Escalating Gaps Reaffirm Private Sector Advantage against Public Sector in Executive Compensation

Summary Points:

·        Gaps continue between private sector and public sector executive pay

·        The biggest differences in pay are observed at the higher executive levels

·        Increasing variable pay amounts in the private sector intensify the gaps further

The perception is that there is a gap between pay levels in the private and broader public sector, with the public sector being a laggard in executive compensation. In the last decade, legislation on executive pay within the Canadian broader public sector have intensified these differences in executive compensation. For example, on August 13, 2018, the Ontario government filed Regulation 406/18, and revoked Regulation 304/16, under the Broader Public Sector Executive Compensation Act, 2014 (“BPSECA”), which reinstated an executive compensation freeze; making it even more difficult for the broader public sector to compete with the private sector. For perspective, inflationary increases to compensation have been nearly 28% in the last decade.

In this article , we analyze the differences between private vs. broader public sector executive compensation by job complexity and compensation element. As expected, there is a noticeable gap – one that intensifies as the level of executive increases and as variable pay enters the compensation mix. Below the executive level, this gap tends to decrease to the point where, at the individual contributor level, the public sector pays higher than the private sector. To understand the scale of this difference for executives, Compensation Governance Partners (CGP) has compared two data lines (Private Sector and Broader Public Sector) from its proprietary database. This snapshot of the current market for base salary, total cash compensation and total direct compensation is presented as a graphical illustration below.

We observe similar salaries at a lower-level executive job. The gap between private and public sector increases slowly as job level grows. This variance ranges from 11% to 72% (the average variance is approximately 38%).

The gap at total cash steepens between the private and broader public sectors, especially at higher job levels, where STI tends to increase significantly for the private sector. In the public sector, executive levels are paid in a tight range for STI %, which typically does not surpass 10-15% of base salary. However, for the private sector, while STI targets are generally much higher, they also tend to increase with job level complexity. Top executive positions at private sector organizations are offered more pay at risk for higher returns on corporate metrics such as profit, to align the executives’ pay to the organizations’ short-term goals and success. The variance between the two sectors ranges from 27% to 150% (the average variance is approximately 93%).

As LTI is introduced into the pay mix, the gap in total direct between private and broader public sectors organizations escalates quite significantly as the job level increases. While LTI vehicles are not prevalent in the broader public sector, this variance is driven by LTI plans in the private sector (usually in the form of equity or “phantom” equity) that create even more pay at risk. LTI vehicles aim to align performance to long-term organizational growth that is aligned with shareholder interests. The variance between the two sectors ranges from 27% to 289% (the average variance is approximately 146%).

While we have used target compensation for the purposes of this analysis, we note that the two sectors become even more divergent when comparing actual compensation due to incentive pay. For example, private sector variable pay is more likely to pay at higher than target and can reach up to a maximum of 200% of target;