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What should managerial compensation look like and what are the trends in executive pay in Switzerland?

Posted by
Swiss Finance Institute
on
Thursday, December 29, 2016 - 08:00

Human capital’s contribution to a firm’s value is extremely important. The ability to create value (skill) and the willingness to work hard (effort) both play a role. Thus, attracting and retaining suitable managers and employees and incentivizing them properly are important elements of corporate governance. A compensation system can support companies in this endeavor. Incentivizing managers to create value is, however, challenging because those indicators that are clearly aligned with a firm’s value (such as the share price) are hard to directly control and influence, while those that can be controlled (such as the sales in one’s own division) may not be fully aligned with the ultimate value-generation goal.

 

With regard to Swiss executive pay trends:

  • There is a trend of convergence between SMI and SMIM, but a trend of divergence between SMIM and small-cap companies. In 2009, the ratio of median CEO pay in SMI relative to SMIM companies was 2.6; by 2015 it had declined to 1.9. In 2009, the ratio of median CEO pay in SMIM relative to small-cap companies was 1.8; by 2015, it had increased to 2.9.
  • A working pay–performance relationship exists for variable compensation overall, with substantial heterogeneity among companies. Equity-based compensation is on the rise. However, shareholders are dissatisfied with how companies discuss the pay–performance link in their compensation reports. In total, 86 percent of issuers believe they have disclosed all the relevant information; only 45 percent of investors agree.
  • The latest SFI White Paper makes several suggestions for incentive design. For example, contrary to current fashion, the use of performance shares is not recommended. Another issue is that value creation requires obtaining a return on invested capital above the cost of capital. Thus, future compensation design should consider a company’s cost of capital as an integral part of internal success management.

Interested to find out more? Read our most recent SFI White Paper to find out about the challenges of benchmarking compensation, the primary risks of today’s compensation practices, and whether shareholders care about compensation levels or composition.

 

Read other related posts on this topic:
How does the corporate governance cycle of companies work?
How active are the shareholders of Swiss listed companies and what is their role?
What is the role of the board of directors in the Swiss context?