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Why Do CEOs Make So Much? They're Worth It

In their annual study of executive pay, the CCPA once again trots out the tired suggestion that executives in Canada make too much money. It is an ancient complaint of the free market: that the market does not produce income equality.
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CEOs make more money than the average Canadian, and the Canadian Centre for Policy Alternatives (CCPA) thinks you should be worried about it.

In their annual study of executive pay, the CCPA once again trots out the tired suggestion that executives in Canada make too much money. It is an ancient complaint of the free market: that the market does not produce income equality.

When studies like these become the economic talking points of the political left, whether in the Liberal Party or the NDP, it is easy to understand why polls demonstrate that Canadians consistently put their trust in the Conservative Party on economic issues.

As we leave one of the worst recessions in decades, Canadians are not and should not be concerned about executive salaries. Instead, they are rightfully concerned about the real indicators of economic health: GDP per capita, unemployment, quarterly growth in the companies in which they have invested, etc. It would seem to me that we have bigger fish to fry in this world than the petty concern that the market rewards some more highly than others. It is an invented problem.

Why must we always have the same ancient battle over the value of income equality? Great economic thinkers like Milton Friedman, Friedrich Hayek, Walter E. Williams, and Thomas Sowell have ravaged these arguments again and again. The entire purpose of economic freedom is to ensure that income equality does not exist. Society uses the price system to incentivize that which we value.

We pay higher wages to those workers with education and greater skills. Value increases based on scarcity: Those who work where specialized labour of a certain sort is rare will earn more than those who compete in an industry where specialized labour is more common. Hence, we pay doctors more than we do fast food workers. It is this simple signaling of value, inherent to the price system, that forms a vital aspect of market interaction.

It is amazing how easily we forget these lessons when we discuss income equality. This study is no different. An easy example will show the importance of these signals. The study fingers Aaron Regent, CEO of Canadian mining giant Barrick Gold Corp., as the most highly compensated executive in Canada. The study weighs his total earnings from Barrick Gold at around $24.2 million. These include stock options, his private pension, base salary, and other perks.

So what makes Aaron Regent so valuable? This is the important question, the question this study leaves unanswered. Without the context of Mr. Regent's value as a worker in the market, we cannot understand why his earnings were so impressive.

It would take me a series of columns to outline Regent's resume. With only a bachelor of arts from the University of Western Ontario, Regent has held executive roles in dozens of companies both in mining and finance. Highlights include his roles as vice president of strategy & corporate development at Vale Inco Limited, Co-CEO of global infrastructure business, senior managing partner of Brookfield Asset Management Incorporated, CEO of Falconbridge Limited, and CEO of Trilon Securities Corporation. These are only a tiny fraction of the executive positions he has held in his lifetime. He also serves on the board of directors of the C.D. Howe Institute, the Nickel Development Institute, the National Ballet of Canada, and the Hospital for Sick Children Foundation.

With that in mind, it becomes understandable why Regent received $24.2 million from Barrick Gold. He has a unique blend of experience in mining and financial firms which are ideal in his current role. More importantly, his resume is rare. There are few management workers in Canada with Mr. Regent's level of experience. Companies compete hard to hire one of the few executives in Canada capable of being CEOs. Since they are so rare as workers, their market value as labourers skyrockets.

Anyone with a simple understanding of price signals in markets can thus see why CEOs are so highly valued. They offer a product, their talent, and experience that is both difficult to find and in high demand. Hence, they are paid more.

The study's author, Hugh Mackenzie, acknowledges this fact, and openly shows contempt for it. He suggests that corporations find themselves in what he describes as a "prisoner's dilemma": If they all colluded they could pay their CEOs less, but because they are competing with each other, they all increase their price since "boards fear that stepping outside the norm will lead them to be unable to hire the best."

The CPPA somehow decries corporations competing to hire workers as somehow morally wrong. But that is the entire point of the system!

What is the solution then, to the moral conundrum the CCPA has invented for itself? Some leftists argue for an outright cap on executive salaries. This would essentially amount to a price ceiling, preventing some CEOs from being able to sell their services in a free market. Those CEOs will thus be incentivized to leave the country, and they certainly will: They will go to freer markets in the U.S., Hong Kong, or Japan, where they will receive a pay that reflects their market value.

Canadians will lose, because Canadian companies will lose world-class management talent to foreign competitors. At its worst, a price ceiling for executive pay could lead companies to relocate entire offices to other jurisdictions. The result from that would be clear: job losses at home which will only hurt economic recovery.

We need to stop wasting time on these minuscule and ideological issues and talk about Canada's real economic problems: reducing inter-provincial trade barriers, completing an open trade agreement with the EU, aggressively cutting personal income taxes, and addressing pension reform. These are the issues that really matter to Canada's future, and these are the problems we should be discussing.

Forced income equality is simply a waste of time and precious resources.

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