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18 November 2013

The trouble with executive pay 

Swiss voters have sharply rejected a ballot initiative to limit executive pay to 12 times the salary of a company’s lowest-paid employee. The idea in itself was simple: Nobody at a company should earn more in a month than the lowest-paid worker earns in a year.

While the Swiss told pollsters they were infuriated by cases of exorbitant executive pay, in the end they were unwilling to let the government determine pay levels. Sixty-five percent of voters in the November 24 ballot rejected the measure.

Supporters of the initiative had been encouraged by legislation passed earlier in the year handing stockholders a larger say in corporate compensation. And the Novartis CEO who demanded a $78 million severance package ended up backing down after widespread public criticism.

However, trying to impose external limits on what to pay executives is a challenge. They can be compensated in stock, stock options, cash, retirement contributions, or just about anything a company’s board of directors thinks suitable.

Consider the impact of another approach designed to rein in executive pay: making the figures public. Studies in Germany, the U.S. and other nations found that publicizing executive pay actually drove salaries up, not down. 

It seems that when boards of directors know exactly what their competitors' CEOs are earning, they are reluctant to pay their own leaders less. Steve Jobs of Apple may have famously earned a “salary” of $1 a year (plus a few hundred million in rising stock values) while the company’s fortunes skyrocketed, but not every CEO will be willing to go down the same route.