Say on Pay in Switzerland—Constitutional Initiative Against Excessive Compensation

On 3 March 2013, Swiss citizens will vote on a constitutional initiative against excessive compensation. Pursuant to this initiative, shareholders of listed Swiss stock companies would have a binding vote on board and management compensation. Furthermore, severance payments and advance compensation of the board and the management of such companies would be banned.

By Gian-Andrea Caprez (Reference: CapLaw-2013-3)

1) Introduction

In Switzerland, as around the world, executive compensation has been heatedly debated over the last few years. As a result of public criticism of executive pay, in February 2008, Swiss entrepreneur and parliamentarian Thomas Minder filed a constitutional initiative, the so-called initiative against excessive compensation (Initiative), providing for mandatory principles mainly regarding executive compensation in listed Swiss stock companies (Aktiengesellschaft). Thereafter, Swiss parliament extensively debated on alternative legislative proposals. In March 2012, a so-called indirect counterproposal (Counterproposal) to the Initiative (i.e. a counterproposal on the level of an amendment to the Swiss corporate law statute, and not to the Swiss Constitution) was agreed upon by Swiss parliament. On 3 March 2013, Swiss citizens will vote only on the Initiative. In order to pass, the Initiative must be approved by the majority of both the citizens voting on it and the various states. If the Initiative is rejected and no referendum on the Counterproposal is called for, the Counterproposal will come into force, presumably on 1 January 2014.

The Initiative provides that the legislator has to adopt statutory provisions being in line with the principles contained in the Initiative. Until the implementation of the Initiative on the statutory level, i.e. mainly in the Swiss Code of Obligations, the Initiative requires the Swiss Federal Council (Bundesrat) to issue implementing regulations within one year after the approving vote.

The Initiative only applies to Swiss stock companies listed in Switzerland or abroad. Foreign companies are not affected by the Initiative even if they are listed in Switzerland. The overall scope of application of the Counterproposal is broader; however, the large majority of the provisions of the Counterproposal relating to compensation matters applies only to listed Swiss stock companies. This article aims at providing an overview on the proposals of the Initiative and the corresponding provisions of the Counterproposal that are applicable to listed Swiss stock companies.

2) Principles of the Initiative/Counterproposal

a) Say on Pay and Further Provisions relating to Compensation

Under the current Swiss corporate law, the determination of the compensation of the Board and the management (Geschäftsleitung) lies within the competence of the Board (unless the articles of association provide for the competence of the shareholders with respect to compensation of Board members). However, several listed Swiss companies have introduced non-binding, consultative shareholder votes on executive compensation.

One of the most important provisions of the Initiative is the binding annual shareholders’ vote on the aggregate compensation (cash and value of other benefits) of the Board, the management and the advisory board (if any). The Counterproposal contains essentially the same rules; however, with respect to the shareholders’ resolution on the aggregate compensation of the management, the articles of association of the company may determine whether such resolutions hall have binding or only non-binding, consultative effect. In addition, pursuant to the Counterproposal, the vote on the base compensation relates to the time period until the next ordinary shareholders’ meeting whereas the vote on the additional compensation components concerns the prior business year. The Initiative does not make such differentiation.

The Initiative requires that the articles of association contain rules with respect to the amounts of credits, loans and pension benefits of the members of corporate bodies (Organmitglieder) as well as regarding their incentive and participation plans. It is not fully clear from the wording of the Initiative what level of detail has to be provided with respect to such information. The Counterproposal requires the Board to issue compensation regulations (Vergütungsreglement) determining, inter alia, (i) the competences and the procedure to set the compensation, (ii) the elements of compensation and (iii) the criteria for credits, loans and pension benefits of the Board, the management and the advisory board. The compensation regulations must be approved by shareholders’ resolution. Shareholders representing 0.25% of the share capital or voting rights or shares with a nominal value of CHF 1 million are entitled to propose to the shareholders’ meeting to amend the compensation regulations. In the compensation report (Vergütungsbericht) contained in the Counterproposal, the Board accounts for compliance with the law and the compensation regulations and discloses the compensation (including the salaries and bonuses, the allocation of shares and option rights and the expenditures creating pension entitlements) and the loans and credits of the Board, the management and the advisory board.

Pursuant to the Initiative, severance payments, advance compensation and success fees for M&A transactions in favor of members of the Board and the management are not permitted anymore. Severance payments and advance compensation are not allowed by the Counterproposal either; however, exceptions in individual cases are possible provided that they are in the interest of the company and approved by a qualified majority of the shareholders. In addition, severance payments and advance compensation must be disclosed in the compensation report. Furthermore, the Counterproposal distinguishes between advance compensation and signing bonuses. The latter are permitted in principle as part of the total compensation if they are provided for in the compensation regulations. Success fees for M&A transactions are not prohibited according to the Counterproposal.

The Counterproposal toughens the rules on the claw-back claim (Rückerstattungsklage) regarding benefits received from the company. In addition, the Counterproposal specifies the duty of care of the Board regarding the determination of the compensations. The Initiative does not include such proposals.

b) Elections by the Shareholders’ Meeting


The Initiative provides for the yearly and individual election by the shareholders’ meeting of the members of the Board, the chairman of the Board and the members of the compensation committee of the Board. The Counterproposal contains the same one-year term of office, but is more flexible as the articles of association may extend the term up to a maximum of three years. According to the Counterproposal, the shareholders’ meeting elects the chairman of the Board if the articles of association do not provide for its election by the Board itself. The Counterproposal is silent on the election of the members of the compensation committee. Hence, its members will as now be appointed by the Board.

Both the Initiative and the Counterproposal provide for the yearly election of the independent proxy (unabhängiger Stimmrechtsvertreter) by the shareholders’ meeting.

c) Provisions regarding Corporate Bodies


Pursuant to the Initiative, corporate bodies must not have additional consulting or employment contracts with other companies of the same group. Furthermore, the management of the company may not be delegated to a legal entity. The Counterproposal does not address these points.

The Initiative requests that the articles of association contain rules with respect to the number of mandates of corporate bodies outside the group and regarding the duration of the employment agreements of the management. According to the Counterproposal, the mandates of the Board members and the management outside the group are to be disclosed in the compensation report. The principles governing the duration and termination of the agreements of the members of the Board, the management and the advisory board must be set forth in the compensation regulations and the duration of the (employment) agreements of the management has to be disclosed in the compensation report.

d) Penal Sanctions

The Initiative requires that any violation of the principles of the Initiative will be punished by imprisonment of up to three years and a monetary penalty of up to six annual compensations. The Counterproposal does not contain any penal sanctions.

e) Further Provisions

As of today, Swiss corporate law provides for three means of institutional proxy voting: the independent proxy, proxies to representatives of corporate bodies (Organvertretung) and proxies of deposited shares (Depotvertretung). The latter two would not be permitted any longer according to the Initiative. The Counterproposal has adopted this rule.

Pursuant to the Initiative, pension funds have to vote their shares in the interest of their insured persons and must disclose how they have voted. The Counterproposal is in line with the Initiative regarding disclosure of voting behavior. However, pursuant to the Counterproposal, pension funds have to vote their shares only to the extent possible. The Initiative requires that shareholders must have the possibility to vote electronically at shareholders’ meetings. The Counterproposal provides for flexibility in this respect as the shareholders can decide whether they want to have such option or not. In addition, the Counterproposal contains the possibility of a purely virtual shareholders’ meeting (without physical meeting location) provided that all shareholders agree and the resolutions do not need to be notarized.

3) Conclusion

The Counterproposal of Swiss parliament has adopted several principles of the Initiative such as enhanced shareholders’ rights with respect to executive compensation. While the Initiative contains strict and mandatory rules, the Counterproposal provides for a more flexible solution allowing the shareholders to deviate from certain (dispositive) provisions. It remains to be seen whether Swiss citizens will vote for the rigid Initiative on 3 March 2013. An intense and emotional debate is currently ongoing.