Say-on-pay

19 July 2012

Introduction

In the past few years, in Switzerland, as in other countries, excessive pay and bonuses for senior company executives has been a hot topic. Following the recent financial crisis, the sentiment of the general public towards executives’ compensation has taken a turn from silent acceptance to large disapproval.
The debate has been sustained by the “Initiative against abusive salaries” launched by Thomas Minder in 2008 (so-called “Minder Initiative”). Basically the Minder Initiative requires the approval of board and executive compensation of Swiss listed companies by shareholders, as well as a ban on severance payments.

Current Swiss regulation

Current Swiss legislation gives all powers concerning compensation to the board of directors. For the time being, boards of directors are free to set the compensation of their own members since the only applicable legal requirements concern the disclosure of the compensation of the board of directors and of the top executives.
Nevertheless, the non-binding Swiss Code of Best Practice for Corporate Governance issued by economiesuisse already recommends that shareholders be involved in compensation decisions. The Code is based on the self-regulation principle and provides listed companies with recommendations on structuring the remuneration system and on how to involve the shareholders in the debate on the compensation system.

Minder Initiative

The Swiss people have direct ways to influence legislation. They can seek a vote on an amendment to the federal Constitution by collecting the signatures of 100,000 voters within 18 months (popular initiative).
In 2008, the member of the Council of States, Thomas Minder launched his initiative against abusive salaries. If accepted by the Swiss people, the initiative will amend the legal framework on executive compensation as follows:

• the aggregate compensation of the board of directors and of any advisory board will be subject to the shareholders’ approval on an annual basis. The shareholders’ vote is mandatory and binding;
• the aggregate compensation of executive officers will be subject to the shareholders’ approval on an annual basis. The shareholders’ vote is mandatory and binding;
• the articles of association will have to include the rules applicable to: (i) bonus schemes and compensation plans of directors and executive officers, (ii) the amount of loans granted to directors and executive officers, (iii) the number of mandates outside of the company and (iv) the duration of employment agreements of executive officers;
• severance payments and advance payments will be prohibited;
• board members will be individually elected by the shareholders on an annual basis;
• the chairman will be elected by the shareholders on an annual basis;
• corporate proxy and the representation of shareholders by depository banks will no longer be permitted; and
• a breach of the above rules and principles will be subject to criminal sanctions.

The constitutional amendment will be enacted if it is approved by a majority of the electorate and a majority of the Swiss cantons.

Parliament’s response to the Minder Initiative

After years of heated discussions in an attempt to counter the Minder Initiative, the Swiss Parliament approved in March 2012 the final draft of a revision of the Swiss Code of obligations that closely follows the Minder Initiative but provides for a more balanced solution. Based on the Minder Initiative, the revision is intended to strengthen the position of the shareholders without going as far as the initiative. This legislative proposal, in the form of an indirect counterproposal, will only be published if the Minder Initiative is rejected by voters or withdrawn.
In addition to this indirect counterproposal, in May 2012, both Chambers of the Swiss Parliament voted in favor of a constitutional amendment (direct counterproposal) according to which compensation to members of the board, of advisory boards, executives or employees exceeding CHF 3 million per business year shall be added to the taxable profit of corporations and taxed accordingly. A vote on the direct counterproposal together with the Minder Initiative was expected to be held this year or in 2013. However, unexpectedly, the National Council (the lower chamber of the Swiss Parliament) rejected this direct counterproposal in a final vote held on June 15, 2012. Consequently, the Minder Initiative will be submitted to voters without a recommendation or a direct counterproposal from the Swiss Parliament.

Below is a comparative statement which summarizes the main principles of the Minder Initiative and of the revision of the Swiss Code of obligations (indirect counterproposal):

What’s next?

The Swiss Federal Council must schedule the popular vote on the Minder Initiative, which is expected to be held in late 2012 or first part of 2013. It is only if the Minder Initiative is rejected by voters that the revision of the Swiss Code of Obligations will enter into force, subject to the optional referendum.
Thus, it is very likely that Switzerland will soon join the group of countries, including Denmark, Norway, Sweden and the Netherlands, where the say-on-pay vote is binding. In the same way, legislation on an annual binding vote of the shareholders on remuneration is under consideration in the UK.