Why some think it's fair to pay top CEOs 184 times the average worker salary - Action News
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Why some think it's fair to pay top CEOs 184 times the average worker salary

A recent report found that top Canadian CEOs made $9 million in 2014, on average compared to the $49,000 earned by a typical worker, and while that huge disparity caused outrage in some circles, others argue that CEOs' salaries are simply a reflection of their market value.

Good CEO 'worth his weight in gold,' says professor

Blackberry CEO John Chen was Canada's highest-paid CEO in 2014, raking in nearly $90 million. The richest 100 CEOs in Canada took in an average annual pay of $8.98 million last year, compared to the average Canadian salary for full-time workers of just shy of $49,000. (Richard Drew/Associated Press)

Edwin Locke, the world-renowned industrial organizational psychologist, says those who take issue with the large salaries oftop CEOs, especially when compared to the earnings of an average worker, are motivated by one thing: envy.

"There's no objective method for determining the correct ratio between the top and the bottom," said Locke, professor emeritus at the University of Maryland's Robert H. Smith School of Business. "There's no way to do it. It's just completely subjective, based on emotion."

Locke was responding to a recent report by the Canadian Centre for Policy Alternatives that calculated in 2014,the top 100 CEOsin Canada made, onaverage,$9 million (including salary and stock options)compared to the almost $49,000 inaverage annual earnings across the Canadian population for someone working full time.

Or, put another way,the top executives were making 184 times that of the average Canadian, and on a typical day, by lunchtime, Canada's 100 top CEOs earned what an average Canadian will make in a whole year.

"I think that's an indication of a compensation system that's out of control," said Hugh Mackenzie, theauthor of the report and a research associate at the think tank.

Atop CEO's salary in the late 1980susedto be around40 to 50 times that of an average worker, Mackenzie said.

"I'm not going to argue that theydon't merit more pay. The question is how much more, how highly leveraged should it be to stock market performance," he said.

'It's completely arbitrary'

Arguing over whether a CEO should or shouldn't be earning 50, 100 or 1,000 timeswhat a worker earns is meaningless, said Locke, because there is no objective standard.

"It's completely arbitrary," he said.

The fact is,Locke says, a good CEO, one who is smart, rational and visionary, is "worth his weight in gold."

"If you don't have the right strategy ... you destroy the company and you destroy all those jobs," he said. "If you really have a good person, there's no amount [of pay] that you can say is too much."

As for how a CEO's salary should be determined that's up to the market, said Steven Kaplan, professor of entrepreneurship and finance at the University of Chicago Booth School of Business.

Kaplan suggested the question isn't whether CEOs are paid too much but whether or not theyare paid above their market value.

"There is a market for CEOs," he said.

Companies have to offer huge salaries to attract candidates already earning several million dollars at lawor consulting firms, Kaplan said.

"Why should [they] go to a job where there's huge risk, lots of scrutiny and get paid less?So, that's the kind of market forces that are operating here."

Whether it's fair that a CEO's salary is so much higher than that of an average worker is not a relevant question for the board of directors, he said.

"The relevant question is whether the board is paying the CEO the market wage. If the board is paying the CEO above a market wage, that is a problem."

'Market is actually dysfunctional'

But according to Mackenzie,the market is the problem.

"One of the points that I'm attemptingto make isthat the market is actually dysfunctional," he said.

"You can't simultaneouslybe concerned about the impact of growing inequality and then decide you're not prepared to do anything when you see it," he said.

What's more, the current system of CEO compensation can have some profound implications on how the economy works.

The value of a professional athlete like Pittsburgh Penguins' Sidney Crosby is much easier to calculate, as their performance can be judged on their playing statistics. But it's more difficult to determine a CEO's worth, says economics professor Jeffrey Dorfman. (Winslow Townson/Associated Press)

The system, Mackenziesaid, isdrivenby boards of directors, many of whom are CEOs themselves, and by compensationconsultantswho advise the boards and have an interest in pleasing theirclients.

"There's an elementof circularityto the systemthat I thinkjust tends to keep salariesup regardlessof what'shappeningto the performance of the companyorthe state of the economy," he said.

Jeffrey Dorfman, an economics professor at the University of Georgia, agreed that there's a huge problem with corporate governance and that shareholders need to have more power.

Reform shareholders' rights

"Shareholders ought to have some sort of way to take a bindingvote on CEO pay," Dorfman said. "Boards of directors should not be able to give away money that is not theirsto CEOs.

"It's very hard for average shareholders to overturn directors in votes because most shareholders don't votemutual funds vote millions of shares in big blocks and so that's whereIthink we shouldlook for reform if we want to do somethingabout CEO pay."

But Dorfman said Mackenzie's study also confuses the issue of CEO paybecause it compares the highest-paid CEOs with the average worker. In the U.S., for example, the average CEO only makes around $170,000 US a year.

"The [top CEOs] make a lot of money. Well, so do the top 100 professional athletesand the top 100 lawyers, plastic surgeons. We're choosing a data sample that purposely makes the problem a lot worse."

And it's doubtful that if the top CEOs were paid any less, that moneywouldtrickledown to the workers, Dorfman said.

"The company's workers are already getting paid whatever it took to hire them and keep them. That money is coming out of stockholders' pockets," he said. "So,workers shouldnot be upsetabout CEO pay,but shareholders should be, because if CEOs are paid too much, it's the shareholders who are losing out."

Dorfman acknowledged that it is difficult to determine whether a CEO is worth what they're paid. Unlike a professional athlete, whose performance can be judged on statistics and measurable performance, "CEOs are doing vague, undefined leadershipthings."

"With a CEO, did the company do well because the CEO is really great? [Or] did scientists in the research lab invent something new? Did the chief marketing officer put togethera great ad campaign?It's reallyhard to tell what theCEO didversusother people."