CEO Compensation, Politicians’ Salaries, and NHL PLayers

Canada, Public Sector, Publications, Role of Government, Steve Lafleur (historic), Uncategorized

Conservative activists often take issue with what they consider excessive pay and perks for politicians. Social democratic activists get riled up over the large salaries commanded by CEOs. Both often do so on an emotional rather than a logical basis. A myopic focus on levels of compensation ignores an empirical question: Are those being compensated delivering value for money? The answer is clear in the case of CEOs, and there is enough evidence to hint at an answer with regard to politicians. To illustrate the principles and to provide some context for examining the justification of these lucrative contracts, let us take a second to think about another wellcompensated group: NHL players.

Mike Moffat from the Ivey School of Business recently penned a column for The Globe and Mail in which he compared the compensation levels of Canadian CEOs and NHL players. There are a larger number of NHL players who earn more than $6-million than there are CEOs compensated above that level. One particular comparison nicely puts it into perspective: “Robert Dutton, CEO of RONA, is responsible for one of the biggest retailers in Canada with nearly 52,000 employees. Mr. Dutton earned just under $3.2-million last year, roughly the same as third-line NHL forwards Niklas Hagman of the Calgary Flames and Colby Armstrong of the Toronto Maple Leafs.”1 One might expect that social democrats would be at least as angry with NHL players as they are with CEOs. After all, a hockey player’s contribution to the economy is far less obvious than is the contribution of people who manage thousands of employees. Yet no one is “occupying” NHL arenas—nor did they during the lockout, which pitted millionaire owners against millionaire players.

NHL salaries often excite strong emotions in fans. This is particularly true when players leave small-market teams for huge salaries and during collective bargaining. Leaving aside the occasional outrage at salaries, the principles behind compensation are clear. As a rule, better players make more money. Exceptions exist, of course. Sometimes teams appear to defy this logic. They will snap up a low-profile free agent for a few million dollars at the trade deadline, or they will get a bargain on a highly skilled player. These anomalies exist because the marketplace is dynamic. Sometimes there is an oversupply of secondline right wingers, and other times there is a dearth of defencemen. Teams adjust their offers accordingly. Although paying a third or fourth defenceman $4-million might seem excessive, it could be the case that he will add that much value to the franchise relative to the alternatives. Other times, a team will sign a high-profile player to a huge multi-year contract, and the player will underperform. Teams often need to take this risk to get ahead. In the absence of emotional rhetoric, it seems reasonable.