if the employees had a “written contractual right of confidentiality …. acquired prior to November 5, 2015,” then that right would expire on December 31, 2017 or earlier.During debate, the Opposition Wildrose speakers were supportive of these measures that removed some of the loopholes of previous legislation brought in by the Redford government.Government of Alberta- Salary and Severance Disclosure Website
While disclosure of middle and senior managers in Alberta’s public sector is relatively new, executive compensation disclosure in Alberta has existed for over 20 years. Under Ralph Klein and Jim Dinning, Treasury Board passed a directive that required at first limited disclosure of top executive salaries. In the mid-2000s, disclosure was enhanced to recognize the increase in value of pensions for executives after criticisms from the Auditor General. Towards the end of the Klein regime, salary disclosure at regional health authorities revealed that total compensation of executives well above the expected norm in the provincial sector. The CEO of the Capital Health Authority departed with compensation and severance in 2008-09 of $2.156 million, including $1.5 million in severance. In addition, the former CEO was to receive $22,072 monthly for ten years.In 2008-09, the CEO of the Calgary Health Region left with total compensation of $2.339 million including $1.67 million in severance. In addition, the former CEO was entitled to $22,409 in monthly pension benefits. This led, in part, to the establishment of the McCrank Committee whose report At the Crossroads examined the appointment process of directors of provincial agencies. If the boards were not making good decisions about executive compensation, perhaps the appointments process needed examination.
Since 2009, salary costs continued to escalate at other agencies in spite of the lessons from Alberta’s Health Authorities. While average salaries of public sector workers languished, such was not the case at various agencies supervised by Order in Council appointments. Needless to say as the public disclosure of executive salaries at both public sector and private, publicly listed companies rose, expectations from front line workers to “C-suite” executives also rose. “Public service” didn’t seem to factor in any more; rather the need to pay “market” for the best executives was commonly heard.
Bill 19 changes all that
This Bill came into force within 8 days of the legislation being tabled. At Second Reading, the government disclosed its concerns about the sharp “divergence in compensation practices between some public agencies and the core public service.” Further “(T)his legislation is meant to address the wide variance in the compensation philosophies, levels, and practices that currently exist in our ABCs.”
A central concept of the Bill is the development of compensation frameworks for the 30 Agencies, Boards and Commissions (ABCs) named in a schedule to the Bill. Major agencies affected include Alberta Gaming and Liquor, Workers Compensation Board, ATB Financial, Alberta Investment Management Corporation (AIMCo), Alberta Health Services, Alberta Energy Regulator, Alberta Securities Commission, Alberta Innovates and Agricultural Financial Services Corporation. These compensation frameworks will apply to executive officers and members of the board governing these institutions. The Government will be advised by an independent, compensation consulting firm in developing these frameworks.
The context for this rather dramatic action probably lies in the extraordinary fiscal circumstances the NDP government finds itself in. With compensation accounting for approximately 50 per cent of operating expenses, the government must address total compensation of executives, managers and unionized staff. While executive compensation accounts for perhaps five per cent of total compensation at various government agencies, “excessive” compensation, whether real or imagined, creates friction amongst employees, unions, members of the public, and has a tendency to drive wages higher.
The Bill contains a number of sections that sends a signal to ABC executives and board members that the government means business. The relevant Minister will be able to demand information from agencies; audits may be required; compliance reports must be filed and signed by the CEO; penalties for non-compliance will range from $5,000 to $50,000; over-payments will be clawed back; and efforts to evade the intent of the legislation. More telling are provisions that protect the government from claims that the Bill constitutes a breach of contract or denies compensation due to loss of expected earnings. This type of legislation is unusual, but the Legislative Assembly can pass laws altering contracts. Normally it is retroactive legislation that is subject to more critical scrutiny by legislators and courts.
The legislation would allow an executive to receive compensation in excess of the compensation framework`s maximum for up to two years after the date that the compensation framework was set by government regulations. If a five year contract was just signed off with an executive officer and if their total compensation exceeds the framework, their pay during last three years of the contract will be lower than contracted by the agency. But the executive who has signed the contract is barred from suing the agency or the government under the Bill.
Over the past year and a half, I have carried out a research project entitled Board Appointments and Executive Compensation at ATB, AIMCo, the Alberta Securities Commission, and the UofA. At ATB over the past twenty years, the ratio of CEO pay to average salary has gone from six times to 45 times, recently dropping to 33 times as loan loss provisions reduced the CEO`s variable pay. At the ASC the ratio has risen from 4.7 to 5.8 times, and at Uof A from 3.6 to 8.7 times. At AIMCo the ratio rose from 7.7 in 2010 to 20.8 times in 2015. Each institution is different of course but the same dynamic held- average salaries were going up more slowly than executive salaries.
For a social democratic government watching executives of provincial ABCs take home million dollar paycheques might not be disturbing if executive performance were stellar. My research suggests that the government does not have enough information to make an informed decision because the level of disclosure about compensation philosophy, what peer groups the board looks at when considering pay, the levels of severance payments, are not in the public domain. Moreover, the rationale for pay received by AIMCo, UofA, ASC, and ATB executives, when contrasted with relevant comparators in the public and private sectors, is absent.
So back to the moral issue of abrogating contracts. What’s the alternative? These contracts were agreed to by boards of directors who were, with one or two exceptions, appointed by the previous government. My research confirmed that virtually all of the appointments (where public information could be obtained), were Progressive Conservative party donors and/or party executives. While this fact should not be surprising, it suggests partisanship was one factor in appointments. Thus, the new government is, in effect, burdened by expensive contracts entered into by well-intentioned, but nonetheless, partisans of the previous government. This has to be particularly galling for the new government. Today, the harsh reality of a province facing annual credit downgrades, falling real estate prices, rising personal and corporate bankruptcies, and out-migration, suggests the pain needs to be shared. Hence, the iron fist in the velvet glove approach. So the war is joined. Still, if the government hopes to slay the deficit dragon, it will still have to negotiate with teachers, doctors, nurses, and other public sector workers.