COLUMN-Swiss outrage over executive pay sparks a movement in Europe


By Peter Gumbel

Nov 15 (Reuters) - Here's an idea for how to end corporategreed and reverse the trend of growing income inequalityworldwide: impose a new rule that would limit the pay of topexecutives to just 12 times that of the lowest-paid employees atthe same firm. In other words, prevent CEOs from earning more inone month than the lowliest shop-floor worker earns in a year.

This proposal might sound like something cooked up by OccupyWall Street or another radical protest movement, but in fact itcomes from the heartland of a nation not usually known for itsdisdain of money-making: Switzerland. On Nov. 24, the Swiss willvote in a referendum on whether to enshrine the 1:12 pay ratio -in their national constitution, no less.

The initiative is backed by an assortment of mainstreampolitical groups, including the Social Democratic Party and theGreens, who argue that CEO pay in Switzerland has gotten out ofcontrol and needs to be reined in. They quote a raft of figuresto show that the ratio of top to bottom earners in Swiss firmshas grown from about 1 to 6 in 1984, to 1 to 43 today. Andthat's just the average. In some companies, especially banks,the gap is much wider, with top executives such as Brady Dougan,the American CEO of Credit Suisse, and Andrea Orcel, head ofinvestment banking at UBS, earning hundreds of times as much astheir juniors.

The campaign's backers consider salary inequality to be asocial injustice. A video cartoon made by the Social Democratsfeatures a Swiss nurse who is astounded by the way top managersalaries have grown to "astronomical" proportions, even as hershas barely increased. Regula Rytz, a co-head of the Greens, saysthat a constitutional amendment is necessary because neither thegovernment nor business has "a recipe against the self-servicementality in corporate suites."

Swiss business, meanwhile, has made a so-far successfuleffort to sway public opinion. A month ago, public opinion forand against the initiative was split at about 44 percent. Swissbusiness launched a public relations campaign, warning that themeasure would spark an exodus of corporations. Employers'associations commissioned studies that predicted lost jobs andhigher taxes if the measure is passed. The latest polls thisweek suggest that the measure is unlikely to be approved, withjust over 50 percent opposing it.

Even so, the issue isn't likely to go away, and is gainingtraction beyond Switzerland. Kristina Schüpbach, leader of theyouth wing of the Social Democrats and one of the campaigninitiators, says that "the main thing this time is to get aresult that sends a strong signal" - to business and government.Significantly, the 1:12 campaign has made inroads in Spain,where the opposition Social Democrats have just adopted it asofficial policy. Schüpbach says the idea of setting a ceiling onpay ratios is also being discussed within the opposition SocialDemocratic Party in Germany. And more broadly, the issue ofexecutive pay has become a red-hot political topic in France andelsewhere on the continent.

Bruce Kogut, director of the Sanford C. Bernstein Center forLeadership and Ethics at Columbia Business School, says theissue resonates in Europe "because people care more aboutequity" than they do in the U.S. But he also sees salary caps asa reaction to the pain of the financial crisis. "There have notbeen major consequences. Collective expiation of guilt andresponsibility is lacking," Kogut says.

Switzerland, with its history of Calvinism and theProtestant work ethic, is particularly fertile ground for thisissue. The nation has lived through a series of corporatecalamities in the past decade, including the collapse ofSwissair in 2001 after it racked up an unmanageable level ofdebt. One of the most shocking blows to many Swiss was the staterescue of UBS in 2008, after the bank incurred giant losses fromits foray into American mortgage-backed securities and otherderivatives.

Huge payouts to executives at struggling companies haveadded fuel to the flames. The referendum campaigners point outthat last year, UBS paid out a total of 2.5 billion Swiss francsin bonuses, at the same time as it reported a 2.5 billion francloss. Pro-reform activists have calculated that it would take anordinary bank employee as much as 385 years to earn the 18.5million franc ($20 million) compensation package given to Orcel,the investment bank head, when he joined UBS from Merrill Lynchlast year. (UBS has defended the package, claiming that itcompensates Orcel for a loss of deferred pay when he leftMerrill Lynch. The total bonus pool, the bank says, was paid outto a range of employees and not just top management.)

Orcel was already at UBS last March, when in a previousreferendum, the Swiss approved an initiative that givesshareholders of listed Swiss companies a binding say in thecompensation paid to their directors. It also sharply curtailed"golden handshakes" and other special bonuses.

Still, imposing caps on pay ratios turns out to be quite abit harder than it sounds. Coming up with reliable statistics isa particular challenge. Publicly-traded companies in America andin many European countries are required to disclose the salariesand benefits paid to their CEO and other top executives. Butobtaining data for the lowest-paid workers is much harder. SomeSwiss opponents of the referendum question the accuracy of thefigures issued by the campaign initiators.

The U.S. is an example of how difficult and politicallyfraught such an exercise can be. Three years ago, under section953(b) of the Dodd-Frank Act, Congress ordered public companiesto disclose the ratio of CEO pay to the annual mediancompensation of employees. So far, however, this stipulation hasnot been enforced, and the HR Policy Association's Center onExecutive Compensation, for one, believes the enforcement is"not worth the cost" to companies.

Supporters of income equality would argue that in the UnitedStates, even more so than Switzerland, such an investment isworthwhile. The Economic Policy Institute calculates that theCEO-to-worker compensation ratio in the top 350 largest U.S.firms is 231:1, including realized stock options. That's morethan five times the gap in Switzerland. According to theinstitute, CEO compensation grew by more than 725 percentbetween 1978 and 2011, at a time when the annual compensation ofa typical private-sector worker grew by just 5.7 percent.

In both the U.S. and Switzerland, the public debate over payratios is just getting started. Schüpbach, the organizer of theSwiss initiative, says that even if the referendum doesn'tproduce a majority vote in favor of the measure on majority onNov. 24, the campaign will continue. "There'll be a second,third or fourth attempt," she says.

It remains to be seen whether even these renewed effortswill put a brake on runaway executive pay. But at the least,they put business on the defensive to justify huge packages.

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