The Swiss people are preparing to vote about the option to legally set a relative earning limit of 1:12 in organizations located in Switzerland. Despite the fact that earning inequality is widely considered one of the biggest social challenges of our times, no country has yet taken concrete steps to address this aspect of the problem. 2013 Economics Nobel Prize Winner and Yale professor Robert J. Shiller says: “rising economic inequality is the most important problem that we are facing today.” The Swiss vote will most certainly make international headlines, hopefully igniting a global debate on the topic, particularly if the Swiss vote will be in favor of the new law. With only three weeks to go, current chances are estimated at 50:50.
Over the past 2 decades, executive compensation has exploded in Switzerland and elsewhere. Salaries in other income categories have increased as well, but by far not to the same extent. While in 1984, a Swiss top manager earned on average 6 times more than his lowest paid employee; in 1998 CEO’s located in Switzerland earned 13 times more than their assistants. By 2011, top manager compensation (salaries and bonuses) are on average 43 times higher than the lowest salary in the same company. This means that salaries of top earners have grown 7 times faster than those of lowest earners. In the UK, in the same period, top salaries increased 11 times faster than those of other income groups. The national average in Switzerland is above 1:350, meaning that the comparison across top and low earners on a national level are a lot more dramatic than when comparing these differences within a company. In Germany, the income disparity between the top 1% of earners and the lowest income is 1:500. In the USA it is 1:6000. No, this is not a typo! The top 1% of American top managers earn 6500 times the salary of blue-collar workers. Much of this gap has occurred in the past 30 years. Imagine, it takes a top U.S. manager less than 4.5 seconds to earn the daily salary of somebody at minimal wage. In Switzerland, the dimensions are a bit less dramatic. Still, it takes a CEO on average only 11 minutes to earn the same salary as the daily salary of his lowest-paid colleague. Is that reasonable? Is it even remotely fair? And is it sustainable?
The Swiss soul is sensitive to unfair treatment and exaggeration, favoring understatement and modesty. It is thus not surprising that sufficient signatures were collected to bring a courageous proposal to the Swiss people to vote on: limiting the relative earning of the highest and lowest paid employee in an organization to a factor of 12. If a Swiss commercial employee of a service company earns the average Swiss salary of CHF 5’000 per month, his boss would be able to collect a maximum annual compensation of Fr. 780’000. Less than 1% of Swiss people earn salaries in and above that range. Those who do are mostly in the banking and financial services sector or work for large multinational organizations. Many organizations are well within the 1:12 range, including most of the small and medium-sized businesses which make up more than 90% of all companies. The largest Swiss employer Migros has published its income disparity and reports a factor of 1:12. At BSL, we are at less than 1:3. At its foundation, the Alternative Bank of Switzerland (ABS) started with a factor 1:1. There are a few exceptions, of course, most notoriously former CEO of Novartis, Daniel Vasella, earning approximately 370 times as much as an assistant in Novartis.
What is at stake?
Switzerland is famous for its meticulous, precious and proper professional attitude and its commendable work ethic. We have an inborn sense of fairness and for ensuring that everybody is treated as equal as possible. This has its advantages and disadvantages. On the up side, companies treasure the culture they find among their employees, the dedication, team spirit, serious engagement. Such an in-born culture quickly comes under pressure when fairness and equal treatment are circumvented. Salaries are not openly discussed in Switzerland – it’s a culture thing. The public declaration of top managers’ salaries has resulted in broad outcries and heavy criticism. To the point that earlier this year, we have voted for a law requiring shareholders to approve the compensation packages of top managers. A move that is unheard of internationally. We are now debating a similar question: do we really need to follow the exorbitant international compensation standards to attract world-class managers to lead our corporations? In the U.S., the compensation of the top 1% of earners accounts for 24% of total incomes earned, meaning that these 1% of people earn as much as the bottom 30% of the people combined.
Princeton University revealed in a study in 2010 the existence of a “happiness ceiling”. If an American earns more than $75’000, his personal satisfaction doesn’t increase anymore. While I don’t know where this “happiness ceiling” is in Switzerland, it is unlikely to occur at a level as high as CHF 500’000. And we can argue that high pay is not only counterproductive but also unnecessary. A relative earnings limit is an effective tool to reduce inequality at the workplace and to undermine the severity of hierarchies that exist in organizations. Besides happiness, I believe the aspect of organizational fairness is critical. Let me look at my own situation.
With an income disparity of less than 1:3 at BSL, I often wonder if my contribution to our institution really warrants a total compensation that is a bit more than twice that of my colleagues who work at least as hard as I do. Am I that much more impactful? Are my solutions and ideas twice as good? I know that I’m certainly not twice as effective. Our ladies are absolute administrative miracles who seem to have 6 hands and at least two brains working at once, while smiling at the same time. Not something I could flatter myself with. I am frankly glad I am not earning 12 times more than them – how would I feel as I look into their eyes? How would I be able to maintain our collegial, personal connection across such apparent differences? Is it possible to work as a true, non-hierarchical team, it is possible to truly live a democratic culture? Isn’t a fair relative earning differential an essential ingredient of a healthy, human-scale enterprise? I seriously doubt if an organization is able to maintain our typical Swiss work culture if employees are exposed to differences in salaries of 43 times as we currently have. Who knows where we might be in another 10 years. If the trend continues, we’ll be at a difference of 1:200. Meaning that it takes a manager 2 ½ minutes to earn the daily salary of his assistant. This will put a huge price tag on a manager’s toilet break!
Let’s look at what we consider as “fair”
Interesting, there are indications of what Europeans feel is a fair income disparity. Christian Felber of the Economy of the Common Goods movement in Austria (Gemeinwohl Ökonomie) has polled more than 50’000 citizens across more than 10 countries including Switzerland. His results: the factor between the highest and lowest salary that is considered most fair and provoking least resistance between those who would like to have a low disparity and those who feel that we should not impose a limitation, is an income disparity of 1:10.
The Swiss proposal that we will soon vote on promotes a factor of 1:12, thus more generous than what has been established across Europe as being the fair income disparity factor. Also, looking at pay differences within a company (in Switzerland on average 1:43) the new law is an effective way for dealing with such income disparities.
Another aspect of fairness is the consideration of risk. While executives earn 43 x more than their assistants, these rewards bear no relationship to risk. A UK study shows that bosses of big companies, the so-called risk takers, are 13 times less likely to be sacked than their lowest paid colleagues. And even in case they would lose their jobs and never work again, “they will have invested so much and secured such generous pensions and severance packages that they’ll live in luxury for the rest of their lives”. The true risks are carried by others.
If we look at what European and Swiss citizens believe is fair in terms of income disparity, we understand that the current proposal is an excellent way to address at least one aspect of the raising income inequality in Switzerland.
The other side of the medal
The counter-argument that is most often raised in Switzerland is based on the following fear: what happens to the many hundreds of European and international organizations that have set up their regional or global headquarters in our tax haven? Will they leave or will they stay? What is the risk in terms of tax income losses if such companies might leave?
It is interesting how fairness comes into play here as well. We can question how fair it was in the first place for Switzerland to attract foreign companies away from their previous headquarters locations to settle in Switzerland. We can now verify if we have attracted these companies for purely financial reasons, eg tax savings, or if they have to come Switzerland for the many other factors that make Switzerland a formidable place to locate a European or global headquarters. Beyond an outstanding public transport and educational system, proximity to international airlines hubs, we offer a rare oasis of stability and peace, coupled with an administrative workforce that easily speaks three languages and is culturally fluent. The uniqueness of who we are and what we offer is tough to find elsewhere. Imagine if a company would decide to relocate simply for the fact that its top executives could not be earning their hugely exaggerated salary anymore. Would these be the kinds of employers we would want to have in Switzerland in the first place? How compatible are such approaches to our culture and values? Would we indeed loose out in the tough international competitive landscape? Jeroen van der Veer, the former Chief Executive of Shell, clarifies the point quite explicitly: “If I had been paid 50% more, I would not have done it better. If I had been paid 50% less, I would not have done it worse”.
The missing link between compensation and performance
Borrowing from George Monbiot in the “The Guardian”: “Writer Dan Pink has shown it’s not just that there is currently no visible link between performance and pay; but high pay actually reduces performance. Material rewards incentivize simple mechanistic jobs but they lead to the poorer execution of tasks which require problem-solving and cognitive skills. As studies for the US Federal Reserve show, cash incentives narrow people’s focus and restrict the range of their thinking. By contrast, intrinsic motivators — such as a sense of autonomy, of enhancing your skills and pursuing a higher purpose — tend to improve performance. Even the 0.1% of the top earners concede that money is not what drives them. Bernie Ecclestone says: “I doubt if any successful business person works for money … money is a by-product of success. It’s not the main aim.”
Furthermore, psychologist Daniel Kahneman has shown that performance in the financial sector is random, and the belief of traders and fund managers that they are using skill to beat the market is a cognitive illusion. A link between pay and results is a reward for blind luck. Most importantly, the wider consequences of grotesque inequality bear no relationship to entitlement. Obscene rewards for success are as socially corrosive as obscene rewards for failure. They reduce social mobility, enhance plutocratic power and allow the elite to inflict astonishing levels of damage on the environment. They create resentment and reduce the motivation of other workers, who see the greedy bosses as the personification of the company.”
Exorbitant salaries come with outrageous expectations. Not just for the top managers, but all the way down the career ladder. We are starting to see the impact of burn-outs and we have had our first examples of CEO’s unable to deal with the pressures of their jobs, too lonely to reach out for help. Is this really the world we want to enter and the game we want to become a part of? Is this really adding value to who we are as a country and how we want to live together? Isn’t this uniquely brave initiative an outstanding way to make a dramatic and hugely important step into a direction that promises a future that is sane, healthy and human? We Swiss have sustainability in our DNA, and sustainability means balancing economic, environmental and social concerns. Putting a limit to one important aspect of income inequality, namely the relative salary limit, would be a courageous and important measure not just for Switzerland but also a sign that will enable a global debate on this critically important issue. Let’s find the courage and let’s do what our people tell us is fair and sustainable.
November 7, 2013 at 5:37 pm
Reblogged this on The BSL Blog and commented:
BSL’s Dean opens the debate on the 1:12 initiative in Switzerland. The blog reveals thoughts and questions on the upcoming Swiss vote on limiting income disparity.
November 7, 2013 at 9:55 pm
Yes, it is an interesting view but unfortunately also unsustainable. Unsustainable because the 1:12 initiative wants to address an issue already addressed by the same population a few months ago: the Minder initiative. Ironically, the political parties who did supported the Minder Lexis are now also supporting the 1:12 initiative, or in other words they supported giving the market the tools by legislation to stop the abuses and now they want to take it away! For recall, the Minder initiative approved by almost 70% of the Swiss voters, gave the shareholders the legit control and powers (above a company’s compensation committee) to decide executive pay.
I can easily agree with the argument of extrinsic motivation and poor performance, there is plenty of scientific data to support that. But there is also plenty of data that will show that whenever you penalize achievement, the best you will get is mediocrity. It’s like telling Usain Bolt that he is limited to run 100 m in ’10s because the greater majority of humans can not run it faster than ’20s…
Give a man a fish and he will never learn the true value of work. Teach him how to fish but don’t let him catch big fish…The 1:12 initiative is the biggest political, and educational contradiction I’ve ever seen…
Yes, maybe we got all wrong linking achievement with astronomic salaries. However, any company, any CEO or shareholder intelligent enough to understand the value of hard work, dedication, the long office hours, missed weekends, family parties, friends and so on, will also understand that the real thing is to gain the world without loosing the soul.
And for that, there is no law, initiative or political power to teach us how to do it. We need to have more powerful and incisive education that opens the doors to men and women that will strive to achieve great things learning how to make wise use of its resources, abilities and opportunities without depleting the planet or the economy. We need men and women that are ready to take the bar higher not lower!
What is really at stake here? This initiative tells me that educated people are reservoirs of knowledge but not fountains of wisdom. It tells me more about the inability of some of us to accept differences than it tells me about fairness. And that’s what scares me the most.
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November 8, 2013 at 1:07 pm
1) You state that at BSL you have a ratio of less than 1:3. Presumably you have some staff on approximately the minimum legal wage (e.g. cleaners, catering assistants). I find it hard to believe that a professor would be prepared to work for about 3 times the minimum wage. Please correct me if I am wrong.
2) The idea that top earners are not driven by money is laughable. Any such person who truly believed this would retain a modest multiple of an average salary to live on and donate the rest to charity. How many top earners do you know who do this? Warren Buffett (late in life) is about the only exception I know of. Bill Gates, perhaps, partially qualifies. These two get a lot of publicity regarding their charitable foundations largely because it is so unusual.
I would be interested in your comments on the above. I do agree with most of your argument, however. The Swiss are leading the way, as they so often do.
Robert Andrews Minchinhampton, UK.
November 11, 2013 at 12:16 pm
The principle is fair… the practice depends on many factors, predominantly, of economic nature and, just arising from existing human ego.
A larger concern (to my opinion), is the income disparity between the First and Third Worlds. But again similar human and economic factors appear… Our planet needs a new international vision and order model… and revisiting/deploying new world ideals to living individuals.