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Swiss Reject To Limit Executive Pay

The Swiss are known as egalitarian people, reportedly concerned about the widening income disparity in their country. This was manifested by the recent proposal by the youth wing of the Social Democratic Party to limit top executive compensation to 12 times that of their companies’ lowest paid employee. Fortunately, a clear majority—66 % of Swiss voters—defeated the “1:12 initiative for fair play” in a referendum. (Read the story here). While the Swiss may have voted down the proposal to limit executive pay on economic grounds so as not to hurt the country’s economic performance or the competitiveness of its businesses, as they have done in the past, there is also a strong moral argument against the government dictating what companies can or cannot pay their executives or any other employees.

The government should have no say in how much—or how little—companies pay their employees; compensation should be up to the employees and employers to negotiate. If companies want to pay their CEOs 300 times as much as their lowest paid employee—or 1,182 times more, like Credit Suisse did in 2009 when it paid CEO Brady Dougan US$ 21 million in total compensation—they should be free to do so, without government interference. The moral argument is this: for individuals or companies to survive and thrive, they must depend on reason. They must observe facts and determine what the best way to achieve their values and goals is. For companies, this involves hiring the most competent people possible, including the chief executive, to carry out production and trade of goods and/or services for long-term profit maximization.

The fundamental requirement of using reason and acting on the consequences of one’s thinking is freedom. If the government dictates how much companies can or must pay their employees, that freedom is violated, and companies could not remain competitive and thrive. The Swiss voters understood this. Had the country imposed the “1:12” rule, Swiss-based multinationals such as Nestlé, Hoffman-La Roche, Novartis, and Zurich Insurance Group, among other firms, would have fled elsewhere, with devastating effects on the Swiss economy and jobs. The best executive talent goes wherever it can get the best compensation, which is determined by the markets, not by government. The demand for talented executives exceeds the supply; therefore they command such high salaries and other compensation. (Similarly, inexperienced, unskilled workers should be allowed to work at market wages, not at some arbitrarily set minimum, so that they can gain experience and develop skills, to command higher wages later.)

The second moral point is that executives, who make the greatest contribution to their companies’ bottom line, deserve to be compensated well—at a level determined by the market. Companies that pay their executives more than the markets dictate are acting irrationally and wasting their shareholders’ money. Companies that pay their executives less than market compensation are also acting irrationally—they cannot obtain the best talent, which their companies’ success requires.

Justice demands that people are compensated on the basis of performance, not on the basis of their need or of the egalitarian ideal dominant in today’s culture. Poor Boris Johnson, the mayor of London, recently became the target of public outrage and was accused of elitism when he stated that income inequality is inevitable because people have different levels of ambition and intelligence, and some simply work harder than others. (Read about it here.) Perhaps Mr. Johnson was lacking in eloquence in delivering his speech, but he was merely stating a fact. People have free will, and therefore egalitarian schemes such as the 1:12 initiative for fair pay in Switzerland will not work. They will merely remove incentives for productivity and value creation and pull everyone down, hindering human flourishing. Kudos to Swiss voters for having the good sense to reject such a plan.

  • Steven Smith

    I read a newspaper article which stated that executive pay is often determined at company board meetings where the board members give themselves hefty pay increases and pay rates. This is not market forces – this is criminal conspiracy – Tony Soprano forces. The only limiting factor is the outrage of ripped off share holders – some deterrence to a multi million dollar ‘lottery win.’ And lets not forget the Exxon executive who got a 200 million dollar golden parachute – market forces? Yeah sure.

  • DRT

    It is market forces. If CEO’s and board members are using too much company money to give themselves underserved raises, and thus hurt the company, then shareholders will sell their stake in the company, the stock price will fall and shareholders will vote them out. There are always a few bad apples. But it’s up to the shareholders to act in such cases. If they don’t act then they accept such salary increases and it’s not up to anyone to question such motives.