I know a guy who used to run a bank, back in the olden days. Nobody had heard of stock options then. He lived in a nice house, but not a mansion. He did not make 250 times more money than the average Canadian, as some top bankers do today. Sometimes, he sounds rueful that he missed out on the bonanza years, when executive pay zoomed into the stratosphere. Mostly, though, he thinks the world has gone a little nuts.
So does Roger Martin, dean of the Rotman School of Management at the University of Toronto. He says the way we pay executives today is ridiculous and perverse. And he thinks the worm may be about to turn. “Greed,” he says, “is not quite as good as it was before.”
A new report by the left-leaning Canadian Centre for Policy Alternatives is helping to stir the pay pot. It found that the country’s top 100 CEOs (that is, the 100 highest paid CEOs of companies listed in the TSX index) make, on average, $8.4-million, which is 189 times more than the average wage. Three-quarters of their income typically comes from stock options, which are tied to the company’s stock-market performance. In 2010, average Canadian salaries went up 1 per cent. Theirs went up 27 per cent. Even in bad times, executive compensation just keeps going up.
I’m no class warrior. If Frank Stronach can bully Magna’s board into paying him $62-million, well, good for him. After all, he started the company. But what about the hired guns, which is what most CEOs are? Although their pay is supposedly related to performance, it’s grown faster than a patch of kudzu vine in Georgia. In just 20 years between 1980 and 2000, says Mr. Martin, CEO pay per dollar of net income produced went up by a factor of eight.
How did things get so out of whack? The answer you usually get is that the world is far more complex than ever before, companies are bigger and more global, outstanding talent is in short supply, blah, blah, blah. All true. But Mr. Martin believes there are more compelling reasons. In the 1970s, a series of economic shocks led people to focus on the types of incentives that might produce prosperity. That’s when the idea of tying pay to performance was born.
At the same time, the talent premium was soaring in every field, from sports to music. It seemed logical that top corporate leaders also deserved a piece of the upside. And then the cult of the CEO began to take off. Suddenly, bankers weren’t boring, faceless drones any more. They were on the cover of Fortune. Soon, some of them were getting paid like rock stars.
The trouble is that corporations picked the wrong incentive. Instead of tying compensation to performance in the real world, they tied it to the stock price. This was one of the lousier ideas in the history of capitalism. It meant that the way to win was not to sell more stuff or make more money, but to increase the stock price. Much mischief has ensued, which you can read all about in Mr. Martin’s excellent book, Fixing the Game. He thinks stock options should be abolished, period.
Stock options were not the only instance of perverse results. In the mid-1990s, public companies had to start disclosing the salaries of top management. It was thought that making this information public would help keep executive compensation in check. In fact, it triggered an ever-upward spiral. “It was like Lake Wobegon. Everybody said, ‘We don’t want our CEO to be below average.’ ”
Mr. Martin’s crusade to pull the plug on stock options hasn’t caught on just yet. But he’s hopeful that the zeitgeist is changing again. Conspicuous consumption is out. Modesty, restraint and social responsibility are in. Today’s business hero isn’t the guy who builds a 60,000-square-foot mega-mansion. It’s Steve Jobs, who lived in a relatively ordinary house.
“I think we’ve reached a tipping point,” Mr. Martin says. “I think enough people have begun to ask, ‘How is it that executives get to make lots of money even if the company doesn’t do well?’ ” That’s what my friend who used to run the bank wonders, too. Smart CEOs should be wondering the same thing.