Is a CEO really worth his weight in gold?

In a CBC story about the CCPA’s January 4 executive compensation report, one of the go-to critics quoted in the piece resorted to a well-worn cliché to back up his dismissal of concerns about high CEO salaries.

Edwin Locke of the University of Maryland said “a good CEO is worth his weight in gold.”

To be fair, Locke wasn’t touting the virtues of all CEOs, just those who are “smart, rational and visionary,” but even assuming that every one of the CEOs on the CCPA’s top 100 list fits the bill, I was curious to see how Professor Locke’s gold standard would actually translate into cash.

As of January 14, 2016 the price of gold is quoted as \$1,083 U.S. per Troy ounce. At 12 Troy ounces to the pound, that is \$12,996 per pound. The U.S. dollar as of the same date \$1.44, Cdn., translating into a Canadian price of \$18,714 per pound.

So let’s do the math. According to Maclean’s magazine, the average Canadian man weighs 187 pounds. But let’s keep the math as simple as possible and assume that our average CEO weighs 200 pounds.

So our average CEO’s weight in gold is worth \$1,083 per Troy ounce multiplied by 12 Troy ounces in a pound, multiplied by 200 pounds = \$3.74 million.

His weight in gold would have placed him 121st in 2014 compensation among the CEOs of companies in the TSX index – well below the lowest-paid CEO in the top 100 — \$4.28 million. The CEO paid his weight in gold wouldn’t even have made the list of CEO salaries we released in January 2016. Or, to put it slightly differently, the average of the top 100 CEOs in Canada is paid 2.39 times his weight in gold. Every year.

So if a CEO really is worth his weight in gold, and if all of the CEOs on the list pass the “smart, rational and visionary test,” the CEOs on the list are either overpaid by Professor Locke’s standard, or they are very large.

Now this probably illustrates little more than the peril of making a statement without checking the math, but maybe Professor Locke is onto something. Maybe his gold standard explains why there are so few women on the highest paid CEO list. As my millennial offspring would say, “just sayin’.”

But behind that is a more serious point: there is no rational way to justify the pay of the typical North American CEO.

There is no evidence of any relationship between CEO pay and any measure of corporate performance.

There is no way to explain why CEOs in Canada who used to be able to scrape by making less than 40 times the average worker now command 184 times the average worker’s wage.

But there is widespread concern that the distorted short-term incentives built into the CEO compensation system are damaging both to our economy, in general, and to the long-term economic interests of the corporations themselves.

And there is widespread concern that the growing income inequality of which excessive CEO compensation is a symbol is bad news for a modern liberal democracy like Canada.

Hugh Mackenzie is a CCPA research associate and the author of Staying Power: CEO Pay in Canada. You can follow him on Twitter @mackhugh

1. SLim says:

Gold is measured in Troy ounces. 12 Troy Oz per pound, Dude.

1. Davis Ballantyne Carr says:

Thanks Slim, we have made the correction.

2. CCPA says:

And as it turns out, the corrected result makes the point even more forcefully. Fewer gold (Troy) ounces per pound means fewer dollars per pound of CEO, which in turn means a lower number for “worth his weight in gold.”

With the corrected numbers, the CEO worth his weight in gold doesn’t even make it to the top 100 list.

2. Shirley Bush says:

Presumably, companies have a Crisis Management Plan. If a CEO has a fatal heart attack today or is killed in an auto accident, someone is ready to replace tomorrow. No one is absolutely indispensable. Therefor, why the enormous money? There should be a formula setting a reasonable amount above average earnings of the company.