Swiss lead European move to restrict executive pay

Published Mar 5, 2013

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Ann Crotty

It seems the ordinary people of Europe got fed up of waiting for the corporate sector to deal effectively with charges of greed and undeserved enrichment.

Just days after the EU secured an agreement on a radical proposal to cap bankers’ bonuses, the people of Switzerland voted to introduce draconian restrictions on the remuneration of executives of all listed companies in that country.

These latest developments mean that South Africa, which has no recommendations let alone any proposed legislation relating to executive pay, significantly lags international developments. The failure to follow international trends when it comes to restricting executive pay contrasts with corporate South Africa’s speedy adoption in previous years of international trends that led to substantial hikes in executive remuneration.

Ansie Ramalho, the executive director of the Institute of Directors, told Business Report yesterday that she knew of nothing in the pipeline that was similar to the EU and Swiss developments. “At this stage the only thing in South Africa that could be considered a restraint is the requirement for a non-binding vote on pay,” she said, adding that this was considerably weaker than the binding vote required in the UK and the three-strike rule in Australia, which requires the entire board to resign if the non-binding vote is not passed for three consecutive years.

There is as yet no sign of the code of conduct on remuneration and labour that Business Leadership SA (BLSA) said, 10 months ago, it was working on. Although there has been some mention of a draft copy being completed, Business Report was unable to get confirmation from BLSA.

Meanwhile, over in Europe it seems that public resistance to ever-increasing executive pay is gaining momentum. The UK’s High Pay Commission undertook an independent inquiry whose recommendations included that employees be appointed to remuneration committees and that companies publish a pay ratio between the highest paid executive and the company median. It also called for a radical simplification of executive pay packages.

In addition, during the past 12 months there have been a number of high-profile rejections of executive remuneration packages by shareholders in the UK. However the proposal on bankers bonuses announced last week by the EU has gone much further than any other initiative to date.

To be expected, within hours of the announcement of the proposal, which will cap bankers’ bonuses at 100 percent of basic salary or 200 percent with shareholder approval, bankers and their consultants across the continent were pointing out why the proposal would not work. One remuneration adviser said it would merely make pay structures even more complicated than they are; a second noted that the move would result in hefty hikes in basic salaries. Bank executives also said the pay restrictions would see the best talent leave the continent and head for the US and Asia.

For most of the European public outside the City of London, the prospect of a mass emigration of bankers is regarded as an added benefit. With banks failing to explain what net value their highly priced activities provide for the taxpaying public, who continue to foot the bill for their previous excesses, the sense of public outrage continues unabated.

And after this weekend’s referendum in Switzerland it is also apparent that the Swiss feel outraged. Some 68 percent of them voted in support of new draconian corporate rules that will ban “golden hellos” and “golden goodbyes” and give shareholders a binding vote on executive pay. And, in a move that makes the “radical” EU proposal look a little limp, the measure includes jail sentences for executives who do not abide by the new rules.

The “yes” camp won the referendum despite considerable opposition from the exceptionally powerful business community in Switzerland. The Financial Times reported that one of the key drivers behind it remarked that criminal sanctions were absolutely necessary. “Three years in jail is perfectly reasonable; if you don’t pay the bill in a restaurant in Switzerland you can get up to three years in jail.”

David Couldridge of Element Investment Managers said that the Swiss initiative was a far more effective way of addressing the remuneration problem than the EU’s proposal. Couldridge refers to what the UK’s Lord Myners calls the “ownerless corporation” characterised by poor transparency, systems of remuneration that are not aligned with sustainable performance and shareholders who have not held boards and executives accountable.

“Citizens are angry and feel little has changed in response to the global financial crisis. The Swiss democratic tradition has given their citizens a voice to express their anger.”

Couldridge said the Swiss initiative was about rebalancing power by requiring investors to recognise their duty of care to clients and beneficiaries and vote in alignment with that.

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