Investigación Digital

Thomas Lustenberger, Alexander Vogel and Laurence Ruckli of meyerlustenberger explain the Swiss rules on remuneration and the public debate surrounding them

Excessive remuneration of corporate officers has been a much debated topic in Switzerland over the last 10 years. The financial crisis has made this debate both more emotional and political with the launch of an initiative to change the constitution. But the public is still outraged. Not only were governments forced to bail out financial institutions that were responsible for the excessive bonuses, the remuneration systems themselves are believed to be the very cause of some of the disastrous developments in the financial markets.

In Switzerland, no other company is as exposed to public criticism as UBS. The bank, prevented from collapsing by a government bailout plan, brought the public debate to a climax after announcing that it would still pay bonuses for the crisis-ridden year of 2008. Other large multinationals have not done much to avoid the spotlight and improve the top managers' image. Recently, Credit Suisse was criticised when it announced that its CEO Brady Dougan would receive CHF90.1 million ($81.5 million).

Since 2001, the public debate on manager remuneration has become more and more important. As a first result, a set of rules was enacted requiring the disclosure of information relating to the remuneration of the members the board of directors and of the senior management. In addition, most listed companies in Switzerland apply International Financial Reporting Standards (IFRS) and are therefore subject to the disclosure regime relating to management compensation provided therein.

However, transparency had not really done much to resolve the problems of excessive and inadequate remuneration schemes. The financial crisis has now tremendously increased the pressure on politicians to tackle the problem. Currently, the initiative against rip-off salaries, as well as counterproposals of the Federal Council and of different political parties are intensively and emotionally discussed. In the months or years to come, the parliament and then most likely the Swiss citizens, will have to take decisions on the subject.

Current rules

The Swiss Code of Obligations (SCO) does not allocate the power to decide on remuneration issues relating to board members and members of top management to a specific corporate body. Indeed, it does not explicitly raise the issue. Hence, if the articles of association do not allocate such power to the shareholders, it is up to the board of directors under its general power to manage the company to decide on remuneration issues. In listed companies, the board usually installs a remuneration committee to prepare the respective decisions. As a general rule in Switzerland, the board not only decides on the compensation of the top management but also on its own remuneration.

Swiss law does allow the allocation of the power to decide on remuneration issues to the shareholders' meeting. To date none of the Swiss listed companies has made use of this possibility. However, recently a number of large companies have introduced a consultative vote by the shareholders on the remuneration report, as suggested by the Swiss Code of Best Practice.

The SCO contains the only set of rules on reporting obligations with regard to executive compensation enacted by the Swiss legislator. The SCO provisions entered into force on January 1 2007 and replaced the former provisions in the Corporate Governance Directive (CGD) issued by the SIX Swiss Exchange (SIX) in July 2002. The CGD only required the disclosure of aggregate salaries paid to the management and members of the board, with the highest remuneration to be disclosed on a no-name basis. While the CGD is applicable to all issuers listed on the SIX, the new rules provided for in the SCO apply to all companies with a domicile in Switzerland and which are listed on a Swiss or foreign stock exchange.

According to the SCO rules, companies must disclose individually the remuneration packages of directors. With respect to top management it is sufficient to disclose the aggregate amount of their remuneration. However, the highest compensation paid to a member of the top management must also be disclosed together with the disclosure of name and function. Auditors have to verify full compliance with those provisions.

The term "compensation" is described in a non-exhaustive way and includes, among others, severance payments and pension benefits. Further, the SCO does not define who belongs to the top management. Depending on the organisational structure of a company, members of different management levels may qualify as top management.

The enhanced transparency provided by the new rules was designed to strengthen the control rights of shareholders by furnishing them more information. Only informed shareholders are in a position to exercise their voting rights in the election of board members intelligently. Or, at least, they should have the information basis that allows them to take an informed decision to sell or keep their participation. The rules were also meant to influence the decision preparers and makers to be responsible and moderate when fixing remunerations.

The SIX requires via its CGD Swiss and foreign issuers whose shares are listed on the SIX to disclose certain information, in particular in the annual report, eg relating to group structures, major shareholders, the issuer's capital structures, transfer restrictions and nominee regimes.

When the SCO rules were introduced on January 1 2007, the SFX decided to revoke most of its disclosure rules regarding compensation since they were similar to the new rules provided for in the SCO. The CGD still contains provisions about the disclosure of the system and the determination process for the compensation of top management.

The Swiss Financial Market Supervisory Authorities (FINMA) issued a circular on remuneration schemes which entered into force on January 1, 2010 (FINMA Circular).

The FINMA Circular sets minimum standards for the structure, implementation and disclosure of remuneration schemes for financial institutions which are subject to FINMA supervision and which are required to meet minimum equity requirements, whether they are listed or not. Currently, only seven banks and five insurance companies meet the criteria. Nevertheless, FINMA recommends that the other financial institutions observe the principles as best practice guidelines.

The FINMA Circular contains detailed rules on how companies must structure and monitor their remuneration systems. Further, it is requesting a summary disclosure of the remuneration structure for all employees and not only of the board of directors and the senior management as well as

...