The Swiss Gini March 4, 2013 at 10:00 am
The NYT gives us very good news on compensation in that most unlikely jurisdiction, Switzerland:
Swiss citizens voted Sunday to impose some of the world’s most severe restrictions on executive compensation, ignoring a warning from the business lobby that such curbs would undermine the country’s investor-friendly image.
The vote gives shareholders of companies listed in Switzerland a binding say on the overall pay packages for executives and directors. Pension funds holding shares in a company would be obligated to take part in votes on compensation packages.
In addition, companies would no longer be allowed to give bonuses to executives joining or leaving the business, or to executives when their company was taken over.
Of course you can bet that right now there are smart people devising A/B share structures where the votes go to the (tightly held) As and the divys to the Bs to get around this, but still, it is a strong and helpful signal.
I don’t understand what people think this will achieve – in fact to be quite honest, I’m not sure people are thinking this through at all. It seems to me more likely (and perhaps understandably so) that people are just too bitter and exhausted by all the economic woes they have endured over the last decade to approach matters like these equanimously.
My own fatigue notwithstanding, this apparent dilemma is nothing more than a simple matter of incentives.
CEO pay packages may be much larger than our own (though still, in the grand scheme of things they are not so large – if you don’t believe me distribute their pay to all the employees that report to them or better yet, calculate their package as a percentage of gross revenues), but are they the cause of the economic downturn? The answer is, not directly.
Countless options for addressing the real problem here have been hashed and rehashed in the media over the past few years (hint: it isn’t decreasing base CEO compensation or capping bankster bonuses). Try any of these on for size: Delaying bonuses a decade; Abolishing quarterly, half-yearly and yearly earnings reports (slow the cycle down, people are expending all their energy worrying about the wrong things – it’s incentives!). These are some the creative and pragmatic solutions that really fit the bill. If only someone had the courage to put them into practice.
Usque (a word that brings back very painful memories of Latin lessons) – I agree with you completely with one important caveat: my articulating a law like this, the Swiss make an aspiration evident. Are there better ways to do the same thing? Clearly yes. Will it even help? Not much at first, and maybe not much at all. But it does change the terms of the debate between the highly paid and government, and so it makes it much easier to do more effective things latter. If you see it as moving the Overton window on compensation rather than as a policy per se, then perhaps you might be more sympathetic?
A very useful dialogue, thank you. It surely is a matter of incentives and, I think, a pragmatic approach reducing the short-termism of quarterly earnings cycles (or even annual ones for that matter) would certainly help. However, I cannot help but think that we are missing the bigger picture of shareholder rights.
Curious if you might be able to tell me of one single business in private enterprise where the owner lets the employees tell them who much they are to be paid? It does not exist in capitalism. Why then should it exist in the public company form? It is nonsensical and has clearly been abused more often than not since the inception of this arrangement. Business owners deserve better treatment and history would suggest if this is to occur than stronger entrenched rights are absolutely necessary. So if the control against these abuses isn’t more shareholder say on pay what is? And if the shareholder is not to have that say, who should?
The idea that countries become less competitive due to limits on public company executive pay is also nonsensical, in my view. Most advanced economies are driven by entrepreneurs with skin in the game where pay does actually equal performance. And this occurs amazingly enough without consultant designed comp programs. On the corporate side any major business cycle downturn would suggest a tails I win, heads you lose approach to exec pay is more often the case than not.
One last point is that I would disagree with incentives not having led to the crisis. I would expect this to be clearly understood to be a key contributor by now. Don’t get me wrong, I work in capital markets and like my pay. But to say pay has not contributed to the pre-crisis excesses is naive. And although a pragmatic approach slowing the cycle down to reduce short-termism it would appear to be much easier to legislate changes directly into pay packages and shareholder rights.
We Swiss voted for Minder’s initiative not because CEOs were receiving millions – if they do their job well, they’re welcome to an eye-watering salary. We are sickened by having to pay 67M$ of our taxes to bail UBS and then see them distribute 2.5M$ of bonuses when they’ve just made a 2.5m$ loss (the 2012 results). There’s no jealousy here, it’s simply that our Calvinist ways dictate that the entrepreneur who gets rich risking his *own* capital is respectable; the pariah who loses whilst risking *other* peoples’ capital should be punished.
Minder’s text, accepted last Sunday, will punish the pariahs with up to 3 years in prison, the only effective deterrent.
i love the prison sentence piece to the initiative. attempting to rip others off shouldn’t be ignored simply because of title, pedigree or value destroying memes. this is easily one of the best developments to occur in 2013 so far. now if shareholders could just grow some ‘brass ones’ and start asserting themselves more effectively…