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Vienna, Austria - “Statutory income limits only foster mediocrity and do not make salaries more legitimate”

The Constitutional Court of Austria has found last year’s act on executive salaries to be constitutional. Under this act, companies can only treat the first 500,000 euros of a top manager’s salary as a tax-deductible business expense. The contents of the Chief Justice’s decision is good and correct, but the act itself is wrong-headed.

Essentially, it is true that a society with highly unequal distribution of income and wealth is undesirable. Capitalism is like a giant game of Monopoly, designed so that one player after the other is eliminated by the system, until the last man standing has all the goods. In this pure form, capitalism is clearly completely socially unacceptable.

Control is needed

In this respect, it is necessary and important for the State to intervene in order to avoid “elimination of players” in which parts of the population fall into poverty. According to the Supreme Court judges, industry self-regulation alone is insufficient to put a brake on very high salaries and thus control the widening salary disparity.

Maximum salaries are futile

However, I consider the introduction of maximum salaries to be questionable for a number of reasons.  On one hand, experience shows that the immediate result of such regulation is invariably a search for loopholes.

For example, some time ago, the EU launched efforts to limit the salaries of bank directors. Just a few days later, my managers brought me a dozen proposals showing ways to legally evade the rules. The economy changes and responds much more rapidly than policy, so any legal limits on salaries are futile.

Invitation to mediocrity

On the other hand, this act sends a very clear and negative message: Bring your performance, but only to a certain limit. Any legal restriction of income is an invitation to mediocrity. Those that aim high are surplus to requirements and will be punished for it. This act shows a typical Austrian characteristic – envy.

Why shouldn’t Austrian top managers rank with the top managers from Germany, the UK and the USA? The labor market for executive directors is international. Those that want to earn high salaries will. Executive directors are internationally mobile. This act may push top managers to leave Austria and take a job in another country, where performance is compensated well, and high salaries reward high performance.  With this in mind, the Swiss voted against limiting executive income by a large majority a few years ago.

The elite and the average

The chief judges say that the legislature’s limit of 500,000 euros for the salary tax deduction is considerably above the average total annual earnings of Austria’s top managers, referring inter alia to Conrad Pramboeck’s salary surveys . It is true that this amount is high in comparison to the mean income in Austria – half a million euros is a lot of money.

However, the maximum ratio between an executive’s income and the average salary is completely arbitrary, with no objective limit. Who earns what is not a matter of objective standards, but of market conditions.

What does the market say?

A position is paid fairly if it is within the scope of what comparable businesses pay in similar positions. Here in Austria, we do not usually have the kind of exorbitantly high salaries seen in the US, where managers can earn tens of millions of dollars per year with the help of stock option programs. Austria's top managers in large corporations earn good salaries by European standards, but only in a few dozen cases do salaries exceed one million euros gross per year.

The act points in a direction that runs counter to the intensive efforts of the workers' representatives, which is to reduce labor costs in Austria. It is contradictory to support a reduction in employee wage costs while approving a higher tax burden on high earners.

Work pays off less and less

The fundamental issue in Austria persists: employed labor pays off less and less. The incomes of the general population are stagnating. Young people entering the job market must bring more qualifications than previous generations to achieve the same starting salaries as new hires ten years ago. Most employees have to work a lot more for the same money. At the same time, prices are rising, and in particular living has become almost prohibitive for a single young person. More and more people find it increasingly difficult to maintain a reasonable standard of living with income from regular work.

On the other hand, income from capital assets is still taxed at a much lower rate than income from employment. Many societal problems arise when gambling on financial markets pays more than productive work. This act on executive compensation is a fatal political signal for managers. It says that advancement, career aspirations and a high performance-related income are undesirable in Austria. This is a highly problematic tendency. In the end, work must be made to pay off again, for Austria’s top managers and regular employees alike.

About the Author:

Conrad Pramboeck is the Head of Compensation Consulting at Pedersen & Partners. Based in Vienna, Austria, he is responsible for consulting companies on all aspects of compensation, including providing companies with up-to-date market information on salary ranges and design of bonus systems across all industries and geographies. Prior to joining the firm, Mr. Pramböck held several senior positions in international consultancy firms. He started his career with a German Consultancy firm working in management consulting and later in the Compensation Consulting business unit based in Austria. For the following seven years he worked with one of the top Austrian Executive Search firms as the Head of Compensation Consulting. He was responsible for all international compensation consulting activities and developed and maintained an international compensation database in 40 countries.

Mr. Pramböck holds a PhD in Law from the University of Vienna. In addition to his native German, he speaks fluent English and has basic knowledge of French and Spanish.