In the midst of those post-holiday, January credit card blues, the Toronto Star business section headline on New Year’s Day trumpeted, “CEO pay returns to ‘glory days.’ Canada’s top 100 CEOs earned an average of $9.2 million in 2013, hitting pre-recession highs.”
While I’m sure the 100 families who benefited from those riches preened in delight, I thought the timing a little harsh for the rest of the country. The average Canadian worker has received little to no raises in the last ten years, and even those on a yearly review schedule can rarely bank on more than a pitiable 2-4% increase.
“The list of high-flying executives was led by Gerald Schwarz, CEO of Onex Corp., who earned $87.9 million in 2013, most of it in stock options. Nadir Mohamed, who was then CEO of Rogers Communications Inc., earned $26.7 million. Michael M. Wilson, of Agrium Inc., earned $23.8 million. All five CEOs of Canada’s biggest banks were in the top 30.” (Toronto Star, Jan 1, 2015)
I don’t begrudge anyone a good income. But these figures are insane by any measure. While it must be said that the CEO’s earning these high wages did so through stock options, and hopefully, good corporate leadership, there is another side to their recompense; the people who work – or used to work – in the companies they manage.
“Canada’s highest-paid CEOs earned 195 times the average Canadian in 2013. That’s up from 105 times in 1998, the oldest date for which comparable figures are available. … However, even the lowest-paid CEO on the list earned more in 2013 than in 2008. While little data is available on CEO pay prior to the 1990s, it is generally accepted that the ratio of executive pay to average pay in the late 1980s was 40:1 in the U.S. and somewhat lower in Canada.” (Toronto Star)
There are only a few ways that a business can continually increase profit over previous years, which increases the value of the stock, and thereby compels the Board of Directors to approve a CEO’s earnings (which include options and bonuses); by introducing a new product so fantastic and coveted that consumers flock to purchase the item, or by reducing assets and/or staff and/or increasing prices.
That’s where the human toll comes in.
(In the 1990’s) “compensation experts came up with the idea of granting a portion of CEO pay in stock options, in which executives are granted options to buy shares at a “strike” price, usually the current market value of the share. Executives can’t “exercise” the option until a future date, at which time the share might be worth more or less than the original strike price. If the shares are worth more, the executive can opt to “buy” the stock and then immediately sell it at the new, higher value. If they are worth less, he or she can simply let the option expire at no cost to them.
Boards of directors were sold on the idea that options would more closely link executive pay to company performance. Instead, the practice encouraged share price volatility at the expense of long-term value, critics say. Among other things, they say, stock options have encouraged executives to cut costs, lay off staff, sell assets and merge with other firms — all to boost the share price in the short term, often at the expense of the company’s future value. They have also led to the rise of activist investors and hedge funds that buy shares in companies with the goal of splitting them up in order to unlock shareholder value.” (Toronto Star)
I suppose the greed is understandable, even though at that level, money becomes little more than paper to be shuffled about. Greed, accompanied by hubris and a massive sense of self-satisfaction, coupled with a belief that the party will never end, and bolstered by his/her cronies in the same tax bracket, good lawyers and accountants, and a taxation system that treats stock options as capital gains, despite stock options carrying none of the risk associated with normal stock purchases.
“A dollar earned through a stock option is worth two dollars of salary income. The difference amounts to a public subsidy paid to these already highly compensated executives.” (author, economist Hugh Mackenzie, Canadian Centre for Policy Alternatives)
These executives would also have superior benefits, perks befitting their pedestaled positions, and a golden handshake agreement that would see them being even better recompensed should they ever be asked to leave the corporation. In contrast, the staff remaining after deep cuts and asset sales would find themselves clinging desperately to their jobs, despite usually having to shoulder the additional responsibilities of their now dispatched former co-workers.
In the long term, that corporate greed that has created such high unemployment in Canada (about 6.6% as of November of 2014, which will drop after seasonal positions are gone,) translates to nearly 1.3 million potential clients and customers who no longer have the income to purchase goods or services from the purveyors.
(That figure only includes Canadians who continue to actively seek employment. It does not include those who are underemployed, or who have given up on ever finding another salaried position. To put it yet another way, in a population of 35.16 million, only 17.7 million have jobs.)
Between the shrinking job force, smaller cash reserves available for purchases, and an aging population, the wealthier of whom may move to a warmer country or the poorer who may have to rely solely on government support during their old age, it soon becomes clear that the highest paid executives are playing a zero-sum game.
(added Jan. 7/15 – from Huffington Post: “Some 70 per cent of businesses expect growth this year, but only half of them will hire. The result? Stress and burnout for workers…
National Bank chief economist Stefane Marion says Ontario’s growth will be slowed by the fact that the manufacturing sector was gutted during the financial crisis and recession. During previous economic recoveries, Ontario had excess capacity in its factories and could quickly benefit from an increased demand for exports.However, much of that capacity was lost after the last recession and will take some time to rebuild, Marion says.”