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12:1 salary cap fails in Switzerland and that's good news


(MoneyWatch) A Swiss referendum to cap executive pay at 12 times the lowest paid employee's salary has failed, rather dramatically, with 65 percent of the population voting against it. Hopefully this will be a signal to the rest of the world that this is a bad idea.

Sure, it sounds fair that no one should earn more in a month than someone else in the company earns in a year -- the idea being that with such a restriction the wealth would be spread around a bit more. John D. Sutter at CNN called for the U.S. to examine the idea of limiting the wage gap between the highest and lowest paid. He is in favor of "tethering top executive pay to SOME sort of concrete metric," which, he argues "might stop American execs from floating further into the stratosphere."

It's true that CEOs of top companies make huge salaries in comparison to their lowest level employees, but capping wages is not the way to solve that problem. That's just a way to cause companies to do legal wrangling in order to continue to attract top talent in the corner office. And the logic of tethering CEO pay to the lowest employee salary means that a CEO who manages a multi-billion dollar retail company must be paid considerably lower than the CEO of a law firm which hires only Ivy League grads at $160,000 per year. (They would, of course, outsource the administrative services -- let some other CEO's pay be tied to the secretarial pool, HR and the people in accounts receivable.) 

And outsourcing is, of course, what would happen should the U.S. implement a law such as this. No longer are the people in a manufacturing plant employees of the company with the highly paid CEO -- they would work for a much smaller firm headed up by someone who would have only held a director level job in the big company. Retail? Fast food workers? It's mostly done by franchise owners, but the central corporations would have no reason to keep possession of the outlets they actually own. Better to sell than to be subjected to ridiculously low salary caps for their top teams. Let the franchise owners sort that out. And, if the requirements are strict enough, you'd see no full time jobs at lower salaries. We've already seen some companies cutting hours to keep employees from being subject to Obamacare. You can bet that companies would do the same to stop a salary cap from being activated.

The Swiss people rightly chose to reject this scheme to force people to be paid something other than what the free market determines. Switzerland is a small country, with two of its largest cities (Basel and Geneva) sitting on the border of other countries. The CEO of pharmaceutical giant Novartis could just pack up his desk and move across the street to France, in order to avoid such a restriction, had this law passed. How does this make anyone better off? Well, it would make the French taxpayers better off as they received an employee with a top salary, but it wouldn't help the Swiss worker at all.

The U.S. should look to Switzerland and realize that capping salaries doesn't actually help others get ahead. It may just force lower level employees out of jobs altogether, or cause massive dividing of companies in order to meet the legal requirements while still paying top people top dollar.
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