Are they worth it?

Executive incomes—now public— stir debate about fairness


Are they worth it?

Executive incomes—now public— stir debate about fairness


Are they worth it?


Executive incomes—now public— stir debate about fairness


Lawrence Bloomberg hit on a good idea in 1979. After 15 years in the Canadian investment industry, he decided there was a niche for a securities firm that catered to the money managers who ran pension funds and other investment pools. An avid runner, Bloomberg called his company First Marathon Inc., after the stamina and endurance of long-distance runners. With early clients who included Vancouver corporate raider Sam Belzberg, First Marathon became known for its agility and innovative ideas. In the investment business, timing is everything—and Bloomberg’s was impeccable. First Marathon burst from the blocks just as the pension and mutual-fund industry began a period of explosive growth. As the business took off, Bloomberg even gave up marathons, preferring the more lucrative sprint for commissions. In that race, he has been phenomenally successful, collecting a total of $6.9 million in commission and bonuses in 1993 alone. Based on information that has been made public to date, he is now Canada’s highest-paid executive—and that’s not counting the $3 million he made in dividends from his First Marathon shares.

Although Bloomberg is unknown to most Canadians, the size of his paycheque puts him in the same ranks of several other more famous multimillionaires. The club includes Joe Carter, the Toronto Blue Jays outfielder who collected $7 million, making him the highest-paid right-fielder in baseball; and Bryan Adams, Vancouver’s boynext-door rock star, who made an estimated $35 million from record sales and concert appearances last year. All of that fell outrageously short of North America’s top-grossing entertainer, TV talk-show host Oprah Winfrey, who collected $66 million.

By contrast, Prime Minister Jean Chrétiens pay for running the country is $157,600, which is still more than three times the income of the average Canadian family as

calculated by Statistics Canada. That kind of disparity may conform to the rules of economic justice, but the question of social justice is another matter. It also raises the issue of whether any person really deserves to collect 100, 200 or even 300 times more money than his lowest-paid employee. “It’s a question of the values we aspire to as a society,” says Lynne Toupin, executive director of the National AntiPoverty Organization (NAIM) in Ottawa. “I can’t even comprehend how much $6.9 million is. It’s not an income— it’s a status symbol. People are starting to say, ‘Whoa— what’s a person worth?’ ”

Canada’s top earners are notoriously secretive. The irony is that institutional investors, the very clients Bloomberg targeted when he founded First Marathon, are largely responsible for the fact that Canadians now know how much he and other business leaders make. Pension-fund managers were among the most vociferous advocates of a 1993 Ontario law requiring all companies listed on the Toronto Stock Exchange to disclose how much they pay their top five policymaking executives. “We hope that we’ll see moreinformed voting by shareholders as a result of the disclosure,” said Dale Richmond, president of the powerful Ontario Municipal Employees Retirement System, “and that the people who are violating the best principles of management will get caught.”

That does not necessarily apply to Bloomberg. Institutional investors admit to being surprised—not outraged—by Bloomberg’s hefty $6.9-million earnings. They say that their quarrel is with executives whose performance is out of line with

their pay. Bloomberg has delivered: an investment of $100 in First Marathon shares in 1984, the year the firm went public, would now be worth $918.


Bloomberg, moreover, is not necessarily the country’s highest-paid individual. There may be even bigger payouts at some of the publicly traded companies that have not yet reported the pay of their executives. (The law requires companies to fde disclosure notices shortly before their annual meetings are held.) In addition, entrepreneurs, executives of private companies and certain specialists on commission, such as bond traders or real estate salesmen in booming markets, may pocket more without having to make their incomes public. The current wave of disclosures, combined with recession-ravaged financial performances of many companies, has prompted complaints that some companies are not getting their money’s worth. Critics point to executives who receive large numbers of stock options as bonuses on top of bonuses, or those collecting hefty paycheques—even bonuses—when their companies are actually losing money.

Although Nova Corp. of Calgary reported a below-target profit of $202 million in 1993, its board granted president Ted Newall 1.36 million share options in 1993, on top of a salary and bonus that totalled $1 million. At Canadian Pacific Ltd. (CP), CEO William Stinson got a salary of $905,000, plus a bonus of $448,911, plus other income of $207,000 and 84,896 share options. All that despite the fact that CP lost $190 million last year, bringing its losses for the past three years to almost $1.6 billion.

Bloated pay packages also raise doubts about the extent of a company’s commitment to such oft-stated goals as teamwork and shared corporate values. At Midland Walwyn Inc., a Toronto securities dealer, the pay disclosure angered employees because they learned that even though company managers had been talking poor, the five top executives collected generous pay packages of more than $1 million each last year. Some experts note that the absence of any reasonable connection between the incomes of corporate leaders and their workers damages employee morale and un-

dermines the notion of shared authority and responsibility for a company’s performance.

Some corporate executives say that those who complain about big pay packages are merely envious. But others counter that there are serious social policy issues at stake. They point out that high-income corporate executives have a disproportionate influence over the country’s political and social policies. And if the incomes of a tiny elite soar far beyond the range of average Canadians, those with power will grow increasingly out of touch with the problems of the majority of their fellow citizens. Disparities like that, these critics conclude, can eventually lead to social unrest and turmoil. For her part, Toupin says that she was struck by the great gap in understanding between the poor and the high-income upper echelon of executives during a NAPO meeting with the board of directors of a major financial institution last year. “We were talking about the problems of poor singleparent families,” recalled Toupin, “and this woman said, ‘Well, I don’t understand the problem. Wouldn’t it just be best if they put the children up for adoption?’ ”

For the most part, corporate executives say their incomes are justified by the economic law of supply and demand. They point to the astronomical incomes of top athletes and entertainment stars as evidence that the free market economy allo-

(A survey of disclosed 1993 earnings as of April 29, including salary, bonuses and stock options)

El Stephen E. Bachand $3.2 million

President and CEO, Canadian Tire Corp. Ltd.

El Robert B. Schultz $2.9 million

Chairman and CEO, Midland Walwyn Inc.

Q W. Galen Weston $2.1 million

Chairman and president, George Weston Ltd. Chairman, Loblaw Companies Ltd,

El Peter Munk $1.9 million

Chairman and president, Horsham Corp. and American Barrick Resources Corp.

El Edgar Bronfman Sr. $1.8 million

Chairman and CEO, The Seagram Co. Ltd.

El Matthew Barrett $1.8 million

Chairman and CEO, Bank of Montreal

El Purdy Crawford $1.7 million

Chairman and CEO, Imasco Ltd.

El Edgar Bronfman Jr. $1.6 million

President and CEO, The Seagram Co. Ltd.

m Paul Desmarais $1.6 million

Chairman and CEO, Power Corp.

EQ William Stinson $1.6 million

Chairman and CEO, Canadian Pacific Ltd,

m Al Flood $1.5 million

Chairman and CEO, Canadian Imperial Bank of Commerce

FTH Edward F. McDonnell $1.5 million

Executive vice-president, The Seagram Co. Ltd.

EH Brent Belzberg $1.4 million

President and CEO, Harrowston Inc.

FTH W. Michael Brown $1.4 million

President, The Thomson Corp.

FTH Richard J. Currie $1.4 million

President, Loblaw Companies Ltd.

EH Allan Taylor $1.3 million

Chairman and CEO, Royal Bank of Canada

PTH Stephen E. Banner $1.3 million

Senior executive vice-president,

The Seagram Co. Ltd.

PTH Robert Gratton, $1.3 million

President and CEO, Power Financial Corp.

FTH Thomas N. Borshoff $1.2 million

Chairman, president and CEO,

First Federal/CT Financial

FT1 James Stanford $1.2 million

Director, president and CEO, Petro-Canada

FTH Charles Bronfman $1.1 million

Co-chairman of the board, The Seagram Co. Ltd.

FTH Anthony Comper $1.1 million

President and CEO, Bank of Montreal

FTH Gordon B. Ballantyne $1.1 million

President and CEO, Maple Leaf Foods Inc.

FTH V. Prem Watsa $1 million

cates value rationally, if unfairly. It is rational, they say, because they, like the athletes and entertainers, are paid according to the revenue their talents generate. Even though running a consistently profitable corporation takes an extraordinary combination of leadership and business skills that are more demanding than the ability to pound a baseball out of a ball park, they are paid less than the best baseball players because their efforts are judged to generate less income. “We tell corporate boards that they shouldn’t try to get a deal on a chief executive,” said Ken Hugessen, whose firm, William M. Mercer Ltd., is hired by companies to advise boards of directors on compensation issues. “You can bargain-shop for a secretary or a middle manager, but not for a CEO.” Hugessen states that the difference between the best person for the top job and the next best can mean hundreds of millions of dollars a year to a corporation. As a result, he says corporations will often pay more than is necessary, rather than run the risk of losing a chief executive who is doing a good job. “The extra they pay a top executive,” he said, “is usually not much more than a rounding error in the profits of a company.”

Instead of dwelling on total pay, Hugessen says that corporate boards, which are responsible for setting executive compensation levels, as well as shareholders, should focus on the performance of the chief executive. “If you’ve got a good one, pay him well,” said Hugessen. “If he isn’t performing, fire him.” Overall, Hugessen says that Canadian companies have not paid their senior executives as much as U.S. corporations—but they have been more willing to tolerate mediocre performance. ‘We’re in a global economy,” he said. “Canada can’t afford substandard corporate leaders.”

Indeed, compared with the rich pay packages common in the United States, most Canadian executives could argue that they are underpaid. Dozens of American CEOs made more than Bloomberg’s $6.9 million last year. One of his American counterparts, Alan (Ace) Greenberg of the New York investment firm Bear Steams & Co., picked up $20 million in 1993. Only Canada’s compensation record-setter, Peter Munk, founder and chairman of Horsham Corp. and the international gold-mining company American Barrick Resources Corp., ranks with the top U.S. executives—he collected $31.6 million in 1991 mainly from exercising stock options that he had been given in the early years of the company’s operation when he was not drawing a salary.

The U.S. record belongs to Michael Eisner, who bagged $260 million last year as chairman of Walt Disney Co. Eisner’s salary was $945,000. But he exercised his stock options—buying the shares for which he had been awarded options during the past 10 years and then selling them immediately at the higher market price, for a profit—on the 5.4 million shares of Disney stock he had accumulated during his 10 years at the helm of the company. A $100 investment in Disney

when Eisner started there in 1984 would now be worth $1,460.

Is money the best, or even the only, incentive that motivates top executives to improve a company’s performance? “That’s baloney,” says Stephen Jarislowsky, a veteran Montreal investment manager who champions the rights of shareholders (page 39). “The ones who are good are not only moneydriven. They have a greater sense of responsibility to the corporation. And they do what they do partly because they enjoy it.” Jarislowsky notes that the Bank of Nova Scotia, which was Canada’s best-performing chartered bank, also pays the lowest salaries.

Still, Jarislowsky, who is a director of several public companies, says that he is often voted down by other board members—usually CEOs of other companies—when he attempts to restrain corporate pay packages. “They make sure the chief executive gets totally protected from the womb to the tomb,” said Jarislowsky. “They get big salaries, big




O Paul Stem $6.1 million

CEO, Northern Telecom Ltd.

B Hartland MacDougall $2.9 million*

Chairman, Gentra Inc.

B Cedric Ritchie $2.6 million

CEO, The Bank of Nova Scotia

Qj David A. Nichol $2.3 million

Loblaw Companies Ltd.

B Raymond Cyr $2 million

Chairman of the board, BCE Inc.

*lncludes share loan repayment

pensions, short-term incentives, long-term incentives, bonuses based on making budget (targets) rather than profits and even golden parachutes in case they lose their job and can’t land another one. It’s obscene.”

Investment managers say that information disclosure is the first step to redressing imbalances and inequities in the system. The Pension Investment Association of Canada (PIAC), which represents 108 pension funds with a combined $220 billion in savings, insists that the structure of an executive pay plan is more important than the size of the payout.

Investment managers say that the most striking thing in the pay plans disclosed to date is the huge disparity between top executives and other senior managers. The Bank of Montreal paid its chairman, Matthew Barrett, $1.8 million in 1993, while just two levels below, Jeffrey Chisholm, vice-chairman of corporate and institutional financial services, received about a third of that, $564,400. At mining company Comineo Ltd., president Robert Hallbauer collected $700,600, while executives one step below him on the corporate ladder earned about $200,000 each.

That hierarchical pay structure is a holdover from the days when a chief executive was considered an omnipotent leader who was almost single-handedly responsible for an organization’s success or failure.

According to Jim Maunder, head of PIAC’s corporate-governance committee, it also reflects a belief that the best way to motivate senior managers was to pit them against each other. ‘They treated them like caged animals,” he said. “They’d throw in a big slab of meat and whoever came out with the largest chunk was the winner and got all the spoils.” In retrospect, Maunder says, “it doesn’t make a heck of a lot of sense” to set up a system that encourages executives to compete with their coworkers, rather than against other companies.

Another aspect of executive pay that is



Chief Justice, *$200,000

Supreme Court of Canada

Prime Minister of Canada *$157,600

Physician $124,500

Provincial court judge $110,000

Dentist $106,750

Lawyer $ 91,200

Chartered accountant $ 68,000

Autoworker $ 52,700

Coal miner $ 48,800

Federal civil service manager $ 42,500

Nurse $ 38,000

Truck driver $ 29,850

Car salesperson $ 28,200

Bookkeeper $ 27,700

Librarian $ 21,500

Shoe salesperson $ 14,600

Barber $ 14,100

Gas station attendant $ 13,400

* Actual salary

coming under increasing scrutiny is the practice of granting generous stock options. Bill Riedl, president of Fairvest Securities Corp., a Toronto investment dealer that caters to institutional investors by specializing in shareholder rights issues, says that it appears stock options are often a bigger problem than salary levels: “We find that option plans are getting more and more generous to executives and directors, and less and less accountable to shareholders.” One of the most controversial examples was Northern Telecom Ltd.’s failed attempt in 1992 to introduce an option plan that would have made 25 million shares, worth an astonishing $1.25 billion, available for distribution mainly to senior managers as part of a long-term incentive plan. Said Maunder: “That kind of benefit comes directly out of shareholders’ pockets.” Ultimately, much of the responsibility for inflated corporate salaries rests with a company’s board of directors—the body that in theory is supposed to safeguard the interests of public shareholders and keep a close watch on senior management. In many cases, however, those roles become reversed: the board is, in effect, selected by the chief executive rather than shareholders because it is management that presents the list of director nominees to shareholders for their approval. And that approval is almost never withheld. In many cases, the directors are not significant shareholders, and are themselves CEOs of other companies. When they approve compensation packages, all too often they do so with an inherent conflict of interest. It is that lack of transparency that led economist John Kenneth Galbraith to describe executive compensation as “a warm gesture of gratitude that an individual pays to himself.”

Ultimately, the solution may be to give shareholders more power—perhaps, as Jarislowsky says, by appointing more of them as directors. Jarislowsky himself favors a simplified compensation structure: a cash salary and, if warranted, a bonus in the form of company shares that could not be sold until the executive leaves the company.

Applying Jarislowsky’s test to First Marathon, Lawrence Bloomberg appears to pass easily. Like the other senior executives of the firm, he took no salary and was awarded no shares or stock options. His $6.9 million came entirely from commissions on his transactions and from his cut of the company’s profits. He also pocketed $2 million because of a special dividend paid to the firm’s shareholders after the sale of one of its divisions. Jarislowsky would be gratified to note that even First Marathon’s board is largely composed of shareholders, though in this case they are company insiders—reflecting the fact that many First Marathon employees are also its largest shareholders—instead of outside independent shareholders. Indeed, First Marathon seems to confirm the wisdom of the principle that investment managers are expounding: linking a company’s pay structure to its performance can be rewarding for shareholders and lucrative for executives. Clearly Bloomberg has made the big leagues. □



n Michael D. Eisner $260 million

Walt Disney Co.

B Sanford I. Weill $67 million

Travelers Corp.

B Alan C. Greenberg $20 million

Bear Steams & Co. Inc.

El Roberto C. Goizueta $19 million

Coca-Cola Co.

B C. Robert Kidder $18 million

Duracell Inc.



B Oprah Winfrey $66 million

TV host, film producer

B Steven Spielberg $53 million

Director, producer

B Kevin Costner $34 million

Actor, director

Q Guns N’ Roses $34 million

Rock group

B Bill Cosby $33 million

Actor, comedian, author


Q Michael Jordan $45 million


B Riddick Bowe $32 million


B Ayrton Senna $23 million

Auto racing

Q Alain Prost $20 million

Auto racing

B George Foreman $20 million


(Includes income from all sources, including salaries, bonuses, royalties and endorsements)