Among other things, the Canadian Center for Policy Alternatives has long accustomed us to an annual meeting at the start of the year. This was the case in January 2023, when we learned that the 100 best-paid CEOs of companies in the S&P/TSX stock index had earned $14.3 million, on average, in 2021. Or even , 243 times the salary of average workers. Or that it took them 43 minutes to do what the average worker would take all year to earn. It depends ! What if these excesses were imposed?
Last week, the Parliamentary Budget Officer (PBO) undertook the exercise of quantifying the motion tabled by NDP MP Jagmeet Singh to increase the corporate tax rate and disclose the ratio between the salary of CEO compared to the median salary of employees. In this motion, it is proposed to increase the tax rate for large companies with disparities in the ratio between the salary of the CEO compared to the median salary of employees. The increase would be 0.5 percentage points if the ratio was between 50 and 100, to be gradually increased to 5 percentage points if the ratio was equal to or greater than 500.
Conclusion ? It would pay off… on paper. The PBO estimates that the measure would allow the federal government to collect additional net tax revenues of $8.91 billion ($11.02 billion gross) over the five-year period. That said, the authors of the note applied “a behavioral response to the effective increase in the corporate income tax (CIT) using the elasticity of this taxable income with respect to changes in the associated tax rate . Because the additional tax is calculated on the IRS, we will necessarily have to expect a behavioral reaction modifying this underlying tax base. This loss in terms of IRS is estimated at 1.8 billion over five years in the base scenario mentioned.
In short, affected businesses would activate the work of their tax advisors with the effect of canceling part of the additional revenue produced by the proposed measure. According to the authors of the note, assuming high elasticity, the loss in terms of the IRS would increase to 5.2 billion, thus reducing additional federal revenues to 5.12 billion over the period chosen.
Utopia that all this
We are talking here about an accounting estimate, which is, moreover, utopian. If only because the exercise is carried out in a closed circuit, without regard to this old, well-established reflex of boards of directors consisting of setting the CEO’s remuneration according to that paid to managers of similar companies by their size or turnover. It is already underlined in the report that based on historical data, only a small number of companies would have been subject to the additional tax (around 300 each year). Changes to CEO compensation could reduce this number, specifies the PBO. “The magnitude of the behavioral impact may also vary. »
Also, the motion tabled is all the more difficult to apply as variable remuneration can occupy a dominant weight in the total remuneration. And that it calls more on shares, retained earnings or off-balance sheet entries than on a reduction in expenses. In 2021, 83% of the total compensation of the 100 CEOs came from this so-called variable portion including bonuses, stock options and shares. This percentage was 69% before the Great Recession of 2008-2009. A portion which, it must be remembered, very often feeds on stock prices as fuel for so-called financial measures having too often borrowed in the past from the rationalization of the workforce, the relocation of production, share buybacks and incentives. on the sale of the company.
Without forgetting that over the years, experience shows that the pay gap has constantly grown in step with the rise in denunciations and attempts at containment, reaching its historic high in 2021. In other words, all attempts aimed at putting an end to these excesses have generated ever more ingenious and more stratospheric remuneration. Performance bonuses transformed into retention bonuses or replaced by golden parachutes, abandonment of purchase options to replace them with units or rights to the appreciation of shares, contractual compensation in the event of stock market setbacks, departure allowances more generous or enhancement of the retirement plan…
The gap of 243 reached in 2021 makes us forget that we were talking about a ratio of barely 60 at the end of the 1990s. How far we have come! The gap has even gone from simple to double when we approach the remuneration of executives at the second or third hierarchical level, the Institute on the Governance of Private and Public Organizations has already calculated.
We know it. Boards of directors and senior managers are simply prisoners of a logic borrowed from professional sports, and trapped in a system of horizontal comparison. They are rather doubtful about the arguments of management specialists seeing in it a remuneration policy based on indicators encouraging short-term performance, or even a prioritization of the shareholder’s total return. It should also be emphasized that, for many companies listed on the stock exchange, there is fear that underperformance will plunge shareholders under the influence of hedge funds, activist shareholders and other opportunistic institutional investors. .
But all this has already been written more than once.