Originally Posted 3 August 2017
Corrections made 9 August 2017
Last October AlbertaRecessionWatch.com published a listing of the top paid senior Executives in Alberta’s provincial Corporation universe. As the tables demonstrated, the pay levels were dominated by individuals working in the financial services and in the energy regulatory setting. Last year, like this year, this group predominates. Since October, the Government of Alberta has made a number of changes to the pay levels of the top officials working in these agencies.
On 24 February, a listing was published with new pay thresholds at various agencies. 23 agencies were included in the compensation regulatory framework. The changes included the elimination of executive bonuses, the elimination of “executive Market modifiers,” and capping executive severance pay at 12 months. In addition, perks such as retention bonuses Golf Club memberships and housing allowances were also taken away.
These agencies included the Agriculture Financial Services Corporation, the Alberta Energy Regulator, the Alberta Gaming and Liquor Commission, Alberta Innovates, Alberta Pensions Services Corporation, the Alberta Securities Commission, the Alberta Petroleum Marketing Commission, the Alberta Utilities Commission, the Appeals Commission for Workers Compensation, the Balancing Pool, the Credit Union Deposit Guarantee Corporation, the Labor Relations Board, Travel Alberta, and the Workers Compensation Board. The table below is taken from the press release and shows the new pay matrix. This regime was developed in consultation with the Hay Group, a large human resources consulting corporation. [Press Release] A key principle underlying the changes were to bring salaries “in line with public sector equivalents.”
|Agency name||2015 Compens-ation disclosure amount (1)||Existing base salary (4)||Existing variable pay||New CEO base salary range||New CEO base salary (5)|
|Agriculture Financial Services Corporation||$732,103(2)||$518,471(2)||N/A||$223,040 – $301,760||TBC|
|Alberta Energy Regulator||$721,680||$525,000||N/A||$264,480 – $396,720||$396,720|
|Alberta Enterprise Corporation Board||$203,982||$275,000||N/A||$184,365 – $249,435||$249,435|
|Alberta Gaming and Liquor Comm.||$367,125||$286,977||N/A||$223,040 – $301,760||$286,977|
|Alberta Human Rights Comm.||$341,917||$258,375||N/A||$184,365 – $249,435||$249,435|
|Alberta Innovates||$284,424(3)||$360,000 (3)||N/A||$264,480 – $396,720||$360,000|
|Alberta Local Authorities Pension Plan||$329,222||$248,200||$52,800||$184,365 – $249,435||$248,200|
|Alberta Pensions Services Corporation||$411,617||$264,576||$73,023||$223,040 – $301,760||$264,576|
|Alberta Petroleum Marketing Comm.||$658,014||$600,000||N/A||$223,040 – $301,760||$301,760|
|Alberta Securities Comm.||$487,356(3)||$491,032||N/A||$333,280 – $499,920||$491,032|
|Alberta Utilities Comm.||$529,400||$345,849||N/A||$264,480 – $396,720||$345,849|
|Appeals Comm. for Workers’ Compensation||$285,945||$217,589||N/A||$184,365 – $249,435||$217,589|
|Balancing Pool||$416,739||$364,000||N/A||$153,595 – $207,805||$207,805|
|Credit Union Deposit Guarantee Corporation||$365,169||$309,000||N/A||$223,040 – $301,760||$301,760|
|Energy Efficiency Alberta (new agency)||N/A||N/A||N/A||$153,595 – $207,805||TBC|
|Health Quality Council of Alberta||$405,540||$350,000||N/A||$184,365 – $249,435||$249,435|
|Labour Relations Board||$314,836 (2)||$217,589 (6)||N/A||$184,365 – $249,435||$217,589|
|Land Compensation Board/ Surface Rights Board||$275,731||$214,032||N/A||$184,365 – $249,435||$214,032|
|Market Surveilance Adminstr||$252,572||$286,977||N/A||$153,595 – $207,805||$207,805|
|Natural Resources Conservation Board||$237,711||$217,589||N/A||$184,365 – $249,435||$217,589|
|Travel Alberta||$240,946||$230,000||N/A||$184,365 – $249,435||$230,000|
|Workers’ Compensation Board||$896,206||$475,000||$218,313||$264,480 – $396,720||$396,720|
1 Includes base salary, bonuses, non-taxable benefits as well as non-monetary benefits such as pension contributions (employer’s portion), employment insurance, CPP and WCB premiums. 2 Previous CEO’s salary disclosure amount 3 Interim CEO information reported in salary disclosure 4 Base salaries submitted as per Section (4) of the Reform of Agencies, Boards and Commissions Compensation Act (RABCCA). 5 New CEO Base Salary will immediately take effect for new hires or reappointments; or on March 16, 2019 for existing incumbents. 6 Existing Base Salary amount based on current incumbent’s existing base salary.
Notable pay cuts included the Agriculture Financial Services Corporation (- 60 % from the 2015 disclosure amount to the top of the new scale), the Alberta Energy Regulator (-45%), the Workers Compensation Board (-56%) , the Alberta Petroleum Marketing Commission (-54%), the Alberta Utilities Commission (-25%), the Alberta Pensions Services Corporation (-27%), the Balancing Pool (-50%), the Labor Relations Board (-21%), and the Health Quality Council of Alberta (-38%). The salary framework applies immediately to new hires and reappointments. Incumbents will receive their previously contracted salary during a two-year notice period. In the case of Alberta Innovates the base salary will increase. This organization is the amalgamation of four previously existing organizations.
However there were a number of significant exceptions to these thresholds. These exceptions are institutions where many individuals are paid over $1 million a year. These institutions include the Alberta Investment Management Corporation (AIMCo), Alberta Treasury Branches (ATB Financial), the Alberta Electric System Operator (AESO), and the Alberta Teachers Retirement Fund (ATRF). Each of these institutions figure prominently in last year’s listing as well as this year’s listing. These three corporations will be required to submit executive compensation plans annually to the Government of Alberta. In the case of Alberta Health Services, AHS will submit a compensation plan to “insure scrutiny of its compensation practices.” In the case of the AESO, “the shift to a capacity market,” according to the government “requires executive continuity.” Total compensation will be frozen at AESO but the agency will be required to submit a compensation plan that “demonstrates how it is aligned to achieve the goals of the market transition.”
The announcement did not apply to universities and colleges, institutions where salary inflation has been rampant. Recently, the Minister of Advanced Education, the Honorable Marlin Schmidt, was critical of Alberta post-secondary salaries in relation to Canadian norms.
Provincial agencies as public institutions
The February announcement also included the release of Ministerial Guidelines. These guidelines deal with health and retirement benefits, relocation expense and leave, reimbursement of other expenses, use of vehicles and parking, paid holidays, vacation leave, and leave of absence without pay. Regarding the reimbursement of other expenses, the guideline is drafted to harmonize payments to those of management employees under the Public Service Act. Detailed guidance with regard to retirement plans of designated executives state that the total cost to the agency would not be greater than if the designated executive were a participant in the Management Employees Pension Plan (MEPP) and a participant in the Supplementary Retirement Plan for public service managers. The MEPP plan is a generous defined benefit plan which provides a pension based on the average 5 consecutive years highest salary times 2 per cent for each year of pensionable service. It also has a partial inflation indexing provision. The retirement age is based on age plus years of service. If those two factors are equal to 80 or more one can retire at a full pension.
The full listing and analysis is found below.
|Total Compensation of Executives of Alberta Agencies, Boards and Commissions ($000s)|
|Rank||Position title||Organization||Name||Base Pay||Grand Total- 2017/16||2016/15||Difference 2017/2016|
|1||Chief Investment Officer||AIMCo||Dale McMaster||425||3341.2||2197||52%|
|3||EVP Private Markets||AIMCo||Robert Mah||333.5||2037.8||1793||14%|
|4||EVP, Corporate Financial Services||ATB||Ian Wild||167||1938||877||121%|
|5||EVP, Public Equities||AIMCo||Peter Pontikes||294.4||1782.4||1137||57%|
|6||EVP, Fixed Income||AIMCo||Sandra Lau||294.4||1774.5||1058||68%|
|7||President and CEO||ATB||Dave Mowat||502||1587||3671||-57%|
|8||Chief Investment Officer||ATRF||Derek Brodersen||322.9||1199.8||1279.5||-6%|
|9||Chief Customer Officer||ATB||Curtis Stange||336||1125||1054||7%|
|10||Chief Financial Officer and Head of Operations||ATB||Robert McGee||365||1102||866||27%|
|11||Chief Transform-ation Officer||ATB||Wellington Holbrooke||315||1003||973||3%|
|12||Chief Corporate and Human Affairs Officer||AIMCo||Angela Fong||285.3||962.8||1132||-15%|
|13||Chief Financial Officer||SAIT||Wayne King||442.5||957.5||356.1||169%|
|14||President and CEO||AESO||Derek Erickson||475||922.6||871.7||6%|
|16||Head, Private Investments||ATRF||Rakesh Saraf||288||896.4||851||5%|
|17||President and CEO||WCB||Guy Kerr||475||886||863||3%|
|18||EVP, Retail Financial Services||ATB||Robert Bennett||276||826||807||2%|
|20||Head, Real Estate Investments||ATRF||Barry Petersson||263||823.1||786||5%|
|21||President, ATBIS||ATB||Chris Turchansky||276||814||733||11%|
|22||Chief Risk Officer||ATB||Bob Mann||284||784||823||-5%|
|23||Chief Evangelist||ATB||Lorne Rubis||286||777||789||-2%|
|25||Vice-President Research||UofA||Lorne Babiuk||520||746||782||-5%|
|26||President and CEO||AHS||Verna Yiu||565||744||N/A||N/A|
|27||Professor||UofC||Steven L. Bryant||706||737.6||419.8||76%|
|28||Senior Portfolio Manager, Equities||ATRF||Charlie Kim||240||735.7||714.1||3%|
|30||Chief Reputation and Brand Officer||ATB||Peggy Garritty||266||710||676||5%|
|31||President and CEO||AER||Jim Ellis||527||695||725||-4%|
|32||SVP Operations||AIMCo||Michael Baker||242||682||719||-5%|
|34||Executive Director||ASC||David Linder||379||651||659||-1%|
|35||Vice-President, Administration||UofA||Phyllis Clark||442||638||672||-5%|
|36||Chief Legal Officer||AIMCo||Rod Girard||244.9||638||511||25%|
|38||VP Operations and Chief Information Officer||WCB||Wendy King||367||616||609||1%|
|40||Chief Risk Officer||AIMCo||Remco van Eeuwijk||252.1||593.2||N/A||N/A|
|42||Vice-President, Facilities and Operations||UofA||Andrew Sharma||425||591||N/A||N/A|
|43||Chief Financial Officer||WCB||Ron Helmhold||347||581||569||2%|
|44||Former President||UofA||Indira Samarasekera||538.2||578.3||584.1||-1%|
|45||Provost and V.P. Academic||UofC||Dru Marshall||425||569||571||0%|
|46||President and CEO||AGLC||Bill Robinson||286||569||374||52%|
|47||VP and Medical Director, Northern Alberta||AHS||David Mador||450||554||522||6%|
|49||VP Quality and Chief Medical Officer||AHS||Francois Belanger||456||549||N/A||N/A|
|50||Provost and V.P. Academic||UofL||Andrew Hakin||355||545||523||4%|
|51||Chief Executive||AUC||Bob Heggie||448||542||543||0%|
|52||VP, People, Legal and Privacy||AHS||Todd Gilchrist||450||528||529||0%|
|54||EVP, Operations||AER||Mark Taylor||316||521||524||-1%|
|55||Vice-President, Research||UofC||Ed McCauley||391||514||539||-5%|
|56||President||Athabasca U||Peter MacKinn-on/Neil Fassina||371||513||377||36%|
|59||Provost and V.P. Academic||UofA||Steve Dew||415||493||457||8%|
|61||V.P. Human Resources||AGLC||Wendy Romanko||262||471||253||86%|
|62||Vice-President, Employee and Corporate Services||WCB||Roxy Shulha-McKay||285||459||447||3%|
|63||Vice-President, Market Services||AESO||Michael Law||277.1||450.5||445.4||1%|
|66||Vice-President, Finance||AESO||Todd Fior||263.3||419.3||407.6||3%|
|67||President and CEO||Bal. Pool||Bruce Roberts||412.5||418.5||416.7||0%|
|68||Vice-President, Regulatory||AESO||Heidi Kirrmaier||260.7||418||402.3||-35%|
|69||Vice-President, Transmission Planning and Performance||AESO||Jerry Mossing||253.6||408.5||384.7||6%|
|70||Vice-President, Operations||AESO||Miranda Keating Erikson||388.7||399.8||396.5||1%|
|71||Vice-President, Transmiss-ion Project Delivery||AESO||Greg Retzer||382||393.1||390.2||1%|
|72||Vice-President, Information Technology||AESO||Bill Baker||377.4||388||400.7||-3%|
|WCB, AESO, financial statements for calendar years ending 31 December 2016 and 2015 except for Bill Baker AESO which is from AESO’s compensation disclosure website.|
|2016 and 2015 compensation disclosure are for UofA and UofC professors, Alberta Utilities Commission, Balancing Pool, Presidents of Keyano College, and one senior administrator at SAIT.|
|Disclosure for University presidents and senior administrators from financial statements ending 31 March 2017 and 2016|
|Disclosure for Presidents of SAIT, NAIT, MacEwan University, Norquest College and Mount Royal University for year ending 30 June 2017.|
|Under the terms of the AHS CEO’s employment contract, in the event of termination and payment of severance, she is required to mitigate by diligently seeking alternative employment or engagement. The maximum severance paid would be 12 months. Severance would be paid in monthly installments in arrears and reduced by the amount of any employment income or consulting earnings or fees received during the month in question.|
|UofL President’s total compensation is from Annual Report of the Ministry of Advanced Education at page 101 which includes an additional non-cash benefits of $55,000. UofL does not include administrative stipends in the senior administrative leaves. Cash payments in lieu of administrative leave are not permitted at UofL.|
As in last year’s survey, Albertarecessionwatch.com contacted the organizations concerned to ensure accuracy and completeness. Nine of the organizations responded and one responded they would not comment. A PDF of the master-sheets is found here: 2017 listing of Alberta Provincial Agencies Executive compensation
The following table shows the overall distribution by gender over the highest paid executives.
Similar to last year, males dominated
the top ten ranking with only Sandra Lau of AIMCo, the Executive Vice-President of Fixed Income earning nearly $1.8 million and taking sixth spot. Angela Fong, Chief Corporate and Human Affairs Officer of AIMCo and Elizabeth Cannon, the President of UofC came in at 12th and 14th spots respectively. Highest pay going to men is consistent with Albertarecessionwatch.com’s review of salaries at SAIT (forthcoming shortly).
There are four major sectors represented in the top listing accounting for all but 2 of the 74 executives. These sectors are Finance (41%), Education (29%), Energy (21%) and Health (5%).
As in last year’s “league tables”, individuals working in the financial area (ATB, AIMCo, ATRF and WCB) were the most highly represented in the group of highest paid executives. The second largest sector represented was in the post-secondary education sector with 22 presidents, professors and senior administrators. The energy sector accounted for 15 positions (AER, AESO, APMC, Balancing Pool). Health accounted for five per cent of positions. All of the ten top positions went to individuals in the finance sector with AIMCo accounting for five of the top ten, ATB for four and ATRF for the other position.
[The listing does not include medical practitioners such as radiologists or dermatologists who receive most of their income in fee-for-service payments from the Health ministry. These individuals operate small businesses and pay for office staff, supplies, and office accommodation.]
Components of Total Compensation
“Variable” pay is the most important component in the earnings of the finance sector executives represented in the league table. Variable pay that includes short-term and longer-term compensation typically dwarfs base pay by factors of two to five times. Alberta’s most highly remunerated provincial agency executive was the Chief Investment Officer of AIMCo who earned total compensation of $3.3 million on base pay of $425,000. The highest short term incentive payment went to Kevin Uebelein of AIMCo of $1.3 million and long-term incentive of nearly $1.7 million to Dale McMaster of AIMCo, nearly double that paid to Robert Mah of AIMCo of $$954,900.
The tables are turned significantly (excuse the pun) upside-down if analyzed on the basis of base salary. Here the Energy and Education sector rise in the rankings. The top base salary went to the President and CEO of the Alberta Electric System Operator, Derek Erickson who took home $866,100 and a total package of $876,400. The education sector accounted for four sector accounted for individuals including two professor (where a breakdown on base salary is not available), a former UofA president (#6), and the Vice-President of Research at UofA (#8). The CEOs of AIMCo (#10) and ATB (#9) fall in the top ten and so do the former CEO of the APMC (#3) and the current CEO of the Alberta Energy Regulator (#7).
Opinion and Questions
The disparity in total compensation and base salary raises important questions for Alberta politicians and senior policy makers. Firstly, why are the organizations employing the highest paid public sector executives exempt from the sunshine list? If the pay of the top dozen or so executives is public, why should the salaries of individuals earning over the threshold levels in these institutions not be disclosed? If the concern about poaching “top talent” is a concern of the boards and executive management of these institutions, why have other organizations, especially in education and health care sectors, not been granted similar exclusions for competitive reasons?
A second question is how sure is the board of directors that pay for performance is actually achieved? Investment management and financial intermediation is as much an art as a science. The thousands of factors that go into causing a bankruptcy or causing a “trade” to make or lose a lot of money suggest that fortuna plays some role. Given the hundreds of thousands of financial analysts in the world now, the edge that is often achieved is a “black edge” used by hedge funds to achieve higher returns. A recent book by Sheelah Kolhatkar, entitled Black Edge on Stephen Cohen’s SAC hedge fund, is suggestive of the thesis that consistently higher returns above the market are not possible.
A third question relates to agents of the Crown adjudicating either credit or investment risks for the benefit or cost of taxpayers or pensioners. Do compensation systems in these entities minimize risk to the ultimate beneficiaries or do they benefit employees unseemly when greater risks are taken? Is the gain or loss to the employee symmetrical; that is are the losses shared equally on the upside as well as the downside? Is the component of variable pay, truly variable? Or is variable pay just another payment made at the end of the fiscal year that is usually anticipated to be part of the pay package?
Another question is the appropriateness of staff serving in corporate functions such as finance, risk management, internal audit, human resources, marketing, and public relations, receiving variable pay. While doing their job properly and well is essential to the success of any organization, is there a danger that some of these control functions might not question executive committee decisions if their variable pay might be compromised?
And finally, has executive compensation become “too complex”? Executive disclosure in the private sector now runs more than forty or fifty pages and is only intelligible to the executives, consultants, lawyers, and (hopefully) board members who sign off on these disclosure documents. This begs the question as to whether these public institutions really need to mimic private sector compensation structures to succeed in financial intermediation or investment management.
Aside from the question of whether it is appropriate and ultimately in the best interest of pensioners and taxpayers to pay large bonuses to executives of significant financial organizations, is the issue of how base pay is determined for executives. Human resource consulting firms take a variety of factors into account. Such factors include: the size of budget managed; assets managed; number of staff managed; skill level required; complexity of tasks; and marginal productivity of worker.
Examining only base pay, we note that Professor Steven Bryant of the University of Calgary received the higher base pay of over $700,000. Unfortunately, with salary disclosure only including “compensation” and “other”. According to the UofC’s website, “compensation is the total amount paid and the value of taxable benefits provided in a year. Compensation includes salary, allowances, supplements and other earnings included in Box 14, 028, 104 or 105 of the T4/T4A slip.” “Non-monetary benefits include employer paid benefits for supplemental health, dental, employee/family assistance program, long-term disability, pension and workers compensation. Non-monetary benefits also include the employer’s portion of CPP (Canada Pension Plan) and EI (Employment Insurance) contributions.” From the UofC’s website, Bryant is a high-powered engineering professor lured from the University of Texas at Austin. He is UofC’s first Canada Excellence Research Chair and leads “the exploration for new and sustainable ways to develop unconventional oil reservoirs by taking advantage of advances in materials science.” Obviously if budget was the sole criteria, Bryant would not be earning this size of pay cheque but his star status in a practical field of non-conventional (i.e. oilsands) engineering is the main rationale for this level of remuneration. Since Dr. Bryant would attract a high salary in the energy industry, this is another factor for his pay grade.
In the case of the number 2 earner, the President and CEO of APMC, Richard Masson’s $630,000 salary presumably reflects market forces where comparable skill levels attract large pay packets. However, APMC function is highly specific being the conduit for marketing Alberta’s conventional crude oil royalty, developing prices used in royalty calculations and other energy related activities. In 2012, the APMC’s mandate was expanded to include assisting in the development of Value Added activity in Alberta’s petroleum sector, such as the development of the Sturgeon Refinery as well as new energy markets and transportation infrastructure. Under the new compensation arrangements, the position will be paid between $223,040 – $301,760 a significant decline in salary. Unlike comparable jobs at the Alberta Energy Regulator or the Ministry of Energy, the APMC has few employees but markets about 70,000 barrels of oil each day ($3.5 million a day @ $50 CAD or about $1.3 billion in revenue). However, this position would carry pension and other benefits not taken by the former CEO.
Continuing down the base salary table, one finds many executives in the post-secondary sector and the health care sector. This reflects the practice that it is more difficult to establish a variable pay system where the variables are so many in the determination of outcomes. Excluding the former UofA President and other professors, the setting of base salaries of Alberta’s top university administrators appears anomalous. For instance the base salary of UofA’s President is $500,000 which is only slightly higher than the presidents of NAIT ($492,500); UofC ($480,000); and SAIT ($479,500) and lower than the salary of the former Vice-President, Research at the UofA who earned a base salary of $520,000.
The third highest base salary was earned by CEO of the largest employer in the province, Verna Yiu ( $565,000) which seems fair given the complexity of the work, enormous workforce over over 100,000, over $2 billion in financial assets, nearly $8 billion in capital assets, and $14 billion budget. The fact that Yiu is 26th in total compensation would seem to suggest that she is tremendously underpaid or that those in the financial and energy sector or too handsomely paid.
In comparison, while AIMCo, ATB, and ATRF manage very significant pools of financial assets, their staff size is much smaller than the large post-secondary institutions (Uof A employs a work force of 15,000; UofC 5,300). ATB has over 5,000 employees while AIMCo has about 400 staff members, and ATRF has less than 100 staff. Except for ATB, which has a significant employee base and significant revenue ($1.5 billion), investment management firms rank low on organizational complexity and size but do require high staff skill levels to succeed.
In the case of the energy sector, the AESO and the AER have moderate levels of staffing of over 1200 with an annual operating budget of about $275 million provided from a levy on the energy industry. AESO has a staff of about and revenue of $1.8 billion through collections from energy generators for transmission. Total administrative costs were under $100 million in 2016 with about two-thirds related to staffing costs suggesting an organizational size of about 100. Base salary in the AESO is in the range of $350,000 to $475,000 for the AESO President. AESO operates a short-term incentive plan which increases total compensation by one quarter to one-half. For the AESO, such salaries could be justified on the basis that the systems operator is competing for talent with the “de-regulated” industry. Given the complexity of the de-regulated market, one could rationalize paying such salaries to obtain expertise to challenge the arguments of industry players on the basis that consultants would be a too costly alternative. But AESO is an “operator” and it is the Alberta Utilities Commission (AUC) who is charged with regulation of electricity markets in the public interest.
In the case of the AUC its Chair was paid $403,000 in base salary and $87,000 in other compensation. When the encumbent leaves, the salary range for this position will $264,480 to $396,720 seemingly consistent with a regulatory function with a relatively high level of expertise. The AUC has a budget of about $36 million and a staff of about 140.
Another regulatory agency with a requirement for expertise is the Alberta Securities Commission. The ASC received $32 million in revenue from the securities industry (registration fees) and spend $40 million last year. The staff of about 100 are highly trained professionals, mainly accountants and lawyers. The new Chair, Stan Magidson, a lawyer is paid a lower base salary than his existing peers the current Executive Director ($379,000)and Vice-Chair ($388,000). He was recruited after the change in government. While his colleagues do not receive variable pay, their other compensation in the form of pension and benefits are over $200,000. The new base salary range of $333,280 to $499,920 appears generous in view of the size of staff and the budget. However, that range is lower than comparable positions in Ontario.
Complexity of task
Without a doubt all executives in the listing require a high level of skill to function effectively in a highly complex, regulatory environment. For the most part, Finance, law, economics, medicine, accounting, and graduate degrees constitute the basis for achieving senior positions in these provincial agencies. What however is not in doubt is that the job of an Alberta deputy minister, to whom many of these agency heads report to, is more complex and requires equal or higher skill levels (or should), to become successful. Such deputies earn base salary of $286,977[Alberta deputy minister] although total compensation can be much higher due to pension and benefits.
Marginal productivity is one way of determining how productive one worker is relative to another. In simple routine jobs it is relatively easy through observation to see how productive a worker is. But with no exactly comparable jobs, this is impossible. The last word goes to Thomas Piketty from his book Capital in the Twenty-first Century (at pages 334-335).
The more convincing proof of the failure of corporate governance and of the absence of a rational productivity justification for extremely high executive pay is that when we collect data about individual firms (which we can do for publicly owned corporations in all the rich countries), it is very difficult to explain the observed variations in terms of firm performance. If we look at various performance indicators, such as sales growth, profits, and so on, we can break down the observed variance as a sum of other variances: variance due to causes external to the firm (such as the general state of the economy, raw material price shocks, variations in the exchange rate, average performance of other firms in the same sector, etc.) plus other “nonexternal” variances. Only the latter can be significantly affected by the decisions of the firm’s managers. If executive pay were determined by marginal productivity, one would expect its variance to have little to do with external variances and to depend solely or primarily on nonexternal variances. In fact, we observe just the opposite: it is when sales and profits increase for external reasons that executive pay rises most rapidly. This is particularly true in the case of US corporations: Bertrand and Mullainhatan refer to this phenomenon as “pay for luck.”