How Much Pay Is Too Much?

The president of the United States, the most powerful position in the world, makes $400,000 per year. Federal cabinet ministers make $215,000 and Prime Minister Stephen Harper earns $295,400. The average Canadian worker makes about $39,000. It's interesting, then, to see who really makes the big bucks.

The CEO of Weyerhauser makes $13.8 million a year. Nearly 14 mil! Kevin McArthur of Goldcorp struggles along on $9.6 million, while Peter Brown of Canaccord Capital makes a hair less than $9 million. Now it must be noted that some of the top 100 money-makers in B.C. get much of the loot from stock options, but that in itself is a story. Stock options work like this: the CEO, Mr. Julius C. Dithers we'll call him, in addition to his basic modest salary of a million a year, is given 100,000 stock options with the stock then trading at a dollar. This is supposed to encourage Dithers to get the stock higher, say to five dollars. If he does that, the free 100,000 shares are worth $500,000 and he can sell and pocket the half million.

Now we've heard a lot about insider trading over the years and here is a classic example -- Mr Dithers knows when to sell because he's as inside as one can be. Ordinary shareholders don't have this information until after J.C. has called his options and made his little pile. This doesn't cost Dithers Widgets -- he makes it by selling on the stock market. There is a cost and an evil. Those 100,000 shares could have been put on the market with the money flowing to the company's treasury and thus to the benefit of all shareholders. In fact, it dilutes the interest of ordinary shareholders to the benefit of management.

It's interesting to note that the aforesaid Weyerhauser CEO made $11.7 of his $13.8 from stock options, while Peter Brown was paid the entire $8.9 million directly from Cannaccord. That surprises me since doing stock deals is how Mr. Brown made his boodle in the first place.

How much incentive?

The rationale for these immense compensation packages is that companies couldn't get good executives without staggering rewards plus other juicy emoluments of office. It's a highly competitive field we're told. Why, Canada's top executives would flee to greener pastures if they couldn't get all that lolly. But where's the proof of that? If it takes all this money to get a competent man, how come he's also given a huge golden handshake if he's fired? After all, if the large salary, bonuses and stock options are an incentive to earn all that money by running a great ship, why should he get a huge payout -- indeed why shouldn't he have to give the money back when he turns out to be a catastrophe?

What does a man like Peter Brown do to earn $9 million that someone paid, say, $1 million, couldn't do? Note again that Mr. Brown takes as salary a mere $210,000 and gets $8.7 million as a bonus. He has no stock options to play with.

This is all for the good, I gather from Fiona Macdonald, managing partner of the professional services firm Towers Perrin. In an article by Fiona Anderson in the Vancouver Sun (where I found the numbers presented above), Macdonald is quoted as saying, "It's a mobile market. People can leave... the calibre of the top executives makes an enormous difference to the success of a company. This can't be overstated."

The only problem with that answer is that it doesn't deal with the question: Who says companies have to pay that much for top executives? Couldn't someone making, say, $2 million a year do a good job running Weyerhauser? Peter Brown has a colleague at Canaccord, Paul Reynolds, who makes even more money than the man they call "the rabbit." Reynolds is only paid $229,000 as a salary but gets -- are you ready for this? -- a bonus of $7.6 million. But we're not through. Another chap at Canaccord, Timothy Hoare, gets a mere $157,000 as salary but -- you'd best sit down -- he gets a bonus of $7.7 million. Canaccord is an international investment dealer that evidently needs nearly $30 million worth of top executives, being three people in all, to be successful. Couldn't a couple of two- or three-million bucks guys handle the task?

Whoops -- I didn't go far enough down the list, for there in the number 14 spot is Jens Mayer, an executive vice president in Canaccord who gallantly accepts no salary but gets a bonus of $5.3 million, and down in 51st place is Bradley Kotush who is the Canaccord's chief financial officer who gets salary and bonus totaling just a hair under $2 million. That (carry the one), amounts to 35 million bucks for the whole kaboodle!

Fat cats fatter to the south

Now there is nothing the faintest bit illegal in what any of the top hundred executives as listed in the Sun article make. The fact that the information is public ensures that all can examine the goings-on. We must also, in fairness, note that these numbers wouldn't raise an eyebrow south of the border. Looking at the investment business, we see at the very top Mr. Richard D. Fairbank who made a tidy $249.42 million last year. Mr Fairbank has been CEO of Capital One Financial (COF) for 12 years.

I imagine that all these numbers make no sense to most people. Even after taxes what the hell do you do with these kinds of incomes? You can only live in one house at a time and sail in one huge yacht at a time. According to Forbes Magazine, which knows about these things, the Saleen S7 has a base price of nearly $560,000, which distinguishes it as the most expensive car available in the United States -- even given a large family, how many of these does anyone need? (I've never even heard of the Saleen, have you?)

As was so often the case, Canadian-American John Kenneth Galbraith made the point best when he said, "The salary of the chief executive of a large corporation is not a market award for achievement. It is frequently in the nature of a warm personal gesture by the individual to himself."

He also said "The conspicuously wealthy turn up urging the character building values of the privation of the poor." (Somehow it seems appropriate to throw that in.)

Where's the 'mutual'?

Let's look where most of us have trod sometime or other -- mutual funds or relatively small investments. Over the years I observed these folks in action and I was surprised how many times their company was recommending that I buy stock they had underwritten. At first I felt warm and fuzzy about their kindness letting me know this, until I realized that I was buying the stock the brokerage house had got in fees and that they were trying to blow this off at the best prices they could find -- a conflict of interest you could drive a Hummer through. Then I noticed something I should have noticed at the beginning: the broker isn't paid based upon his success (at least the executives I mentioned above are stated to be paid for positive results) but upon sales, with me paying him as much to lose my money as I pay him when he made some. I don't know many other jobs like that, do you?

I also noticed that even in the bleakest of times, my broker was always being rewarded with exotic, first class trips to neat places. I also learned that brokerage houses just hate it when a client has cash in his account. When that happens an e-mail is promptly sent to the salesperson telling them to rectify this unsatisfactory situation at once!

So what does all this mean?

I guess for one thing it means that the days that stockbrokers, in bad times, jumped out of their office windows or sold apples on the street are long gone. The investment business is one where you win if you win and if you lose you win. But clearly the main lesson is that monstrous compensation packages, tidy stock options and first class trips must be paid for by the magic fairy and not by us, the mere investor; otherwise wouldn't we rise as one and demand that our politicians tax them into reality so we could get some of our money back?

"It's the same the whole world over,
It's the poor wot gets the blame,
It's the rich wot gets the pleasure,
Cor Blimey ain't that a shame" (Old English pub song)

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• Dying for the Rich
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• Rich as Hell
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