Gov. Mark Dayton’s decision to go ahead and implement big pay raises for his commissioners drew a predictable response from his opponents. The Republican speaker of the House blasted the decision to “raise commissioner salaries by $30,000 on average for political appointees who already make six-figure salaries.”
The thing is, it wasn’t politics driving Dayton but an approach that looks a lot like what the big companies do. He hired consultants, just like SuperValu’s former CEO Jeffrey Noddle does, to determine market rates of pay.
Noddle is the chair of the compensation committee of Ameriprise Financial, which paid its CEO $97.4 million last year. So the same sort of market-based thinking means one job is paid more than 600 times what the other one pays.
It would be a lot easier to understand how that’s possible if the labor market were as simple as the corn market, where price is easily discovered. But wages are sticky, and don’t move up and down like the price of corn. Social and political thinking about what’s appropriate matter, too.
But if we just assumed the market worked, a “market clearing” wage means high enough to get qualified people for a given occupation but not so high that many qualified people can’t find jobs.
Getting those qualified people for state jobs was what the governor had in mind in raising salaries for the state’s senior staff, according to Myron Frans, the commissioner of Minnesota Management & Budget and the point person on senior staff compensation.
Frans also happens to be an interesting case study in the labor market for commissioners. He came to the state after meeting with the governor-elect back in December 2010 to talk about the revenue commissioner job. It then paid $108,000 per year and hadn’t been raised since 2000.
That’s likely a lot less than Frans had been making. Frans said he thinks he was the only person offered this job, and he took it.
More recently, Frans moved over to MMB and his old job was filled by Cynthia Bauerly, his former deputy. Commissioners were paid around $120,000 in 2014, but Bauerly as deputy had made more.
That means the revenue job has been open twice in five years and both times it was filled by somebody who grabbed it without a bump in pay. That sure seems like evidence the job paid enough.
Frans cautioned against drawing too much of a conclusion from his experience. He had roughly 30 years as a private practice lawyer and in business before going to the state, and while he hasn’t made this little since the 1990s, he could afford it. And he wanted to work for the governor.
“It’s really about getting people from the private sector,” Frans said. “It’s really hard to get people to take too significant of a pay cut. Now that we are up in the $140,000s or $150,000s, it’s a little easier.”
That’s where a consultant comes in handy. The Hay Group said private sector jobs comparable to the revenue commissioner last year paid a median salary of more than $336,000 per year. Public service can be interesting and rewarding work, but the state had to close some of the gap.
Presiding over a big financial services company like Ameriprise looks like interesting work, too. As the job of Ameriprise CEO in Minneapolis pays $97.4 million, including stock gains, we have to accept that this, too, is somehow a market-based wage.
Ameriprise’s proxy pointed out how closely tied the CEO’s total pay is to performance, and it’s certainly true that Ameriprise has performed well by any number of measures. Its stock has done far better than the broader market over the past five years, too.
Tying CEO pay to stock performance, though, doesn’t necessarily make it “market” based. How much does the CEO get when the stock goes up? Couldn’t the board find another really effective CEO to do the job for much less?
Economists and others have been trying to explain that kind of sky-high CEO pay since the 1990s, when generous stock option grants and a rising market put CEO compensation on a rocket ride. Big company CEO pay averaged less than 30 times annual worker pay through 1988, and 10 years later it had shot up to 322 times.
One explanation is the so-called “agency effect,” when the CEO just works for the real owners of the company’s assets and thus grabs as much of the owners’ money as he or she can get away with. But there’s no reason to think CEOs just figured that out in the 1990s.
The most convincing explanation is that CEOs used to effectively cap their own pay — that together with their directors they knew too much looked bad to the customers, employees and the public. And at some point in the 1990s that restraint broke down.
Compensation practices have improved since the 1990s, with executive pay more directly tied to the company’s performance.
That sounds like a job for a consultant, and it’s easy to argue that the CEO pay so carefully tracked by the consultants does reflect the “market” wages of executives genuinely worth millions of dollars per year.
Really all these consultants are doing, however, is tracking pay that reflects the big reset that took place in the 1990s. The real market clearing wage is far more difficult to name, because unlike engineers or store managers, top executives usually won’t move from job to job for a 10 percent bump.
That doesn’t mean CEOs don’t care about pay. After observing this at close range for years, however, it’s less about the lifestyle the money buys and more about status and an affirmation of value. A $20 million pay package for one CEO is galling to another who earned $10 million leading a company that performed much better.
Once the conversation about pay turns to status and what’s socially acceptable, however, it’s mostly left the realm of traditional economics. Maybe one of the ironies here is that what the governor was trying to do with political appointee jobs was less political and more market-based than what the big companies do with their CEO jobs.