c-suite report
TRANSCRIPT
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The 27th Quarterly C-Suite Survey:Cash Reserves, Debt, Interest Rates and
CEO CompensationJune 18th, 2012
Sponsored by:
Published andbroadcast by:
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Introduction
This is the 27th edition of the C-Suite Quarterly survey, conducted onbehalf of KPMG; published and broadcast by the Globe and MailsReport on Business and BNN. Previous quarters surveys are availableat GandalfGroup.ca .
This quarters survey and this presentation focus on:
Companies savings or cash reserves Debt levels
Access to financing
Interest rates
CEO compensation
Exporting, the dollar and emerging markets Methodology: telephone interviews were conducted with 156 C-Suite
executives from ROB1000 companies between May 17th and June 5th 2012.The margin of error for this study is +/- 7.85% 19 times out of 20.
http://www.gandalfgroup.ca/http://www.gandalfgroup.ca/http://www.gandalfgroup.ca/http://www.gandalfgroup.ca/ -
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Summary of Key Findings
Based on renewed optimism about the US economy, business expectations forCanadas economy are improved this quarter.
There are still a number of dark clouds that executives see, but none darkerthan Europe which is preoccupying the Canadian business community.
These concerns particularly manifest themselves in concern about another credit crisiswhere debt financing is unavailable.
Concern about those risks has business sitting on healthy balance sheets,
hoarding for a rainy day. There is considerable concern about the impact rising interest rates would
have, and most in Ontario are opposed to any move by the Bank of Canada toraise rates even a point.
Most business leaders think that CEOs compensation cannot be justified byimprovements in shareholder value, and see growing income disparity as anegative development in society.
Most Canadian businesses do not have and think they do not need a strategyfor emerging markets.
3
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The Economic Outlook
The outlook of executives for the US economy has improved slightly
since last quarter; confidence in growth is now back to the same levelas June of last year, recovering from a pessimistic September 2011.
The C-Suites evaluation of the Canadian economyat the current timecontinues a year long trend of steady incremental improvement. Fourin five executives said the economy is in moderate growth.
The outlook of executives for the Canadian economy is effectivelyunchanged from last quarter with the vast majority expecting theeconomy to grow only moderately over the next 12 months.
In the past we have typically seen a 15 point difference between Western andOntarian executives, but this quarter finds the two sets of executives on the
same page.
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555
Current Growth Levels In TheCanadian Economy
Which of the following do you think best describes the Canadian economy at the current time -strong growth, moderate growth, moderate decline, strong decline?
0 20 40 60 80 100
May/Jun. '12
Feb. '12
Dec. '11
Sept. '11
Nov/Dec. '10Sept. '10
May/Jun. '10
Mar. '10
Dec. '09
Sept. '09
May/June '09
Feb. '09
Nov. '08
1
1
3
1
1
10
5
1
81
77
75
68
89
84
85
90
75
67
17
2
13
14
15
25
29
9
16
5
4
23
31
71
73
78
1
1
1
1
2
11
25
8
3
7
1
1
1
1
2
1
Strong growth Moderate growth Moderate decline Strong decline DK
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Projections For The CanadianEconomy
What are your expectations for the Canadian economy over the next 12 months, strong growth,moderate growth, moderate decline, strong decline?
0 20 40 60 80 100
May/Jun. '09
Sept. '09Dec. '09
Mar. '10
May/Jun. '10
Sept. '10
Nov/Dec. '10
Mar. '11Jun. '11
Sept. '11
Dec. '11
Feb. '12
May/Jun. '12
1
2
7
3
1
3
3
2
1
4
1
55
8489
92
89
85
89
93
93
74
69
81
81
42
128
1
7
14
8
4
5
24
29
12
15
3
1
1
1
2
1
1
1
1
2
3
1
Strong growth Moderate growth Moderate decline Strong decline DK
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The US EconomyOver The Next Year
0 20 40 60 80 100
May/Jun. '12
Feb. '12
Dec. '11
Sept. '11
Jun. '11
Mar. '11
Nov/Dec. '10
Sept. '10
May/Jun. '10
Mar. '10
Dec. '09
Sept. '09
May/Jun. '09
1
3
1
1
3
1
1
2
2
1
71
66
50
33
70
78
60
49
68
75
6568
55
26
26
45
59
27
16
37
45
29
21
2727
42
1
1
2
8
1
1
1
5
2
53
3
1
3
2
1
1
2
1
1
22
1
Strong growth Moderate growth Moderate decline Strong decline DK
What are your expectations for the U.S. economy over the next 12 months, strong growth,moderate growth, moderate decline, strong decline?
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Companies Expectations
We have found for many quarters now that executives with Canadastop companies have a more positive outlook for their companies thanfor the economy.
Although resources executives have tended to be more confident of theircompanys growth relative to other sectors, this quarter sees resourcesexecutives approximately as confident about their companys growth as
manufacturing executives.
Previously about half of resources executives predicted strong growth fortheir companies. The past few months have seen that drop to about one inthree.
Western executives remain much more confident of growth for their
companies than executives in the Rest of Canada.
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Expectations: Company
0 20 40 60 80 100
Total
West
Rest of Canada
Resources
Services
Manufacturing
27
36
20
31
21
30
66
56
74
58
76
64
6
8
5
9
2
6
1
1
2
Strong growth Moderate growth Moderate decline DK/NR
What are your expectations for your company over the next 12 months, strong growth,moderate growth, moderate decline, strong decline?
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External Impacts On The CanadianEconomy
Growing optimism about the Canadian economy results from
executives thinking that a strengthening US economy outweighs aEurope-in-crisis.
Most executives are modestly concerned about weakness in the US, aslow down in China, and high levels of household debt.
Many are also concerned about a renewed credit crunch, labour
shortages, and the high value of the Canadian dollar. The majority of Western and resource executives are concerned about labour
shortages, while just over one third of those in Ontario and in manufacturingare concerned.
Only one in ten business leaders is highly concerned about a rise in Canadian
interest rates. Overwhelming all of those concerns is optimism about the
US, Less than a year ago most Canadian business people sawrecession and many were very concerned; now most seegrowth.
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0 50 100
European political instability
The US economy
High levels of household debt among
Slowing Chinese economy
Ability of companies to access financing
The possibility of higher interest rates
Labour shortages
The value of the Canadian dollar
US retail sales
Canada's housing market
Canadian retail sales
49
17
14
15
15
9
17
18
5
5
9
40
62
56
54
40
44
35
32
43
42
34
9
19
21
21
38
29
28
29
37
35
43
2
2
10
10
7
18
20
20
13
17
12
1
1
2
1
3
Very concerned Somewhat concerned Not very concerned
Not at all concerned Don't know
11111111
Im going to read a list of market forces and economic factors and Id like you to tell me howconcerned you are about each. When it comes to ____, are you very concerned, somewhat
concerned, not very concerned, not at all concerned?
Where Do The Threats Lay?
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0 50 100
May/Jun. '12
Sept. '11
Mar. '11
17
43
27
62
48
58
19
7
12
2
3
31
Very concerned Somewhat concerned Not very concerned
Not at all concerned Don't know
12121212
Im going to read a list of market forces and economic factors and Id like you to tell me howconcerned you are about each. When it comes to the US economy, are you very concerned,
somewhat concerned, not very concerned, not at all concerned?
Tracking Concerns Over USEconomy
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Debt Levels and Financing
Most leading Canadian businesses will need to borrow money over thenext year, and the balance of risk is seen as shifting back towardrestricted credit.
Two thirds of those that said they are not holding cash said they would accessdebt financing, while less than half of those that are holding onto cash saidthe same.
Executives were more likely to say they expect equity financing, rather thandebt financing, to become more difficult over the next year compared to last.
The majority of executives said their companies were not close to themaximum limit of loan covenants.
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14141414
Accessing Financing
0 50 100
Debt
Equity
Do not plan on accessing financing
Acquisitions and Mergers (incl. jointpartnerships)
59
39
14
4
Please tell me with a yes or no answer if your company is likely to access financing through anyof the following means in the next 12 months? (% saying yes)
21% said dont know.
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Accessing Financing
0 20 40 60 80 100
Debt
Equity
25
16
37
21
34
47
3
13
1
3
Less difficult No different More difficult N/A Don't know
Are you anticipating that it will be less difficult or more difficult for you to raise money from
_____ over the next year, compared to the last twelve months? Will it be much more difficult,somewhat more difficult, somewhat less difficult or much less difficult or no different?
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16161616
Accessing Debt Financing
0 50 100
Total
Support keeping interest ratesat current level
Oppose
Concerned about ability to
access financingNot concerned
4
3
6
2
8
21
19
22
10
37
37
29
44
35
41
24
32
17
34
11
10
14
5
15
3
3
4
3
3
1
1
1
Much less difficult Somewhat less difficult
No different Somewhat more difficult
Much more difficult N/A
Are you anticipating that it will be less difficult or more difficult for you to raise money frombanks or other debt financing over the next year, compared to the last twelve months? Will
it be much more difficult, somewhat more difficult, somewhat less difficult or much lessdifficult or no different?
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17171717
Accessing Equity Financing
0 50 100
Total
Resources
Service
Manufacturing
Concerned about ability
to access financingNot concerned
3
2
5
3
1
6
13
14
10
18
11
17
21
6
33
24
14
30
26
33
21
24
30
21
21
38
10
9
32
5
13
8
16
18
9
19
3
5
3
3
2
Much less difficult Somewhat less difficult
No different Somewhat more difficult
Much more difficult N/A
Are you anticipating that it will be less difficult or more difficult for you to raise money fromequity markets over the next year, compared to the last twelve months? Will it be much
more difficult, somewhat more difficult, somewhat less difficult or much less difficult or nodifferent?
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Accessing Equity Financing
0 50 100
May/June
2012
Sep-11
3
2
13
12
21
28
26
39
21
17
13 3
3
Much less difficult Somewhat less difficultNo different Somewhat more difficult
Much more difficult N/A
Don't know
Are you anticipating that it will be less difficult or more difficult for you to raise money fromequity markets over the next year, compared to the last twelve months? Will it be much
more difficult, somewhat more difficult, somewhat less difficult or much less difficult or nodifferent?
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19191919
Accessing Financing
0 50 100
56 10 3 27 5
Not close to limit Close to limit At the maximum N/A Don't know
Is your company close to or at the maximum limit of its loan covenants?
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20
Company Cash Reserves
Almost half ofCanadas biggest companies - 45% - are holding on tocash reserves rather than investing that money in capital, humanresources or otherwise, as policy makers are urging them to do.
Mostly, they are doing so to give themselves a buffer against the risksthey see out there.
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21212121
Holding onto Cash Reserves
0 50 100
16 29 54
Strongly applies to your company
Somewhat applies to your company
Does not apply at all to your company
Recently, its been noted that companies have been choosing to hold on to cash reserves, ratherthan reinvesting or distributing it. Would you say this:
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Reasons for Holding onto CashReserves
0 20 40 60
Uncertainty in the economy
Need to conserve/ reserve profit/ capitalfor the future
Need it for future/ current growth
Obtaining financing is difficult
46
27
14
8
Why is your company choosing to hold on to cash reserves rather than deploying or investingthem?
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How Cash Reserves Will Be Deployed
0 10 20 30
(Re)investing in growth
Capital investments
Mergers and acquisitions
Putting money back into company(general)
Dividends
R & D
Do not plan to spend
Debt retirement
23
16
14
7
6
6
5
4
How is your company likely to deploy the money it has been holding on to?
Other responses less than 3%.28% said dont know.
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The Role and Importance OfEmerging Markets
Most leading Canadian business executives do not think that it is
critical that their company be globally competitive, nor do they thinkan emerging markets strategy would be strongly beneficial.
Again this shows the divide between the exporting Western companiesthat are focused on global markets and the manufacturing or servicesectors in Ontario that are locked into North America.
Many manufacturers are undertaking emerging markets strategies, but thinkthe Canadian dollar is working against them in global markets.
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0 50 100
36 29 22 12 1
Very important Somewhat important Not very important
Not at all important Don't know
25252525
How important is global competitiveness to your companys business plans? Is it:
Global Competitiveness
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0 50 100
The Canadian economy
Your company
28
26
53
26
13
45
3
1
1
1
3
1
Strongly positive Somewhat positive No impact
Somewhat negative Strongly negative Don't know
26262626
The Government of Canada and others have said trade policy and Canadian companies have to puta greater focus on emerging markets. Is an emerging markets strategy something that would have a
positive or negative impact on_______?
Emerging Markets
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0 20 40 60 80 100
Total
West
Ontario
Resources
Manufacturing
Services
26
39
14
34
24
17
26
27
21
27
30
22
45
32
58
36
39
57
1
4
3
2
1
2
1
2
4
3
2
Strongly positive Somewhat positive No impact
Somewhat negative Strongly negative Don't know
27272727
The Government of Canada and others have said trade policy and Canadian companies have to puta greater focus on emerging markets. Is an emerging markets strategy something that would have a
positive or negative impact onyour company?
Emerging Markets
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0 20 40 60 80 100
Total
West
Ontario
Resources
Manufacturing
Services
22
20
26
19
42
14
46
45
46
50
33
50
24
23
23
17
24
31
6
11
4
13
3
1
2
2
2
2
Strongly agree Somewhat agree Somewhat disagree
Strongly disagree Don't know
28282828
I'm going to read some statements about exporting. For each, please tell me if you strongly agree,somewhat agree, somewhat disagree, or stronglydisagree.
The high value of the Canadian dollar makes it difficult for companies to move onan emerging markets strategy.
Exportation
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0 50 100
Canadian companies have become toocomplacent in relying on the US for
exports
The high value of the Canadian dollarmakes it difficult for companies to move
on an emerging markets
Fear of the unknown is keeping manyCanadian companies from expanding or
selling into offshore markets
23
22
20
58
46
44
14
24
24
4
6
7
1
5
Strongly agree Somewhat agree Somewhat disagree
Strongly disagree Don't know
29292929
I'm going to read some statements about exporting. For each, please tell me if you strongly agree,somewhat agree, somewhat disagree, or stronglydisagree.
Exportation
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0 20 40 60 80 100
May/Jun. '12
Feb. '12
Dec.'11
Sept.'11
39
42
31
39
61
49
59
58
9
10
3
Yes No Don't know
30303030
Doesyour company have a strategy in place to access these markets?
Emerging Markets
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0 10 20 30 40
Began/ continue operations in emergingmarkets
Partnering with foreign markets/ ventures
Strategic planning/ analysis of expenditures
Product/ service development for themarket
Customer/ client demand and satisfaction
Don't know
39
16
15
15
3
11
31313131
What are key initiatives your company is undertaking as part of your strategy to access emergingmarkets? [Among those who have an emerging markets strategy n=61]
Emerging Market Initiatives
The Bank Of Canada and Interest
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The Bank Of Canada and InterestRates
There is significant resistance in the business community, especially inOntario, to even a one point increase in interest rates.
Most Ontario executives are prepared to tolerate higher inflation inexchange for keeping rates where they are.
Those who think the economy has a little wind in its sails areattributing that to current low interest rates.
The majority of executives in the resources industry support raisinginterest rates, while only about one third of those in manufacturingand services said the same.
Ontario executives overwhelmingly said that keeping the dollar at alevel where Canadian exporters can compete is important, while fewer(two-thirds) from the West said the same.
When setting rates, executives want the BOC to be considering anumber of, sometimes contradictory, objectives, but most want theBank to place more emphasis on encouraging growth than on fightinginflation.
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0 50 100
13 37 33 14 3
Strongly support Somewhat support Somewhat oppose
Strongly oppose Don't know
33333333
Would you strongly support, somewhat support, somewhat oppose or strongly oppose theGovernment of Canada imposing new rules to tighten lending standards used by the banks to loan
money?
Government Action on Borrowing
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0 50 100
Warning Canadians about the dangersand risk inherent in high borrowing levels
Raising interest rates by as much as
necessary to keep inflation below twopercent
Leaving interest rates at the current leveleven if that means rising inflation
Raising interest rates by one percent
49
13
12
7
41
40
36
38
4
29
36
35
4
16
15
18
1
2
1
1
Strongly support Somewhat support Somewhat oppose
Strongly oppose Don't know
34343434
Would you strongly support, somewhat support, somewhat oppose or strongly oppose the Bank ofCanada doing the following?
Bank of Canada Actions
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0 50 100
Preventing an interest rate shock thatcauses mortgage defaults
Stimulating economic growth
Keeping inflation in check
Keeping the dollar at a level whereCanadian exporters can compete
Not damaging consumer spending
55
38
29
38
20
39
57
56
40
56
4
4
12
13
18
1
2
2
9
7
1
Very important Somewhat important Not very important
Not at all important Don't know
35353535
How important should the following considerations be when the Bank of Canada is setting interestingrates?
Considerations for Setting InterestRates
Interest Rates and Consumer
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Interest Rates and ConsumerSpending
Most executives agreed that the level of household debt in Canada
represents a serious threat to the economy. Yet most also agreed thatthe economy needs more consumer spending, not less.
Most Canadian business leaders think the success of their business isnot strongly linked to domestic consumer spending. Western andresources executives were overwhelmingly likely to agree that their
business is not materially affected by Canadian consumer spending.
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0 50 100
The level of household debt in Canadarepresents a serious threat to the
economy
Our economy needs more consumerspending, not less
Your business is not materially affected
by Canadian consumer spending.
13
15
35
60
51
27
21
27
16
3
3
21
2
4
1
Strongly agree Somewhat agree Somewhat disagree
Strongly disagree Don't know
37373737
Im going to read you a few statements about consumer spending and debt. For each, please tell me ifyou strongly agree, somewhat agree, somewhat disagree, or strongly disagree.
Conflicting Economic Needs
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CEO Compensation
Half of executives believe that the growing wage disparity between
executives and average workers has a negative impact on society. Those that said it has a positive impact were mostly from the West, and those
in resources were the least likely to say it has a negative impact, relative to theother sectors.
Executives are more likely to think growing CEO compensation has anegative impact on shareholder value than think it is a benefit.
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0 20 40 60 80 100
Total
West
Rest of Canada
Resources
Services
Manufacturing
Expect strongcompany growth
Moderate growth
6
11
2
9
3
3
143
33
38
30
42
24
33
3830
54
47
61
41
66
58
4557
7
5
7
8
7
6
210
A positive impact on society No impact on society
A negative impact on society Don't know
39393939
The 100 highest paid CEOs of TSX listed companies earned just over $8 million on average in 2010,or 180 times the average worker's salary. In 1995 average pay of Canada's top 50 CEOs was only 85
times that of the average worker. Does this growing disparity have:
CEO Compensation
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0 50 100
19 43 32 6
A positive impact on shareholder returns No impact on shareholder returnsA negative impact on shareholder returns Don't know
40404040
And what impact has the upward trend in CEO compensation had on returns to shareholders? Is it:
CEO Compensation
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CEO Compensation
Most believe that the disparity will not continue to grow - most expect
the ratio between CEO and average workers salaries will decrease orstay the same.
Indeed, almost no executives believe Canadian CEOs are underpaid.
A minority believe that CEOs are overpaid.
Roughly half said they think Canadian CEOs are paid about what their
performance is worth. Executives outside of the west were twice as likely to say CEOs are paid more
than they are worth, as western executives.
Executives who expect strong growth were less likely to agree that CEOs arepaid more than their worth, compared to executives who expect moderate
growth for their companies.
i
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42424242
In the next five years, do you foresee this disparity between CEO's and average workforce salaries:
CEO Compensation
0 50 100
28 39 33
Continuing to grow Staying at the same ratio Decreasing
h ld di i
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43434343
You said you foresee wage disparity continuing to grow, why do you say that?
Why would CEO pay disparityincrease?
0 50 100
Due to societal/ economic trends
Good CEO too important
Society/ public does not have enoughcontrol
Boards not doing their job, continue tosupport high wages
Due to public/ shareholder/ governmentpressure
Greed
Cannot see them justifying anythinghigher
Don't know
35
21
21
16
7
7
7
2
h ld C O di i
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44444444
You said you foresee wage disparity decreasing, why do you say that?
Why would CEO pay disparitydecrease?
0 50 100
Due to public/ shareholder/ governmentpressure
Boards not doing their job, continue to supporthigh wages
Due to societal/ economic trends
Society/ public does not have enough control
Change not strongly supported
Cannot see them justifying anything higher
52
15
10
4
2
2
CEO C i
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45454545
Do you think Canadian CEOs are paid:
CEO Compensation
0 20 40 60 80 100
Total
West
Rest of Canada
Expect strongcompany growth
Moderate growth
33
21
44
14
39
49
68
37
67
44
4
2
7
10
3
13
9
13
10
15
More than their performance is worth About what their performance is worth
Less than their performance is worth? Don't know
Hi h I S
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High Income Surtax
Most executives oppose the new 2% surtax on annual incomes above
$500k, introduced in Ontario, while one third support it. Support nearly matched opposition among those that said that the
CEO wage disparity has a negative impact on society.
Most executives who said the CEO/worker wage disparity will continueto grow support the surtax.
Hi h I S t
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0 50 100
Total
Ontario
CEO compensation has a negative
No impact
CEO wage disparity to grow in next 5 yrs.
Same ratioDecrease
14
7
20
6
26
154
24
30
26
21
33
1131
17
18
21
12
12
2019
41
44
30
60
28
4844
4
2
2
2
2
72
Strongly support Somewhat support Somewhat oppose
Strongly oppose Don't know
Recently the Ontario Liberal government amended its budget to add a 2% surtax on annual incomesover $500,000. It is a temporary deficit reduction measure. Would you say you strongly support,
somewhat support, somewhat oppose or strongly oppose this measure?
High Income Surtax