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Swiss Voters Reject CEO Pay Cap
 

By Roy Maurer  12/3/2013
 
 

A majority of Swiss voters rejected a proposal to limit monthly executive pay to the equivalent of the annual earnings of a company’s lowest-paid employee. In a closely watched referendum held Nov. 24, 2013, final results showed 65.3 percent of votes against the proposal and 34.7 percent in favor of it.

The referendum was the second ballot this year on the subject of executive compensation in traditionally conservative and business-friendly Switzerland. In March voters approved a measure that expanded shareholders’ power over managerial salaries and banned one-off “golden handshake” and “golden parachute” entry and exit packages.

Proponents of the measure to cap top executives’ pay argued that the savings would be redistributed among lower-paid employees.

Employers fought against the proposal, claiming it would undermine Switzerland’s competitiveness as a business destination and cross a line in government intrusion in business affairs. “The people don’t want the state intervening in salaries,” said Valentin Vogt, president of the Swiss Employers Association, in a media statement.

Former Society for Human Resource Management CEO Ron Pilenzo, SPHR, agreed that pay caps set by government policy is a turn in the wrong direction.

“CEO pay in a capitalistic system should remain unfettered,” said Pilenzo, president & CEO of the Global HR Consultancy, based in Hobe Sound, Fla. “The issue of pay—including cash, benefits, bonuses, etc.—should be a matter of the compensation committee of the board. The board itself should be answerable to the stockholders and nobody else.

“One of the reasons it doesn’t work well is that once you set caps, you also limit the ability of an organization to reward meritorious performance,” he continued. “Psychologically, it also puts limitations on the selection process for CEOs and possibly termination conditions.”

Christian Keuschnigg, professor of public economics at the University of St. Gallen, told the Guardian newspaper that companies might have increased their dividends or relocated to other countries. “Multinational corporations could easily switch their headquarters elsewhere. That danger, in our view, was quite real.”

Opponents and supporters were evenly divided on the measure in October, according to polling conducted by Gfs.bern. But in  an early-November survey, only 36 percent of those questioned were likely to vote for the proposal, down from 44 percent in the earlier poll. A majority of respondents were in favor of limiting executive pay, according to the poll; however, many did not think caps should be imposed by the government.

“Our fight will continue against fat-cat salaries and an unfair pay system,” said David Roth, the president of Switzerland’s Young Socialists and the referendum’s leading sponsor. “This system has no future. We succeeded in mobilizing many people and launching a broad debate.”

Compensation reformers said they would now focus on establishing a national minimum wage of 4,000 francs, or $4,400, a month. Although Switzerland has no official minimum wage, many workers are covered by union agreements.

How Best to Compensate CEOs

Pilenzo explained that compensation for a CEO should include a mix of cash, deferred cash, stock, perks and a reasonable retirement plan, the measures of which should be left up to the compensation committee and company stockholders.

He described three essential ingredients of a sound CEO pay package:

  • A fair and unbiased compensation committee, made up of board members and nonboard members, with no selection input by the CEO.
  • Measurable, reasonable and achievable goals and objectives, established jointly by the CEO and the board or the executive committee, with the board’s approval. “If fairly set, then the performance of the CEO is easily measured,” he said. “There are too many examples of CEOs who receive huge pay increases, stock or bonuses that are not earned and are more discretionary than objective or have been negotiated in advance. These should be avoided at all cost.”
  • Extending key elements of the compensation package over a period of years by, for example, rewarding the company’s leader with a mix of substantial amounts of stock, instead of cash. “This is designed to encourage the CEO to achieve company objectives, advance the stockholder value and return, as opposed to encouraging a CEO to take the cash and run,” he explained.

“To be sure, societal issues and the economic conditions in a given country are factors that should be considered by the comp committee, but in the end, the stockholders who own the company should be involved directly or indirectly in the decisions about CEO pay,” stressed Pilenzo. “The trend today is for more and more stockholder input, which may lead to the actual approval of CEO pay by the stockholder group. If boards don’t consider the many factors involved in CEO pay, others will,” he warned. “The worst thing that could happen, at least in the U.S., is for the federal government to become involved in not only setting caps but determining how and under what conditions CEOs should be paid.”

Roy Maurer is an online editor/manager for SHRM.

Follow him at @SHRMRoy

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