Swiss salary cap fails at ballot box | Hacker News Reader

Swiss salary cap fails at ballot box

swissinfo.ch

47 pointsalternize87 comments

Ben & Jerry's used to have a company policy that limited the pay of top employees to 5x an entry level employee. Of course it was dumb-foundingly stupid and they ultimately had to drop it when they were unable to find a CEO capable of managing a $75 million dollar company for $88,000 a year. The company suffered from mind-boggling mismanagement as some positions remained unfilled for years and were then often filled with grossly incompetent hires who were willing to work for such pay.

We no longer live in a manufacturing economy. In service industries the value of an employee is almost entirely reflective of their responsibility and/or the amount of money they bring to a company. Most of you work in software... how much more valuable is a GREAT engineer vs a mediocre engineer... or an awful engineer?

This is childish sophomoric ideological baloney based on jealousy, not on need. How many Swiss do you know that are dying of starvation or lack of health care? The world bank says the average income in sub Saharan Africa is a little over $1,300 a year. Maybe we should tie all out incomes to a maximum of 12x THAT number. Would that make the world more fair? Would that actually help anyone in Africa? Would it help economic development or encourage more people to start businesses?

It is hard to see this stupid legislation as anything more that rich people in rich countries bitching that someone's Bentley is bigger than their Mercedes.

how about we let the citizenry do whatever we want and force the politicians to take a net salary that is 12x the sub-saharan africa value?

That would have my vote

Because then politicians would be considerably more likely to accept bribes, and only the uber rich, upper class, indenpendently wealthy people would be able to be politicians.

The UK used to not pay MPs. In the 19th century there were working class movements for politicians to be paid ( http://en.wikipedia.org/wiki/Chartists ), so that working class people would be able to stand in parliament.,

Because then politicians would be considerably more likely to accept bribes, and only the uber rich, upper class, indenpendently wealthy people would be able to be politicians.

But that happens anyway. Look at the "socialist" president of France. Four houses (three holiday homes on the riviera), millions of euro personal wealth...

I'm going to go out on a limb and hazard a guess that this is a simplification of a more complex story about Ben and Jerry's in order to make a point about trying to constrain executive compensation.

Your correct from that standpoint that all stories are simplifications of more complex realities. That said, Ben & Jerry's is used as a textbook example of the effects of untended consequences when attempting to artificially manipulate cost structures in a market economy. It is even arguable, these consequences directly caused Ben and Jerry to loose control of their own company.

All that aside, I don't have a problem with curtailing executive compensation (for example CostCo does it in a way that maintains their corporate identity while allowing them to compete in their market.)

>> The aim was to reduce the salary gap to a 1:12 ratio – in other words to limit the salaries of top executives based on the annual minimum wage of the lowest paid employee within the same company.

I don't know how the law works in Switzerland, but as a hypothetical top-exec in an American company I can think of a way to screw over the little guy. I would not hire anyone below a certain salary range. I'd have those jobs filled with contractors; technically not employees. Thus defeating this law. And as an added bonus I suddenly don't owe a bunch of people health-care benefits either.

Actually if you have "single client" contractors a lot of labor laws will grandfather those employees as "real" employees, and you'll have a lot of back taxes and they'll end up in your employee register.

It's exactly to avoid this sort of exploitation. A lot of people don't seem to know about labor protections, unfortunately employees are just as misinformed of their rights as business owners are.

Require in the contract that you are not their only client, but lawyer it well. "We only work with contractors with a diverse set of clients as we believe that diversity promotes excellence."

Create buffer companies for those contractors to also work for indirectly for you if necessary. You might still have to pay some taxes, but you won't have the same problem as the Swiss salary cap is trying to prevent if it were implemented.

There will always be ways to exploit systems. You see it as exploitation, but those running the companies see it as necessary to compete.

all those extra layers are going to end up making it more costly in some cases.

Also, parts of contracts can be invalidated. Just because you put something like that in the contract doesn't mean you're not violating labor laws.

Some jobs make more sense to be outsourced, in which case contractors will usually already exist and offer "reasonable" prices that will be cheaper than having a full-time employee around.

Other times it doesn't make sense, but employers will try and convince employees to become contractors, so that a lot of employee taxes end up coming out of the employee's side of things. Of course, the employee thinks that this is necessary to keep their job. The construction and taxi industries are very bad at this. It's exploitation, plain and simple.

I agree that min/maxing is easily exploitation, but it's also what those companies see as necessary to compete, and it is what high relative fitness companies do to not fail. One company gets a competitive advantage from doing perfectly legal activities which can allow them to edge out their competition from the market. See: Walmart.

Require in the contract that you are not their only client, but lawyer it well. "We only work with contractors with a diverse set of clients as we believe that diversity promotes excellence."

In some countries (I think UK is like this), they will actually look at the amount of work a "contracter" does for a client. Do too much (i.e. only work for them) and they (the taxman) treat you as an employee. Doesn't matter what you put in the contract.

It's not nearly that simple.

The typical workaround is for their contract to "end" after nine months.

but you could also hire a firm to do the same work. Few companies have on staff janitors any more. Instead they hire out to a general purpose janitorial firm. There are plenty of structures that incentivised people could find that would not violate or skirt any labour protection laws in a max salary scenario. How about creating a separate strategic consulting firm that hires the executives? Then contacting with that firm for the work the executives are expected to perform.

Contractor has a particular definition in the US. Having low-level employees who have the legal right to set their own hours and pick which tasks to accept doesn't sound fun for a corporation.

Fairly irrelevant if the company says "do the hours and tasks we want you to do or you get none at all".

That won't fly in many European countries. If the worker can prove s/he had fixed hours, a manager, etc, s/he's entitled to the same rights as a salaried worker.

Sure, but in such cases that will generally come down to employer vs. government regarding taxes etc. (and sometimes about employee rights too), it won't lead to a contractor working the hours/tasks they want to do because then they'd just lose the work immediately.

At least in the United States, contractors at all of the companies (ranging from 50, 500, to 5000 employees) I've worked at have had the least ability to set their own hours and no ability to pick the tasks they work on. They work for third party contracting agencies, get no stock, and aren't invited to the all-hands or the company parties. On the flip side, if they work a 60 hour work week, they get paid for 60 hours. And, in mature companies, they seem to get paid a higher hourly salary than employees - but, they get few, if any, benefits like medical/vision/dental.

Hm. I was an independent contractor for years. I got to pick every project I was on. Well, 'bid for' is a better term. I accepted only those that I was interested in, AND paid well.

Once the project starts I was almost completely independent. That's the nature of a contractor vs an employee - no day-to-day supervision, just milestones to accomplish.

So I'm not sure I know what kind of contractor you're talking about.

It sounds like you were in more of a consultant role, where the company had a particular task, and paid you handsomely to do it. A lot of companies nowadays will hire you as an employee (come into the office every day, give you projects to do, report to a boss, ect.) but for tax purposes, will pay you as an independent contractor, as to not give you benefits or sick/personal leave.

You and the parent are talking about two different types of "contractor".

You are talking about an individual working as a proper independent contractor. You pick your clients, negotiate rates and other details, provide your own insurance, pay your own employment taxes, your clients send you 1099s every year.

ghshephard is talking about workers who are typically W-2 employees of a contracting agency. The agency contracts with the "employer" to provide the workers. The "employer" pays the agency who in turn pays the workers, pays various employment taxes, sometimes provide health insurance and other basic benefits.

There is a third type, which selectodude in a sibling comment to this one posted about. Those are individuals working directly for a company which is abusing the term/status "independent contractor". This is not terribly rare, but it is illegal, and can get the employer in trouble with the IRS and state DOL if reported, especially if the workers haven't been paying the taxes themselves.

This would be very hard to achieve in Switzerland. For one, Swiss law places a big emphasis on acting in good faith. If an employer were to hire permanent employees as "contractors", courts would be likely to reject that argument.

Secondly, social security is structured a bit differently from the U.S. version: Contributions are taken out of employee's salaries (and matched by the employer). Contractors would be required to act as commercial entities and contribute themselves. This would require a fair bit of paperwork -- not something you'd expect a low-wage employee to complete. And if they'd fail to complete and submit the paperwork, social security would take action against said contractors or -- more likely, imo -- against the original employer.

Thirdly, self-employed persons face some extra paperwork for their tax declarations. A big shift from employees to self-employed people would be noticable (and, going back to point 1, likely to be rejected by the courts).

By the way: the proposal included language specifically prohibiting outsourcing the leadership of a company to another company.

> Secondly, social security is structured a bit differently from the U.S. version: Contributions are taken out of employee's salaries (and matched by the employer). Contractors would be required to act as commercial entities and contribute themselves.

Actually, that's exactly how social security is taxed in the U.S. People call that matching tax "self-employment tax." :-)

> hire permanent employees as "contractors"

The company doesn't hire them directly. They hire a third party and that third party hires the contractors (or employees for that matter).

I'm curious why some workarounds become widespread, but others don't.

For example, why don't US companies find ways to compensate all employees through some sort of interest or dividend instead of salary/wages, for the radically lower taxation?

For most employees that would be worse. Dividends are taxed (15-20%) by the recipient after at the corporate level (35%). Also the small problem of what happens when the company doesn't make money.

> What happens when the company doesn't make money

I'm not talking about company stock, I'm talking about stock in a sort of artificial vehicle used to compensate employees.

I see your point, though, salaries/wages are tax deductible, so it's hard for companies to use other things besides salaries/wages. But...

> If you transfer property (including your company's stock) to an employee as payment for services, you can generally deduct it as wages.

http://www.irs.gov/publications/p535/ch02.html

But then if it's a transfer of property, you can't turn it into a long term capital gain, unless maybe you rented it to them? Hmm... probably wouldn't work.

Turns out tax law is complex and not quite as easy to game as I thought.

For starters, interest is taxed at ordinary income rates...

As for the other suggestion...it has already been around for decades. Look up ESOPs ("employee stock ownership plans," frequently aka "profit-sharing plans").

the 'contractor' role would be of ambiguity illegality.

however, outsourcing the job(s) to an external, possibly offshore or cross-border firm that specializes in low-wage workers with a puppet CEO who's actually a supervisor would do the trick nicely.

then, of course, the 'janitorial' firm would be owned or otherwise controlled by a parent company where the execs make much more money, since they are either

a) not bound by compensation rules or b) don't hire anyone under a certain salary

It's fairly ignorant to think it's impossible for one employee to be worth more than 12 of another. For example, I imagine Drummond (Google's CLO) provides far more than 12x the value of a new hire.

I also imagine him to be more than 12x as valuable than a janitor (and, if this is Google, a masseuse.)

From the stark monetary perspective, in many large partnership-based corporations (not Google) - it is all about the client money you are directly responsible for bringing in to the firm. Especially in Law. Partners in law/accounting/consulting firms are invited to partnership based on the client business they bring in. And then they have to "buy in".

The ratios vary. I recall one Andersen (now Accenture) partner telling me that he brought in about $10M of business. For a Big-4 (or is it Big-3?) accounting firm, the revenue per partner was $2.66 million. [1]

Law firms are notorious for PPP. [2]

[1] "Total firm revenue was $22 billion and global partnership was 8,280 partners giving a revenue per partner ratio of $2.66 million."

[2] http://en.wikipedia.org/wiki/List_of_law_firms_by_profits_pe...

You're making a couple of assumptions:

1) The value of employees can be measured individually. Say you've got 100 assembly line workers. What's the value of losing an assembly line worker? Almost nothing. What's the value of losing all the assembly line workers, divided by 100? Pretty big number! In the U.S. we tend to define "value generated by an employee" in terms of "marginal cost of replacing the worker" but that's arbitrary.

2) That renumeration should be tied to value generated by the individual employee.

2) You're saying remove the supply of part of the equation? By this logic my iphone should cost $100,000 because it generated that much value for me. Or I should've paid my accountant closer to 50k instead of the 1k I paid him because that's how much the penalties would've been.

I'm saying that its an arbitrary choice for a society to allow companies to base compensation on supply and demand. As soon as you institute law to keep laborers from occupying factories and taking them over, everything subsequent is arbitrary and can be chosen to achieve whatever social goals you want. Supply and demand is not some law of nature. Its a phenomenon that emerges in particular legal regimes.

Supply and demand is a economic model that exists in ALL economies that have finite resources and free exchange. The only ways to overcome supply and demand in the long run (as even the law of gravity can be overcome in the short run), is to either limit free exchange by force or have access to unlimited resources.

Assembly line workers aren't only replaceable with other identical workers though. As the marginal cost of a worker increases, so do the attractiveness of alternatives like automation. If that bill passed, it would have been very bad for the Swiss economy, as it would have driven away businesses (and therefore jobs) in droves. You simply couldn't stay in Switzerland and be competitive globally.

And to vote against this measure is even more ignorant since it's repercussions are utterly negative to a society. I can't spot a single positive thing out of this and please greed is NOT good.

In Switzerland the avg net income[1] is about 4.000 EUR (~ 6.000 USD) which is sky-high compared to other European countries. Probably the possibility to become rich some day is what drives most of these voters to say 'no'.

[1] http://en.wikipedia.org/wiki/List_of_countries_in_Europe_by_...

especially since some new hires are worth negative amounts. If salary has anything to do with one's worth to the firm (as modern intellectual socialists often argue) then perhaps some people should pay to have the privilege of employment and training.

The more interesting referendum that is still pending in Switzerland is the guaranteed monthly income referendum. There is another pending referendum, as yet unscheduled for vote, about paying every Swiss citizen a guaranteed monthly income of 2500 CHF (~$2755).

The guaranteed monthly income has long been a proposal for getting rid of a whole host of complicated welfare schemes, which sometimes have perverse incentives that prevent you from getting back to work as they go away if start earning money. The idea is simple; just give everyone a certain basic amount of money, no matter how poor or wealthy.

It would be quite a bold move if Switzerland actually implemented it. I have my reservations, but traditional need-based welfare has so many problems, it would be interesting to see if such a dramatic change would actually work.

Agree that it is the more interesting referendum.

Tyler Cowen wrote about these sorts of proposals a week ago and I really think he hits the nail on the head. Like many, I'm attracted on an intellectual level to the idea of replacing the thicket of social services and redistribution programs with a single basic income. The problem is I simply can't imagine a world where a real-world government could commit credibly to that sort of policy long term. There's just way too much to be gained by saying, "well the GBI is great, but I think this group does need something a _little_ more than everyone else. And then instead of replacing the thicket, it just becomes part of it, and at that point has very little to recommend it as policy.

I also agree it would be interesting to see a country other than mine try it out so we could see the effects play out.

Cowen:

http://marginalrevolution.com/marginalrevolution/2013/11/wha...

I can tell you this will get like 80% no votes. We voted two years ago if we want 6 weeks of vacations instead of 4 resulting in 66% no votes. Swiss people like to work. We are raised with the believe that work is our strongest asset.

I talked to a lot of people about this topic. It's hard even to find one who might consider it even remotely.

This seems orthogonal to how much the Swiss like to work once you consider it as a more efficient replacement for existing benefit systems, rather than adding a new benefit.

I guess electorates are bad at understanding opportunity costs though, so they might vote for a more expensive version of something they don't like, to prevent appearing to support the less expensive version of that thing.

American here, watching from afar. I personally do not mind the socialist overtones of the measure. I think a big problem was that it aimed for an unrealistic ratio (1:12). A ratio that was closer to existing practice might have been more tactically effective. If at first you fail, try, try again (somewhere else)!

What I really like about the 1:12 idea is that a more practicable version of it would put in place an incentive for self-interested and self-serving execs and board members to look after the wellbeing of employees in a more substantial way than the "career advancement" programs and similar palliatives that are currently fashionable. At the moment there are few real incentives in place for companies to look after employees, and this feeds into the ghastly and unseemly wage inequality that we're seeing.

Obviously there would be an ongoing game of closing loopholes, but that's always been the case with things like taxes, so the difficulty of implementing something like this is not a showstopper in my mind. The worries about talented execs leaving in droves seem to me to be speculative; if anything, I wonder whether companies might benefit from the flight of execs who are there primarily for the extremely generous compensation.

Probably should've been more like 1:20 or 1:30.

"in real life", it would have been closer to 1:21 actually due to the bill's proposed salary span calculations:

- calculated based on hourly rate instead of monthly salary

- bottom is defined as the top hourly wage of the bottom 10% wages (1:12 => ~1:14)

- bottom wages: 40hrs/week vs top wages: 60hrs/week (~1:14 => ~1:21)

one pro-bill study therefore calculated only 2500 persons would be affected; their cut salaries would be almost entirely spent on new jobs; only minor insurance/tax losses ; and no company would leave Switzerland - all of which was wishful thinking at best.

"The aim was to reduce the salary gap to a 1:12 ratio – in other words to limit the salaries of top executives based on the annual minimum wage of the lowest paid employee within the same company."

Can't you get around that by having a company owning smaller companies? Kind of like a corporate franchise.

Or using outsource companies for lowest paid positions. Many companies outsource cleaning, security etc anyway.

I'm sure smart people could've come up with hundreds of ways to get around this new law if it would've been accepted. It would've probably turned into a cat-and-mouse game where the lawmakers would have to keep catching up to new loop holes found by corporations. This is most likely the reason this initiative failed. Most of the people I talked to here in Switzerland that voted against it said they like the idea in theory but it would be pointless to commission the government with trying to limit salaries.

Let's say that this passed and became law. With this law in effect, why would I want to work as an executive in Switzerland when I can get much better pay elsewhere?

Because you like living in Switzerland, you love what you do, you make generous compensation and you add value to the company. Quite simple, actually.

But you can do all those things and have as good a quality of life for your family in London or New York or even Paris, for now anyway.

That's fine -- leave the Swiss company for one in London, New York or Paris. There are ten people who are as talented and qualified as you (nothing personal, this is just the way things work when there is a large candidate pool), whose priorities will be compatible with the position at the Swiss company.

If there are ten people who are talented and qualified for the position and willing to work at the low wage, why would the company choose someone for the position where they would have to pay a lot more money?

It doesn't compute. Obviously the company believes the higher paid individual brings more value to the company.

why would the company choose someone for the position where they would have to pay a lot more money

Because the system of executive pay is self-serving and broken. See http://www.economist.com/node/2121856.

can you? in New York? London? Sure.

Right-o. So we're mostly Americans here, at least more so than we are Swiss: let me use American figures.

Assume minimum wage of $7.25/hr, equivalent full-time salary of $14,500/yr. You're the CEO of a firm doing labor-intensive business, with a large number of minimum-wage employees and low-ish profit margins (they tend to go together) so that raising wages would mean swift bankruptcy. Your maximum salary is now $174,000. Which is not a bad rate of pay, but it's not a really really good rate of pay. Heck, I've made that much before (2010, when the market un-crashed and my stock options were actually worth money).

You used to make more, so you own your little chalet, and you've got a nest egg of $4.5 million. You make about $175k/yr off the stock market alone.

You love what you do... but do you love it more than a full-time job skiing in the Swiss Alps and living off savings?

While Switzerland doesn't have a hard minimum wage, the reasonable minimum is around triple your figure or CHF 20 ($21) per hour.

Lidl (a chain of deep-discount stores) recently ran a campaign touting their new minimum of CHF 4'000 per month. Some smaller businesses are a bit below that, but you'd be hard pressed to find a position below CHF 3'500.

At half a million per year, I'm confident I could make ends meet.

I don't think Switzerland has many "labour intensive industries" :P

Rich people do not need money. Money is the way they keep score in the game they play. Running a high level company is not trivial, and those who are willing and able to do the hard work are going to live where they can actually compete. The best performers are not watered down by simplistic idealism.

Because you don't have a choice? A lot of companies relocate to Switzerland because of low corporate taxes (juices earnings per share metrics). For shareholders, driving down executive compensation is just icing on the cake.

> For shareholders, driving down executive compensation is just icing on the cake.

Until your executives jump ship and you can't find qualified replacements.

I'm from switzerland. We voted yes this year on the "restrictions on fat cat salaries" [1]. And this was a try to hop on the train on people's currently antipathy regarding some top executives in our country. But there are like a dozen ways to get around this. Fortunately we voted no (my opinion).

[1] http://www.swissinfo.ch/eng/swiss_news/Voters_accept_restric...

Foreigner living in Switzerland, the fact that it seems to easy to get around was what was bugging me most.

Do you have pointers to arguments pro and cons used during the campaign (in particular why having the execs paid by a different company wouldn't work, and how stock compensation was supposed to work in this scheme)? (in german, english or french)

It's pretty easy to search for these arguments?

"in particular why having the execs paid by a different company wouldn't work" this would work. you could just launch a new company with only the ones earning the top salaries. Some say even a holding would suffice. But it looks like this was covered.

Btw: my favourite poster during the campaign.. always got hungry :D http://www.handelsblatt.com/images/1-12-initiatve-in-der-sch...

Am I the only one who actually agrees with this law? In fact I'd go even lower to a 1:5 or 1:3 salary ratio. This way all employees become independent contractors who can set their own hours, they become emancipated from the corporate ladder, they're forced to develop entrepreneurial experience, network, form micro-companies that can work for multiple companies and develop enhanced specialities, have low level workers become CEOs by virtue of necessity, have less job security leading to increased competition and quality among all levels of workers preventing the big company style slide into mediocrity etc, etc.

Sounds like a much better system to me.

Edit: The analogy I see is like changing from owning your own servers to moving to a cloud/aws-like pay for use model. This sort of change reduces risk and unlocks innovation.

Of course it's a wonderful idea, and it would be even better if it applied to contractors. I don't get the HN mindset of "He totally deserves billions of dollars, he threw together a few photo filters and created Instagram! Those poor kids can rot!"

I don't get the statist idea that it's any of your damn business to decide who does and doesn't "deserve" a particular amount of money. Given that free markets have lead to prosperity for average people on a scale that would've been unimaginable a few short centuries ago, while people living in socialist utopias like Cuba and North Korea continue to live in extreme poverty, those who support redistributionist schemes like this are clearly the ones who want to see poor kids rot.

People don't want to be independent contractors.

It's better if you're one of the very small percentage of people that want to run their own micro-company instead of just do their job. What you listed sounds like a ton of overhead (mental and otherwise) for the vast majority of jobs.

I don't agree. What we have now are people being trained to not think like entrepreneurs and view the system as scary and risky. If everyone becomes entrepreneurs, remove the social ostracization, and I think you'll find that everyone is suited for it.

The mental overhead is different but not increased (obviously it's all up to the execution, and I don't really have proof for my opinion). I can see software, non-software services, and different cultural practices reduce the overhead of current contractor systems. Moreover it's naive to assume that the overhead involved in being a normal employee is any less than that of being a contractor. The office politics that most people have to deal with is asinine, and could benefit from the type of legal clarification that being a contractor would entail.

This kind of law just invites hacks to work around it. It might sound nice on paper but it will never ever work.

I actually agree with the spirit of it, but rather than provide a hard cap, I think it'd make more sense to offer incentives instead.

I don't know exactly what the right incentive would be, but off the top of my head I think you could offer tax breaks to companies that have lower salary deltas, or allow executives to make as much money as they want but incentivise investing that money in local swiss ventures.

I think it should have failed. There are too many ways to get around this law by just outsourcing labor, creating subsidiaries, issuing dividends, etc. I think the better approach is marginal tax rates.

Maybe the inverse (or is it reverse?) is better, the lowest salary can't get below 1/12th of the top salary?

I'm yet to see the day when a proposal that puts the rich at a disadvantage gets passed.

Our fight will continue against fat cat salaries

Yeah, that explains it all.

Precisely. It seems it was more motivated by jealousy than any realistic possibility of changing anything.

Instead of attempting to attack a symptom of the growing gap between super rich and the rest of us, they should be looking at underlying causes. Hint: regulatory capture and central banking.

It's utterly unsubstantiated handwaving to assume that income disparity results from regulatory capture or central banking.

The basic mechanics of capitalist societies result in winner take all systems in which having more money makes it easier to earn money. Divergence is mathematically assured.

I like your hand waiving to dismiss hand waving.

You really can't claim that anything is mathematically assured without providing formal proofs. Care to share them?

It's intuitively obvious. Capital earns returns, generates more capital. If you think of it as a distributed systems problem, it's obvious how it converges.

Right. I don't believe in using intuition to reason about complex social systems.

Jealousy? Yes, that must be it. The ridiculous and exaggerated money worship and pro-capitalist sentiment on this site is perhaps its worst quality. Is there any alternative for awesome technical news without the terrible startup news?

Anyone who actually thinks this is a good idea should read Thomas Sowell's The Quest for Cosmic Justice (http://www.amazon.com/Quest-Cosmic-Justice-Thomas-Sowell/dp/...), and everything else Sowell wrote, and Hayek and von Mises, and Friedman and all the other economists who've long since debunked this kind of idiocy . . .

Reply on news.ycombinator.com