Not even a pandemic can stop escalating CEO riches

Jordan Ever since I entered the workforce in the early 2000s, the title of CEO has basically meant one thing to me: rich. As long as I’ve been working for a living, to hold that position at a major company was to be awash in cash and stock options and other perks that make your compensation hundreds of times more than anything I’d ever earn. But it wasn’t always this way. Sure, the person at the very top of a company’s org chart has always earned more than the people below him. And yes, I said him for a reason. But it used to be an imaginable amount more, not a frankly impossible to even contemplate amount more. And this rising inequality is a trend not even a pandemic can stop. Not even a pandemic that began by holding up a company’s frontline workers as heroes and has led eventually to a rise in wages in many sectors that would have seemed miraculous before it. It doesn’t matter, though. CEOs will get theirs regardless. Which is why, last week, the day after you signed back on or walked back through the doors of your workplace, the average CEO had already made the average Canadian’s annual salary. But like I said, it hasn’t always been this way, and it wouldn’t be that hard to change back. It is just a question of will.

I’m Jordan Heath-Rawlings, this is The Big Story. David Macdonald is a senior economist with the Canadian Center for Policy Alternative’s National Office. He is also the author of this year’s version of their annual study on CEO Pay in Canada. Hi, David.

David Hi. Thanks for having me.

Jordan You’re very welcome. I’m going to start with the top headline question that has been certainly pissing a lot of people off over the last few days. On average, during the first year of the pandemic, how much did Canada’s 100 highest paid CEOs earn in 2020?

David Yeah. So in 2020, the average pay for the top 100 CEOs of publicly traded companies in Canada was 10.9 million. That’s the second highest pay that we’ve had for top CEOs on record in Canada, higher than 2019. So there was a slight bump up in pay between 2019 and 2020. Not quite as high as 2018. That is the highest that we have on record. 2018 had an extremely high pay package for the CEO of BlackBerry, as well as having several big golden parachutes for some big CEOs who retired that year. So they got big pay packages that year. And that really drove the payout that year. I expected when we started looking at this that we would see actually a pay decrease in 2020, that CEOs would get hit by the pandemic, just like other Canadians. Turns out I was wrong. They’re in essence, completely insulated from major economic events like this.

Jordan That’s kind of crazy to me. And how do you like to think about that? And what’s a good way to compare compensation for CEOs to the average worker wage in Canada?

David So if you do compare the CEO pay to the average worker pay, the average worker working full time in 2020 made just over $57,000. So CEOs that are making 191 times more than the average worker, which boggles the mind a bit. I mean, it’s difficult really to conceptualize that. So one of the ways that we do it is we calculate it on a time basis. So how long does one of these top CEOs take to make $57,000 or the average pay of the average worker? And it’s just before noon on January 4 this year. The year has just started and they’ve already made the equivalent of what the average work will make for the entire year, just to give us some perspective of what 191 times means in very practical terms.

Jordan How has that changed and evolved over… I was going to say the years, but I guess probably decades is a better way to look at it. How much more than the average worker did CEOs used to make in the 70s or the 80s, maybe?

David Yeah. This is an important point. So it’s not so much that CEOs make more than the average worker. That has always been the case. It’s a question of how much more do they make. So are average workers seeing pay increases just like CEOs? If both are seeing pay increases, I don’t think there’s a big problem with that. But if only one is seeing pay increases and the other isn’t, then there is a big problem with that. And that is what we’re seeing. I mean, if we go back to say the 60s, the ratio is 20 times, CEOs making 20 times what the average worker makes. Once you get to the 80s, it’s about 40 times and it really starts to take off once you get past the 1980s. So in the 1990s, it’s about 100 times. And now we’re at about 200, we’re just under 200 times this year. And so you can see just a huge expansion and chasm opening up between what the average worker makes and what the CEO makes.

There’s a big management guru, Peter Drucker, who in ’65, said that the CEO should never make more than 20 to one ratio what the average worker makes, and that if you were making far more than that, then you weren’t running your company properly, in essence. And really, in the 60s and 70s, there was a culture within the CEO class, the corporate class, that it just wasn’t acceptable to have massive pay for CEOs, that your average worker isn’t also seeing pay increases. So you get these huge ratios.

Jordan What changed it?

David It changed in terms of how CEOs are paid in the 1980s, a real change in what the CEO’s role is in the company. Prior to the 1980s, the CEO was really seen as a manager of the company, they weren’t seen as sort of an entrepreneur. They were more seen as sort of the head of a management class who runs a big company. They were thought of as managing several interests that a company might have. One of which was to shareholders, but there are other important features that CEOs needed to look after. One was the workers. One was providing high quality products and services that people wanted to buy. Another one was actually often to communities, because corporations were often more rooted in particular places where they’d have their factories or major sales networks. And so they’d be rooted in those communities. And the CEO was seen as someone who would manage those various relationships.

What changed in the 1980s was the conversion of the CEO from managing various parts of the company to exclusively serving the needs of shareholders. And that the incentives, quote unquote, for the CEO had to be aligned with the incentives of the shareholders. This is also the changing nature of the corporation itself, of what the role of the Corporation was. Prior to that, there was a lot more of what today, we say, corporate social responsibility. But in those days, it was just that corporations weren’t exclusively for shareholders. If there was some money left over after the company had gone through all of its books, it could be paid to shareholders. But they weren’t first in line. And that really changed, this conception of what the corporation’s role is, in the 1980s, so that its role is exclusively to pay every penny that it can to shareholders, and then everybody else is the back of the line. Workers, providing high quality goods and services, those are an afterthought to paying the shareholders.

And so as a result of the change in how corporations are envisioned, the way that CEOs are paid also changed. So instead of them being paid primarily via salary with some perks in terms of stocks and stock options, there was a heavy shift towards paying CEOs via stock and stock options. And the goal of this was to sort of align them with shareholders. They became major shareholders in companies where they weren’t necessarily before. And as a result, they would also be willing to pay more to shareholders because they were one of those big shareholders, in essence, paying themselves. Their interests, in essence, then, were aligned with those of shareholders.

Jordan I don’t know if this is a proper leap to make from there, but I might as well ask you, how does that tie into what we saw in 2020? Because obviously you mentioned you were probably expecting pay to go down. I’m sure most of us who don’t think much about CEO compensation know it was a horrible year economically and would have expected the same thing. So why didn’t pay fall in 2020?

David And so CEO pay now is much different from how regular workers are paid. So regular workers get a salary or hourly wage, and that’s going to make up most of their pay package. They might see some holiday bonus or something like that, but bonuses are going to be pretty small. For CEOs, it’s the exact opposite. For the top CEOs in Canada 10% of their overall pay package comes from a salary, but over 80% of it comes from bonuses of various forms. These can be cash bonuses. They can be payment in shares or stock options where you can buy more shares in the future at a set price today. And this makes up the vast majority of their pay package. And this bonus portion of their pay package is linked to or hypothetically linked to performance measures of various kinds. So does the company meet its revenue goals for this year, its profit goals? Or does the share price go up by X amount? And if it does, then you get more shares and more bonus and so on. And so the idea is this is performance based pay. If you perform and the share price goes up, then you get a big bonus. But if you don’t perform and the share price goes down, then your bonus gets wiped out. That’s the theory of how this works.

So for a portion of the CEOs on the list this year, that’s exactly what happened. They were on the right side of COVID, this massive economic event. Again, this is not under their control, they didn’t cause COVID. They’re just in the right sector. So they happen to be running grocery stores, they happen to run Internet companies or a lot more of their services were online and therefore they could weather the storm much better. And that’s part of the problem with this type of pay that’s based on these measures that are often not at all in the control of the CEOs, the CEOs see huge benefits just because they happen to be in the right place at the right time. So a portion of companies, that’s why you see pay increases this year is the happenstance. And this is part of the problem with CEO pay, it’s not connected to behaviour per se.

In many cases, the flip side is that there were companies on the wrong side of COVID in Canada that did quite badly because they happen to be providing services… you know, they’re in the restaurant business. Well, this is a tough year for the restaurant business. And so what’s interesting, though, is that there are still a lot of CEOs that headed companies that were on the wrong side of COVID, but they were insulated from this hypothetical downside because of two main reasons. One was massive federal government support, and the second one was they changed the complex formulas that calculate how much bonus they get. 49 of the top 100 CEOs this year did one of those two things or headed companies where one of those two things happened. They received massive federal government support through the wage subsidy program and or the formulas for which bonuses are awarded were changed after the fact to exclude the worst impacts of COVID-19. This is half of the CEOs being protected from the downside of this.

And so you have a system, and I think 2020 really reveals the bankruptcy of the system where we want to incentivize CEOs to act like shareholders and so on. On the upside, you’re incentivizing them with things they have no control over. Share price goes up because you’re on the right side of a massive economic event, well, that has nothing to do with whether you worked hard or not, you’re just in the right place at the right time. And on the other side, you protect them from the downside. And so you have this economic theory on the one side, you want to align interests of CEOs and shareholders. But in real life, you cap the downside either by asking the government for money or changing the way the bonuses are calculated. So I mean, this really shows that this is not a system that’s based on merit or aligning CEO interests with those shareholders. It’s a system based on power, the power of a corporate class to set the rules in their favour such that even with massive economic events, the pay doesn’t go down. It only goes up.

Jordan I want to ask you about policy alternatives to this in just a moment. But first, just because I want to make sure we all understand it. And this was something in the report that caught my eye and I didn’t quite know. Could you explain what the capital gains inclusion rate loophole is and how it impacts 2020 in terms of CEO compensation?

David The capital gains inclusion rate, as well as stock option deduction are two tax loopholes that are used heavily by the wealthy in Canada, but specifically by CEOs because of how they’re paid. So because so much of their pay is in the form of shares in the company that they run or in stock options to buy more shares at some point in the future at a price that’s set today, the tax loopholes that apply to capital gains on shares and on stock options, which is called stock option deduction, is particularly important to CEOs. And so if we take the stock option deduction as an example, in 2020, the top 100 CEOs saved $63 million in taxes. Just those 100 people saved $63 million in taxes on that one tax loophole alone. That’s just 100 people.

And so it just really shows how focused some of these tax breaks are. If you’re paid in stock options, you can take advantage of this. Well, most Canadians aren’t paid in stock options, right. But CEOs are overwhelmingly paid in stock options. Three quarters of them received stock options in 2020. And so it’s worth pointing out that the stock option deduction was capped in 2021. It just happened in July, it was capped so that you’d only get this massive tax break where you pay half the tax you otherwise pay for amounts under $200,000. And so basically all the CEOs are going to hit that next year. I don’t think there’s a good reason why it shouldn’t be zero, but at least there was a cap put in place. And I think it’s an important step forward.

On the capital gains inclusion rate, this is a half-off coupon that the wealthy use for increases in the value of capital things like shares if shares increase in value. You only pay half the tax you pay if you made that same money working. These CEOs are big shareholders in their company. The share value goes up and they get this huge write off, which is that they only pay half the tax they’d otherwise pay if they were just paid in wages. I mean, these are two very particular technical ways that CEOs get around paying taxes that people would otherwise pay if they were just paid in straight up money.

The other thing that you could also do, and this is on the corporate side, is you could limit how much corporations can write off of total compensation per employee. So you can pay your CEO $20 million if you want to, but you can’t write it all off. You can only write the first million off and the rest of it you’ve got to pay tax on, you’ve got to pay corporate tax on. This is actually something that they did in the US, and something we could certainly do in Canada. It sort of decreases the incentive, I suppose, for companies to pay these things. I don’t think the companies or the CEOs care, I think they would continue to be paid this money, even with higher tax rates. But then you raise some money you can use for something that’s potentially more useful, like health care, long term care, supporting small businesses or the jobless who have been hurt by Covid-19, for instance.

Jordan Is there momentum for some of these measures? I know you mentioned the cap that just came into place in July. Is there progress in the federal government towards, at the very least, like you say, recapturing some of that money in taxes, even if there’s no way to actually limit CEO pay?

David Well, we just had an election, right? We had a federal election. Several of these issues featured quite prominently. Certainly some form of additional corporate income tax was very much in discussion. Higher corporate income tax rates, as well as a pandemic corporate income tax of some kind, like a short term super profits tax during the pandemic was discussed during the campaign. So we haven’t seen a full budget yet from this new minority Parliament. That would have to involve some negotiation with other parties because it’s a minority government. So it is certainly possible that something like capping the deductibility on corporate taxes of executive compensation could play a role.

There was a lot of debate around a wealth tax during the federal election. So I’m not sure the Liberals are that interested in that. But the NDP certainly are. It’s not difficult to imagine an experiment where one group of people is paid $10 million a year and another group of people is paid $60,000 a year. And after ten years, one group is going to be a lot wealthier than the other and a lot wealthier in shares, in particular, in companies. And so wealth tax is also something that we could think about in terms of reducing the gap on the wealth side. For the CEO report, we’re only looking at income. We’re only looking at a single year 2020. But once you run that same year 20 times, then you’ve got a huge wealth gap that’s actually much bigger than the income gap. I don’t know what it is, a thousand times or something like that, but it’s not something we included in this report.

Jordan I’m going to go out on a limb here when I ask this question, but I assume these measures poll rather well amongst the average Canadian, yes?

David Oh, absolutely. I mean, there’s a lot of support for taxing both the corporate world as well as taxing the very wealthy. These are things that get a lot of attention, get a lot of support, I think, from regular Canadians, they don’t get a lot of support from the corporate world or from CEOs. Those folks have a lot of sway. And the argument is always that CEOs are going to leave or companies are going to leave or whatever.

Jordan Does that actually happen? Do we know if that happens?

David No. I mean, this is the interesting thing about higher tax brackets and closing tax loopholes is that everyone says, I want to move to New York or something like that. And you say, well, personal income tax rate’s higher in New York than it is in Canada. CEOs can move right now to PEI. We can close all the stores and move to the territories. I mean, some of the tax rates on the corporate side are lower in the territories. Well, why don’t people do that? Well, because if you close your restaurant in downtown Toronto and move to the territories, it’s kind of a smaller market.

Or as a CEO, you can move right now from Bay Street to Whitehorse if you want to. I’ve been to Whitehorse. It’s nice. I’m not sure if it compares to Bay Street, but you can actually move within the country to seek out lower personal income tax rates. If you wanted to, you can move to Kansas. The personal income tax rate in Kansas is much lower than it is in Toronto. But the point here is that by taxing people with very high income, you’re inherently taxing people that are very tied to where they are. Because they’re going to be older, they’re going to make that money because of their connections to where they are. So they’re working at a corporate headquarters, corporate headquarters located in Toronto. You can’t just move to Kansas, to lower your tax rate because your job is not in Kansas, it’s in Toronto.

That part of it, I think, is underestimated. Sure people don’t want to pay. The execs don’t want to pay more tax. They’ll seek any way to pay less tax. But you’re going to take your kids out of school? You’re going to tell, in most cases, your wife because 96 of the 100 people are men, to quit her job so you can move to Kansas to pay a lower tax rate? People aren’t going to move because the tax rate is slightly higher or they don’t get this particular loophole. They’ll try to avoid it. They’ll try to evade it, don’t get me wrong. But moving is the last resort because you probably have to quit your job, which is why you’re making $10 million a year.

Jordan The last thing I want to ask you about, and it’s kind of tied to popular support for this, but maybe not in a political way. We’ve done some stories on this show about the resurgence, I guess, of the labor movement in terms of unions and strikes. And even people in really low wage jobs just kind of up and quitting. Are you guys hearing or seeing that there’s that kind of more grassroots rather than political and lobbying push to deal with this crazy inequality?

David Certainly in the US, the great resignation is a trend that we’re certainly seeing the in statistics in the US, we’re not seeing it in Canada. So there’s nowhere near the same kind of mass quitting trend in Canada as there is in the US, in part because minimum wages are higher in Canada in a lot of places than they are in the US. So you’ve got a bit more potential retention there.

One of the big things I think that happened in COVID-19 to the labor market is that a lot of people in particular industries, particularly food and accommodation, were booted out of work early in the pandemic, and they didn’t get consistent work back. And so as a result, they had to seek work in other sectors. Now, luckily, there were other sectors that were expanding. Professional and scientific services, in particular, were expanding. Healthcare was expanding. Education was expanding over the period of 2020 to early 2021. And so a lot of the folks that were working in food and accommodation, retail, entertainment, sought other positions. In part, that was made easier by programs like the CERB that was easy to access. It was paying a higher rate than you’d ever get for most people on EI. And so it allowed people some flexibility to properly do a job search, properly seek out employment in other areas, likely at higher pay than they were making in retail, food and accommodation, where they are likely working at or near minimum wage.

And so as a result, you have this huge shift in people that used to work in those industries, had experience in those industries, had skills that were transferable, and they moved on. And so as these industries then seek other employees to refill those positions, particularly starting in September of 2021, they call up their former employees, and they don’t want their old job back because their new job has probably got better hours and it probably has higher pay.

And so I think one of the long term impacts of Covid-19 is likely going to be higher wages in low wage professions because you’ve got to attract a whole new group of people. You’ve got to train up a whole new group of people to do these jobs, food, accommodation, entertainment, retail, because the skilled folks have moved on to other industries. And I think what that’s going to mean is rising wages in order to entice people to come into those industries. And what that inherently also means is more power to the workers to ask for higher wages or stay on the sidelines. This isn’t a labor shortage. People would fill those jobs if they were paid well enough, if the hours were good enough, and so on. It’s not that there are not enough people. There are plenty of people who would fill those jobs. And so as a result as well, what this means for the labor movement and bargaining more generally is that you’ve probably got more flexibility to drive up wages because you don’t have enough workers anyway, because you’ve got more competition in the rehiring after Covid-19.

Prior to the last couple of weeks, Covid-19 seemed like it was receding. Now it’s pushed forward again. And so I think a lot of workers that are still in food and accommodation, retail, entertainment, and these sectors that have been shut down again in Ontario that are seriously curtailed in other provinces. This is just going to be another push for those workers to get jobs elsewhere and will make it even harder for them to be rehired in those industries when these restrictions inevitably are removed, hopefully sooner rather than later. But I think one thing that Covid-19 has taught us is that we always seem to overestimate how quickly things will reopen, and they often take a lot longer than we think they’re going to.

Jordan Well, if only those workers can come back at 100 or so times what they used to make, we can make a dent in this. Thanks so much for this, David.

David Sure thing. Well, thanks for having me.

Jordan David Macdonald, senior economist with the Canadian Center for Policy Alternatives’ National Office.

That was The Big Story, for more from us head to thebigstorypodcast.ca. Find us on Twitter at @TheBigStoryFPN. Of course, talk to us anytime via email, thebigstorypodcast@rci.rogers.com [click here!]. You can also find this podcast in every single podcast player on Earth or at least the ones on your phone and your computer and your ipad. Whatever else you got. It doesn’t matter really, find it, rate, review, tell your friends. We appreciate every last one of you.

Thanks for listening. I’m Jordan Heath-Rawlings, we’ll talk tomorrow.

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