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171 times the wages of average Canadians—and barely a squeak

 

According to the Centre for Policy Alternatives (CPA), last year Canada’s top 100 CEOs earned an average of 171 times more than the average working Canadian. Almost as troubling, however, is the tendency of commentators to shrug this off as a “decision by the market.”

Perhaps they are afraid that if they questioned the verdict of the market, they’d have to start arguing for a cap on salaries—and few want to go there. Personally, I don’t find either position convincing. There’s a bigger story here that needs to be told.

Let’s start with the claim that the compensation is reasonable and fair. According to the CPA report, since 1998 CEO’s average earnings have rocketed from 105 times that of the average Canadian to the current 171 times—a 73% increase. By comparison, average Canadians got a 6% increase.

Furthermore, this period was marked by the near-death experience of the financial system, a catastrophic collapse in stock prices, huge corporate bailouts, recession, high unemployment, and now sluggish growth. Does anyone really believe that market forces would so generously reward such dismal performance?

The claim that these CEO salary packages were decided by the market is nonsense. If markets actually were allowed to work here, such excesses would have been reigned in long ago. The trend is really part of a culture of collusion, not unlike the political patronage system.

The patronage system was designed to manage group behaviour—members of a political party—through a system of rewards. As David Mitchell writes, Sir John A Macdonald was a master of the art and used it to consolidate and maintain political power. When Liberal leader Wilfred Laurier became prime minister in 1896, rather than clean up the system, he expanded it.

Following the First Great War, the creation of the Civil Service Commission and the introduction of the merit principle showed that an alternative is possible. Still, as Mitchell notes, outside the walls of the public service the patronage system continued to expand and prosper:

Friends and insiders were still regularly appointed to the Senate, the judiciary, the diplomatic corps and to vice regal positions [and then later] to tribunals, boards, commissions and an array of new government agencies and Crown corporations…Today, patronage remains an enduring feature of governance in Canada.

Mitchell’s point is that, as a behaviour management system, patronage is both remarkably effective and very hard to dismantle. The key to its success is the culture of collusion between political parties. While in opposition, a party may attack a government for its cronyism, but once it gets into office the commitment to reform evaporates.

CEOs’ high compensation also relies on a culture of collusion. Boards of directors hire CEOs and set their compensation. But this has at least as much to do with the collegial nature of the corporate executive world as with markets. Boards are an elite professional club. To become a member—most of whom are still men—people work hard to cultivate the right connections, say the right things, dress properly and be recognized as a “team player.” If not, they don’t get in—or at least they don’t last. And therein lays the problem.

Many members sit on multiple boards and depend on this for a substantial part of their income. The more robust the compensation packages for CEOs, the more likely board members are to see their own status and compensation enhanced. No one wants to upset the applecart. On the contrary, there are very strong incentives to support the trend to ever better packages, and serious risks for opposing it—even if one thinks it is unnecessary or wrong.

“The market” provides the perfect alibi. It allows board members to ascribe CEOs’ salaries to an impersonal calculus. They talk about the remarkable skills and learning of CEOs, the small talent pool available to run big organizations, the risk of losing such talent, and so on.

In a private moment, however, the same people can be surprisingly candid about how becoming a successful CEO has less to do with exceptional management skills than proper grooming, meticulous planning, and a ruthless dedication to the goal.

Skills such as strategic planning, reorganizing a business, designing new products or building new markets are important, but they are no guarantee of success. Many of the most talented people in the organization will never make CEO. Leadership is at least as much about ambition, image, presence and positioning as skills and substance.

Now, to be clear, I’m not denying that there are some very talented and outstanding CEOs and directors or that many of them do an admirable job of overseeing the corporation’s affairs. My point is simply that corporate governance has some serious flaws—as public governance does—and that this hides some unseemly activities that need to be cleaned up. The often obscene levels of compensation are a case in point.

Nor do I see this as an argument for some kind of cap on salaries. Intervention of this kind is not likely to resolve the issue so much as create other ones. Ultimately, the answer lies in more informed and engaged shareholders (possibly supported by new rules) who understand the principles of good governance and are able to hold their boards to account.

In the meantime, however, the rest of us should stop giving CEOs a free ride by simply accepting the bogus argument that their salaries are set by the market. Clearly, other forces are at work here and it is time we called a spade a spade.

 

Dr. Don Lenihan is Chair of the Ontario Open Government Engagement Team and Senior Associate at Canada’s Public Policy Forum in Ottawa. He is an internationally recognized expert on democracy and public engagement, accountability and service delivery. Don’s latest book, Rescuing Policy: The Case for Public Engagement is an introduction to the field of public engagement, a blueprint for change, and a sustained argument for the need to rethink the public policy process. The views expressed here are those of the columnist alone. Don can be reached at: Don.Lenihan@ppforum.ca or follow him on Twitter at: @DonLenihan

The views, opinions and analyses expressed in the articles on National Newswatch are those of the contributor(s) and do not necessarily reflect the views or opinions of the publishers.
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