March 3rd, 2013 will be remembered fondly by Thomas Minder, the entrepreneur and independent member of Swiss parliament who has spent the past ten years running a campaign against “fat cat pay.” With the recent incident involving a $78 million non-compete agreement at Novartis fresh in their minds, approximately 68% of Swiss voters approved Mr. Minder’s controversial initiative. Some corporate issuers are more likely to remember March 3rd as the day on which Switzerland became a less appealing place to do business.
The vote marks a monumental accomplishment in Mr. Minder’s crusade to impose strict rules regarding potentially excessive executive compensation at Swiss companies. Initially prompted by the bankruptcy of his family-owned business due to what Minder considered corporate waste at Swissair, Minder broadened his campaign, accusing bankers and other prominent executives of receiving “rip-off” pay packages. Despite warnings from the Swiss business lobby and members of parliament that the initiative may trigger an exodus of large companies, voters chose Minder’s “Fat Cat Initiative” in favor of the less onerous parliamentary counter-motion.
If Minder has his way, the initiative will be swiftly transposed by parliament into Swiss law over the next few months and will have the effect of significantly curbing companies’ ability to grant outsized compensation. The cornerstone of the initiative is the introduction of a mandatory annual binding vote on executive compensation amounts. Until now, companies submitted their compensation reports for an advisory vote to shareholders on a voluntary basis. During the past proxy season, only 35% of companies submitted an advisory vote for shareholder approval. In anticipation of the introduction of a mandatory say-on-pay vote, however, almost every Swiss annual meeting so far this season has included a say-on-pay proposal. Though the effects of the mandatory nature of the proposal are already being felt, it will be interesting to see to what extent, if any, the change from an advisory vote to a binding vote will have on both compensation structure and disclosure. In terms of structure, if the initiative is fully implemented as-is, companies will no longer be allowed to grant sign-on bonuses, severance payments or change-in-control payments. Violations to these rules could result in fines equal to up to six years of salary and a prison sentence of up to three years.
With the European Union’s plans to cap banker’s bonuses ramping up and the looming introduction of say-on-pay in France, public opinion has certainly influenced the debate on rules and laws regarding executive compensation. It remains to be seen, however, whether these changes will be beneficial to shareholders in the long-term and whether pay will be more closely tied to a company’s performance