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

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15 comments on “Why comparing CEO pay to average incomes makes no sense: Chris MacDonald

  1. Yet another apologist for the fraudulent state of CEO pay today.

  2. Many CEO’s earn large salaries, bonuses and stock options when they are bleeding the companies dry. These salaries need to be tied to performance…..And they often aren’t. Look at BC Ferries for example.

  3. Chris: I wont argue that this is an immensely complex issue. What I will argue is that it IS easy to measure a CEOs worth, but that no one has bothered to take the time and trouble. Why…because their very worth is directly attributable to the so-called plentiful unskilled labour you so casually dismiss in your article (BTW I am one of those labourers…I made the National Average $46,000 last year as a Store Manager!). In most corporate structures it is the front-line – or your unskilled labour – that executes the directives and decisions made by the executive. The success or failure of a business hinges in great part on two things…was the directive a good or bad call, and was it executed to its fullest potential by the workers. As someone who has worked on the front lines her whole life, it is exceptionally frustrating to see front-line workers so casually disposed of and dismissed when it is their work that directly contributes to the success of a CEO and their compensation! I am bonus eligible for my Job, and it is written right into the guidelines for payout that I will not share my bonus! But, my success is directly attributable to my staffs ability to execute my directions and follow Best Practices for the business. It would be criminal NOT to share my bonus with them…they are the reason I get it! And as a group, the front line – or your unskilled labour – are the reason a CEO receives their bonuses as well! So I would suggest that you can measure a CEOs worth by looking at their Unskilled Labour. A good leader will make good employees and good employees will make a good leader. So let us redistribute some of that wealth, shall we!

  4. “Unskilled labour is like air. It’s plentiful, relative to demand, and so no one needs to pay very much to get it.”
    Did you see the recent front page of the New York Post re: a one particular landlord’s grisly fate and whether anybody really cared? Do you still stand by that notion? Do you even know what “unskilled” is? Ethics are by default complicated but we are returning to “gilded age” levels of disparity and this will not stand without some serious trouble.

  5. Actually the inflation of CEO and other executive salaries and bonuses started many years ago when the good folks in the US securities regulator made a regulation that companies must publish the compensation of their top executives (seemed like a good idea at the time – more transparency). Ironically this led to hefty increases in executive pay since the executives no longer had to guess at what their counterparts in other companies were being paid so when they were in compensation negotiations with the board they had hard numbers to compare to and could ask for higher compensation simply because XYZ company was paying more. Up until this regulation was made the boards could tell executives that they were in the top 20% of the compensation range for comparable companies and most executives accepted that and were satisfied. Most executives knew that if they asked another executive in a competing company how much they were being paid most of them would lie so no one was really sure what the other guy was being paid.

    Therefore in order to restore reason to executive pay we should go back to the old situation where companies would not publish their top executive compensation. This would go back to the situation where top executives would be guessing at what the other guy was being paid and it would put an end to these compensation jealousy reports where top executive compensation is compared to the ordinary Joe pay. Sometimes there is something to be said for less transparency.

  6. The author is living in some sort of CEO Fairyland. CEO salaries are unquestionably out of whack with their corporate value added with few exceptions. There are plenty of examples of incompetent chief executives which everyone reading this is well aware of. There are many others who are merely doing an adequate job. Here’s a rather simplistic idea but it could be a starting point. In companies with over 500 employees set the CEO’s basic compensation at 20 times the average worker’s wage. Provide an annual bonus based on the % of increased profitability of the company to all employees. CEO comp packages will increase in dollars by 20 times that of the average worker but at least everyone is rewarded and encouraged and the company ultimately benefits. (Obviously some protections for workers would have to be built in.)

    I’d also like to make a comment about all the references to ‘unskilled’ workers. Very few workers are in fact unskilled. An MBA doesn’t necessarily translate into skill. Many front line workers have abilities and skills which can make or break a company and they are not necessarily easily replaceable. Ever increasing expectations of front line workers while their salaries and benefits decay as full time jobs are converted to part time or outsourced will cost everyone in the end. Boardroom greed isn’t the answer.

  7. someone who brings a lot of money (and growth) to the company deserves to be paid a lot. However, the compensation packages CEOs get nowadays is so exorbitant that they just don’t make sense. And, in great many cases, they get paid regardless of their performance, which, IMO, should be tied to long-term effects *after* they left the company. This is to avoid rewarding their performance on cost-effective but short-sighted moves directed at immediate cost savings that may incur long-term disastrous consequences.
    The other thing is that they (relatively frequently) get fired for poor performance but they move on to the next CEO position, nonetheless. Incomprehensible. Mind-blowing, in fact.

  8. Let companies pay CEO’s what they want. None of them are worth it. Railways make money when there are no pipelines so the CEO looks great. The recently fired Blackberrry guy got 33 million in severance. Everyone knows these guys are not worth it. But we can not control that. We can control what they pay in taxes and that is where we should act.

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