Swiss voters ponder: Are CEOs paid too much?

A Sunday referendum in Switzerland could force companies to cap salaries for the highest paid so that they don't exceed 12 times that of the lowest paid.

Flags supporting the 1:12 Initiative for Fair Pay adorn various houses in Bern and Zurich in November 2013. Switzerland will vote Sunday on the initiative, which would limit the salaries of top executives so they don't earn more in a month than the lowest paid workers earn in a year.

Top executives in Switzerland beware: If voters outraged over corporate salaries have their way in the latest Swiss referendum Sunday, their pay could be drastically cut – a surprising turn for a country known as much for its wealthy, business-friendly attitude as its alpine scenery.

The ballot question pushed by the 1:12 Initiative for Fair Pay would amend the Swiss Constitution to ban companies from paying their top employees more than 12 times their lowest-paid workers.

Currently, Swiss executives earn 73 times as much on average as the employees at the bottom of their companies’ wage scale, say referendum proponents. Some companies have an even wider gap. The ratio at pharmaceutical giant Roche is 1 to 261 if its CEO’s salary is taken into account, according to Travail.Suisse, a labor union.

“These numbers are economically senseless,” says David Roth, president of the Young Socialists, the party leading the "Yes" campaign. “We need a better distribution of wealth.”

Controlling CEO pay

The Young Socialists launched the Initiative in 2009 and in the following 18 months they manage to collect the 100,000 signatures needed to put the issue to a binding vote. Other left-wing political parties and labor groups are also campaigning for the "Yes."

Corporations and employers' associations didn’t pay much attention to the 1:12 Initiative until March, when Swiss voters decided in another referendum that shareholders should decide executive and board members’ salaries, bonuses, and golden parachutes. The measure was the first among a recent series of proposals in Switzerland to address widening income disparities in society.

Fearing Switzerland might lose ground as one of the world’s most competitive countries if the referendum passes, many large corporations are fighting the 1:12 Initiative.

Nestle, Swiss railway company SBB, and others have sent letters to thousands of their employees claiming the proposal, if adopted, could put their jobs and the Swiss economy in jeopardy. 

The chief executive of commodities giant GlencoreXstrata, Ivan Glasenberg, even threatened to move his company abroad if the law passed. Other critics have raised similar concerns.

“The 1:12 Initiative is not the solution because large corporations will find a way out,” says Bernhard Salzmann of the Small and Middle Swiss Companies Association (USAM). “They could take the contracts of their top executives to other countries and then have them work here, for example.”

But Mr. Roth says the same fearmongering took place before the March vote on shareholders’ role in executive compensation. No firm left the country as a result of the referendum’s passage, he said.

“Switzerland offers so many other advantages such as well-educated workers, good infrastructure, and safety,” he says. “That’s the reason why companies are here, not because they can pay millionaire salaries to greedy managers.”

Taxes at risk?

The referendum would mandate that top executives’ monthly salary can’t exceed the annual pay of their company’s lowest-paid employees, including all sorts of remunerations (bonuses, assignment packages, etc.)

Roth describes the proposal as sensible, not just part of a utopian dream. Executive pay in Switzerland in recent years has ballooned out of proportion compared to the past, he says. “In the 1980s, the ratio was 1 to 6; in the 1990s, it was 1 to 13. And our economy worked just fine.”

According to a KOF Swiss Economic Institute study presented in October using data collected in 2010, life for the vast majority of Swiss executives wouldn’t necessarily change if the referendum passes, as only around 4,400 people received salaries that surpass the proposed limit. In terms of companies, only 1.5 percent of the companies based in Switzerland currently top the 1-to-12 limit.

Mr. Salzmann at the USAM says that the average salary gap is distorted by the high salaries of the large corporations so the figures are deceiving. At more than 96 percent of the 43,600 firms examined in the study, the ratio between the top and lowest salaries was less than 1 to 8.

Small and medium-sized firms will suffer disproportionally if the 1:12 Initiative passes, Salzmann says. “If the salaries of top executives fall, so will the tax revenues of the state, so taxes for smaller companies will be raised.”

Another study, by the University of Sankt Gallen, estimates that should the measure pass, tax revenues would fall by $1.64 billion annually due to its impact on the salaries of the top 2 percent of earners, who contribute almost half of all federal tax revenue.

The Young Socialists admit there will be lost revenue for public coffers in the short term. They say that as salaries at the lower levels increase that would also raise tax revenue as well as provide a boost to purchasing power.

A toss-up proposal

Earlier this year, the Swiss public appeared to be evenly split over the referendum. But in a Swiss Broadcasting Corporation poll conducted in the first week of November — the last survey of public opinion before the vote — 56 percent of respondents said they would vote against the proposal. Only 34 percent said they would cast their ballots in favor. The 10 percent of voters who remain undecided will therefore be key to the initiative’s final outcome.

Thomas Hofmann, who owns a two-employee company in Basel, says he will vote ‘No’ on Sunday because, although some salaries are “indecent,” shareholders should regulate the wage gap, not the government.

If the referendum passes, Mr. Hofmann believes companies would find a way around the new law by creating separate firms to employ their least-paid workers or, even worse, outsourcing low-paid jobs to other countries.

“Instead of low-paid jobs, we would have no jobs,” says Hoffman.

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