Salaries – the great social and moral divide

Joseph Jimenez, Novartis drugmaker’s chief executive, earned SFr15.7 million ($17.1 million) in 2011. Reuters

Since the mid-1990s, the wage gap has been widening in Switzerland. In response to public outrage two popular initiatives have been launched. But the question remains whether it is possible to define fair or excessive salary at all.

The lowest-paid employee at Novartis would have to work 266 years to earn the SFr15.7 million ($17.1 million) the drugmaker’s chief executive Joseph Jimenez received in 2011 alone. This wage differential is the largest measured by the trade union group Travail Suisse in its annual survey.

In third place, with a ratio of one to 229 in 2011, came Novartis chairman Daniel Vasella, who headed the ranking of top earners between 2005 and 2009. Such executive salary levels have brought cries of “indecent” and “excessive” from the general public.  

In 2010, Vasella was, however, dethroned by Credit Suisse head Brady Dougan who bagged an annual salary of SFr90 million that year, 1,812 times more than the lowest paid employees at Switzerland’s second largest bank.

Those remuneration packages were paid in the middle of a financial crisis, which led to a general outcry, followed by a time of contrition and the predicted end of excessive bonuses, those millions paid out to UBS managers who almost led Switzerland into disaster by venturing into United States subprime markets.

Over the past two years, the wage gap has narrowed slightly, according to the trade union Unia, which calculated that in 2011 a top manager earned about 39 times more than an entry-level employee, down from 43 times more a year earlier. This decrease is minor in contrast to the profits of the top 41 publicly traded companies, which plunged 35 per cent to SFr56 billion.

Neo-liberal swing

The Swiss Trade Union Federation calculated that between 1997 and 2008, the number of people earning more than a million per year rose from 510 to 2,824. Should we be outraged by this development?

“There is no economic justification for exorbitant executive salaries,” Jean-Jacques Friboulet, professor for economic ethics at Fribourg University told swissinfo.ch. During the liberal swing of the 1990s, some lines were crossed. The essentially Protestant moral, religious and cultural barriers, which were slowing down capitalist enrichment, were broken down.”

For Friboulet, this evolution showed that the economy cannot regulate itself, and that is why he backs the initiative “against rip-off salaries”, to be voted on by the Swiss electorate in March. If accepted, shareholders will be asked to approve the pay of public companies’ executives and board members.

Bitter failures

“In a semi-direct democracy, people obviously have a right to express their opinion on these social issues,” said Cristina Gaggini, an economist from the Swiss Business Federation, which is against the initiative. “Outside of Europe, nobody understands the debate. In the US, in China or India, people are proud of a good salary because it is symbol of their social advancement.”

Wage gaps are not an issue for Gaggini. “The phenomenon goes back to ancient times. Attempts to regulate differentials ended in bitter historic failures,” Gaggini said.

Trade unionist and sociologist Alessandro Pelizzari does not share her view, but he agrees on one point – remuneration cannot be indecent or excessive, and it is also not really possible to define a fair salary.

“It is all a question of balance of power,” Pelizzari explains. “On the one hand it determines revenue allocation between capital and labour, and on the other hand salary distribution itself.”

Very clearly, the balance of power has tipped in favour of capital over the past twenty years. “At the end of the post-war economic boom, salaries represented about 70 per cent of GDP, compared with 60 per cent today,” said Friboulet. “At that time, top executives started taking over a substantial part of the profits.”

Minder Initiative

The initiative “against rip-off salaries” demands the introduction of a new article in the constitution comprising a number of measures to strengthen shareholder rights. The main goal is to make sure that executives of publicly traded companies are not able to pay themselves excessive remuneration, which does not bear any relationship to financial results.

The initiative gives shareholders the right to elect all the board members at the annual general meeting. They may also decide on the amount of remuneration for the directors, executives and members of the advisory board.

Upfront payments, termination pay and bonuses when companies are bought or sold are forbidden. Proxy voting is also not allowed.

Swiss people will vote March 3 on the issue. If the initiative is rejected, the counterproposal, which was accepted by parliament, will come into force. It is a revision of the law on stock companies and the financial reporting act, incorporating some of the initiative’s proposed measures, but only in a limited form.

Maximal gap

Before the liberal movement of the 1990s, the salary scale reached a maximal ratio of one to 40 within large companies. “The public agreed that the level of responsibility and risk the executives were taking merited those salaries,” Friboulet said.

Golden parachutes, colossal bonuses and all sorts of benefits – sometimes even paid out when the companies are losing money – have alienated public opinion.

These developments incited the youth wing of the centre-left Social Democrats to launch another popular initiative, which will be put to the vote before the end of the year. Named “1:12 – for fair salaries”, it demands that the maximum wage at a company may not be more than twelve times the lowest salary.

“We had to find an amount and compromise, which has a chance of being accepted in a popular vote,” Pelizzari said. He added that it is not possible to determine a “decent” salary bracket. “At Unia, the ratio is one to three, but such a differential is already hard to justify.”

Friboulet estimates that a scale of one to 12 is acceptable in the public sector, but does not fit well in the private industry because “market economics only works if a company can attract executives.”

Gaggini adds: “No state in the world has set such a ceiling. Wages are a source of motivation. If an executive earns a lot of money, he will also pay a lot of taxes. In Switzerland, the redistribution has been guaranteed for a long time.”

(Translated from French by Chantal Britt)