Bruce Murphy
Murphy’s Law

The Incredible Rise of CEO Pay

Their pay has risen 997% since 1978, driving the wealth gap nationally and in Wisconsin.

By - Jun 23rd, 2015 12:31 pm
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Gale Klappa

Gale Klappa

It was back in 1978 that David Mahoney, Chairman of Norton Simon, was the highest paid executive in America, with a salary of $2 million.  In real, uninflated dollars that would have been worth $7.6 million in 2014, which is peanuts compared to what the top-paid executive, Nicholas Woodman, CEO of GoPro Inc., made last year: a cool $285 million.

Executive pay has been exploding in America. As Bloomberg notes, “the gap between pay for U.S. chief executive officers and the people who work for them has widened sevenfold in three decades.” American CEOs “made 331 times more than their employees in 2013, up from a ratio of 46-to-1 in 1983,” and that’s more than twice the gap in Switzerland and Germany, about four times bigger than in Australia and five times bigger than in Japan, the publication found.

A new study by the Economic Policy Institute shows that average CEO pay at the top 350 companies in America has risen from $1.08 million in 1978 to $16.3 million in 2014, an increase of 997 percent.

During that same period the federal minimum wage rose from $2.65 to $7.25, an increase of just 173 percent. Had the minimum wage risen as fast as CEO salaries, it would now be $39.97.

And during that same period, the average worker in America saw their wages rise from about $6 an hour to $20.67.  Had average worker pay risen as quickly as CEO compensation, it would now be $90 an hour.

All boats aren’t rising. Just the luxury liners.

And the problem is local as well as nationally. Years ago, stories in the Milwaukee Journal Sentinel would suggest CEO salaries weren’t as high in Wisconsin as nationally, but that’s merely a function of company size, which drives compensation. Since Wisconsin’s top public companies are far smaller than the top ones nationally, the executive compensation at state companies reflects that difference.

So don’t cry for Milwaukee’s CEOs, they are doing just fine, as this table shows. The top-paid executive, Alex Molinaroli of Johnson Controls (the state’s largest publicly-owned company), earned $19.5 million last year and nearly $48 million from 2010 through 2014. (For the first three years, he served as president and rose to CEO in 2013.)

Yet Molinari was out-earned over the five year period of 2010-2014 by Wisconsin Energy Corp. CEO Gale Klappa, who raked in $59 million. That is all the more remarkable as Wisconsin Energy is less than one-third the size of Johnson Controls, suggesting Klappa’s salary is way out of line even by the obscene standards for executive compensation nowadays. And his company is a publicly-regulated monopoly whose revenue comes from ratepayers, many of whom are low-income.

Executive Compensation at Top Milwaukee Companies

Company CEO 2014 Compensation 2010-2014 Compensation
Johnson Controls Alex Molinaroli $19.5 million $47.7 million
Fiserv Jeffery Yabucki $8.7 million $35.9 million
Rockwell Automation Keith Nosbusch $8.5 million $46.1 million
Kohl’s Corp Kevin Mansell $9.7 million $41.8 million
Harley-Davidson Keith Mandell $11.1 million $44.3 million
Wisconsin Energy Corp. Gale Klappa $14.5 million $59 million
Manpower Group Jeff Joerres $11.4 million $50.3 million
Joy Global Edward Doheny $4.5 million $16.8 million

Data from Morningstar. Companies listed by size of company.

The EPI study noted the profound impact of skyrocketing CEO compensation on America’s growing wealth gap: “These extraordinary pay increases have had spillover effects in pulling up the pay of other executives and managers, who constitute a larger group of workers than is commonly recognized. …Together, finance workers and nonfinance executives accounted for 58 percent of the expansion of income for the top 1 percent of households and 67 percent of the income growth of the top 0.1 percent.”

The rare defenders of this trend have suggested CEOs are getting paid a market rate based on their talent. But as I discovered writing a series for the Milwaukee Journal Sentinel, CEOs largely control the compensation they receive: it is typically approved by board members paid high fees by the CEO and his/her company and is based on recommendations by a compensation expert hired and paid by the CEO.

Defenders have also pointed to the pay of pro ballplayers or Hollywood stars, but they do not determine their own pay (as CEOs do) and are paid based on performance. Once they begin to fail, they are dumped. By contrast, CEO pay isn’t tied to performance in any meaningful way. Indeed the highest performing executives are often those running the worst performing companies, as Forbes reports.

As the EPI study concludes, “CEO pay does not reflect greater productivity of executives but rather the power of CEOs to extract concessions… Consequently, if CEOs earned less or were taxed more, there would be no adverse impact on output or employment.”

The other argument made is that studies should look at the pay of the average CEO, not CEOs of the largest firms. But as the EPI notes, “the average firm is very small, employing just 20 workers, and does not represent a useful comparison to the pay of a typical worker who works in a firm with roughly 1,000 workers. Half (52 percent) of employment and 58 percent of total payroll are in firms with more than 500 or more employees.”

Finally, as stratospheric as CEO pay is, it may actually be higher than indicated in public filings by corporations. Back in 2012, Milwaukee Journal Sentinel reporter Cary Spivak did an excellent story showing that some local executives were actually earning more than public filings showed, as measured by the state corporate income tax they paid (which can be requested under the state open records law). For decades, the newspaper tracked CEO salaries on a yearly basis, but the last such story ran more than two years ago. That’s a loss for readers.

Categories: Business, Murphy's Law

48 thoughts on “Murphy’s Law: The Incredible Rise of CEO Pay”

  1. PMD says:

    What can be done about it though? Or, for that matter, should anything be done about it? I mean the gap between CEO pay and that of their employees is shocking and bonkers, but is that just something we have to deal with like it or not?

  2. Tim says:

    Well, let’s look to the PSC to rein in CEO pay for utilities in the state of WI. That is something that can be done today; it will save residents & businesses around WI millions of dollars a year.

    Although the local marina might be upset they’ll have 1 less yacht to care for.

  3. Observer says:

    Each commissioner gets $131,000 a year and were appointed by Scott Walker. http://psc.wi.gov/aboutus/organization/commissioners.htm I wouldn’t hold my breath hoping that the PSC will rein in Klappa’s salary. This is the man that decided the most expensive plant ever in Wisconsin should be coal fired. The late S.C. Johnson fought this and lost. Now if someone can make a horrible expensive decision like that and still be grossly overpaid, you, me, and Bruce are not going to able to change anything.

  4. stacy says:

    Now we have to wait for the “trickle down”.

  5. Andy Umbo says:

    …guess my Mom should have named me ‘Keith’…

  6. Kyle says:

    The article makes a point about Molinaroli’s 5 year total compensation, but Molinaroli hasn’t been CEO for 5 years. Saying other CEOs (Klappa) made more than a non-CEO doesn’t really seem like a worthwhile comparison.

  7. Bruce Murphy says:

    Kyle, you’re right, though Molinaroli served as company president prior to becoming CEO in 2013. But the five CEOs listed above Klappa all run bigger companies yet he makes more than all of them.
    The bigger issue here, of course, is the compensation made by all CEOs.

  8. wisconsin Conservative Digest says:

    Unless you are stockholder, why would you care? This is just cheap demagoguery.

  9. PMD says:

    Yes why would anyone at all care about income inequality and the gap between what a CEO makes and what their employees make. Certainly you don’t.

  10. AG says:

    This being America and all… we should be free to aspire to make as much money as we can. The publicly traded companies can pay their CEO whatever they want to pay and CEO’s do get fired. To say their pay isn’t performance based isn’t really true since most of the large pay packages are made of stock and stock options… thus they need to perform well to get paid well. Sometimes it can take a bit, but ultimately CEO’s are held responsible for performance.

    I do take more of an issue with a CEO of a public/private organization taking home significantly more than their counterparts of a normal publicly traded company. I’d have to see more information to make a judgement call on if this is the case for WE energies’ CEO and whether there is justification for it.

    In the end, it makes more sense to me having a CEO who’s responsible for tens (or hundreds) of thousands of employee’s making millions per year vs. someone who plays a game for a living.

  11. PMD says:

    Solid points AG. And I’d add makes movies like this (http://www.imdb.com/title/tt2191701/?ref_=nv_sr_1) to plays a game for a living.

  12. Dave says:

    Maybe we can start throwing them off bridges. I’d start with Gale Klappa.

  13. Observer says:

    Someone explain to Mr. “I don’t want to pay taxes” that he pays any CEO’s salary when buys or uses their product. I thought he knew how things work in the real world. Does he really think the shareholders pay out the money? Sheesh!

  14. Wisconsin Conservative Digest says:

    CEO pay has not effect on price of product. If they increase prices for any reason sales will go down and competitors eat them up. Good CEOS are paid a lot, cause they make the place run better. Best example was Ford and GM during the TARP. Ford had good leaders, GM did not. The Ford people earned their money. Left has no idea how thing work cause most of them are blood suckers on the people working for govt. Big salaires come out of profits. Most of them make money on options, bonuses.

  15. Tim says:

    WCD, how does your faulty market logic work in an uncompetitive environment, say like WE energies?

    Ooops.

  16. Observer says:

    Ah so if we double Klappa’s pay my electric and gas bill go down?
    Thanks. I guess I couldn’t see the forest for the trees.

  17. Justin says:

    WCD: “Left has no idea how things work because most of them are blood suckers on the people working for government”.

    “Blood Suckers”

    Thanks WCD for adding yet another slur to my collection of slurs that Wisconsinites use to describe public educators in our state. Young people going into teaching and those considering teaching in Wisconsin deserve to know in advance how Wisconsinites refer to their work teaching the children in our state.

  18. Observer says:

    Let’s use WCD logic in a competitive environment. Carly Fiorina was HP’s CEO from 1999 to 2005. Let’s take a wider view of Fiorina’s salary during the years she was CEO at HP. According to proxy statements, her salary in 1999 was $4.2 million (and she also got tens of million in preferred stock when she took the job). In 2000, her salary went to $3.7 million. It dropped to its lowest point in 2001, $1.2 million; then went to $4.1 million in 2002; $3.5 million in 2003; and $3.2 million in 2004. Under her tenure Hewlett-Packard lost half of its value and finally she was fired. She got a severance of 42 million dollars (she says it was 21 million but she’s not telling the truth). Anyhoo, using WCD’s logic anyone buying an H-P computer should have gotten it for half price right?

  19. Observer says:

    Another article, this time from the Wall street Journal that notes performance and salary don’t go hand in hand. http://www.wsj.com/articles/how-much-the-best-and-worst-ceos-got-paid-1435104565?KEYWORDS=joann+s+lublin

  20. Tom D says:

    WE Energies rates are based on their costs (including the CEO’s compensation). When Klappa makes $14 million, that cost is passed on to every electric and gas customer.

    Suburbanites became apoplectic with the prospect of WE Energies paying for streetcar utility relocation (even though most of the utilities involved were steam lines and nobody outside the city pays anything for steam).

    Why isn’t Brett Healy as angry about Klappa’s salary as he is about utility relocation costs? Over the long term, WE Energy pays more for CEO (and other officer) compensation more than they would for streetcar utility relocation. And unlike steam line relocation, which is only paid by city utility customers, Klappa’s salary is paid by everybody.

  21. Wisconsin Conservative Digest says:

    PSC sets rates and if they though that the CEO salary would be out of line they could take that into account. That salary has been that way under dems and GOP on committee. It is totally meaningless in anything, just cheap shots an demagoguery.

  22. AG says:

    To be fair here… Most of Klappa’s compensation is probably from preferred stock, stock options, etc. The brunt of the cost of that compensation does not fall on the customers of WE energies but rather the open market. There’s some costs of course, but not really as much as many people here are thinking.

  23. Tim says:

    To be fair, inflated compensation packages partially paid via “preferred stock, stock options, etc” do dilute shareholders’ future expected profits, unless firm leadership increases profitability (aka rates).

    There is no free lunch.

  24. AG says:

    Really, Tim?

  25. Tim says:

    Everything has a cost.

  26. AG says:

    I appreciate that you thought this through critically and weighed a number of the costs and their effects. However, the miniscule effect that the actual cost would have seems to have escaped you. This isn’t just money right off the bottom line. Most of it is made up, most likely, from capital gains he realized when he exercised his options. Stock holders will hardly see any real effect from any dilution of shares compared to the vast amount outstanding. Even if they ignored that WE energies has outperformed most of their direct competitors (well, we’ll call them a peer group since they don’t really directly compete) and I’m sure most stock holders are satisfied with that mild cost in return for good performance.

    This is a pretty standard practice. Any of those CEO’s on the list will have fairly wild swings in their compensation based on their own personal financial decisions. The most I look at it, the less I’m concerned about this situation.

  27. Tim says:

    It sounds like you want to have your cake & eat it too. If the dilution is so small that the shareholders would barely notice, why isn’t the firm issuing more shares & using the proceeds to increase profitability or dividends paid out?

    I’m aware it is standard practice but that doesn’t reflect on the cost of it.

  28. Tim says:

    I can understand why someone looking at this from the shareholders’ perspective would find this arrangement pleasing. As you said, WE Energies has been very profitable, in the case of a regulated monopoly that’s not enough.

    It seems WI not only has some of the highest electric rates in the midwest but the country:

    https://www.pacificpower.net/about/rr/rpc.html

  29. Tom D says:

    AG (post 22):

    If an executive exercises stock options, it does NOT follow that the ‘brunt of the cost” falls on the open market; it often (usually??) comes from the corporate treasury and is paid via a paycheck. I know this because I’ve worked in payroll for two major companies—each was NYSE-listed and each had decades as one of the 35 components of the Dow Jones Industrial Average.

    It works like this. Let’s say the stock is at 35 and the executive is given an option to buy 10,000 shares at 40 at any time in the next 5 years. Four years later, the stock is up to 50, and the executive decides to exercise that option.

    You’d think he would pay $400,000 and then take delivery of 10,000 shares (worth $500,000), but it almost never works that way. Instead both companies offered “Stock Appreciation Rights” (aka SARs). If the executive chose the SAR (and they almost always did), he was just given the $100,000 (before taxes) in his next paycheck. The money was taxed as if it were salary (the same rate as a regular stock option exercise) and was (I believe) reported to shareholders as a stock option exercise.

    Wisconsin Energy’s (WE Energies parent) mentions SARs in their proxy statement, so I’m sure they do the same thing.

  30. AG says:

    True Tom D, that can be the case and I’m unfamiliar with how often that is used in lieu of exercising the option to purchase shares, that all comes down to the tax advantages (and other specific needs) of the executive. I was just trying to keep it simple to point out that the costs are small in the grand scheme of things. Even if we take it down to the simplest form, and his average yearly take home was straight salary dollars it would still have an extremely small impact on customers or shareholders.

  31. Observer says:

    But we all agree right the profits in the treasury or the value from the stock all derive from the consumers, i.e. us.

  32. AG says:

    No Observer, not necessarily. In fact, often a good portion is not. It all depends on where the compensation is coming from and how it’s generated. If an executive chooses to exercise options then issuing authorized shares won’t actually affect total shareholder equity, even if it it dilutes the value of individual shares (albeit at a ridiculously small level). That is one example, but you can see it all depends on how they are compensated and in what mix.

  33. wisconsin Conservative Digest says:

    The question every body skirts is if they are worth it Was Jobs? Carnegie, Iacocca, Buffet, Gates?? Course they are. The companies that do not have good leaders fail, or do poorly and those that have great leaders change the world. That is what you want as head of your company if you are stockholder.
    It is just petty leftist demagoguery, and class warfare, and standard Alinsky. Pick on the rich, tax the hell out of them, chase them down south, out of Milwaukee.
    That is why you see all the entrepreneurs going to Waukesha, and after the NML fiasco more will do so, very quietly. The Left, who needs the rich the most for jobs for the inner city are the dumbest. Go visit KC in Texas for jobs. Or China, India, Taiwan, Japan, Korea and elsewhere. Capital follows the sun, where it shines on them the best. Chris christie said it best: “Send all the 1%ers to NJ, we love them” Look at Greece, Puerto rico, Illinois, Spain, Ca. venezuela with their taxing and beating up of the rich. Where are they now? And that is what these dizzy Lefitists want for MILwaukee, 4th most violent crime city in country in their population class. But we do have a trolley.

  34. Tim says:

    It’s just a magical pot of money, taking from it harms no one. If you question it, the rich executives whose pay isn’t correlated with performance (aka competance) will run away with hurt feelings.

    Got it. I’ll wait for the paperback though.

  35. AG - poster formerly known as Andy says:

    Ah yes, when you don’t understand something it must be magic. I understand.

    And regardless of what the Forbes article says, CEO pay IS based on performance… it just doesn’t bear out necessarily year to year to align with current performance, depending on how the pay structure is set up and the personal financial decisions of the executive themself. And CEO’s do get fired. Alllll the time.

  36. AG says:

    So I finally looked into these executives pay packages. They are really all over the board, and some of them have vast amounts of benefits and pay available to them that they haven’t taken advantage of and thus are not reflected in their past 4 year’s salaries. Not that the idea of unused pay and benefits helps the argument against high CEO pay for some people… but wanted to point it out regardless.

    Bruce, small correction but it’s Kevin Mansell not Keith. Looks like CBS58 picked up your story here and never bothered to double check the data. That’s fun! They also use it to note Molinaroli is the highest paid CEO is Wisconsin, but they didn’t even note that he’s only been CEO for a short time… so his actual CEO pay per year is much higher than it looks. Would have made an even better little story if they had double checked that. Unless they compared it to his predecessor who made 30some million a year. Oh well.

  37. Dave Reid says:

    @AG Thanks fixed….

  38. Tim says:

    Yeah, I couldn’t possibly have a substantive difference of opinion backed by facts… I must not understand it. There’s no point in going point by point with you about this; you believe that the market somehow doesn’t respond to the millions being taken out of the shareholder pockets… somehow that’s too small for them to notice.

    However, you never answered why companies don’t use this strategy to fund their operations & increase profitability if that’s the case. So, yeah… another goofball commie I must be.

  39. AG says:

    Tim, you called it magic money that pops out of nowhere… I don’t see how that is an opinion backed by facts.

    What question about why companies don’t use this strategy to fund their operations and increase profitability? Which strategy are you talking about? Are you talking about equity financing? Because that’s what every publicly traded company has done at some point (hence why they’re a publicly traded company) and some privately held companies as well.

    When an executive exercises stock options, he/she is purchasing authorized shares at an agreed upon preset price that is less than the market value.

  40. Tim says:

    Ha, I beginning to see why PMD has so much fun posting with you. I like how you effectively rated my “It’s just a magical pot of money, taking from it harms no one” comment like a poor copy of politifact. Wowee, you caught that I wasn’t being literal… you are a sharp tack Mr. AG.

    Getting to the underlying matter in question, is there no cost to equity financing? Above, you treat this as though there is no cost… if there is no cost or it’s so low… why would WE Energies carry debt? They must be after that great interest write-off huh? I mean if a company can just continue to go back to the equity markets for round after round of financing… each time the cost of doing business would fall “on the open market”, right? I mean, why even collect bills from ratepayers when you’ve got this endless stream of revenues from the capital markets?

  41. AG says:

    Tim, the difference with this is that usually I can tell when PMD really doesn’t understand something and wants to know vs when he’s just being glib. I’m not really sure with you… clearly you don’t think a company can run on equity financing alone (forever anyway)… but then maybe you don’t really know why a company carries debt if you think it’s only because of an interest deduction.

    I didn’t say there were no costs… I just said the costs are smaller then people here seem to realize. With a market cap of something around 11 billion dollars, an executive who exercises 15 million in stock options is not going to do much to dilute shareholder value. And compared to other forms of compensation, stock options are an extremely inexpensive way to pay a CEO compared to straight salary or bonus.

  42. Tim says:

    Glad you actually attempted to address the point, albeit with a strong helping of groundless condescension. As earlier, I understand you’re saying a large company can skim from their shareholders to pay for their costs related to management. I’m saying this is not free money as the dilution needs to be made up through increased performance, which almost always means higher rates in an uncompetitive, regulated sector such as energy distribution.

    I agree this seems to be an inexpensive way to pay the management compensation costs from the company’s perspective; however, that is not my perspective. As someone on the receiving end of rate increases instead of their dividend checks; I see this as my rates need to be driven higher to justify their high pay.

  43. Wisconsin Conservative Digest says:

    I have sign in my bathroom: In life there are things that you can change and some things you cannot, wisdom is knowing the difference”, You cannot change this, by any law that would get thrown out asap. If you do not like what a company pays it’s leaders and they are in short supply, good ones than do not buy their products or their stock.
    if it could be cjanged you would see countries flooding to other venues for their HQ’s. Capital moves fast these days.

  44. Observer says:

    I’d have been in favor of a one time bonus had Klappa made Wisconsin rates the lowest in the country instead of one of the highest. I think a salary of $250,000 a year is fair compensation for a monopoly with bonus’s given for over and above achievements. Why does WCD hate consumers? They are his fellow citizens and are more likely to be his neighbor than Klappa.

  45. Rich says:

    As someone on the receiving end of rate increases instead of their dividend checks

    There’s your problem. Buy some WEC stock right now. Sure, you’ll help line Klappa’s pockets, but if they do well because of or even without his magical direction, they pay you too. Don’t hate the player or the game, get in on the game.

  46. Tom D says:

    Rich (post 45): Contrary to popular opinion, at least 99.9999% of the time when you buy stock from a broker, absolutely none of your money goes to the company, directly or indirectly; it just goes to another investor who is selling.

    In most cases, it is illegal for a company to sell shares directly to the public, the exception is when there is a “public offering” and a current prospectus.

    So, if you buy WEC stock, you won’t line Gene Klappa’s pockets at all (unless you happen to buy shares that were personally sold from Klappa’s personal portfolio.

  47. Joecool says:

    This generation’s working class doesn’t care about making money like the greatest generation did. Number of large strikes of 1,000+ employees per year: in 1965 – 268, 1975 – 235, 1985 – 54, 1995 – 31, 2005 – 22, and in the most recent year 2014 – 11 strikes. And the top 1%ers used to be taxed 90%, even 80% under conservative Nixon, but now if you want to raise their taxes from 37 to 39% they call you a socialist.

  48. AG says:

    Joecool, do you think it’s a coincidence then that the sharp drop off in large strikes coincided with the same time period that manufacturers found they needed to find less expensive ways to manufacture because of foreign competition?

    Also, do you think we should have an 80 or 90% tax rate? (it was only 77% the first year Nixon was in office btw) Currently, if you take the 39.6% top income bracket and add in state income taxes in WI, plus medicare surtax, plus Obamacare 3.8% surtax and you’re over 50% income tax for the highest bracket. I think that’s fair… but I guessing you disagree.

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