Coro’s Blog: On Purpose
Excessive executive compensation not sustainable for companies – or society
Published on July 17, 2012
Pop quiz: In 2010 the average Canadian CEO compensation package was how many times larger than that of an average entry-level employee?
|▢ 5 ▢ 25 ▢ 85 ▢ 100 ▢ More|
Answer: Read on.
In my last post I talked about using a few carrots in compensation schemes to encourage CEO action on corporate sustainability objectives.
Today I alert you to another compensation issue that boards must address: excessive executive compensation and its role in the growing gap between rich and poor.
Here’s a reality check from Richard Wilkinson, a leading international researcher on the societal benefits of income equality,
“In societies where income differences between rich and poor are smaller, the statistics show that community life is stronger and more people feel they can trust others. There is also less violence – including lower homicide rates; health tends to be better and life expectancy is higher. In fact most of the problems related to relative deprivation are reduced; prison populations are smaller, teenage birth rates are lower, maths and literacy scores tend to be higher, and there is less obesity.”
It makes sense that companies that are interested in modeling social responsibility and promoting healthy communities may want to consider their role in reducing income inequality. From a corporate risk perspective, the widening income gap could be a future liability for a company that gets its license to operate from society. The growing divide between the rich and poor leads not only to community dysfunction, but also to global unrest. Companies likely seed this problem through excessive executive compensation. Companies and their boards need to understand the long-term ramifications to see how their compensation philosophy could undermine social cohesion.
Companies interested in the future prosperity of society and healthy communities and are serious about advancing global sustainability need to consider family-supporting living-wage policies. In 2011, Vancity became the largest organization in Canada to adopt a living wage policy and joined a growing number of employers to be certified under Greater Vancouver’s Living Wage Employer Program. These companies recognize the social and economic benefits of paying a living wage.
Vancity also tracks and reports the ratio of CEO to entry-level employee compensation. In 2011 the Vancity CEO salary was 25 times that of an entry-level worker. (If you checked this box in the pop quiz, sorry you’re wrong. Keep reading. )
Vancity is a leader on these fronts, but not representative of the norm. Here’s the current reality in Canada.
The Canadian Centre for Policy Alternatives (CCPA) recently published a study of the 100 highest paid CEOs of Canadian companies listed in the TSX Index. It reported that the total average compensation was $8.38 million in 2010, representing a 27 per cent increase over the average $6.6 million they received in 2009. This compares to the average weekly wage of full-time Canadian workers at $44,366 in 2010. This means that in 2010, the average CEO pay was 149 times that of the average Canadian worker. (That’s your pop-quiz answer.) That’s a significant jump from 1995 when the average pay of Canada’s highest-paid 50 CEOs was $2.7 million, 85 times the pay of the average worker. To add insult to injury, between September 2010 and September 2011 average weekly earnings in Canada rose by only 1.1 per cent compared to the 27 per cent increase for corporate CEOs.
But who has the power to reverse this trend?
One solution is shareholder action. To address this growing excess, corporate governance and sustainable investment professionals call for a “Say on Pay” that enables shareholders to vote on how much executives should be compensated. One survey shows that 81 reporting issuers in Canada including the major banks have, or plan to adopt Say-on-Pay advisory votes. They represent approximately seven per cent of Canadian listed issuers. In 2012 Air Canada’s board approved a Say-on-Pay policy and QLT Inc., a biotech company based in Vancouver, became the first Canadian company to lose its non-binding advisory pay vote in which shareholders voted 58 per cent against its compensation program.
The Canadian Coalition for Good Governance, an organization that represents institutional shareholders and asset managers, advocates for the adoption of Say-on-Pay votes by Canadian companies. In a 2011 study it showed that 44 of the companies in the S&P/TSX Composite Index, or 19 per cent, had adopted Say-on-Pay votes. Shareholder Association for Research and Education (SHARE) tracks the companies that have adopted Say-on-Pay policies.
The jury is still out on the impact of shareholder “Say on Pay” in Canada but meanwhile the compensation gap continues to increase. When a CEO makes 149 times more than the average worker, we should at least understand why that pay is merited, how that individual creates value in the business and how that business contributes to a healthy society.