Editor’s Note: Pehr Gyllenhammar was the CEO of Volvo for 24 years. He has also worked with or served on the board of such institutions as Lazard, Reuters, Rothschild, Chase Manhattan Bank, the Aspen Institute, The Rockefeller University and the London Philharmonic Orchestra. His upcoming memoir, Character is Destiny, will be published by Morgan James Publishing in May of 2020. The opinions expressed in this commentary are his own.
I spent 24 years as CEO and chairman of Volvo, and when I left, I neither sought nor received a hefty golden parachute. They didn’t offer, and I didn’t ask. My salary at the time might seem modest by present day standards, but I felt I was well paid for my work. Yes, I left Volvo with the customary pension, but the prospect of a golden parachute did not even occur to me. My priority throughout my tenure at Volvo was to do my best for the company, its shareholders and Volvo’s factory workers, not to enrich myself at their expense. I feel that is as it should be, and that pay should be balanced and equitable at every employment level.
The CEO-to-worker income gap has reached some of its highest levels in recent years — this in spite of the fact that both the US unemployment and poverty rate are at new lows. It’s time for a change — that means an end to sky-high CEO pay and golden parachutes, and an end to corporate governance designed to work for the benefit of the CEO pool.
Income of American CEOs has grown a staggering 940% since the late-1970s, while worker compensation has increased just over 11% in the same period, according to recent analysis. By this accounting, a company’s CEO will earn, on average, 278 times the amount of a worker in his or her company. The inequity of this income gap is not a phenomena that remains contained within the corporation, but rather it creates a ripple effect across society, the environment and the government.
Today, the company top seat is increasingly viewed by investors as a short-range investment because corporate management so often prioritizes short-term strategic thinking and profit objectives. Cultivating an internal candidate takes years of forethought, talent management planning and developmental investment, and few companies are willing to take the long view and do the hard work. Organizations are more likely than ever to hire leaders from the outside, rather than award the highest position to loyal and longstanding employees from within. A potential CEO must have the ability to communicate and establish trust with investors, and to inspire confidence from Wall Street. Often that means hiring a big name — someone already known in the industry as a person who can turn a business around and boost earnings. CEOs are under enormous pressure to deliver increased profits every quarter, or risk being ousted. Considering the difficulty of maintaining that kind of job performance, it is not surprising that the average tenure of a large-cap (S&P 500) CEO in the United States is estimated to be around seven years.
In the 1960s, a high-level corporate executive might easily have pocketed 40 times that of his or her low-level counterpart, but most poor and middle-income workers still managed to enjoy individual earnings growth. This has always been the key to a healthy capitalist system: the expectation by lower-level employees that their continued productivity will bring financial gain and upward mobility. Moderate disparity in capitalism begets reasonable mobility to all. When that disparity becomes oversized, the opposite occurs.
Today, income disparity is so egregious that to many it can’t be justified, not simply because of the enormity of the sums involved, but because those bloated salaries are often not correlated to merit or performance. Companies typically benchmark CEO remuneration against their executive counterparts in the industry, so over time, a raise for one drives salaries up for the rest. Another insidious force at play behind the scenes is the role of search consultancies, which work on a commission basis that incentivizes them to make a hire at the highest possible compensation package.
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The structure created by this circular logic will never change unless an outside force intervenes. The prevailing presumption is that change must come from government, which I would applaud if the regulation was effective. But to date, the steps it has taken have not garnered any substantive improvement. Just look at the 2008 collapse of Lehman Brothers and the global financial crisis that followed. Congress passed the Dodd-Frank Wall Street Reform law to regulate financial markets and protect consumers. That law included requirements affecting CEO compensation such as the “say-on-pay” vote, which accorded shareholders a vote on executive remuneration once every three years. While this seemed like a promising move at the time, shareholders have seemed to be reluctant to vote down executive compensation packages.
In reality, if we’re ever going to truly reverse this trend, we need a multifaceted approach that targets not just the outsized growth of executive salaries, but also the short-termism in corporate governance that has fostered this growth. Corporate tax policies can impose penalties on companies maintaining extreme income gaps, but businesses can choose to simply pay the penalties rather than reduce executive salaries. Tax policies must be designed to change the shareholder incentive structure, perhaps according directors a percentage of any savings generated in a vote that reduces CEO pay. And many believe it is time for the United States to follow Europe’s custom of giving workers representation on corporate boards. Several recent bills introduced to Congress have proposed that a portion of a company’s board members be elected by its workers.
Judging from the headlines, the issue of income inequality is looming large in the minds of many voters and is set to be in the forefront of the upcoming presidential race. Prioritizing long-termism and sustainability in corporate governance would go a long way toward re-establishing balance. The human propensity for greed can never be eradicated, but the corporate mechanism that creates the capacity for individuals to acquire mass wealth can and must be redesigned if the United States hopes to retain the values on which it was built.