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Should the Ratio of CEO-to-Worker Pay be Disclosed?

It’s not often that Canada can learn from Americans how to regulate business. Americans are notoriously anti-business regulation, as we all learned during the Wall Street crash a few years back.  Go watch Inside Job. However, in the wake of that scandal, the Obama Administration managed to pass a few decent laws to better oversee business practices. One of interest is buried deep in the Dodd-Frank Wall Street Reform and Consumer Protection Act.   That legislation requires that executive compensation be put to shareholders for a vote at least every three years, and that public corporations:

  • Disclose executive compensation compared to the performance of the corporation
  • and

  • the ratio of the median of the annual total compensation of all employees of the corporation , except the CEO (or any equivalent position) , to the income of the CEO

In  other words, American corporations are now required to tell the public the ratio of the CEO pay to that of the average employee of the company.  This ratio is reflective of the growing economic inequality in North America.  Although productivity has grown, the real income of most working people is actually declining, whereas the percentage of earnings going to CEOs and senior executives has been growing at staggering rates.

My colleague here at York, Professor Neil Brooks (along with journalist Linda McQuaig) recently published a book called The Trouble with Billionaires that recounted how the ratio of CEO pay to worker pay has exploded in recent years.  Here’s an excerpt:

In the 1970s the gap was about 30-1; by 2007, it has risen to 340 to 1.  But even this understates the size of the gains made by the very top rung of CEOs.  If we look at the average pay of just the 100 highest-paid CEOs and compare it to the pay of the average workers, we find that the gap in the 1970s was about 45 to 1.  By 2006 that gap had become 1,723 to 1.

This American labor movement is now tracking and publishing the CEO-to-worker pay ratios. This New York Times article quotes the average median pay of an American worker at $33,190 and the average CEO pay at $11.4 million.   The results of funnelling of productivity gains to the highest paid employees, not surprisingly, is massive income inequality.  According to the OECD, the United States “is the country with the highest inequality level and poverty rate across of the OECD” with the exception only of Mexico and Turkey.  The ability of America’s rich to take so much of the wealth for themselves is related to government policy.  Tax policies and labor law policies are part of the story.  It’s now coincidence, for example, that the growth in the share of wealth going to the most wealthy employees coincides with the decline in the percentage of American workers represented by unions.  American workers lack the ability to bargain a higher share of the wealth they create than in the past.

Can anyone make an argument that the model of channelling more and more of a country’s wealth to the richest citizens is a good and sustainable model?

In Canada, the situation is not as bad as the U.S., but it’s heading that way.  In this 2008 report by the Canadian Centre for Policy Alternatives, we see that Canada’s top 100 CEOs earned an average of $7.35 million compared to an average income of Canadians of $43, 305.  That’s a ratio of 174 to 1.  If we move to the top 50 CEOs or Top 10 CEOs, that ratio would skyrocket. The ratio has been growing quickly in Canada as well as in the United States as our governments adopt more “American-style” policies. The OECD singled out Canada in 2008 for its sharp increase in income inequality and poverty over the preceeding decade:

After 20 years of continuous decline, both inequality and poverty rates have increased rapidly in the past 10 years… In the last 10 years, the rich have been getting richer leaving both middle and poorer income classes behind… Inequality of household earnings has increased significantly.

Time for Canadian Law-Makers to Follow the American Lead?

I think the Americans are on to a good idea here.   A law requiring corporations to disclose the ratio of CEO salary to average worker salary would create greater interest in the growing percentage of our wealth be funnelled to a few high priced employees.  The business lobby would no doubt resist this, but really I can think of no principled argument against this sort of disclosure law.  It adds information to the marketplace, forces  business leaders and compensation experts to learn how a companies’ wealth is being shared, informs workers of how the company values their contribution, and if companies can’t justify a huge ratio, then perhaps they should try to lower it, either by lowering executive pay or raising wages of the other workers.  In any case, Canadians have an interest in watching how wealth is distributed, and politicians should take the lead on this with a push for greater transparency.

What do you think?  Should our governments being following the American’s lead and requiring disclosure of the ratio of CEO pay to average employee pay?

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2 Responses to Should the Ratio of CEO-to-Worker Pay be Disclosed?

  1. Malgorzata Starszyk Reply

    January 25, 2012 at 9:27 am

    I totally agree with the idea of full disclosure of top executives’ salaries to the shareholders and to taxpayers. The issue of workers’ wages has been under heated discussion especially since the economic problems started in the US and most media as well as corporate lobby groups trying to put an onus on working people and the unions to cut down on their salaries. There is no end to corporate and executive greed and there is no excuse for it. With the growing gap in ratios of working people’s salaries to those of executives’, there is absolutely no excuse and no place to demand ordinary working men and women to cut down their wages/salaries. Sadly, the political and financial elites seem to manouver people’s wages towards the minimum, althought one wonders how the society can then expect the same people have purchasing powers to sustain the economy and consumer spending. The political environment has become that of corporate greed rather than sharing in profits and sadly, the governments seem to be working against the mainstream of their electorate, the disappearing middle class.

  2. Bonnie Walton Reply

    August 7, 2015 at 5:14 pm

    I used to find the amount of money paid to CEO’s offensive. GM even paid bonuses to their CEO with bailout money. CEO’s really like to point at wages/benefits paid to rank and file as one of the greatest expenses a company has, yet they could save millions with a little trim to the CEO’s income contract. (most of which is in stock in most cases not cash) But my position has recently changed because industry leaders need to responsibly control large corporations that if they fail could cause a severe market crash, dissolving pensions and savings and putting workers out of work and entirely at the public purse. Does government subsidize minimum wage or does minimum wage assist the government from having to pay 100% of the bill for those who live in poverty? If there was competition for workers, wages would go up but jobs are scarce. However, competition for effective leadership has forced the income packages of top executives into what should be embarrassing levels while the workers buying power is shrinking and even subsidized. That being said, I do believe that the CEO of a company who has that much responsibility, should make at least as much as a professional basketball player, a movie star or a rock band. Looking then at the resulting ratio of executive to average worker: Is this ratio really that telling? What did you expect it to be 1:1? When people go to work they are going to be miserable comparing themselves with the upper echelon if the ratio is in their face. Are these two situations,sailor and captain, even comparable? Perhaps there will be pressure to lower the amount that upper management receives and maybe that is the only expense companies have left to trim. Perhaps the ratio will become a useful tool over time as we see its progression but what is the ideal amount to aim for? What does it tell us about the corporation just that the CEO makes substantially more than the average worker. We knew that.

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