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The pitchfork-and-torch brigade is out in full force for highly paid CEOs. Across Europe voters and politicians are clamouring to clamp down on executive compensation. Now Ottawa is angling for a bit of the action.

On Tuesday, Finance Minister Jim Flaherty crowed that the government had struck a "tough" bargain with Air Canada: In exchange for Ottawa providing relief on the carrier's huge pension deficit funding obligations, Air Canada agreed, among other things, to freeze executive pay at the rate of inflation, prohibit special bonuses and limit their incentive plans. It may make good politics to go after the rich, but it's poor policy, and it's difficult to see how limiting executive pay will fix the carrier's problems.

There's no question CEOs are highly paid, possibly overpaid, a situation that was decades in the making in the mid-20th century, and exacerbated by huge corporate scandals and the credit crisis in the 2000s.

But while governments and their appointed agencies have a role to play to ensure markets are transparent and uncorrupted, the job of determining how much to pay top executives of private-sector corporations should be left to owners (i.e. shareholders) of companies, their appointed board directors and management to sort out.

Giving governments a role to rein in pay is a mandate with no end in sight to the chronic dissatisfaction of the rabble. Even, say, forcibly cutting executive pay in half would leave a sizable gap between CEOs and the average worker and would lead to a flight of executive talent to jurisdictions with friendlier pay rules. Compensation consultant Ken Hugessen points out that setting ceilings would do little to help redistribute overall income, as foregone compensation would merely be transferred to corporate earnings, which are taxed at a lower rate (at least in Canada) than individuals.

In fact, backlashes from increasingly vigilant shareholders and increased regulatory disclosure requirements have already helped to usher in better compensation practices. Indeed, Air Canada's proxy shows it has been doing the right things: It limits top salaries by paying in the second quartile or lower of comparable companies. More than half of CEO Calin Rovinescu's pay package depends on him earning a certain threshold of operating earnings. The board is entitled to claw back his compensation awards, and the CEO is required to own at least the value of his base salary of $1.4-million in shares. In their first "say on pay" vote last year, Air Canada shareholders voted 92 per cent in favour of the executive pay structure.

Now, consider what reining in Mr. Rovinescu's pay will do to address Air Canada's pension solvency deficit, which stood at $4.2-billion at the start of last year: almost nothing. Mr. Rovinescu earned $4-million in 2011 and, in addition to his regular compensation, got a $5-million retention bonus from the board last year. Even if, hypothetically, he paid that bonus back, and all that money went toward the pension deficit, it would be a rounding error's worth of difference.

What Air Canada does need to fix its pension deficit problem is two things: a rise in interest rates over which management has no control, and improved financial performance, which management does. Reining in the incentives the board can offer its leaders won't help with the latter, and might just chase away talent.

Sean Silcoff is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights, and follow Sean on Twitter at @seansilcoff .

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-0.25%19.59

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