Swiss Follow EU With Stringent Executive Pay Curbs: The Implications

For the second time in a week, European nations have voted to limit executive pay.

While the curbs themselves are potentially significant, it is the trend that may be most worthy of note.

Corporate leaders have been threatening for years that limits on their compensation are anti-competitive, placing limits on growth, investment or both and will cause those afflicted to find more sympathetic locales in which to do business.

The data on taxation, among other factors, suggest that businesses and their leaders move for many reasons but rarely because of issues related to pay. One of the reasons for that is that there are simply too many clever ways around such strictures.

What is significant about the Double-Whammy from Europe is that it further limits the places to which executives can flee without facing compensation challenges. Geneva and Zurich were always bruited about by British, German and other Euro-execs as a place in which they could find surcease. Not any longer. French actor Gerard Depardieu chose Russia, though he was roundly mocked for doing so - and given the death rate associated with business disputes, to say nothing of the absence of a legal system recognizable to sentient leaders (BP, anyone?), that is unlikely to become the refuge of choice. Businesses could follow for NBA basketball star and attention-seeking clown Dennis Rodman to North Korea, but the weather isnt great and those food shortages sound unattractive.

The US has recently raised taxes on the wealthy, with New York and California, its two most salubrious business destinations having piled on, so if money is the primary consideration, that may be problematic as well.Even China has begun to crack down on real estate developers and corrupt government officials, at least those who are too egregious or not well-enough connected.

The larger issue is that recognition of executive pay abuses has become global. The days of playing one country or continent off against another may be ending. Financial industry pay is up, but that is due in part to the fact that employment in the sector is way down - and going lower. In short, austerity has engendered a predictably hostile response from those affected by it and they are demanding retribution. Business leadership, after lecturing others about the benefits of limits, find they are no longer immune. JL

Emma Thomasson reports in Reuters:

Swiss citizens voted on Sunday to impose some of the world's strictest controls on executive pay, forcing public companies to give shareholders a binding vote on compensation.
The government said 67.9 percent of voters had backed allowing shareholders to veto executive pay proposals as well as banning big rewards for new and departing managers, one of the highest approval rates ever for a popular initiative.
While anger at multi-million dollar payouts for executives has spread around the globe since the financial crisis, Swiss direct democracy - including four national referendums a year - means public outrage can be translated into strong action.
Brussels agreed a cap on bankers' bonuses last week and countries including the United States and Germany have introduced advisory "say on pay" votes. Britain also wants to give shareholders a binding vote on pay and "exit payments" at least every three years, but the Swiss plans go further.
The clear majority in pro-business Switzerland was unusual given fierce campaigning by corporate lobby group Economiesuisse, which warned the proposals would damage the country's competitiveness and scare away international talent.
Support for the move was driven partly by big bonuses blamed for fuelling risky investments that nearly felled Swiss bank UBS, as well as outrage over a proposed $78 million payment to outgoing Novartis chairman Daniel Vasella.
"The clear support for the initiative reflects the understandable anger of the electorate at the self-serving mentality of certain managers," said a group representing most of the parties in parliament which opposed the plan. "With their misconduct, they have done the economy as a whole a disservice."
Thomas Minder, the businessman-turned-politician behind the campaign who says his proposals are aimed at ending a culture of short-termism and rewards for managers of badly-run companies, said intense corporate lobbying had backfired.
"This is a clear sign of the distance between the people and the political and business establishment," he said.
Despite threats from some executives, Switzerland is unlikely to see an exodus of big companies, drawn to the country by low taxes, stable politics and business-friendly laws.
Activist shareholder group Actares welcomed the result of the referendum: "Actares is convinced that the electorate has improved Switzerland's position as a place to do business by strengthening shareholders' rights."
WAYS AROUND
Companies will likely seek ways around the new rules to reward executives, just as banks in Europe are looking to soften the impact of a cap on bonuses for top staff agreed by European politicians on Thursday.
"If a company wants to pay a top executive 25 million, then they will find a way to do so regardless of the initiative," Rolf Soiron, chairman of cement maker Holcim (HOLN.VX) and drugs industry supplier Lonza (LONN.VX), told Reuters before the vote.
Experts also question whether shareholders in Swiss companies will make full use of their new rights.
Of the top 100 Swiss companies, 49 already give shareholders a non-binding vote on the pay of executives. But while opposition to pay deals is on the rise, a majority of investors have never voted them down.
Justice Minister Simonetta Sommaruga said implementing the proposals would be challenging, but said Switzerland would remain an attractive location for business, due to its educated population, quality of life, security and political and economic stability. "I am sure the economy can cope with this."
Swiss companies employed five of the top 10 best-paid chairmen in Europe in 2011, but only the heads of Novartis and Roche made it into the continent's top 10 for chief executives as under-fire big banks UBS and Credit Suisse reigned in pay.
Minder's initiative forces binding votes on compensation every year as well as on board composition and would also ban bonus payments to managers if their companies are taken over.
The plan also includes possible jail sentences and fines for breaching the new rules.
While Switzerland has fared relatively well through the financial crisis, the government bailout of flagship bank UBS in 2008 stoked anger among Swiss who blamed its heavy losses on hefty rewards for bankers who made risky bets.
Last year, more than one third of UBS shareholders rejected the bank's plans for executive pay, including a 4 million Swiss franc signing-on fee for new chairman Axel Weber, after a sub-par 2011 profit and a $2 billion rogue trading scandal.
The center-left Social Democrats are already pushing for another referendum on even tougher curbs on executive pay - they want to limit the annual compensation of top managers to just 12 times that of their lowest-paid worker.