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Why politicians' pay zooms:
We let corporate executives set the bar crazily high

The Tyee.ca, July 26, 2007
 

When it was announced that British Columbia's MLAs would net a pay raise of 29 per cent -- and the premier a whopping 53 per cent bump -- there was outrage. Now we learn the MLAs are going to get a raise on top of their raise -- another 10 per cent for most of them -- plus that hefty pension.

 

But anyone who complains about greedy politicians should instead focus on protesting the stratospheric amounts paid to corporate executives.

 

Here's how the two are connected.

 

As long as legislators tried setting their pay on their own, they were inviting trouble. They've finally, belatedly, realized that what they have to do is somehow equate themselves with the private sector with its outsized compensation for executives, corporate lawyers and the like. The best way of doing that, in turn, is to have a certain class of outsiders adjudicate, for they'll inevitably look for such comparisons.

 

Right wing silent

 

This formula is what brought about increases to compensation for members of Parliament, formerly a matter of unending controversy. An independent commission tied MPs' pay to the incomes of federal court judges, whose pay scales had earlier been established by tying them to a complex mix of other measures, including senior lawyers in corporate centres like Toronto and Calgary and deputy ministers who look to corporate executive pay as a comparator. A different benchmark is now used for MPs' incremental increases, but that one interlude with private-sector links was enough.

 

MPs now get $151,000 per year, with automatic increases, plus extra compensation for cabinet ministers, party leaders, parliamentary secretaries, party officials (house leaders and whips), and committee chairs and vice-chairs. The base rate is almost four times the average wage in Canada, with the ratio even greater for those who receive extra stipends.

 

Cabinet ministers pull down $223,000, putting their incomes, counting their salaries alone, in the top one per cent of Canadians. Gilles Duceppe and Jack Layton, leaders of third and fourth parties respectively, are paid $202,000 annually.

 

The often heated criticism of MP's compensation, however, is no longer heard, although the pay is far out of line with what the most vociferous critics had previously been prepared to accept. The critics were effectively silenced because most of them had been anti-government right-wingers, who now would be forced to criticize not supposedly greedy MPs feeding from the public trough but private sector practices they have no inclination to question.

 

The wonder is that it took so long for the BC Liberal caucus to fasten on to what is the foolproof way of getting a big raise. Also ironic is that critics of MP and MLA salaries and pensions should have ever insisted on independent assessment by those living in the supposed "real world" of the private sector. In B.C., two of the three on the commission turned out to be high-earning lawyers.

 

Millions in frills

 

Let's have a look at the leading source of comparison: CEO salaries, bonuses and perks and the compensation accorded in fields such as investment banking, corporate law, and marketing. Then let us trace the connections back through to the public sector, and then to MLAs.

 

The connections might not always be apparent. A task force looking into MLAs' pay might not explicitly say, "Don Mattrick at Electronic Arts pulled in $21.9 million the previous year, David Thompson at Teck Cominco pocketed $18.4 million, several other BC executives managed $14 million, and recently Home Depot's ex-CEO retired with US$210 million on top of his US$38 million annual pay; so an MLA, with long hours and an uncertain future, is therefore worth at least $98,000 a year and a pension plan." The outsized compensation in the upper reaches, however, is well known and provides the cultural background for the demands, and acceptability of demands, of those in executive and professional functions all the way down the line.

 

Let's call those upper reaches the "private corporate bureaucracy." Compensation there is exorbitant not only in its principal amounts but also in its frills. In 2005 the average CEO in the Standard & Poor's 500 stock index pocketed 369 times the pay of the average worker. This was up from 28 times in the 1970s, itself an extraordinary multiple.

 

'Market' mantra

 

If such compensation occurred in the public sector, there would be screams of indignation, with media helping to whip up the anger. But because they occur in the private sector they are supposedly legitimized by having been generated by "free enterprise."

 

We are told they are determined by "the market for executives." The phrase, with the word "market" in it, has ideological resonance, but it's really a cover for an entrenched bureaucratic process. In my 1991 book, The New Bureaucracy: Waste and Folly in the Private Sector, I detailed how it happened: Executives, with their collaborative boards of largely fellow executives, used comparative compensation data to leapfrog each other year after year until, in their salaries, bonuses, options and perks, they were collectively in the stratosphere.

 

Scattered shareholders were no problem. Shareholder governance was a myth for large corporations with widespread ownership, as it had always been. Every once in a while there would be an attempt, or the show of an attempt, to tie compensation to results, to help pretend that there was at least some rationale to the exorbitant pay packages -- say by increasing the role of stock options -- but that would occur from already inflated standards as well. No matter what initiative was taken, moreover, there would almost always be adjustments made with new devices or compensation fads if events proved perverse, so that the pattern of high and higher pay would continue regardless. Performance indicators could be hollow anyway, heavily influenced by outside factors that had nothing to do with a CEO's own actual performance.

 

What does the money buy?

 

One should keep in mind, too, that western economies performed magnificently in the post-World War II period when executive compensation was a relatively low multiple of the average wage and when, at the same time, the marginal tax rate on upper incomes, including corporate executive incomes, was quite high.

 

The escalation of these pay packages, in sum, took place by a very bureaucratic process within an entrenched bureaucracy, protected ideologically just as surely as commissars were ideologically protected in the old Soviet Union.

 

The New Bureaucracy also documented variants of this entrenched, self-inflating process among investment banks, institutional investors, stock-exchange communities, a rampant, often self-feeding mergers-and-acquisitions bureaucracy, associated law firms and consultants, commodity traders, and advertising and marketing cadres.

 

It was inevitable that this would eventually have repercussions in the public sector. Executives of major crown corporations, for example, began making invidious comparison with their peers in private-sector corporations. Something had to give. In B.C. and across the country, compensation for crown corporation executives was pushed up. The same went for deputy ministers and others with executive responsibility like health authority managers and hospital administrators although, again, they had all previously been well paid by most people's standards.

 

Conservative spendthrifts

 

Ironically, but logically, anti-public-sector, right-wing governments rather than left-wing governments have most radically pumped up those public-sector compensation packages. In their minds, the closer crown corporations and other agencies are to private-sector corporations, the better, and that includes the way executives and directors are rewarded. Right-wing governments, in this way, are ideologically compelled to inflate public-agency executive and board compensation.

 

Consider the pay of the chair of the BC Securities Commission, Doug Hyndman, whose largesse was in the news last year. He was earning $511,000 at the time, a 370 per cent increase since 1998. The earnings of those immediately under him had been similarly inflated. When Hyndman's pay was questioned, a BCSC spokesperson pointed out that his counterparts in Alberta and Ontario had earned $698,000 and $652,000 respectively.

 

The press fingered the ability of the commission to set its own compensation levels as the problem, but the government could always have reined in that ability. The latitude given to BCSC, however, parallels the ability of corporate boards to set compensation and indulge their executives. The main, underlying reason for such extravagant pay is that BCSC is as close to the ideologically sanctified corporate world as it can be without formally being in that world, so that world's norms and benchmarks set the frame.

 

Blain's big cheque

 

It's the same reason that Larry Blain, the head of Partnerships BC, has been raking in $500,000, twice what a deputy minister is paid, for what amounts to a public relations job. Partnerships BC interacts with the private-sector corporations and is premised on private-sector corporate ideology. Paying Blain a more reasonable rate would undermine that premise. And Blain's compensation, unlike Hyndman's, is set by cabinet directly.

 

People wonder with amazement how such compensation comes about and how its beneficiaries continue to get away with it. A government that sees the corporate model as ideal is going to insist on such extravagance, viewing it as approximating how free enterprise works -- an unqualified good -- and hence business enlightenment rather than extravagance.

 

Next to all that, raising MLA's pay 29 per cent, or 50 per cent, or 100 per cent, reasonable or not, is just an insignificant incidental.

Copyright Herschel Hardin 2005
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