ETHOS SURVEY Executive Remuneration in the 100 Largest Companies listed in Switzerland (Summary version) NOVEMBER 2006 © Ethos ”The market is capable of disciplining excessive compensation, provided that the market has adequate information.” Christopher Cox, Chairman of the US Securities and Exchange Commission (SEC) “Investors should welcome reforms that will provide them with an accurate picture of the magnitude and make-up of executive pay. But they should also press for the power they need if the added disclosures are to have a significant impact on executive compensation and corporate performance.” Lucian Bebchuk, Professor of Law, Economics and Finance at Harvard Law School “Shareholders should be able to make their views known on the remuneration policy for board members and key executives. The equity component of compensation schemes for board members and employees should be subject to shareholder approval.” Organisation for Economic Co-operation and Development (OCDE) Principles of Corporate Govern- ance, 2004 Ethos 2 Place Cornavin - PO Box - 1211 Geneva 1 - Switzerland T +41 (0)22 716 15 55 - F +41 (0)22 716 15 56 - www.ethosfund.ch Analysts Dr. Yola Biedermann, Senior Analyst Vincent Kaufmann, Analyst Vinzenz Mathys, Analyst Disclaimer This study is based on a methodology developed by Ethos. The information was gathered from sources avail- able to investors and the general public, e.g. company reports, websites, eventually direct contacts with company officers. Despite multiple verifications, the information provided cannot be guaranteed exact. Ethos takes no responsibility on the accuracy of information provided. © Ethos 2006 All rights reserved. Unauthorised reproduction, lending, hiring, transmission or distribution of any data is prohibited. Page 3 Table of contents Table of contents ...............................................................................................................................3 Executive Summary ..........................................................................................................................4 Key Findings and Shareholder Expectations ..................................................................................5 1. Disclosure ................................................................................................................................5 2. Structure...................................................................................................................................5 3. Competencies ..........................................................................................................................6 Appendix ............................................................................................................................................8 page 4 Executive Summary Main results • The remuneration disclosure of the com- panies analysed rarely exceeds the mini- This is a summary version of Ethos’ mum required by the SWX Swiss Ex- study “Executive Remuneration in the change Corporate Governance Directive 100 Largest Companies Listed in (CGD). This falls short of international stan- Switzerland”. dards and does not allow shareholders to The complete text of this study is avail- form an informed opinion of the remunera- able in French and in German on tion policy. Ethos’ website www.ethosfund.ch Ethos calls on listed companies to en- hance disclosure by publishing more than the minimum amount of informa- The remuneration of Directors and executive tion required under the CGD. management in listed companies is a matter • The analysis of the remuneration structure of serious concern to shareholders. reveals that the level of remuneration is Prompted by a number of cases of excessive closely related to company size. The aver- remuneration paid by Swiss listed compa- age pay of executive directors and execu- nies, Ethos, as a long-term institutional inves- tive management in the 100 companies tor, conducted an in-depth study of executive amounted to CHF 2.2 million per person pay among Switzerland’s 100 largest listed and the average pay of non executive di- companies. rectors to CHF 230,000 per person. The study has three complementary parts. Ethos asks companies to apply the The first examines remuneration policy in rules of international best practice, in the perspective of international best prac- particular by strengthening the link be- tice, reviewing successively disclosure, pol- tween remuneration and performance, icy structure and competencies with regard in order to genuinely align share- to establishing remuneration. holder and executive interests. The second part analyses actual remu- • In Switzerland, the remuneration of Board neration on the Swiss market in 2005. The members and executive management is results are presented in three sections. The determined by the Board of Directors itself. first looks at the level of remuneration dis- Ethos would like the annual meeting closure of Swiss listed companies. The sec- of shareholders to be able to cast an ond examines the remuneration structure, advisory vote on the remuneration with special emphasis on its components, policy for listed company Board mem- the amounts and types of remuneration bers and executive management. This granted and the link between pay and per- practice is recommended by the OECD formance. The third analyses the competen- and functions very well in several cies with regard to setting executive remu- European countries, including the neration, in particular the existence and the United Kingdom, the Netherlands and composition of a separate and focused re- Sweden. muneration committee. Finally, the third part assesses the state of executive pay in the main listed compa- nies in Switzerland. In this context, Ethos also presents the expectations of long-term institutional investors committed to the re- spect of international best practices on re- muneration. Page 5 Key Findings and • The mechanisms for awarding bonuses and the performance criteria applied to Shareholder Expectations long-term incentive plans are rarely pub- lished in comprehensive detail, seriously undermining the remuneration policy’s The successive analysis of international best credibility in the eyes of the sharehold- practice on executive pay and actual remu- ers. neration in Switzerland’s 100 largest listed • The publication of individual data on ex- companies resulted in interesting conclusions ecutive pay remains an exception, even on each of the three main aspects of the though the most recent version of the issue: disclosure of remuneration policy, its Swiss Code of Obligations stipulates that structure and who has competence to estab- such publication shall be mandatory as of lish it. the 2007 annual report. For each of the three aspects, the conclu- sions describe the situation in Switzerland, Expectations of institutional investors and present the expectations of institutional Listed companies must have transparent investors committed to the respect of inter- remuneration policies if they are to enjoy the national best practice on remuneration. shareholders’ confidence. The remuneration policy must therefore be described in exhaus- tive and clear detail. 1. Disclosure Companies should publish a remuneration report comprising in particular: Conclusions for the Swiss companies a detailed description of the fundamental analysed • principles and mechanisms underpinning The study on 2005 executive remuneration in the remuneration policy and each of its Switzerland’s 100 largest listed companies components; concludes as follows in respect of remunera- tion policy disclosure: • total remuneration and the fair value of each of its components; • Since the entry into force of the SWX Swiss Exchange Corporate Governance • a detailed description of each incentive Directive (CGD) in 2002, there has been plan; a gradual improvement in remuneration • a summary of executive management disclosure. The level of disclosure never- retirement schemes; theless rarely exceeds the minimum re- quired by the CGD. • a description of executive management employment contracts, in particular the • The description of the remuneration pol- conditions under which senior execu- icy usually uses boilerplate language. tives are hired and leave the company. Most of the companies analysed still need to make serious progress if their shareholders are genuinely to under- 2. Structure stand the principles and mechanisms underlying the remuneration policy. Conclusions for the Swiss companies • Only a minority of companies presents analysed the different components of remunera- tion (salary, cash bonus, shares, options, The study on 2005 executive remuneration in pension fund contributions) separately, Switzerland’s 100 largest listed companies making it extremely difficult to evaluate concludes as follows in respect of remunera- remuneration policy. tion policy structure: page 6 • In 2005, few companies paid their ex- their absolute value. Executive pay usually ecutive management in cash alone. comprises a fixed component (basic salary), a Most companies also granted shares variable component (annual bonus and long- and/or stock options. On average, execu- term incentive plans) and other forms of re- tive directors and executive manage- muneration (pension fund contributions and ment earned 42% of their pay in shares benefits in kind). and/or options, while non executive di- Generally speaking, the following principles rectors earned 30% of their pay in should be applied: shares and/or options.