Crawl Across the Ocean

Wednesday, May 04, 2005

Did Your Pay More Than Double Last Year?

If not, don't worry because your CEO's did.

The Globe's Report on Business figures that the 161 top executives in Canada received average total compensation of $5.5 million each last year, thanks mainly to cashing in some stock options.

So let's do some math. $5.5 million x 161 = $885.5 million. Over 5 years that adds up to a little over $4.4 billion dollars. Hmm, roughly $4.5 billion over 5 years, that rings some kind of bell...

Just to refresh your memory, here's some quotes from a Globe story last week:

"Business leaders roasted the minority Liberal government's decision to boost spending by $4.6-billion and cancel corporate tax cuts [worth $4.6 billion over 5 years] to buy NDP support for its beleaguered budget.

They warned it will cost Canada billions of dollars in lost investment, job gains and tax revenue, and erode the business-friendly reputations of Prime Minister Paul Martin and Finance Minister Ralph Goodale.

"I think it puts Mr. Martin's credibility in doubt and Mr. Goodale's credibility in doubt," said Nancy Hughes Anthony, president of the Canadian Chamber of Commerce."


and more,

"Thomas d'Aquino, president of the Canadian Council of Chief Executives, warned that rolling back corporate tax cuts will discourage the investment needed to generate the future tax revenue needed to "pay for the massive federal commitments to expanding social programs and equalization payments."

Jack Mintz, president of the C.D. Howe Institute, predicted Canada will lose "billions of dollars in investment" as a result of Liberal missteps on corporate taxes."

and my favourite,

"Perrin Beatty, head of the Canadian Manufacturers & Exporters, said Liberals are turning their back on businesses. "The government put those tax cuts in the budget because they recognized that Canadian business faces unprecedented competition"


So forgoing a $4.6 billion future tax cut for Canadian business will cost us billions of dollars in investment, destroy the credibility of the government, make business unable to compete in a tough global environment and is enough to pay for massive federal commitments to social spending and equalization.

But the same amount (probably more if you consider the time value of money) paid to the CEO's of just 161 companies is no doubt a wise and necessary cost of doing business which will more than pay for itself by creating incentives for CEO's to try and do a good job - something which a salary of $700,000 (on average) apparently wouldn't be enough to encourage them to do thus requiring the incentive of cashing in stock options if the share price goes up.

Here are some quotes from the Globe article on executive compensation:

David Beatty, head of the influential Canadian Coalition for Good Governance (CCGG), agreed that some CEOs, such as Power Financial's Mr. Gratton, have created "tons of value" for their shareholders, but others "are just riding on the boat" that has been lifted by overall rising market levels. "They are giving away a lot of the company for nothing. There are other ways to reward people."

...
Bill Mackenzie, head of Institutional Shareholder Services Canada, formerly Fairvest, said it's hard to link huge option gains with individual performance. "It just means there were big grants. Whoever has options has beautiful leverage, and they are making a killing."

...
Claude Lamoureux, CEO of the Ontario Teachers Pension Plan, argues that options do not always reward performance. "It is very random. You could do wonderful work and not be rewarded, and you could do crappy work and make a lot of money with your options."

...
Mr. Hugessen [from Mercer] expects investor groups will pressure boards to be more selective about when they hand out share units, rather than just making grants a given every year for anyone "who fogs a mirror."

"It begins to feel a little like a money machine. People are hankering on to this."

...
Citing the work of Harvard law professor Lucian Bebchuk, he [David Beatty] said many compensation decisions are based not on performance but on a desire for collegiality, a sense of loyalty to the CEO and conflict avoidance. The result, he said, has been "outrageous costs."


Just something to think about next time you hear dire warnings of doom and gloom from our CEO's when the government fails to cut corporate taxes quickly enough for them or when they talk about how we need to keep costs down in order to be competitive.

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9 Comments:

  • Declan, I'm not entirely sure our low corporate taxation is a good thing if it comes at the price of high personal taxation. Having said that, do you honestly believe the four and a half billion dollars will come out of CEO pay? If you have a problem with executive pay - and I do in many cases - then go after executive pay, not corporate taxes.

    Put another way, starving the corporation won't starve the executives.

    By Blogger Babbling Brooks, at 10:14 AM  

  • I think the point, Damian, is that if the CEOs can rake this in for salary, then the corporations are obviously not suffering at all.

    By Blogger Timmy the G, at 10:58 AM  

  • I'm not sure that's the best argument, Timmy. How much was the CEO of Worldcom making when it tanked?

    Absent any other changes, these guys are going to feather their own nests no matter whether their company makes a profit or not.

    I'd suggest that reducing the profitability of a firm will hurt those lower on the food chain before it hurts those at the top.

    Again, I'm not arguing that we need corporate tax cuts, because I'm not convinced we do right now. But I think the connection between corporate tax cuts and executive compensation is a tenuous one at best.

    By Blogger Babbling Brooks, at 12:12 PM  

  • These exorbitant CEO salaries indicate they are pigs at the trough. Giving lower corporate taxes now on top of all the reductions of the last 10 years is like giving your teenage son or daughter a brand-new Porsche and a $10,000 a month allowance for drugs and so on. More more more corporate tax cuts (its the chant that never ends) should be called out for what it is. Reckless and irresponsible.

    Lower corporate taxes should only be considered after they've cleaned up their act. Right now its disgusting.

    By Anonymous Art, at 1:28 PM  

  • Damian, there's no doubt that corporate pay is tied to corporate tax cuts. Share prices are roughly based on earnings which in turn are influenced by taxes and a lot of CEO compensation is based on share price so obviously there's a connection there.

    But really, my point was not that the money would come out of the CEO's pay. My point was that all the hysterical ranting about the lost tax cuts comes into perspective when you realize it's (potentially) the same amount of money they are going to pay 161 individuals over the same time period.

    If $4.5 billion is as crucial as they say it is, does it really make sense to give that amount of money to 161 people? Are those 161 CEO's destroying Canada's business climate with their salary demands? It's the hypocrisy I was getting at.

    When it comes to starving corporations, I think that if you starve a corporation you will starve the executives, but that's not the point (nor what I would advocate). The point is that not reducing corporate taxes by $4.5B over 5 years won't starve the corporations, it's more like removing a french fry or two from their happy meal - they'll hardly even notice the difference, any more than having 161 CEO's work pro-bono for the next five years would transform the competitiveness of Canadian business.

    Or to put it another way, the CEO's and their groupies should tone down the corporate tax cut monster rhetoric and realize that corporate tax cuts are a sometimes food.

    To be honest, I haven't really sorted out my own thoughts on what the optimal level of corporate taxation would be - in some ways I think it might be better to get rid of all corporate taxes altogether (along with a few other simultaneous changes) - but I get irritated by the overblown, self-interested, nonsensical alarmist rhetoric we get from the business community any time the government does something they disagree with.

    ---

    timmy: I agree - although like Damian notes, it's not proof the companies are doing well as much as it is proof that they're in no position to throw stones about lost profits.

    art: pigs at the trough indeed.

    By Blogger Declan, at 5:06 PM  

  • Thankfully, you could always sell your shares. Another reason why not to index invest.

    By Anonymous Sacha, at 11:50 PM  

  • That's true Sacha (and exec. comp is certainly a consideration when I buy/sell a stock) but pickings are thin in Canada to begin with - if you exclude all the companies which are overpaying their executives the pickings really start to get thin.

    By Blogger Declan, at 8:38 AM  

  • I think to cherry pick companies is the job of a good discriminating investor. It shouldn't be an easy process - it should involve lots of work. The market would have otherwise discounted the 'low lying fruit' into the price of the stock.

    The only advantage that small investors have is that they can move in and out of relatively small and illiquid companies without facing excessive transaction costs (not talking about commissions, but spreads). This gives them the ability to look at companies that have far less volume than what you see on the TSX 60.

    Yes, it sucks to see people like John Roth of Nortel (circa 2001) walk out with millions, but ultimately as long as people have a choice of voting with their wallets, it's OK. Kind of like how sports stars are 'excessively compensated', but nobody forces people to attend the games or watch them on television.

    By Anonymous Sacha, at 1:57 AM  

  • I see what you're saying Sacha, but I'm not sure the case of ballplayers and executives is exactly analagous since there are some agency problems with executive pay that you don't get with sports star pay (at least not as often). That is, you can rely on the owners of sports teams to put their interests ahead of their players interests but with a company, you often see situations where the board of directors which is supposed to be representing the shareholders is instead just a rubber stamp for doing whatever management wants (or whatever is fashionable in business at the moment) and what management wants is what's best for themselves, not what's best for the company.

    Anyway, I certainly agree that shareholders voting with their wallets is one of the best ways to send a message about what they think of management.

    By Blogger Declan, at 9:09 AM  

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