2.5 Corporate Governance and Management Compensation
2.5.1 Directive Corporate Governance
Among the information that issuers have to provide in their annual report are specific details about the management and control at the highest level of the company (corporate governance). What information has to be published can be found in the Directive Corporate Governance (DCG). The DCG requires issuers to publish information about the management and control at the highest corporate level of their enterprise or to provide substantial justification of why certain details are not published («comply or explain» principle). The individual disclosures that have to be published in a separate corporate governance chapter in the annual report of an issuer are specified in the appendix to the DCG (see ➔ Chapter 8.4 for further information).
2.5.1 Directive Corporate Governance
An important sub-aspect of the communications in corporate governance matters is the communication concerning management compensation. The legal basis underlying how the related information has to be presented can be found in the Directive Corporate Governance (DCG, see also the section above) as well as in the VegüV – Ordinance Against Excessive Remuneration in Listed Stock Corporations, see ➔ admin. ch/opc/de/classified-compilation/20132519/index.html. At present, many companies are going about incorporating ESG factors into their variable remuneration. For new listings, this should be taken into consideration from the start.
With the introduction of the VegüV in 2014, communication with the annual general meeting underwent a pronounced change, especially as additional votes are now required. The tasks of Investor Relations concerning management compensation here include:
- Cooperation in and/or knowledge of the remuneration report, including with regard to the degree of transparency of the report or the presentation of additional information, such as the realized compensation of the management; clear and comprehensible preparation of the information
- Cooperation at and/or knowledge of the annual general meeting, including with regard to the concept of the prospective and retrospective votes and the voluntary consultative vote
- Answering questions from institutional investors and primarily the proxy advisors; each one has a detailed catalog of questions on this
- If need be, IR roadshow on corporate governance and compensation issues in advance of the annual general meeting or in the case of planned adjustments to the compensation model
- Cultivate contacts with proxy advisors
Communication increases in importance especially when criticism starts to be expressed. It is generally understood to be a warning signal to the board of directors when approval for the remuneration report falls below 80 percent at the annual general meeting. Typical points of criticism from investors and proxy advisors include:
- There is a lack of more specific information on the targets and only general levels of payment are described in relation to the achievement of targets
- The compensation system includes an (excessively) large number of target values and compensation elements
- In general terms, the links between performance and variable compensation are not clear and comprehensible.
- ESG factors are inadequately or not at all considered in the remuneration model.
Regulatory Changes
Another IR task consists of appropriately recording and mapping changes in the regulations. SIX Exchange Regulation AG therefore revised the Guideline on the DCG in 2017, specifying in more detail the information that has to be published by companies. One of the innova- tions means that improved disclosure results in better assessments of the performance incentives offered and the reasons for the compensa- tion trends. The design of the compensation packages of the board of directors and the management should be disclosed “in a manner as transparent and comprehensible as possible” (section 5.1 of the DCG). The basis for the passage is formed by the need for more transparency concerning the connection between “pay” and “performance”.
In addition, the criteria for setting compensation are newly described in the Guideline to the DCG. If criteria of this kind are applied, specific infor- mation on them and how much weight they are given has to be provided. It must be explicitly pointed out if the criteria are weighted on a discre- tionary basis.
There are serious doubts, however, that the basic problem of the weak or non-existent correlation between pay and performance can be remedied with these regulations. The level of compensation awarded to the board of directors and the CEO is closely connected both in Switzerland and internationally to the market capitalization of the company but not with the business performance over the course of time. The cause of this is not the remuneration report but the compensation model.