Economic fallout from the novel coronavirus pandemic is amplifying the scourge of income inequality.
The twin health and economic crises are especially hurting lower- and middle-income Canadians who were already struggling to get by. Last month alone, 3.1 million Canadians either lost a job or worked fewer hours.
Those who’ve hung on to their jobs are also encountering adversity. Part-time workers, including cashiers, orderlies and cleaners, face elevated health risks, but may not have benefits. Many salaried workers, meanwhile, are taking pay cuts or bracing for temporary layoffs.
The federal government is rightly helping businesses by offering wage subsidies, access to credit and deferring tax payments. The central bank is relieving stress in financial markets partly by purchasing corporate bonds and commercial paper. But as that taxpayer-funded assistance rolls out, policymakers also have an ethical obligation to tackle income inequality.
They can start by taking a long, hard look at executive compensation. In particular, securities regulators should make pay ratio disclosures mandatory to improve transparency of executive pay packages at public companies. Pay ratio disclosures reveal the difference in the total remuneration between a company’s top executives and its rank and file workers.
“It’s gone from being ‘nice to know’ to ‘have to know’ as we try to trace the impact of the stimulus," said Nell Minow, vice-chair of ValueEdge Advisors, a corporate-governance consultancy. “If we want to make sure that the stimulus money is being spent in the way that is most beneficial to the economy as a whole, and in a way that is true to the spirit of the legislation, that’s the best way to track it.”
Other countries already mandate pay ratio disclosures. The U.S. Securities and Exchange Commission, for instance, requires publicly traded companies to disclose how their median worker’s compensation stacks up to that of their chief executive officer. In Britain, public companies with more than 250 U.K.-based employees must disclose the ratio between their CEO’s compensation and those of median, lower quartile and upper quartile workers.
Here in Canada, shareholder advocates want similar rules. Le Mouvement d’éducation et de défense des actionnaires (MÉDAC) has asked major banks to disclose the compensation ratios their boards use. MÉDAC also calculates bank remuneration ratios based on shareholder documents. Last year, CEOs at the Big Six banks earned 54 to 153 times more in total compensation than the average employee, according to that analysis.
The Shareholder Association for Research and Education (SHARE), meanwhile, has urged securities regulators to require pay ratio disclosures. “Frankly, the way that we approach corporate disclosure here in Canada is due for an overhaul,” CEO Kevin Thomas said. “While I don’t think the pay ratio is a perfect tool, any mechanism that helps to ground executive pay in the real economy is welcome.”
Desjardins Group, Canada’s seventh-largest financial institution, has voluntarily disclosed the pay ratio of its CEO to its median employee since 2012. In 2019, president and CEO Guy Cormier earned 34 times more than the financial co-operative’s average full-time equivalent employee.
“There was a willingness to be transparent,” said Marc-Andre Malboeuf, vice-president of human resources. "We are very comfortable with those ratios and very comfortable with showing those to our members.”
Desjardins’ progressive stand debunks the myth that calculating pay ratios is too onerous for companies. “We call that the Barbie excuse,” Ms. Minow said, referring to a 1990s controversy sparked by a talking version of the doll programmed to say “Math class is tough!”
As Ms. Minow points out: “If you don’t know what you’re paying your people -- if you can’t just add up all those numbers and divide it by however many employees you have -- then you’ve got a bigger problem than unfair pay."
Critics of disclosures complain it’s difficult to compare pay ratios at companies within the same industry because businesses have discretion on making calculations. But securities regulators can always define standards, and companies can explain the factors influencing their ratios, such as employing workers in lower-cost markets.
"The onus is on them. The shareholders want the information and it is only fair that they give it to them,” said Rosanna Weaver, an executive compensation expert at As You Sow, a non-profit focused on shareholder advocacy that tracks overpaid CEOs.
Ms. Weaver said that while CEO pay has increased, middle-class wages have largely remained stagnant for years. Pay ratios shine a light on such disparities.
They also help investors gauge risk. For instance, the pay structure of average employees was a factor in both the subprime mortgage crisis and the Wells Fargo account fraud scandal, Ms. Minow said. In both instances, employees were compensated based on volume rather than on the quality of transactions.
Directors have a duty to align executive pay with the long-term health of companies and stamp out reputational risk. Being a good corporate citizen includes recognizing how CEO compensation drives income inequality, said Steven Clifford, a former chief executive and director, and author of the 2017 book The CEO Pay Machine.
“Anything that can help slow CEO pay is going to be, in my opinion, good for Canadian companies, good for the Canadian economy and good for Canadian democracy," Mr. Clifford said. "And certainly disclosure is the one thing that can help slow it.”