eye - April 8, 2004


The 3000 per cent solution

A couple of weeks ago, Gerry Schwartz (Onex CEO, capitalist extraordinaire and Mr. Heather Reisman), made the unusual gesture of turning down an US$8-million bonus because he felt his company's performance didn't warrant it.  The day before, the papers reported that Robert Gratton, the CEO of Power Corp., exercised a little bit more than half his stock options for a total personal enrichment of $170 million.  And though, as Derek DeCloet pointed out in his March 31 Globe column on the subject, Schwartz still gets to make plenty of money due to various weird and convoluted share-purchase plans, Schwartz and Gratton conveniently bookend an issue that has not received nearly enough attention.

Corporations, for all the horrible things they do around the world, tend to subscribe to one basic golden principle: shareholder equity.  Sure, they say, we may be strip-mining Alaska and paying eight-year-old Sri Lankans a penny a week for sticking camels through the eyes of needles, but we're doing it for our shareholders, who are our constituents, and given that we live in a free market economy and whatnot, anyone can buy some shares and be enriched by our success.  In other words, they justify their inattention to social and environmental issues with their very pointed attention to their shareholders.  If governments act as they should, and everything else as it should, the market will take care of itself and everything will come out in the wash.

Some are skeptical of this world view, but there is some consistency to it.  Or there would be, were it not for those absurd, envy-inducing CEO bonus and stock-option packages.  Whether shares go up or down, CEOs often reap enormous rewards from the companies they pilot, and this money comes straight off the bottom line (no matter how various accountants may spin it) and, as a result, right out of that shareholder equity.

Things have started to turn around, most likely as a result of the unignorable infelicities in companies like Enron and WorldCom.  In the US, the Financial Accounting Standards Board has proposed that stock options be considered a corporate expense, a recalculation that would lower many corporate profits and, potentially, share value.  (According to a financial analyst for Credit Suisse First Boston, the 2003 earnings of the Standard & Poor 500 would have been 8 per cent lower had stock options been factored out of profits that year.)  And recently, George Soros and Warren Buffet, both billionaires, have turned on their fellow barons, demanding more responsibility, both to the world at large, and to their shareholders.  According to Corporate Knights ("the magazine for Canadian corporate responsibility," http://www.corporateknights.ca/), Buffet said that, "If class warfare is being waged in America, my class is clearly winning."

So, while things do seem to be swinging in the right direction, we suggest giving a little extra push.  One of the areas that has gotten the most out of control is the ratio between the earnings of an organization's highest earner to that of its lowest.  This ratio is more and more often submerged, with multinational corporations whose headquarters can be thousands of kilometres and several shell companies distant from their lowest-earning workers.  But since there is a connection, no matter how increasingly distant, not only between a company's highest and lowest earners, but between the efforts of its lowest earners and a company's worth, the two ends of the ladder should be connected by a fixed link in the form of a legislated ratio. We suggest the ratio be somewhere in the neighbourhood of 1:30.  This would mean that a company's highest earner likely the CEO could not make more than 30 times what its lowest earner does, options and bonuses included. Let's see what that would do:

Tony Comper, chairman and CEO of the Bank of Montreal, got $3.2 million in salary and bonuses last year, in addition to cashing in $6 million in stock options, for a total of $9.2 million.  If his pay had been linked in the 1:30 ratio, your BMO bank teller would have been a lot friendlier to you in the knowledge that s/he was taking home about $6,400 a week.  If, instead of going bankrupt doing this, the bank decided to work from the bottom up, it would mean that the $12/hr bank teller would ensure Comper's packet would be about $748,800.  Which, he'd pretty much have to admit, was still pretty good.  He could still afford a house that was 30 times bigger or better than his tellers.  His car could be 30 times flashier, his food 30 times more exotic and his vacations 30 times sandier (instead of, if you'd like us to do the math for you, Comper's current factor of 368).

As Mel Gibson once said, there will be poor always, and it stands to reason that there will also always be rich folks.  We've got no problem with that.  We just don't think the spread has to be quite so indecent.