Executives can do with less \ Amnon Portugali

Originally published on Ynet, 04.11.13

On November 24, 2013 the citizens of Switzerland will vote in three referendums. One over the “1:12” initiative, which limits the pay of companies’ top executives.Citizens will decide whether to approve an amendment to the Swiss constitution which limits the highest salary in a company to 12 times the lowest salary.

The questions voters will have to answer are: “Are you for the popular initiative ‘1:12 – for fair wage’?” and “Are you for the recommendations of the Federal Council and the parliament?”

The Swiss business world is deeply averse to the initiative, as are the political right and center. The Federal Council and the parliament recommended against it, and it was forecast to be rejected by the referendum. But a poll commissioned by the Swiss public broadcasting company, SSR, and released late October revealed the initiative’s supporters and its opponent are tied at 44%. Previous polls gave supporters only 35%.

In November 2012 in Israel, the Knesset passed a minimalist government bill to limit top executives’ salaries in public companies, based on the Neeman Committee’s recommendations from the previous year. The bill doesn’t limit salaries, but sets provisions according to which salaries would be determined. The bill was passed as an alternative to the private bills sponsored by lawmakers Shelly Yachimovich and Haim Katz, who proposed to limit the salary of top executives in public companies to no more than 50 times that of their lowest paid employee.

The Swiss initiative

In a referendum held on March 3, 2013, the Swiss approved an initiative setting limits to executive salaries in publicly traded companies. The initiative was meant as an amendment to the Swiss federal legislation so that it will, for instance, require an annual vote by shareholders on the total remuneration of the board of directors and executives. It also required companies’ articles of association to include the directors and executives’ bonus schemes and pay plans.

The Swiss also banned advance payments for new executives and severance packages for departing ones, and required an annual vote by shareholders for the president and other members of companies’ board of directors. The initiative also banned corporate proxy and the representation of shareholders by depository banks.

The initiative, which Swiss media termed the “against rip-off salaries” initiative, also banned giving bonuses to executives if the company they head has been taken over by another company, and required loans and pension plans for executives and board of directors members to be more transparent.

In addition, the initiative required pension funds that hold controlling shares of companies to

participate in the aforementioned annual vote for remuneration for top executives. For violating these provisions, the initiative levels criminal sanctions of up to three years imprisonment and a fine of up to six years’ remuneration.

According to the Swiss government, about 2.4 million citizens have cast their vote, some 46% of eligible voters. Some 68% supported the initiative and 32% were opposed, one of the highest rates of support a popular initiative has ever received. The origin of the initiative’s success can probably be traced back to public discontent with the $78 million paid to the chairman of Novartis after his departure and the large bonuses awarded to executives who brought the Swiss bank UBS to near collapse.

Quid pro quo

Wall Street Journal slammed the referendum, saying the Swiss have lost their way by limiting executive remuneration, and that requiring shareholders to vote on these matters is “unnecessary.” If shareholders and investors disapprove of a company’s pay plan, the article argued, they should express their displeasure by voting accordingly or by selling their stock and investing in companies with more conservative and transparent pay plans.

Simply put, if you don’t like the executives’ pay, sell your stock. It’s a common argument which is usually well received, but it is completely opposed to the essence of the corporation. The shareholders are the corporation’s owners, and if the remuneration set by the shareholders or by the state is not to the executives’ liking, it is they who should quit, not the shareholders.

The state awards corporations, especially the public ones, with a variety of legal privileges, grants and tax benefits. The state can and must require corporations to oblige with proper codes of conduct – including limits to executive pay.

We should learn from Switzerland.

The writer is a lecturer at the Social Economic Academy and a researcher at the Center for Social Justice and Democracy at the Van Leer Jerusalem Institute.