Europe: Mixed messages on executive pay

28 Nov 2013

Swiss voters have rejected a proposal on remuneration that would have seen executives unable to earn more in a month than their lowest paid workers earn in a year.

The so-called ‘12:1’ proposal followed hot on the heels of this summer’s public approval of the Minder initiative, named after the Swiss senator whose idea it was. That proposal made law a binding shareholder vote on executive salaries at all publicly traded Swiss companies. When finalised, it will also rule out golden parachutes and signing bonuses, among other means of compensation.

It seems as though the later 12:1 proposal was a step too far forthe Swiss public, who have the opportunity to vote when a referendum is called on a change to Swiss law – an option in every case. Votes against the proposal hit 65.3%, with the yes votes at 34.7%.

Traditionally, the Swiss business environment has been soft on the issue of large executive pay packages. But some high profile cases in the banking and pharmaceuticals industries are thought to be behind the souring of public opinion.

This time, the no-vote lobby was successful in painting a picture of large companies moving their headquarters elsewhere and eroding the tax base, as well arguing that the government should not set a precedent for mass state intervention in the private sector.

The death of this proposal is not the end of the issue in Switzerland – a trades union-backed proposal on the minimum wage is slated for 2014.

Move to binding vote on pay in the EU?

Nor is it the end of the matter in Europe, where the Germans and the French are moving in a similar direction. And the EU is looking at a binding shareholder vote on executive pay, following its move to tighten remuneration at credit institutions.

But despite the generally cooling conditions for executive pay on the regulatory and political front, research from Thomson Reuters shows that the total take-home for FTSE 100 executives in the UK has risen by 14% in the last year.

A breakdown of that pay shows that while basic salaries have risen by only 4.1% and annual bonuses have fallen by 8.8%, the number of executives cashing in their long-term incentive plans rocketed by 58%.

Will transparency rein in long-term incentives?

These findings suggest that well-remunerated executives in the UK are channelling their rewards through less visible mechanisms – though this too may soon come to an end with the new regulations now in place. Currently, a number of executive awards are not included in the main table for remuneration. But the government’s new narrative reporting requirements mandate that a single total figure for top executives is included in the annual report. This makes it far more visible to shareholders, who then have an advisory vote on that annual report every year and a binding vote on the directors’ remuneration policy itself every three years.

The Financial Times reports that for executives “such gains may not be repeated in coming years” and boards may be “starting to rein in future increases”.