Blogs & Comment

Why comparing CEO pay to average incomes makes no sense: Chris MacDonald

The truth is, it's complicated

(Photo: Hill Street Studios/Getty Images)

(Photo: Hill Street Studios/Getty Images)

A recent study about CEO pay in Canada has been getting a fair bit of attention lately. This is unsurprising, both because executive compensation has become one of the hot topics of the day (or rather, of the post-Occupy era) and because the study highlights the fact that if you look at the Top 100 Canadian CEOs (in terms of salary), the average Top 100 CEO earns as much in four hours as the average Canadian makes in an entire year (i.e., about $46,000).

So Canadian (and American) CEOs are highly paid, for sure. Whether they are too highly paid is another question. I’ve pointed out before that, well, the issue is complicated. Just about everyone recognizes that CEO pay is at least sometimes out of whack. But is the pattern problematic? From a moral point of view, the pattern of CEO pay raises two key questions: first, are shareholders (and others who benefit from competent corporate leadership) getting their money’s worth? And second, do current patterns of CEO compensation contribute to an overall social distribution of wealth that is unjust?

It’s useful to remember that a CEO’s salary (or, more accurately, his or her total compensation) is just the price of his or her services. And part of the problem is that there’s no “real” or “natural” price for CEO labour (or for anything else), nothing to serve as a comparison point to figure out if such labour is being sold at the “right” price. So one common alternative is to compare it to the price of the “average” person’s labour, or in some cases, to the price of the labour of the lowest-paid person in the organization. The latter is truly a case of comparing apples and oranges. Unskilled labour is like air. It’s plentiful, relative to demand, and so no one needs to pay very much to get it.

Another option is to compare CEO compensation to the value they bring to the organization. That’s hard to do, for a number of reasons. Not all value is directly reflected in financial impact, and a company’s financials can go up or down with the market (or to reflect external factors such as new competition) in ways that simply do not reflect the quality of leadership. But a recent study by the Clarkson Centre at the University of Toronto suggested that CEO pay in Canada is more closely aligned with performance than people generally think.

The social question—about the social distribution of income—is easier to answer, but harder to solve. Yes, mega-salaries for CEOs are contributing to income disparities. That’s a mathematical fact. And even those of us who believe fervently in the value of free markets can see that it’s not a good thing that a CEO can afford to build a $50-million home while others living in the same country can’t afford a roof over their head at all. It is unjust by almost any measure, socially divisive, and potentially socially disruptive. But such critique does not immediately imply a solution. It doesn’t imply that any particular CEO isn’t worth the money, and it doesn’t imply that any particular board is obligated to do the impossible, namely to “fix” the big problem of social inequity by paying its own CEO less.

If you need further evidence of the complexity of this issue, consider this. One Canadian business professor recently suggested that CEOs would be welcome to keep their high salaries, on condition that they stopped outsourcing jobs. That way, working-class Canadian could at least keep their humble jobs. But consider: if you’re really interested in social justice, you might well insist that Canadian CEOs continue outsourcing to foreign countries, where workers surely need the jobs (on average) much more than (most) Canadians do. After all, the average Canadian salary is as lavish from the point of view of someone living in the Congo or in Liberia as a Canadian CEO’s salary is from the point of view of the average Canadian.

Chris MacDonald is director of the Jim Pattison Ethical Leadership Education and Research Program at the Ted Rogers School of Management