Thursday, January 05, 2012

Soaring CEO salaries are big trouble

Here I am, posting a Margaret Wente column. Her sheer contrariness, not to mention her privileged viewpoint that she rarely acknowledges, generally rub me the wrong way. But today she wrote on an issue that we obviously share indignation over: The soaring pay of Canada's CEOs.
As she notes in the column, a private company has the right to pay its boss whatever it wants. But tying salaries to stock options has screwed things up. It motivates CEOs to do things for all the wrong reasons. And with governments now tying their own managerial salaries to private-sector salaries, things are getting way out of hand.
And here's the TC's editorial from yesterday on the same subject: Both the editorial and Wente's column are based on a new report from the Canadian Centre for Policy Alternatives. 

Rising inequality demands debate


How much is too much? It's time to ask that question about income inequality in our society.
The Canadian Centre for Policy Alternatives cleverly frames the issue with an annual New Year's look at the compensation for 100 corporate CEOs compared with the average Canadian.
The CEOs, the centre reported, had earned as much as the average Canadian makes in a year by noon on Tuesday, the second working day of the year.
Their average compensation jumped 27 per cent in 2010, to $8.4 million. The average income for Canadians increased 1.1 per cent, to $44,366.
The increase might reflect improving corporate performance. But the gap has been growing steadily in recent decades. In 1995, for example, the average compensation for the 50 highest-paid Canadian CEOs was $2.66 million, 85 times the pay of the average worker.
By 2010, the average for the 50 was $11.3 million, 255 times the pay of the average worker.
Put another way, the average Canadian salary grew by about 2.4 per cent a year. The average for the 50 CEOs, through good times and bad, was 10.5 per cent a year.
Two arguments have been used to justify the increasing share of corporate revenues claimed by those at the top. The compensation reflects market forces, defenders argue. Just as Robert Luongo can command $6.7 million from the Canucks because he offers scarce and valuable skills, so can top executives demand big pay.
The second claim is that only shareholders should care care about executive compensation, as it's their money.
It's not that simple. Luongo's pay is determined by the market, but free agency rules, team salary caps and other factors all provide checks and balances. The process is, at least, transparent.
Compensation for top executives is supposedly set by market forces. But the market appears rigged. Those who determine pay - boards of directors - tend to benefit themselves as executives' pay increases, because corporations develop pay plans by surveying compensation at other companies. Many directors are in similar positions with other corporations, or directors on several boards. Rising compensation means increases for them as well.
And shareholders are rarely given the chance to protect their interests when it comes to compensation.
Of course, answering the first question - how much is too much - raises a second one. What is to be done if we decide this trend is damaging our society?
There are policy responses which would introduce market discipline without interfering with corporations' ability to set compensation levels. Shareholder rights, both to detailed information on compensation plans and to a direct say, could be strengthened. Shareholders, for example, could be required to approve any compensation plan that provides increases greater than a set percentage. Greater independence for directors could be mandated.
Alternatively, government could use its redistributive powers to level the playing field. The centre notes, for example, that CEOs increasingly take their payment in stock options, taxed at half the rate of income.
The growing inequality demands, at least, a public debate. The Organization for Economic Cooperation and Development reported last month that income inequality continues to increase in Canada and around the world. Government policies have ensured that those with high incomes claim a larger share of the country's wealth, while reducing the share earned by the rest of Canadians.
The trickle-down approach hasn't worked, said OECD secretary-general Angel Gurría. "Without a comprehensive strategy for inclusive growth, inequality will continue to rise."
And without such a strategy, the OECD warned, "the social contract is starting to unravel in many countries."
Our ability to function as a society is based on that social contract, which assumes the game is not rigged to favour a fortunate few. When it starts to break down, serious trouble lies ahead.

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