Why I’m backing the proposed Swiss crackdown on CEO pay

Limits on what senior executives can earn. Laws to give shareholders the final say over the compensation of company boards. This might sound like bits that got edited out of an Ed Miliband speech, but in fact by next month it may just be a description of Switzerland.

One referendum this year forced companies to get shareholders to agree to top salaries and another later this month will, if successful, force them to limit the highest salary they pay to 12 times the lowest.

The small Alpine nation, with its private banks and low taxes, is hardly a hotbed of leftist radicalism. It is one of the free-trading nations with the smallest government and lowest taxes in the world – and one of the richest as a result.

Yet, the Swiss have noticed that the massively inflated salaries of the people who run quoted companies have become a racket. There is nothing anti-business in doing something about that. And, if the Swiss can tackle soaring executive pay, it may set an example for the rest of the world.

It is well established that the pay of the men, and less often women, running public firms has soared in the last decade. Take the UK. Last year, the average FTSE 100 chief executive earned £4.8m, up 12% on the previous year (while the average wage rose by just 1%).

A report by research firm Income Data Services found that between 2000 and 2010 CEOs’ pay at the 350 largest quoted firms rose by 108%. Over the same period, the value of those firms increased by just 8%.

A decade ago, it was still rare for a FTSE 100 CEO to earn a million a year. Now almost £5m is the going rate. Yet businesses are hardly five times more complex, or five times better run.

The FTSE is still lower than it was in 2000 – so shareholders have made nothing, while the people running the firms on their behalf have made fortunes. There is nothing exceptional about that.

It is the same in the US, Switzerland, and most other countries. It is a scandal. A small group of executives sit on each other’s boards and routinely vote each other huge pay rises – and shareholders pay for it.

While most countries assume it is inevitable and that little can be done about it, the Swiss have decided otherwise. One referendum was already won earlier this year, with 68% of voters in favour.

It forced big firms to give their shareholders the final say on executive pay and restricted big signing-on bonuses and pay-offs, as well as forcing fund managers to get the views of their policy holders before deciding how to vote on pay issues.

But now it may go further still. A second referendum will introduce a new law that would limit the salary of the highest-paid person in a company to 12 times that of the lowest-paid person. Right now, the highest-paid people at large Swiss firms are earning 93 times the lowest salary on average, so that will have a huge impact if it is passed.

Business groups and the government are campaigning against it. But the polls show it is very close – in the latest survey 44% are in favour and 44% against, with the rest undecided. It is not hard to see the referendum being carried.

Plenty of people will decry that as anti-business, but in fact,the proposal has much to recommend it. No one objects to entrepreneurs making a fortune. If you set up a company and it does well, you will make a lot of money, and no one has any problem with that. You will have created a lot of new jobs and fresh wealth in the process.

But the Swiss plan only applies to quoted companies, so entrepreneurs will not be affected, at least until they float their business (at which stage, they will probably have made so much money they won’t be too concerned anyway). It will only apply to salaries earned at businesses that are already large and well established.

That is why there is much to be said for it. It is hard to see why the person who happens to be running Novartis or Nestlé or British Airways or the National Grid for a few years deserves to make tens of millions – particularly at a time when shareholders have done so badly. They did not create the business, or risk their own capital to get it started.

While occasionally they might have made a decisive difference, it is rarer than claimed. More often, one suit is interchangeable with another. Arguably, a ratio of 12:1 is too extreme – but likewise 93:1 seems too extreme as well: 20 or 30 times the lowest salary would put most CEOs on a generous income.

If the Swiss vote in favour, no doubt we’ll hear lots of arguments about how big companies will quit the country for more executive-friendly nations. We’ll hear that they won’t be able to recruit top talent globally because they won’t be able to pay them the salaries they expect. Swiss companies’ share prices may take a hit as investors grow nervous about their ability to cope with the new law.

But we’ll see. It may well be that the companies are bluffing. All those Swiss executives won’t be able to get jobs in Germany or America, and those who do might not be much missed.

At the very least, we’ll be able to find out whether huge executives salaries are justified – or whether it is all simply a con trick, and one that deserves to be exposed. If so, the Swiss will have done us all a service – and the law can be copied here, and in many other countries as well.