Don’t begrudge high CEO compensation

Along with the perennial New Year’s resolutions, January typically features a swat of commentaries decrying CEO pay and demands for new regulations and taxes. Unfortunately these cries for everlarger government interventions on entrepreneurs and businesses miss the bigger picture and risk harming the Canadian economy.

There’s no doubt that the compensation of Canada’s top CEOs has reached unparalleled heights. According to the Globe and Mail’s annual survey of Canada’s top 1,000 CEOs, the average compensation for the top 100 CEOs in 2016 was $9.6 million. This means the ratio of the top CEOs compensation relative to an average worker ($49,738) was 194 to 1, which is startling.

This finding, which echoes previous analyses, will surely prompt calls for higher taxes and new, largescale regulations limiting what firms and entrepreneurs can pay executives. But, inconveniently for those calling for such interventions, the story is much more complicated.

Let’s first extend the analysis of CEO compensation. If, for example, we examine the next 100 CEOs — those ranked from 101 to 200 — the average compensation falls to $3.4 million, which results in a CEO-to-worker compensation ratio of 68 to 1. There’s still a marked gap but it’s substantially smaller compared to the results for the top 100 CEOs.

If the entirety of the survey of CEOs are included, the average CEO compensation falls to $2.1 million, a decline

But does the story end with corporate Canada?

Here’s where the calls for new taxes and regulations fall flat. The top talent across most sectors of the global economy has enjoyed substantial increases in compensation in recent decades. Taylor Swift, for example, was the top musician in 2016 earning US$179.0 million while Dwayne “The Rock” Johnson was the top actor (US$64.5 million). The top earners in sports, entertainment and music, to name music, Dwayne Johnson’s movies, or the products of many of Canada’s largest firms, is no longer a single country, or even North America, but rather the global market. Simply put, the larger market increases the value of top talent.

The second explanation, which is linked to the first, is that the aptitude and skills of top talent is not easily substituted by lesser talent. Top talent, whether in business, entertainment or sports, is not easily replaced by the next best available person. It’s just not that easy to replace Sidney Crosby, Steve Jobs or Taylor Swift.

A third factor is that top talent is incredibly mobile. It’s not at all clear how an individual firm, or the jurisdiction where it’s located, is made better off by introducing new punitive taxes and/ or additional regulations limiting compensation when top talent is difficult to replace.

Indeed, there’s a strong argument to be made that lower taxes and more flexible regulations are needed to attract more, not less, of the globe’s top talent to Canada.