Executive Compensation & Corporate Governance Insights – Part 2

The first part of ExCo Insights 2017 summarised the key highlights for the largest 100 Swiss listed companies regarding the level of compensation of CEOs and other executives, as well as chairmen and other board members. Then, it studied the much-discussed differences between financial-services (FS) and nonfinancial- services (non-FS) companies – and unearthed some arguably surprising patterns. Specifically, the overall rise in executive compensation since 2009 has mostly been driven by non-FS companies rather than FS companies.

PwC’s ExCo Insights 2017, part 2 now focuses on pay-for-performance in Switzerland. For an overall assessment of this challenging topic, one has to consider multiple perspectives.
We hope that this analysis provides useful background and benchmark information as companies, boards, managers, and policymakers reflect on the adequacy of incentive systems in Swiss companies. Based on the results presented in this part 2, ExCo Insights 2017, part 3 will discuss new methods of pay design and will offer an analysis of the demands of shareholders in the upcoming annual general meeting season.

Read the ExCo Insights 2017 – Part 2

We look forward to engaging in dialogue with you.

Dr. Robert Kuipers
Partner People & Organisation PwC
+41 58 792 45 30
robert.kuipers@ch.pwc.com

Remo Schmid
Partner People & Organisation, PwC
+41 58 792 46 08
remo.schmid@ch.pwc.com

The ethics of pay - striking the proper balance

With growing wealth disparity around the world (the eight richest people are worth as much as half the world’s population) and the erosion of the wealth of many families, executive compensation has come under serious scrutiny. A recent study by PwC in partnership with the London School of Economics, “The ethics of pay in a fair society — What do executives think?”, looks at how executives around the world consider principles of distributive justice as they apply to compensation in their organizations and society.

The key challenge in distributive justice is that some of the basic principles of fairness are mutually incompatible. Consider principles based on need, equality and contribution, for example. Only in the truly exceptional case where all people have the same exact needs and have performed exactly the same will the principles agree. Thus, as the researchers argue, achieving complete perceived fairness is an impossible task. An encouraging result of the PwC study is that executives have views of fairness that acknowledge this conundrum. They tend to show the strongest support for four very different principles:

It seems rather than thinking the market should decide, or that pay systems should ensure that individuals be able to live a dignified life, executives believe compensation at the organizational and societal levels should incorporate elements of both. This is heartening because in the perfect world there should always be some balance. Contribution-based principles provide an incentive for performance, need-based principles ensure basic dignity is met for most people and equality-based principles ensure some sense of shared identity. The trick is to find the right balance.

The authors identify four groups of people, or “tribes”, that address this question of balance in different ways, giving greater weight to a one or two principles over the others; one intriguing result is that older people would rather have the market decide, while younger people prefer protection on basic needs and dignity in our compensation systems. Moreover, in the case of both companies and society, respondents generally believe that we are failing, not only to meet standards for equality of opportunity, but also to provide compensation sufficient for basic human needs and a sense of dignity.

Why should we care? Given the growing concern over inequality in the world, it is incumbent upon us to create systems that ensure market success and performance for our firms, but also remember the lessons of Louis XVI and the Romanovs. If key principles of fairness are not met, societies tend to crumble and those on top find themselves in unhappy circumstances. As Will and Ariel Durant noted, when such an imbalance has existed historically, we’ve seen a correction either through “legislation redistributing wealth or by revolution distributing poverty”.

Read more

Contacts

Dr. Robert Kuipers
Partner People & Organisation PwC
+41 58 792 45 30
robert.kuipers@ch.pwc.com

Remo Schmid
Partner People & Organisation, PwC
+41 58 792 46 08
remo.schmid@ch.pwc.com

 

Executive Compensation & Corporate Governance Insights – Part 1

Do you have an opinion on executive pay? Everyone else does! The debate is emotionally charged, but how well informed is it? Every year, PwC endeavours to fuel a better-founded conversation by presenting one of the most detailed studies of board and executive remuneration in Switzerland. Next out is the eleventh edition of Executive Compensation & Corporate Governance Insights, covering the largest listed Swiss companies from 2007 to 2016.

Our research is designed to inform and stimulate dialogue on the hot issue of top management pay. It shows how pay levels have developed over time, how they compare between industries, where trends in pay structure are headed, and whether there’s a connection between pay and performance. It gives insights into the performance criteria that are relevant for determining pay, and how companies can best communicate these issues with shareholders, employees, the media and society at large.

This year’s outcomes are being issued in a number of shorter Insights 2017 releases. Each focuses on a specific issue, though we invite you to read them together to get a unique breadth of perspective. Please note that the longer studies from prior years remain available online.

Insights 2017, part 1 (released October 2017):
The level of compensation of CEOs, other executives and chairs and other board members at Swiss listed companies: valuable insights for board members and executives seeking the right quantum of compensation.

Insights 2017, part 2 (November 2017):
Do Swiss executives get paid for performance? Insights to help board members and executives benchmark the situation in their own companies.

Insights 2017, part 3 (December 2017):
New methods of pay design and an analysis of the demands of shareholders in the upcoming annual general meeting season: analysis to help companies prepare for communication with shareholders.

 

 

 

 

 

We look forward to engaging in dialogue with you.

Dr. Robert W. Kuipers
Partner People & Organisation, PwC
+41 58 792 45 30
robert.kuipers@ch.pwc.com

Remo Schmid
Partner People & Organisation, PwC
+41 58 792 46 08
remo.schmid@ch.pwc.com

P&O global research: ‘The Ethics of Incentives’

PwC is working with Professor Alexander Pepper and Dr Susanne Burri of The London School of Economics on a ground-breaking global study into the ethics of incentives and the fair distribution of income in society.

As a senior business leader, we would very much value your contribution to this piece of work. Our survey takes a maximum of 20 minutes and includes questions which are designed to investigate the complex views we all have about pay fairness. Please click on the link below:

Survey

Please submit the survey by Friday 20th January 2017.

All responses will remain confidential – but there is an option to sign-up for an advance copy of the findings if you so wish.
I hope you will find the time to contribute.

Contact:
Dr. Robert W. Kuipers
PricewaterhouseCoopers AG
Birchstrasse 160, 8050 Zurich
Switzerland

Email: robert.kuipers@ch.pwc.com
Phone: +41 58 792 4530

If you have any questions, please write to us at SurveyAdmin@us.pwc.com

Executive Compensation & Corporate Governance: Insights 2016

Executive Compensation: Focus on Performance and Communication

Since 2007, managers’ pay at SMIM constituent companies has been closing the gap with the remuneration earned by executives at SMI companies; and it is outpacing the rate of increase at small caps. Share-based compensation is becoming a more important factor at large- and mid-cap enterprises. Variable compensation goes up if the company has performed well – and it decreases when the results are poor. Communication with shareholders has gained in significance. These are the findings of the study entitled “Executive Compensation & Corporate Governance: Insights 2016” conducted by PwC Switzerland.

Read the online version of the study here.

 

Portrait of successful senior businesswoman standing in factory shopfloor with digital tablet

You can find more information here.

Share valuation of startup companies for Zurich private net wealth tax purposes

The Zurich tax authorities recently published new guidelines regarding the valuation of shares of start-up companies for Zurich private net wealth tax purposes. In the past in some cases owners of start-up companies were facing high annual net wealth taxes resulting from their shares in case the company had financing rounds, which were considered relevant for the determination of the share value (in line with circular letter no 28 of the Schweizerische Steuerkonferenz). In the first years after foundation the share value determined based on financing rounds may not be representative and too high as the companies are still in the process of building up business and have no or very limited revenues. The new Zurich guidelines now take into account these specific circumstances allowing for a beneficial valuation in these first years. As per the guidelines, only the net asset value of the shares is relevant for the first 3 years and any higher market values derived from third party investments or financing rounds can be ignored. In the fourth and fifth year the valuation resulting from financing rounds are to be taken into account gradually (1/3 in the fourth year and 2/3 in the fifth year). As of the 6th year after foundation, the share value is to be based on the results of financing rounds. Additional concessions are offered to the Biotech as well as medtech companies as these companies may use the net asset value for the first 5 business years with a subsequent transition period of 2 years.

Though the above applies as general rule, the new guidelines state exceptions and limitations. For example, if a start-up company determines its own fair value, this amount represents a minimum value for the Zurich annual net wealth tax purposes. That said, if such a formula value is agreed with the Zurich tax authorities e.g. for the use in an employee share plan, this agreed value is considered under the new rules the minimum value for wealth tax purposes. As consequence, it is no longer possible for founders of the company or third party investors to declare their shares for net wealth tax purposes at a lower value.

This beneficial valuation approach for net wealth tax purposes only applies to newly founded start-up companies whereby the group of effected companies is not yet defined in the guidelines. The rules are applicable with immediate effect for companies located in the canton of Zurich. Additionally, a Parliamentary initiative has been launched in March to specifically address these issues for specified start-up companies. We will monitor the effect of the new guidelines closely and expect that key stakeholders will participate in an intensive debate.

 

Please find additional Information here.

 

Should you have any further questions please contact your local PwC advisor our the contacts listed below:

Robert Kuipers & Remo Schmid

2015 Global Equity Incentives Survey

PwC and the National Association of Stock Plan Professionals (NASPP) are pleased to release the 2015 Global Equity Incentives Survey (GEIS) Executive Summary. Our survey is one of the most comprehensive studies available on the design and administration of equity incentive compensation plans for multinational companies. GEIS

Our 2015 GEIS illustrates interesting trends and news from the marketplace. Our 2012 survey showed a return to the basics after periods of economic boom and bust. At that time, companies were heavily focused on compliance and reacting to pay for performance requirements/expectations. Our 2015 results are reflective of the continuation of globalization. Not surprisingly, our 2015 survey clearly shows that our participants (virtually all U.S. multinationals) have expanded their reach of equity grantees more globally than ever before.

To access and download the executive summary, please click here.

We hope you find the results from the 2015 survey useful as you evaluate and compare your employee equity plans to those of your peers and design plans that are effective drivers of the behaviors necessary for your company’s success in this global economy.

Ordinance on excessive pay: lessons learned from daily practice

Implementation of the Ordinance against Excessive Compensation (VegüV/ORAb) is progressing well. Find out more about key experience in practice, and read how a balanced say-on-pay system can strengthen a company’s value creation.

Topics of the article

  • More work for AGMs
  • Election of compensation committees and say on pay
  • Information needs for say on pay

Read more here.

Summary

Compensation per se might be less important than issues such as capital structure and dividend policy (which for their part are closely tied to the organisation’s growth strategy), but we’re convinced that systematically implementing a balanced compensation system is a strategic factor in the success of a company.

The new regulatory environment places great demands on everyone involved. For the board of directors and management of listed companies, preparing for say-on-pay votes – in other words drawing up a meaningful compensation report, documentation and arguments for the motions for shareholders – requires a lot of work. Despite this, companies benefit if they adopt a holistic approach, involving human resources, legal, finance and the board of directors at an early stage of the proceedings. A successful say-on-pay system has to be grounded in value-based management and reflected in value reporting. That way it can help management, shareholders and other stakeholders get a uniform understanding of the challenges faced by the organisation and the factors in its success. Ultimately this consensus will result in better, value-creating decisions.