Case Analysis Report: ETHICAL DILEMMA
Are CEOs Paid Too Much?
Case Summary (Step 1 – Inventory of Facts)
In 2018, the average compensation of CEOs in Canada’s 100 largest companies was $11.8 million, 227
times higher than the average Canadian worker’s income. By comparison, the highest-paid American
CEO, Elon Musk, earned $595.3 million in 2019, 347 times the average U.S. salary. Supporters of high
CEO pay argue that these figures reflect supply and demand for top executive talent, responsibilities and
stress of the role, and potential influence on a company’s success. However, critics argue that
compensation is often disconnected from company performance and that CEOs appoint board members
who support pay raises regardless of results. For instance, Darren Entwistle and Joe Natale of TELUS
were overpaid by $8.7 million, and similar overpayments were observed in other major companies. In
2019, Jose Cil of Restaurant Brands earned $27 million, mostly in stock options. CEO compensation
continued to rise even during COVID-19, with a median package of $7.65 million for TSX-listed
companies.
Major Problems and Causes (Steps 2 & 3)
Problems:
1. Disproportionate CEO Compensation
CEO pay far exceeds average worker wages, causing income inequality and employee
dissatisfaction.
2. Weak Link Between CEO Pay and Company Performance
Evidence shows a low correlation between CEO compensation and firm results, suggesting
unjustified earnings.
3. Governance Issues in Boardrooms
CEOs may influence or select board members who approve excessive pay, creating a conflict of
interest.
Causes:
Market Competition: High compensation is justified by the demand-supply gap in qualified
executive leadership.
Lack of Accountability: Boards often fail to critically evaluate CEO performance.
Misaligned Incentives: Bonuses and stock options are sometimes awarded regardless of results.
Cultural Norms: North American corporate culture tends to normalize excessive compensation
for success.
Possible Solutions (Step 5) and Theory Application I (Step 4)
Applicable Theories:
Stakeholder Theory: Suggests corporations should consider the interests of all stakeholders, not
just executives and shareholders.
Agency Theory: Addresses the conflict between the agents (CEOs) and principals (shareholders)
due to misaligned goals.
Equity Theory: Suggests that individuals evaluate fairness based on input-output comparisons
(e.g., CEO vs. employee pay).
Possible Solutions:
1. Tie CEO Pay to Performance Metrics
Compensation should reflect company results (e.g., profit, growth, employee satisfaction).
o Objective: Align incentives and improve accountability.
2. Board Reform and Oversight
Boards should consist of independent members without personal or financial ties to the CEO.
o Objective: Strengthen governance and ensure objectivity in executive compensation
decisions.
3. Introduce Compensation Caps or Ratios
Limit CEO pay to a fixed multiple of the average employee wage (e.g., no more than 50x).
o Objective: Promote wage fairness and improve morale across the organization.
Recommended Action (Steps 6, 7, 8)
Preferred Solution: Combine Performance-Based Pay with Governance Reform
Justification: Using Agency Theory, it’s evident that CEOs act in their own interests when not held
accountable. Linking compensation directly to company performance addresses this misalignment.
Stakeholder Theory supports this by emphasizing the responsibility of the organization to employees,
shareholders, and the broader community. Strong, independent boards are critical to implementing and
monitoring such systems.
Implications:
Positive:
Enhances transparency and accountability.
Boosts employee trust and satisfaction.
Encourages CEOs to make decisions that benefit long-term performance.
Negative:
May discourage top talent if compensation becomes too restricted.
Could lead to short-term decision-making if metrics are not well balanced.
Applicable Theories (Revisited):
Agency Theory explains why performance-based pay aligns CEO and shareholder interests.
Stakeholder Theory supports limiting excessive pay to consider fairness for all involved.
Equity Theory reinforces the idea that employees perceive fairness when pay is proportional to
contribution.
Implementation Plan (Step 9)
Short-Term Actions (within 6 months):
Establish clear performance metrics tied to long-term growth, sustainability, and employee
satisfaction.
Responsibility: Board of Directors and Compensation Committees.
Conduct an independent audit of current board composition and remove members with
conflicts of interest.
Responsibility: Corporate Governance Advisor or external consultants.
Implement a pay ratio policy limiting executive pay to a maximum multiple of median employee
salary.
Responsibility: Human Resources and Executive Board.
Long-Term Actions (within 1–2 years):
Review and adjust compensation annually based on transparent, pre-defined performance
criteria.
Responsibility: Compensation Committee.
Train and recruit diverse, independent board members to improve objectivity and
representation.
Responsibility: Governance Committee.
Develop internal reporting mechanisms for employees to report perceived ethical concerns
regarding executive pay.
Responsibility: HR and Ethics Office.
