Growing compensation gap blamed on poor board oversight
by Jennifer Wells
What is a CEO worth?
Readers are eager to have a say in this discussion. The latest report from the Canadian Centre for Policy Alternatives (CCPA), illustrating yet again the widening gap between pay at the top and pay for average workers, prompted a range of responses.
(To reprise: the CCPA crunched the numbers on the country’s top 100 CEOs and concluded that by 10:57 a.m. on Jan. 2, Canada’s average top-100 CEO will have already made what the average Canadian worker will make all year. The numbers: the highest-paid CEOs made $10.4 million on average, 209 times the average income of $49,738.)
So, what do you think about that?
“Shouldn’t private companies be allowed to run as they please?” a reader writes. “What is the point of being successful if you don’t reward yourself for it? That is raw capitalism at it’s (sic) best.”
And this: “Nowhere do you mention the relative value of the CEO to an organization. In my experience, very few people are able to function as the head of a private sector organization of significant size and value. Clearly almost anybody can fill the lower level employees in most organizations. Generally people are paid what the value of their work and experience is to a private sector organization.”
On the other hand: “The disparity between the average person and the elites is astonishing. It is hard to imagine how the economy could be more exploitive outside of a return to outright slavery.”
And then: “The myth of the value-added-CEO is one of capitalism’s great achievements; that, and the legitimizing of GREED as something to be valued above all.”
And finally: “‘Let them eat cake.’ Then look what happened.”
That the compensation of top execs has become unhinged from that of the average worker is not a new story, and can be time-stamped to the explosion of equity-based rewards and short-term incentives in the mid-1980s.
But we are mistaken if we think that carping about executive rewards has been restricted to a particular political domain. Or, as one reader expressed it: “There is the liberal press whining again about CEO salaries.”
I am reminded of long ago interviews with compensation expert Bud Crystal, who passed away last year. Crystal was acerbic and used to work for corporations devising pay rewards. Then he realized how broken the system was – incentivizing CEOs just to go to work, was how he put it. He taught a course at Berkeley – according to one report the students renamed the course Greed 259A. And he wrote a landmark book, In Search of Excess: The Overcompensation of American Executives. He monitored the gap between executive and regular pay until it no longer made any sense.
Fast forward to the report released last autumn by MSCI Inc., the New York-based
data/research/indexes outfit with global reach. After examining 429 large-cap U.S. companies across a 10-year span to 2015, MSCI found that companies that awarded CEOs with higher pay incentives achieved below-median returns. “Has CEO pay reflected long-term stock performance? In a word, ëno,'” the report concluded.
What MSCI calls a “misalignment” between CEO and shareholder interests was echoed in a letter, first reported by the Financial Times, from U.S. asset manager BlackRock to the chairmen of all companies in the FTSE 350 index. Note that BlackRock has $5.7 trillion (U.S.) in assets under administration. “We consider misalignment of pay with performance as an indication of insufficient board oversight, which calls into question the quality of the board,” the letter stated.
BlackRock is focused on sustainable, long-term performance. The letter provided guidance to companies submitting their remuneration policy to a shareholder vote. “Annual shareholder votes on pay should not be used as a pro-forma justification to increase pay: pay should only be increased each year” – I will pause for emphasis here – “if at all, at the same level of the wider employee base, and in line with inflation.”
Pay practices, the letter concluded, should serve “all stakeholders – shareholders, executives and workers alike.”
Workers have too often been lost in the discussion. In the U.S., the Securities and Exchange Commission adopted a provision of the Dodd-Frank Act requiring public companies to disclose the ratio of CEO compensation to the median employee’s compensation.
Despite Republican pushback, disclosure is required for the first fiscal year beginning on or after Jan. 1, 2017, which means we will begin to see ratio disclosure in the U.S. 60 days from the New Year. Similar proposals are scheduled to come into effect in the U.K. in June.
No such initiatives are in train in Ontario.
In an ideal world, such initiatives would restrain executive pay and strengthen worker pay. Some readers may believe that’s not necessary. The facts are against them.
Copyright 2018-Torstar Syndication Services