The severed head of Gabriel Canizares, 36, was found in a bag left at a gas station in Jolo, capital of Sulu province in southern Philippines, the Philippine Daily Inquirer reported.
The beheading was believed to be a retaliation for the arrest during the weekend of Adan Asnawi, the suspected sub-commander of the Abu Sayyaf group wanted in the beheading of Marine soldiers in Basilan in 2007, the report said.
The report said the body of the victim was found hours later about two miles from where the severed head was found, police said.
Eufremio Canaria, Sulu's education department supervisor, told the Inquirer by phone that prior to the killing, the victim's family had received numerous ransom calls for up to $40,000 from the kidnappers, but the family could not raise the amount.
"We shall make them pay for the enormity of this savagery," Philippine President Gloria Arroyo's spokeswoman Lorelei Fajardo said in a statement, the BBC reported.
Abu Sayyaf has been blamed for a number of terrorist attacks in the Philippines including the 2005 Manila Bay ferry bombing in which more than 100 died.