In Switzerland this weekend, there was a referendum on executive pay. Had it passed, this would have made it illegal for companies to pay anyone more than 12 times the wage of their lowest earners. It would have put Switzerland in a unique place among Western nations on executive pay.
Given that almost everyone agrees that top salaries are out of control and often create perverse incentives to ramp up short-term performance, one might have thought that voters would have backed this populist measure. After all, back in March the Swiss backed a referendum that increased shareholder involvement in salaries and banned golden hellos and parachutes.
But while superficially attractive, the Swiss voters were smart enough to think through the consequences of this measure and realised that they would be the losers rather than the winners. It’s a bit like the UK’s opposition leader, Ed Miliband, proposing to cap energy prices, which ultimately lost him support. It sounds a great idea but deep down we know it is unrealistic and unworkable.
The same is true with a crude 1:12 ratio on pay. It would have put companies in a terrible bind. Not only would it have been impossible for them to find a qualified CEO but they would also have struggled to hire a range of experts and specialists essential to their business. Switzerland would have seen a major exodus of companies if the rule were strictly enforced.
Alternatively, companies would have just found ways round the rules – paying salaries in different forms, raising the minimum salary by contracting out all the low-paid work, etc... etc... Press reports in October suggested Barclays was considering making additional payments to top bankers as a way around EU bonus rules. Barclays did not comment on the reports.
So if salary limits are unworkable, what is the answer? The Swiss were closer to an answer with their stipulation that executive salaries are subject to shareholder approval. In principle, shareholders already have this responsibility but in practice they tend not to get too involved or they simply waive through the recommendations of the board.
Maybe the way ahead is to insist on a more formal governance structure whereby major changes require a special shareholders' meeting to be called and awards outside industry norms require special justification. The result has to be published in a full-page advertisement in a newspaper and on the company’s website.
The other angle, which is being pursued in the UK, in the case of bankers’ bonuses, is to insist on a portion being paid in stock and a portion deferred as well as a clawback mechanism if things go wrong.
These measures don’t catch the headlines in the way the Swiss 1:12 proposal did. But ultimately they may prove more effective.
Brian Caplen is the editor of The Banker.
