A recent report released by the Canadian Centre for Policy Alternatives (CCPA) found that the compensation levels of Canada’s wealthiest 100 Chief Executive Officers (CEOs) now average about $9.2 million — each. Many of these individuals earn more in a single day than the average Canadian will earn over the course of a year. The last time that CEO compensation reached such exorbitant levels was in 2008, just prior to the financial crisis.
Since then, the average CEO’s salary has risen from $7.35 million to $9.2 million, representing an increase of almost 25 per cent. Bonuses have also increased, growing from about 22 per cent of CEO salary in 2008 to about 25 per cent in 2013; and share grants and stock options have risen from 26 per cent to 27 per cent and 21 per cent to 26 per cent, respectively. Although Canada has fared better in the wake of the financial crisis than its American neighbours, and CEO compensation would seem to reflect this, the economy as a whole has not yet fully rebounded.
A common — and advantageous — income means for these executives has increasingly become stock options, shares specified for company employees and set at a predetermined price. Although stock options do not directly amount to cash in the pockets of CEOs, they give executives the right to a given number of company shares. The price of these shares, referred to as the “strike price”, is generally the market price of the share on the day that the stock option is granted. If the stock price goes above that of the strike price, executives retains the right to sell their stocks at the higher price – and, as a result, the ability to profit substantially.
Income gains from stock options are a major contributing factor to CEOs’ inordinate salaries. They are also taxed to a lesser degree than salaried income: when a CEO cashes in on his or her stock options, the income gained is taxed at half of the rate (26 per cent) than if it were considered a salary (52 per cent in the highest income bracket). This huge variation in taxation levels provides an incentive for CEOs to claim income as a capital gain. Precisely how much Canada’s top 100 CEOs are benefitting from this system is unknown, as income tax treatment is not considered when surveying corporate executives. That said, it is certainly not “small change”: in 2013, the average value of granted stock options was $3.16 million.
The reality for the rest of Canada is much more bleak. In 2013, the average Canadian worker took home an annual salary of $47,358 – meaning that the average CEO earned as much as the average Canadian did over the course of the year by 1:47pm on January 1st. The average CEO’s salary has become nearly 200 times that of the average Canadian. When adjusted for inflation, the average pay of Canada’s top 100 CEOs rose by 98 per cent from 2008 to 2013, compared to a mere 7 per cent increase in salary for all other workers.
It should come as no shock, then, that CEO compensation has become a contentious issue in Canada. The staggering salary increases noted above are particularly disconcerting, given that the average Canadian worker has seen little or no progress over the past five years. Critics of the current system have proposed tying CEO salaries to stock prices, the argument being that — provided that the company is maintaining high stock prices — executives would be appropriately rewarded.
However, Roger Martin, former Dean of the University of Toronto’s Rotman School of Management, disagrees. Martin has argued that, because the stock market is just a reflection of market expectations, it is not an accurate depiction of a company’s success. This means that this proposed “fix” to CEO’s salaries would be ineffective and potentially problematic in terms of incentivizing executives.
Despite rampant income inequality and a growing consensus that Canada’s top executives are grossly overpaid, both problems are likely to persist. In the current corporate structure, CEOs are hired by a board of directors; and in order to project company success, that board needs to hire the best people. These people are generally the most expensive, a reality that incentives the reinforcement of high compensation rates.
In order to make changes to the current system of executive compensation system in Canada, the corporate governance system itself would require significant restructuring — something that would be almost impossible, given the “club mentality” held by both CEOs and their boards of directors. As an alternative to change led by the business community, the CCPA report proposes one of two approaches: compensation regulation or a change to the current tax system. A change to the current tax system would presumably be more feasible than regulating the level to which CEOs could be compensated, although it would certainly be challenged by various lobbying groups.
Closing the loopholes that Canada’s top CEOs currently exploit to boost their already exorbitant income levels could result in a more fair and reasonable level of compensation. Changes to the tax system could ultimately serve to benefit a broader population, and could prove significant in terms of making strides to reduce income inequality. While economists continue to dispute the value add of increasing executive taxes, the fact remains that the widening compensation gap in Canada is exacerbating income inequality. Tackling this problem head-on through the tax system offers arguably the most direct means of levelling the national playing field.
Brynne Moore is a 2016 Master of Public Policy candidate at the School of Public Policy and Governance, University of Toronto. She holds a Bachelor of Arts in Political Science from McGill University, and has recently worked for both the House of Commons and the City of Ottawa. Her main areas of policy interest include health policy and fiscal policy.