The typical Canadian CEO makes $8 million a year, 140 times the average private-sector salary, according to new research by the Montreal-based Institute for Governance of Private and Public Organizations (IGOPP). In the banking sector, that ratio is even higher, with the median CEO compensation at $10.5 million.
Things, though, weren’t always so. In 1998, Canada’s CEOs were making 62 times the average Canadian salary — still a big gap, but one less than half the size what it is today.
The trend toward higher and higher CEO compensation has drawn sharp criticism over the past 20 years, and much of it justified, according to Yvan Allaire, executive chair of IGOPP and author of the report.
But the public outcry seems to have done little to curb exorbitant executive pay. Instead, it has largely led companies to adopt a highly complex system for justifying such compensation levels, the research suggests.
That system, designed by compensation consultants, “has now become the standard and the norm” across very different businesses and industries, according to the report.
In 2000, companies would take six pages on average to describe their CEO’s compensation. Today, that number has ballooned to 34 pages.
But all the additional ink has hardly translated into a better pay model, Allaire told Global News.
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Here are some of the pay perks you would likely enjoy if you were the CEO of a publicly traded company in Canada, according to the report:
You’re on a pay escalator
Companies tend to set CEO pay by looking at the median executive compensation in their sector. The idea here is that you need to keep paying your CEO a little more than competitors in order to avoid them being able to poach your top dog.
But if everyone sets their pay higher than the median, the median itself will keep increasing, Allaire noted.
“This self-imposed requirement is the weakest link in the current system of compensation setting,” reads the report.
But can CEOs always easily switch jobs and hop from one company to another?
In Canada, many large businesses compare their executive pay to that of around 20 other companies, whereas “it seems quite unlikely that 20 companies on average are truly comparable to any Canadian company; that is, 20 companies operating under the same market contingencies and in competition to attract the same management talent,” writes Allaire.
You are virtually guaranteed your annual bonus
Bonuses make up 22 per cent of Canadian CEOs’ annual pay package on average, according to the report. In theory, the premium can vary between 0 per cent and 150 per cent of CEO pay depending on performance compared to targets, but in reality, “the probability of 0 per cent incentive is nil as the history of past premiums paid shows that it was never the case.” In fact, many companies establish a floor for minimum bonus pay.
Technically, a big chunk of your compensation is ‘at risk’ – but that risk is low
On paper, 80 per cent of Canadian CEOs’ total compensation is so-called “at risk” pay, money that is contingent on meeting results and performance metrics. Salaries are the only guaranteed part of the compensation package.
In practice, however, executives are very likely to cash in a large chunk of that “at risk” money, according to Allaire.
And that’s not just because CEOs will almost certainly receive some kind of bonus every year. It’s also because they are increasingly being paid in stocks.
This was in large part the result of a shift away from using stock options, which give company employees the option to buy stock in the company at a set price, the so-called exercise price. Options meant executives could reap huge gains if stock prices soared above the exercise price. But they would make no money if stocks dipped below the exercise price.
The financial crisis triggered a widespread rethinking of the use of stock options for executive pay, with research suggesting that it encouraged executives to take excessive risks in order to pump stock prices.
That’s why companies are increasingly using stocks, rather than stock options, to pay their CEOs.
But if this has reduced the motivation for CEOs to take daredevil gambles, it also increased their chance to cash in on at least some of their “at risk” pay, noted Allaire.
The value of a company’s shares, after all, may go up or down but rarely goes to zero.
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You can boost your pay without doing the harder, riskier stuff
CEOs who receive a large part of their compensation in company shares can use a number of financial maneuvers to boost stock prices – and their own pay – in the short term, even if that won’t necessarily benefit the business in the long term.
Share buy-backs, whereby a company buys back a portion of its outstanding stocks from investors, are one such maneuver that can be used to temporarily prop up the price of a company’s shares.
Company takeovers and mergers are another well-tested trick to drive up stock prices, at least in the short term.
By contrast, investing in things like research and development is often a riskier proposition that might only benefit the company in the long term, said Allaire.
Boards of directors should minimize the incentive to use financial maneuvers such as share buy-backs and asset sales as pay-boosting gimmicks by ensuring that CEOs won’t directly benefit from them.
As it is, the standard model for setting executive pay in Canada is “deeply flawed,” the report concludes.