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Mirabile Dictu! More Executive Pay Revolt as Swiss Impose Curbs

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It isn’t clear how effective the pushback against stratospheric top-level compensation will be, but the howls in the European media suggests that the corporate overlords really are concerned. But the problem in that folks in finance in the US have taken to wildly exaggerating the effects of any incursion on what they see as their God-given right to loot profit. If the authorities planned to escalate from wet noodle-lashings to wet towel snappings, it is depicted as if they were plotting the Rape of Nanking with new horror added, like salting the earth.

Nevertheless, if one is to take the banks’ complaints, as reported by the Financial Times, at face value, they really are mundo unhappy about proposed EU rules which would restrict bank bonuses to two times salary. Bankers are already up in arms, threatening to move staff to the US or the Far East. The problem is, however, that London remained a critical trading center, leading New York in many core businesses, such as foreign exchange. Why? First is the time zone advantage: it overlaps with the Asian and US trading day. Second is the heft of the EU economies. They are still the largest in the world, despite the austerians’ fierce efforts to diminish them. Corporate and many institutional customers don’t do business impersonally; the salesmanship (and for otherwise commodity businesses like foreign exchange, the wining and dining) are key to winning business. Even if you can move the traders elsewhere, you need to keep your salesmen in place. We will see how far the banks go in creative ways around these limits, such as expense accounts, payments to pension plans, and other techniques (hat tip Richard Smith):

The latest indignity about to be foisted on the Masters of the Universe is that shareholders in Swiss companies might actually have “say on pay” votes with real teeth. From Aljazeera (hat tip Marshall):

Swiss citizens voted to impose some of the world’s strictest controls on executive pay, forcing public companies to give shareholders a binding vote on compensation, initial result projections showed.

Claude Longchamp, of pollsters Gfs Bern, told Swiss state television on Sunday early returns in a referendum showed 68 percent backed plans for shareholders to veto executive pay and for a ban on big rewards for new and departing managers.

The clear majority was unusual given fierce opposition and intense campaigning by a business lobby group, which warned the proposals will damage the country’s competitiveness and scare away international talent.

Support for the move was fired by anger over the big bonuses blamed for fuelling risky investments that nearly felled Swiss bank UBS, as well as outrage over a proposed $78m payment to outgoing Novartis chairman Daniel Vasella.

Longchamp said the public outcry last month that forced Novartis to cancel Vasella’s “golden goodbye” helped drive the campaign.

The article did not make any bold calls as to what this change would mean in practice. It does not appear likely that large companies will reorganize to escape the requirement. But it also is not clear how many companies will be on the receiving end of successful campaigns. Nearly half of the biggest Swiss companies already allow for non-binding votes on pay, and none has yet a majority of shareholders vote against executive pay levels. Of course, this may also be self-selection, that it’s the ones who aren’t giving shareholders any voice that have the problem cases.

The measure is broad and tough-minded, so even a close vote might change corporate behavior:

Minder’s initiative forces binding votes on compensation every year as well as on board composition and would also ban bonus payments to managers if their companies are taken over.

The plan also includes possible jail sentences and fines for breaching the new rules.

The FT indicates that the Swiss government may take a year to draft the law. It also notes that other EU governments are getting more serious about restricting runaway executive compensation:

Other EU states are eyeing even more stringent restrictions. The Netherlands, which has been involved in multiple bank rescues, imposed a bonus cap in 2010 and is considering tightening the limit to 20 per cent of salary.

The UK is also introducing reforms to give shareholders a binding vote on pay in October, as well as measures to make remuneration packages more transparent.

John Hempton, an Australian hedge fund manager, has said no executive is worth more than $2 million. The CEO’s union has done such a good job of protecting and promoting its interests that it’s hard to fathom how fragmented, transient investors will ever roll the corporate pay boondoggle back. But any steps in that direction need to be applauded.

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14 comments

  1. Chris Engel

    Democratizing financial capitalism won’t work out well for the corrupt masters.

    By the way, Cameron is pushing back against the EU rules, probably because he’s currently more interested in padding his anti-EU cred than his anti-bankster cred:

    http://euobserver.com/economic/119248

    The real problem with exec/bankster pay is that in stock market booms (where share prices are rising totally irrespective of any managerial competence), the corporate managers jump on the success of the boom by demanding higher pay to compensate for “performance” of the stock price, which they try to inextricably link to their own managerial brilliance. Then when the bubble bursts and share prices collapse, the execs had already made off with the loot and probably get a nice severance package on top of it to say “thanks for screwing us over.” However, the “executive pay price level” remains high, and it’s psychologically hard to break it down as there’s a group-think on boards that you “HAVE TO PAY FOR TALENT!!1111″

    Maybe Obama could take a page out of Putin’s book and send a few of them to a Siberian prison to think about their sins…if only he really was a dictator the way the teahdists insist.

    1. Chris Engel

      Anyone interested in background on the whole topic of executive remuneration and bad corporate governance, check out Lucian Bebchek’s book:

      Pay without Performance: The Unfulfilled Promise of Executive Compensation

      It predates the financial crisis, but there’s tons of insight there that actually should have served valuable warnings and lessons to what was to come in 2007-8.

  2. Gerald Muller

    First the ban did get a majority. And not thin: almost 70% of the votes.
    This leads to the strength of Swiss democracy, probably the only one left on the planet: it takes 100,000 signatures to force a “votation” as they called referendums over there. Whihc means that any subject that gets the attention of “the people”

  3. Gerald Muller

    First the ban did get a majority. And not a thin one: almost 70% of the votes.
    This leads to comment on the strength of the Swiss democracy, probably the only one left on the planet: it takes 100,000 signatures to force a “votation” as they called referendums over there. Which means that any subject that gets the attention of “the people” will get a general vote. That is how the Swiss voted lately against the building of any new minaret in the country.
    Imagine if one million signatures would force a vote on Wall Street pay!
    Or on sequestration?
    Or on the artificial fiscal cliff?
    Or… but that was only a dream.

  4. Chris Rogers

    I applaud the Swiss to act on curbing excessive rewards to senior management of large corporations, many of them with a global reach – however, these rules will be circumvented by the bankers and senior executives in listed businesses.

    So, perhaps in trying to prescribe against excessive pay for senior executives, all on the left should actually encourage such excessive pay, indeed pay should be increased further in my opinion – with one highly important caveat, all pay above and beyond 20X the lowest paid salary within each business, be this paid as salary and stock options or other tax avoidance scam should be taxed at 93%, i.e., the highest tax rate under President Eisenhower.

    This policy would have two positive knock effects, first, corporations would increase the pay of their lowest paid staff to try and retain a large pay packet, and secondly, treasury coffers would grow due to an enlarged tax base created by taxing money from the already obscenely rich.

    Further, anyone trying to circumvent the new law should face imprisonment and not a fine with all wealth confiscated by the state from the lawbreaker and their immediate family – such as is done with those convicted of drug related crimes.

    A one strike and you are out policy should be actively embraced to achieve this.

  5. Boris Jäggi

    Just to be clear, the initiative wasn’t from the left, it came from an entrepreneur/capitalist (owner of a toothpaste factory) who was offended by the huge bonuses in big corporations and he belongs to the political right. (He was supportet from the left though)
    Nobody knwos whether the new laws would actually change things here, everybody is speculating.

    The left has its own initiative, which will be up for voting in november. This initiative would set a maximum ratio of 1:12 for any firms ratio of lowest-to-highest salary. So no ceo could earn more in a month than his lowest paid employee in a year. That obviously would change a lot, but it probably won’t get a majority. We will see…

  6. Gil Gamesh

    Corporate executives should pay the shareholders for the privilege of not leading their respective businesses, but enjoying limitless suck-uppery formerly seen only among royal courtiers.

    If the US were serious about saving itself, which it isn’t, then structural reforms, such as capping executive compensation, would be aplenty, as the need is obvious and urgent..except to those that run this sorry-excuse-of-a-society. So, we may as well just go ahead and shoot* the CEOs, re-educate their political factota in work camps, and socialize profits and privatize costs. While I’m no fan of Mao, enough is enough.

    * Sarcasm alert. The writer is speaking figuratively, and not urging any unhinged NC reader to actually pump 20 or 30 hollow-pointed rounds into the skull any rich capitalist. Nope.

  7. dw

    maybe the easiest way to capp executive pay woould be to allow only 20X the average pay of employees (non manavgement) to be taken off taxes. then if companies want to pay more, they can with shareholder approvale, but without any tax breaks. then its shareholders choice to raise pay.
    and scam of comparing executive pay at related companies will help them increase it without approval.
    and we could also look at it as cost cutting. just like most companies look at labor costs.

  8. ChrisPacific

    I like the twice salary or $2 million limits. In order to give senior executives a way to measure their success relative to one another (the function that bonuses currently serve) I suggest that all compensation in excess of this amount be paid in “penis points” which are not legal tender but are tied to the same metrics used for bonus calculations.

    This would solve the problem of excessive wealth concentration while still allowing senior executives to compare balances to determine whose is biggest.

  9. Lune

    While I applaud the Swiss for maybe putting some teeth into the concept of shareholders’ rights (will have to see how it works out), I think capping exec pay at X multiple of the lowest worker is worthless. All it means is that the executives will be set up in some “subsidiary” company comprised only of management, who are “contracted” by the company proper to provide management services. Or you do it the other way, with the company proper consisting only of management, with all actual workers “outsourced” to a subsidiary which is contracted for certain services. Unless you have some way of combating these types of workarounds, any such regulations are meaningless.

    1. Nathanael

      This is why you need former insiders, who’ve worked in the businesses and seen the scams, to write the laws which prohibit the scams.

      Minder is a former insider. I will bet his initiative has serious teeth and the Swiss CEOs may be completely unable to evade it.

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