By Peter Gumbel
Nov 15 (Reuters) - Here's an idea for how to end corporate greed and reverse the trend of growing income inequality worldwide: impose a new rule that would limit the pay of top executives to just 12 times that of the lowest-paid employees at the same firm. In other words, prevent CEOs from earning more in one month than the lowliest shop-floor worker earns in a year.
This proposal might sound like something cooked up by Occupy Wall Street or another radical protest movement, but in fact it comes from the heartland of a nation not usually known for its disdain of money-making: Switzerland. On Nov. 24, the Swiss will vote 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 mainstream political groups, including the Social Democratic Party and the Greens, who argue that CEO pay in Switzerland has gotten out of control and needs to be reined in. They quote a raft of figures to show that the ratio of top to bottom earners in Swiss firms has grown from about 1 to 6 in 1984, to 1 to 43 today. And that'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 of investment banking at UBS, earning hundreds of times as much as their juniors.
The campaign's backers consider salary inequality to be a social injustice. A video cartoon made by the Social Democrats features a Swiss nurse who is astounded by the way top manager salaries have grown to "astronomical" proportions, even as hers has barely increased. Regula Rytz, a co-head of the Greens, says that a constitutional amendment is necessary because neither the government nor business has "a recipe against the self-service mentality in corporate suites."
Swiss business, meanwhile, has made a so-far successful effort to sway public opinion. A month ago, public opinion for and against the initiative was split at about 44 percent. Swiss business launched a public relations campaign, warning that the measure would spark an exodus of corporations. Employers' associations commissioned studies that predicted lost jobs and higher taxes if the measure is passed. The latest polls this week suggest that the measure is unlikely to be approved, with just over 50 percent opposing it.
Even so, the issue isn't likely to go away, and is gaining traction beyond Switzerland. Kristina Schüpbach, leader of the youth wing of the Social Democrats and one of the campaign initiators, says that "the main thing this time is to get a result 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 as official policy. Schüpbach says the idea of setting a ceiling on pay ratios is also being discussed within the opposition Social Democratic Party in Germany. And more broadly, the issue of executive pay has become a red-hot political topic in France and elsewhere on the continent.
Bruce Kogut, director of the Sanford C. Bernstein Center for Leadership and Ethics at Columbia Business School, says the issue resonates in Europe "because people care more about equity" than they do in the U.S. But he also sees salary caps as a reaction to the pain of the financial crisis. "There have not been major consequences. Collective expiation of guilt and responsibility is lacking," Kogut says.
Switzerland, with its history of Calvinism and the Protestant work ethic, is particularly fertile ground for this issue. The nation has lived through a series of corporate calamities in the past decade, including the collapse of Swissair in 2001 after it racked up an unmanageable level of debt. One of the most shocking blows to many Swiss was the state rescue of UBS in 2008, after the bank incurred giant losses from its foray into American mortgage-backed securities and other derivatives.
Huge payouts to executives at struggling companies have added fuel to the flames. The referendum campaigners point out that last year, UBS paid out a total of 2.5 billion Swiss francs in bonuses, at the same time as it reported a 2.5 billion franc loss. Pro-reform activists have calculated that it would take an ordinary bank employee as much as 385 years to earn the 18.5 million franc ($20 million) compensation package given to Orcel, the investment bank head, when he joined UBS from Merrill Lynch last year. (UBS has defended the package, claiming that it compensates Orcel for a loss of deferred pay when he left Merrill Lynch. The total bonus pool, the bank says, was paid out to a range of employees and not just top management.)
Orcel was already at UBS last March, when in a previous referendum, the Swiss approved an initiative that gives shareholders of listed Swiss companies a binding say in the compensation 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 a bit harder than it sounds. Coming up with reliable statistics is a particular challenge. Publicly-traded companies in America and in many European countries are required to disclose the salaries and benefits paid to their CEO and other top executives. But obtaining data for the lowest-paid workers is much harder. Some Swiss opponents of the referendum question the accuracy of the figures issued by the campaign initiators.
The U.S. is an example of how difficult and politically fraught such an exercise can be. Three years ago, under section 953(b) of the Dodd-Frank Act, Congress ordered public companies to disclose the ratio of CEO pay to the annual median compensation of employees. So far, however, this stipulation has not been enforced, and the HR Policy Association's Center on Executive Compensation, for one, believes the enforcement is "not worth the cost" to companies.
Supporters of income equality would argue that in the United States, even more so than Switzerland, such an investment is worthwhile. The Economic Policy Institute calculates that the CEO-to-worker compensation ratio in the top 350 largest U.S. firms is 231:1, including realized stock options. That's more than five times the gap in Switzerland. According to the institute, CEO compensation grew by more than 725 percent between 1978 and 2011, at a time when the annual compensation of a typical private-sector worker grew by just 5.7 percent.
In both the U.S. and Switzerland, the public debate over pay ratios is just getting started. Schüpbach, the organizer of the Swiss initiative, says that even if the referendum doesn't produce a majority vote in favor of the measure on majority on Nov. 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 efforts will put a brake on runaway executive pay. But at the least, they put business on the defensive to justify huge packages.