PwC Human Resource Services …...Human Resource Services For further information about this survey or our services in the fi eld of compensation planning for executives and applicable

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Executive Compensation & Corporate Governance

A survey examining compensation in SMI, SMIM and small-cap companies as well as trends in corporate governance

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PwCHuman Resource Services

For further information about this survey or our services in the fi eld of compensation planning for executives and applicable governance, disclosure and accounting requirements, please contact:

Dr. Robert W. KuipersPartner, Human Resource ServicesPwCPhone: +41 58 792 45 30Email: [email protected]

Remo SchmidPartner, Human Resource ServicesPwCPhone: +41 58 792 46 08Email: [email protected]

Other recent PwC publications on the subject of executive compensation and disclosure:

• Moving On: Global retirement benefits in a post-defined benefits world, 2014• Smarter incentives: Turning the regulatory shake-up to your advantage, 2013• Making executive pay work – The psychology of incentives, 2012• Global Equity Incentives Survey 2012

If you would like further copies of this survey or of the above publications, please contact:

Florence SchmidHuman Resource ServicesPwCBirchstrasse 1608050 ZurichSwitzerland

Phone: +41 58 792 43 67Email: fl [email protected]

* Alexander Wagner thanks Rebecca Ribi and Christoph Wenk for research assistance.

Prof. Alexander F. Wagner, PhD*Independent Counsel, Human Resource ServicesSwiss Finance InstituteUniversity of ZurichPhone: +41 44 634 39 63Email: [email protected]

Jose Marques Partner, Human Resource ServicesPwCPhone: +41 58 792 96 34Email: [email protected]

Insights 2014

© 2014 PwC. All rights reserved. “PwC” refers to PricewaterhouseCoopers AG, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.

Disclaimer This publication has been prepared for general guidance on matters of interest only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers Ltd., its members, employees and agents accept no liability and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

Chairman SMIM SMIM Changes

2007 2008 2009 2010 2011 2012 2013 2012/2013 2007–2013

Highest 1,124,000 1,052,000 1,009,100 1,458,055 1,596,343 1,654,735 1,726,476 4.34 % 53.60 %

Upper Quartile 548,173 649,000 751,464 645,000 837,975 839,700 920,417 9.61 % 67.91 %

Median 384,327 409,114 554,000 550,000 461,819 590,488 544,000 –7.87 % 41.55 %

Lower Quartile 266,250 258,000 302,000 316,906 275,000 306,000 379,000 23.86 % 42.35 %

Lowest 0 107,000 160,000 141,000 0 0 107,010 n/a n/a

Average 458,859 478,818 538,301 555,840 565,027 619,228 697,304 12.61 % 51.96 %

Board of Directors

SMIM SMIM Changes

2007 2008 2009 2010 2011 2012 2013 2012/2013 2007–2013

Highest 3,255,621 3,511,407 3,052,565 2,844,157 3,702,177 1,591,000 2,370,000 48.96 % –27.20 %

Upper Quartile 221,000 215,341 220,180 224,020 222,000 244,979 248,375 1.39 % 12.39 %

Median 169,500 154,000 157,388 171,000 169,950 176,197 194,955 10.65 % 15.02 %

Lower Quartile 106,417 106,500 105,288 114,000 112,000 127,300 145,000 13.90 % 36.26 %

Lowest 0 0 0 0 0 0 0 0.00 % 0.00 %

Average 203,512 193,255 199,360 202,270 201,351 200,623 217,161 8.24 % 6.71 %

CEO SMIM SMIM Changes

2007 2008 2009 2010 2011 2012 2013 2012/2013 2007–2013

Highest 12,024,884 7,062,808 7,840,619 6,999,000 8,568,000 7,400,468 6,689,000 –9.61 % –44.37 %

Upper Quartile 4,397,000 3,512,979 3,505,219 3,452,000 3,770,986 3,425,508 4,315,525 25.98 % –1.85 %

Median 2,846,000 2,472,705 2,151,000 2,576,000 2,388,487 2,391,389 3,199,000 33.77 % 12.40 %

Lower Quartile 1,792,000 1,579,217 1,314,369 1,976,291 1,680,750 1,743,500 2,266,250 29.98 % 26.46 %

Lowest 1,012,836 930,824 710,000 5,000 5,000 5,000 1,634,412 32588.24 % 61.37 %

Average 3,945,922 2,939,327 2,828,691 2,801,649 2,930,972 2,869,831 3,583,325 24.86 % –9.19 %

Chairman Small-caps Small-caps Changes

2007 2008 2009 2010 2011 2012 2013 2012/2013 2007–2013

Highest 2,924,700 2,500,000 1,991,300 1,366,780 1,452,600 2,319,900 2,318,200 –0.07 % –20.74 %

Upper Quartile 479,000 439,599 400,000 384,000 415,116 456,376 431,198 –5.52 % –9.98 %

Median 334,000 265,000 230,000 247,000 305,100 309,000 291,935 –5.52 % –12.59 %

Lower Quartile 157,821 191,000 144,000 158,821 175,245 226,423 202,893 –10.39 % 28.56 %

Lowest 0 0 0 0 60,413 64,000 69,364 8.38 % n/a

Average 457,707 422,241 355,162 337,884 386,969 406,859 405,349 –0.37 % –11.44 %

Board of Directors

Small-caps Small-caps Changes

2007 2008 2009 2010 2011 2012 2013 2012/2013 2007–2013

Highest 1,369,487 606,810 600,000 372,000 501,671 535,000 638,000 19.25 % –53.41 %

Upper Quartile 143,600 140,000 134,436 140,000 150,000 155,925 155,195 –0.47 % 8.07 %

Median 108,600 99,000 91,916 100,424 106,000 109,740 108,500 –1.13 % –0.09 %

Lower Quartile 65,000 62,000 62,500 66,800 67,400 73,150 70,949 –3.01 % 9.15 %

Lowest 0 0 0 0 0 0 0 0 % 0 %

Average 125,240 112,538 102,219 109,800 111,104 118,633 122,389 3.17 % –2.28 %

CEO Small-caps Small-caps Changes

2007 2008 2009 2010 2011 2012 2013 2012/2013 2007–2013

Highest 8,254,573 5,938,000 4,175,632 5,389,826 3,830,506 4,200,957 4,612,870 9.81 % –44.12 %

Upper Quartile 2,186,020 1,760,000 1,930,000 1,730,815 2,076,000 1,523,550 1,911,406 25.46 % –12.56 %

Median 1,208,000 1,098,000 1,173,970 1,140,200 1,084,200 1,179,500 1,240,000 5.13 % 2.65 %

Lower Quartile 954,000 810,000 765,072 831,000 921,000 832,245 924,000 11.03 % –3.14 %

Lowest 298,500 303,727 20,000 338,210 289,348 0 116,000 n/a –61.14 %

Average 1,850,604 1,600,209 1,465,539 1,635,184 1,393,312 1,379,043 1,465,641 6.28 % –20.80 %

PwC Executive Compensation & Corporate Governance 1

Contents

1 The Study 2

2 Executive Summary 3

3 Top Management Compensation: Main Results 5

3.1 Chairmen of boards of directors 5

3.2 Other members of the board of directors 7

3.3 CEOs 9

3.4 Structure of compensation 11

3.5 Wealth changes due to share ownership 14

3.6 Small-cap companies 16

4 Executive Compensation and Corporate Governance after the “Abzocker-Initiative”: Challenges and Opportunities 18

4.1 Pay for performance 18

4.2 Challenges in the design of compensation systems 21

4.3 Challenges for compensation governance and for the board of directors 24

5 Concluding Remarks: Six Principles 27

2 Executive Compensation & Corporate Governance PwC

1 The Study

We are delighted to present the eighth edition of our study “Executive Compensation & Corporate Governance”. This study is one of the most detailed Swiss studies available on the level and structure of board and executive compensation for the years from 2007 to 2013. This report provides a comprehensive picture of executive compensation for SMI and SMIM companies in Switzerland today. We also provide a shorter summary of executive compensation in small-cap companies, and we hope you find this breadth of perspective helpful.

Following the release of the “Ordinance against excessive compensation in stock exchange listed companies,” many, but by far not all listed companies revised their articles of association in the 2014 proxy season. This includes in particular choices with regard to the say-on-pay regime but also several other aspects of corporate governance. The main observation that can be made from companies’ responses to the new regulatory setting is that “one practice does not fit all.” Boards of directors, executive management as well as investors – in particular institutional investors such as pension funds – have the responsibility to consider what is the appropriate design and disclosure of compensation matters in the specific context of a given company. An ongoing dialogue between boards of directors, investors, and other stakeholders is essential for fostering the long-term positive development of companies.

All data used in this survey is based on disclosed compensation information in the annual reports of the companies reviewed. We have not made any assumptions or adjustments to the disclosed values and methodologies used, in particular with regard to the variable compensation (valuation, vesting clauses, timing of disclosure and earning periods, etc.).

We trust you find “Executive Compensation and Corporate Governance: Insights 2014” to be an interesting read that supports you in answering key questions and provides ideas for addressing today’s reward challenges. As always, we welcome your feedback and hope to have the opportunity to discuss these issues with you.

Dr. Robert W. Kuipers Remo SchmidPartner Partner


2 Executive Summary

Building on the results from the studies of the last six years, “Executive Compensation & Corporate Governance: Insights 2014” examines the changes from 2007 to 2013 in total compen-sation for the board of directors and CEOs as well as some governance topics. The key findings are:

• In the seven years under consideration, median non-execu-tive chairman pay has increased in both SMI and SMIM companies: by 16.2 % from slightly below CHF 1 million to slightly above CHF 1.1 million in SMI companies and by 41.6 % from CHF 384,327 to CHF 544,000 in SMIM compa-nies. However, last year, chairman pay in SMIM companies declined by 7.9 %.

• By contrast, in the same period, median CEO pay has decreased in SMI companies by 17.6 % from CHF 8.1 million to CHF 6.7 million. Interestingly, though, CEO pay in SMIM companies increased – due to a strong increase in 2013 – from 2007 to 2014 by 12.4 % from CHF 2.8 million to CHF 3.2 million. This outcome is partially driven by an unusually large number of CEO turnovers and the corre-sponding additional payments to incoming CEOs.

• The composition of CEO pay fluctuates significantly, but some broad patterns can be detected. In SMI companies, base salary has never made up more than 30 % of total pay, long-term incentives (LTI) never less than 40 % (and they are close to or exceed 50 % in some years). In SMIM companies, by contrast, throughout the sample period (except in 2007), base salary did not make up less than 30 % of total pay, while the LTI did not account for more than 40 % of total pay (and falls below 30 % in some years). Cash bonuses and other payments are of approximately equal importance in the two samples.

• The median board member at a small-cap firm receives pay of around CHF 100,000, and this pay level has essentially remained stable in the past seven years. The median CEO of a small-cap company received roughly CHF 1.2 million in 2013. As such, median CEO compensation in these firms is now slightly above 2007 levels. Small-cap CEOs tend to receive a larger portion of base salary and a smaller portion of equity-based compensation than their counterparts in SMI and SMIM companies. Pay of small-cap CEOs is less volatile over time than is pay of SMIM CEOs, which is in turn more stable than pay of SMI CEOs.

• Executives and board members participated with their equity holdings in the continued general positive stock market developments in 2013. In the SMI and SMIM sample, more than 75 % of all CEOs experienced positive wealth changes, with the interquartile range (between lower and upper quartile) being CHF +540,000 to CHF +2.2 million. For chairmen, this range is from CHF +180,000 to CHF +1.4 mil-lion for 2013. For other board members, this range amounts to CHF +30,000 to CHF +400,000 for 2013. A similar picture also emerges in the small-cap companies.

• Our rich dataset allows us to identify five different channels of pay for performance. First, the ratio of executive total compensation to earnings before interest, tax, depreciation and amortisation (EBITDA) is approximately constant over time. This means that, in aggregate, when profits vary, total top management pay varies in the same direction. Second, when total shareholder return increases by one percentage point, variable CEO pay increases by about 1.2 %. (We note that variable pay is difficult to measure precisely as compa-nies vary in their approaches for disclosing long-term incentive components in particular.) Similarly, return on equity is significantly associated with variable pay. Return on assets, by contrast, is not associated with variable pay, suggesting that companies, on average, are not explicitly rewarding operating performance. Third, the typical CEO in an SMI firm receives pay which is three times higher than the average non-CEO executive. In SMIM and small-cap firms, the typical CEO receives double the pay of non-CEO execu-tives. This induces a fairly strong set of what economists call “tournament incentives” within companies. Fourth, the median CEO of an SMI company earns twice the remunera-tion that the median CEO of an SMIM company earns, and the median CEO of an SMIM company receives 2.6 times the pay that the median small-cap CEO obtains. Given this strong relationship between pay and firm size, we conclude that there can be substantial (implicit) incentives for executives and board members of Swiss companies driven by the fact that career advances depend on success at the present company. Fifth, SMI, SMIM, and small-cap CEOs participate in shareholder wealth creation (and reduction) due to their equity holdings. A change in shareholder wealth of CHF 1,000 is associated with a change in CEO wealth of CHF 0.2, CHF 0.6, and CHF 1 for the median CEO in each of these groups of firms, respectively.


• Based on our analysis of the pay-performance relationship, we discuss several questions around pay design. Compensa-tion should achieve the goals of incentivising management properly as well as attracting and retaining the best-suited managers. We argue that suitable key performance indicators should align managerial behaviour with firm value, are effective when management can actually influence perfor-mance, and reflect the reality that teamwork is essential for most firms’ success. We also show that these goals are often in conflict with each other. Perhaps counterintuitively, we argue that variable compensation should not completely filter out all exogenous factors, that is, it should not only depend on the achievements of the CEO relative to other companies but should also have an absolute performance component. Finally, caps on variable pay offer some advantages, but need to be handled with great care.

• In this publication, we also analyse and discuss how compa-nies have responded to the “Abzocker-Initiative” by adjusting their articles of association. Several interesting empirical observations arise. For example, companies that chose a prospective voting regime without a retrospective advisory vote tend to have much lower median CEO compensation than those who chose a retrospective voting regime. The latter group in turn has lower median CEO compensation than those companies which chose a prospective voting regime with a retrospective advisory vote. We conclude by stating some implications for the next proxy season, in particular as regards the role of the board of directors. We argue that open dialogue, pro-active communication, and stakeholder engagement are essential for fostering the long-term positive development of companies. The board of directors should not be afraid to engage with major share-holders and should be aware of the key differences in policies and processes of proxy advisors such as Ethos, ISS, Swipra, and zRating.


Figure 1: Total compensation of chairmen in SMI companies1)

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In this section, we analyse and comment on the level and structure of compensation for chairmen of boards of directors, other board members and CEOs. Our focus is on SMI and SMIM companies (sections 3.1 to 3.5), but we also provide a summary perspective on small-cap companies (section 3.6).

3.1 Chairmen of boards of directors

As the structure of the board of directors and the related responsibilities and tasks for members of the board of directors vary, for the chairman in particular, a one-to-one comparison among the SMI and SMIM companies proved difficult. Neverthe-less, a comparison was made based on compensation data disclosed. Some companies disclose separately pay that a

chairman/CEO receives in his two roles. In this case, we include the corresponding individual with the chairman pay in this section and with the CEO pay in the CEO-related analysis. When pay is not shown separately for the two roles, this individual is considered only in the CEO analysis. We also do not include chairmen who held a non-CEO executive role in this analysis, unless pay for the executive function is separately disclosed.

3.1.1 MainfindingsIn the seven years under consideration, median chairman pay has increased in both SMI and SMIM companies from CHF 981,479 to CHF 1.1 million, or by 16.2 %, in SMI companies and from CHF 384,327 to CHF 544,000, or by 41.6 %, in SMIM companies. However, last year, chairman pay in SMIM compa-nies decreased by 7.9 %.

3 Top Management Compensation: Main Results

1) Compensation for non-executive function (n=18 in 2013)


2) Compensation for non-executive function (n=21 in 2013)

Figure 2: Total compensation of chairmen in SMIM companies2)

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3.1.2 DetailsonSMIcompaniesFrom 2012 to 2013, the median chairman compensation remained essentially constant at CHF 1.1 million. The upper quartile decreased by 11.6 % to CHF 4.2 million, whereas the lower quartile increased slightly by 1.4 % to CHF 620,260. Dispersion continued to decrease at the extremes: from 2012 to 2013, the compensation of the highest paid chairman de-creased by 32.8 % to CHF 8.8 million whereas the compensation of the lowest paid chairman increased minimally by 0.6 % to CHF 200,316.

3.1.3 DetailsonSMIMcompaniesSMIM chairmen saw pay increases throughout, with the largest increase concentrated at the lower end: the lower quartile increased by 23.9 % to CHF 379,000 comparing 2013 with 2012. Increases were smaller at the upper end: the upper quartile increased by 9.6 % to CHF 920,417, and the highest paid received CHF 1.7 million, which represents an increase of 4.3 % from the previous year. However, the distribution between the lower and upper quartiles shifted such that, in fact, the median decreased by 7.9 % to CHF 544,000 last year, though it is still more than 40 % above the level of 2007.


Figure 3: Total compensation of other members of the board of directors in SMI companies3)

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3) Chairman and executive functions excluded (n=188 in 2013)

3.2 Other members of the board of directors

3.2.1 MainfindingsIn 2013, the median board member of an SMI company received around CHF 320,000, approximately 60 % more than the median board member of an SMIM company, who received around CHF 200,000. As such, there has been some convergence between the groups, as in 2007 the median board member of an SMI company received around 75 % more than the median board member of an SMIM company. Compensation levels of SMI board members have been increasing slightly in a relatively small band from 2007 to 2013. For SMIM members, the increase has been somewhat more pronounced.

3.2.2 DetailsonSMIcompaniesThe lower quartile amounted to CHF 228,806 and the upper quartile to CHF 400,951 with small changes compared to last year, namely, increases of 5.4 % and 0.9 %, respectively. The median amounted to CHF 318,411 (a decrease of 2.4 % from last year). The highest paid amount has varied a lot over the years. In 2013, it remained similar to last year, with a small increase of 6 % to CHF 2.7 million. The median increased from CHF 297,059 in 2007 to CHF 318,411 in 2013 (+7.2 %).


Figure 4: Total compensation of other members of the board of directors in SMIM companies4)

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3.2.3 DetailsonSMIMcompaniesThe lower quartile amounts to CHF 145,000 (+13.9 % relative to 2012) and the upper quartile to CHF 248,375 (+1.4 %), i.e., half of all SMIM board members were paid in this range for the year 2013. The median increased from CHF 169,500 in 2007 to CHF 194,955 in 2013 (+10.7 %), with the greatest increase taking place from 2012 to 2013.


Figure 5: Total compensation of CEOs in SMI companies5)

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5) (n=20 in 2013) In 2013, there was only one (in 2012: one) company in which a member of the executive board other than the CEO received the highest total compensation. In 2008 and 2010, the highest paid disclosed person in the whole sample was not a CEO. In these firms the compensation of the CEO was not disclosed and so could not be used in Figure 5. Departing CEOs are not included in this calculation.

3.3 CEOs 3.3.1 MainfindingsTwo facts are particularly noteworthy. First, from 2007 to 2012, total CEO compensation in SMI and SMIM companies had changed in parallel and decreased overall in both groups of companies; 2013 shows a marked difference between SMI and SMIM companies. Specifically, comparing 2013 to 2012, the median compensation of SMI CEOs remained essentially unchanged at CHF 6.7 million. Over the full sample period from 2007 to 2013, therefore, median CEO total compensation in SMI companies fell from CHF 8.1 million to CHF 6.7 million, or by 17.6 %. By contrast, due to a large increase in median CEO total compensation in SMIM companies from 2012 to 2013 (+33.8 %),

over the whole period median total CEO compensation in these companies in fact increased from CHF 2.8 million in 2007 to CHF 3.2 million (+12.4 %). This finding should not be overinter-preted, though, as we discuss below.

Second, as can also be observed from Figures 5 and 6, CEO compensation in SMI companies has in general varied signifi-cantly more over time than CEO compensation in SMIM companies. The development from 2012 to 2013 is the excep-tion. It will be interesting to see whether this year remains an outlier.


Figure 6: Total compensation of CEOs in SMIM companies6)

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3.3.2 DetailsonSMIcompaniesComparing 2013 to 2012, the median compensation of SMI CEOs remained essentially unchanged at CHF 6.7 million. There was a slight divergence in the lower and upper quartiles: The upper quartile increased by 7.8 % to CHF 10.0 million and the lower quartile actually decreased further to CHF 4.5 million (–5.9 %). The average total compensation increased slightly by 0.9 % to CHF 7.2 million. As such, the average total compensa-tion is still significantly below the figures for 2007 (CHF 9.5 million, –23.9 %) when this survey was conducted for the first time (see also Figure 7).

3.3.3 DetailsonSMIMcompaniesIn contrast to SMI companies, median total CEO compensation increased significantly in SMIM companies in the past year: It jumped by 33.8 % to CHF 3.2 million. Several factors need to be borne in mind. First, despite a generally positive market development in 2012, median pay had in that year not increased

in SMIM companies (in contrast to SMI companies). Thus, we are arguably seeing a partial catch-up to a development that happened earlier in SMI companies. Second, the composition of the SMIM has changed. Third, SMIM companies saw a higher number of CEO changes than usual, and newly appointed CEOs tend to have a larger pay package than their predecessors.

In fact, essentially the whole distribution of CEO pay shifted up. The lower quartile increased by 30 % and now amounts to CHF 2.3 million. The upper quartile increased by 26.0 % to CHF 4.3 million. Consequently, 50 % of SMIM CEOs are paid in the range of CHF 2.3 million to CHF 4.3 million.

Average total compensation also increased from 2012 to 2013, by 24.9 % to CHF 3.6 million. However, from an overall perspec-tive, the average total compensation has decreased over time by 9.2 % from CHF 3.9 million in 2007 to CHF 3.6 million in 2013 (see also Figure 10).


Figure 7: Overview of compensation structure in SMI companies in 2013

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Figure 8: Overview of compensation structure in SMIM companies in 2013

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3.4 Structure of compensation As in previous years, we have analysed the structure of the average total compensation as we believe this provides impor-tant insights in addition to the analysis of the level.

3.4.1 ComparingrolesBy and large, a similar picture emerges for SMI and SMIM companies when comparing the structure of compensation of different roles. On average, the largest part of total compensa-tion for chairmen and other board members – between 80 %

and 90 % – comes from fixed and other compensation. (Fixed compensation refers to the sum of compensation in cash and non-performance-related payments conveyed in the form of equity-based compensation.) By contrast, variable pay (either cash bonuses or equity-based long-term incentive plans) makes up the biggest portion – between 50 % and 70 % – of the total compensation package for CEOs and other executives.


Figure 9: Structure of average total compensation of CEOs in SMI companies

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3.4.2 ComparingcompaniesSome interesting patterns become apparent when comparing SMI and SMIM companies and when considering the develop-ment of the pay composition over time.

First, for board members of SMI companies fixed compensation was again a more important component in 2013 (relative to total compensation) than in SMIM companies. Other board members receive 86.6 % (SMI) and 80.4 % (SMIM) as fixed compensation, and these numbers have remained stable in the past seven years. The average chairman receives around 80 % in fixed pay in SMI companies and around 88 % in fixed pay in SMIM companies.

Second, for CEOs, in SMI companies, for 2013, the average total compensation was split into 25 % base salary, 18 % cash bonus, 47 % long-term incentives, and 10 % other compensation. In SMIM companies, for 2013, the average total compensation was split into 31 % as base salary, 26 % as cash bonus, 32 % as long-term incentives, and 11 % as other compensation. These numbers appear representative for the seven-year sample period, even though the composition of average CEO pay fluctuates to some extent over the years. In SMI companies, base salary has never made up more than 30 % of total pay, long-term incentive plans have never made up less than 40 % of total pay (and exceed 50 % in some years). In SMIM companies, by contrast, throughout the sample period (except in 2007), base salary has not made up less than 30 % of total pay, while long-term incentives did not account for more than 40 % of total pay (and fall below 30 % in some years). The cash bonus and other payments are of approximately equal importance in the two samples.


Figure 10: Structure of average total compensation of CEOs in SMIM companies

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26%

31%

3.4.3 Detailsonyear-on-yearchangesinthestruc-tureofCEOpay

In 2013, for SMI companies, the average base salary amounted to CHF 1.8 million, decreasing from CHF 2.2 million in 2007, a fall of 21.4 %. The average cash bonus amounted to CHF 1.3 million in 2013, which is a decrease of 16.7 % compared to 2012. Total average cash compensation (base salary plus cash bonus) decreased by 4.8 % to CHF 3.1 million comparing 2013 to 2012. The average long-term incentives increased from CHF 3.2 million in 2012 to CHF 3.4 million in 2013, which represents an increase of 5.6 %.

For SMIM companies, the average base salary increased by 14.2 % from 2012 to 2013 and has now essentially returned to the level of 2007 (CHF 1.2 million). The average cash bonus also increased from CHF 746,366 in 2012 to CHF 935,730 in 2013 which equals +20.2 %. Similarly, average long-term incentives increased from CHF 826,547 in 2012 to CHF 1.1 million in 2013 (+27.3 %). Thus, the long-term incentive portion increased in 2013, while the portion of base salary as well as the cash bonus decreased slightly. Overall, the level of total variable compensation increased by 24.1 % to CHF 2 million when comparing 2012 to 2013.


3.5 Wealth changes due to share ownership

In addition to analysing the total compensation development, it is also important to understand net wealth changes in the share ownership of board members and executives resulting from share price changes. These can be substantial in the case of volatile markets. Table 1 lists these changes and developments. The highest gains and losses relate to chairmen and other board members who have significant share holdings (in particular as founders or founding family members).

In 2008, at least 75 % of CEOs, chairmen and other board members suffered net wealth losses resulting from falling share prices. In 2009, we observed the mirror image, i.e., at least 75 % of the persons surveyed benefited from rising share prices. In 2010, an intermediate result occurred. The median CHF wealth change due to ownership was around zero or slightly positive for all three groups. The difficult market environment in 2011 led to broad losses throughout, and so the gains the median CEO, chairman and board member had made in 2009 and 2010 essentially evaporated in 2011. In 2012 the significant positive market development helped the median CEO recoup all losses from the previous year so that the overall wealth position of this (imaginary) median CEO was, at the end of 2012, approximately the same as at the beginning of 2008.

In line with the stock market development, the year 2013 brought continued positive wealth changes for all three groups of individuals (at least for 75 % as in the year 2009). For example, the median CEO’s wealth in equity in his company increased by CHF +1,250,000. The wealth changes of the middle half of CEOs, chairmen, and other board members are in a relatively narrow range around the median. 50 % of all CEOs (between the lower and upper quartile) experienced wealth changes in the amount of CHF +540,000 to CHF +2,150,000. For chairmen, this range is from CHF +180,000 to CHF +1,450,000 for 2013. For other board members, this range amounts to CHF +30,000 to CHF +400,000 for 2013.

We discuss shareholdings more generally in Section 4.1.5.


Table 1: CEO and board of director wealth changes in SMI and SMIM companies in the years 2008, 2009, 2010, 2011, 2012 and 2013 due to ownership7)

2008 Highest gain Top 25 % (upper quartile)

Median Bottom 25 % (lower quartile)

Greatest loss

CEOs +42,800,000 –230,000 –730,000 –2,880,000 –2,750,000,000

Chairmen +190,000 –290,000 –1,820,000 –18,700,000 –466,000,000

Other Members of the Board of Directors

+42,800,000 –40,000 –200,000 –200,000 –3,010,000,000

7) All amounts in CHF and rounded. Wealth changes in 2008 are calculated as the difference between the wealth due to the average of the reported shareholdings on 31 December 2007 and those on 31 December 2008, valued on 31 December 2008, minus the value of these average shareholdings on 31 December 2007. For wealth changes in 2009, 2010, 2011, 2012, and 2013 the same methodology is applied. All shares (not only vested shares) are considered. Companies that report no sharehold-ings for the respective category of individuals are not considered in this table. Significant changes in wealth in these calculations can also arise, independent from developments in the share price, when an individual acquires or sells shares. Outside (non-equity) wealth is not observable. All the numbers reported in this section do not reflect implied ownership through options or other instruments similar to equity. They are merely based on what companies report to be the direct alignment of their CEOs with shareholders through the ownership of shares.



Greatest loss

CEOs +10,300,000 +860,000 +340,000 +20,000 –35,400,000

Chairmen +2,170,000,000 +5,810,000 +240,000 +10,000 –30,100,000


+1,440,000,000 +230,000 +50,000 +/–0 –23,000,000



Greatest loss

CEOs +20,000,000 +790,000 +170,000 –80,000 –21,100,000

Chairmen +1,899,000,000 +650,000 +90,000 –80,000 –32,100,000


+713,000,000 +120,000 +10,000 –30,000 –587,000,000



Greatest loss

CEOs +10,600,000 –100,000 –400,000 –1,060,000 –99,300,000

Chairmen +10,600,000 –110,000 –360,000 –1,290,000 –70,800,000


+44,400,000 –10,000 –70,000 –270,000 –1,570,000,000



Greatest loss

CEOs +59,300,000 +1,350,000 +580,000 +150,000 –10,200,000

Chairmen +519,000,000 +590,000 +140,000 +30,000 –760,000


+1,100,000,000 +240,000 +60,000 +10,000 –175,000,000



Greatest loss

CEOs +168,000,000 +2,150,000 +1,250,000 +540,000 –1,730,000

Chairmen +71,400,000 +1,450,000 +570,000 +180,000 –310,000


+455,000,000 +400,000 +100,000 +30,000 –61,900,000


3.6 Small-cap companiesLike last year, we have also examined compensation of execu-tives and board members in a wider sample. In particular, we also consider those companies that ranked 51st to 100th in terms of equity market capitalisation at the end of the year 2013. Essentially, our study covers those 50 companies in the SPI Large and SPI Mid indices (which together contain 100 compa-nies) that are not in the SMI and the SMIM. We refer to these companies in total as small-cap companies.

Naturally, this large sample provides a wealth of data. We highlight some salient, general facts here. More detailed evaluations, geared to the interests of the reader, are available on request.

Figure 11: Total compensation of CEOs in small-cap companies 8)

The median board member at a small-cap company receives pay of around CHF 110,000, and this pay level has remained essentially stable in the past seven years. The median CEO of a small-cap company received CHF 1.2 million in 2013. As such, median CEO pay has increased by 5.1 % from 2012 to 2013, putting it slightly above 2007 levels. The range of the middle 50 % of small-cap total CEO compensation has increased quite substantially in the past year and is now between around CHF 920,000 (+11 %) and CHF 1.9 million (+25.5 %). This corresponds approximately to the range of the middle 50 % of base salary for SMI CEOs. Total compensation of small-cap CEOs is less volatile over time than is pay of SMIM CEOs (which is, as we have seen earlier, more stable than pay of SMI CEOs). We return to the pay differences according to company size in our discussion of pay for performance below.

0

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2007 2009 2010 2011 2012 20132008


Milli

on C

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2

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8) n=47 in 2013. One company, which belongs to the SPI Large index but is not part of SMI nor the SMIM indices, is not included in this study as we consider it to be unrepresentative of the sample we wish to study.


Rewards in the form of equity participation are of relatively minor importance for CEOs in small-cap firms. The fraction of incentives paid in the form of equity remained similar in 2013 to 2012, with on average just 11 % of total compensation of small- cap firm CEOs being equity-based incentives. For CEOs in small-cap firms, the portion of base salary in total compensation has conversely increased from around 40 % in 2007 to around 50 % in 2013.

Finally, we have also analysed the wealth changes due to share ownership of executives and board members in small-cap firms. Table 2 presents the results of this investigation of equity wealth changes. It is more difficult than in the case of the SMI and SMIM companies to compare amounts across years because the composition of the sample has changed more for the small-cap firms. Nonetheless, by and large the table shows that, over the years, the median small-cap executives and board members have experienced much the same fluctuations as their colleagues in the larger firms.

Figure 12: Total compensation of other members of the board of directors in small-cap companies10)

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

02007 2009 2010 2011 2012 20132008


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1.4

1.6


CEOs Chairmen Other members of board of directors

2008 –360,000 –220,000 –40,000

2009 +90,000 +70,000 +10,000

2010 +70,000 +90,000 +15,000

2011 –180,000 –80,000 –20,000

2012 +90,000 +40,000 +10,000

2013 +160,000 +150,000 +16,000

Table 2: Median CEO and board of director wealth changes in small-cap companies in the years 2008, 2009, 2010, 2011, 2012, and 2013 due to ownership9)

9) For details on the calculation, see footnote 7.

10) n=304 in 2013


4 Executive Compensation and Corporate Governance after the “Abzocker-Initiative”: Challenges and Opportunities

The general perception in society, but also among many shareholders, is that executive compensation is not sufficiently tied to performance. Indeed, some cases come to mind where the pay-performance relationship was arguably tenuous at best. This perception was one of the reasons for the adoption of the “Abzocker-Initiative”, with broad ramifications for the govern-ance of Swiss companies. Shareholders are paying increasing attention to the alignment of pay with performance.

In this chapter in section 4.1, we first consider whether empiri-cally a pay-performance relationship exists in Swiss listed companies. This analysis provides both a policy-relevant input and an input for discussions on the company level. It also prompts several important questions regarding the design of compensation plans, to which we turn in section 4.2. In many ways, the design of compensation plans is closely linked to their governance, which we study in section 4.3. To complement our conceptual discussion of challenges for the board of directors in compensation governance, we provide some data on how companies have responded in the revision of their articles of association.

4.1 Pay for performance There are several distinct components linking pay and perfor-mance which boards of directors and, in particular, members of compensation committees, need to be aware of and which they can use. Table 3 presents an overview of five perspectives of pay for performance. We discuss each point in turn.

Channel Observation

Firm-wide profits and top manage-ment pay

The ratio of executive total compensation to EBITDA is approxi-mately constant over time

Direct pay for performance: Change in variable CEO compensation when performance changes

Increase in TSR by 1 percentage pointIncrease in ROA by 1 percentage pointIncrease in ROE by 1 percentage point

Change in variable CEO compensation (all companies, controlling for firm characteristics)

+1.2 %n.s.+5 %

Career concerns inside the firm: CEO total pay as a multiple of non-CEO executive total pay (median value)

SMI: 3 times SMIM: 2 times Small-cap: 2 times

Career concerns across firms: median total pay of the CEO

SMI: CHF 6.7mSMIM: CHF 3.2mSmall-cap: CHF 1.2m

CEO equity wealth change per CHF 1,000 shareholder wealth change

SMI: CHF 0.2 SMIM: CHF 0.6Small-cap: CHF 1

Table 3: Five perspectives on pay for performance


4.1.1 Thegenerallinkbetweenprofitsand compensation

A concern sometimes raised is that executive compensation does not vary sufficiently with the underlying economic performance of a company. To shed some initial light on this question, in Figure 13, we plot the ratio of total executive board and total board compensation as a fraction of EBITDA. The sample consists of all the companies in our study.

Two interesting observations emerge.

First, there are large differences among firms in the percentage of profits that accrue to executive compensation. In the lower quartile, around 1 % of EBITDA is paid out to executive manage-ment, whereas in the top quartile more than 4 % is paid out to executive management. Note that these numbers refer to the full sample. There are, of course, differences among companies in terms of size. In the SMI firms, the median executive compensa-tion to EBITDA ratio is around 0.7 %; in SMIM firms, the median is around 1.9 %, in small-cap companies, the median is around 3 %. The relative numbers across quartiles are, however, fairly similar in these three groups of companies.

Second, from the perspective of pay for performance, it is noteworthy that the fraction of earnings going to top executive management has been fairly stable over recent years on average. In other words, when profits go up, compensation tends to go up, and when profits go down, compensation tends to go down. However, when looking closely, there appears to be some trend towards top earners among executive management (the top quartile of the ratio of executive compensation to EBITDA) receiving an increasing fraction of EBITDA. Even at the median, there is a slight upward trend.

Boards should be aware of the percentage of profits used for top management compensation. An issue that is difficult to navigate in practice – but that tends to draw the attention of sharehold-ers – is how extraordinary events should be taken into account. Should these be treated as exogenous events that should be “filtered out”? Or should management be held accountable for appropriately responding to such events, too? We discuss this question in some more detail in Section 4.2.2 below but empha-sise here that transparent, consistent communication is key in this matter.

Figure 13: Total executive compensation as a fraction of EBITDA in SMI, SMIM, and small-cap companies

MedianLower quartile Upper quartile

0%

2%

4%

6%

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FY13FY12FY11FY10FY09FY08FY07FY06FY05

20132012201120102009200820070%

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4.1.2 CEOvariablepayandperformanceSecond, drilling deeper from the aggregate level we can now ask: On the individual CEO level, what is the relationship between performance in a year and pay received for that year?

Determining the direct relationship of CEO pay and perfor-mance is a challenging task. First, total CEO pay has both backward-looking and forward-looking components, and as such is not a direct indication of what the CEO received for his actual performance. We use CEO variable compensation (short-term incentives and long-term incentives) as disclosed by companies as the quantity of interest. We do note, however, that companies do not always separate pay that is awarded for past performance from pay that is received as an incentive for future performance (where the latter may correctly be independent of past performance). Second, there are several factors that are associated with both pay and performance. Therefore, if one were to simply calculate a correlation of pay and performance, such a correlation may pick up omitted factors. To address this issue, we conduct a regression analysis. Thus, we make firms comparable by taking into account the size of the firm, the risk of the firm, and other factors. The analysis also takes out any common time trends.11

The main result of this analysis is that there is a statistically significant relationship between variable pay (the dependent variable) and some, but not all performance measures. However, the economic significance of the association may be considered small. A one percentage point increase in total shareholder return (TSR) (say, from 6 % to 7 %) in a given year is associated with an increase in CEO variable pay, for that year, of about 1.2 %.

An alternative way to understand the economic meaning of these numbers is to think in terms of standard deviations. The data imply that a one standard deviation increase in TSR is associated with a one tenth of a standard deviation increase in variable pay, a fairly modest impact. Similarly, variable pay is also statistically significantly associated with return on equity (ROE), but economically the relationship is not very strong, with a standard deviation increase in ROE being associated with a one eighth of a standard deviation increase in variable pay.

Interestingly, and perhaps somewhat worryingly, the data does not provide evidence of a statistically significant relationship between operating performance, as measured by return on assets, ROA, and variable pay. There is, however, a strong relationship between ROA and total CEO pay, consistent with the idea that more profitable firms in general pay higher compensation.

Overall, boards of directors need to consider whether pay in their company is designed to foster long-term value generation. We discuss some design challenges that we have encountered in practice below.

4.1.3 Paydifferenceswithincompanies:Tournamentincentives

A third aspect of incentives – and opportunities to reward performance with pay – derives from “tournament incentives” inside the firm. By this we mean the observation that climbing the corporate ladder typically entails increases in pay, which creates incentives for management to work hard and secure a promotion. To measure this source of incentives, we calculate CEO pay as a multiple of the average compensation of non-CEO executives.

Table 3 reports the median value of this multiple. A promotion to CEO from being a non-CEO executive member implies, at the median, a doubling or tripling of the total pay package, suggest-ing strong monetary incentives to attain the top position. As expected, this multiple is significantly higher in SMI firms than in SMIM firms. This result is consistent with the idea that there is a premium for managing larger, more complex companies.

These numbers have to be interpreted with care. For example, the experience as well as the roles and responsibilities of executives vary significantly. Naturally, individual performance also plays an important role. Companies may have different policies in terms of which group of top management they disclose in the remuneration report. Finally, we also note that there can be drawbacks when pay distribution is too unequal. When the CEO receives a much larger pay package than other executives (adjusting for experience and other factors), this can indicate an imbalance of power and a culture that is not conducive to productive discussions, leading to excessive conflicts and potential governance problems.11) However, some factors are difficult to control for. For example, as mentioned in

the descriptive analysis, CEO changes can lead to higher compensation, particularly when a CEO is appointed from the outside. At the same time, an involuntary CEO change is more likely if performance has been poor. This would tend to bias the results against finding a significant relationship between pay and performance.


4.1.4 Paydifferencesamongcompanies:Implicitincentivesduetothelabourmarket

As Table 3 shows, the median CEO of an SMI company earns twice the total compensation that the median CEO of an SMIM company earns. And the median CEO of an SMIM company receives 2.6 times the total compensation that a small-cap CEO obtains. Similar ratios also hold for average compensation.

Given this strong relationship between top management pay and firm size, and given the powerful empirical relationship between management performance and career advances, we conclude that there can be substantial implicit incentives through career concerns for executives of Swiss companies. That is, these individuals are motivated not only by the incentive system in place in their current job, but they also arguably take into account that good performance now opens up better career opportunities – in particular, the opportunity to manage a larger, higher-paying firm – in the future. Conversely, they are aware that poor performance now is likely to result in fewer such opportunities in the future; indeed, poor managers may find themselves slipping down a notch or two in the size of the company they lead, which implies lower pay. When added up over the duration of a career, these forward-looking incentives can be substantial.

4.1.5 WealthincentivesIn 2013 the median CEO equity ownership in SMI companies was 0.02 %, while it corresponds to 0.06 % in SMIM firms. This means that a CHF 1,000 change in shareholder wealth in a given year corresponds to a CHF 0.20 and a CHF 0.60 CEO wealth change, respectively. In the SMI and SMIM firms, the median CEO holds roughly CHF 4.0 million in equity, which is around three-and-a-half times the CEO’s annual base salary. This is up from two times the base salary at the beginning of the sample period. The percentage wealth change, defined as the wealth change of a disclosed person expressed as a percentage of the wealth he holds in shares of his company, can be substantial also in Switzerland: the median percentage wealth change of SMI and SMIM CEOs was +33 % from 2012 to 2013. For chairmen this number was +28.6 %, for other board members it was +26.9 %.

CEO participation in small-cap firms is more widespread and reaches higher total levels in terms of fractions of ownership than in the SMI and SMIM companies. For example, in 2013 the median CEO equity ownership in small-cap companies is 0.1 %. This means that a CHF 1,000 change in shareholder wealth in a given year corresponds to a CHF 1.00 change in CEO wealth. However, naturally, the median CEO of an SMIM company holds about twice the amount of wealth in firm’s equity than the median CEO of a small-cap company.

Overall, despite some fluctuations over the years, we are witnessing an increase in the “wealth lever”. This occurs both on the extensive and the intensive margins: First, more CEOs are holding equity and the proportion of CEOs who do not hold any shares has dropped sharply in the past seven years. Second, those who already hold equity hold large positions (and/or do not sell the shares even though share prices have increased).

4.2 Challenges in the design of compensation systems

Based on the above analysis, and based on our experience in advising companies, several challenges arise in the design of compensation. Here, we discuss a selection of three interlinked key questions. First, what are useful key performance indicators that can be used as a basis for determining compensation? Second, should only relative performance be rewarded? Third, should there be caps on variable pay?

4.2.1 Whatareusefulkeyperformanceindicators?A compensation system should be designed to incentivise individuals appropriately, to attract those who match the company’s needs, and to retain the best-suited employees. As regards the design of incentives, a question that often arises is which indicators of performance should be used. Three aspects play a role here, and as we will see, it is important to recognise that the question of incentives cannot be considered separately from the issues of attraction and retention. First, a compensa-tion system should ensure alignment of managerial actions with firm value. Second, incentives are most effective when they relate to something that the manager can actually control. Third, teamwork is essential in today’s environment, and so the interdependence of managers’ actions needs to be reflected in the compensation system.


While these three goals arguably make sense taken individually, the crux of incentive design is that goals are often in conflict with each other. The key idea to realise is that firms get what they pay for. Thus, when banks reward employees for attracting net new money, they will attain higher net new money flows, but possibly at the cost of attracting “bad” money. When a salesforce is rewarded for higher customer satisfaction, they will achieve higher customer satisfaction, but possibly by giving special favours to customers that may be unsustainable in the long run. And when managers are rewarded for increasing accounting profits, they will indeed increase accounting profits, but possibly do so by engaging in (legal) accounting earnings management or foregoing profitable investment opportunities (thus conduct-ing real earnings management), which in the long run hurts firm value.

More generally speaking, broad key performance indicators – such as firm-wide economic profit or even just the stock price – optimally ensure aligment of managerial incentives with the interests of the firm and such also provide incentives for cooperation among managers. However, these indicators provide for poorer line of sight, and they offer a cruder measure of individual performance. On the other hand, specific individu-al performance measures provide exact measures of individual achievement and offer managers a clear, controllable line of sight, but they may lead to distorted behaviour and only provide for limited teamwork incentives.

In sum, there is no panacea and no unique answer to the question of what is an appropriate set of key performance indicators. What can be said (and cannot be emphasised enough), however, is that an effective compensation system has to be designed as as a “best fit” with company strategy, that is, it needs to be tied to the specific value drivers of a company, and it should be communicated as such.

4.2.2 Shouldonlyrelativeperformanceberewarded?When choosing key performance indicators, an issue of great practical importance is whether absolute or relative perfor-mance should be rewarded. Some observers are concerned that executive pay for performance may still at least partially be pay

for good luck or bad luck (that is, performance aspects outside the control of the CEO). Conceptual considerations and our practical experience suggest a differentiated view should be taken on this matter.

On the one hand, traditional agency theory argues that the principal should filter out all observable exogenous shocks when linking pay and performance. This idea of “indexing” compensa-tion fits well with the intuitively appealing notion that managers should not be rewarded merely for good luck that comes, for example, from generally rising share prices or favourable market conditions.

On the other hand, even if performance was good relative to, say, the industry, firm-specific performance on an absolute basis may still have been quite bad. Shareholders in general do not care about relative performance but rather about absolute performance. (Notably, however, asset managers – who are frequently paid based on relative performance – and pension funds may directly care about relative total shareholder return.) Moreover, relative performance evaluation tends to increase and possibly distort risk-taking incentives when management realises that it is below the competition. Furthermore, and critically, indexing limits even destroys another important function of compensation: retention. In particular, one central advantage of non-indexed equity-based compensation is that it should increase in value as the general stock market rises. Thus, together with suitable vesting and service conditions, managers who hold equity are less likely to leave. Next, the question quickly arises as to which index (the “peer group”) to use, and whether and how to disclose the index and index changes. Several studies suggest that severe agency conflicts can arise when management itself is involved in choosing a “suitable” peer group. Finally, when aspects that a manager cannot control are part of a compensation system, management is thus encour-aged to proactively consider how it responds to challenges in the external environment.12

Overall, these considerations suggest that an incentive system should in general not only be based on relative performance. Non-indexed equity-based or equity-related pay is an important compensation component.

12) Consequently, Murphy and Jensen (2011), CEO bonus plans: And how to fix them, Harvard Business School Working Paper, Boston, p. 42, argue that executives “should be held accountable for factors that are out of their control when they can control or affect the impact of these non-controllable factors on performance”.


We have to add the caution that capped variable pay plans also need to be very carefully managed. In particular, as we ex-plained in detail in our 2013 study on Executive Compensation and Corporation Governance, caps can lead to severe distortion-ary incentives. Firms may put a cap on variable pay to limit managerial risk-taking incentives. However, when such a cap is combined, as it often is in practice, with a floor or a jump in compensation at some lower threshold of performance, it may, in fact, induce strong and possibly excessive risk-taking incen-tives. There may also be a strong push for increased base salaries.

In the context of the revision of the articles of association, companies had to consider whether they wanted to include a cap on compensation in the articles. Table 4 shows total CEO compensation, variable CEO compensation, and the percentage of variable compensation for those SMI and SMIM companies that set a cap in the articles and for those that did not. Out of 48 companies in the SMI and SMIM index, at the time of this analysis 43 have completed their AGMs. Of these, 32 have completely adopted the Ordinance against excessive compensa-tion in stock exchange listed companies.13 (We have to say that these results are derived from a small sample and should, therefore, be interpreted with care.)

N Median total CEO compensation

Median variable CEO compensation

Percentage CEO variable compensation

Caps on variable pay Yes 15 CHF 4.3m CHF 2.2m 56 %

No 17 CHF 4.3m CHF 2.2m 58 %

Table 4: Caps on variable in the articles of association and characteristics of SMI and SMIM companies in terms of 2013 CEO compensation levels and structure

We briefly comment on the practice of setting benchmarks based on prior-year performance. For example, some companies use “Delta EPS” or “Delta Economic Profit” as a performance measure. This is intuitively appealing at first, and can provide a good way to measure progress over time. However, a drawback of this system is that executives will quickly realise that good performance this year will serve to increase the benchmark for the following year, and they will presumably take these dynam-ics into account. Whether the resulting potential distortion dominates the advantages of such a system depends, among other things, on the quality of governance by the board of directors.

4.2.3 Shouldtherebecapsonvariablepay?Putting caps on performance-related pay components can be a reasonable strategy to manage “headline risks” – that is, it becomes less likely that a company will find itself in the media and in the spotlight of public inquiry (and shareholder unrest). Caps can also simply help to predict ex ante how high pay will ultimately be. Regulatory tendencies also go in this direction; see, for example, the rules in the Capital Requirements Directive IV. (It is noteworthy, however, that the currently available draft of the new Swiss Code of Best Practice for Corporate Govern-ance does not include a recommendation to cap variable pay. By contrast, the German Corporate Governance Code does include such a recommendation.)

13) This analysis uses data provided by Wagner and Wenk, 2014, “Aktionäre and Stimmrechtsberater im Jahr 1 nach der Abzocker-Initiative”, University of Zurich working paper.


The data imply that median total and variable CEO compensa-tion in 2013 was no different in firms that chose to include a cap on variable pay in their articles than in those that did not. However, additional analysis reveals that the distribution is more skewed among those who do not have caps. For firms that did not set caps, the average CEO total compensation is CHF 5.8 million, as opposed to CHF 4.5 million for those with caps. For the average variable compensation, the two compensation amounts are CHF 3.5 million and CHF 2.8 million, respectively. Among the small-cap firms (not shown in the table), the tendency to higher pay in firms without caps is also true.

Presumably, some companies have used the articles to signal their commitment to a particular kind of pay policy. Overall, however, our interpretation is that companies are – perhaps in light of the pro’s and con’s of caps discussed above – undecided on whether a cap is so important that it needs to be included in the articles. Whether caps are included in articles or “just” implemented, we emphasise that having caps in place does not absolve the board from carefully choosing the performance measure, setting appropriate targets, meaningfully calibrating the “slope” of the pay-performance relationship around targets, and managing and supervising the implementation of the system.

4.3 Challenges for compensa-tion governance and for the board of directors

The design of compensation plans and the governance of such are inherently linked. Indeed, we have already touched on this point in our discussion of key performance indicators and caps on pay above. In this section, we highlight some additional points that have become particularly relevant since the adoption of the “Abzocker-Initiative” in Switzerland. The two common themes are that (1) the board of directors will play an increas-ingly important role in today’s challenging governance environ-ment and (2) one practice does not fit all.

4.3.1 Whoshouldserveonthecompensation committee?

Although a significant portion of the power boards of directors once held with respect to determining top management compen-sation has passed to shareholders, the board of directors still has a substantial responsibility in setting and governing an appropriate pay-setting process within the limits set in the articles and by shareholders in the yearly votes on compensation amount.

One concrete, practical challenge for companies is the individu-al, separate election of compensation committee members. While the original motivation for this new rule is understand-able, there are problematic side effects. In particular, as shareholders elect compensation committee members, they may begin thinking in terms of committee assignments of individual board members. In other words, a compartmentalisation tendency can arise, with specialists being favoured by share-holders. We believe that this is ultimately not in the best interest of companies (and not in the interests of shareholders them-selves). To counter this tendency, companies should think about their compensation committee as a portfolio of individuals and explain to shareholders (in the invitation to the annual general meeting) why the proposed group of individuals is best suited for this task.

With the rising power of proxy advisors and ever-increasing demands for disclosure of quantitative information, there is a (in our view, rather unnatural and unfortunate) push towards formulaic compensation systems where discretion of the board is minimised. We believe that boards of directors would do well to resist this push. A certain, well-governed degree of discretion, which is used to adjust compensation (upwards and downwards) in the light of extraordinary circumstances is an essential element of an effective compensation system. What this requires is, however, a credible board, and a clear process for how the discretion is used. Shareholders rightly worry about situations where executive management is too deeply involved in the setting of compensation, for example. It is perhaps somewhat surprising that only one quarter of SMI and SMIM companies that have revised their articles of association have so far chosen to commit themselves, in the articles of association, to allow only independent board members to be elected to the compensa-tion committee. One interpretation of this fact is that companies realise that true independence – namely, independent behaviour that supports the board’s strength – cannot be ensured by adherence to a checklist of personal characteristics but is a choice that needs to be proven again and again.


4.3.2 Howshouldtheboardofdirectorspreparesay-on-payvotes?

The biggest challenge in the upcoming annual general meeting season will be the implementation of the first binding say-on-pay votes. (A few companies have already conducted such votes this year.) It is interesting to note, first, that several distinct combi-nations of say-on-pay votes have proven popular among firms.14 One way to look at the data is to compare compensation levels and structures across firms (see Table 5).

Although care must be exercised when interpreting this data due to the small sample size, the results suggest an interesting pattern with regard to the association of the chosen say-on-pay regime and compensation levels. Companies that chose a prospective voting regime without a retrospective advisory vote tend to have much lower median CEO compensation than those who chose a retrospective voting regime, which in turn have much lower median CEO compensation than those who chose a prospective voting regime with a retrospective advisory vote. These patterns make sense: It is perhaps most difficult to convince shareholders to provide a “budget” of compensation under the pure prospective voting mechanism, where no future advisory vote can be held. Therefore, compensation levels are the smallest for these firms.

Naturally, for companies conducting retrospective votes (and for those using retrospective advisory votes) the remuneration report will be the most important document that shareholders (and the proxy advisors who provide recommendations for shareholders) will use to evaluate the appropriateness of the compensation system and the resulting amounts. Based on our evaluation of companies’ remuneration reports, we notice that significant heterogeneity continues to exist in the quality of disclosure. For example, there is much variation between companies in the disclosure of individual goals relevant in variable pay plans, and the degrees to which a link between the attainment of goals and the change in pay from one year to the next is established. We note that the market standard for disclosure has been raised significantly by the decision of several companies to provide more insight into how they aim for pay for performance.

In our experience, Swiss companies are increasingly eager to please proxy advisors because there is a perception that at least some proxy advisors have a substantial impact on voting decisions. Importantly, proxy advisors disagree far more frequently than is commonly assumed. A recent study15 of 909 items that were voted on at the AGMs of the SMI and SMIM companies shows, for example, that more than 27 % of items received a “Vote against” recommendation from one of four

14) Anecdotal evidence suggests that there is a strong “law firm fixed” effect in the sense that companies seeking out the advice of law firm X were much more likely to end up choosing a prospective voting pattern than those working with law firm Y. But the choice of the law firm itself is arguably not random.

15) Wagner and Wenk, 2014, ibid. That study approximates ISS voting recommendations by the actual voting record of Swisscanto, which uses voting policies developed jointly with ISS. Some differences are possible, however.

16) This analysis uses data provided by Wagner and Wenk, 2014, ibid. Several companies promise, in the invitation to the annual general meeting or in other documents, that they will hold advisory votes in the future. This analysis considers only a commitment in the articles of association.

N Median total CEO compensation

Median variable CEO compensation

Percentage variable compensation

Vote on short-term variable compensation

Prospective 21 CHF 3.2m CHF 2.1m 57 %

Of which with retrospective advisory

7 CHF 6.4m CHF 4.9m 60 %

Retrospective 11 CHF 4.5m CHF 3.2m 58 %

Table 5: Say-on-pay mechanisms of SMI and SMIM companies and 2013 CEO compensation levels and structure16


proxy advisors (Ethos, ISS, Swipra, and zRating). But the correlations among proxy advisors are far from perfect. For example, only in 15 out of 35 advisory compensation votes did Ethos and ISS provide the same advice; in the remaining 20 cases, either Ethos or ISS provided a “For” recommendation while the other proxy advisor provided an “Against” recommen-dation. In short, proxy advisors differ greatly in both their substantive policies and in terms of their processes. Institutional investors have to be aware of these differences when choosing proxy advisors, and companies also have to keep these differ-ences in mind when interacting with proxy advisors and shareholders.

Especially for prospective votes, we expect an essentially new “language” to develop through which companies communicate their plans to shareholders. It will be very important for companies to provide understandable and explicit information regarding the derivation of the budget amounts in their propos-als to shareholders. Proxy advisors base their recommendations on disclosed information, and it is in the interest of companies to

avoid ambiguity, imprecision, or a lack of transparency in their remuneration reports. Positive recommendations by proxy advisors are most likely to occur when a compensation system is perceived as working well in substance and when disclosure is perceived as transparent. Indeed, the two factors often go hand in hand. So far, in our view, the notice of the annual general meeting has been almost completely neglected by most compa-nies as an important tool for communicating with shareholders. One possible scenario is that the importance of this document will significantly increase in the near future.

We recommend to our clients not to be afraid of engaging major shareholders in a constructive dialogue. Of course, there is always a challenge as regards the equal treatment of sharehold-ers, but this challenge can be successfully navigated. When boards of directors realise that institutional investors are not “out to get them” but are (also) interested in the long-term success of the company, successful cooperation will occur that supports long-term value creation for all concerned.


5 Concluding Remarks: Six Principles

Despite – or because of – the market fluctuations we have seen over the past years and the many new regulatory challenges companies face, we continue to recommend that executive compensation should be designed with six simple principles in mind.

1. Only a strong board can implement an effective total compensation system.

2. The incentive system must be designed as a “best fit” with company strategy – and it needs to be communicated as such.

3. Compensation should be linked to a few key performance indicators (KPIs), but not exclusively to easily controllable factors.

4. Limits to pay are not needed in well-balanced compensation systems.

5. An effective compensation system establishes entrepreneuri-al incentives.

6. An effective compensation system focuses on value created for the long term.


Chairman SMI SMI Changes

2007 2008 2009 2010 2011 2012 2013 2012/2013 2007–2013

Highest 14,624,000 15,228,951 15,116,196 10,599,302 13,500,946 13,067,592 8,778,814 –32.82 % –39.97 %

Upper Quartile 2,267,343 2,510,380 3,070,609 5,170,938 3,901,563 4,744,835 4,193,723 –11.61 % 84.96 %

Median 981,479 849,045 1,330,867 1,288,694 1,359,124 1,139,932 1,140,754 0.07 % 16.23 %

Lower Quartile 540,402 752,011 670,599 621,725 817,837 611,893 620,260 1.37 % 14.78 %

Lowest 277,000 157,000 256,570 145,845 179,230 199,230 200,316 0.55 % –27.68 %

Average 2,388,680 2,452,604 2,954,167 2,984,783 2,972,324 2,985,809 2,435,080 –18.44 % 1.94 %

Board of Directors

SMI SMI Changes

2007 2008 2009 2010 2011 2012 2013 2012/2013 2007–2013

Highest 5,027,381 2,901,796 5,274,667 6,034,881 2,390,000 2,556,000 2,708,134 5.95 % –46.13 %

Upper Quartile 400,030 374,497 408,169 427,780 423,935 397,445 400,951 0.88 % 0.23 %

Median 297,059 279,869 317,407 327,388 323,680 326,376 318,411 –2.44 % 7.19 %

Lower Quartile 176,794 170,000 189,000 216,991 229,308 217,098 228,806 5.39 % 29.42 %

Lowest 0 0 0 0 0 0 0 0.00 % 0.00 %

Average 380,461 355,828 413,729 413,077 375,373 363,348 379,753 4.51 % –0.19 %

CEO SMI SMI Changes

2007 2008 2009 2010 2011 2012 2013 2012/2013 2007–2013

Highest 22,280,000 20,544,032 20,471,929 12,760,000 15,722,386 13,228,188 13,226,287 –0.01 % –40.64 %

Upper Quartile 13,136,500 8,363,477 12,239,331 8,696,498 9,322,764 9,303,409 10,025,031 7.76 % –23.69 %

Median 8,093,387 5,318,957 5,487,132 7,631,875 5,820,000 6,707,148 6,668,465 –0.58 % –17.61 %

Lower Quartile 4,682,601 3,466,990 3,821,146 5,220,068 5,315,541 4,795,092 4,510,798 –5.93 % –3.67 %

Lowest 1,704,000 1,814,702 1,819,000 1,560,206 1,570,000 1,652,000 1,713,000 3.69 % 0.53 %

Average 9,470,696 6,989,794 7,971,237 7,159,064 7,208,376 7,142,766 7,143,090 0.00 % –24.58 %




2007 2008 2009 2010 2011 2012 2013 2012/2013 2007–2013

Highest 1,124,000 1,052,000 1,009,100 1,458,055 1,596,343 1,654,735 1,726,476 4.34 % 53.60 %

Upper Quartile 548,173 649,000 751,464 645,000 837,975 839,700 920,417 9.61 % 67.91 %

Median 384,327 409,114 554,000 550,000 461,819 590,488 544,000 –7.87 % 41.55 %

Lower Quartile 266,250 258,000 302,000 316,906 275,000 306,000 379,000 23.86 % 42.35 %

Lowest 0 107,000 160,000 141,000 0 0 107,010 n/a n/a

Average 458,859 478,818 538,301 555,840 565,027 619,228 697,304 12.61 % 51.96 %

Board of Directors

SMIM SMIM Changes

2007 2008 2009 2010 2011 2012 2013 2012/2013 2007–2013

Highest 3,255,621 3,511,407 3,052,565 2,844,157 3,702,177 1,591,000 2,370,000 48.96 % –27.20 %

Upper Quartile 221,000 215,341 220,180 224,020 222,000 244,979 248,375 1.39 % 12.39 %

Median 169,500 154,000 157,388 171,000 169,950 176,197 194,955 10.65 % 15.02 %

Lower Quartile 106,417 106,500 105,288 114,000 112,000 127,300 145,000 13.90 % 36.26 %

Lowest 0 0 0 0 0 0 0 0.00 % 0.00 %

Average 203,512 193,255 199,360 202,270 201,351 200,623 217,161 8.24 % 6.71 %


2007 2008 2009 2010 2011 2012 2013 2012/2013 2007–2013

Highest 12,024,884 7,062,808 7,840,619 6,999,000 8,568,000 7,400,468 6,689,000 –9.61 % –44.37 %

Upper Quartile 4,397,000 3,512,979 3,505,219 3,452,000 3,770,986 3,425,508 4,315,525 25.98 % –1.85 %

Median 2,846,000 2,472,705 2,151,000 2,576,000 2,388,487 2,391,389 3,199,000 33.77 % 12.40 %

Lower Quartile 1,792,000 1,579,217 1,314,369 1,976,291 1,680,750 1,743,500 2,266,250 29.98 % 26.46 %

Lowest 1,012,836 930,824 710,000 5,000 5,000 5,000 1,634,412 32588.24 % 61.37 %

Average 3,945,922 2,939,327 2,828,691 2,801,649 2,930,972 2,869,831 3,583,325 24.86 % –9.19 %


2007 2008 2009 2010 2011 2012 2013 2012/2013 2007–2013

Highest 2,924,700 2,500,000 1,991,300 1,366,780 1,452,600 2,319,900 2,318,200 –0.07 % –20.74 %

Upper Quartile 479,000 439,599 400,000 384,000 415,116 456,376 431,198 –5.52 % –9.98 %

Median 334,000 265,000 230,000 247,000 305,100 309,000 291,935 –5.52 % –12.59 %

Lower Quartile 157,821 191,000 144,000 158,821 175,245 226,423 202,893 –10.39 % 28.56 %

Lowest 0 0 0 0 60,413 64,000 69,364 8.38 % n/a

Average 457,707 422,241 355,162 337,884 386,969 406,859 405,349 –0.37 % –11.44 %

Board of Directors


2007 2008 2009 2010 2011 2012 2013 2012/2013 2007–2013

Highest 1,369,487 606,810 600,000 372,000 501,671 535,000 638,000 19.25 % –53.41 %

Upper Quartile 143,600 140,000 134,436 140,000 150,000 155,925 155,195 –0.47 % 8.07 %

Median 108,600 99,000 91,916 100,424 106,000 109,740 108,500 –1.13 % –0.09 %

Lower Quartile 65,000 62,000 62,500 66,800 67,400 73,150 70,949 –3.01 % 9.15 %

Lowest 0 0 0 0 0 0 0 0 % 0 %

Average 125,240 112,538 102,219 109,800 111,104 118,633 122,389 3.17 % –2.28 %


2007 2008 2009 2010 2011 2012 2013 2012/2013 2007–2013

Highest 8,254,573 5,938,000 4,175,632 5,389,826 3,830,506 4,200,957 4,612,870 9.81 % –44.12 %

Upper Quartile 2,186,020 1,760,000 1,930,000 1,730,815 2,076,000 1,523,550 1,911,406 25.46 % –12.56 %

Median 1,208,000 1,098,000 1,173,970 1,140,200 1,084,200 1,179,500 1,240,000 5.13 % 2.65 %

Lower Quartile 954,000 810,000 765,072 831,000 921,000 832,245 924,000 11.03 % –3.14 %

Lowest 298,500 303,727 20,000 338,210 289,348 0 116,000 n/a –61.14 %

Average 1,850,604 1,600,209 1,465,539 1,635,184 1,393,312 1,379,043 1,465,641 6.28 % –20.80 %




2007 2008 2009 2010 2011 2012 2013 2012/2013 2007–2013

Highest 1,124,000 1,052,000 1,009,100 1,458,055 1,596,343 1,654,735 1,726,476 4.34 % 53.60 %

Upper Quartile 548,173 649,000 751,464 645,000 837,975 839,700 920,417 9.61 % 67.91 %

Median 384,327 409,114 554,000 550,000 461,819 590,488 544,000 –7.87 % 41.55 %

Lower Quartile 266,250 258,000 302,000 316,906 275,000 306,000 379,000 23.86 % 42.35 %

Lowest 0 107,000 160,000 141,000 0 0 107,010 n/a n/a

Average 458,859 478,818 538,301 555,840 565,027 619,228 697,304 12.61 % 51.96 %

Board of Directors

SMIM SMIM Changes

2007 2008 2009 2010 2011 2012 2013 2012/2013 2007–2013

Highest 3,255,621 3,511,407 3,052,565 2,844,157 3,702,177 1,591,000 2,370,000 48.96 % –27.20 %

Upper Quartile 221,000 215,341 220,180 224,020 222,000 244,979 248,375 1.39 % 12.39 %

Median 169,500 154,000 157,388 171,000 169,950 176,197 194,955 10.65 % 15.02 %

Lower Quartile 106,417 106,500 105,288 114,000 112,000 127,300 145,000 13.90 % 36.26 %

Lowest 0 0 0 0 0 0 0 0.00 % 0.00 %

Average 203,512 193,255 199,360 202,270 201,351 200,623 217,161 8.24 % 6.71 %


2007 2008 2009 2010 2011 2012 2013 2012/2013 2007–2013

Highest 12,024,884 7,062,808 7,840,619 6,999,000 8,568,000 7,400,468 6,689,000 –9.61 % –44.37 %

Upper Quartile 4,397,000 3,512,979 3,505,219 3,452,000 3,770,986 3,425,508 4,315,525 25.98 % –1.85 %

Median 2,846,000 2,472,705 2,151,000 2,576,000 2,388,487 2,391,389 3,199,000 33.77 % 12.40 %

Lower Quartile 1,792,000 1,579,217 1,314,369 1,976,291 1,680,750 1,743,500 2,266,250 29.98 % 26.46 %

Lowest 1,012,836 930,824 710,000 5,000 5,000 5,000 1,634,412 32588.24 % 61.37 %

Average 3,945,922 2,939,327 2,828,691 2,801,649 2,930,972 2,869,831 3,583,325 24.86 % –9.19 %


2007 2008 2009 2010 2011 2012 2013 2012/2013 2007–2013

Highest 2,924,700 2,500,000 1,991,300 1,366,780 1,452,600 2,319,900 2,318,200 –0.07 % –20.74 %

Upper Quartile 479,000 439,599 400,000 384,000 415,116 456,376 431,198 –5.52 % –9.98 %

Median 334,000 265,000 230,000 247,000 305,100 309,000 291,935 –5.52 % –12.59 %

Lower Quartile 157,821 191,000 144,000 158,821 175,245 226,423 202,893 –10.39 % 28.56 %

Lowest 0 0 0 0 60,413 64,000 69,364 8.38 % n/a

Average 457,707 422,241 355,162 337,884 386,969 406,859 405,349 –0.37 % –11.44 %

Board of Directors


2007 2008 2009 2010 2011 2012 2013 2012/2013 2007–2013

Highest 1,369,487 606,810 600,000 372,000 501,671 535,000 638,000 19.25 % –53.41 %

Upper Quartile 143,600 140,000 134,436 140,000 150,000 155,925 155,195 –0.47 % 8.07 %

Median 108,600 99,000 91,916 100,424 106,000 109,740 108,500 –1.13 % –0.09 %

Lower Quartile 65,000 62,000 62,500 66,800 67,400 73,150 70,949 –3.01 % 9.15 %

Lowest 0 0 0 0 0 0 0 0 % 0 %

Average 125,240 112,538 102,219 109,800 111,104 118,633 122,389 3.17 % –2.28 %


2007 2008 2009 2010 2011 2012 2013 2012/2013 2007–2013

Highest 8,254,573 5,938,000 4,175,632 5,389,826 3,830,506 4,200,957 4,612,870 9.81 % –44.12 %

Upper Quartile 2,186,020 1,760,000 1,930,000 1,730,815 2,076,000 1,523,550 1,911,406 25.46 % –12.56 %

Median 1,208,000 1,098,000 1,173,970 1,140,200 1,084,200 1,179,500 1,240,000 5.13 % 2.65 %

Lower Quartile 954,000 810,000 765,072 831,000 921,000 832,245 924,000 11.03 % –3.14 %

Lowest 298,500 303,727 20,000 338,210 289,348 0 116,000 n/a –61.14 %

Average 1,850,604 1,600,209 1,465,539 1,635,184 1,393,312 1,379,043 1,465,641 6.28 % –20.80 %

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