Excessive pay for corporate CEOs is shaping up as a political issue at home and abroad.
This week’s Question Period was marked by accusations of Harper government callous regard for hard-pressed middle-class Canadians by a tag team of Liberal Leader Justin Trudeau and NDP Leader Thomas Mulcair.
There were echoes of the Occupy movement in the opposition leaders’ critiques of a government they say has presided blithely over a shift of society’s resources to the 1 per cent at the expense of the rest of us.
To be sure, globalization plays a role in our income inequality crisis. But unwinding trade pacts and the Industrial Revolutions underway in the developing world are a practical impossibility. Which means if there is to be a battle over income inequality, it will be fought on the playing fields of Corporate Canada.
CEOs make easy targets for politicians eager to be seen as populist champions. Last year, average total compensation for Canada’s 100 highest-paid corporate CEOs was $7.9 million. That’s 171 times more than the average pay of their workforces. (The U.S. figure is 354 times. In Britain it is 133 times.)
Fairness and common sense dictate that no man or woman is “worth” 171 times the value of those in the front lines, where the day-to-day work gets done.
Nor is it explainable that in the 1980s, when Nortel Networks Corp. was pioneering the fibre optics that are the backbone of today’s Internet and Magna International Inc. was placing the bets that would make it the world’s third-largest auto-parts maker, the pay ratio was about 20 to 1.
Have CEOs become 151 times smarter since then? Consider the tragedies of Lac Megantic and the oil-spill catastrophe wrought by BP PLC in the Gulf of Mexico, the implosion of Wall Street that triggered the Great Recession or the demise of Nortel through chronic incompetence and the answer is obvious.
U.S. financier J. Pierpont Morgan and, much later, management guru Peter Drucker, each thought the pay ratio should be set at 20:1. CEO pay restraint was appropriate, said Drucker, since “So much of what we call management consists in making it difficult for people to work.”
Instead, the compensation rewards reaped by Canada’s business elite are way out of line.
Canada’s economy grew by a substandard 1.7 per cent in 2013. Wages for everyday Canadians inched up by just 2.5 per cent. Our anemic export growth came in at 1.4 per cent. Canadian rates of industrial productivity growth remain among the worst in the industrialized world. And the average investor in Canadian stocks saw a modest 6 per cent gain in the S&P/TSX last year.
Yet CEO pay growth outpaces all those leading indicators. For the top 100 highest-paid Canadian CEOs — who set the benchmark for all of Corporate Canada — 2013 average pay jumped by 52 per cent in what by most measures was a lousy year.
Corporate pay routinely outpaces economic growth and corporate performance. Economics 101 tells us that this is unsustainable, except that the 1 per cent’s haul comes at the expense of everyone else.
The European Union, the world’s biggest economy, will soon adopt measures requiring that the EU’s 10,000 publicly traded businesses reveal the pay ratio between CEOs and average workforce pay. The U.S. already requires that pay ratios be disclosed, as part of the Great Recession’s Dodd-Frank Act.
Excessive CEO pay is a comparative anomaly in Germany, with its two-tiered structure of traditional and supervisory boards. The latter are made up of everyday shareholders and of directors elected by rank-and-file employees.
In 2012, the supervisory board of Volkswagen A.G. imposed a 20 per cent pay cut on the CEO, despite record VW profits, feeling that his pay out of line with stagnant shop floor pay, and that his bonus targets were set too low — a trick that’s long been a mainstay of complaisant corporate remuneration committees.
British reforms in corporate governance in 2013 give shareholders a binding vote on executive pay every three years. And the pay of the total workforce must be shown to influence how pay is set for top executives.
The pro-business Conservative government headed by British Prime Minister David Cameron is irate over foot-dragging by Corporate Britain on those reforms. It is feeling the heat after recent disclosures of huge bonuses even at British companies whose profits have fallen or remain on government life support dating from taxpayer-funded bailouts during the Great Recession.
Vince Cable, Cameron’s business secretary, told a gathering of British corporate CEOs in late March that “If companies and investors are unable or unwilling to act responsibly, the pressure for stronger measures will be hard to ignore.”
The pressure on politicians, that is. No amount of corporate lobbying will dissuade a government from action that will save its skin in a forthcoming election.
Cable got specific about his intended corrective measures. They include punitive action against firms that fail to comply with the reforms, naturally, but also include the unprecedented step of requiring shareholders to disclose how they voted on executive pay.
Will it come to that here? Conditions are ripe for it. Resentment is growing among financially struggling Canadians that a select few are getting much more than their fair share. Even the major institutional investors are restless over the disconnect between pay and performance.
Members of the family that controls Rogers Communications Inc. enjoyed an 18 per cent gain in their net wealth in 2013, while ordinary Rogers shareholders eked out an 8.7 per cent gain in a year in which Rogers’ profits actually dropped slightly.
If the U.S. president gets by with $400,000 (U.S.) in pay to run a $16-trillion economy, how is it that a crippled BlackBerry Inc. must pay fired CEO Thorsten Heins a reported $22 million in severance pay for a job poorly done?
The Harper government delights in cost-free populist measures. A Cameron-style Fairness in Business package of corporate governance reforms would cost the federal treasury nothing and be mighty appealing as an election promise.
It was sadly amusing to hear British shareholder advisory expert Sarah Wilson urging caution in forcing shareholders to vote on executive pay. “Voting is just one tool and sometimes it can be a blunt one. Sometimes a quiet conversation can achieve more.”
This is a bald fear of genuine shareholder democracy, of course. And really, what are the chances of Wilson or I having a quiet one-on-one with the head of a hulking multibillion-dollar enterprise — with, say, CEO Mary Barra about the faulty GM ignition parts tied to 13 deaths and millions of costly vehicle recalls?
And what are yours?