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Ontario Premier Doug Ford has indicated to his cabinet that he is prepared to fire the board of Hydro One – including his own appointees – if the utility does not lower its proposed executive-compensation package, a senior government source told The Globe and Mail.

A source with direct knowledge of the situation, who was granted anonymity by The Globe because they were not authorized to speak publicly on the matter, said the government is still hoping to reach a consensus with the utility on a proposal that is in line with the government’s maximum CEO compensation of $1.5-million.

Mr. Ford’s threat to fire the board comes even though the Progressive Conservative government has the power – established through legislation it passed last August − to override the board and establish a compensation package through a directive from the Energy Minister.

Hydro One’s chairman Tom Woods is defending the company’s proposed compensation plan that has drawn the provincial government’s ire, saying a target of $2.475-million is needed to attract an experienced CEO and a top-quality management team. Mr. Woods and three other Hydro One directors were appointed in August by the province. The other six Hydro One directors were appointed by the utility’s institutional shareholders.

Under the Hydro One Accountability Act, passed last summer, the government can fire the entire board, or choose to nominate four new people as its own appointees at the annual meeting in May.

Energy Minister Greg Rickford said in a letter to Hydro One on Wednesday that the government is prepared to take “any and all action necessary” to ensure executive compensation falls within its guidelines.

When asked Friday if he is prepared to fire the board or chair of Hydro One, Mr. Rickford said the framework agreement provides for “next steps,” but said he wouldn’t speculate on what will happen.

“We’re very hopeful that they’ll come back and, not just consider, but respect what we’ve put here. So we’ll deal with that in the not-too-distant future,” he said during a press conference with reporters at Queen’s Park.

“There are scenarios, but I don’t want to upset in any way, shape or form a process that by and large has been very respectful.”

The Hydro One proposal would set a maximum compensation at $2.775-million, with a $750,000 salary and bonuses tied to various performance measures. Mr. Woods said the expected compensation would be $2.475-million, and that the maximum would only be hit if the company had a stellar performance in terms of cost reduction that could be passed along to ratepayers.

In a letter to Mr. Rickford dated Thursday and posted on the company’s website Friday, Mr. Woods laid out the thinking of the board in overshooting the government’s prescribed $1.5-million cap on CEO compensation. The chairman urged the government to continue the “dialogue” as the board proceeds to a final recommendation under the process laid out by the legislation.

Mr. Woods said in his letter that, under the government’s proposed salary cap, the directors could not fulfill their duty to ensure Hydro One’s stability on behalf of all shareholders.

Based on the maximum payout, Hydro One’s proposed compensation package would be 65 per cent below the top rate of $7.8-million that the previous CEO could have hit. All told, the board’s reduction in CEO compensation as well as payments to other executives and directors would save the company $10-million a year over the next four years, he said.

On Friday, Mr. Rickford was adamant that the government will not accept the board’s proposal, saying it is determined to rein in a “culture of excessive salaries” at Hydro One.

“It will not be approved as it’s written,” Mr. Rickford told reporters. “We gave clear parameters on the CEO compensation, and board remuneration, those were two very bright lines, sticking points for us. And we’re hopeful that in very short order, they will come back with a framework that respects those numbers.” In the letter to the Hydro One board on Wednesday, Mr. Rickford had given the utility until Thursday at 5 p.m. to meet the government’s compensation framework.

The Hydro One board has been conducting a search for a new CEO to replace the previous one, Mayo Schmidt, who resigned after the provincial election in June. During the campaign, Mr. Ford dubbed Mr. Schmidt the "$6-million man” and targeted him as an example of spendthrift ways in the electricity sector that had driven up costs to consumers.

During the CEO recruitment, the board considered 140 candidates and interviewed 13 people. Mr. Woods said in his letter that Hydro One has identified a “very talented prospective CEO” who the board believes would accept the job under its proposed compensation plan.

In addition, Mr. Woods said the existing top five managers at Hydro One are working under retention agreements, and it appears likely all five will depart soon after their agreements conclude this spring.

“While we appreciate your statement that the CEO hiring decision remains the exclusive prerogative of the board, these retention challenges and the suggested $1.5-million cap in effect preclude the board from being able to effect the smooth transition to the next management team for Hydro One,” Mr. Woods said.

Hydro One executive vice-president Patrick Meneley announced on Tuesday that he plans to leave the company on March 1. Mr. Meneley is the utility’s chief corporate development officer and was hired by Mr. Schmidt as part of an expansion strategy by making acquisitions in the U.S.

Prior to the cancellation of Hydro One’s proposed takeover of U.S.-based Avista Corp., sources at the utility said Mr. Meneley was considered a candidate to become the company’s next CEO. Mr. Meneley is the former head of investment banking at TD Securities, a unit of Toronto-Dominion Bank.

With a report from Andrew Willis

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