Monday, January 4, 2010

New salary politics

On page 28 of its January 3, 2010 issue, the Neue Zürcher Zeitung (compare to the Wall Street Journal) has an interesting article on salary politics written by Gabriela Weiss. Here in the USA, the typical salary policy of corporations is to peg the total salaries to about 10% of the corporation's revenue, and to distribute this sum exponentially among the employees in order of responsibility.

For executives, the salaries have 2 components, called fixum (the fixed base salary) and the bonus/malus, where the malus is simply a negative bonus (the performance premium). The malus, where the employee reimburses the corporation for a poor performance, is a relatively new concept that is becoming more common since the 2008 financial crisis.

Weiss reports that the Berner Kantonalbank (BEKB), a public bank listed on the stock exchange, switched from the traditional bonus system to the new bonus/malus system in 2002, with the bonus capped to 100% of the fixum. The malus instead is capped to 50% of the fixum.

In 2006 the BEKB further eliminated the golden parachutes and capped the highest salary to 20 times the lowest salary. To translate this to California, if a corporation has employees paid at the minimum wage (in 2010 $8.00 per hour, or $8*8*300 = $19,200 per annum), the highest paid executive would get at most $384,000, independent of the corporation's revenue.

Now that in Switzerland the crisis is officially over, Weiss asks the question of how BEKB performed compared to the rest of the industry.

She found that BEKB's stock price increased by 90% since 2002, while the Swiss Performance Index increased by 30% over the same period. Moreover, during the crisis year 2008, the BEKB stock increased by a hefty 12%. Hence, BEKB had good executives who performed very well.

The article discusses also a different salary policy proposed by Ethos, a corporate governance think tank. Ethos addresses the concern that if a corporation does not pay well, its executives will jump ship. Ethos proposes to set the fixum to the median of the 15 largest international companies in the same business line.

As an example, Ethos discusses the salary of Novartis CEO Daniel Vasella, who currently makes $40 millions per annum. The median CEO salary of the 15 largest pharmaceutical corporations worldwide is $2 millions, which would peg Vasella's salary at $4 million including the variable bonus of up to $2 millions.

According to Ethos, the reason for capping the bonus to 100% of the fixum is that when the bonus is higher, the executives tend to follow their personal private interests instead of aiming for the long-term benefit of the corporation.

[link to the article]