IT is important not to confuse this weekend’s Swiss referendum vote for much greater shareholder power over boardroom pay with last week’s move by the EU to impose caps on bankers’ bonuses.
The first rule change will, with one unfortunate exception, improve and enhance shareholder democracy, and give the owners of publically listed firms similar powers to those of private firms, where owners typically sign off all of the big decisions, including bosses’ pay.
The second is an entirely disastrous attempt at trying to buck the market, with politicians trying to loosen the relationship between performance and reward, and with officials, rather than shareholders or their agents, deciding that no employee will be allowed a bonus of more than 200 per cent of base pay, with all sorts of unintended (on in the case of those in the EU who hate the City, intended) consequences in a global economy. The rule may exceed Brussels’ powers; Article 153, section 5 of the Lisbon Treaty states that the EU’s ability to modify social policy “shall not apply to pay”. We shall see.
Most of the Swiss rules are fine, including binding shareholder votes on corporate pay, annual director re-elections and the like. Of course, some of these will need to be implemented carefully– but since when do employees – for that is what directors are – think that is wrong for their bosses – shareholders – to be able to tell them what to do, or limit their contract? With one exception, the Swiss rules are pro-capitalist and pro-shareholder – with no exception, EU bank cap rules are anti-market.
There is one clause of the Swiss rule which will create problems, however, and that is the ban on golden hellos and goodbyes. Massive payouts for failure are a disaster, whenever they happen, and tend to discredit the market economy. They should not happen. But it makes sense to ensure bosses are always incentivised to do the right thing for shareholders. If CEOs of listed firms believe that a takeover bid for their company makes sense for their shareholders – perhaps because the premium is so big that there is no way the same value could be created by retaining the firm’s independence – then it is important that they are incentivised to say so. There is a role for golden goodbyes in this case: a payout to compensate the CEO for selling the firm and thus losing his or her job. Without one, the CEO may have an incentive to resist at all cost, which would not be in shareholders’ interests.
As to golden hellos, they can be useful to buy out a star CEO at another firm tied in by long-term performance incentives. So these clauses – and especially the second – are silly and will damage Swiss firms’ ability to compete, at least at the margins. A firm trying to poach a CEO will now have to offer substantially larger base pay to entice them; nothing will really have changed, apart from making it more costly to fire the new recruit if they turn out to be useless.
In general, large firm CEOs should be paid handsomely, as determined by supply and demand – but in return they should be willing to accept “employment at will” contracts, with shareholders having the right to dismiss them at any time without a payout. Such arrangements are not the norm today – and a strict application would actually probably be illegal under unfair dismissal rules. As with the case of the CEO whose firm is being taken over, this general principle would need to be tailored carefully to ensure perverse incentives didn’t creep in. But with high rewards should come high risks, not a corporatist easy life that culminates in a massive, guaranteed exit package.
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