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Utah Business

Utah enjoys some of the nation's highest levels of economic equity. But the gap is widening.

Is your CEO worth $6 million?

According to public filings, Pluralsight’s CEO Aaron Skonnard took home nearly $6.5 million in total compensation in 2019. Extra Space Storage’s CEO took home $6.2 million. Nu Skin’s CEO took home just over $4.5 million. 

Since 1978, CEO compensation has grown over 1,000 percent, outstripping stock market gains and vastly exceeding wage growth overall, with the average worker’s salary increasing just 12 percent in the same period. As a result, the one percent of the wealthiest Americans now take home 21 percent of the entire nation’s earnings, according to the Economic Policy Institute, and the demand for low-to-mid-wage talent has increased.

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Why CEOs have been historically overpaid

There are varying theories on why CEOs have historically been compensated so handsomely, but Lawrence Mishel, an economist with EPI, doesn’t believe it’s accidental. “It’s sometimes called wage stagnation, but we refer to it as wage suppression, because it’s not like something that just happened,” he says. “It’s the conscious result of policy decisions sought by wealthy people, corporations, and businesses.”

Ethan Rouen, an assistant professor of business administration at Harvard Business School, says this cycle begins with the way most firms decide what to pay their CEOs and other executives. A CEO’s salary is typically determined by a committee, which reviews the pay of CEOs at similar firms and then, theoretically, uses the CEO’s performance to determine the salary they deserve compared to the standard set by their peers.

The trouble with this system is that nobody wants to admit when their CEO is underperforming, Rouen says, and so most companies elect to pay their CEOs above the average suggested by the peer group. This results in a keeping-up-with-the-joneses dynamic that ensures executives enjoy ever-larger compensation packages, regardless of whether the company as a whole has done well. “All the children are above average—that’s the problem with CEO pay,” Rouen says. “Nobody wants to admit they have a below-average CEO.”

Over time, as this dynamic has enabled the nation’s top earners to amass an increasingly large proportion of the nation’s wealth, the upper class has created structures and enacted policies that shore up their earnings, Mishel says. Cutting taxes for the wealthy is just one example. “In the 1960s, Fortune magazine asked why you would pay your CEO $2 million rather than $1 million when the second million mostly goes to the treasury,” he says. “These days, the second million doesn’t go to the treasury.”

But the problem goes beyond tax policy, Mishel says. For the past four decades, the wealthiest Americans have fought minimum wage increases, normalized a host of practices such as non-compete agreements, and forced arbitration that benefit executives at the expense of rank-and-file workers. They’ve also sought to erode the social safety net, he says, which forces Americans to work for low wages rather than seek better opportunities.

“There are a whole lot of reasons why middle-class workers have worse quality jobs now than they used to, and the executives have all the incentive for that to happen,” Mishel says.

Rouen believes this erosion of middle-class earnings drives the worker dissatisfaction he’s observed in his own research. “I find that when you look at the difference between the CEO and the median employee, you wind up with lower employee satisfaction and higher turnover because of the disparity,” he says. But it’s not necessarily the CEO’s salary that drives the relationship. The wider the gap between the CEO and the average employee, the greater the level of dissatisfaction.

Counter-intuitive as it may seem, this relationship primarily hinges on the company’s pay-setting practices, particularly for its youngest and lowest-paid employees, says Rouen. This dynamic is apparent in Utah’s own companies. Pluralsight, for example, has one of the highest-paid CEOs in the state, but also has a relatively high median salary of roughly $57,000-$172,000, according to Indeed.com (Pluralsight did not report its median employee salary in last year’s financial disclosures). 

The relatively high employee salary means Pluralsight has a smaller wage gap than, say, Vivint Smarthome. Vivint may pay Todd Pedersen a meager $2.5 million, but its median employee earns just under $35,000 a year, resulting in a relatively high pay ratio of 74:1. The median pay ratio in Utah, according to Yihui Pan, an associate professor at the University of Utah’s David Eccles School of Business, is 51.5.

The firms with the largest pay ratios tend to exhibit extremes with respect to both measures. Extra Space Storage, for example, pays its CEO $6.2 million and its average worker just $38,000, resulting in a ratio of 163:1—high not only for Utah but higher even than the national median wage gap of 145.

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 Nu Skin Enterprises competes with Extra Space Storage and a handful of other firms for claim to the title of Utah’s largest wage gap. Nu Skin’s CEO took home just over $4.5 million in 2019 but paid its average employee $31,500. The resulting wage gap is dead average for a US firm, but only if you exclude its international employees, who make less than $10,000 a year, from the calculation. Globally Nu Skin’s pay ratio exceeds 1,000:1.

Executive compensation isn’t the only root of the issue, Rouen says, though Americans have begun to catch on to the way it influences their lives, even outside the realm of business. “There’s a very famous paper that shows that for the average American, their preferences on legislation don’t make any difference at all,” he says. “For wealthy people, it’s perfectly correlated.”

Why Utah isn’t as bad as other states

Utah, of course, is notoriously conservative in its politics, especially when it comes to economic policy. It’s one of just a handful of states that hasn’t set a minimum wage above the federal limit, for example. So if Utah’s politics should, theoretically, drive income inequality, why does Utah enjoy a more even distribution of wealth, with the state’s top earners claiming less than 17 percent of the state’s total wealth?

Jeff Coles, a University of Utah finance professor who has studied income inequality, believes the importance of CEO pay is largely overstated. But one common driver of the CEO-employee pay gap, he says, is company size. “Bigger firms have a bigger pay ratio, and that’s not a horribly unreasonable thing,” he says. “If you’re a top executive running a big company, you should get paid more.” Larger companies are also better able to compete for high-profile talent, he adds.

This helps to explain Utah’s relative equity, Coles says. Unlike states where a handful of large companies dominate the economy, Utah’s business community is populated by numerous smaller firms.  Consequently, Utah has about twice as many CEOs per capita as the rest of the nation, according to the US Bureau of Labor Statistics.

“We don’t have as many Fortune 500 companies, and if we do they’re not headquartered here,” says Abby Roberts, director of permanent placement services at Robert Half. “Utah has a lot of growth, but the majority of the growth and demand we have seen has been for low-to-mid level employees. There has not been as much increased demand for C-Level employees.”

Roberts believes this lack of demand relative to supply has put downward pressure on executive compensation in Utah—an explanation Coles finds entirely plausible. “There are a bunch of CEOs up by Deer Valley,” he says. “I don’t know if they’re looking for work, but it sure would be nice to work near your fancy house in Park City.”

Further dampening local wages is the fact that smaller companies tend to pay their employees less than larger firms—a dynamic Rouen believes may be even more important in driving inequality than executive compensation. “It’s not just that the janitor makes so much less than the CEO,” he says. “It’s that the CEO of Google makes so much more than Yahoo. Basically the best firms are paying all of their employees more. It’s not just that all janitors are really struggling, it’s that the janitors at small firms are struggling.”

While company size is a critical factor, Coles doesn’t believe it fully explains the disparity between Utah’s wage gap and that of comparable states. Cultural factors, though difficult to quantify, also play a role—and they may be difficult to maintain as the state grows.

How we can keep the pay gap from widening

Utah doesn’t just enjoy a relatively low wage gap—the state has the highest rate of economic mobility in the country, according to Matthew Weinstein, state priorities partnership director for the Voices for Utah Children advocacy group.

“The chances of someone growing up in poverty and making it into the middle class—Utah is the best in the country for that,” Weinstein says. “People point to that as a sign that the ‘Utah way’ really works, and it’s a convincing argument. But it’s not replicable for anyone else because a lot of it is how cohesive society is here, for which you have to give a lot of the credit to the LDS Church.”

Members of the Church of Jesus Christ of Latter-day Saints take care of each other, Weinstein explains. When someone loses their job, when a family is affected by divorce, or when the neighborhood is struck by a natural disaster, there’s always someone to step in to make sure everyone lands on their feet. The community pulls together to ensure children graduate high school and parents work their way up the professional ladder.

“The heart of conservative ideology, going back 40 years to Reagan, is the idea that we don’t need the government to help poor people because people will help other people,” Weinstein says. “And the only place that works anywhere close to reasonably well is in Utah. In other places, people pay lip service to that principle, but those states don’t actually live their professed values the way Utah does, and that has given Utah a big advantage.”

Utah’s brand of conservatism is also a more moderate ideology, according to Coles, and one that grew out of populist and egalitarian roots. That means that among wealthy Utahns, flaunting wealth as a means of competing with one’s peers is frowned upon. “It would be unseemly in a state where our Mormon founders had the United Order and you had storehouses that you could take what you needed,” Coles says.

This mitigates one of the dynamics Rouen believes drives the rapid growth of executive compensation in other states. Certain CEOs, he says, demand ever-larger salaries or pricey perks such as private airplanes as a means of satisfying a need to compete with their peers. Utahns, Coles believes, are much less likely to indulge in this sort of wealth for wealth’s sake behavior.

The small size of Utah companies, according to Roberts, also contributes to this dynamic. “At a lot of small to mid-sized companies, you get executives who don’t change jobs continuously. They make enough to be happy and they aren’t always chasing the dollar,” she says. “They focus on their overall lifestyle.”

This dynamic could also explain why some successful Utah firms offer downright modest compensation packages for top leadership. Overstock, in particular, caught Coles’ attention. In 2019, CEO Jonathon Johnson took home just over $1.5 million. His average employee made more than $78,000, for a pay gap of just 21:1. Josh James, the high-profile CEO of DOMO, earned just $400,000 in 2019, though his firm has yet to start reporting median salaries.

The question, Weinstein and others agree, is whether Utah can maintain this success in light of a growing population and changing demographics. Utah will soon have a fourth congressional seat, they point out, but the newcomers are more diverse and, critically, less likely to be members of the Church than Utahns of days prior.

“Historically people think of Utah as a being a white state, but in the last census we’re 22 percent nonwhite, and the biggest part of our minority population is Latino,” Weinstein says. “That’s 17 percent of our children and 1/6th of our future workforce. The question is, will Utah follow in the steps of other states that didn’t integrate the minority populations and didn’t tend to their needs in terms of workforce integration and education? Or will we add some new tools to the tool kit?”

Both Weinstein and Coles believe education is critical, with Weinstein expressing concern about decreased levels of educational attainment beginning with the Millennial generation. “We had a big lead over the nation, in the percent of adults with college degrees,” he says. “In younger generations, we seem to have lost that edge.”

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But education is also one of Utah’s strengths, Weinstein says. This is in no small part thanks to state-level policies that help to equalize funding for education. States that lack these mechanisms, he says, have developed stubborn pockets of concentrated poverty that concentrate in intergenerational inequity—a fate Utah has largely avoided.

Utah’s support of progressive tax policies—yes, you read that correctly—is another thing the state has going for it, according to Weinstein. While Utahns favor low taxes generally, the public has historically demonstrated little patience for policies such as sales taxes on food and gasoline, which disproportionately impact low and middle-income earners, and may yet approve an earned income tax credit. Some of Utah’s wealthiest residents have expressed willingness to pay higher income taxes to support increased spending on equalizing services such as education.

“I think there is every opportunity to move things in a good direction on policy,” Weinstein says.

Coles believes planning for growth while focusing on the state’s strengths will also be critical in determining Utah’s future. “It is an attractive place to be,” he says. “It would be more attractive if we were attracting a skilled workforce, and if we keep in mind what makes us attractive in the first place—outdoor opportunities.”

That will require that Utah maintains its emphasis on economic development, but with perhaps greater emphasis on planned communities and tourism, Coles says. Yet, even with the best of planning, Coles is skeptical that Utah can avoid the impact of growth entirely.

“Do we want to be an unsecret secret and have everybody from California start moving here?” he asks. “To the extent that we attract firms here, and those get relatively larger, then we will have increasing pay disparities.”

Emma Penrod is a journalist based in rural Utah who covers science, technology, business and environmental health. She writes a weekly water politics newsletter at pactio.us/host/emma-penrod and Tweets about the latest science and industry news @EmaPen. When she's not writing, reading or researching, she's hunting sagebrush-scented air fresheners.

Comments (1)

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    Jim

    Sour Grapes toward successful and capable people. Successful CEO’s build the jobs for everyone else. Read or Watch Ayn Rand’s Atlas Shrugged. It will entertain you and educate you.

    Education is good policy, but saying that CEO’s are overpaid is naïve.

    This article is full of statements asserted to be true without any rational support. Additionally, the author doesn’t recognize well the dynamics of compensation as it relates to wages, equity and other forms (Clearly, Josh James is not just taking home $400k for his successful efforts. That’s his wage, but its not what motivates him to devote 24/7 and his talents to Domo).

    This is clearly an opinion piece by someone who would prefer a less fee society and is frustrated at the foundations of our form of economics and society. However, it is the foundation we have built this country on that has created the most prosperous nation in the world.

    JMHO

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