In his new book Thinking, Fast and Slow, the Nobel-winning psychologist Daniel Kahneman, demonstrates how when people are confronted with difficult questions, they tend to get around them by answering easier ones. You can’t find a better example than the just-passed Swiss referendum on abusive pay.
The ‘rip-off’ initiative–yes, that’s the official name of the voter proposal–garnered an overwhelming 68 percent support among Swiss voters. Driven by a series of corporate scandals and outsized pay packages, the Swiss approved a requirement for shareholder votes on pay and bans signing bonuses and golden parachutes. The news that pushed the proposal over the top, according to most accounts, was Novartis AG agreeing to pay outgoing chief Daniel Vasella $78 million in a non-compete agreement.
So what did the vote actually accomplish? That’s where the hard question/easy question part comes in.
The complicated question underlying the executive pay debate is “What do 21st century economies do about the startling growth of inequality?” Think about that one for a couple of seconds. Have an answer in mind? No? Well, that’s why it’s a complicated question.
The easier question here: “Do you think a chief executive should be paid $78 million to get lost, or just to show up?” That’s the one that Swiss voters answered. The outcry over Vasella’s exit package had already killed the Novartis deal. The voter initiative codifies the public’s anger at this deal and kills similar ones in the future.
Does this do anything to deal with the complicated question? Not really. What the Swiss vote amounts to is a shareholder protection measure. Except that it’s a shareholder protection measure that (as Dealbreaker’s Matt Levine has also pointed out) most shareholders weren’t asking for. Overall it might mean that top executives get fewer outsized payouts. It could also mean that mediocre and entrenched executives stay on longer. There are sometimes good reasons to pay signing bonuses, though probably fewer good reasons for golden parachutes.
In the debate over the Minder initiative, Swiss Justice minister Simonetta Sommaruga said that giant pay packages do “enormous damage to social cohesion in our country.” That the growth of inequality damages social cohesion is almost inarguable: the greater the differences in income, the greater the gap in outlook.
The real gap in income to worry about, though, isn’t between ultra-rich chief executives and the merely rich tier below them. It’s between the wealthy and everybody else. To be clear: that doesn’t mean that a sweetheart $78 million golden parachute payment is defensible. It means that getting rid of such payments for corporate officers doesn’t address the social cohesion problem.
Like many other efforts to rein in bonuses and executive pay, the Swiss initiative, if it succeeds at all, will succeed in shifting some money from executives to shareholders. There’s just no reason to think that this will shift any more money into the hands of those shouldering the biggest burders of inequality — ordinary workers.
An earlier version of this post appeared in the Market Now daily email. Click here to register and subscribe.