When Oxford University economics professor Simon Wren-Lewis recently mused about introducing a maximum wage, I cringed.
While minimum wages are widely accepted, the idea of a maximum wage is hard for many people, me included, to swallow. Prof. Wren-Lewis said it’s high time for a real debate on introducing a maximum wage to tackle growing inequality.
Switzerland took up the charge last year, holding a referendum on the idea of capping salaries for top executives at 12 times the company’s lowest salary, something the good professor cited. The measure was defeated by slightly less than two-thirds of voters.
It’s a bad idea, full stop. For one thing, it would give companies an incentive to outsource their lowest-paid jobs, so they wouldn’t count in any wage comparison. And it’s too rigid.
There are other ways to ensure that executive compensation doesn’t get out of hand when compared with average pay packages, and Canadian companies would be wise to take some pro-active measures because Canada won’t be immune to the growing pressure to cap wages.
Wall Street occupiers are long gone and the financial crisis is fading into the recesses of our minds, but the spotlight on pay packages is only beginning. Regulators and policy makers in the U.S. and U.K. have gone furthest to rein in swollen salaries. That’s fitting, because they have bigger problems with inequality and outlandish pay. But Canada is far from perfect.
This summer, the Organization for Economic Co-operation and Development noted that disposable income inequality has increased by considerably more in Canada since 1995 than in other OECD countries, and is now the 12th highest.
The financial crisis barely put a dent in that. The total compensation of Canada’s top 100 CEOs has risen for four years in a row now, and is approaching the level it was at before the crisis hit, according to consulting firm Global Governance Advisors. A study by Dr. Michael Wolfson of the University of Ottawa and professors Mike Veall of McMaster University and Neil Brooks of York University found that the top one per cent of Canadian income earners accounted for 13.3 per cent of all reported individual income in 2011, up from 12 per cent a decade earlier.
“There is growing evidence that relative equality is good for growth,” Bank of England governor Mark Carney said recently. In the U.S., the Securities and Exchange Commission has proposed a rule that would require public companies to disclose the ratio of CEO compensation to the median employee pay.
Expect more noise in Canada, where shareholders are becoming increasingly vocal about compensation.
“We actually right now are trying to design a proxy voting guideline that is a maximum pay guideline,” says Michelle de Cordova, director of corporate engagement at Toronto-based NEI Ethical Funds. “It’s something that a couple of our colleagues in the U.S. in the socially responsible space have got, but I’m not sure it’s something that anyone’s been doing in the fund space in Canada yet.”
There have been some Canadian executive pay packages in recent years where shareholders “looked at the number and said ‘no,’” she says, adding that NEI is looking for a quantitative way to back up that instinct.That would be in addition to guidelines it has linking pay to performance
Already some of Canada’s biggest banks have been looking at vertical pay ratios. That means instead of comparing compensation of executives at similar companies, they consider how much people lower down their own firm are earning.
Ms. de Cordova suggests that that’s just a drop in the bucket. “We’re going to see more changes on this,” she says. “As things that people never would have imagined would be implemented in the past gradually do get implemented in various jurisdictions, I think we will see change in Canada.”
There are lots of possibilities. A number of British companies publish a metric comparing the rise in executive pay to the rise in pay for general employees. Other possibilities include comparing the top compensation within a company to an archetypal position, such as a teller at a bank, or creating a pay band that defines how much more a CEO should be paid than the next senior executive and carrying that down, Ms. de Cordova says.
She prefers comparing executive pay to median household income, and setting a cap that would be a multiple of that. “If the situation of the median household in Canada is deteriorating, that kind of suggests that the situation as a whole is probably deteriorating, and maybe the titans of corporate Canada are not somehow driving benefit in the economy as a whole,” she says.
Whatever the case, change is coming. And the more steps that Canadian companies voluntarily take down this path now, the less chance of calls for a rigid cap.