The Bombardier scandal fallout is giving many pause. Executives with beleaguered aerospace giant Bombardier (Bombardier Stock Quote, News, Chart TSX:BBD.B) are currently feeling the heat for what seem to be ill-timed pay raises and compensation packages, worth $32.6 million US and paid out just as the company has been given hundreds of millions in financial aid from provincial and federal governments.

Coming close to bankruptcy in 2015, Montreal-based Bombardier had bounced back in 2016 with major contracts to build trains in the UK and renewed interest in its CSeries jet planes. Even so, the company lost $981 million last year, compared to $5.34 billion in losses from 2015. The company is currently in the process of a huge employee layoff, reportedly to reach 14,500 jobs cut worldwide by the end of next year.

Bombardier garnered a $1-billion investment last year from the Quebec government, one which had the province take on a 49.5 per cent stake in its CSeries program. More recently, the federal government announced a $372.5-million loan to the company.

Neither seem to sit well with critics who point to the $32.6 million paid in 2016 to five executives and board chairman Pierre Beaudoin, an increase from the $21.9 given out in compensation the previous year. “At the very least, it demonstrates a rather incredible sense of entitlement, doesn’t it?,” said David Baskin, president at Baskin Wealth Management, a Bay Street investment management firm, to CBC News. “Here’s a company that basically went begging to the province and the federal government for money, saying that if you don’t give us all this money, we’re going to lay off all these workers.”

The Feds love their aerospace

Over the years, Canadian governments have shown particular interest in supporting aerospace firms. Beyond Bombardier, both Pratt & Whitney and CAE Inc. have been major recipients of federal and provincial money. In 2014, as part of the Strategic Aerospace and Defence Initiative, Pratt & Whitney and CAE received $300 million and $250 million, respectively from the federal government. A 2014 Fraser Institute report on government subsidies found that Pratt & Whitney had taken in over $3.3 billion in Canadian subsidies since 1970.

Yet the federal government sees such payouts as good for the Canadian economy. “Investing in Bombardier is a way of ensuring good long-term jobs in the aerospace industry right across the country,” said Prime Minister Justin Trudeau last week at an announcement at a Ford engine plant in Windsor, Ontario.

The opposing argument, however, maintains that companies in need of regular government handouts in order to stay afloat are more of a drain than a boon for society. “Nobody wants to see an industry go bye-bye,” said Mark Milke, senior fellow at the Fraser Institute and author of the 2014, to the Financial Post. “But the fact is, it doesn’t make sense to subsidize one business over another. You pick winners or losers, and you often end up with losers.” In total the report found that Canadian federal and provincial governments spent nearly $684 billion Cdn on subsidies to the private sector between the years 1981 and 2009.

Bombardier Scandal

In the United States, public wrath over government bailouts and fat bonuses reached its nadir in the wake of the financial crisis of 2008, when US banks received hundreds of billions in assistance under the government’s Troubled Asset Relief Program yet still paid out huge compensation packages to bank employees, the very same cohort whom many blamed for the financial meltdown. The charge was laid that bonuses to bank CEOs effectively amounted to rewarding people for taking unreasonable risks. When the scandal broke, then-White House press secretary Robert Gibbs said, “I think the president continues to believe that the American people don’t begrudge people making money for what they do as long as … we’re not basically incentivizing wild risk-taking that somebody else picks up the tab for.”

An investigation commissioned by the Obama administration found that together, the top 600 executives at the major banks issued government relief funds took in bonuses totalling $2.03 billion US during the year following the crash, with the report’s administrator Kenneth R. Feinberg determining that 80 per cent of those bonuses were “unmerited.”

In Canada, a scandal broke in 2012 when it was revealed that Canada Post was giving performance bonuses to 7,402 employees despite losses of $327 million, the first time in 16 years that the crown corporation ended up in the red.

Justifying exorbitant CEO salaries is not a popular task, yet a 2013 study from the Clarkson Centre for Business Ethics at the University of Toronto did just that, charting both CEO pay and company performance between 2004 and 2011 for companies in the S&P/TSX 60 index. They found that overall, CEO salaries were kept in line with company performance, with salaries going up in tandem with shareholder returns, a benchmark of company performance.

“It’s less alarmist than I expected to see. … We’re not seeing very many cases where pay is going up extremely aggressively,” said author Matt Fullbrook of the Clarkson Centre, to the Globe and Mail. “And we certainly aren’t seeing any cases in the eight-year observation where it is completely out of whack, where pay goes up 1,000 per cent and [total shareholder return] is minus 90 per cent.”

But as in the case of Bombardier, the combination of government bailouts and executive bonuses seems particularly irksome. Canada’s big banks received tens of billions in aid following the 2008 crash, too, according to a report from the Canadian Centre for Policy Alternatives, yet top CEOs for the banks still raked in among the highest compensation packages in the country. Although disputed by government officials (who at the time preferred to call the aid “liquidity support”), the CCPA report stated that government aid reached $114 billion at its peak, ten times what was provided for the auto sector following the crisis. “At some point during the crisis, three of Canada’s banks — CIBC, BMO, and Scotiabank — were completely under water, with government support exceeding the market value of the company,” said David Macdonald, the CCPA’s senior economist, to the CBC. “Without government supports to fall back on, Canadian banks would have been in serious trouble.”

But for the 2008 year, Bank CEOs reaped sky-high bonuses, topped out by Gordon Nixon of Royal Bank whose compensation for 2008 was nearly $43 million above his base salary of $1.4 million.

How to fix the problem

A range of solutions have been offered to address the problem of out-of-control executive bonuses, from tying compensation not just to stock performance but to a company’s debt as well (which would discourage excessive risk-taking) to giving shareholders real power to decide what CEOs make (typically, they do so only in an advisory capacity).

One essay from the London Business School argues that the real problem is not overall pay for CEOs but how it’s structured, namely, with big performance bonuses attached. Instead, executives should be paid a fixed salary, since performance incentives don’t really suit the kind of work that CEOs do. Executive jobs are far too complex to be adequately captured by performance measures, the essay’s authors say, and studies have shown that contingent pay is only effective for routine tasks, not for jobs that require creativity.

“For CEOs, it’s actually nothing unusual for 60, 70 or 80 percent of their remuneration to be dependent on performance,” said London Business School professor Freek Vermeulen, one of the essay’s authors, to the Washington Post. “But we have quite a bit of research on the effects of that performance-based pay, and it isn’t very pretty. We know from research that it doesn’t have a very positive effect.”

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