THE NATION’S BUSINESS

Giving capitalism an obscene reputation

Peter C. Newman May 9 1994
THE NATION’S BUSINESS

Giving capitalism an obscene reputation

Peter C. Newman May 9 1994

Giving capitalism an obscene reputation

THE NATION’S BUSINESS

PETER C. NEWMAN

As Canada’s national finances continue to deteriorate, it has become obvious that more and more of the social and economic infrastructure will soon have to be supported by the private sector. That’s why it’s doubly awkward that recent disclosures of Canadian executive salaries brand most of the men (and a few women) who command the country’s major business enterprises as selfish beasts, collecting obscenely swollen pay packets that have little connection with the success or failure of their efforts.

While blueand white-collar workers are being asked to forgo raises or to cut back their incomes, many of their bosses keep raking in more and more dollars. Apart from the dismal ethics of this game, the fact that compensation is often unrelated to profit and performance means there is little incentive for higher productivity, no motivation for our industrial leaders to try harder.

Almost the opposite is true.

No Canadian company whose executives weren’t actually jailed suffered a more humiliating downfall than Royal Trust, which went from ranking among the continent’s highestrated financial institutions to virtual bankruptcy in 20 months. Yet Hartland MacDougall, the chairman of the Royal Trust board who presided over this self-inflicted carnage, was handed a combined salary, bonus and severance package of $2.9 million for 1993, when his collapsed company was folded into the Royal Bank. Although Royal Trust’s senior executives had boasted in the good years that their compensation was tied directly to their sterling performance, when they managed to run their once-great enterprise into the ground, they were reimbursed for the loans they had taken out to finance their share purchases and continued to collect hefty bonuses. Similarly, Marvin Marshall, the CEO of the real estate firm Bramalea Ltd., was paid an impressive $971,225 in 1993, the year his company lost a howling $90.6 million.

Those who command the country’s major businesses earn swollen salaries that have no link with their successes or failures

The 22 rocket scientists who run Hamilton’s Dofasco Inc., which once was the pride of the Steel City, awarded themselves $4.3 million in salaries and $1.6 million in bonuses in 1990. That was the same year the steelmaker had to write off $713 million as a result of the same executives’ decision, two years earlier, to buy Sault Ste. Marie, Ont.’s debt-ridden Algoma Steel Corp. Ltd. (Japanese steel executives regularly commit suicide for losing a quarter as much.) Being rewarded for losing money on that grand a scale is particularly rotten, because at the same time its executives were collecting their booty, Dofasco was laying off hundreds of its mill workers and other employees as part of its cost-cutting measures.

At Canadian Pacific Ltd., which has been able to weather past economic downturns, chairman and CEO Bill Stinson was paid $1,181,895 in 1990, a 31-per-cent increase from the previous year, although his company’s profits were down 52 per cent. More recently, Stinson has been making some extra hay based on the fact that while Canadian Pacific’s balance sheets continue to flow with red ink, its losses are getting smaller. In 1993, he received $619,866 in bonuses on

top of his $905,000 salary (up by $31,300 from the year before) for a total of more than $1.5 million—just for reducing Canadian Pacific’s annual loss (presumably caused, at least in part, by his own decisions) from a disgraceful $478 million to a shameful $190 million.

Meanwhile, Varity Corp., the pitiful Buffalo, N.Y.,-based remnant of the agricultural implements empire Massey-Ferguson, once Canada’s mightiest and most profitable manufacturing enterprise, provided its chairman Victor Rice with more than $1 million in annual compensation in the 1980s, a decade when it lost money most years. Although his faltering enterprise had been saved by taxpayer-financed handouts from Ottawa and Queen’s Park, he moved Varity’s headquarters across the border. That way their salaries are paid in American greenbacks.

Some of the worst excesses involve the pay packages executives are able to negotiate even before joining a company’s payroll. Stephen Banner, who joined the The Seagram Co. Ltd. of Montreal as an executive vice-president in 1991, was given a signing bonus of 200,000 Seagram shares, worth at least $5 million at the time, in addition to an annual salary and bonus package of more than $1.2 million. Stephen Bachand, who joined Canadian Tire Corp. Ltd. in March, 1993, was handed a starting bonus of $1.8 million (plus his $1.2 million in annual salary and bonuses), not to mention a $ 1-million interest-free loan to purchase a home, and stock options worth $2.1 million. The jury is still out on his performance.

There are exceptions to this style of unbounded greed, of course. Paul Desmarais, for example, chairman of the mighty Montreal-based Power Corp. of Canada, paid himself a relatively modest $1.66 million last year though his firm’s net earnings were a healthy $201 million. The executives of a few companies that have fared badly in the recent recession were conscientious enough to decline bonuses in 1993. Conspicuous in this small field were BCE Inc. chairman and CEO Red Wilson as well as David Jolley and David Galloway of Torstar Corp., which owns The Toronto Star and Harlequin books.

Sometimes getting rid of a bum executive is more expensive than keeping him. When Paul Stem stepped down as CEO of Northern Telecom last year, he left with $164,112 for two months of employment, a cash compensation package totalling $6 million and another $1.5 million in stock options. The Keystone Kops duo that almost succeeded in drowning Montreal’s once-profitable Domtar Inc.—James Smith and Raymond Pinard— collected a combined $1.9 million in salaries and bonuses for 1990, even though they left at the same time 1,300 salaried employees were being laid off.

This sordid tally is not only bad for shareholders, it’s bad for business. If the leaders of our vaunted private sector aren’t careful, Canadians will soon begin to realize their ethics stink as much as those of the politicians.