Top CEO pay 227 times more than average worker pay: report

But data can be flawed, says alternate study highlighting skills required for top spot

Top CEO pay 227 times more than average worker pay: report
CEO pay has increased because the demand for the skills of CEOs has increased, says a Fraser Institute report

In its annual look at CEO compensation in Canada, the Canadian Centre for Policy Alternatives (CCPA) found the 100 highest paid CEOs made 227 times more than the average worker made in 2018, up from 197 times average worker pay in 2017. 

The country’s highest paid 100 CEOs on the S&P/TSX Composite index made, on average, $11.8 million in 2018, compared to 2016’s record of $10.4 million. Between 2008-18, top CEOs saw their pay rise by 61 per cent, and by 18 per cent between 2017-18 alone, found the CCPA. 

“Growth in the vast gap between excessive CEO compensation and average incomes is an indicator of Canada’s income inequality juggernaut,” says report author and CCPA senior economist David Macdonald. “Wealth continues to concentrate at the very top while average incomes barely keep up with inflation.” 

Myths and misperceptions

But CEO compensation in Canada largely reflects the nature of the job, the skills required and the global demand for top talent, according to a new study by the Fraser Institute.

“The best business leaders in the world, just like top professional athletes and entertainers, are in limited supply while also being in high demand globally, so the compensation they receive reflects that,” says Vincent Geloso, Fraser Institute senior fellow and author of The Truth about CEO and Worker Compensation.

There’s a belief that CEO pay is not linked with performance and that corporate executives are shielded in their jobs, he says, in confronting several myths around CEO compensation in the study.

For one, CEO pay has increased because the demand for the skills of CEOs has increased, says Geloso.

“With rapid technological changes and globalization, firms have been exposed by more intense competition. In such settings, even small errors can be costly. The skills needed to lead a major corporation are thus increasingly valued, which means that there is great (and increasing) demand for such skills.”

The average CEO today tends to have more technical skills than in the past, while boards invest considerable resources in selecting the right candidates, tracking the performance of those selected, and firing those who fail to perform, he says.

Between 38 per cent and 55 per cent of CEO turnovers are “performance-induced,” meaning the CEO is fired for disappointing performance, says Geloso.

In addition, studies comparing CEO to worker pay are flawed, he says, by comparing apples to oranges.

“An apples-to-apples comparison that consists in comparing the overall compensation of these top 100 CEOs with the total compensation of the workers in companies of equal size to those managed by these CEOs is better. Such a comparison reduces the ratio frequently published by 24 per cent.”

An even better comparison is to compare the top 1,000 CEOs to the average worker, says Geloso, where the ratio then falls by 81 per cent.

“The best comparison consists in comparing all senior management workers with all workers. When this is done, the ratio between the pay of managers and that of workers falls from 197:1 to between 1.75:1 and 2.1:1 — a considerably lower figure.”

And sometimes, in industries with government monopoly charters or protection against foreign competition, CEOs are selected not for their business or leadership skills, but for political reasons, he says.

“When a CEO is appointed because of his or her political connections in order to secure government subsidies or keep a market protected from competition, it’s fair to question their compensation because it isn’t being determined in a competitive market.”

Overall company losses

But even when companies lose money, executive pay remains high, says the CCPA report, and in some cases, executive payrolls have become so large that they are a major factor in overall company losses. 

More than three-quarters (79 per cent) of the average CEO’s pay in 2018 came from bonuses related to company stock prices, “though complicated formulas insure CEOs get much of their variable pay regardless of stock performance,” says the CCPA report.

Of the companies on the S&P/TSX composite that lost money, one-third reported C-suite payrolls amounting to at least 40 per cent of their losses, it says. “These numbers undercut the argument that C-suite pay is based on performance.”

"Left to their own devices, it is clear what these companies prioritize — big bucks for top positions regardless of performance, leaving crumbs for the vast majority of their workforce," says Macdonald.

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