Overpaid CEO's

The newspaper today revealed that Gary Holden received $4.6 million as severance for quitting his job as CEO of Enmax. This on top of his $2.7 million annual salary and bonus for running an electrical utility company wholly owned by the City of Calgary. I note that the Mayor of the City of Calgary is paid on the order of $165,000 a year, and is one of the best paid mayors in Canada. I further note, the Premier of Alberta is paid on the order of $200,000 per year. Even further, the Prime Minister of Canada is paid about $315,000 per year.

Holden was essentially forced to resign in the light of accepting a trip to Monaco for the F1 race, paid for by SAP, a company that sells software to Enmax. Enmax employees are not allowed to accept gifts in excess of $100. There were several other indiscretions, shall we tactfully call them, where he behaved more like one of the magnates of the Guilded Age. There was even one episode recently where he sent a several page email (rant) to every Enmax complaining about biased media reporting on these, ahem, indiscretions. More on that later.

I went looking to see if I could find the average salary for the average Enmax employee. There are about 1700 of them. About a quarter are IBEW, so I assume these are the actual electrical people. Not quite 45% are CUPE, so I assume these are administrative staff. The rest are non union managers. I found the 2006 to 2008 collective agreement between Enmax and CUPE. The highest hourly pay I can find for 2008 is 45.88 for a drafter. Whatever that is or does. The top grade accountant is 38.86 per hour. Many positions are much less per hour. Lets for the sake of argument assume that all Enmax employees have been there long enough to be at the top of their pay grades, AND that the mix is skewed to the higher end of the hourly range, and assume the average employee is getting $35 an hour. They work a 40 hr week, for an annual salary of $72,800 per person, or $54.6 million for all CUPE employees. That's almost certainly a bit high. I would have guessed average salary across CUPE employees to be closer to $50K per person, what with new employees, and greater numbers in the more junior positions.

Even so, if you crunch the numbers, Holden got paid 37.5 times what the average employee got paid, or put another way, it took 37.5 employees to equal his annual paycheck. If you assume $50 K average salary, Holden got paid 54 times what the average CUPE employee got paid. I didn't look for the IBEW contract, but it's probably out there, and I suspect the average wage for those employees is somewhat higher.

The CEO pay apologists would argue that CEO's get paid what they do because they produce corporate value, provide a scarce commodity called leadership, and magically increase stock prices to increase shareholder value. There are enough examples of poor leadership, and declining share values to dispose of this argument. Is Holden 40 to 50 times smarter or harder working than the average employee? I doubt it. Yes, Enmax has done well financially recently, but how much of that is appreciable to Holden, and how much to the other members of management and staff?

The apologists would say CEO pay is "comparable", but Holden was paid far more than other CEO's running similar or larger companies. For example, Hydro-Quebec is 10 times the size of Enmax, and the CEO got $600,000 per year. Personally, I think this benchmarking and comparison is a mugs game. They only compare themselves to the top of the scale, so it's a self-ratcheting system. The whole financial end of the big corporations is dodgy at best, crooked as a dog's hind leg only when they can't away with being outright fraudulent. Each big corporation has legions of people devoted to cooking the books, I mean, producing financial results that flatter the senior executive team and further other corporate goals.

Holden's 5 page reaction to media exposure of rock star parties in his home was predictable. The rich and powerful hate it when the hoi polloi get wind of what they are up to. They grow accustomed to the swanky life, the corporate jets (though to be fair, nobody so far has mentioned abuse of corporate jets as one of Holden's sins) the ostentatious offices and homes, the army of underlings to smooth all before them. They begin to think they earned it, that they deserve it. Then they want more. And more. There is no enough.

Recently Alberta saw the forced departure of Stephen Duckett from the Alberta Health Services board over a cookie. Yes, an oatmeal raisin cookie. In response to media questions about the serious and urgent issues facing the board, he waved his cookie and said he was busy eating. Idiot. That cost us $680,000 in severance. That's the most expensive cookie I've ever heard of. His base salary was $575,000, with some other allowances and a bonus between $0 and $140,000. That's for running an organization with about $10 billion in revenue. Enmax's revenue in 2008 was just over $2 billion, and is on track in 2010 for about the same or a bit more. I wonder who's salary was out of line, Holden's or Duckett's?

I think we are all agreed that people with different skills should be paid differently. Society values some skills more than others. I certainly don't mind paying other people to be a cop or a firefighter. They have dangerous jobs with a huge impact on how well our society works, and should be well compensated. I want the medical people working on me or my loved ones to be well trained and up to date on the latest developments in the field. Such training is not cheap, and I don't begrudge it in the slightest if they are well paid. Engineers typically are not in the limelight until a bridge falls down or there is some other infrastructure failure. These people have a huge role in determining if our world is safe, and again, should be well compensated. But here we start seeing a transition. You need to be fairly smart, but don't need to be brilliant to be an engineer. There are lots of people willing to do the work to become an engineer, and what there is a large supply of tends to be valued less.

One could do a similar calculation for almost every job. There are the skills that go into learning what is needed to do the job, there are hazards involved with the job, a value to society, there is a prestige factor associated with the job, and of course, your own personal charisma. All these things determine what a particular person in a particular job will be paid. Of course there are distortions. Unions and similar organizations are a distortion. Government regulation is a distortion leading to both higher and lower compensation. Selective benchmarking is a distortion. Many other factors distort the labour market.

But I have to say, the CEO's have done the best job of marketing themselves as a scarce commodity supplying a valuable product. I'm not quite sure how they did it, but I suspect the CEO's, their boards, and the senior financial people are all in it together, along the lines of "if we don't hang together, gentlemen, we will assuredly hang separately." Their manipulations have destroyed billions, perhaps trillions of dollars of value in the last few years. How much longer are we going to put up with a small group of people stealing from society at large for their own private profit? How much longer are we going to put up with a small group of people privatizing the profit, but socializing their losses?

If a CEO wants to be paid on the basis of shareholder value, then let him (it's almost always a him) record the value of the shares when they take office, and set a timeline, and express their desired compensation in terms of value per share. When that time comes we look at the books, rather, we audit the crap out of the books to see if he's done what he said he could do. If it's all Jake, pay him. If not, send him packing with nothing. None of this huge reward regardless of the quality of results bullshit.

The world isn't a fair place. Grown ups don't expect fair results all the time. But we do expect equitable results when it comes to the work world. I don't have a problem with someone taking more responsibility getting paid more. People that do more complicated or difficult or dangerous jobs should be paid more. But you can't convince me that a guy sitting in an office performing financial manipulations for a small company is producing 40 to 50 times the value of the average employee, and should be paid accordingly. And what about in comparison to the person leading the organization that owns Enmax; is Holden providing 16 times the value that the Mayor of Calgary produces?

Some inequality provides incentive for people to better themselves, which is better for society. People take risks with the idea they will gain a reward. People can choose to invest in themselves or their children, undergoing many years of expensive post secondary education with the idea they can be well compensated for applying that knowledge.

But gross inequality is corrosive. Rightly or wrongly, when people see someone being extraordinarily well compensated for doing a poor job, they feel the compensation is not deserved. It doesn't matter if it's a CEO or a star athlete. If they don't perform, they are seen as getting away with the loot, as if they had stolen it. Which, in a sense, they have. People are rightly enraged when the average worker loses their income and their pensions because financial manipulations destroy a company, and the people who did it escape with their golden parachutes. And then, to top it off, they say something like, "that's the way the contract was written", as if they wouldn't have taken the money otherwise. Which makes most of us just about pop a blood vessel.

Boards are supposed to oversee and regulate such things, but they've long since been captured by the system. They are careful to choose new board members for being "one of us". Part of the self-perpetuating system. Government regulation? Don't make me laugh. The bean counters can already manipulate the company results to produce any numbers they want for any audience, government, regulators, shareholders, or the public. Odd how that reduces their tax to next to nothing, and buries the lucrative compensation clauses in the footnotes.

One place to start is to repeal the laws granting corporations "person-hood." Corporations are not people, and should not have the same rights as people. They've been using free speech rights to pervert government actions, thwart public policy, and shelter themselves from public criticism. Maybe we should make a law that no corporation can have more than 150 people involved with it, total. That might keep things to a more manageable size. Of course, apologists say that big corporations make for more efficient markets. Yes, more efficient to the point of being monopolies raking in huge profits. Having many more smaller companies might be more inefficient from an economic point of view, but I think it would lead to more human results.

I'd love to see people at the top of an organization getting paid some reasonable multiple of the average worker, and then their increases are the same percentage increase granted to those average workers, based on corporate results. The real results. So rather than a corporate board committee scouring the land for some outlying CEO compensation package that they can use as justification for a pay increase, it would be quite straightforward. They grant the staff a 4% raise, then that's what the CEO and senior management gets. And by staff, I don't mean senior management staff, or staff in other organizations. I'm talking about the internal, non-management staff, often paid hourly. Any bonuses should be distributed in a similar manner. The corporation's financial results, and compensation paid, should be openly and transparently reported, in such a way that you don't need an accounting degree to understand them.

Yeah, for these last couple of paragraphs, if you want some of the drugs I'm on, drop by. It's called Tempranillo Cab Sauv. Tasty.