This weekend Switzerland voted to … do something about executive pay? Maybe? I was a little frustrated reading the news reports because they didn’t really say what the Swiss actually did, so I went and found the actual resolution, and turns out it doesn’t either. Something something vote on executive pay:1
The shareholder meeting will vote each year the total amount of remuneration (money and value of benefits in kind) of the board of directors, of management, and of the the advisory committee. Each year it will elect the chairman of the board of directors and, one by one, members of the board of directors and the Compensation Committee as well as the independent representative. Pension funds will vote in the interest of beneficiaries and will communicate how they have voted. Shareholders may vote by absentee ballot electronically, but they can not be represented by a an affiliate of the company or a depositary;
So immediate fun simple questions like
- are you voting on last year’s pay, or next year’s pay?
- what happens if you vote no? do they get nothing? do you do another vote in a month? and
- since you apparently just vote on total amount of comp, can management/the board divvy it up however they feel like it?
remain totally unanswered. All the news coverage says “companies are unlikely to leave Switzerland over this,” and, fine, but that depends on what it means. If I worked for twelve months for a company and at the end of it my comp for the year was put to a shareholder vote with the options of approving it or giving me a zero, I would sure leave. Especially since “any violation … will be punished by imprisonment of up to three years and a fine of up to six years of annual compensation.”
But of course it won’t mean that, as it’s off to legislators to rulemake and polish and edit and generally make sense of. And eventually there will be rules that let shareholders vote on pay while not, presumably, making working for a Swiss company just a wild gamble. Those rules should be in place by 2014, or 2015, or never, or something.
This is being described as compensation reform and to some extent it is; the proposal actually outright bans golden parachutes. But mostly it’s a shareholder-rights reform, in the sense in which that term is used in the U.S., to mean “making it easier for shareholders to do what they already had the right to do with strenuous and annoying effort.” Shareholders always have the technical ability to “vote on pay”: run a proxy fight, replace directors with more pay-restrictive directors, amend the charter, etc. etc. The fact that shareholders never really sought to do this, though voters sure did, suggest that restricting pay is not a big priority among shareholders. As does the fact that “Nearly half of the biggest Swiss companies already allow for non-binding votes on pay, and none has yet a majority of shareholders vote against executive pay levels.”
Here in America you can read – though not vote on! – an even sillier idea:
[W]hy not, for example, put a ceiling on salaries and let clients reward good service, just as they do in restaurants? That could allow banker pay to shrink to a more realistic level.
The U.S. restaurant business even provides a model of sorts. The Fair Labor Standards Act lets an employer pay waiters below minimum wage as long as they earn a certain amount a month in tips. If the combined total remains below the minimum wage, the restaurant has to make up the difference.
Regulators could easily adapt that for the banking industry, setting a reasonable amount that bankers should be able to earn in a given year. … But clients would be empowered to pay what they really feel a banker or trader is worth. Long-standing M.&A. and underwriting fee structures could be overhauled, while trading would probably become more efficient more quickly, as all sides would have a greater incentive to switch more deals to electronic platforms.
Part of what makes this a silly idea is that it’s already exactly what happens. M&A and underwriting fee structures work like this:
- Bank pitches business.
- Client says “you’re hired.”
- Bank says “great, you’ll pay us 3%.”
- Client says “yes” or “no” or “how bout 1%” or whatever.
The fee negotiation is a negotiation, based on the usual negotiating dynamics of what the client is willing to pay, what the bank is willing to receive, and what the market dictates. Yes there is an element of tradition to the 7% IPO fee or whatever, but then, there’s an element of tradition to the 20% restaurant tip. Frequently, in fact, there ends up being some “incentive fee” component that is entirely in the discretion of the client: if you do an okay job you get 2.25%, if you do a great job you get 2.50%, and the client alone determines, after the fact, what kind of job you did.2 It’s a tip!3
Trading is a bit different, insofar as banks do a lot of work on a principal basis and so sometimes do sell stuff at huge undisclosed markups. But mostly they don’t. Remember Jesse Litvak, the Jefferies trader who got in trouble for lying to his clients about how much he was paying for some bonds? Part of his problem is that he had explicitly negotiated deals with those clients about how much they would pay him: they thought he was making 4 ticks and thought that was the right level of pay for his services. In fact sometimes they thought he deserved better, for getting them a great deal, and so they volunteered to pay him more.4 That’s how it works a whole lot of the time even in fairly opaque areas (Litvak traded RMBS): the client pretty much pays the bank the amount the client thinks is appropriate.
There is probably a general rule to be derived here? It probably goes something like, “if you pass a law that will explicitly give the power to determine someone’s pay to the people who already more or less have the power to determine that person’s pay, not much will change.” Maybe you don’t feel the need to regulate banking (or other) compensation, in which case I say unto you: yeah, okay, fine.
But if you do feel such a need, it’s probably not just because your heart bleeds for the Novartis shareholders or RMBS-trading hedge funds who are paying the compensation directly. Perhaps it’s because you think that the compensation scheme imposes externalities on the rest of society that are not borne directly by shareholders and customers in a free and voluntary market. In which case: why leave compensation regulation to those shareholders and customers?
Swiss Voters Approve a Plan to Severely Limit Executive Compensation [NYT]
Swiss Voters Approve Limits on ‘Fat Cat’ Executive Pay [Bloomberg]
Swiss Shareholders Get More Say on Pay [WSJ]
Initiative populaire fédérale ‘contre les rémunérations abusives’ / Eidgenössische Volksinitiative ‘gegen die Abzockerei’ [admin.ch]
Tip Bankers Like Waiters [Breakingviews]
2. Ooh M&A also has its success fees, insofar as you tend to get paid (1) a lot if the deal closes and (2) not so much otherwise. This is perhaps problematic incentiveswise but whatever.
3. It’s possible the Breakingviews column wants clients to tip individual bankers, not the bank, which, I can’t even. Come on man.
Though now I want it to happen? I would start a company and get all rich and do a massive IPO, and then my bankers would come to me and stand around awkwardly with their hands out, and I’d be all, “here’s $10 for you, MD, and $100 for you, VP, and I like the cut of this first-year analyst’s jib so I’m tipping her TEN MILLION DOLLARS.” The power dynamics in banking would be horribly, amazingly altered.