1992 Report of the Auditor General

Assistant Auditor General: Robert Lalonde
Responsible Auditor: Jacques Goyer

Main Points

7.1 The primary objective of the audit was to determine the extent to which payments in lieu and other related benefits granted between 1986 and 1991 under the Work Force Adjustment Policy were well founded and in keeping with the intent and letter of the Policy.

7.2 We found significant differences in the way the provision regarding payments in lieu was administered in departments. There were instances where it was well managed and instances where it was not managed in a satisfactory manner. In each case, there were some common characteristics.

7.3 Some 32 percent of the 396 payments examined were well founded and in keeping with the intent and letter of the Policy. Thirty-five percent were judged to be without foundation. In addition, we found that a number of payments - 29 percent - were called into question, given the reasons for and the circumstances in which they were made. We were unable to conclude in 4 percent of the cases. Our findings were indicative of trends and patterns, notably regarding payments made between April 1990 and December 1991.

7.4 While payments in lieu have facilitated work force adjustment situations, there has been a gradual deterioration in the administration of this provision, notably because of weaknesses in the management framework in departments and at the central agency level.

7.5 In our opinion, there is a need to clarify and better understand the roles and responsibilities of central agencies and departments and to ensure that all players concerned work in partnership. We suggest that there must be a change in mindset about empowerment, control and accountability. We also suggest that consideration be given to developing policies or mechanisms to deal with specific departmental problems such as work force renewal and other personnel problems. We believe that the emphasis needs to shift from reducing personnel to eliminating unnecessary and non-essential work. We also believe that there is a need for managers to absorb, or at least take into account, the full cost of their decisions regarding payments in lieu.

Background

The Work Force Adjustment Policy

7.6 The objective of the Policy is to minimize layoffs of indeterminate (permanent) employees affected by work force adjustment situations through the provision of alternative employment opportunities. Work force adjustment situations occur when a deputy minister or an authorized officer decides that the services provided by one or more indeterminate employees are no longer required because of lack of work or discontinuance of a function. Up to 31 August 1992, the Policy applied to employees at all levels. Work force adjustments can result from such things as expenditure constraints, new legislation, program changes, technological change, privatization, reorganization and productivity improvement.

7.7 The Policy, originally established in the sixties, was agreed to by the National Joint Council and approved by the Treasury Board. The Council is an organization made up notably of representatives of the Treasury Board (the employer) and bargaining agents.

7.8 Introduction of "payment in lieu" (cash-out). The Policy was amended in June 1986 by the introduction of payments in lieu to employees declared "surplus to requirements" and scheduled to be laid off, who resign before the date of their layoff. The Policy requires a minimum of six months advance notice to surplus employees before their layoff, except in special circumstances. The payment is a lump sum equal to regular pay for the period from the date of resignation to the date of the scheduled layoff - a maximum of six months or 26 weeks' pay.

7.9 Payments in lieu were expected to:

• permit surplus employees who so desired to quit immediately if there was no work to be performed; and
• save costs of employee benefits, of retraining, and of finding a job for those opting for such a payment.

7.10 The payment in lieu option was introduced to facilitate the task of redeploying permanent employees possibly affected by the government's decision in May 1985 to reduce the size of the public service by 15,000 person-years over five years. The stated objectives of the government were a reduction in the size of the ongoing public service, the achievement of a more efficient public service and a reduction of salary expenditures.

7.11 Several conditions were to be met before a payment in lieu could be authorized:

• The employee had to be declared surplus.
• The employee had to request such a payment.
• The employee had to relinquish statutory entitlement to priority consideration for positions in the public service.
• The work had to be discontinued as of the resignation date, and the employee not replaced.
• The deputy head or an authorized officer had to certify that no additional person-year, salary or operating costs would be incurred in having the work done in any other way during the period for which the employee would receive payment.
• The payment was to be granted at management's discretion, with the understanding that a request was not to be unreasonably denied.
• The recipient had to sign a declaration agreeing to terms of reimbursement, if reappointed during the period covered by the payment in lieu.

7.12 Payments in lieu could be funded under Treasury Board Vote 5 - Government Contingencies - if they resulted from the government's decision to reduce the size of the public service and if funds were not available within departmental appropriations. One of the purposes of Vote 5 is to make up for paylist shortfalls. Departments access Vote 5 by way of a submission to Treasury Board. Where work force adjustment situations resulted from departmental initiatives such as reorganizations, payments were to be funded through departmental appropriations.

7.13 Introduction of a "waiver" and a "separation benefit". In 1988, the Secretariat informed departments that Treasury Board had given advance approval in principle to a waiver of reduction of annual allowances payable to eligible employees whose employment was being terminated involuntarily in work force adjustment situations. An annual allowance is a pension actuarially reduced to take into account the fact that it is paid earlier than normal. The waiver eliminates the penalty reduction of five percent for each year that the employee is less than age 60 or has less than 30 years of service at the time of the separation. To be eligible, an employee must be at least 55 years of age and have 10 years of pensionable service. The maximum waiver is 25 percent of pension. The waiver was to be approved without question by Treasury Board upon the recommendation of the deputy head for surplus employees who had received payment in lieu.

7.14 In 1989, amendments were made to the Policy. One such amendment was an entitlement for surplus employees to a guarantee of one year's retraining to facilitate their appointment to another position. Another was the introduction of a separation benefit of one week's pay for each year of service up to a maximum of 15 weeks' pay. This benefit was to be paid to surplus employees resigning or being laid off provided they were entitled to opt for an immediate pension or annual allowance and had not received more than one month's retraining.

7.15 In the 1991 Budget Speech, the government stated that it would consider legislation if it was unable to reach an agreement with bargaining agents to make major changes to the Work Force Adjustment Policy. Because of long negotiations, the Policy - and the provision for payment in lieu - initially scheduled to expire 31 March 1991, was extended first to 29 June, then to 30 September, to 31 October, to 30 November and finally from 1 December to its expiry, which occurred 14 December of that year. A significantly revised Work Force Adjustment Policy came into effect on 15 December 1991.

7.16 The accountability framework for managing work force adjustment situations and administering the Policy. The Policy in effect during the period covered by our audit described in some detail the roles and responsibilities of the Treasury Board Secretariat, the Public Service Commission, the National Joint Council, departments and employees in work force adjustments. Exhibit 7.1 summarizes these roles.

7.17 Departments are responsible for managing work force adjustment situations - with the assistance of the Public Service Commission - and are accountable to Treasury Board for the implementation of the Policy. The Policy required that a number of control mechanisms be in place in departments, such as the monitoring and the evaluation of the administration of the payment in lieu provision. Some of these control mechanisms were relaxed in the context of Increased Ministerial Authority and Accountability (IMAA) and Public Service 2000 initiatives. For example, in June 1990, deputy heads were authorized to sub-delegate the authority to approve requests for payments in lieu.

7.18 The Policy also stated that the Secretariat is responsible for monitoring certain aspects of the Policy, including payments in lieu, and may require deputy heads to justify their decisions. The Work Force Adjustment Policy is one of the key human resource management policies taken into account by the Secretariat in its assessment of departmental performance.

Objectives, Scope and Criteria of the Audit

Objectives

7.19 The audit was designed to determine:

• whether payments in lieu and other related benefits had been made in accordance with the intent and letter of the Work Force Adjustment Policy;
• if costs had been incurred in having the work done during or after the period for which an employee had received payment; and
• the nature and extent of review, monitoring and other controls used in administering the Policy at the departmental and central agency levels.

Scope

7.20 The audit was initially designed to cover all payments in lieu and other related benefits provided under the Work Force Adjustment Policy from July 1986 to December 1991. For a variety of reasons, such as the lack of an audit trail and turnover in management ranks, we focussed our examination on payments made between April 1990 and December 1991, just before the major revision of the Policy.

7.21 We reviewed the activities of the Treasury Board Secretariat and the Public Service Commission in relation to their roles and responsibilities in the administration of the Policy. In addition, we reviewed, analyzed, and consolidated information on payments in lieu and other benefits obtained from departments and agencies that had more than 1000 employees and for whom Treasury Board was the employer.

7.22 A detailed examination was conducted in departments that accounted for some 43 percent of all payments in lieu since 1986. We reviewed a total of 396 payments. For each payment examined, we sought to ascertain if a work force adjustment situation existed; if the process followed was in keeping with the intent and letter of the Policy and if the decision was thus justified, given the circumstances.

7.23 We reviewed available internal audit and other reports that were produced by the Secretariat, the Commission or departments concerning work force adjustment situations and/or the administration of the Policy. Where relevant to our audit, we included findings and observations in our report.

7.24 Finally, we reviewed numerous reports from both the private and the public sectors on downsizing practices over the years. We also interviewed a number of representatives of companies and experts who had extensive experience in downsizing.

Criteria

7.25 The provisions of the Work Force Adjustment Policy provided the framework for audit criteria. Where necessary, other central agency and departmental policies, directives and guidelines were also taken into account.

Observations

7.26 In this section we do not name departments where individual cases were examined, for a number of reasons including:

• The findings and the problems identified are indicative of trends and patterns and thus are systemic in nature.
• To prevent the identification and to protect the reputation of individuals.
• Recognition of the implications of potential legal actions against individuals or the Office.
• To respect the intent of the Privacy and Human Rights Acts.

Some 13,000 Payments in Lieu Were Made Between July 1986 and December 1991

7.27 On the basis of information obtained from departments, agencies and Treasury Board Secretariat, we estimate that some 13,000 payments in lieu were made to employees between July 1986 and December 1991, at an estimated cost of $260 million. From June 1989 to December 1991, we estimate that some 5,800 employees received the separation benefit. The Secretariat reported that some 1,700 waivers were also granted to recipients of payments in lieu. The total cost of payments in lieu, separation benefits and waivers granted since 1986, is estimated at more than $325 million.

7.28 Typically, the recipient of a payment in lieu was a person over 50 years of age with 18 years of pensionable service who had worked as a clerk or a program administrator in a large department. In addition, such a person received the separation benefit equivalent to 15 weeks of regular pay, for a combined lump sum payment equivalent to a maximum of 41 weeks of regular pay - some $30,000 on average. A typical waiver amounted to some $1,800 a year.

7.29 In 1991, there was a substantial increase in the number of payments in lieu. More than 4,800 payments (or 37 percent of all payments) were made between January and December 1991 (see Exhibit 7.2 ). This is more than twice the number of payments made each year since 1986 - including 1987, when the government's five-year 15,000 person-year reduction program was considered to be at its peak. Analyses revealed that peaks occurred in March 1988 and in March, June and September 1991 (see Exhibit 7.3 ), months in which the Policy was expected to expire.

7.30 The option of payments in lieu appears to have been used more frequently to resolve reported work force adjustment situations in recent years. Exhibit 7.4 shows that the number of recipients of payments in lieu represented some 29 percent of the number of employees reported surplus by departments to the Public Service Commission in 1987, compared to some 64 percent in 1991. We found, however, that for a variety of reasons, departments have sometimes failed to inform the Commission that employees had been declared surplus, a requirement of the Policy. The numbers reported by the Commission are thus understated.

7.31 The relationship between the number of payments in lieu made and the reduction in size of an organization was not always evident. Unless there were significant changes in the nature or the level of certain activities of an organization to compensate for a reduction in others, we expected the number of payments to represent a fraction of the overall reduction in size because:

• the Policy's primary objective is to provide alternative employment, where possible, to minimize layoffs; and
• good management practices, statements of officials and the Policy itself emphasize consideration of alternatives such as natural attrition, early retirements, termination of term/casual employment and contracted services, staffing freezes and the use of part-time, job sharing or seasonal employment, where such actions could prevent or minimize the number of involuntary separations.

7.32 Exhibit 7.5 shows that for work unit "A", the number of payments in lieu represented some 27 percent of the reduction of the person-year allocation over a five-year period. In unit "B" (see Exhibit 7.6 ) the number of payments have - with the exception of 1988 - consistently exceeded the reduction in person-years. In 1990-91 and 1991-92, unit "B" had its person-year allocation augmented to help it cope with an increase in activity levels. While there might be valid reasons that the number of payments exceeded person-year reductions in any given year - for example the elimination of a few clerical positions and the creation of a large number of professional jobs - we found that such imbalances were often one indicator of problems in the administration of the Policy.

Significant Differences in the Way Work Force Adjustments and the Provision for Payments in Lieu Were Managed

7.33 We found a number of instances where work force adjustment situations and the provision for payments in lieu were well managed. They shared a number of characteristics (see Exhibit 7.7 ), although not all to the same extent.

7.34 There was a direct relationship between the presence of these characteristics and the good management of payments in lieu. In these instances, the recourse to payments in lieu was usually well founded and in keeping with the intent and letter of the Policy, and the payments were used in conjunction with alternatives such as attrition and redeployment. In one situation examined where a work unit was being eliminated, all employees were redeployed, and there were no payments in lieu.

7.35 We also found a number of instances where work force adjustment situations were not handled in a satisfactory manner. They also shared a number of characteristics (see Exhibit 7.7 ). In such situations, payments in lieu were used much more frequently and liberally, often in contravention of the Policy.

Characteristics of well-managed work force adjustment situations

7.36 An understanding of the purpose and context of the work force reduction. Where work force adjustment situations were well managed, managers knew what was expected of them and understood the circumstances leading to the decision to reduce the work force. Often, management had anticipated the decision of the government because it had grown out of their own review of the organization and because managers had spent months, if not years, studying the problem, alternative solutions and their implications. They knew what needed to be done and why. For example, one 1990 work force adjustment situation examined had been the subject of debate and planning since 1986.

7.37 Leadership starting at the top that provided direction and fostered commitment through participation and communication. Senior management communicated clearly the nature and extent of the challenge faced and the objectives to be achieved; they conducted information sessions with staff at various levels - sometimes across the country - to explain the situation, its causes, the changes required and the process to be used in making the changes. Management was clearly in charge; they were perceived by staff members to be determined to meet the challenge and ready to provide the necessary support.

7.38 Time was made available for staff participation, and dialogue was used to elicit commitment and build up confidence among managers and other employees that the challenge would be met in an organized way, and that people would be treated fairly and humanely. Those managers likely to be affected were asked to review initial proposals and to present their own suggestions or ideas for staff reduction. These suggestions or ideas were given serious consideration before a final decision was made. While a significant amount of time was spent on planning, implementation was carried out swiftly.

7.39 Mobilization of the organization to "rethink" the work and program delivery and to tackle the challenge faced. Managers were not simply asked to cut staff; they were asked to rethink the work and to make substantial changes in the way they provided services and managed their activities. They had to do things "differently" or "better". The nature and magnitude of such challenges required an organizational response and the mobilization of a significant portion of the organization, including support services such as personnel. In one situation, the unit had to redefine the nature of its relationship with external organizations in addition to transferring certain responsibilities to them. Remaining employees who had been direct providers of services had to become advisors. Some 70 percent of the staff in that unit had to be transferred, redeployed internally or retrained.

7.40 A management framework that included solid plans, the formation of ad hoc committees and support units for a co-ordinated and integrated effort. A management framework was put into place. Detailed action plans were prepared to ensure that the objectives would be met. Ad hoc committees at various levels, such as steering and local work force adjustment or implementation committees, were set up for the duration of the exercise, headed by senior line managers and supported by personnel and others as required. These committees reviewed action and implementation plans to ensure a co-ordinated and integrated effort.

7.41 The work force adjustment process was not managed in isolation from other activities. Staffing decisions were reviewed to ensure that any employee likely to be declared surplus would be considered for retraining or redeployment before any other person was hired. Payment in lieu situations were reviewed to ensure both justification and consistency. Personnel played an important and visible role by providing assistance to line managers in charge of the process and by providing information to employees on the Work Force Adjustment Policy. Exhibit 7.8 provides an illustration of a well-managed work force adjustment situation.

7.42 Measurable and definite objectives. The objectives to be achieved were clear and did not change as time passed, their achievement over time was measurable, and results appeared to be permanent.

7.43 Control of the exercise through periodic reporting, concurrent evaluation and other mechanisms to ensure that objectives were met. During the work force adjustment process, information flowed between the various committees and managers responsible for the implementation. Emphasis was on ensuring that objectives would be met and that the process would be fair and equitable. For example, committees received periodic reports on implementation and progress in relation to objectives. In turn, committees provided additional direction and support to managers responsible for implementation. Treasury Board Secretariat, the Public Service Commission and unions, were consulted prior to and during implementation; they were kept informed through formal reporting as well as informal discussions.

7.44 In some instances, there were audits or reviews of the work force adjustment process in mid-stream. Management did not wait until the work force adjustment was completed to learn from experience and to improve practices.

Characteristics of poorly managed work force adjustment situations

7.45 Senior management of the organization failed to provide leadership, direction and support. Where work force adjustment situations were poorly managed, senior management often failed to recognize the importance of managing work force reductions. It provided little or no direction, information or support to managers at lower levels. Senior management limited its role to processing requests for payments in lieu and rubberstamping decisions. This sometimes led to the perception, among lower level managers, that it did not care or that it was not important.

7.46 Planning was inadequate. Where management did not properly plan, options other than payment in lieu were often not explored. Where planning took place, it was short-term and carried out only at the local level. In some instances, employees whose jobs were terminated received payments in lieu soon after being appointed from term (temporary) to permanent positions. In other situations, positions similar to the ones vacated by employees receiving payments in lieu were created soon afterwards. In some instances, workers who had received payments in lieu were reappointed immediately after the end of the period covered by the payment. Better planning could have prevented such situations from occurring and could have reduced the cost to taxpayers.

7.47 No appropriate management framework was established; the opportunity to learn from experience was lost. Because of the shortcomings mentioned above, an appropriate management framework was not put in place.

7.48 The work force adjustment process was not co-ordinated or integrated with other activities, such as staffing. In one specific situation, workers who had received payments in lieu from one unit were found to be working in a similar unit nearby shortly after the end of the six-month period for which they had received payment.

7.49 Information that would have permitted management to track progress in achieving work force reductions and to determine the contribution of payments in lieu to that process was not collected. In many instances, Personnel had great difficulty in ascertaining the total number of payments in lieu made, even though deputy heads or other delegated senior officials had to approve each request, certify that no additional cost would be incurred in having the work done during the period covered by the payment, and ensure that the person would not be replaced. The difficulties in obtaining basic information from some organizations led us to conclude that controls, including those required by the Policy, were not always in place. Where controls existed, they were not always effective. In one instance, a review of payments in lieu was conducted by Personnel but it lacked rigour and failed to identify important problems and to bring them to the attention of senior management.

7.50 As a result of the absence of an appropriate management framework, managers did not receive feedback from senior management that could have helped them to learn from their practices and those of their colleagues.

7.51 Work force reductions were not used as an opportunity to "rethink" the work. Work force reductions were not used as an opportunity to question the organization's provision of specific services or to reduce overhead, either because the reduction was perceived as relatively small or because the work force reduction was divided up among several units. The emphasis was on reducing the work force without much consideration of the effect on service to the public. Payments in lieu were routinely processed and approved. For example, one district office was instructed to reduce its total person-year allocation by 2.6 over one year. The manager of one of the four local offices in that district recommended approval of requests from three people in less than three months, leaving a potential gap in the provision of service to the public. All were approved without question.

7.52 Management relied on employees requesting payments in lieu to achieve the work force reduction. Management spent little or no effort to determine the nature and the number of positions to be eliminated or to identify employees likely to be affected. In some instances, the provision of the Work Force Adjustment Policy regarding payments in lieu was transformed into a "voluntary early retirement incentive package" in spite of the government's decision not to offer such a package, notably because of its perceived prohibitive cost. Case 2 (see Exhibit 7.9 ) provides an illustration.

7.53 Where employees were invited to volunteer, typically more employees than were required to meet the reduction target requested payments in lieu. Most, if not all, requests were approved. Management believed that doing otherwise would result in perceived inequities, frustration, grievances and morale problems. Often, the most experienced employees left, creating a significant loss of expertise and corporate memory in addition to creating serious operational problems. In one unit, the chief and the assistant chief left at the same time, with nobody sufficiently experienced to take over. Often, in such situations, departing employees eventually had to be brought back or new employees had to be hired to ensure continuity of essential services.

7.54 These effects can be best exemplified by an excerpt from a report prepared subsequent to a work unit using "volunteering". In that unit, 68 employees had requested payments in lieu. All the requests were approved, and 48 employees left at the end of March 1991.

"The effect of these cash-outs on the organization has been three-fold. Firstly, the effect has been the loss of many older, more experienced employees during a period of high workload. Secondly, the acceptance of cash-outs was disproportionate [to the number required], with some responsibility centres being left with a number of supervisory positions to fill. Thirdly, the timing of the cash-outs (with 70 percent leaving in March) gave little time or flexibility to local managers in terms of using the vacant positions for developmental assignments. (sic) "

7.55 Studies and surveys of downsizing practices reveal that one of the secrets of successful downsizing lies in carefully defining and designing the future organization and assessing the positions and skills required in the new structure before proceeding with downsizing. "Volunteering", as described, precluded this from happening.

Payments in Lieu Used for Reasons Other Than Lack of Work or the Discontinuance of a Function

7.56 We found a number of instances where payments in lieu were used for reasons other than those for which the Policy was specifically established, i.e. lack of work or the discontinuance of a function. For example, payments in lieu were used to facilitate work force renewal, to solve performance problems or to reward employees. Case 3 (see Exhibit 7.10 ) provides an illustration of the use of the Policy for work force renewal, while Case 4 (see Exhibit 7.11 ) provides an example of the use of payment in lieu to solve a performance problem.

Significant Weaknesses in the Monitoring, Review, and Other Control Mechanisms of Central Agencies

7.57 The parameters for monitoring the administration of the Policy were too narrow. While central agency monitoring focussed on such important elements as the extent of redeployment of surplus employees, other key elements were not taken into consideration. For example, the extent of the use of payments in lieu, the consideration of alternatives prior to declaring a work force adjustment situation and the relationship between payments in lieu and other indicators such as person-year reductions, changes in position and occupational profiles were ignored.

7.58 The Secretariat did not have the information necessary to effectively monitor payments in lieu. The Policy stated that the Secretariat would monitor the administration of the provision regarding payments in lieu. To do this, the Secretariat intended, among other things, to rely on data obtained from the central pay system of the Department of Supply and Services and from the Priority Administration System of the Public Service Commission. Suspecting that there were shortcomings in the systems, the Secretariat conducted a review in March 1990 to assess the accuracy of the amounts shown to have been paid, to ascertain whether some term employees had received payments in lieu, and to determine if persons shown as having been reappointed during the period covered by the payments had reimbursed the Receiver General. The review identified problems with the information systems and concluded that the monitoring component was not working. Furthermore, some public servants were excluded from the system. A comparison between the number of payments in lieu reported by the Secretariat and those reported by departments as of 31 March 1991 showed a discrepancy of some 25 percent. In some instances, the discrepancy was more than 50 percent.

7.59 Departments did not always inform the Commission when employees were declared surplus, although they were required to do so by the Policy. As a result, some of the figures reported by the Commission for 1991 and possibly previous years, such as the number of employees declared surplus or the number of surplus employees reported as having left the public service, are significantly understated. For example, the Commission reported that close to 8,000 surplus employees retired or left the public service between 1986 and 1991. Since some 13,000 surplus employees received payments in lieu during roughly the same period, the number of surplus employees reported by the Commission as having left the public service is obviously low. Such information was to be used by the Secretariat in monitoring the administration of the Policy.

7.60 As a result of all these weaknesses, the Secretariat did not have the information necessary for deciding whether or not to have the Public Service Commission audit the administration of certain aspects of the Work Force Adjustment Policy. The weaknesses identified also prevented the Secretariat from effectively monitoring whether employees had been rehired during the period for which they were paid.

7.61 Weaknesses in the information system identified in 1990 were not addressed by the Secretariat because the Policy was coming up for its three-year review. We were informed that monitoring payments in lieu for the revised Policy, which came into effect 15 December 1991, is more complex due to an increase in the number of instances where recourse to payments in lieu can occur.

7.62 Weaknesses in the audits of the administration of the Policy. Treasury Board Secretariat has delegated the audit of the application of the Work Force Adjustment Policy to the Public Service Commission. Under the terms of a 1986 agreement concerning the audit of personnel policies, the Secretariat is responsible for providing to the Commission the audit criteria and information on procedures and systems to be audited, as well as data related to departmental operations in the areas to be audited. The Secretariat is also responsible for determining whether departments will be subject to or exempted in whole or in part from such audits. Twelve of the 31 audits conducted by the Commission from 1989 to 1991 included an assessment of the administration of the Work Force Adjustment Policy. Our review of the 12 audit reports revealed that few problems related to payments in lieu were ever identified and brought to the attention of departmental management or the Secretariat.

7.63 In our opinion, one reason for the Commission's failure to identify significant problems related to payments in lieu was that the audit program developed by the Secretariat was inadequate. For example, it did not include examination of the reasons for declaring a work force adjustment situation even though the existence of such a situation is an essential condition for authorizing payments in lieu. Furthermore, although the Secretary of the Treasury Board had written to deputy heads reminding them of their responsibility with regard to the monitoring and evaluation of the application of payments in lieu, the audit program did not assess whether departments had in place the controls to do so. In the course of our audit, at the request of the Secretariat, the audit program was modified and applied in one department. The Commission's auditors found some of the same problems we identified, such as positions not being abolished and others being staffed again.

7.64 In our opinion, weaknesses in the monitoring, review and control systems of departments and of central agencies have contributed to a gradual increase in the use of payments in lieu in situations where it was without foundation. These weaknesses have precluded an objective and complete assessment of departmental performance in administering the Policy. They have also prevented the Secretariat from having the information needed to question departmental decisions where warranted. In April 1992, all audit projects to be carried out by the Commission on behalf of the Secretariat were placed "on hold" pending a reassessment of the overall accountability framework and the development of performance indicators for human resource management.

Treasury Board Secretariat's comments: The government is concerned about the inappropriate use of the payment in lieu provisions in the Work Force Adjustment Directive. The Report identifies cases where mistakes were made in applying the Policy. There have also been weaknesses in the underlying management system. To guard against future occurrences, the Treasury Board Secretariat and departments are working together on corrective action.

The reassessment of the overall human resource management framework will be used to address the weaknesses in the central agency monitoring, review and control systems identified in the chapter.

Thirty-two Percent of the 396 Payments in Lieu Examined Were Well Founded and in Keeping with the Intent and Letter of the Policy

7.65 Of the 396 payments examined, 128 (32 percent) were found to be justified, i.e., well founded and in keeping with the letter and intent of the Policy, while 140 (35 percent) were found to be unjustified, i.e., without foundation.

Treasury Board Secretariat's comments: Parliamentary consideration of the issues raised in the Report will be better served if there is no mystery about the identity or overall performance of the departments that were the subject of more detailed examination by the Auditor General. Departments are responsible for administering the Policy in their own jurisdictions and should respond to questions about their own actions. At the request of the Treasury Board Secretariat, and with the agreement of the departments concerned, a summary of the findings, by department examined and under the headings used by the Auditor General, will be available when the Report is made public.

7.66 In addition, a significant number of payments - 113 (29 percent) - were categorized "in question", as illustrated in Case 3 ( Exhibit 7.10 ). While these payments were often not in keeping with the intent or letter of the Policy, managers argued that positive outcomes were nevertheless achieved. In other situations, although management had achieved a reduction in size, less costly alternatives were available, such as terminating term employment. In other instances, the process used to achieve the reduction caused significant disruptions to operations and resulted in expenditures that, in our opinion, could have been avoided. We were unable to conclude in 15 (4 percent) of the cases. Exhibit 7.12 provides an illustration of our overall findings.

Treasury Board Secretariat's comments: Many of the managers who engaged in the practices criticized by the Auditor General felt that their actions were "justified" because they saved taxpayers money, renewed their workforce, or resolved difficult personnel situations. A strong case can be made in many instances that this was indeed so, but the fact remains that they did not comply with the letter and intent of the Policy.

7.67 In our opinion, our findings are indicative of trends and patterns regarding payments in lieu, notably in the months between April 1990 and December 1991.

7.68 A significant number of the payments judged to be without foundation were made in the March to September 1991 period and were the result of "volunteering" as described in paragraph 7.52 to 7.55 and Case 2 (see Exhibit 7.9 ). This situation appears to have been triggered by the February 1991 Budget as well as the anticipation of the expiration of the Policy and its provision for payments in lieu. The 1991 Budget Speech stated that salary increases were to be limited to three percent with the caveat that in 1991-92, if the government, through bargaining, was unable to maintain a freeze on operating budgets, each increase of one percent would result in the loss of some 2,000 jobs. In the end, the government decided, based on the fact that there would be no increase in pay, not to proceed with this reduction in jobs. About one-third of all payments in lieu were made between March and September 1991. If we exclude from our analysis those payments we examined that occurred in the peak periods of March, June and September 1991, our findings are not affected significantly.

Conclusions ... and Some Unanswered Questions

7.69 Payments in lieu have facilitated work force adjustments. The provision for payments in lieu, where properly used, has made it much easier to protect the employment of remaining employees and to handle work force adjustments. Managers have suggested that without payments in lieu, there would have been a greater number of layoffs over the years. In its report for the year 1991, the Public Service Commission reported that 1,277 employees were involuntarily laid off between 1986 and 1991.

7.70 The deterioration in the administration of payments in lieu has been gradual. There are indications that there has been an increase in the use of payments in lieu as the only option to resolve work force adjustments or other personnel problems. Emphasis has gradually shifted from redeployment and other alternatives to payments in lieu. Some of the reasons for the deterioration include:

• weaknesses in the management framework that have led to poor management practices eroding good ones;
• difficulties related to the identification of actual surplus situations;
• an emphasis on person-year reductions; and
• the availability of central funding.

As a result, the number of payments in lieu - and the cost to the taxpayer - has been significantly higher than necessary. Because of this and also because PS 2000 (the government initiative for the renewal of the public service) advocates greater devolution of authority to departments and managers, we believe there are important lessons to be learned from this experience and significant improvements that need to be made, notably to the management framework.

7.71 In our opinion, weaknesses in the management framework have led to significant differences in the interpretation and application of the Policy. Organizations that erroneously and liberally applied the provision of payments in lieu did not, and were not required to, improve their practices. As a result, there was a gradual erosion of managers' perceptions of "acceptable practices". This was evident, for example, in regions where many departments share accommodation. Managers reported that it was increasingly difficult to deny requests for payments in lieu from employees who claimed to know of similar requests in other organizations that were being approved. In our opinion, some managers felt obligated to lower their standards to avoid creating inequity and morale problems among their employees.

Treasury Board Secretariat's comments: Discussions with departments are proceeding to establish what happened in cases where the Auditor General has determined that the Policy was used inappropriately or in unintended ways. As an initial step, the Treasury Board Secretariat has reviewed the Auditor General's findings with each of the departments in which the more detailed examinations were conducted and will work with them to ensure that necessary corrective action is taken.

A need to clarify and better understand the roles and responsibilities of all players

7.72 There is a need to clarify and better understand the respective roles and responsibilities of central agencies and departments for managing work force adjustments and administering the Policy. Who is ultimately responsible for ensuring that work force reductions are achieved and that the intent and letter of the Work Force Adjustment Policy regarding payments in lieu are respected? If it is the Secretariat, where specifically does this accountability lie? If it is departments, how does Treasury Board ensure that departments meet their obligations? Who is responsible for ensuring that control mechanisms are in place and are working? Who is responsible for the establishment and the maintenance of adequate information systems and the provision of accurate information regarding work force adjustments and payments in lieu? Why were problems in the administration of the Policy not identified and promptly corrected?

Treasury Board Secretariat's comments: Responsibility for administering the Policy and for applying it in individual cases lies with departments. Treasury Board is responsible for establishing and reviewing the Policy. Departments and the Treasury Board Secretariat share the responsibility for monitoring its application by departments and for taking corrective action within their own area of responsibility. Clearly, the well-managed work force adjustment situations cited by the Auditor General show that this system can and does work.

A need to ensure that all players work in partnership

7.73 Managing work force adjustment situations and the provision for payments in lieu requires the concerted effort of many players, including those in the Secretariat, the Public Service Commission, Supply and Services; and in departments, from deputy heads to managers to pay clerks. For example, if a pay clerk is not informed of the appropriate coding for payments in lieu, the deputy head and the Secretariat will not have the accurate information needed for monitoring payments. Who is responsible for providing leadership and ensuring that the respective roles, responsibilities and accountabilities are understood by all players; that the process is co-ordinated; that problems are identified; and that the concerns of each player are promptly addressed?

Treasury Board Secretariat's comments: Implementation of the revised Work Force Adjustment Directive will be fully monitored, including through the internal audit activities of departments. Treasury Board Secretariat will work with heads of personnel, the Department of Supply and Services, and the Public Service Commission to ensure that the related data systems operate effectively. During 1993, there will be on-site reviews of work force adjustment documentation to verify that the provisions of the Policy are being properly interpreted and administered.

A need to change the mindset about empowerment, control and accountability

7.74 In our opinion, there is also a need for a change in mindset about empowerment, control and accountability. During our audit it became evident that some managers were reluctant to interfere in the decision-making process of subordinates and adopted a hands-off attitude even when they were uncomfortable with a decision concerning a payment in lieu.

7.75 Empowerment is not the abdication of responsibilities. Nor is it simply the delegation of authority. True empowerment means that managers with delegated authority are provided with the information, the tools, the training and the support they need to achieve desired results. We found that while some managers had authority, they did not always have all of the necessary information and support needed to appropriately exercise that authority or to gradually improve their practices. For example, some managers were not aware of the staffing requirements in other parts of their organization that would have permitted them to manage work force adjustments better.

7.76 Management controls such as reviews, audits and reports should not always be seen as unnecessary constraints. When properly designed and used, these tools can contribute to improvement in practices over time and to the achievement of objectives.

7.77 There is also a need to move from an attitude that accountability rests only with those having the direct authority for making decisions to one where people concerned about a situation feel that they have a collective responsibility for probity and prudence. In the course of our audit, some people expressed concerns about the use of payments in lieu but did not feel that they had a responsibility to speak up. What information, tools, support and control mechanisms need to be provided by central agencies and departments to ensure that managers meet the government's objectives of reducing costs and properly managing the provisions of the Policy? How do we bring about the desirable attitudinal change?

Treasury Board Secretariat's comments: In the final analysis, the Policy will be well managed across the Public Service when both its intent and its letter are fully understood and accepted. This is a shared management responsibility of central agencies and departments.

A need to determine more precisely when a genuine surplus situation exists

7.78 Payment in lieu was an option initially introduced to reduce the burden of redeployment after the government had announced its five-year, 15,000 person-year reduction program. It was a specific response to a specific situation. It is now a permanent feature of the Work Force Adjustment Policy. This implies that if an employee is declared surplus, that employee can request and - if conditions are met - obtain a payment in lieu and other benefits. Therefore it becomes critical to determine if a genuine surplus situation exists.

7.79 The use of the payment in lieu option may be justified in situations potentially affecting a large number of employees - such as contracting out, devolution to other levels of government or the relocation of work units. In other situations, however, such as a reduction of one or two percent in person-years, natural attrition and a slow-down or freeze on recruitment could be sufficient. There should be no need for managers to invoke a work force adjustment situation under the Policy and to use payments in lieu where good management practices would suffice.

7.80 Companies in the private sector that have successfully downsized have often used financial incentives. However, these incentives were offered only if the reduction sought was significant and if natural attrition would not be sufficient; they were tailored to fit the needs of the organization and were offered for a limited period of time - a window - before being withdrawn.

7.81 In the course of our audit, we noted that many employees who have received payments in lieu were in occupational groups where there is a continuous demand, such as clerks, secretaries and other support personnel, program administrators or even experts such as computer science specialists. We also noted that some 800 persons who received payments have been back on the payroll at some point in time. The public service hires some 5,000 indeterminate and more than 18,000 term employees every year; temporary agency personnel accounts for an equivalent of some 3,000 person-years annually; and there is an unknown number of individuals working under personnel services contract. How do we ensure the most economical and effective use of these various categories of human resources? When and in what circumstances is there a genuine need to invoke the Policy and the use of payments in lieu? Should payment in lieu be granted when there are suitable employment opportunities in other departments or agencies? If not, what mechanisms should be in place?

7.82 We are concerned that if payments in lieu are routinely used, the perceptions that they are an entitlement or a "right" regardless of circumstances will increase even further. This could have a long-term effect on natural attrition because of anticipation of future inducements. During our interviews, many employees said: "I hope that this program will still exist when I retire." Exhibit 7.13 shows that in 1991, payments in lieu represented a somewhat larger percentage of the separations of indeterminate employees from the public service than in 1987. We found, however, that the number of separations derived from the pay system and reported by the Public Service Commission for 1991 and previous years were significantly understated. How many people paid to retire or leave in 1991 would have left anyway? How many people are delaying retirement or resignation in anticipation of being in a position to request payments in lieu in the future? What measures should be in place to ensure that the public service has an appropriate separation rate in the context of long-term financial constraints and continuous work force adjustments?

A need to determine if other policies or other mechanisms should be available for application in certain situations

7.83 As mentioned in paragraph 7.56 and described in Cases 3 and 4 (see Exhibits 7.10 and 7.11), in a number of instances, managers have used payments in lieu for work force renewal or for solving performance or other personnel problems. Many felt that payments in lieu were an appropriate and humane way to resolve some of these problems, notably because no other policy or mechanism permitted the negotiation of the terms of the termination of employment in such situations. They were aware, however, that this was not the objective or intent of the Policy.

7.84 While we sympathize with managers faced with such problems, we have concerns about using the provisions of the Policy to resolve them. There are many reasons for this, including the following:

• The Policy was not established for these purposes.
• All benefits flowing from the application of the Policy automatically "kick in".
• In many instances, management incurs additional costs to have someone perform the duties of the person who has left.
• The lack of consistency in approach could lead to labour relations problems and litigation.
• The use of payments in lieu in such situations can affect the morale of those remaining on the job.

7.85 Private sector companies have different policies to meet different needs. For example, they use financial incentives to negotiate the termination of employment of persons with performance problems, notably to avoid litigation. In such situations, however, the incentives are less generous than those used when the termination is due to lack of work or discontinuance of a function. The use of such incentives is tightly controlled to prevent abuse and to ensure consistency, fairness and equity. Similarly, companies offer different benefit packages to employees "volunteering", depending on whether they are already eligible for retirement, close to retirement or would welcome a change of career. Should there be other policies or mechanisms to deal with things other than lack of work or discontinuance of a function, such as work force renewal?

Treasury Board Secretariat's comments: Treasury Board Secretariat is reviewing whether additional policy tools are required to assist managers with work force renewal and other situations in which the Work Force Adjustment Policy was found to be applied inappropriately.

A need to shift emphasis from reducing personnel to eliminating unnecessary or non-essential work

7.86 The emphasis that the government has placed on person-year reductions may have had important negative side-effects, including unintended reductions in levels of service or limits to management flexibility in making cost-effective decisions. Recent studies and surveys of downsizing practices and our own observations reveal that, while politically attractive, the first objective of downsizing should not be to eliminate workers or to reduce person-years. Instead, emphasis should be on the elimination of unnecessary, non-essential work or waste, improvements in decision making and the maintenance of or improvements in the levels of service at a lower cost over time.

A need to ensure that managers consider the full cost of their decisions

7.87 Central funding of payments in lieu using either departmental appropriations or Vote 5 - Government Contingencies - has also had significant side effects:

• It conveyed the paradoxical message that as long as person-years were reduced, cost-effectiveness was not important.
• It resulted in managers recommending or authorizing payments in lieu without being aware of the cost of their decisions.

As a result, managers made decisions regarding payments in lieu without concerns for cost-effectiveness. Would managers have reacted differently to requests for payments in lieu if they had known, and if their budgets had had to absorb, the full cost of their decisions?

Treasury Board Secretariat's comments: Access was provided to Treasury Board Vote 5 to accommodate work force adjustment costs associated with the five-year person-year downsizing program announced in May 1985 Budget in situations where departmental appropriations were exhausted. Since the conclusion of the downsizing program in 1990-91 departments have been liable for all work force adjustment costs other than those arising directly from a Budget measure where permanent savings in salary costs are expected.

7.88 In the context of PS 2000, the government has announced that, effective in 1993-94, all departments will have single operating budgets and that controls on person-years will no longer exist. The concept of the single operating budget implies that managers faced with the problem of having to reduce costs will have the flexibility to decide on the best alternative for achieving cost-savings. Our observations lead us to believe that this could be a move in the right direction, but that it may not be sufficient.

Treasury Board Secretariat's comments: The discipline embodied in the Operating Budget regime will reinforce the requirement that managers be accountable for the full financial consequences of their decisions, including those arising from the application of the Work Force Adjustment Directive.

7.89 For expenditure reductions to be definitive and effective, the nature and level of services to be provided must be determined and the cost of providing these services must be calculated. Service level standards and the cost of providing these services must be used as the basis to "work smarter" to reduce costs while maintaining or improving the level of service over time. This requires that managers assume or consider the full cost of their decisions including payments in lieu. If it is not possible for a manager to assume the full cost of his/her decisions, the situation should be managed so that the costs not borne directly by the manager are fully considered in the decision-making process.

Treasury Board Secretariat's comments: Errors have been made and the government is concerned about this. But with appropriate safeguards and encouragement of responsible action by its managers, the government is convinced that the policy of delegating to departments responsibility for administering the work force adjustment provisions is the best approach.