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Dave Murray

Wage wars

As the pay gap between executives and employees widens, advocates for corporate responsibility say it’s time to take the air out of inflated salaries

By Susan Peters

The open-concept office and group decision-making at the New Beat creative agency might hint at who earns the highest salary in the company: everyone. That equal salary — the same for all seven co-owners — stands in sharp contrast to the highly paid heads of large Canadian corporations, who can earn 200 times as much as the lowest-paid staffers.

At the New Beat, where staff produce videos and web content, the co-owners considered hiring a junior employee who would have less responsibility but also earn less money — then decided against it. “We all don’t have the heart to pay someone less just to make money off them,” explains Geoff Watson, who co-founded the Toronto agency with his cousin in 2009.

Watson’s attitude is uncommon in today’s corporate world. But a growing movement of business leaders and income-equality advocates are trying to rein in the gap between rich and poor. A rare few take New Beat’s approach — paying everyone equally. A more common strategy is to limit the pay for top executives. This compensation-capping trend raises questions: Is it up to businesses to find their own fix for CEO salaries swept upward like a runaway balloon? Or is it time to consider a maximum wage, in the same way governments legislate a minimum wage?

Critics of sky’s-the-limit salaries argue there’s no need for today’s chief executive officers to be paid 10 times more (in inflation-adjusted terms) than the CEOs of the 1970s: it has not become 10 times more difficult to attract and keep talented executives. Also, CEO compensation doesn’t necessarily reflect a company’s performance. Stock-based compensation can reward CEOs who chase short-term profits, rather than encouraging them to pursue long-term growth.

“What does it do to the rest of the organization if they see that the rewards only reach the top people?” asks Michelle de Cordova, director of corporate engagement at NEI Investments, a socially responsible investing company. De Cordova suggests inflated salaries could even repel customers. “If the CEO’s pay appears to be excessive, how does that affect the attitude of consumers who might buy the company’s product?”

CEO payouts started ballooning in the 1990s when compensation began to include stocks and options, along with salary and bonus. Wages for average workers haven’t kept pace. According to Statistics Canada, in 1982, the top one percent of tax filers had a median income of $191,600, about seven times higher than the median $28,000 earned by the rest of Canadians (figures adjusted to 2010 dollars). By 2010, the median income was $283,400 for the top one percent, almost 10 times the median wage of $28,400 earned by the rest.

But never mind the top one percent: Canada’s CEOs are in a category all their own. In 2012, they made an average of $8 million, or about 171 times the salary of the average Canadian, according to the Canadian Centre for Policy Alternatives. This country’s best-paid CEO is Hunter Harrison, who earned $49 million in 2012 to lead Canadian Pacific Railway.

“For society, it means a return to the gilded era of the rich and the rest. It ends up becoming a
race to the top for those lucky executives, and a race to the bottom for those left behind,” says Peter MacLeod on the phone from Toronto. As the founder of the Wagemark non-profit organization, he encourages small and medium-sized companies to commit to an 8:1 salary ratio between their highest- and lowest-paid employees. “This is less and less of a controversial position. There’s a growing consciousness that [pay inequity] needs to change. It’s about working as a team. It’s more of an idea that a company is like a family, and we should look out for each other.”

The driving force behind ever-increasing salaries is a practice called “horizontal benchmarking,” where companies compare their CEO’s earnings to that of their competitors, then match or even exceed it. Like parents comparing their child to the neighbours’ kid, companies tend to believe their CEO is exceptional and deserving of an above-average payout.

But some companies are adopting a practice called “vertical benchmarking,” where the CEO’s pay is set in comparison to the lowest-paid workers in the company (or to those paid an average or median salary).

The most famous example is Whole Foods, a U.S. supermarket chain with stores in Toronto and Vancouver, which in the 1980s decided that its CEO could not earn more than eight times its average employee. Over the years, the board of directors raised that to a 19:1 salary ratio, arguing it was necessary to keep its executives from being lured away by other companies.

At The United Church of Canada, salary schedules allow for a 5:1 ratio between the highest- and lowest-paid staff. According to Rev. Alan Hall, the General Council executive officer in charge of ministry and employment and human resources, the decision to keep a lid on salaries was made during a 2007 recategorization of jobs. “There was a sense that when you start moving into $200,000 or $250,000 positions, you’re moving into levels that aren’t consistent with church values,” he says.

Politically, the idea of government-imposed salary caps has seen limited application. In a 2013 referendum, Swiss voters rejected a plan to cap CEO salaries at 12 times the wages of their lowest-paid staff. Venezuela has set a salary cap for public servants of 12:1; the country’s president receives a maximum of 12 times the country’s minimum wage.

Globally, CEO salaries are the highest in the United States, with Canada and the United Kingdom following close behind. It’s unlikely any of these countries would legislate a maximum wage, but other solutions could be on the horizon. In the United States, the Dodd-Frank Act may soon force companies to report the ratio of CEO pay to the median worker salary. It’s thought that publicizing the ratio will prompt change.

One way this happens is when corporations allow shareholders to vote on CEO compensation at annual general meetings, often described as a “say on pay.” Investors usually approve the pay, but they sometimes give a thumbs-down to CEOs they deem undeserving (“nay on pay”).

Another promising development comes from activist investors who attend company meetings, vote and work with corporations to promote change. One such investor is Bill Davis, a retired senior financial officer for The United Church of Canada, who attends the annual general meetings of Canada’s large banks. As a shareholder himself and a representative of the United Church, Davis has partnered with NEI Investments to ask banks to control the income gap. “Fundamentally, economic inequality is a threat to the capitalist system,” he says. “The system has to work for the society at large. If the top one percent are creaming off more than the bottom 35 or 40 percent, there’s a sustainability issue. It’s a justice issue.”

Davis would like the committees that set CEO pay to include more members with experience at large not-for-profits, such as universities and hospitals. He also wants companies to consider factors other than the salaries earned by other CEOs: “They never compare to the cost of living, to the average employee, to the consumer price index.”

But one bank has started doing just that. The Royal Bank of Canada broke ground in 2013 as the first Canadian bank to use vertical benchmarking in setting its CEO’s salary. It’s seen as a step in the right direction, even if RBC keeps the information private.

Pulling CEO salaries down to earth won’t happen automatically, but there is some hope that shareholders concerned about profits, activist investors worried about social inequality, and government regulations requiring companies to publish their salary ratios could help. As citizens, employees and investors, we should demand no less.

Susan Peters is a writer and editor in Winnipeg.

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