Protesters hold signs outside a Tim Horton’s on Bloor Street West in Toronto in reaction to franchisees scrapping paid breaks and fully covered health and dental plans after Ontario’s minimum wage was increased. Findings from a recent study out of the Canadian Centre for Policy Alternatives highlighted a high income gap, as Canada’s top CEOs receive compensations more than 200 times that of a regular employee. (Steve Russell/Toronto Star via Getty Images)

World | Ethics

Consequences to organizations handing out big bucks to senior management: Experts

Compensation for Canada’s 100 highest-paid CEOs is more than 200 times that of the average worker

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In this time of corporate social responsibility, Neil St. John believes organizations handing out big bucks to senior management should be paying more attention to the potential consequences.

“Branding and reputation are so important today. You only need look at the impact on Facebook [over data breaches] and Tim Horton’s [over minimum wage increases in Ontario],” the executive director with the Canadian Centre for Ethics & Corporate Policy says. “People want to do business with companies that operate in an ethical fashion. That includes not sucking large amounts of money out of an organization to pay the chief investor and the CEO. It goes to the value proposition.”

A recent study by the Canadian Centre for Policy Alternatives pegs 2016 compensation for Canada’s 100 highest-paid CEOs at more than 200 times that of the average worker, indicating a record high income gap.

According to the study, the highest-paid 100 CEOs on the S&P/TSX Composite index now average $10.4-million in annual compensation versus the average income of $49,738. 

It should be noted that the numbers are somewhat skewed by Valeant Pharmaceuticals CEO Joseph Papa, who earned top spot in the study with more than $83-million in total compensation ($1,299,990 in base salary). By contrast, second place finisher, Magna CEO Donald Walker, earned $28.6-million ($430,781 in base salary). Beyond base salary, additional compensation may include cash, stock and options-based bonuses, as well as pension value.

In the CCPA study, author David Macdonald says a co-ordinated federal tax strategy is needed to address the compensation gap issue. His suggestions include taxing capital gains earned from any compensation vehicle as employment income, closing the stock option deduction, increasing the capital gains inclusion rate and creating a new top marginal bracket.

Jason Clemens, executive vice president with the Fraser Institute and co-author of CEO to Worker Pay: A Broader Examination, takes a different view. He believes comparing executive compensation to the average worker’s salary is misplaced.

“Top talent in any industry, including sports, music and the movies, is compensated at high levels because they are in high demand globally. They are a limited resource, highly mobile and as such there is fierce competition to attract the absolute best,” Clemens says. “Star talent is unlikely to stay in a country that imposes a 70 per cent marginal tax rate.” In essence, they will move themselves and/or their money, to more hospitable jurisdictions. Even U2 lead singer Bono, known for decades as a champion for the downtrodden, has taken advantage of tax havens.

So how can Canadian organizations show leadership where it comes to CEO compensation? They can start by looking to companies that have already made changes, such as: Whole Foods, with its 19:1 executive salary cap, and Buffer, with its transparent salary policy.

“It has to come from senior leadership, in terms of making it a commitment for the organization,” Francis Fong, chief economist for CPA Canada, said recently. “You see it within your own senior team, address it there—and that filters down to the rest of your organization.” And creating equity at the board level sees upstream benefits too.

“You set yourself up way better in the future, in terms of establishing a pipeline for future female leaders that will eventually make their way to the board level.”

Establishing long-term targets versus short-term goals that focus on quarterly results and stock-option returns is another strategy, suggests St. John. “It’s up to shareholders and Boards [of Directors] to control CEO compensation and deliverables,” he says. “And, if performance doesn’t measure up, don’t let the door hit you on the way out.”