The pros and cons of a high salary

Everybody dreams of making big bucks. However, there can be drawbacks to drawing a hefty salary, and we’re not just talking about the higher marginal tax rate .

For one thing, those with the biggest paycheques are subject to intense public scrutiny. Consider the case of Chris Eagle, the former president of Alberta Health Services. He stepped down amid controversy after some home-care clients who were denied service due to problems with contracted providers in Edmonton. But recent headlines aside, much was made of his $580,000 base salary.

“One of challenges with public perception around compensation is that people’s personal perception of what ‘big’ is may not be aligned with what the market realities are,” says Michael A. Thompson, a partner at Mercer who works in the talent division. So while the average Canadian can’t even imagine what it’s like to take home more than half a million bucks a year, salaries like those of Eagle aren’t necessarily out of line in the big picture.

“He was running one of the largest health-care institutions in North America with an operating budget of about $13 billion,” Thompson says. “To the public, that seems high, but relative to the market, he was egregiously underpaid.”

However, when things go wrong or when the economy tanks the way it did in 2008, those with the massive take-home pay are often walking targets.

“For whom much is given, much should be expected” is executive coach Greg Nichvalodoff’s take on the issue of big salaries.

“I am a proponent of results-based compensation,” says Nichvalodoff, president of Inscape Consulting Group. “I have no problem with multimillion [dollar] salaries as long as corporate results in terms of profit and shareholder value are increasing. What I do have a problem with is boards granting exorbitant salaries to executives that consistently underperform in their market place.”

So how exactly can it be concluded that “too much” is too much? The answer isn’t black and white; rather, an inflated salary is a relative thing. However, the larger, more diverse, and more complex an organization gets and the more risk and responsibility a position entails, the more the salaries can be expected to climb.

“What’s too big in one industry is normal in another, so there’s no absolute,” says Karen Wright, managing director Parachute Executive Coaching and author of The Complete Executive: The 10-Step System for Great Leadership Performance.

What's your value?

Risk is often the rationale for the salaries that so many CEOs receive; another factor is how long a career can be expected to last, such as in the case of professional athletes. But it’s when inflated numbers are attached to people whose value is not clear where trouble can brew.

“When times are tough, when business is slow, the big salaries do have to get examined, but cuts don’t happen just because the numbers are big,” Wright says. “If someone carries a big price tag and it’s not clear whether they pay for themselves, they’re going to find themselves under the microscope.

“I know someone who is a 100-per cent commission sales representative in a company that’s gone through several downsizing and is expected to go through more,” she adds.

“He’s never the slightest bit concerned about his job, because even though he makes a very good living, he pays for himself every day.”

Big bucks come with big headaches

There are other potential downfalls of an eye-popping take-home pay. Fat salaries can also be targets for the external marketplace, particularly shareholders.

“If a company has had a tough year yet there has been no impact on executive compensation, the shareholders will likely have something to say about it,” Wrights says.

Another downside of big pay? It’s harder to bounce back if the worst happens.

“If you’ve designed a life based on a very big number and then you get downsized or otherwise have your livelihood affected, it's harder to find a replacement job at the same salary level,” Wright notes. “There are fewer of those jobs out there -- the organizations are smaller at the top--and they don't come available that often.”

Despite the heat the individuals and corporations can receive over large compensation, Thompson says that generally speaking, those big numbers are well thought-out.

“Most organizations really try to make reasoned judgements about the appropriateness of pay and try to ensure that an increase in the amount of pay is aligned with performance and are trying to manage compensation in a way that meets all expectations,” Thompson says. “They have to pay attention to stakeholders, to shareholders, to other employees and public-interest group ... In the audit process there may be 50 or 60 pages of disclosure on how these people are paid.”