Voters in Switzerland will weigh in on a novel approach to runaway executive pay later this month as regulators, economists, and lawmakers in the United States continue to grapple with the problem.
A referendum is set for November 24 on a law called the “1:12 Initiative” that would impose a flexible cap on top employee compensation at Swiss companies. If approved, the highest-paid employee of any given Swiss firm could not earn more in a month than its lowest-paid employee makes in a year. By using a ratio rather than a dollar figure cap, the 1:12 Initiative would both shrink the salaries of top executives and raise the pay of underlings. “You shouldn’t just say a maximum salary, because what we really want is a relationship between the lowest and the highest,” said David Roth, one of the plan’s architects, in an interview with Business Insider. In March, Swiss voters overwhelmingly approved a package of CEO pay reforms, including an outright ban on so-called “golden parachute” payouts for fired executives.
The 12-to-1 ratio would be a massive shift for Swiss businesses, many of which currently pay their top people a couple hundred times what their worst-paid workers earn. Here in the United States, the prevailing ratio was 273-to-1 last year.
American regulators have sought to curb CEO pay through public pressure rather than through statutory caps like the one being considered in Switzerland. Those efforts compare top pay to average pay, rather than top to bottom as in the 1:12 Initiative. The Securities and Exchange Commission recently finalized rules for how companies will report the ratio between their CEO’s pay and the average compensation of the rest of their workforce, as required by the 2010 Wall Street reform package. Other efforts to publicize executive pay levels in that law, known as Dodd-Frank, have proven ineffective to date.
The disconnect between CEO and worker pay helps reinforce and worsen economic inequality, but the current state of executive compensation has consequences beyond the unfairness of a new Gilded Age. Taxpayers subsidize CEO pay, which means less funding is available for public programs. The way pay packages are structured creates incentives for executives to cut corners, commit fraud, and take excessive risks like those that brought about the Great Recession. There is no meaningful connection at present between performance and pay, and a full third of the best-paid CEOs over the past two decades have ended up getting fired, busted for fraud, or begging the government for bailouts.