Blogs & Comment

A simple fix for CEO salaries: James Cowan

Public shaming hasn’t helped bring CEO pay down to earth. It’s time to put their salaries to a vote

(Photo: KC Armstrong)

(Photo: KC Armstrong)

Hunter Harrison’s compensation package at Canadian Pacific is undeniably inspirational—it can inspire envy, admiration, incredulity or outrage. What his $49-million payout inspires for you likely depends on two factors: Do you think the railway’s booming revenues and stock price can be directly attributed to Harrison’s leadership? And—perhaps more important—should CEOs be paid exponentially more than we mere mortals? If the second question is a “no,” then it doesn’t matter how awesome Harrison is at his job. For folks angered by soaring executive pay, the cheque’s size alone is provocation enough.

A recent report from the Canadian Centre for Policy Alternatives was clearly aimed at stoking this populist outrage. The think-tank ranked the 100 highest-paid CEOs on the TSX index, then compared their compensation to the salary of an average Canadian worker. They found it took top-tier CEOs until 1:11 p.m. on Jan. 2 to earn the $46,634 that an average worker makes in an entire year. For some, the payout came even quicker—Harrison pocketed a normal schmuck’s annual salary in just under two hours. A remarkable number of alarming—and alarmist—statistics appear in the report’s dozen pages. Wages for the average worker rose 6% between 1998 and 2012 in Canada; executive compensation rose 73%. CEO pay is now 171 times that of the average Canadian.

We should be clear here—the ever-more stratospheric salaries of CEOs is a legitimate concern, particularly for shareholders who see profits and dividends diverted to paying the tab. But there’s an irony to the CCPA report. Thing is, publicizing C-suite paydays only makes the problem worse.

True, public outcry over CEO bonuses in the midst of the financial crisis has led regulators to bolster disclosure laws. The Canadian Security Administrators closed some loopholes in 2011 while the U.S. Securities Exchange Commission last fall introduced rules requiring companies to reveal how their chief executive’s pay compares to an average worker.

But it was an earlier toughening of the rules that paradoxically sent compensation soaring skyward in the first place. U.S. companies have been required to report executive salaries since the 1930s, but it was the reforms of 1978 that forced the disclosure of a CEO’s total compensation. This change had an unintended side effect, because it allowed corporations to survey their competitors and set their compensation packages accordingly. This “peer benchmarking” was done by pegging a CEO’s pay to 50th, 75th or 90th percentile at rival companies. This led to the “Lake Woebegone” effect; like the children of Garrison Keillor’s fictional town, all CEOs were above average. The end result of this benchmarking was a salary arms race: between 1936 and 1980, the average CEO salary increased from $970,000 to $1.1-million, according to a 2010 study. But after the new disclosure laws, compensation rose quickly, hitting $4.4-million in the ’90s and $7.6-million by 2005.

Basic scrutiny hasn’t held back this tide. As corporate-governance expert Charles Elson recently noted in the New Yorker: “People who can ask to be paid a hundred million dollars are beyond embarrassment.”

What would truly help is the growing “say on pay” movement, where shareholders are given a non-binding vote on executive pay packages. Shareholders in Barrick Gold—including seven major pension funds—used such a measure to express displeasure over an $11.9-million signing bonus for its co-chairman. Critics complain “say on pay” votes are ineffectual because boards aren’t bound to the results, but of the 53 U.S. companies for whom shareholders rejected compensation plans in 2012, 45 made changes and got positive votes the following year, according to Institutional Shareholder Services. To deal with the few obstinate holdouts, Brookings Institution fellow Robert Pozen has suggested making the second year’s “say on pay” vote after a shareholder’s revolt into a binding resolution. It’s a practical solution that will prove far more effective than public shaming.