Canada is at a crossroads. A gap has grown between the middle class and the wealthy. Now, that divide is This is part of The Globe's Wealth Paradox series, a two-week examination into how the income divide is shaping Canada.
Executive pay is surging while middle-class wages are barely treading water – but some employers are deliberately trying to keep the former in check.
Through his company's 35-year history, Leonard Lee, founder of Lee Valley Tools, has ensured that the highest-paid worker never makes more than 10 times the wage of the lowest-paid worker. By contrast, that ratio averaged 122-to-one last year at Canada's biggest companies, up from 84-to-one a decade earlier, according to data prepared for The Globe and Mail.
The maker and retailer of woodworking and garden tools distributes a quarter of pretax profit to its staff of 850 each year, with the lowest-paid cleaner garnering the same as the CEO. Profit-sharing isn't the only unusual aspect of its corporate culture. The privately-held company has never had layoffs and pays its executives no bonuses. "You get tremendous loyalty from employees if they enjoy their work and they are participating in the income and they have the authority that they need to execute their job," Mr. Lee, 75, said in an interview at his Ottawa headquarters, surrounded by antique wooden tools.
Mr. Lee has found that the flatter pay structure pays off in better worker retention and more engaged staff. When times are hard, like in the last recession, he says employees are also more responsive in cutting costs. The profit-sharing scheme ensures they have a direct incentive to watch the bottom line.
"Our staff know that if they save a box, it saves us a dollar. And they'll get 25 cents out of that dollar," Mr. Lee said.
His business philosophy reflects his modest roots. Mr. Lee was born in rural Saskatchewan during the Depression and grew up in a log cabin without electricity or running water, when farmers helped each other with the threshing and no one locked their doors.
He embedded that co-operative approach into the firm he founded in 1978, even as it grew from a mail-order business that distributed stove kits to a large firm with more than $100-million in annual sales. It now produces more than 800 types of tools, exports to 20 countries from Japan to South Africa and has 15 retail stores across Canada. Mr. Lee is now chairman. He earns less than $200,000 a year.
The approach is not one that suits all companies. It is much easier at a family-run business that's not publicly listed nor obliged to meet quarterly targets, Mr. Lee and his son Robin, who is president, point out. Public companies have shareholders and analysts who create pressure to keep labour costs down.
Still, Lee Valley is an anomaly among companies where average executive pay is stretching further from what rank-and-file workers earn – a trend occurring in both Canada and the United States.
In the U.S., the typical CEO at a large company earned 354 times more than the average worker last year – compared with 42 times in 1982, according to the AFL-CIO labour federation. At the highest end, at J.C. Penney the ratio was 1,795-to-one last year, Bloomberg analytics show. Canada's CEO-to-average-worker pay ratio is 206-to-one, the labour federation calculates using OECD data – higher than 147 in Germany, 93 in Australia, 84 in the U.K. and 67 in Japan.
In contrast, Costco Wholesale Corp. has long paid its workers a wage that's well above the industry average – about $21 not including overtime, nearly triple the minimum wage. (Its Canadian staff make a similar average hourly wage.)
Its chief executive officer, Craig Jelinek, has lobbied to raise the federal minimum wage in the U.S., where the company employs 123,000 people. "At Costco, we know that paying employees good wages makes good sense for business. ... Instead of minimizing wages, we know it's a lot more profitable in the long term to minimize employee turnover and maximize employee productivity, commitment and loyalty," he said in March.
Grocery chain Whole Foods Corp. also trumpets its ratio of CEO-to-average worker pay, which doesn't exceed 19:1.
The idea of indexing executive pay to what average workers earn has attracted more attention in recent years amid concern over rising inequality. In the U.S., the Securities and Exchange Commission said in September that companies will now have to disclose how their CEO's pay compares with their workers'.
It's not the first time advocates have argued for limits on those ratios. In 1984, management consultant Peter Drucker said wide pay gaps makes it tough to foster teamwork and trust within organizations. "I have often advised managers that a 20-to-one salary ratio is the limit beyond which they cannot go if they don't want resentment and falling morale to hit their companies," he wrote in an essay.
That can translate into falling productivity. Academic research has found workers proportionately withdraw effort as their actual pay falls short of their perceived fair wage.
In Switzerland, bastion of the world's wealthy where In Switzerland, bastion of the world's wealthy where voters decided this year to limit executive pay, a "1:12" referendum is under way that proposes restricting the highest salary at a Swiss firm to no more than 12 times the lowest one.
And in Toronto, Wagemark Foundation is a new, voluntary standard that certifies employers who pledge to keep the ratio of their highest and lowest earners at 8-to-1 or below. Close to 50 Canadian employers have so far signed on.
"It's about re-coupling top and bottom earnings, and returning to the traditional pay ratios that powered our economy and built a strong middle class," founder Peter MacLeod said. "Returning to these norms is good for business and good for society."
There are challenges to this approach. Robin Lee, who now oversees day-to-day operations at Lee Valley, notes that the limits on compensation do make it harder to attract highly-skilled people, such as a top marketing executive, particularly from other cities.
But the benefits outweigh the costs, they say. The rule has encouraged the company to train and develop its own workers (its chief operating officer, for example, began as a warehouse worker). It has increased retention and employee engagement, says Judie Garbo, now executive director who's been with the company for 35 years. "It all makes us feel part of things."