Business 4 March 2013 Swiss aim to tackle high pay through shareholder democracy You scratch my back, I'll ask the shareholder remuneration committee to vote to scratch yours. Print HTML Switzerland has followed the EU and implemented laws designed to curb high pay. But whereas the EU implemented a hard cap which only affected bonuses in the banking industry, the Swiss plan is both more wide-ranging and less heavy-handed in how it operates. The key change is a requirement that companies give shareholders a binding vote on executive pay. Currently, pay is set by companies' boards, but now that the Swiss people have spoken, in a referendum which achieved a 68 per cent "yes" vote, one of the highest in the country's history, that is going to change. The move will fight the so-called principal-agent problem, which is common throughout business and politics. In theory, shareholders entrust the board to make the right decisions on executive pay; if higher pay will lead to more value for the shareholders, perhaps by encouraging the best candidates, then the board should support it, but in most situations, the board should endeavour to keep costs down. Unfortunately, while the board members are entrusted by the shareholders to act in their interests, board members also have their own interests — which may conflict. In this situation, the classic conflict is that a board member for one company may well be an executive for another, and vice versa. They end up in the situation where they are making decisions about the pay of people who make decisions about their pay, and it's not hard to see how that could result in pay going through the roof. But handing control over to shareholders doesn't remove all principal agent problems. It all depends how institutional shareholders decide to act — and there's reason to believe they may not be much better. If you invest in a pension fund, you technically own several companies. But the right to vote on how those companies are run — and now, in Switzerland, on how much those companies' executives are paid — is held by the pension fund. Such funds tend to be uncomfortable about exercising too much shareholder democracy. Partly, this is because they fall prey to the same problem that boards do: the executives who decide how to vote have their pay set by other executives voting on remuneration committees, and the whole backscratching saga continues only slightly abated. But it is also a matter of privilege and viewpoints. Even if there is no chance of reciprocity, a highly paid financial executive is likely to have very different views on the appropriate level of pay for other highly paid financial executives compared to you or I. For shareholder democracy to really deal with high pay in the boardroom, it would need either a massive resurgence in private investors (not the best idea, since that would likely also result in a huge upswing in private investors losing all their money in the stock market) or institutional investors devolving much more say to their members. The other requirements set by the Swiss referendum are likely to have more direct effects. In requiring annual re-elections for directors, they remove much of the inertia that can keep people in these extremely well-remunerated, largely ceremonial positions for years beyond their time. And in explicitly banning "golden hellos" and "goodbyes", the practice of awarding a large lump sum upon joining or leaving a company, they create a much more stable and manageable system of pay for the shareholders to oversee. But fundamentally, tackling high pay — and by extension, inequality — requires tackling the fact that the rich choose how much to pay the rich. The best proposal to do that is something similar to the suggestion that employees ought to have a place on the company's remuneration committee. After all, they have just as much interest in the company being run well, because their jobs depend on it. But they also bring a viewpoint which is sorely lacking in these discussions, whether they are being held in Switzerland or Britain. › Is Chris Grayling running scared of Margaret Hodge? The city of Montreux, Switzerland. Photograph: Getty Images Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter. Subscribe More Related articles What's to be done about racial inequality? Ignore the spin - social housing is still under threat from the Conservatives Who benefits, and who loses out, from David Cameron’s housing plan?