"Fat Cat" Laws Approved In Europe To Curb Excessive Corporate Pay


Nearly 70 percent of Swiss voters approved a "fat cat" referendum that would prohibit "golden handshake" bonuses to departing corporate bosses while the European Union approved legislation limiting bankers executive bonuses to a maximum of one year's salary, or twice that amount if a majority of shareholders approve.

"The people have decided to send a strong signal to boards, the federal council and the parliament," Thomas Minder, who kickstarted the Swiss "fat cat" referendum in 2006, told Radio Télévision Suisse. Minder is CEO of Trybol, a herbal products company, and a Swiss senator. His initiative passed overwhelmingly despite opposition from the main Swiss political parties and parliament who argued that the executive pay cap could drive big business out of the country.

These new laws come as a public outcry mounts around the world against bloated executive compensation packages, taxpayer-funded bank bailouts and Wall Street style profiteering. (See "Do Not Pay Dozen: 12 CEOs Who Met Shareholder Spring Revolts")

Last month, lawmakers and investors were enraged when Novartis, the Swiss pharmaceutical giant, offered Daniel Vasella, its outgoing chairman, $1.1 million every month for six years (a total of $78 million) in order to keep the former CEO from going to work for the company's competitors. Novartis quickly rescinded the offer.

But it was too late. Vasella had unwittingly become a symbol of greed and excess in Switzerland fueling growing national support for legislation to curb corporate voraciousness. In 2012 - a year in which the company laid off nearly 2,000 workers - Vasella took home nearly $14 million, according to the company's annual report.

Christian Democratic People's Party President Christophe Darbellay told SonntagsZeitung newspaper that the offer was "beyond evil."

Vasella was hardly alone. Five of Europe's 20 highest-paid CEOs work for Swiss companies - according to data compiled by Bloomberg News - including ABB, an industrial group, Credit Suisse bank, Nestlé, the food giant, Novartis and Roche, both pharmaceutical companies.

This past Sunday the Minder initiative was approved by 68 percent of Swiss voters. It outlaws executive compensation packages that encourage company takeovers and sell-offs. It would also make it mandatory for shareholders, including pension funds, to make decisions on executive pay that companies would be bound to honor.

All publicly traded Swiss companies listed in the Swiss or foreign stock exchanges will be required to follow the law. Violators could be punished with up to three years of prison time and fines totaling six years worth of salary.

The Swiss referendum came on the heels of a February 27 vote by the Economic and Financial Affairs Council of the European Union that approved legislation to limit bank executive bonuses to a maximum of one year's salary, or twice that amount if a majority of shareholders approve. It will apply to bankers working in all 27 EU states (including those owned by foreign companies) and those working abroad for EU-based banks and their subsidiaries.

The rule is part of the Basel III financial reform package that requires banks to set aside more funds in reserve in order to make them more stable and guard against expensive taxpayer bailouts in the future.

"If we had had rules (on financial reserves) like this six years ago, the Lehman case wouldn't have happened, or at least not with such devastating consequences," said Michel Barnier, the EU commissioner who oversees financial regulation, referring to the collapse of the New York investment bank in 2008 that was widely seen as the precipitating event in the global financial meltdown that year.

While the financial reserves rules could make the banks less likely to fail, the rules on bankers pay are unlikely to be effective.

First it should be noted that most bank executives, whose bonuses are typically 30 percent of their salaries, are unlikely to be impacted by the EU pay cap. It is true that senior management and investment bankers can make as much as ten times their annual salary in bonuses. Analysts have estimated that some 5,000 bank executives in London, Europe's financial capital, could be affected by the regulation.

Just this morning Barclay bank, one of the "big four" in the UK, released its annual report showing that five staff were paid more than £5 million ($7.5 million) in 2012 and 428 staff made over than £1 million or $1.5 million. (It should be noted that half its 140,000 staff earned less than £25,000  or $37,500)

Second, banks are already looking for ways to circumvent the new rules which will take effect in January 2014, say UK observers. George Osborne, the UK finance minister and a member of the Conservative party, argued that the pay restriction would have a "perverse" effect.

"It will push salaries up, it will make it more difficult to claw back bankers' bonuses when things go wrong, it will make it more difficult to ensure that the banks and the bankers pay when there are mistakes, rather than the taxpayer," he said. (Osborne stood alone in opposing the legislation against the other 26 EU states)

His opinion was echoed by more politically liberal commentators. "(T)he bonus cap is the point where good intentions lose touch with experience," writes Nils Pratley, the Guardian's financial editor. "Did the parliamentarians not notice how Goldman Sachs UK, for example, wanted to defer its bonus payments this year to April to dodge the 50p rate of income tax? That's how banks behave: they will exploit any change in the rules."

EU commissioner Barnier, however, has been emboldened by the vote. He told Reuters that he was currently drafting legislation that would give European shareholders a mandatory say on compensation. "I am in favor of making shareholders more responsible on pay," Barnier said.

But empowering shareholders may not be enough to rein in corporate pay, if U.S. precedent is anything to go by. In 2010, the U.S. passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, otherwise known as the "Say on Pay" Act, which required public companies to allow shareholders to vote on executive pay at least once every six years. Such votes are advisory only and non-binding, meaning that corporations can do whatever they please, although they tend to obey investor votes.

Unfortunately in the years since Dodd-Frank passed, investors have overwhelmingly agreed to approve executive pay packages, according to a recent report conducted by financial consulting group, Semler Brossy: Out of 2,215 companies surveyed in 2012, only 2.6 percent of those reported that shareholders had voted against proposed executive compensation packages.

Indeed, median pay of the 200 highest paid CEOs in the U.S. in 2011 was $14.5 million, according to a study by Equilar, a compensation data firm, with an average pay raise of 5 percent.

"You call this a revolution?," wrote Nathaniel Popper in the New York Times. "Yes, some corporate boards seem to be listening to shareholders. But rewards at the top are still rich - and getting richer."

AMP Section Name:Financial Services, Insurance and Banking
  • 201 Executive Compensation
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