Industry Watch

Photo by Tate Carlson

To The Moon

Skyrocketing pay for top executives shows no signs of returning to earth

By Kevyn Burger
Mon, 2017-01-30 07:43

In January of 1985, Ronald Reagan was sworn in for his second term, Prince’s “Purple Rain” was No. 1 on the Billboard Album Chart and Michael Jordan was dribbling his way through his rookie season.

It was also the month the business world was buzzing over the cover story in the Harvard Business Review: “Those Million-Dollar-A-Year Executives.”

“I remember the outcry. A million dollars — how could that be?” says Mike Davis with a rueful chuckle.

A former executive vice president at General Mills, Davis now teaches a course on executive compensation to MBA students at the Carlson School at the University of Minnesota.

He’s watched as paychecks for captains of industry have hit ever grander heights. While the wages of American workers have stagnated, data collected by the Economic Policy Institute shows that CEO pay at the 350 biggest public companies jumped by 997% over the past 40 years.

“Salaries for public companies very directly spill over to impact compensation in private companies,” Davis says. “Compensation consultants benchmark salaries constantly, gathering pay data so private companies are competitive.”

The lucrative C-suite compensation packages have been a long time coming.

Little is known about the boss’s pay in the early 20th century; one survey from before World War I put the average salary of a top executive at a large company at $9,958, around $220,000 in today’s dollars.

The 1934 Securities Exchange Act required disclosure of a company’s three highest-paid officers to be filed with the SEC. At the time, it was thought that mandating such truth-telling would keep salaries reasonable to thwart shareholder and public backlash.

The average executive paycheck grew gradually between 1940 and 1970, staying below $1 million in inflation-adjusted dollars. But the EPI’s research show momentum building in the late ‘70s; CEO compensation, now larded with stock options and performance bonuses, leaped from $1.5 million in 1978 to $16.3 million by 2014. “Executive pay is excessive and outrageous, but the genie is out of the bottle and the genie doesn’t want to go back into the bottle,” observes Charles Denny, who urges restraint in high salaries.

Denny climbed the executive ladder in a 20-year career as a top Honeywell executive, then left in 1971 to run what he calls “a pipsqueak bankrupt company” with 400 employees. ADC Communications went on to become a billion-dollar global business.

In his professional life, Denny was among the group of thoughtful Minnesota business leaders who brought stable prosperity to the region in the latter half of the last century. In retirement, Denny has been an engaged civic volunteer, addressing corporate responsibility and business ethics.

“It’s a false premise that people at the top are superstar geniuses. But the system we have takes wealth from shareholders and transfers it to these top executives,” Denny says. “We’ve lost sight of the understanding that corporations exist by the will and license of our government. We are not free to just pursue profit, we are there to serve a public purpose.”

For decades, Denny has been often a lone local voice, writing editorials and campaigning publicly for higher taxes for top income-earners and reforms to slow the concentration of wealth.

Now 85, he would like to see someone from a younger generation campaign for his cause.

“I’ve said my piece. It’s time for others to step in. We have up-and-coming leaders as good as any this town has ever seen, but I don’t see anyone deeply engaged in issues like this,” Denny says. “I don’t know of anyone locally who has picked up the sword.”

High salaries for executives at public companies have never been easier to track.

“In my classroom, I load information from the Internet on the screen to show how quickly anyone can find very detailed executive pay information for public companies,” Mike Davis says.

While he applauds recent requirements that expand transparency, Davis knows that the executives who have their paychecks revealed hate to be financially undressed.

“I’ve never meant a single person who is happy about the public disclosure of their compensation,” he says. “Every public company has to put five people into the proxy, executive-level people who have decision-making roles. People always say, please, let me be number six.”

Davis observes that while many of Minnesota’s top executives are handsomely compensated, they wear their success more modestly than in other cities.

“There is no question the visibility of wealth differs by region. You see it in the trappings, like who regularly takes a limousine. In our part of the world, that’s not how we’re wired,” he says. “In the Twin Cities, senior executives live like normal people, with their two feet on the ground.”

But Davis predicts that their paychecks will continue to soar.

“Today, pay is better managed, better disclosed, but there has never been a downward trend in the level of executive compensation in my 40 years of working in this area and watching the money,” he says. “Not yet.”