Swiss Vote on Pay

Swiss voters adopt limits on excessive executive pay (Minder-Initiative)

As expected, the Swiss voters today adopted limits on excessive executive pay (Minder-Initiative) by a clear margin.

1. What happens next?
The new constitutional provisions are not directly applicable, but must be implemented first by the Federal Parliament at legislative level. Pursuant to the wording of the initiative, the Federal Council has to adopt by March 3, 2014 at the latest a provisional regulation for the transitional period until the entry into force of the new law. We expect that the new rules will apply for the financial year 2015 at the earliest. We assume the act already adopted by the Federal Parliament as a counterproposal to the initiative will, as far as possible, be used as a basis for the implementation of the new rules.

2. Who does it affect?
Affected are public companies with registered office in Switzerland that are listed on a stock exchange in Switzerland or abroad, as well as Swiss pension funds. Swiss companies not listed and foreign companies even when listed in Switzerland are not concerned.

3. Impact on listed companies
Articles of association
The articles of association must comply with the new mandatory requirements of the new rules. That applies in particular to the following areas:

  • Election of the Chairman of the Board of Directors and the other board members, members of the Compensation Committee and the independent proxy holder will take place annually and for each candidate separately.
  • Corporate and custody representation are no longer permitted.
  • The General Meeting has the binding vote on the total amount of remuneration for the members of the executive bodies (board, management, advisory board).
  • The amount of credit, loans and pensions payable to the members of the executive bodies, their performance and share bonus plans, and the number of their mandates outside of the group, as well as the duration of the employment contracts of the senior management, will require to be regulated in the articles of association.

Contracts with members of executive bodies
Contracts with the members of the executive bodies (whether mandate, employment, advisory or other contracts) will have to comply with the legal and statutory requirements. Prohibited are severance payment, compensation in advance and transaction incentives. Members of the executive bodies are not permitted to have any additional consulting or employment contracts with other group companies. Still open is what will apply to contracts concluded before the entry into force of the implementing regulations.

General Meeting of Shareholders
Changes relevant to the proceedings at and the agenda of the General Meeting comprise:

  • The General Meeting will be required to vote annually on the total of all remuneration of the members of the executive bodies. It is unclear what will happen if the shareholders vote against the proposed package.
  • It will be mandatory to offer an online General Meeting. Shareholders will be able to use remote electronic voting.

4. Impact on pension funds
Pension funds must exercise their voting rights in listed Swiss corporations in the interest of the insured and disclose how they voted. Pension funds need to consider, in advance, how to comply with these obligations, in particular, whether they wish to delegate the voting to new specialised service providers likely to offer their services soon.

5. What else has changed?
The Minder-Initiative provides for drastic penalties: offenses are punishable with imprisonment of up to three years and fines of up to six years' remuneration.

6. Immediate action required
Listed companies are well advised to adapt their compensation system swiftly. In doing so they can benefit from a "testing period" before the entering into force of the new rules. We recommend that any new agreements with members of the executive bodies take into account the new law already now. Apart from that, companies have to wait for the implementing regulations of the Federal Council and the new law to be passed by Federal Parliament.

Authors

Dr. Benedict F. Christ
Dr. Benedict F. Christ, LL.M.

bfchrist@vischer.com

Dr. Peter Kühn
Dr. Peter Kühn, LL.M.

pkuehn@vischer.com

VISCHER AG