Each year around this time, the Centre for Policy Alternatives releases a report showing the gap between executive CEO compensation the average income of Canadians. This year, the report (entitled Canada’s CEO Elite 100: The 0.01%) notes the following:
* The top 100 highest paid executives in Canada received a 27% pay hike in 2010, despite the failing economy. Meanwhile, the average income of Canadians rose only 1.1 percent. This is lower than inflation, so that the average Canadian is actually worse off this year than last.
* The average income of the Top 100 CEOs was $8.4 million in 2010, compared to only $44,366 for the average Canadian, and only $19,798 for a worker earning the minimum wage.
* Since 1987, one-third of all income gains in Canada has gone to the richest 1 percent!
* There is only one woman on the list of the top 100 highest paid executives.
We have long regulated low pay in this country, with varied success. For example, we have a wage floor–the minimum wage, which is set very low (as noted in the statistic above). Because we don’t trust the market to fix wages at the low end at an acceptable level, we impose a legal rule forbidding employers and employees from agreeing to wages below the legal minimum.
However, we do not regulate maximum pay. In fact, as the Centre Report notes, our tax policies actually incentivize paying executives huge bonuses through “stock options”, which we all subsidize by permitting the executives to pay lower taxes than would be the case if the money were paid simply as salary.
Should there be a legislated maximum pay?
Some people have called for it. They argue that, just as we cannot trust the market to fix wages at the low end at rate that allows working people to subsist at a standard of living acceptable to Canadian values, nor can we trust the market to fix salaries at the top end. The process of setting executive salary has been called into question by a broad range of experts. For example, my colleague here at York, Dr. Richard LeBlanc, has argued that the process by which Boards set CEO compensation are skewed towards ever increasing levels, regardless of actual performance.
If CEO compensation does not reflect performance, and yet CEOs are taking home a huge portion of a corporation’s share of income going to compensation, then the model is broken and indefensible. If you are concerned about the fast-growing income inequality in Canada, then finding a way to distribute income among more of a firm’s workers would no doubt help.
The most common proposed method for doing this is to tie the highest paid employees to the lowest paid employees in the form of a maximum ratio. The U.S. (of all places) recently took a modest yet innovative step in that direction when it passed a law requiring public corporations to publish the ratio of the median annual total compensation of all employees of the corporation to the income of the CEO. The Swiss are considering a law that would cap executive pay at a ratio of 12:1, CEO pay to the lowest paid worker! The theory is that the CEO shouldn’t earn more in a month than the lowest paid worker earns in a year. The ratio of the income of Canada’s 100 top paid CEOs to the average Canadian income is now around 189-1. They earned the average Canadian income by noon today (Jan. 3rd)! In 1998, the ratio was only 105-1. So you can see how the rich are getting richer and richer in Canada.
Would you support a law in Canada that requires every corporation to publish the ratio of its CEO to the average employee income?
Would you support a law that established a fixed maximum ratio that tied the highest paid worker to the lowest paid workers?
What would be an argument against using a mandated ratio like this?