What We Can Learn From Switzerland’s CEO Pay Cap Vote

The cap may not have been a good idea, but discussing the underlying issue remains important.

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Voters in Switzerland yesterday rejected a referendum that would have limited executive pay at Swiss companies to 12 times that of the company's lowest-paid employees. (In Switzerland, any referendum that garners 100,000 signatures is voted on and can become law if it receives a majority of votes in both the country and in each of the country's 26 cantons.) The vote was decisive: 65 percent of Swiss voters said thanks but no thanks to the measure, even though they voted earlier this year to clamp down on CEO pay in other ways, banning so-called "golden parachutes" and giving shareholders more power to veto executive pay packages.

Those pushing for the so-called 1:12 initiative said they did so because, in the last three decades, the ratio in pay between the highest and lowest-paid Swiss citizens has increased from 6-to-1 to 43-to-1. For CEOs, the ratio is even higher: The average Swiss CEO makes about 148 times that of the average worker, with some companies clearing 200-to-one.

But those ratios are tame compared to what's going on in the United States. Here, the average CEO makes an eye-popping 354 times the pay of the average worker, according to the AFL-CIO's "Executive Paywatch."

[See a collection of political cartoons on the economy.]

For those keeping score, that translates into an average CEO compensation of more than $12 million, while average worker pay is a bit under $35,000. And at some companies, as Quartz's Jason Karaian noted, the ratio is even more out of control. CEOs at JC Penney, Oracle and Starbucks, for instance, make more than 1,000 times the pay of their workers. In 1980, for comparison's sake, the pay ratio between CEOs and workers was 42-to-1, which looks positively quaint next to today's numbers.

And knowing this ratio is important for reasons other than trying to ensure that workers get a fair share for their productivity, as ever-increasing CEO pay is one of the main drivers of income inequality, which then has consequences for economic growth and mobility. The Economic Policy Institute has actually found that "the significant income growth at the very top of the income distribution over the last few decades was largely driven by households headed by someone who was either an executive or was employed in the financial sector."

But even mild attempts to rein in CEO pay here run into stiff resistance. Under the Dodd-Frank financial reform law, for instance, companies are supposed to begin disclosing the ratio between their executive pay and the pay of their median worker. The Securities and Exchange Commission proposed the final rule a few months ago.

[See a collection of political cartoons on the European debt crisis.]

Keep in mind that under the proposed rule, unlike the Swiss initiative, there's no requirement for companies to stick to any particular ratio; they'd simply have to make public what the ratio is. But even that bare amount of transparency was considered an unacceptable assault on capitalism by America's titans of industry, who fought hard to prevent it, claiming it would constitute an undue burden on their businesses. (Incidentally, there's also good evidence that companies with a high disparity between CEO pay and the pay of other employees do worse on a host of economic measurements, including stock returns.)

Now, none of this is to say that Switzerland should have passed the 1:12 referendum; nor does the U.S. necessarily need such a blunt cudgel (except, perhaps, in the financial sector, where out-of-whack CEO pay can actually threaten the whole system, if it incentivizes executives to take short-term risks that lead their banks to collapse). The problem can be taken care of via: more progressive taxation, with tax brackets that distinguish between the upper-middle class, millionaires, multimillionaires and billionaires; more disclosure, which will hopefully convince investors that their money is being misspent; and stronger unions, which can help workers bargain for a better wage.

But Switzerland at least brought the problem out into the open and took seriously the question of whether or not sky-high CEO pay is good for the country, and it did so at a time when its issue pales in comparison to the one faced by the United States. It'd be nice if the merits or problems of ever-increasing CEO pay received such serious consideration on this side of the Atlantic. Instead, those who attempt to rein in some of the worst pay excesses here just get called communists.

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