Alberto Mingardi  

Switzerland doesn't cap the salaries of top executives

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The Swiss overwhelmingly rejected a popular initiative that would have capped executive pay to 12 times the wage of the lowest-paid employee in the same business. Some 65% of the voters came out against the proposal, which was proposed by the youth wing of the Social Democratic Party. The referendum is one in a row: the Young Socialists are also proposing referenda on the minimum wage and the inheritance tax.

Avenir Suisse, an important Zurich-based think-tank, published in July a paper that provides food for thought for those who argue that Switzerland is a paradise for the rich. According to Avenir Suisse, "Switzerland is among those countries where the spread of incomes is relatively narrow. In France, Italy and Germany, by contrast, Switzerland's three big neighbours, spreads are all wider".

I think it is interesting to compare this, unsuccessful, referendum, with the one that earlier this year approved measures to require a binding annual vote by shareholders to set aggregate pay for directors and required the board members and the chairmen to be individually elected by shareholders every year. One reading may be that "corporate Switzerland", after having lost the first referendum, had better equip itself lest it lose another one in a few months' time. This is a perfectly reasonable hypothesis. Another one might be that the "Minder referendum" (named after small businessman and activist Thomas Minder) succeeded because it was framed in the language of shareholders' democracy, whereas the 1:12 one pushed for an unequivocal salary cap.

The success of the Minder proposal showed how displeased the Swiss were with fat cat salaries: the story of Daniel Vasella's "golden handcuff" made big noise. The Swiss ended up limiting freedom of contract, but for the sake of empowering small shareholders. Expectations of shareholders' democracy may be exaggerated but I think they signal an attitude towards corporate capitalism which does not necessarily entail a desire to have the government regulating salaries. Shareholders' democracy is congenial to the Swiss attitude towards dispersed power and direct democracy, top down regulation of wages and prices is not.

It will be interesting now to see what happens with the other groups that in Europe have flirted on the idea of having a 1:12 regulation to be introduced in their respective countries. In Italy, Beppe Grillo, the comedian turned politician, seemed to be intrigued by the idea. I would guess the same referendum in countries like Italy or France may have produced a very different result.

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CATEGORIES: Price Controls , Regulation

COMMENTS (5 to date)
Taeyoung writes:

How are these ratio-based salary caps supposed to work anyhow? If it's just the ratio between lowest compensated employee to CEO, isn't that comparatively easy to circumvent? Just subcontract out to another company (like a the local equivalent of a Japanese haken company) for all your lower compensated employees. You pay the contractor, and they pay the employees, taking them off your payroll, freeing up your ratio. Is there some mechanism to prevent this? And how is it supposed to work with overseas subsidiaries in low-cost countries?

Maximum Liberty writes:

Is it really fair to characterize the Minder referendum as limiting freedom of contract?

It seems to me that the main issue it addressed is not freedom of contract, but control of the agency relationship between the non-controlling owners and controlling managers of the enterprise. The contracts in question are between the managers and the company that they control. That type of issue is squarely one of agency.

The one part of the referendum (as I understand it from Wikipedia) that does not fit that story is the ban on severance packages. I can see how that would be related to agency, but it really seems like a stretch for me to lump it in with the other features of the referendum.

So, in deciding whether it is fair to characterize the referendum as limiting freedom of contract, how significant are the provisions excluding advances and severance payments?


MingoV writes:

If the 1:12 rule is enacted, corporations will get around it easily by outsourcing all work performed by low pay employees.

Oops, I see that Taeyoung makes a similar point in an earlier comment. Great commenters think alike...

Alberto Mingardi writes:

@MaximumLiberty I agree that the Swiss who voted in favor of the Minder proposals did so in order to empower small shareholders. However, think for example to the apparently innocous provision for boards to be elected every year. Why should not shareholders of a company decide freely to elect boards at different intervals? I think that the referendum went in the direction of constraining freedom of contract, including of course in banning severance payments.

@Taeyoung @MingoV Surely corporations as well as individuals tend to change their behavior to circumvent some of the consequences of new regulations. However, the very fact that this happens does not seem to me to be an argument for considering regulation as irrelevant, or costless.

spezi writes:

@Alberto Mingardi:
The structure of publicly traded corporations is not based on freedom of contract. The law dictates the existence of chairmen and boards of directors in the first place. The chairman can't sell his post to the highest bidder or pass it on to his son. The board of directors is to be elected, not to be chosen by lot. There are strict and detailed requirements for disclosure and regulations on insider trading, etc.

The whole point of the law is clearly the establishment of representative shareholder democracy and the swiss referendum simply made minor adjustments.

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