Swiss voters tell shareholders to do their job on executive pay

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Swiss voters have told shareholders to do their jobs. In voting in a referendum for the strictest curbs on executive pay anywhere outside a command economy, Swiss citizens have made shareholder votes on pay binding on public companies in the country, not advisory as is common across Europe and the U.S.

As with the European Union’s moves last week to cap bankers’ bonuses at twice salary, they have also given vent to popular anger in Europe at what are seen as excessive levels of executive pay continuing when the broad swathe of the workforce, if they have jobs, have gone through five years of austerity that in many countries show no immediate sign of easing. The campaign was initiated by Thomas Minder (above), a businessman-turned-politician, under the slogan, ‘Against the Rip-Off!”

How successful shareholders in Swiss public companies will be be in lowering top compensation remains to be seen. Management generally at public companies in Europe and the U.S. has an impressive record when it comes to shareholder votes. They lose hardly any. On the occasions they do it has usually been at the hands of deep-pocketed activist shareholders, individual and institutional, and rarely over pay.

Public shame has reined in some pay excesses. Swiss pharmaceutical company Novartis’ abandoned plan to give its departing chairman David Vasella a $76 million pay off when they were made public. Such examples are notable by their rarity.

Chief executives will argue that there is a market for managerial talent, and, that as with professional sports, there is a small pool of top talent competitively sought after; companies that would be winners need superstar chief executives. It is a self-serving argument. However, many companies do themselves no favors by benchmarking salaries against peers and then paying their chief executives above average, an exercise that just results in ever high average chief executive salaries.

Pay restraints, at any level, and whether for banker or bakers, rarely work in the long term. That includes fixed ratios of highest to lowest paid as much as caps. Perks and other arrangements are devised to get round them.

Banks, too, will likely find ways around the EU’s proposed bonus cap, just as U.S. companies got round the $1 million limit on executive salaries introduced in the 1990s. That had the unexpected consequence of boosting stock-options for senior executives, which in turn turbo-charged compensation packages and often misaligned chief executives’ short term incentives and shareholders’ long-term interests, particularly around risk.

Since 2008, it has been taxpayers who have reaped the whirlwind of wealth that that created in financial services. As regulated businesses, banks should arguably be considered as a special class of company when it comes to compensation. A wider range of stakeholders, from creditors to depositors and taxpayers, has an interest than is the case with non-financial companies. (Hamid Mehran of the New York Fed argues a case for designing bank compensation to curb risk taking.)

Britain plans to try to get European finance ministers to put some loopholes back into the bonus regulations at a meeting later this week. If the doomsayers are to be believed (they are not), the bonus curbs will lay waste to London as a financial center and lead to mass emigration from the its financial district to New York and Asia. The U.K. is unlikely to win much if anything by way of concessions. It can no longer count on the support of Germany to fend off restrictions on financial services given the prevailing mood in Germany that Europe’s big banks, having been bailed out, should be kept on a short leash.

Those moves, though, stand in odd contrast with the U.K.’s own plans to introduce later this year, binding shareholder votes on pay and measures to make compensation more transparent. Companies would be required to disclose their proposed pay policy, including potential payments and the use of performance metrics, as well as the calculation of exit payments.

This is all good corporate governance. Shareholders should be insisting on it, and the board of directors ensuring it. However, executive management at too many companies has the board under its sway. Swiss citizens have done their bit to break that spell. But shareholders have to use the powers they are been given to reject pay deals that are not aligned to the long-term success and corporate culture of the companies that they own.