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Volume 15, Number 10: Faculty Focus
October 2009

Listen to a 5-minute interview with Professor Colette Southam on executive compensation   Listen (5.1MB)   Subscribe

When we hear of CEOs making more money that Brad Pitt and Angelina Jolie combined our ears inevitably perk up.

Ashleigh Nimigan recently sat down with Colette Southam, professor of Finance, to discuss CEO’s sometime-sensational salaries, how their salaries are set in place, and the impact of cross-listing on a Canadian CEO’s salary. Ashleigh started by asking her why executive compensation is such a hot topic.

A. The media loves to report on these excessive CEO salaries and I think we like to look at these headlines because the dollar values are just so shocking, even compared to movie stars or rock stars. In 2007, the Rolling Stones had a really big world tour that was very successful and their annual compensation, as a group, was 88 million dollars. That equals 22 million a piece, which is a lot of money. That same year, Steve Jobs, the CEO of Apple, made 650 million –so that’s quite a bit more money. So I think we have a hard time wrapping our heads around what it would be like to live the life of Mick Jagger, but then we see Steve Jobs making three times that amount and I think that’s what really attracts us; it’s the big numbers.

Another issue that gets a lot of attention is the disconnect between firm performance and CEO pay. Going back to Apple [as an example] with Steve Jobs, that year his salary was only one dollar! So that 650 million dollar windfall that he earned came from increases in stock price. So that’s part of his long term incentive plan, which is designed to get CEOs to act in the best interests of the shareholders. So in that particular case, the Apple shareholders really won because the share price really went up.

But then last year, 2008, there’s a completely different story [to tell]. Let’s look at the CEO of Citigroup, Vikram Pandit. [Last year] he brought home 38 million dollars, which seems a little bit modest, but during the same time period his shareholders lost more than 75 per cent of the value. I think the Citigroup share went from around 30 dollars a share to about 7 dollars a share. So while his shareholders were losing, he was winning. And the bad part about that situation was, at the same time, Citigroup accepted 45 billion dollars in bail out money from the Federal Government. In this particular case we have the shareholders who are very unhappy and then we’ve got the tax payers of the United States who are very unhappy.

Q. Who sets these seemingly excessive salaries?

A. The board of directors has a compensation committee and that’s their job is to decide on executive compensation. Their justification for these high salaries is that they have to maintain market levels of CEO compensation [in order] to attract good CEOs. If the firm is not willing to pay the market rate then their CEO is going to be bid away by firms who are willing to pay that price.

Interestingly, Bloomberg was reporting that about a third of companies want to position their CEO in the top 25 per cent. The other 2/3 want to position their CEO at average [salary]. So you see where the problem is: nobody wants to position their CEO as below average. So this is going to continue to drive up the average.

Q. There is a wide consensus that CEOs in the US earn significantly more than their Canadian counterparts; but, you just completed a study that might suggest otherwise…

A. All of the studies show that US CEOs are paid significantly more than CEOs in any other country in the world. We found this to be the case with Canadian [CEOs]. When we looked at the entire population of TSX compensate index firms, the US CEOs were paid about 50 per cent more than the Canadian CEOs. This was a study that I completed with Professor Stephen Sapp and we matched each Canadian firm with a US firm in the same industry and in the same relative size range, to ensure that we’re comparing apples to apples. But then when we focused in on just the cross-listed firms we were a little bit surprised to find that those CEOs of cross-listed firms were paid on par with their US counterparts.

Q. How does cross-listing influence compensation?

A. For Canadian firms, generally once you’re successful you’ll list on the Toronto Stock Exchange and then if you do very well and you meet the listing requirements for a US exchange you might choose to list on the New York stock exchange or the NASDAQ [stock exchange]. So you can be cross-listed, meaning, you can be listed on two different exchanges in two different countries at the same time. Canadian firms that are cross-listed tend to pay stock options while the Canadians firms that aren’t cross-listed, the ones that are only listed on the TSX don’t tend to pay options. And that’s how the cross-listed CEOs are able to keep pace with their neighbours to the south. When I focused in on the Canadian firms, size didn’t matter and industry didn’t matter, the only variable that mattered was “is the firm cross-listed.”

That was Colette Southam, professor of Finance, at the Richard Ivey School of Business.