ARCHIVED - Expenditure Review of Federal Public Sector - Volume One - The Analytical Report and Recommendation

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SECTION FOUR
RECOMMENDATIONS

10. Context for Recommendations

In this concluding section, we position the findings of this Report in a broader policy context and present specific recommendations for managing federal public sector compensation more deliberately and effectively.

The essential message is that because compensation is a substantial share of federal government discretionary spending (over one third of program spending), and because the components of compensation are closely interrelated, this whole area should be managed in a coherent and strategic manner in support of ensuring that we have the Public Service we need. Work in preparing this Report has underlined how piecemeal our current management regime remains, despite recent efforts to promote greater coherence. Even the data needed to answer basic questions in this field are subject to confused definitions and inconsistent reporting. Given the magnitude of the sums involved, there must be clear reporting and accountability for federal government compensation costs. Sound public management demands it.

In the years ahead, compensation must continue to be driven primarily by the principles of external comparability and internal consistency–fairness both to employees and taxpayers. We must apply these principles to ensure that we can meet our future business needs and operational realities. Our compensation arrangements must be generous enough to attract, retain and motivate the talent we need, and modest enough to ensure fiscal prudence, all the while reflecting our collective commitment to remaining a socially responsible employer. Such a balance can never be easy and will always require us to make choices. Better information and more systematic management will permit us to juggle these trade-offs in the best way possible.

This chapter summarizes the factors driving increases in compensation costs between 1997–98 and 2002–03, and briefly describes some key trends likely to affect the nature of the Public Service in the next decade or two. An appreciation of both perspectives is essential to shaping future compensation policy. In the following chapters of this section, we then work through 17 sets of recommendations (77 proposals in total) organized into five themes:

1. Transparency and accountability;
2. Coherent management of compensation;
3. Substantive compensation issues relating to salaries;
4. Substantive compensation issues relating to pensions and other benefits; and
5. Possible areas for updating the legislative framework.

We also provide, in Chapter 15, an outline for a possible implementation plan. Chapter 16 contains our concluding thoughts.

Factors shaping the recommendations

Compensation Cost Drivers

In formulating our recommendations, we have been guided first by our assessment of the main factors driving compensation expenditure increases, particularly since the end in 1997–98 of the freezes and downsizing associated with Program Review. Broadly speaking, as summarized in the appendix to the Overview of this Report, salaries drove two thirds of the approximately $8 billion increase in total federal public sector compensation between 1997–98 and 2002–03. Table 1051 summarizes the main drivers of change during this period.

Table 1051

Major drivers of federal public sector compensation cost increases since the end of Program Review, 1997–98 to 2002–03

Cost Drivers	Expenditures		Difference
	($billions)		($billions)	%
	1997–98	2002–03
Salaries	12.0	17.2	5.2	66
Pension Contributions	1.3	2.5	1.2	15
Payroll Deductions	0.4	0.9	0.5	6
Health and Dental	0.7	1.1	0.4	5
Allowances	0.4	0.8	0.4	5
Other (Net)	0.9	1.1	0.2	3
Total*	15.7	23.6	7.9	100
* Note that the totals are somewhat smaller than reported elsewhere in this report. They exclude compensation costs for what we have dubbed the "other" domain (e.g. federally appointed judges, parliamentarians) as well as such amounts as retroactive payments or payments of non-pension benefits for public sector pensioners, for example. In other cases, we were unable to obtain the detail needed for analysis at this level. So we limited the analysis to the data reported in the appendix to the Overview of this Report.

Figure 1052
Main components of salary mass increases in the combined core public service and separate employer domains, 1997–98 to 2002–03

Display full size graphic

Within the salaries area, using the combination of the core public service and the separate employers as our analytical focus, increases can be attributed to five main factors, as illustrated in the pie chart in Figure 1052. First, at a cumulative level of 11.6% between 1997–98 and 2002–03, inflation alone would have increased the salary mass for this part of the federal public sector by $1 billion, from $8.2 billion to almost $9.2 billion.

Second, beyond inflation, the largest factor was increases in the number of employees. About $1.8 billion of the total $4.2 billion increase in the salary mass for the combined core public service and the separate employers resulted from hiring more employees. Because the hiring was spread over the whole five years, it is hard to extract the inflation component. A reasonable estimate of the after-inflation contribution from new employees' salaries would be $1.7 billion.

Third, we have increases in salaries resulting from collective bargaining outcomes that went beyond matching inflation. These raised the salary mass overall by the end of the five years by about $0.8 billion, more or less equally driven by economic increases in excess of actual inflation, and by increases resulting from changes to the pay structures of various groups.

Fourth, changes in the composition of the public service workforce contributed about $0.5 billion to the cumulative increase in the salary mass. Finally, pay equity settlements explained about $0.2 billion of the increase.

Beyond salaries, the only other really substantial cost driver for the overall federal public sector between 1997–98 and 2002–03 was increases in the employer share of contributions to cover the cost of pension entitlements for current service. This category amounted to $1.2 billion, or 15% of the overall $8 billion compensation cost increase to the federal Government.

On the other hand, some categories of compensation expenditures grew much faster in percentage terms. For example, performance pay tripled in total cost, albeit on a very small base. Payroll deductions more than doubled. Health and dental programs increased by about 50%, which was more than twice the rate of increase to the number of employees.

Some of these increases were a result of socio-economic pressures affecting all Canadian employers. Under this heading we would put inflation, of course, but also a substantial part of the changes in the composition of the workforce as the importance of knowledge to employers increased, as well as pay equity, increases in payroll deductions, and much of the increases in health and dental costs as employees aged on average, and drug costs soared. Also, some of the increased employer pension costs for current service were a result of lower real interest rates. In total, these components of compensation cost increases apparently amounted to in the order of $3.5 billion of the total $8 billion increase observed between 1997–98 and 2002–03.

That leaves a majority of the expenditure increases in components that were subject to control by the employer. The realities of collective bargaining, however, do put constraints on what an employer can accomplish in controlling compensation costs. On the basis of this analysis, we have put an emphasis in our recommendations on several measures to bring greater discipline to the management of employment and salary increases in particular, beginning with transparency, and complemented by more coherent management of such growth.

In addition to weighing the relative factors driving past cost changes, we have looked to the future, asking regularly whether the existing compensation arrangements will equip the federal public service to attract and retain the expertise and leadership it will need to meet Canadians' expectations over the coming generation. Thus, we have proposed various reviews of the suitability of what has grown up since 1967 when collective bargaining was implemented in the federal Public Service.

The Future Public Service

While this Report cannot provide an in-depth analysis of how public administration will evolve over the coming years, we must acknowledge some of the trends likely to affect the future of the public service. Rising expectations of service quality and relentless pressures to reduce administrative costs will require governments of all stripes to reassess frequently their core functions and competencies, and to review how they carry out their responsibilities. The nature of those responsibilities is itself subject to renewal as public attitudes evolve, and the roles of the federal government shift in response. This ongoing rethinking of government can be expected to continue, and will lead to changes in the nature of work and the skill sets required of employees. By extension, it will be necessary to adjust the compensation regime in order to support these changes.

In the broader society, we can expect such trends as demographic and technological changes, emphasis on rights, globalization and interconnectedness to play key roles.

Demographic changes

Overall, the population will continue to age. Population and labour market growth will increasingly result from immigration. By 2020, such growth is predicted to be driven entirely by immigration. Ethnic and cultural diversity will increase.

Technological changes

Rapid advances in the ubiquity of information and its speed of dissemination will continue. Robots and automation will take over most goods production, with new services emerging to stimulate employment. The linking of biology and technology will change our thinking about life.

Emphasis on rights

More areas of policy will be driven by demands to recognize rights and by a desire for equality across groups. Both litigation and complex mediation will grow as ways to resolve conflicts.

Globalization

While some backlash to increasing global convergence can be expected, we can still anticipate that fashions, standards and news will be driven more and more by a shared consciousness that envelopes much of the globe.

Interconnectedness

Problems fit less and less well into the conceptual and institutional structures we have established to bring order and accountability to public administration. The result is an increasingly recognized need to deal with issues horizontally and across boundaries. 

This list is fairly conventional. In effect it extrapolates the trends of the past 10 or 20 years. It takes no account of possible major discontinuities resulting from such threats as terrorism, war, extreme weather or pandemic. In any case, whether current trends accelerate or something unexpected asserts its primacy, the Government of Canada will be marked by an intensified need to anticipate, interpret and adapt to rapid and unpredictable change. It will need to absorb, understand and utilize increasingly vast and complex information. It must become better at reconfiguring itself in order to respond rapidly as demands shift.

Implications for our Future Management of People

Such phenomena suggest several implications for our management of people. In the future public service there will be a need to recognize the significance of skill sets, to balance the stream of permanent and temporary staff according to opportunities and priorities, to keep structures and people flexible, and to minimize hierarchies.

The significance of skill sets

There will be a growing need for specialized expertise. In recruiting, the federal public sector will need to access its full share of the most talented university graduates. In addition, we will need to attract more senior workers who have critical experience and knowledge outside government. These requirements will extend to virtually all areas of specialization.

An emphasis has to be placed on continuous learning. Existing public servants will need to invest a substantial part of their time in deepening their knowledge, whether in their original area of expertise or in new fields.

Balancing the streams of permanent and temporary staff

Preserving a substantial core of public servants who remain for all or nearly all of their career is essential to ensuring continuity of values and preserving corporate knowledge. However, innovation or new tasks will require a steady stream of new employees. We can expect a larger share of the public service to move in and out over the years in response to opportunities and priorities, perhaps several times in the course of a career.

Keeping structures flexible

The basic paradigm of the stable organization is a barrier to our ability to adapt to changing priorities. People need a defined home base, and an understood relationship to the organization. However, greatly increased structural flexibility will be essential if we are to meet the challenges we face in a timely way. Under pressure of necessity, the existing rules are interpreted flexibly, but the underlying norm of stability is increasingly an obstacle to effectiveness, and employee expectations in this regard become a source of unnecessary frustration.

Flexibility in assignments

As with structures, flexibility is also key with individuals. More and more often we need to assemble and disassemble different groupings of people for particular purposes. The existing classification systems presume that jobs are relatively fixed, and that individuals can be slotted in a stable way into such roles. More and more, such concepts are an impediment to delivering on the constantly evolving business of government.

Balancing the ratio of specialists and generalists is another key way to maintain employee flexibility. While expert knowledge is crucial, so also will be our capacity to synthesize information across disciplines in novel ways. This will increase the importance of generalist skills, not as a substitute for subject-specific expertise but as a complement to it. The need to translate knowledge across sectors will be at a premium.

Minimizing hierarchies

We will need to ensure less hierarchy in the federal public service. A corollary of the trends described so far is the need to connect the experts more directly to the decision makers. As the time to react shrinks, intermediaries must be few. And their role would be more to translate across specialties than to interpose multiple levels of approval. Executives and managers will need to be as highly skilled in the fine arts of diplomacy and persuasion, relationship management, inter-organizational team- and consensus- building, as well as project and performance management, as the substantive experts must be steeped in their specialized domains.

It is important to emphasize that these trends apply significantly to all branches and levels of the public service. Terms such as knowledge worker are often understood as applying only to highly educated specialists. In fact, the knowledge content of all work is increasing dramatically. Work in the trades, for example, demands greater ability to use electronic devices and to install or repair a wide variety of customized equipment, as well as specialized and often lengthy training. Clerical and secretarial work more frequently involves coordinating services in support of constantly reconfiguring work teams and mastering complex software. So while the extent and nature of the trends described above will vary across different groups of public servants, virtually no part of the federal public sector––like the larger Canadian society and economy––will be exempt from their effects on the workplace and the nature of work.

As a final observation, we may speculate on the future size of the federal public sector. We reported in Chapter 5 how the federal public sector has shrunk as a proportion of the Canadian labour force over the past decade or so. While there was fairly rapid growth, especially in the core public service, in the years between 1997–98 and 2002–03, this followed on dramatic reductions in the earlier part of the 1990s. Looking ahead, the most likely scenario is for the total size of the federal public sector to remain at about its current level, and therefore its share of the total Canadian labour force to decline further. Some service functions, for example, in the area of Employment Insurance processing, will be delivered electronically, with resulting staff reductions. Other functions may be privatized or shifted to other governments. On the other hand, we can expect some core federal functions such as the Canadian Forces to grow, and new programs of various kinds to require additional staff.

The phenomena sketched in this section will no doubt require responses in the areas of compensation policy and practice. As we present in the rest of this section our recommendations on how to strengthen the management of federal public sector compensation, as far as possible we used the expected trends we have highlighted here as reference points in shaping our thinking.

 

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