executive greed

Switzerland will soon hold a referendum on reforms to limit compensation of top executives to 12 times that of the lowest-paid employee of their company. The Financial Times agrees that excessive remuneration of executives is a problem, but thinks that a legal cap on earnings would be “a step too far”.

There is a problem with excessive top pay. Bosses of big US companies earn 340 times as much as the average worker, while in the UK the figure is 133 times. At Switzerland’s best-known companies, ratios of 200 times the lowest paid are not unknown. Not only is this unjustifiable in almost all circumstances, it also provides perverse incentives – not least to manipulate share prices rather than invest in businesses.

But arbitrary caps are not the answer. The Swiss proposal would constrain freedom of contract unreasonably. It is also questionable whether any such measure would achieve its intention were Switzerland to impose it unilaterally. Many international businesses and hedge funds would surely just decamp. ….

The responsible exercise of binding votes by shareholders is the best hope for change. Using the law to restrict contracts cannot be the answer to executive greed.

Swiss pay vote“, editorial, Financial Times, 14 November 2013.

It so happens that Swiss voters last March passed a referendum that imposes binding votes by shareholders on executive pay. The referendum also bans ‘golden parachutes’ for dismissed executives and ‘golden hellos’ for new executives. Interestingly, the referendum, known as the “fat cat initiative”, was championed by Swiss businessman Thomas Minder. At the time, the liberal Austrian financial newspaper Der Standard suggested “the free economic system would benefit should the Swiss example catch on in Europe”.

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