"Say on Pay" in Switzerland: taking stock after the first AGM season
Bulletin July 7, 2014
"Say on Pay" in Switzerland:
Taking Stock of the 2014 AGM Season
The Swiss Ordinance Against Excessive Compensation entered into effect on
January 1, 2014. The Ordinance implements the key elements of the "Minder
Initiative", a constitutional amendment approved by the Swiss electorate in
March 2013. The majority of Swiss listed companies have already adapted
their articles of association to the Ordinance at the 2014 AGM. The AGM season has brought no big surprises; almost all board proposals were approved
with overwhelming majorities.
The Federal Council passed the Ordinance
Against Excessive Compensation (the Ordinance)
on November 20, 2013. The Ordinance applies to
all Swiss companies whose shares are listed on a
Swiss or foreign exchange. It entered into effect on
January 1, 2014, subject to the following transitional provisions:

The articles of association of Swiss listed
companies must be amended at the 2015
AGM at the latest. About two-thirds of all
Swiss listed companies, and 75% of the
Swiss blue chip companies represented in
®
the Swiss Market Index (SMI) , have already
implemented the new regime. And with only
two exceptions, all board proposals to align
the articles of association with the provisions
of the Ordinance have been approved by
shareholders.

The first AGM to which the say-on-pay
requirement of the Ordinance applies is in
2015. If a company adopts a prospective
voting model pursuant to which shareholders at the 2015 AGM approve board and executive compensation for the 2016 financial
year, any compensation paid out during
2014 or 2015 does not need to be approved
under the Ordinance.

Existing employment agreements must be
brought in line with the Ordinance by January 1, 2016. In relation to pre-existing employment agreements, the statutory prohibitions regarding severance compensation,
"Say on Pay" in Switzerland: taking stock after the first AGM season
Bulletin July 7, 2014


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advance payments and "commissions" for
the acquisition or transfer of enterprises or
parts thereof must therefore be repealed by
end of 2015.

the vote on compensation is held annually
and relates to a one-year period;

the vote is binding rather than advisory; and
New employment agreements must comply
with the Ordinance as of January 1, 2014.

the vote is held separately for the board of
directors and executive management, respectively.
The first compensation report pursuant to
the Ordinance must be prepared for the financial year 2014 and made available to
shareholders ahead of the 2015 AGM.
Institutional voting representation by depository banks and the corporate proxy is prohibited since January 1, 2014. In the 2014
AGM season, shareholders were generally
asked to elect the independent proxy,
which will be the only permissible form of institutional shareholder representation at a
general meeting.

The members of the board of directors, the
chairman and the members of the compensation committee must be elected for
one-year terms, starting from the 2014
AGM.

The electronic grant of proxies and voting
instructions to the independent proxy must
be made possible for the first at time at the
2015 AGM. Many companies have used this
year's AGM season to test the new model.
Board Compensation
A large majority of Swiss listed companies have
opted for board compensation to be approved in
relation to the time period from one AGM to the
next. This corresponds to the one-year term of
office of board members. About 70% of all Swiss
®
listed companies and 93% of SMI companies
have adopted this model. Other companies who
have chosen a different model usually have shareholders approve board compensation in relation to
the following financial year.
As a general observation, institutional shareholder
advisers, in particular ISS, have objected to articles of association that allow board members to be
awarded options or similar instruments. Deferred
compensation elements such restricted shares or
deferred units that are independent of the performance of the company are better received.
Executive Compensation
For executive compensation, various models have
emerged, all of which have been supported by
shareholders and institutional proxy advisers alike.

Fixed compensation is almost universally
approved on a prospective basis, in general
in relation to the next financial year. Very
few companies ask their shareholders to
approve fixed compensation in relation to
the ongoing financial year.

About 75% of listed companies surveyed
also submit variable compensation to a
prospective shareholder vote, generally for
the following financial year. The vote relates
to a maximum amount, which almost always
Structure of the Say-on-Pay Vote: Prospective,
Retrospective or Something In-between?
An earlier draft of the Ordinance provided that, as
a default, shareholders would approve board compensation ex ante, from one AGM to the next, and
executive compensation ex post, for the past financial year. The Ordinance no longer provides for
a default rule. Rather, it allows Swiss companies to
specify in their articles of association how say-onpay votes are to be conducted, provided that:
"Say on Pay" in Switzerland: taking stock after the first AGM season
Bulletin July 7, 2014
will be higher than the amount actually
awarded in the end. Some companies have
distinguished within variable compensation,
in particular as regards short-term and longterm incentive awards, and apply separate
voting regimes or separate reference periods in this regard.
Shareholder advisory groups have generally
supported prospective voting regimes, provided that companies are sufficiently transparent ahead of the AGM as regards the parameters that determine variable compensation.

A few companies have introduced a retrospective regime in which all executive compensation is approved ex post. Many of these companies have a controlling or anchor
shareholder.
Advisory Vote After the Fact
On top of the binding vote required by the Ordinance, many Swiss listed companies intend to
submit the compensation report for the past
financial year to an advisory vote by shareholders, especially where executive compensation is
approved for ongoing or next business year.
By its nature, a prospective vote on compensation
relates to a maximum amount within which the
board has discretion, subject to the parameters of
the relevant compensation plans, to set executive
pay. Only after the financial year has closed will it
become clear to what extent the maximum amount
has been used.
The advisory vote is therefore an ex post check on
the actual compensation paid. In line with international best practices, this vote is only advisory in
nature.
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Sign-on Bonuses and Replacement Awards
The Ordinance proscribes the payment of "compensation in advance", but continues to permit
sign-on bonuses and replacement awards, i.e.,
payments to compensate benefits and other entitlements from previous employers that a joining
executive will forfeit. Many Swiss companies have
introduced a provision in their articles of association that confirms the permissibility of sign-on bonuses or replacement awards.
In relation to companies with a prospective voting
regime, the Ordinance provides for additional flexibility by allowing companies to determine a "supplementary amount" that can be paid to executives
who join the company only after the say-on-pay
vote. "Supplementary amounts" are sometimes
determined by reference to predecessor pay,
sometimes by reference to the aggregate compensation of the executive board. In the latter case,
the articles of association generally provide that
between 20% and 40% of the aggregate maximum
compensation amount approved by shareholders
ex ante may be used for "supplementary amounts".
Severance Payments and Non-compete Covenants
The Ordinance proscribes severance payments
beyond the maximum statutory notice period of
twelve months. However, a consensus has
emerged that accelerated vesting or vesting at
target with respect to deferred compensation elements, including deferred equity awards, remains
permissible.
Further, non-compete agreements continue to be
allowed, irrespective of whether or not included the
articles of association. Many Swiss listed companies now explicitly refer to non-compete payments
(and their limits) in the articles of association.
Some proxy advisors have advocated that aggregate non-compete payments awarded to a former
executive should not exceed 100% of the annual
compensation.
"Say on Pay" in Switzerland: taking stock after the first AGM season
Bulletin July 7, 2014
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External mandates of directors and executives
Pursuant to the Ordinance, the articles of association of Swiss listed companies must set out the
maximum number of external board mandates
a director or officer can hold in addition to his or
her position at the company in question.
As regards mandates in other listed companies, a
best practice has emerged. Most of the companies
surveyed allow four additional mandates in listed
companies for directors, and one outside mandate
for executive officers; some allow for five and two
additional mandates, respectively.
With respect to mandates in privately held companies and non-profit organizations recorded in the
commercial register, practice is more varied.
Conclusion
By and large, the first AGM season in which the
Swiss "say on pay" provisions were implemented
brought few surprises. This is good news for the
boards of directors of Swiss listed companies:


There are, in effect, few constraints on the
ability of a Swiss corporate board to structure the articles of association and the compensation related provisions in a manner
that it considers to be in the best interests of
the company.
Generally, Swiss boards can be confident
that shareholders will follow their proposals
with large majorities.
Thus, even though the Ordinance affords the final
decision to shareholders, a Swiss board of directors remains in control of how "say on pay" is structured.
* * *
For any questions or further information relating to
this Bulletin, please contact your regular contact or
the following attorneys at Homburger:
Daniel Daeniker
Dr. iur., LL.M., Attorney-at-Law
[email protected]
T +41 43 222 1650
Claude Lambert
Dr. iur., LL.M., Attorney-at-Law
[email protected]
T +41 43 222 1538
David Oser
Dr. iur., LL.M., Attorney-at-Law
[email protected]
T +41 43 222 1570
Andreas Müller
Dr. iur., LL.M., Attorney-at-Law
[email protected]
T +41 43 222 1681
Homburger AG
Prime Tower
Hardstrasse 201 | CH-8005 Zürich
Postfach 314 | CH-8037 Zürich
T +41 43 222 1000
F +41 43 222 1500
[email protected]
Legal Note
This Homburger Bulletin expresses general views of the authors at
the date of the Bulletin, without considering the facts and circumstances of any particular person or transaction. It does not constitute legal advice. As such, this Bulletin may not be relied upon by
any person for any purpose, and any liability for the accuracy,
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explicitly excluded.