Most companies ignore social goals in setting CEO pay

Andrew Binet

The CEOs of Canada’s largest 60 companies earn an average of 330 times the income of their lowest-paid employees, according to this year’s Corporate Social Responsibility Survey.

The survey, compiled for the Globe and Mail by Corporate Knights magazine, demonstrates an enormous gap between the pay policies at different companies and suggests that the highest-earning CEOs may not necessarily be producing the largest benefits to shareholders or other stakeholders.

“There is not a lot of evidence to suggest that somebody should be paid 400 times more than the guy who is sweeping the lobby,” says Toby Heaps, editor-in-chief of Corporate Knights. He argues that “astronomical pay divides speak to a misappropriation of a firm’s resources.”

Ken Hugessen, an executive compensation consultant with Hugessen Consulting Inc. of Toronto, takes a different viewpoint. “First and foremost, [companies] need to make sure they have the best possible talent in that chair,” he says. “Price is very important, but ultimately secondary.”

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Pay inequalities are just one of the issues highlighted by the survey. It also found that most companies do not take social and environmental issues into account when setting senior executive compensation.

Only 26 out of 60 firms incorporate so-called “environmental and social governance,” or ESG targets, in their formula for executive pay.

Most glaring, though, are the large disparities between companies in terms of how much CEOs earn in relation to their lowest-paid employees. These disparities seem to have little to do with market performance.

Barrick Gold Corp’s CEO, Aaron Regent, earns 1,210 times more than that company’s lowest-paid employee. On the other hand, First Quantum Minerals CEO Philip Pascall only earns 69 times those at the bottom of his company’s pay structure.

But despite the higher pay at Barrick, First Quantum performed better for shareholders, tripling over the past five years, compared to Barrick’s 50 per cent gain.

A higher CEO salary can lead to certain risks, say corporate governance experts.

One risk is the potentially damaging effect that higher ratios of CEO pay can have on employee morale. Disproportionately large ratios can be demeaning for those at the lower end of the pay scale, “when the CEO doesn’t work 500 times harder than them, and isn’t 500 times smarter than them,” says Mr. Heaps. A deep pay divide between an executive and his deputies can also mean that upper-level management lacks cohesion, adds Mr. Hugessen.

The financial crisis has made shareholders much more aware of where their money is going, and they are increasingly cautious of pay packages that might “incentivize excessive risk-taking behavior,” says Paul Gryglewicz, of Global Governance Advisors in Toronto.

After years of minimal influence, “shareholders are now literally the dog that caught the car,” says Mr. Hugessen. He believes investors are looking for better accountability on the part of senior management, especially when it comes to environmental and social risks and equity.

ESG targets for executive pay can act as a balancing measure to ensure that both short- and long-term goals and risks are given due attention.

For today’s businesses, says Mr. Hugessen, “being seen as a good citizen is crucial.”

Angela Baldwin, of Canadian Business for Social Responsibility, is confident that more companies will begin to account for long-term ESG factors. “If you talk to any individual,” she says, “they would like to do better in terms of environmental and social responsibility.”

The challenge, however, comes in transplanting these hazy values on to the corporate business model, which requires concrete targets.

“It’s a whole lot easier to determine whether someone met an earnings goal than an environmental goal,” says Mr. Hugessen.