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Swiss head to polls to vote on salary cap for CEOs

Kalyeena Makortoff, special to
Holding a placard with the face of the CEO of Swiss banking giant UBS Sergio Ermotti, members of the youth organization JUSO of the Swiss Social Democrats (SP) take part on November 2, 2013 in the centre of Zurich in a demonstration in favour of their initative '1:12' to limit the amount of money companies pay their managers.
Fabrice Coffrini | AFP

Switzerland's chief executives await with bated breath a vote on Sunday to determine whether their monthly pay packets should be capped in line with the annual wages of their lowest paid members of staff.

The referendum takes place following the "1:12 initiative", led by the youth branch of Switzerland's socialist Social Democratic Party, to pressure companies to limit top earners' salaries to 12 times the salary of their worst paid worker, including bonuses and non-monetary rewards.

"We are trying to make a turn-around after two decades of neo-liberalism here," said David Roth, president of JUSO, the party's youth wing. "And the public discussion is on our side. Even if our opponents argue against us, they aren't saying that we are wrong, but that it's just not the right solution," he told CNBC.

The 1:12 initiative pointed to research showing Switzerland's bottom-to-top salary differential increased from 1:6 to 1:43 between 1984 and 2011. Big Swiss banks like Credit Suisse exceeded the average, with the ratio between lowest paid workers and their CEO Brady Dougan near 1:191. And at UBS, the ratio between top execs and workers was 1:194.

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Nonetheless, business lobbyists feared that national control of salaries could put Switzerland's successful economic model at risk.

"Once you choose the centralized system, there's probably no way back," Rudolf Minsch, CEO of national trade and commerce body Economie Suisse, told CNBC.

If passed, the 1:12 initiative will entrench wage gap regulations into the Swiss constitution. The proposal has already faced parliamentary debate, after a 130,000-signature petition triggered Sunday's referendum.

The latest polls showed opponents of the salary cap are gaining ground. Swiss research institute Gfs.berne, sees 35 percent of the public voting "yes", 54 percent voting "no" and 10 percent undecided.

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Minsch said businesses fear losing a flexible labor market and strengthening the powers of Switzerland's traditionally weak labor unions.

"The most serious effect will be the big enterprises probably decide to shift activity away and out of Switzerland," he said.

It's unlikely big players like UBS and Credit Suisse — who brand themselves under the Swiss flag — would outsource operations, Minsch said, but businesses were weighing up different responses should the bill pass.

(Read more: We're half way through job cuts: UBS CEO)

"The most serious effect will be that big enterprises will probably decide to shift activity away. Fifty percent of (Swiss) shares are held by foreigners, not Swiss enterprises anymore -- therefore, they have to provide values for the shareholders. One measure could be to shift some management, top management, out of Switzerland. This would be quite problematic," he said.

However, Roth said that outsourcing management from Switzerland would require executives to convince shareholders that displacing company headquarters was more economical than cutting their salary.

As for lower paid services, the outsourcing exodus was over, Roth said. "You won't go to Italy to go to your bank, and you can't fill the [Swiss] shopping malls [with workers] in India."

Setting precedent

The 1:12 initiative joined a number of wealth distribution proposals popping up across Switzerland. These followed protests sparked when Novartis CEO Daniel Vasella was awarded a 72 million francs ($79 million) pay-off earlier this year, which was later withdrawn. Subsequently, nearly 68 percent of the Swiss public voted to ban sign-on bonuses and severance packages, and to introduce binding annual shareholder votes on executive pay.

There are also plans to implement a minimum income of 2,500 Swiss francs ($2,761) a month to everyone in Switzerland, workers and unemployed alike —Switzerland currently has no minimum wage.

Outside of Switzerland, some companies have already experimented with salary ratios limiting executive pay. For instance, American company Whole Foods Market began regulating salary with a 1:8 ratio in the 1980s, but now maintains a 1:19 salary gap.

(Read more: $2,800 a month for every Swiss person …even if you're in work)

In the U.K., employee-owned department store John Lewis regulates for a 1:75 salary ratio cap between leading senior executives and its lowest paid employees.

"I'm still loathe to say it's exemplary, but at least the company recognizes there is a limit," said Luke Hildyard, the head of research for the High Pay Centre, a U.K. lobby group. "Average pay ratio between CEOs and average employee is 133:1 in the U.K."

He added that the Swiss plebiscite was part of a larger story, with politicians like Francois Hollande campaigning on inequality, and New York mayor-elect Bill de Blasio narrating a tale of two economically separated cities within New York.

"It's one way rising concerns about the super-rich racing away from everyone else is manifesting in different countries." Hildyard said.

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