OBAT WORK146 Part 2Striving for Performance
ETHICAL DILEMMAEXERCISE
Are CEOs Paid Too Much?
EXHIBIT 4-16 2005 Compensation of Canada’s “Most Overpaid” CEOs
CEO(s) Was Paid Should Have Amount
(3-Yr Avg.) Been Paid* Overpaid- Ian Telfer/Robert McEwen $32 823 000 $1 313 000 $31 510 000
Goldcorp
Vancouver, British Columbia - E. Melnyk $23 392 000 $1 404 000 $21 988 000
Biovail
Mississauga, Ontario - Richard Smith/David Stein $9 647 000 $675 000 $8 972 000
CoolBrands
Markham, Ontario - Jeffrey Orr/Robert Gratton $76 139 000 $9 898 000 $66 241 000
Power Financial Corporation
Montreal, Quebec - Gerald Schwartz $26 163 000 $4 709 000 $21 454 000
Onex
Toronto, Ontario
*National Post Business’scalculations take into account CEO performance variables.Source:D. Dias, “CEO Scorecard 2005,” National Post Business,November 2005, p. 79. Material reprinted with the express permission of
National Post Company, a CanWest Partnership.Critics have described the astronomical pay packages given
to Canadian and American CEOs as “rampant greed.” In
2004, the average compensation of CEOs of Canadian com-
panies that make up the S&P/TSX index was $5.5-million,
nearly doubling the $3.5 million in compensation awarded in- By comparison, the S&P/TSX index rose 14.5 in 2004
and profits at TSX companies were up 30 percent.
How do you explain such large pay packages to CEOs?
Some say this represents a classic economic response to a sit-
uation in which the demand is great for high quality top-
executive talent and the supply is low. Other arguments in
favour of paying executives $1 million a year or more are the
need to compensate people for the tremendous responsibil-
ities and stress that go with such jobs; the motivating poten-
tial that 7- and 8-figure annual incomes provide to senior
executives and those who might aspire to be; and the influ-
ence of senior executives on the company’s bottom line. (For
example, research findings cited on page 271 of Chapter 8
attribute a 15- to 25-percent variation in profitability to the
leadership quality of CEOs.)
Critics of executive pay practices in Canada and the
United States argue that CEOs choose board members
whom they can count on to support ever-increasing pay for
top management. If board members fail to “play along,”
they risk losing their positions, their fees, and the prestige
and power inherent in board membership.
In addition, it is not clear that executive compensation is
tied to firm performance. For instance, KPMG found in one
survey that for 40 percent of the respondents, there was no
correlation between the size of the bonus and how poorly or
well the company fared. Consider the data in Exhibit 4-16,
which illustrates the disconnect that can sometimes happen
between CEO compensation and firm performance. National
Post Businesswriters calculated that the CEOs noted in the
exhibit were overpaid, based on their companies perform-
ances for the year.
Is high compensation of CEOs a problem? If so, does the
blame for the problem lie with CEOs or with the sharehold-
ers and boards that knowingly allow the practice? Are
Canadian and American CEOs greedy? Are these CEOs act-
ing unethically? Should their pay reflect more closely some
multiple of their employees’ wages? What do you think?Sources:E. Church, “Market Recovery Delivers Executive Payout
Bonanza,” Globe and Mail,May 4, 2005, pp. B1, B9; “Gimme
Gimme: Greed, the Most Insidious of Sins, Has Once Again Embraced
a Decade,” Financial Post,September 28/30, 1996, pp. 24–25; and I.
McGugan, “A Crapshoot Called Compensation,” Canadian Business,
July 1995, pp. 67–70.