Labor’s losses to capital, much studied, aren’t quite as grim when stock and options are tabulated
A working paper by UCLA Anderson’s Andrea L. Eisfeldt, the Federal Reserve’s Antonio Falato, and the University of Texas at Austin’s Mindy Z. Xiaolan offers a significant revision to the vast body of recent research about labor’s declining share of the fruits of the U.S. economy.
When stocks and options paid to workers are included with cash pay, about 30% of the decline of labor’s share of the overall economy’s income is eliminated, the authors report. And for highly skilled workers — those who regularly receive equity as part of their compensation package — 87% of the previously identified decline in labor’s share goes away.
The point of the paper, which calls workers receiving stock and options “human capitalists,” isn’t so much to call into question decades of research looking into how and why labor’s share of income has fallen, but to differentiate between workers who increasingly are paid with capital — stocks and options — from those who earn wages only. Human capitalists’ incomes have suffered relatively little, in this accounting, and the wage earner, who tends to have lower skills, has seen their labor share decline much more substantially.
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Extending Far Beyond the C-Suite
This way of looking at compensation also suggests that the neat division between capital and labor no longer holds. The analysis suggests a more nuanced view of the economy and the labor market. “Including equity-based compensation in human capitalists’ total labor income is critical for accurately measuring human capitalists’ contribution to economic activity as well as their share of income,” the authors remark.
“Human capitalists” are not only the CEOs or their C-suite colleagues but rather a cohort of high-skilled employees whose employers, for various reasons including tax incentives or to encourage worker loyalty, deploy equity-based compensation such as equity grants and stock options, to reward or retain them. Employees below the C-suite receive 78% of equity-based compensation, the authors estimate.
Ever since Karl Marx elaborated his theories of labor and capital, the two have largely been seen in opposition to one another: One gains at the expense of the other, as when unionized workers secure a raise from a firm, or, conversely, when a firm’s shareholders secure higher returns on their ownerships stakes by squeezing additional output from employees often by making investments in machinery or, nowadays, software, that helps boost productivity.
Equity compensation packages confound the traditional breakdown between capital and labor. Human capitalists are still laborers, in the sense that they go to work (or lately, work from home) every day, and trade their time for money. But some of that money now comes in the form of an ownership stake in the firm they work for. This equity — say, shares in Google parent Alphabet — is also capital, in that it gives the owner a claim on future dividends or corporate profits, as well as capital gains if when the workers sell their shares, should the company prosper.
Since the 1980s, the authors find, equity-based compensation has risen dramatically. In recent years, as much as 40% of total compensation to highly skilled workers comes in the form of equity. When this equity is treated as labor income, its inclusion “reduces the total decline in labor income share relative to value added by over 30%,” the authors write. In other words, nearly one-third of labor’s overall declining income share can be explained by the use of capital as a form of compensation to this particular class of workers, the human capitalists.
For high-skilled employees in particular, including equity-based compensation has an even more dramatic effect, accounting for nearly all of what appeared to be a falling income share for this group of workers: Its inclusion “eliminates the decline of skilled wage income share by 87%,” the authors write. “In large part, equity has simply replaced wages, leaving the high-skilled labor share fairly constant,” they write.
Equity-based Compensation Is Missing from Labor Statistics Data
To anyone who has taken stock options at a startup instead of a higher salary, this observation may be obvious. But calculating this on an economywide scale is no easy feat, since a large fraction of equity-based compensation is missing from national account measures of labor compensation such as the data sets produced by the Bureau of Economic Analysis or the Bureau of Labor Statistics.
Furthermore, pay in the form of equity is often deferred (think of stock options that vest over a period of five years), in order to encourage a worker to stay on long enough to take advantage of promised equity opportunities. The fact that equity compensation is growing quickly and deferred implies that vested grants captured in measured incomes today are a small fraction of current new grants.
The authors get around this by hand-collecting the information in annual Securities and Exchange Commission filings from publicly traded firms on shares reserved for employee stock options or equity grants and combining this data with existing datasets also drawn from SEC filings. This combined set of 5,271 firms in 133 industries covers the period between 1960-2019.
The researchers estimate that, as a result of all of these equity grants and options, human capitalists came to own a full 10% of public companies in the 2010s. Because corporate valuations have risen significantly since 1980, this large ownership stake in publicly traded firms has netted human capitalists average earnings of over $136 billion each year in equity-based compensation over the most recent decade, according to their estimates. And since equity-based compensation is increasingly common, the authors note, “not only have firm profits grown, the ownership share of human capitalists grew as well.”
Andrea L. Eisfeldt
Laurence D. and Lori W. Fink Endowed Chair in Finance and Professor of Finance
About the Research
Eisfeldt, A. L., Falato, A., Xiaolan, M.Z. (2021). Human Capitalists. doi: 10.3386/w28815