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Shareholder power Fat cat pay checked, but bonuses rankle

Novartis boss Daniel Vasella took a non-compete agreement worth CHF72 million, a method that may be used in place of "golden parachute" severance packages by some companies


An initiative aimed at “fat-cat” executives has curbed the pay of Swiss company bosses, according to sustainable investment foundation Ethos. But firms are introducing questionable bonuses via the backdoor, the pension fund advisor has complained.

Swiss voters approved the Minder initiative in March 2013, giving shareholders greater say over remuneration of company executives and directors. Swiss firms have until the end of 2015 to phase in all of the voters’ wishes, that include binding votes on remuneration packages and an end to certain bonuses.

But the initiative is already starting to show positive effects, Ethos said in its annual survey of executive pay. The study found that 1,416 managers and executive board members earned on average CHF1.58 million ($1.64 million ) in 2013 - just 2% more than in 2012.

This meant that top managers’ earnings grew less than their companies’ stock prices and profits. In the financial sector alone, manager salaries increased just 8% even though profits doubled between 2012 and 2013.

But Ethos Deputy Director Vincent Kaufmann says there’s still work to be done, especially with regard to transparency.

“There is some lack of clarity about what’s possible and what’s not possible [under the initiative].”

“We need to see the 2014 remuneration report to see whether it’s more transparent. We still have a lot to do.”

Kaufmann and Ethos point out that amid the current uncertainty and lack of transparency, some companies have found ways to circumvent the spirit of the initiative. Most notably, almost half of the firms surveyed had included the possibility in their articles of association to replace “golden parachute” exit bonuses – banned under the initiative as of 2015 – with “non-compete” packages that are paid out if a departing executive promises not to work for a competitor.

“It’s not exactly a golden parachute because the beneficiary cannot work for the competition, so we would agree if it weren’t a way to pay a severance payment,” Kaufmann says.  “With such a long notice period in many sectors as well as an existing non-compete period, we believe it’s actually a hidden severance payment.”

Ironically, it was the CHF72 million non-compete bonus of former Novartis chairman Daniel Vasella that sparked outrage amongst voters in the weeks leading up to the Minder initiative vote.

The extraordinary compensation package was later withdrawn by the pharmaceutical firm, but the controversy it created was credited with pushing some voters into accepting the initiative.

“[In the Vasella case], the non-compete clause had never been very transparent in the annual reports,” Kaufmann says. “Because we don’t know the contracts of the managers, we don’t know whether those agreements include such [non-compete] clauses. We believe that based on the current regulations companies should disclose this, but in the Novartis case two years ago this was not disclosed.”

Another gripe from Ethos was that shareholders were often not given enough information about the rationale behind company bonus schemes.

And when they did get a say on a ceiling for bonuses (in less than half of firms), they had to do it at the start of the year before the company’s results were known.

In addition, more than a third of managers received bonuses last year that were three times as high as their base salaries, according to the report. And Ethos says that most of the companies continue to pay bonuses without so-called “claw-back” clauses that guarantee the bonuses reflect long-term targets.

Of the 136 firms that had to change their articles of association to pave the way for remuneration reforms, 70% have already done so. However, only 21% have already proposed a binding vote on the amount that board and executive members should be paid.

The rest have until the end of next year to introduce these changes. In practical terms, this would mean presenting proposed changes to shareholders during next year’s annual general meetings.

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