This paper examines the growing gap between executive compensation and ordinary worker salaries, with particular focus on Canada and a comparative analysis with the United States. It explores how compensation structures — including salary, bonuses, stock options, and long-term incentive plans — have evolved over the past 25 years and what drives executive pay increases. The paper also investigates the social consequences of compensation inequality, including social unrest, crime, and health problems, as well as the broader economic implications. Regulatory and tax policy approaches to controlling excessive executive pay are discussed, and the paper concludes that reform and transparent monitoring of executive compensation practices are necessary.
The average compensation of executives, compared to worker salaries, is strikingly high. According to some research reports, the compensation gap between executives — such as CEOs and senior managers — and ordinary workers was 85 times higher in 1995 and had risen to 219 times higher by 2009 (Mackenzie, 4). These figures indicate that executive compensation rates have been increasing rapidly year over year. The aim of this research report is to analyze the influence of higher executive compensation on the social environment as well as on Canada's economy. This report also examines and compares executive compensation in Canada and the United States, and investigates the reasons why these compensation rates increased over the last 25 years.
Executives play an important role in every organization and act as key members. They can be considered the leaders of the workforce because they direct and manage the standards, processes, production, and quality of an organization. The high compensation rates for executives are understandable given their specific and critical responsibilities. However, as the data above suggest, the growing compensation gap between executives and workers is a fundamental source of inequality. This inequality affects the social environment and produces negative impacts.
High executive compensation not only affects the country's social environment but also impacts the economy. It should also be noted that growing inequality stems not only from salary or wage differences but also from executives' shares and stock holdings in their organizations. Executives additionally receive high-value benefits in the form of allowances and bonuses. Boards of directors invest considerable resources to attract and compensate the right person for an executive role.
The government can address the high compensation issue by implementing regulatory procedures and tax systems targeting outstanding executive salary packages. However, there are drawbacks to government-based regulation. The business community and executives typically view such regulations as government interference in business operations, and this carries the potential to create political instability. Therefore, a regulation-based system alone may not be the most effective approach for reducing or eliminating inequality. On the other hand, a progressive taxation system can help reduce income inequality and provide broader public benefits (Mackenzie, 10).
Previous research on executive compensation has shown that bonuses and other incentives can enhance executive performance. This type of compensation provides short-term benefits to executives. Share ownership and stock options increase executives' long-term interests in the firm, leading to higher compensation compared to bonus-based arrangements. Bonus-based compensation is also known as cash compensation. Research indicates that the relationship between compensation type and performance matters: executives compensated primarily through shares and stock options have not always been shown to perform better. Therefore, it can be concluded that the relationship between executive performance and compensation is not uniformly strong (Jiang, par. 2).
In order to examine and analyze the current executive compensation system in Canada, it is helpful to categorize the compensation structure according to the type of firm. These types include family-controlled, institutionally controlled, and widely held firms (Jiang, par. 4). Family-controlled firms hire family members at the executive or management level, which produces a stricter compensation control and monitoring system and protects owner interests. Both family-controlled and institutionally controlled firms focus on the nature and protection of investments, which enables effective monitoring of shareholders. These firms typically have large shareholders, which tends to increase executive performance accountability. By contrast, the shareholder monitoring systems in widely held firms are less effective due to mismatched incentives and the high monitoring costs associated with small, dispersed shareholders. The monitoring system of family-controlled firms is generally more effective than that of institutionally controlled firms, in part because hiring family members in executive positions enables closer oversight and also influences executive performance.
Executive compensation also varies according to firm size and changes over time. Firm size can be measured by sales data, total assets, and the number of employees. The components of executive compensation combine both short-term elements — such as salary and bonuses — and long-term elements — typically based on stock and shares. The relationship between executive pay and performance has been widely examined. The goal of an organization is to maximize profit; shareholders and owners obtain financial benefits from this profit. Managers and executives, responsible for running the firm, may naturally focus on personal benefits rather than shareholder or organizational interests. This principal-agent problem can be mitigated by offering attractive compensations and incentives to executives. For example, executives may seek higher compensation by boosting sales or production. Therefore, the compensation relationship should be tied to profit rather than to sales or production volume alone, to avoid misaligned incentives (Sharma, Smith).
Political and social factors also play an important role in executive compensation. Executives may seek to use political influence to maintain or increase their compensation. High executive salaries affect the social environment by deepening inequality, as ordinary workers' pay cannot match executive compensation levels. Firm size also correlates positively with executive compensation: smaller firms tend to show a negative relationship with executive pay levels, while larger firms exhibit a positive one.
The role of the executive is critical to achieving organizational goals; however, extraordinarily high executive compensation in Canada and the United States produces long-term negative impacts on society. If executive compensation is 20% or more above the average for executives, it can be characterized as excessive pay (Whelton, 15). Unequal wealth distribution is widely considered unfair, yet capitalism — the foundation of American society — rewards talented individuals, and executives capture a large percentage of firm income. High executive compensation does not only affect society broadly; it also impacts ordinary workers, communities, and the nation. In particular, high executive compensation is seen as fostering a culture of financial self-interest and ethical compromise. The most significant contributing factor is the unfair distribution of wealth and the corresponding lack of material security for ordinary workers. Addressing such excessive compensation requires legal reform and limits on pay levels. The failure to do so results in low workforce morale, which in turn affects product quality.
The inequality between executive compensation and ordinary worker salaries has a considerable influence on the social environment. Compensation inequality creates social problems such as unrest, higher crime rates, and mental and physical health issues. The growing income inequality in Canada can also act as an obstacle to economic growth and can damage political democracy. The expanding compensation gap may contribute to financial instability and increase the risk of serious financial crises. The absence of reform in social, economic, and labor policies is among the main drivers of this growing inequality (Lazonick).
The effects of executive compensation on a country's economy have been examined through surveys of US-based firms, focusing on the long-term implications of executive pay policies. These policies help firms not only control costs but also address issues such as public criticism and shareholder protection. Firms have begun to acknowledge compensation inequality as an economic concern. Necessary corrective actions include freezing salaries, reducing merit-based budget increases, and delaying salary raises. Tax policy also plays an important role in reducing the negative economic impacts of executive salaries. Additionally, companies should revise long-term incentive packages, and stock options or share-based compensation should be subject to time-based restrictions ("Effect of the Economy on Executive Compensation Programs").
"Cross-national comparison of pay structures and cultural attitudes"
"Historical shift from cash to stock-based compensation"
Sapp, Stephan, and Colette Southam. "A Canada-USA Comparison of CEO Compensation." Canada, 25 July 2003. Web. 22 June 2012.
Whelton, Russel S. "Effects of Excessive CEO Pay on U.S. Society." n.p. Web. 23 June 2012.
Zhou, Xianming. "Executive Compensation and Managerial Incentives." Journal of Corporate Finance. 2006. Web. 22 June 2012.
"Effect of the Economy on Executive Compensation Programs." WatsonWyatt.com, March 2009. Web. 22 June 2012.
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