Much Ablog About Nothing

I try to vary my topics here at CAtO, but I can't deny that some stories just seem to push my blogging buttons, so to speak. Still, making a strenuous effort, I am not going to blog about today's front page National Post story, "Canada 'adrift': CEOs. Political 'vacuum' threatens nation's standard of living" -

- other than perhaps pointing out that when the article warns of "skyrocketing government spending -- up 20% on a per-capita basis over the past five years", and the CEO's say, "The country's fiscal base remains strong, but is threatened by runaway spending growth,", a balanced approach might have contrasted this whining with the fact that CEO compensation increased by roughly 100% last year.

If this pace of increase was to be sustained for 5 years (and as the Globe article notes, "Compensation experts say the surge in total payouts is likely the beginning of a string of banner years for top executives"), this would compound to a 3100% gain over 5 years.

Which kind of puts public spending increasing by 20% over 5 years (roughly 3.7%/year, which is probably less than nominal GDP growth over the same period) into perspective.

Also, when the CEOs put out a plan for Canada which says that, "Governments should ensure their activities contribute to future economic growth, rather than redistributing wealth for current consumption." they should perhaps pick their words more clearly or people will think they are suggesting an end to progressive taxation and all welfare programs, which might seem a little heartless and selfish coming from people who make millions of dollars a year.

But I'm not going to blog about that. The other thing I would normally blog about but am going to ignore because I've already said too much on this topic recently, is the stupidity of the Conservatives. In case you haven't heard, faced with the prospect of same-sex marriage legislation passing, here was the crybaby Conservative reaction (hat tip Gen X at 40):

"Conservative Leader Stephen Harper says the government's same-sex legislation will make it through the House of Commons only because of support from the Bloc Quebecois, and that, says Harper, means the legislation "lacks legitimacy." BQ Leader Gilles Duceppe immediately pounced on Harper's remarks, saying his party has as much legitimacy as the Conservatives. On his way into question period on Monday, Harper told reporters that the majority of federalist MPs will vote against the bill that extends the right to marry to gays and lesbians. He warned that the Liberals will face a backlash from voters outside Quebec over the bill. "It makes it an issue of Quebec versus Canada. Most Canadians have a skeptical view of Pequistes breaking up the country," said Conservative deputy leader Peter MacKay."

I'm assuming you don't need me to point out how dumb it is to write off the elected representatives of almost an entire province as illegitimate so there's no need to blog about this either.

What I will blog about today, is the book, 'The Efficient Society' by Joseph Heath.

First, some background. Over the past Christmas holiday I read a book called 'The Rebel Sell' by Andrew Potter and Joseph Heath. I posted my review here and in the comments Andrew Spicer suggested I might like Heath's earlier work, 'The Efficient Society'.

Andrew recently reviewed the Rebel Sell and concluded that the two books were worth reading as a pair. It's too late for me to do it in the proper order, but nonetheless I got a copy of The Efficient Society from the excellent Vancouver public library (I'm coming to think of it as the free version of Amazon with a better backcatalogue) last week and even found enough free time to read it.

The central premise of the book is that Canada is an efficient society because, when faced with decisions over whether economic functions should be carried about by government or by the market, we go with whatever works best (most efficiently) in that situation - as opposed to just putting personal freedom / fear of government ahead of efficiency (the 'American' approach) or putting collective thinking / fear of the private sector ahead of efficiency (the 'French' approach).

I'm not going to write a review here, beyond saying that I think anyone interested in understanding the proper role of government in Canada (and the world) should get hold of a copy and read it for themselves (it's an easy, not particularly long read and even just reading the first few chapters will give you a pretty good sense of the book as a whole).

What I am going to do, in my next few posts, is to highlight and discuss a few of the concepts in the book I found most interesting, starting with the contrast between a society motivated by improving/maintaining the virtue of its citizens and a society motivated by improving efficiency.

Did Your Pay More Than Double Last Year?

If not, don't worry because your CEO's did.

The Globe's Report on Business figures that the 161 top executives in Canada received average total compensation of $5.5 million each last year, thanks mainly to cashing in some stock options.

So let's do some math. $5.5 million x 161 = $885.5 million. Over 5 years that adds up to a little over $4.4 billion dollars. Hmm, roughly $4.5 billion over 5 years, that rings some kind of bell...

Just to refresh your memory, here's some quotes from a Globe story last week:

"Business leaders roasted the minority Liberal government's decision to boost spending by $4.6-billion and cancel corporate tax cuts [worth $4.6 billion over 5 years] to buy NDP support for its beleaguered budget.

They warned it will cost Canada billions of dollars in lost investment, job gains and tax revenue, and erode the business-friendly reputations of Prime Minister Paul Martin and Finance Minister Ralph Goodale.

"I think it puts Mr. Martin's credibility in doubt and Mr. Goodale's credibility in doubt," said Nancy Hughes Anthony, president of the Canadian Chamber of Commerce."

and more,

"Thomas d'Aquino, president of the Canadian Council of Chief Executives, warned that rolling back corporate tax cuts will discourage the investment needed to generate the future tax revenue needed to "pay for the massive federal commitments to expanding social programs and equalization payments."

Jack Mintz, president of the C.D. Howe Institute, predicted Canada will lose "billions of dollars in investment" as a result of Liberal missteps on corporate taxes."

and my favourite,

"Perrin Beatty, head of the Canadian Manufacturers & Exporters, said Liberals are turning their back on businesses. "The government put those tax cuts in the budget because they recognized that Canadian business faces unprecedented competition"

So forgoing a $4.6 billion future tax cut for Canadian business will cost us billions of dollars in investment, destroy the credibility of the government, make business unable to compete in a tough global environment and is enough to pay for massive federal commitments to social spending and equalization.

But the same amount (probably more if you consider the time value of money) paid to the CEO's of just 161 companies is no doubt a wise and necessary cost of doing business which will more than pay for itself by creating incentives for CEO's to try and do a good job - something which a salary of $700,000 (on average) apparently wouldn't be enough to encourage them to do thus requiring the incentive of cashing in stock options if the share price goes up.

Here are some quotes from the Globe article on executive compensation:

David Beatty, head of the influential Canadian Coalition for Good Governance (CCGG), agreed that some CEOs, such as Power Financial's Mr. Gratton, have created "tons of value" for their shareholders, but others "are just riding on the boat" that has been lifted by overall rising market levels. "They are giving away a lot of the company for nothing. There are other ways to reward people."

...

Bill Mackenzie, head of Institutional Shareholder Services Canada, formerly Fairvest, said it's hard to link huge option gains with individual performance. "It just means there were big grants. Whoever has options has beautiful leverage, and they are making a killing."

...

Claude Lamoureux, CEO of the Ontario Teachers Pension Plan, argues that options do not always reward performance. "It is very random. You could do wonderful work and not be rewarded, and you could do crappy work and make a lot of money with your options."

...

Mr. Hugessen [from Mercer] expects investor groups will pressure boards to be more selective about when they hand out share units, rather than just making grants a given every year for anyone "who fogs a mirror."

"It begins to feel a little like a money machine. People are hankering on to this."

...

Citing the work of Harvard law professor Lucian Bebchuk, he [David Beatty] said many compensation decisions are based not on performance but on a desire for collegiality, a sense of loyalty to the CEO and conflict avoidance. The result, he said, has been "outrageous costs."

Just something to think about next time you hear dire warnings of doom and gloom from our CEO's when the government fails to cut corporate taxes quickly enough for them or when they talk about how we need to keep costs down in order to be competitive.

CEO overpay cons

It's always interesting to see what searches bring people to this site. So far my favourite was a recent visitor who searched for "CEO overpay cons" - a search for which this site comes up a respectable 8th on google.

In honour of that search I direct your attention to this post by pogge in which he rightly takes Thomas d'Aquino (president of the Canadian Council of Chief Executives) to task for his hysterical, hyperbolic reaction to the deal between Paul Martin and Jack Layton to cancel corporate tax cuts in the federal budget.

Says Thomas,

"By reneging on the corporate tax cuts in the 2005 budget, the deal announced today will sacrifice Canada's ability to foster more high-paying jobs and to ensure that our economy grows fast enough to pay for the massive federal commitments to expanding social programs and equalization payments,"

As pogge notes, given that the federal corporate tax rate has already been reduced from 28% to 21% since 2000, it seems a bit absurd for supposedly serious people to be making statements that not cutting the rate further for a few years is going have some huge negative impact on our economy.

Personally, I think Paul Martin should have stuck to his guns on this one, and on principle I worry about deals which increase spending but don't increase revenue to pay for it (the spending occurs now while the corporate tax cuts didn't take effect for a few years - and Martin is now telling the Conservatives he's going to go ahead with the cuts anyway), but we're not talking about a huge amount of money on the scale of the federal government and it would be nice to discuss it like adults rather than having flacks like d'Aquino making ridiculous statements with no connection to reality.