TThe income gap has only widened in recent years as the stock market posted record gains. And the disparity is particularly glaring in the salary packages of the country’s CEOs.
All 50 highest-paid public company CEOs in Minnesota in 2021 earned more than $1 million from salaries, bonuses and realized stock awards, with the median salary package being $6 million. Thirteen CEOs earned more than $15 million, three more than $50 million.
In a national survey of 200 large companies by compensation consulting firm Equilar for The New York Times, the 10 highest-paid executives in 2021 all had packages in excess of $100 million, with an average compensation of $330 million, the highest ever. (Equilar/NYT uses a different formula to count total compensation.)
In the Star Tribune’s review of Minnesota public company proxies, only one CEO made more than $100 million: Ceridian HCM Holdings’ David Ossip, who made $120.5 million, mostly from stock awards.
The big question is whether pay is justified, particularly compensation based on long-term stock awards — and how it affects companies’ performance. In Minnesota, 43 of the 50 highest-paid CEOs derive most of their profits from long-term stock awards.
“Twenty million dollars in compensation wouldn’t bother me one bit if that person increased the company’s assets by $300 million to $500 million — and the employees got some of that,” said James Bailey, a professor of leadership at George Washington University School of Business.
While the figures sometimes vary greatly from company to company, the employees do not at least receive the same share of the assets from a company’s equity.
The Economic Policy Institute, an independent nonprofit think tank that studies economic trends, researched the salaries of CEOs of the 350 largest companies in the US by revenue each year. One result: Compensation was $1.7 million in 1978 and grew 1,322% to $24.2 million through 2020.
CEO salaries grew 60% faster than the overall stock market during that time. Typical employee earnings in the industries these 350 CEOs represented increased by 18%, indicating growing income inequality.
Another sign: The gap between CEO salaries and workers’ salaries has also widened steadily over the past 20 to 30 years.
In our list of the 50 highest paid CEOs in Minnesota, CEO-to-worker pay ratios range from 13-to-1 at Northern Oil and Gas to 775-to-1 at Target. Compensation ratios vary widely between industries and tend to be highest in service and retail companies, which rely heavily on part-time and seasonal workers whose compensation is included in the calculations.
Another measure that suggests inequality over this period is what economists call the share of work, which measures how much of total income can be attributed to work in the form of wages, salaries, bonuses and other benefits.
The work share is measured against the capital share, which in simplified terms contributes to the rest of the income. Key drivers of equity share include income from individuals who own their own businesses or shares in a business, or lease their land.
The percentage between the two has been relatively stable for decades. But the labor rate began to fall markedly in the 1970s and 1980s and has tended to fall at a faster rate since the start of the new century.
According to a 2019 report by McKinsey & Co., the labor force participation rate in 35 developed countries has fallen from 54% in 1980 to 50.5% in 2014.
The US experienced the sharpest decline from 2000 to 2016, when the employee share fell from 63.3% to 56.7%, with a corresponding increase in the capital share.
Cheaper overseas labor and increased productivity associated with capital improvements, including software and automation, are big factors in the decline. So the rise of this century’s mega-corporations like Apple, Microsoft, Alphabet, and Amazon, each with trillion-dollar valuations, has contributed to a downward shift in the labor rate.
So is the wealth of billionaire founders and CEOs as the percentage of their income attributed to stock awards increases, said Louis Johnston, an economics professor at the College of St. Benedict and St. John’s University.
An executive’s salary, cash bonuses and certain benefits contribute to the work share, he said. Your gains from long-term stock awards, including stock options and restricted stock, contribute to the equity share.
The decline in work share also coincides with the rise of what Johnston calls the super CEO.
“They can come in and they can either choose the board themselves or shape it and then negotiate a pay package to their liking,” Johnston said. “So they can really dictate how much they get in terms of stock options versus their salary.”
The Equilar/New York Times compensation report pointed to Tesla CEO Elon Musk’s $2.3 billion salary package in 2018 as a turning point. Consisting largely of long-term stock awards, the package influenced other companies to take a similar approach to their CEO compensation packages.
While long-term stock awards have become a larger part of compensation — leading to more mega-packages in recent years — executive compensation has steadily increased.
The 50 highest-paid CEOs of Minnesota public companies collectively made $648.4 million last year; 75% came from previously issued stock options that exercised or blocked shares that vested.
In 2020, the 50 highest-paid CEOs in Minnesota realized $647.2 million, with 82% of the total coming from long-term stock awards.
On the New York Times/Equilar annual CEO compensation list, 171 of the 300 CEOs earned more than $20 million. This list counts total compensation closer to what appears in the powers of attorney.
Ninth on that list was Mike Mikan, CEO of Bright Health Group. The company calculated Mikan’s 2021 salary package on its proxy to be worth $180 million, so Equilar used that number. This total included the value of the stock awards on the grant date.
According to the Star Tribune formula, Mikan’s realized compensation was $2.3 million, which ranked him 42nd on the Minnesota list.
The Star Tribune has been counting the realized value of executive compensation plans for more than 30 years. During that time, only one of the top 15 realized executive pay packages in Minnesota, all over $72 million, was before the year 2000; 11 since 2005.
For the past two years, Ossip has earned nearly $230 million from Ceridian and has earned more than $100 million each year through the exercise of previously issued stock option awards.
As the pandemic turned the economy upside down in 2020, many CEOs took voluntary pay cuts. During the uncertain stock market conditions since then, they may also have been reluctant to cash in long-term stock awards.
Those who showed patience were rewarded as the market rallied in late 2020 and earned even more as stocks soared in 2021.
Stock market performance so far this year means stock award values have fallen — which could mean next year’s compensation packages won’t be valued as highly.
Historically, stock markets have had more years up than down, and most CEOs will take advantage of that. But workers who rely on wages and bonuses will see less of that growth, and income inequality may continue to widen.
“In a way you have this negotiation between labor and capital,” Johnston said. “But capital has become much more powerful and has a much more powerful bargaining position over labor.”