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Executive Compensation & Corporate Governance

2010 survey examining compensation structure in SMI and SMIM companies as well as Say-on-Pay

Chairman SMI SMI Changes SMIM SMIM Changes

2007 2008 2009 07/08 08/09 07/09 2007 2008 2009 07/08 08/09 07/09

Upper Quartile 2,568,379 2,388,785 3,070,609 –6.99% +28.54% 19.55% 906,043 932,560 751,464 +2.93% –19.42% –17.06%

Median 1,200,000 844,723 1,330,867 –29.61% +57.55% 10.91% 430,500 581,876 560,591 +35.16% –3.66% +30.22%

Lower Quartile 520,869 397,564 670,599 –23.67% +68.68% 28.75% 278,750 261,000 305,640 –6.37% +17.10% +9.64%

Highest 14,624,000 15,228,951 15,116,196 +4.14% –0.74% 3.37% 10,625,656 7,418,000 7,418,000 –30.19% 0.00% –30.19%

Average 2,328,611 2,424,636 2,954,167 +4.12% +21.84% 26.86% 1,231,812 906,415 862,602 –26.42% –4.83% –29.97%

Lowest 0 0 256,570 0.00% n/a n/a 0 0 144,000 0.00% n/a n/a

Board of Directors

SMI SMI Changes SMIM SMIM Changes

2007 2008 2009 07/08 08/09 07/09 2007 2008 2009 07/08 08/09 07/09

Upper Quartile 400,000 375,053 400,034 –6.24% +6.66% +0.01% 221,000 218,217 223,975 –1.26% +2.64% +1.33%

Median 296,030 279,869 317,407 –5.46% +13.41% +7.22% 169,000 154,500 158,423 –8.58% +2.54% –6.26%

Lower Quartile 176,265 170,000 192,799 –3.55% +13.41% +9.38% 105,919 106,250 105,050 +0.31% -1.13% –0.82%

Highest 5,027,381 2,901,796 5,274,667 –42.28% +81.77% +4.92% 3,255,621 4,107,000 4,107,000 +26.15% 0.00% +26.15%

Average 377,953 363,552 400,572 –3.81% +10.18% +5.98% 248,103 239,510 230,052 –3.46% -3.95% –7.28%

Lowest 0 0 0 0.00% 0.00% 0.00% 0 0 0 0.00% 0.00% 0.00%

CEO SMI SMI Changes SMIM SMIM Changes

2007 2008 2009 07/08 08/09 07/09 2007 2008 2009 07/08 08/09 07/09

Upper Quartile 12,618,250 8,185,720 12,518,763 –35.13% +52.93% –0.79% 4,058,039 3,469,390 3,664,328 –14.51% +5.62% –9.70%

Median 7,727,944 5,351,799 5,861,461 –30.75% +9.52% –24.15% 2,750,174 2,520,853 2,178,500 –8.34% –13.58% –20.79%

Lower Quartile 4,792,787 3,770,484 3,935,927 –21.33% +4.39% –17.88% 1,788,900 1,581,127 1,383,553 –11.61% –12.50% –22.66%

Highest 22,280,000 20,544,032 20,471,929 –7.79% –0.35% –8.12% 12,024,884 7,062,808 7,840,619 –41.27% +11.01% –34.80%

Average 9,326,781 6,943,456 8,191,353 –25.55% +17.97% –12.17% 3,814,715 2,939,052 2,948,413 –22.95% +0.32% –22.71%

Lowest 1,704,000 1,814,702 1,819,000 +6.50% +0.24% +6.75% 1,012,836 930,824 710,000 –8.10% –23.72% –29.90%

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© 2010 PwC. All rights reserved. “PwC” refers to PricewaterhouseCoopers AG, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.

Disclaimer This publication has been prepared for general guidance on matters of interest only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers Ltd., its members, employees and agents accept no liability and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

PricewaterhouseCoopers Executive Compensation & Corporate Governance 1

Contents

1. TheSurvey 2

2. ExecutiveSummary 3

3. SurveyResults 4

4. Shareholdersandcompensation(Say-on-Pay) 14

5. GoverningReward 16

6. ConcludingRemarks 18

Appendix 19

A) Companiessurveyed(inalphabeticalorder) 19

B) MethodsandadditionalresultsfortheanalysisoftheimpactofSay-on-Pay 20

Contacts 23

2 Executive Compensation & Corporate Governance PricewaterhouseCoopers

1 The Survey

Wearedelightedtopresentthefourtheditionofoursurvey“ExecutiveCompensation&CorporateGovernance”.ThesurveyisoneofthemostcomprehensiveSwissstudiesavailableonthelevelandstructureofboardandexecutivecompensationfortheyears2007,2008and2009.Thisreportprovidesacomprehen-sivepictureofexecutivecompensationforSMIandSMIMcompaniesinSwitzerlandtoday,andwehopeyoufindthisbreadthofperspectivehelpful.

Inthelightofdifficulteconomiccircumstancesandanincreas-ingshareholderactivismwepaidregardalsototherecentdevelopmentsinthepracticeofSay-on-Pay.Our2010issuecoversthefirstanalysisofhowtheSwissstockmarketreactedtothe“Abzocker-Initiative”(“Initiativeagainstrip-offsalaries”),whichwaslaterfollowedbythesupportofamajorpoliticalparty.Furthermore,wediscusstheaspectsofgoverningrewardintoday’sregulatoryandeconomicenvironment.Theremunera-tioncommittee’sremitisincreasing,andcompensationreport-ingneedstomovefromcompliancetovalue-generatingcommunication.

Alldatausedinthissurveyisbasedondisclosedcompensationinformationintheannualreportsofthecompaniesreviewed.Wehavenotmadeanyassumptionsoradjustmentstothedisclosedvaluesandmethodologiesused,inparticularwithregardtothevariablecompensation(valuation,vestingclauses,timingofdisclosureandearningperiods,etc.).

Wetrustyoufindthe2010“ExecutiveCompensation&Corpo-rateGovernance”surveyaninsightfulandinnovativereadthatpresentsanswerstoyourkeyquestionsandprovidesideasforaddressingtoday’srewardchallenges.Asalways,wewelcomeyourfeedbackandhopetohavetheopportunitytodebatetheseissueswithyou.

Dr.RobertW.Kuipers RemoSchmidPartner PartnerHRSConsulting HRSConsulting


2 Executive Summary

Buildingontheresultsfromthesurveysofthelasttwoyears,the2010issueof“ExecutiveCompensation&CorporateGovernance”examinesthechangesfrom2007and2008to2009intotalcompensationfortheboardofdirectorsandCEOs.Thekeyfindingsare:

• Afterasignificantdropincompensationfrom2007to2008,thepaylevelofchairmenoftheboardofdirectorsofSMIcompaniesincreasedfrom2008to2009andwasin2009abovethelevelof2007.Themedianin2009wasCHF 1.3 mil-lion,whichreflectsanincreaseof10.9%comparedto2007.ForSMIMchairmen,though,thesituationlooksdifferent:afteranincreasefrom2007to2008ofthemediancompensa-tionby35.2%,aconsolidationoccurredin2009,whenthemedianwasCHF 560,591.Thus,theapparentconvergenceofthepayofchairmenofSMIandSMIMcompaniesobservedin2008didnotcontinuein2009.

• CompensationforotherboardmembersofbothSMIandSMIMcompanieshasremainedstableinrelativesmallbandsfortheyears2007to2009.Noupwardtrendcanbedetectedinregularboardmemberpay,andthelevelswererelativelylow(mediancompensation:CHF 317,407forSMIandCHF 158,423forSMIMcompanies).

• FixedsalariesofCEOshaveremainedrelativelyunchangedoverthethreeyearsobserved:theaverageCEObasesalaryhasdecreasedby8.7%(SMI)and8.8%(SMIM)from2007to2009.Variablecompensationhasreactedtotheeconomicsituationinapronouncedway,forbothSMIandSMIMcompanies.ThemedianCEOtotalcompensationdroppedsignificantlyfrom2007to2008andincreasedslightlyin2009forSMIcompanies.WithCHF 5.9 million,themediantotalcompensationin2009wasstillbelowthelevelsof2007,though.LookingatSMIMcompanies,asignificantdropalsotookplacefrom2007to2008,butnoincreaseoccurredin2009;infact,themediandecreasedfurther.Thus,thereboundinCEOcompensationhasbeenincomplete(forSMIcompanies)andnon-existent(forSMIMcompanies).

• In2008,atleast75%ofCEOs,chairmenandotherboardmemberssufferedanetwealthreductionontheirsharehold-ingsduetofallingshareprices.In2009,thissituationwaspartiallyreversedduetothelargelypositivestockmarketdevelopment.ThemedianwealthchangeforCEOswasCHF –900,000for2008andCHF +480,000for2009.Forchairmen,itamountedtoCHF –1.0millionin2008andCHF +240,000in2009.Forotherboardmembers,itwasCHF –200,000in2008andCHF+50,000in2009.

Inthissurvey,wealsoputaspotlightonthegovernanceofpay.Atectonicshiftofthelandscapeofhowpayisgovernedis,infact,takingplace.Oneparticularlyimportantdevelopmentisthetendencyforenhanced“Say-on-Pay”byshareholders.InSwitzerland,thishasbecomeparticularlysalientthroughthe“Abzocker-Initiative”.Argumentscanbemadesupportinganddenouncingsuchlegislation.Opponentsworrythebillwillrestricttheboardandmanagementandlimittheirabilitytodesigneffectivecompensationpackages.Proponentsarguethatthebillfurtheralignsowner-managerinterests.Itcouldalsobearguedthatonbalancethebillwouldnothaveanymarketimpact.

OurresultssuggestthatthestockmarketreactedinmixedwaystotheannouncementoftheInitiative.Onaverage,stockpricesreactednegatively.Stockpricesofthelargestcompaniesincreased,whilethedecreaseinstockpricesofsmallandmediumcompaniessuggeststhatthemarketperceivestheproposedregulationasvalue-destroyingforthesecompanies.ThesupportfortheInitiativebyalargepoliticalpartyhadlittleadditionaleffect.

Apartfromgreatershareholderactivism,anotherimportantdevelopmentthatwediscussistheenhancedremitoftheremunerationcommitteeofboards.Indeed,theultimateresponsibilityofdevelopinganeffectiveandcompetitivecompensationschemelieswiththeboardofdirectors.Itis,therefore,importanttohaveskilledandindependentlyactingboardmembers.


Figure 1: Total compensation of chairmen in SMI companies1)

Mill

ion

CH

F

Lower quartileLowest Median HighestUpper quartile

2007 2008 2009

16

14

12

10

8

6

4

2

0

AsaconsequenceoftheTransparencyActwhichcameintoforcein2007,compensationdataisnowavailablefortheyears2007,2008and2009.Inthissection,weanalyseandcommentonthelevelandstructureofcompensationforchairmenoftheboardsofdirectors,otherboardmembersandCEOsforbothSMIandSMIMcompanies.

3.1 Chairmen of the Board of Directors

Asthestructureoftheboardofdirectorsandtherelatedresponsibilitiesandtasksformembersoftheboardofdirectorsvary,forthechairmaninparticular,aone-to-onecomparisonamongtheSMIandSMIMcompaniesproveddifficult.Neverthe-less,acomparisonwasmadebasedoncompensationdatadisclosedwherebyonlythenon-executivechairmanfunctionwasconsidered.

SMI companiesIngeneral,thetotalcompensationforchairmenhasincreasedsignificantlyfrom2008to2009afteradropinthepreviousyear(exceptforthehighestpaid).Thelowerquartileforinstanceincreasedby68.7%toCHF670,599,themedianby57.6%toCHF 1.3 million,andtheupperquartileby28.5%toCHF 3.1 million.TheaveragecompensationamountedtoCHF 3 millionwhichisanincreaseof21.8%comparedto2008.

Afteradropoftheoverallcompensationfrom2007to2008,thefiguresof2009exceedtheonesof2007.Basedonthesefindingsitappearspossiblethatcompensationlevelsforchairmenarefollowingageneralupwardtrend,butitis,ofcourse,tooearlytotellforhowlongthisdevelopmentwillcontinue.

3 Survey Results

1)Compensationfornon-executivefunction(n=16)


Figure 2: Total compensation of chairmen in SMIM companies2)

Mill

ion

CH

F


2007 2008 2009

16

14

12

10

8

6

4

2

0

SMIM companiesAfterageneralincreasefrom2007to2008,thecompensationlevelsremainedrelativelyunchangedin2009.Comparing2007to2009,anambiguoustendencycanbeobserved:

• thelowerquartileincreasedby9.6%toCHF 305,640andthemedianby30.2%toCHF560,591;

• theupperquartiledecreasedby17.1%toCHF 751,464andthehighestpaidby30.2%toCHF 7.4 million.

Thus,aconvergenceofcompensationlevelsamongstSMIMchairmenhastakenplace.

Basedonthedevelopmentsfrom2007to2008,ithadappearedasifaconvergenceofcompensationofchairmenoftheboardofdirectorsofSMIandSMIMcompanieswastakingplace.Thedatafrom2009suggestthatthiswasonlyatemporarydevelop-ment.Infact,thedifferenceinmediansin2009wasalmostexactlythesameasithadbeenin2007,aboutCHF770,000.

2)Compensationfornon-executivefunction(n=21)


3.2 Other members of the Board of Directors

SMI companiesThelowerquartileamountedtoCHF 192,799andtheupperquartiletoCHF 400,034,i.e.halfoftheSMIboardmemberswerepaidinthisrangefortheyear2009.In2007thisintervalrangedfromCHF 176,265toCHF 400,000.TheaverageincreasedfromCHF377,953in2007toCHF 400,572in2009(i.e.plus6%intwoyears).

Basedonthesefiguresandtrendsweconcludethatcompensa-tionlevelsofSMIboardmembershavebeenstableinarelativesmallbandfortheyears2007to2009.

Figure 3: Total compensation of other members of the board of directors in SMI companies3)

Mill

ion

CH

F


2007 2008 20090.0

0.2

0.4

0.6

0.8

1.0

3.0

3.5

4.0

4.5

5.0

5.5

3)Chairmanandexecutivefunctionsexcluded(n=177)


SMIM companiesThelowerquartileamountstoCHF 105,050andtheupperquartiletoCHF 223,975,i.e.halfoftheSMIMboardmemberswerepaidinthisrangefortheyear2009.In2007thisintervalrangedfromCHF 105,919toCHF221,000.TheaveragedecreasedfromCHF 248,103in2007toCHF 230,052in2009(i.e. minus7.3%intwoyears).

Basedonthesefiguresandtrendsweconcludethatcompensa-tionlevelsofSMIMboardmembershavebeenstableinarelativesmallbandfortheyears2007to2009.Theoverallpictureofthedevelopmentofcompensation,therefore,isrelativelysimilarforboardmembersofSMIandSMIMcompa-nies.

Figure 4: Total compensation of other members of the board of directors in SMIM companies4)

Mill

ion

CH

F


2007 2008 20090.0

0.2

0.4

0.6

0.8

0.1

3.0

3.5

4.0

4.5

5.0

5.5



3.3 CEOsInthissectionweanalyseandcommentonthelevelofcompen-sationforCEOsofSMIandSMIMcompanies.ForbothSMIandSMIMcompaniesadropoccurredfrom2007to2008.ThisdownwardtrendhascontinuedforCEOsofSMIMcompaniesfortheyear2009.Bycontrast,forCEOsofSMIcompanies,thedropfrom2007to2008wasmoresignificantthanforSMIMCEOs.ForSMICEOsanincreaseoccurredin2009comparedto2008.Evenforthem,though,the2009compensationlevelsweregenerallybelowthoseof2007.

SMI companiesThelowerquartileincreasedfrom2008by4.4%toCHF 3.9 mil-lion,themedianby9.5%toCHF 5.9 millionandtheupperquartileby52.9%toCHF 12.5 millionfortheyear2009.Incomparisontothepreviousyearthelowerquartileandmedian

Figure 5: Total compensation of CEOs in SMI companies5)

Mill

ion

CH

F


2007 2008 2009

24

22

20

18

16

14

12

10

8

6

4

2

0

haveremainedrelativelyunchangedwhereastheupperquartileincreasedsignificantly.Thus,thespreadofindividualtotalcompensationhasincreasedamongstSMICEOsfrom2008to2009.

Incomparisontotheyear2007,the2009mediantotalcompen-sationdecreasedby24.2%fromCHF 7.7 milliontoCHF 5.9 mil-lionandtheaveragecompensation2009decreasedby12.2%fromCHF 9.3 milliontoCHF 8.2 million.

Insum,afterasignificantdropin2008,areboundoccurredin2009.However,compensationin2009didnotreachthecompensationlevelsof2007forCEOsofSMIcompanies.Thisisduetothedownturnin2008,overallvolatilemarketsandaslowrecoveryoftheeconomyduring2009.Itisalsopossiblethatweareseeingthebeginningofsomewhatlowerpaylevelsgoingforward.

5)CEOorhighestpaidExecutiveBoardmemberrespectively(n=20)


SMIM companiesThelowerquartiledecreasedfrom2008by12.5%toCHF 1.4 millionandthemedianaswelldecreasedby13.6%toCHF 2.2 million.Theupperquartileincreasedby5.6%toCHF 3.7 millionandthehighestpaidby11%toCHF 7.8 millionfortheyear2009.Atthesametime,theaverageremainedalmostunchangedatCHF2.9million.

Compensationlevelsin2009weresignificantlylowercomparedtotheyear2007.Theaveragecompensation2009was22.7%lowerthan2007,i.e.itdroppedfromCHF 3.8 milliontoCHF 2.9 million.Themediandecreasedby20.8%fromCHF 2.8toCHF 2.2 million.Fromanoverallperspective,compensationlevelsofCEOsofSMIMcompanieshavesomewhatdecreasedovertheperiodsurveyed,i.e.from2007to2009.

Figure 6: Total compensation of CEOs in SMIM companies6)

Mill

ion

CH

F


2007 2008 2009

14

12

10

8

6

4

2

0



3.4 Structure of average total compensation of CEOs

Likeinpreviousyears,wehaveanalysedthestructureoftheaveragetotalcompensationforCEOsaswebelievethisprovidesimportantinsightsinadditiontotheanalysisofthelevel.

SMI companiesAsdescribedearlier,theaveragetotalcompensationincreasedby18.0%fromCHF 6.9 millionin2008toCHF 8.2 millionin2009.This,however,happened,afterasignificantdropfrom2007to2008of25.6%.Thus,theaveragetotalcompensationoveralldecreasedby12.2%fromCHF 9.3 millionin2007toCHF 8.2 mil-lionin2009,i.e.thecurrentaverageCEOpaylevelisstillbelowthefiguresof2007.

For2009,theaveragetotalcompensationwassplitinto24%basesalary,18%cashbonus,53%long-termincentives,and5%other

Figure 7: Structure of average total compensation of CEOs in SMI companies

Mill

ion

CH

F

Cash bonusBase salary Long-term incentive Other payments

2007

23%

23%

48%

6%

2008 2009

29%

16%

40%

15%

24%

18%

53%

5%

10

9

8

7

6

5

4

3

2

1

0

compensation.Thebasesalarydecreasedslightlyby8.7%from2007to2009(CHF 2.1 millionin2007,CHF 2.0 millionin2008andCHF 1.9 millionin2009),asomewhatsurprisingdevelop-ment.

ThecashbonusdroppedfromCHF 2.2 milliontoCHF 1.1 million(–49.5%)andthenincreasedtoCHF 1.5 million(+33.8%).Thecashbonusdidnotreachthelevelof2007(–32.4%comparing2007to2009).Thelong-termincentivesdecreasedfromCHF 4.5 milliontoCHF 2.8 million(–38.6%)andthenincreasedtoCHF4.4million(+58.6%),returningalmosttothelevelof2007.Theaverageotherpaymentsarerelativelyconstantat5%oftotalcompensation,exceptanindividualone-timepaymentwhichincreasedtheaverageto15%in2008.

Basedonthesefindings,itappearsthatthevariablecompensationhasreactedtotheeconomiccircumstances.Thatis,itincorporatedasignificantreductionoftotalpay,mirroringtheeconomiccrisisof2008,andthenamoderatereboundin2009.


SMIM companiesTheaveragetotalcompensationofCHF 2.9 millionin2008remainedunchangedin2009.However,fromanoverallperspective,theaveragetotalcompensationdecreasedby22.7%fromCHF 3.8 millionin2007toCHF 2.9 millionin2009.

For2009,theaveragetotalcompensationwassplitinto36%asbasesalary,19%cashbonus,32%long-termincentives,and13%othercompensation.Thebasesalarydecreasedby8.8%from2007to2009and16.7%from2008to2009(CHF 1.2 mil-lionin2007,CHF 1.3 millionin2008andCHF 1.1 millionin2009).

Figure 8: Structure of average total compensation of CEOs in SMIM companies

Mill

ion

CH

F

Cash bonusBase salary Long-term incentive Other payments

2007

31%

19%

43%

7%

2008 2009

44%

20%

26%

10%

36%

19%

32%

13%

4

3

2

1

0

ThecashbonusdroppedfromCHF718,828in2007toCHF 599,070in2008(–16.7%)andthentoCHF 562,634in2009(–6.1%).Thelong-termincentivesdecreasedfromCHF 1.6 millionin2007toCHF 774,094in2008(–52.7%)andthenincreasedtoCHF 936,566(+21.0%),returningalmosttothelevelof2007.TheaverageotherpaymentsincreasedtoCHF 383,962in2009whichreflects13%oftotalcompensation.

Basedonthesefindings,itappearsthatthevariablecompensa-tionhaspartiallyreactedtotheeconomiccircumstances.Asignificantreductionofvariablecompensationoccurredduetotheeconomiccrisisof2008.Fortheyear2009,despiteamoderateeconomicrebound,thecompensationlevelremained,however,unchangedcomparedto2008.


3.5 Compensation structure 2009

Overall,thetotalcompensationstructureof2009withinSMIandSMIMcompanieshasnotchangedsignificantlycomparedto2008.Boardmemberswerepredominantlyremuneratedintheformoffixedcompensation.Chairmenreceivedabout60%oftheirremunerationasfixedcompensation,forbothSMIaswellasSMIMcompanies.OtherboardmembersofSMIcompaniesreceived88%asfixedcompensationwhereasSMIMboardmemberswereprovidedwith72%fixedcompensation.WhileotherboardmembersofSMIcompaniesreceivednoLTIawardsin2009,SMIMcompaniesremuneratedtheotherboardmemberswith14%LTIawards.

Figure 9: Overview compensation structure 2009 in SMI companies

Cash bonusFixed compensation Long-term incentive Other payments

% 20 40 60 80 100

Other payments

Long-term incentive

Cash bonus

Base salary

OtherExecutives

CEO

Other Membersof the Board of

Directors

Chairman 59%

88%

24%

27% 21% 42% 10%

18% 53% 5%

7% 5%

11% 19% 11%

Figure 10: Overview compensation structure 2009 in SMIM companies

Cash bonusFixed compensation Long-term incentive Other payments

% 20 40 60 80 100

Other payments

Long-term incentive

Cash bonus

Base salary

Other Executives

CEO

Other Membersof the Board of

Directors

Chairman 63%

72%

36%

40% 20% 23% 17%

19% 32% 13%

6% 8%14%

22% 7% 8%

WithinSMIandSMIMcompanies,thecompensationofCEOsandotherexecutiveswasstructuredinasimilarway.Betweenthetwosamples,however,thereweresomenoteworthydifferences.Inparticular,CEOsandotherexecutivesofSMIreceivedalowerfixedcompensationratiocomparedtotheonesinSMIMcompanies.Onaverage,thevariablecompensationexceededforallexecutivesthefixedcompensation.Interest-ingly,withinthevariablecompensationtheLTIportionexceed-edthecashbonus.ThiswasparticularlypronouncedfortheCEOsofSMIcompanies(53%oftotalcompensation)aswellasfortheotherexecutivesofSMIcompanies(42%oftotalcompensation).


3.6 Wealth changes due to share ownership

Inadditiontoanalyzingthetotalcompensation,itisalsoimportanttounderstandnetwealthchangesintheshareownershipofboardmembersandexecutivesresultingfromsharepricechanges.Thesecanbesubstantialincaseofvolatilemarkets.Table1liststhesechangesanddevelopments.Itisimportanttonotethatthehighestgainsandlossesrelatetochairmenandotherboardmembersthathavesignificantshareholdings(inparticularasfoundersorfoundingfamilymem-bers).

In2008,atleast75%ofCEOs,chairmenandotherboardmemberssufferednetwealthreductionsresultingfromfallingshareprices.For2009,however,thetablereflectsthemirrorimage,i.e.atleast75%ofthepersonssurveyedbenefitedfromrisingshareprices.50%ofallCEOs(betweenlowerandupperquartile)benefitedfromsharepriceincreasesintheamountofCHF 60,000toCHF 980,000.Inthepreviousyeartheysuffered,however,alossrangingfromCHF 240,000toCHF 2 million.

Table 1: CEO and board of director wealth changes in the years 2008 and 2009 due to ownership8)

2008 Highestgain Top25%(upperquartile)

Median Bottom25%(lowerquartile)

Greatestloss

CEOs +230,000 –240,000 –900,000 –2,000,000 –220,000,000

Chairman +6,340,000 –300,000 –1,000,000 –35,600,000 –2,745,000,000

OtherMembersoftheBoardofDirectors

+42,830,000 –60,000 –200,000 –670,000 –3,015,000,000

7)Atonecompany,threeboardmembershaveashareholderagreementregardingalargestockpackage.Inour2008analysis,showninthetoptable,wehadattributedthewealthchangeonthewholestockpackagetooneindividual.Inthe2009analysis,showninthebottomtable,wedividedthetotaleffectbythreetoaccountfortheagreementbetweenthesethreeshareholders.

8)AllamountsinCHFandrounded.Wealthchangesin2008arecalculatedasthedifferencebetweenthewealthduetotheaverageofthereportedstockholdingson31 December 2007andthoseon31 December 2008,valuedon31December2008,minusthevalueoftheseaverageshareholdingson31December2007.Forwealthchangesin2009,thesamemethodologyisapplied.Allshares(notonlyvestedshares)areconsidered.Companiesthatdonotreportshareholdingsfortherespectivecategoryofindividualsarenotconsideredinthistable.

2009 Highestgain Top25%(upperquartile)

Median Bottom25%(lowerquartile)

Greatestloss

CEOs +10,300,000 +980,000 +480,000 +60,000 –35,400,000

Chairman +2,170,000,000 +3,100,000 +240,000 +10,000 –30,000,000

OtherMembersoftheBoardofDirectors

+1,440,000,000 +240,000 +50’000 +7,000 –318,000,000

Forchairmen,thisrangeiswider:fromCHF +10,000toCHF +3.1 millionfor2009comparedtoCHF–35.6milliontoCHF –300,000in2008.Forotherboardmembers,thisrangeamountsfromCHF +7,000toCHF +240,000for2009comparedtoCHF –670,000toCHF –60,000for2008.7)

TheaveragewealthchangeofCEOsconsideredfromendof2008toendof2009thatisimpliedbytheiraveragesharehold-ingswasnegative:theaverageCEOlostCHF 550,000.However,thedistributionisskewed;themedianwealthchangewas,infact,againintheamountofaroundCHF 500,000.(Theskewnesswasmoreextremein2008.)Themedianshareownershipin2009wasaround0.035%oftherespectivecompany.ThisshowsagenerallylowshareownershipquotaofCEOsintheircompany.ItmeansthataCHF 1,000changeinshareholderwealthinagivenyearcorrespondstoCHF 0.35CEOwealthchange.Allthenumbersreportedinthissectiondonotreflectimpliedownershipthroughoptionsorotherinstrumentssimilartoequity.TheyaremerelybasedonwhatcompaniesreporttobethedirectalignmentoftheirCEOswithsharehold-ersthroughtheownershipofshares.


4 Shareholders and compensation (Say-on-Pay)

Theheadlinesandeditorialsofthepopularpressarefilledwithcriticismsobjectingtoexcessinexecutivepay.Ofthestakeholdersaffected,shareholdershavethemostimmediaterightstoinfluencethepay-settingprocess.Inthepast,theyhaddefactodelegateddecision-makingoncompensationmatterstotheboard.However,manycriticalobserversproposethatshareholdersshouldreasserttheirpower.Toputthisinperspec-tive,itisinstructivetoconsidersomeglobalevidenceonthismatter.ThePricewaterhouseCoopersGlobalEquityIncentivesSurvey(availableonrequest)coversaround320companiesaroundtheworld.Inthisdata,weobservedadecliningtrendfrom2005to2009ofcompaniesputtingcompensationplanstoashareholdervote(thoughpartofthistrendmaybeduetosamplecompositionchanges).Atthesametime,wherevotesareheld,thegeneralapprovalratehasalsocomedown.Somecountries(suchasAustralia,theNetherlands,Norway,Sweden,andtheUnitedKingdom)requireshareholdervotesonexecutivecompensation.

4.1 Views on Say-on-Pay Likeinmanycountries,Say-on-PayiscontroversiallyandemotionallydiscussedinSwitzerland.Webelieve,however,thatespeciallyinadebateasheatedastheoneonmanagerialcompensation,rationalthoughtdeservesaplace.Toorganizethinking,theargumentsrelatingtothesay-on-payinitiativecanbecategorizedintothreehypotheses:thealignment,interfer-ence,andneutraleffecthypotheses.

Thealignmenthypothesisproposesthatsay-on-paywillbetteralignowner-managerinterestsandimprovegovernanceandperformance.Allowingshareholderstohaveasayinexecutivepaymayhelpreducetheagencycostsbetweenexecutives,directors,andshareholders,resultinmoreefficientcompensa-tioncontracts,andaddvaluetothefirm.Thismaybeespeciallyrelevantforlargecompanies,asintheircasethecollectiveactionproblemforshareholdersandtheentrenchmentpossibili-tiesofmanagersmaybeparticularlypronounced.Toavoidtheembarrassmentofalowapprovalvoteonexecutivecompensa-tion,managementmaybemorewillingtostartdialogueswithshareholdersandlistentotheirconcern.Anotheradvantagethatpractitionersweworkwithsometimeshighlightisthathavingtoexplainacompensationsystemtoshareholdersandwintheir(advisory)approvalforcestheboardandexecutivestoreallythinkthroughthesystem.

Bycontrast,theinterferencehypothesisarguesthattheSay-on-Payinitiativewillbedisruptive.Opponentsarguethatthecurrentpaypracticesofmostcompaniesareefficientandthereisnoneedforthegovernmenttoregulatetheprocessofdeter-miningexecutivecompensation.Theyfurtherarguethatthebillwilldistracttheboardandmanagementandreducetheauthorityoftheboard.Moreover,theyworrythatproposalswillbedivisiveordrivenbyspecialinterestsorextremelysmallshareholders.

Third,historicallytherehasbeenlittlemarketimpactsurround-ingtheannouncementoforvotingonshareholderproposals.Thismaybebecausethevotesaresymbolicorbecausemanage-mentgenerallydoesnotadopttheseproposalsevenwhentheyreceivemajorityvotes.Thisistheneutraleffecthypothesis.

4.2 The impact of Say-on-Pay on shareholder value

SwitzerlandhasnotintroducedSay-on-Payinabindingoradvisorymanner.However,in2006,theso-called“Abzocker-Initiative”(“Initiativeagainstrip-offsalaries”)waslaunchedbyThomasMinder.ThisInitiativecoversalotofground.Also,theInitiativemaynotbeexclusivelydesignedtofostershare-holdervalue,butitmayalsotargetsomesocialgoals.ButSay-on-PayisanessentialelementoftheInitiative,anditis,therefore,interestingtoevaluatetheshareholders’perspectiveontheproposedregulation.Specifically,thelaunchofthisInitiativeprovidesanaturalexperimenttoexaminewhethershareholders’votesonexecutivecompensationinparticular,andaccesstotheproxyingeneral,addvaluetoacompany.TheSwissversionofSay-on-Paywouldinvolvebindingvotes(asopposedtotheadvisoryvotesrelevantintheU.S.ortheU.K.).

Toinvestigatethisquestion,weemployawell-establishedstatisticalmethodcalled“eventstudy”.Thelogicofthismethodissimple.Onthedayofaparticularevent,onecanseewhetherthestockofacompanyreactsin“abnormal”ways.Thebench-markofthe“normal”returnisgivenbyamodelofhowthestockwouldtypicallydevelop;suchpredictionsarerelativelyreliableonaverageovertheshortrun.Thedifferenceoftheactualstockpricedevelopmentfromthepredicteddevelopmentthenistheso-calledabnormal,orsurprisereturn.Ifthisreturnislargeandsufficientlypreciselyestimated,asignificantcausaleffectoftheeventonthestockpricehasbeenfound.


Inthepresentcase,weconsidertwoeventswhosecausalimpactonstockpricesweevaluated:thefirstimportantstepwasmadeonFebruary26,2008,whenentrepreneurThomasMinderpubliclyannouncedthatmorethan100,000signaturesinfavourofhis“Initiativeagainstrip-offsalaries”hadbeencollected.PerSwisslaw,thismeantthattheproposedbillofMr.Minderwassetforapublicvote.ThesecondeventofinteresttookplaceonFebruary10,2010,whenalargepoliticalparty(theSVP)announcedtheindirectbackingofMr.Minder’sbill.Infact,theysuggestedthatanevenmorestringentstockcorporationlawshouldbeenacted,replacingthepublicbillproposedbyMr. Minder.

4.3 Event study on Swiss stock market reaction

Whenanalyzinghowthemarketreactedtotheseinitiatives,wefoundinterestingresults(fordetailspleaserefertothepertain-ingTable2intheAppendix).Considerfirstthetotaleffectforallofthearound220SPIcompaniesforwhichtherequireddatawasavailable.Value-weightingtheindividualstockreturneffectsaccordingtothemarketcapitalisationoftherespectivecompanyimpliesthattherewasasmall,positiveeffectof+0.11%ofthe“Abzocker-Initiative”.Fromthisperspective,theInitiativecouldbeseenasanimmediatesuccess.If,however,theSPIcompaniesareequallyweighted,anegativeeffectof–1.34%results.Thiseffectisstatisticallysignificant.Putinanotherway,asignificantmajorityofcompanieswerenegativelyimpactedbytheInitiative.

Theseresultscanbeexplainedbynotingthattheorysuggeststhattheremaybedifferenteffectsforbigandsmallcompanies.Toexplorethispossibility,weanalyzedthereactionwithinfivesizequintiles,i.e.consideringseparatelythegroupofthebottom20%,thenext20%,andsoonintermsofmarketcapitalisationatthetimeoftheevent.Thestrikingresultisthattheon-averagenegativereactionwas,infact,concentratedinthe(relatively)smalltomediumcompanies,whereasthequintileofthelargestcompanies(roughlythe40largestSwisscompanies)benefited.Value-weightingtheindividualeffects,weestimatethatduetothe“Abzocker-Initiative”the20%largestcompaniesgainedCHF 2.9 billioninmarketvalue,whereasthesmalltomediumcompaniestogether(80%ofthecompaniesstudied)lostroughlyCHF 1.7 billioninmarketvalue.

WhentheSVPjoinedin,itseemstherewaslittleextraeffectonthestockmarket.

4.4 Concluding remarks on Say-on-Pay

Takentogether,theevidencesuggeststhataSay-on-Paybillmaynotbenefitallfirms.Ofcourse,someuncertaintysurroundstheseestimates.Also,itispossiblethatthestockmarketreactedtoelementsofthe“Abzocker-Initiative”thathadnothingtodowithSay-on-Pay.Forexample,thestockmarketreactionmayreactonageneralfearofregulation.Butforallpracticalpurposestheseresultssuggestthatthe“Abzocker-Initiative”createdvaluefortheshareholdersofthebiggestcompaniesbutdestroyed,ratherthancreated,valueforsmalltomediumcompanies.Weinterprettheseresultsasimplyingawarningcallforthelattersetofcompaniesthattheyneedtohaveappropriateproceduresinplaceinordertodealefficientlywithwhatthestockmarketappearstoseeasinterferencebyregulation.Bycontrast,themarketappearstothinkthatforlargecompaniesthebenefitsofbindingSay-on-Pay,perhapsduetobetteralignmentofmanagerswithshareholdervalue,willoutweighthecosts.


5 Governing Reward

Inthissection,weputthespotlightonafewdevelopmentsintheareaofrewardpracticethatweregardasparticularlyrelevantforthosefirmsandmanagerswishingtopreparethemselvesforthelongterm.Thisdiscussionisbrief,butwearehappytoengagewithyouoneachofthesepoints.

1. Paymentofnon-executivedirectorsislikelytooccurmoreintheformofequitythaninthepast.Infact,empiricalevidence(fortheUS)clearlydocumentsthatequity-ownershipofdirectorsiscausallyrelatedtosuperiorperformanceofcompanies.Oneimportantconcern,though,isthatdirectorswithperformancepaymaybe“toowell”alignedwithmanage-ment’sinterestsandtoodependentinparticularontheCEO.Forexample,directorsmayengageinexcessiveearningsmanage-mentorevenmanipulation,andtheymaybemorewillingtobe“flexible”withcompensationarrangements.Clearly,strongboardmembersandboardsareneededtoavoidsuchpitfalls.

2. Trueboardstrengthisdifferentfromproformaboardindependence.Indeed,theevidencethatindependenceofdirectorspersehasmuchtodowithfirmperformanceisweakaswediscussedinlastyear’sSurvey.Detailedanalysisofalargesampleoffinancialinstitutionsrevealsthatitwas,infact,banksandotherinstitutionswiththemostindependent

Figure 11: Interactions of Compensation Committees

Compensation Committee

Shareholders

Board and Senior Management

Government

Control Functions

Regulators

Firm-wide Policy and Process

Dialogue

Oversight

Existing relationship

New or extended relationship

directorswhohadthehighestwrite-downsinthecourseofthefinancialcrisis.Butevidenceexiststhatmorecompe-tentdirectors(offinancialinstitutions)havehelpedtheircompaniessurvivethecrisisbetter.Wepredictthatboardcompetenceisgoingtoremainamajorthemeofthefutureandindeedthatitwillbecomeevenmoreimportant.

3. TheCompensationCommittee’sremitisexpanding.AsillustratedinFigure11,notonlydoestheCompensationCommitteehavetoworkwiththerestoftheboardandwithshareholders,butitisalsoincreasinglyinvolvedininteractionswithregulators,thegovernment,controlfunctionsinthefirmaswellaswithfirm-widepolicyformationandprocesses.

4. EachcompanyneedstodefineitsownpreferredwayforallowingtheCompensationCommitteetoactuallydecideontheseexpandedremits.Anumberofscenariosareconceivable.Oneentailsthecreationofacompensationoversightcommitteewithrepresentationfromkeycontrolfunctions.ThiscommitteecouldsupporttheCompensationCommitteewithitsincreasedremitandresponsibilities.Itwouldreviewthedesignandoutcomesofdivisionalandindividualincentives,recommendtotheExecutiveCommitteesomedesignchangesandadjustments,andreportfindingsof


reviewstotheCompensationCommittee.AnotherscenariowouldbetoestablishDivisionalCompensationCommitteeswhoauthoriseremunerationbelowtheExecutiveCommitteelevel.TheseDivisionalCommitteescouldbestaffedbydivisionalmanagingdirectors,grouphumanresourceandriskofficers,andpossiblyexternals.Whileameaningfuldivisionoflaborinsomesense,itispossiblethatsuchasetupwouldlackclarityagainstthegroupCompensationCommittee’sremit,andtherecouldbeissuesofconsistencyacrossdivisions.Itmayalsounnecessarilyinhibitmanagement’sabilitytousecompensationasamanagementtool.

5. Compensationreportingneedstocomplywithnewregu-latorystandardsandtosupportvalue-basedmanagement.Reportingshouldbepartofastrategicapproachtoshare-holderengagement,anditneedstocoverrationaleaswellasfacts–“disclosureandanalysis”.Evidenceisaccumulatingthatcompanieswithhigh-qualityvoluntarydisclosureactuallyoffersuperiorlong-termperformanceforshare-holders,atleastuptosomepoint.Inshort,compensationreportingisakeyelementofbuildingshareholdertrust.Inaddition,forcompanieslistedontheSwissExchangeSIX,transparentandcleardisclosureisvital,astheSIXhasannouncedthatinitsreviewofcompanyreports2010(asalreadyin2009),itwillpayparticularattentiontowhether

thequalitycriteriarequiredbytheDirectiveonInformationrelatingtoCorporateGovernancebytheSIXare,infact,fulfilled.Asarecentcasehashighlighted,theSIXintendstovigorouslyenforcecompliancewiththisdirective.

6. Designingsuitabletotalcompensationstructuresischallengingduetoavarietyofcomplexinfluencefactors(includingregulatoryandlegalrestrictions,shareholderpres-sure,expectationofmanagement,volatilemarkets,warfortalents,demographicdevelopments,etc.).Totalcompensa-tionsystemsconsistofseveralparts(seeFigure12)andmustbecloselyalignedtothebusinessstrategyandmustsupportlong-termsustainablevaluecreation.Forexample,wemaywitnessariseofperformance-dependentpensionsasanimportantelementofpay.ThenewEUrulesoncompensationputinplaceinJuly2010(whichforthetimebeingcoverfinancialinstitutionsonly)entailthepossiblerequirementtoconveypartofpayintheformofinstrumentswhosevalueistiedtotheoverallvalueofthecompany.Itistooearlytotelltheimpactinpracticee(e.g.legalenforceabilityandlocalpensionlaw)butweurgecompaniestoremainwatchfulonthismatter.Structuringandbalancingofthedifferentelementsoftotalcompensationwillcontinuetobeofvitalimportanceinordertogainandsustaincompetitiveadvantages.

•Participationinthelong-termsustainablevaluecreation(prospectiveview)•Enforcementofcorporatecultureandbusinessstrategy•Alignmentofinterestsofshareholdersandmanagementthroughownership

•Short-termretrospectiveperformancemeasurement(quantitativeandqualitativegoals)•Riskadjustmentanduseofnon-financialmetrics(includingdiscretion)•Morelong-termoriented(deferredmechanismandbonusbank)

•Fixedcompensationelement,representingmarketvalueoffunction•Functionalgradingsystemservingasbasisfortotalcompensationsystem•Strongerfocusonbasesalary

• Importantremunerationelement(long-termwealthaccumulation)•Pressureonfundingofliabilities(assetperformanceandageingofsociety)•Socialsecurityplanningandcompliance

•Tailoredandtax-efficientoffering•Costcontrol

Share-basedcompensation

Bonus

Basesalary

Pensions&SocialSecurity

FringeBenefits

Figure 12: Elements of total compensation: Best practise consideration

Ownership:alignmentthroughholdingofequity

investment(skininthegame)


6 Concluding Remarks

Theheatedpoliticaldebatehasspurredregulatorsintoaction,bothinSwitzerlandandglobally.ThepastyearhasseentheSwissFinancialMarketSupervisoryAuthority(FINMA)publishingguidelinesonminimumstandardsforremunerationsystemsoffinancialinstitutions.Mostrecently,anInitiativehasbeenlaunched(andatleastpartiallysupportedbypoliticalparties)thatwould,ifputintolaw,implementthemoststrictversionofbindingSay-on-Payinanymajorcountry.Wesug-gestedinlastyear’sSurveythatthereseemstobeatendencytooverregulatecompensationmattersinSwitzerland,andwecontinuetostandbythisassessment.Whilearegulatoryframeworkisneeded,itshouldnotbetoorestrictive.Otherwise,companieswillnotbeabletodevelopandoperatecompensationsystemswhicharecompetitiveinthemarketandsupportsustainablelong-termperformance.TheevidencethatisofferedbythestudyofthestockmarketreactiontothecurrentSay-on-PayInitiativeinSwitzerlandsupportsthisview.

Apartfromconsideringregulatoryaspects,itcontinuestobeessentialtoconsidercompensationsystemsinthecontextofanoverallpicture.Therightcompensationsystemforaparticularcompanydependsdirectlyonitsbusinessstrategyandtheenvironmentinwhichitoperates.Abalancedcompensationsystemisonethatofferslong-termincentives,isgearedtostrategicobjectives,andincludesrisk-takingintheevaluationofperformanceandresults.

Theultimateresponsibilityofdevelopingsuchcompensationsystemslieswiththeboardofdirectors.Itisthereforeessentialthatthemembersoftheboardofdirectorshavetherequiredcompetenciesandarenotonlyformallyindependentbutalsoactinsuchamanner.Thisisacornerstoneofgoodcorporategovernance.Itensurestherightprinciplesaresetandimple-mented,andadherenceismonitored.Webelievethatthefollowingsixprinciplesarecentraltosuccess:

1. Onlyastrongboardcanimplementaneffectivetotalcompensationsystem.

2. Theincentivesystemmustbedesignedasa“bestfit”withcompanystrategy–anditneedstobecommunicatedassuch.

3. Compensationshouldbelinkedtoafewkeyperformanceindicators(KPIs),butnotexclusivelytoeasilycontrollablefactors.

4. Limitstopayarenotrequiredforwellbalancedcompensa-tionsystems.

5. Aneffectivecompensationsystemestablishesentrepreneuri-alincentives.

6. Aneffectivecompensationsystemfocusesonvaluecreatedforthelongterm.


AppendixA) Companies surveyed (in alphabetical order)

SMIcompanies

ABB

Actelion

Adecco

CreditSuisse

Holcim

JuliusBär

Lonza

Nestlé

Novartis

Richemont

Roche

SociétéGénéraledeSurveillance

Swatch

SwissLife

SwissRe

Swisscom

Syngenta

Synthes

UBS

ZurichFinancialServices

SMIMcompanies

Aryzta

Bâloise

BarryCallebaut

Basilea

Clariant

EFGInternational

Galenica

GAM

Geberit

GeorgFischer

Givaudan

Helvetia

Kühne&Nagel

Lindt&Sprüngli

Logitech

NobelBiocare

OCOerlikon

Panalpina

Pargesa

Petroplus

PSPSwissProperty

Schindler

Sika

Sonova

Straumann

Sulzer

Temenos

Valiant


B) Methods and additional results for the analysis of the impact of Say-on-Pay

WehighlightheresomeofthefeaturesoftheanalysisofSay-on-Payofferedinthemaintext.Furthertechnicaldetailsandresults(includingrobustnesschecks)canbefoundinthestudyunderlyingthesummaryhere.9)

Theeventstudymethodologyemployedinthisstudyisasimpleandwidely-usedmethod.Thebasicidea,asdescribedinthemaintext,istoidentifythecausaleffectofaneventonstockpricesbycalculating,withtheuseofamodel,howstockpriceswouldhavedeveloped,andthentakingthedifferencetotheactualdevelopment.Thedifferenceinthechange,labelled“abnormalreturn”canthenbeattributedtotheevent.

Asforeveryeventstudy,thecrucialpointistocarefullyexamineanddefinethedateatwhichasignificanteventtookplace.Itisimportanttodeterminewhichmilestonesarelikelytohavethelargestimpact,astheyweretheleastexpectedandmostimportant.Inthepresentcase,anationalkeywordsearchinthevastnewsdatabaseofLexisNexisforthetimeperiodofJuly2006toMarch2010wasconducted.AlthoughseveraleventspotentiallyarerelatedtoSay-on-Pay,thetwoeventschosenforthisstudyarethemostsignificantones:thefirstimportantstepwasmadeonFebruary26,2008,whenentrepreneurThomasMinderpubliclyannouncedthatmorethan100,000signaturesinfavourofhis“Initiativeagainstrip-offsalaries”hadbeencollected.PerSwisslaw,thismeantthattheproposedbillofMr. Minderwassetforapublicvote.ThesecondeventofinteresttookplaceonFebruary10,2010,whenalargepoliticalparty(theSVP)announcedtheindirectbackingofMr.Minder’sbill.Also,weconfirmedthattheydonotsufferfrompotentiallyconfoundingnewsthattookplaceonthesameday.Mostimportantly,theannouncementthatmorethan100,000 signa-turesinfavourofMr.Minder’s“Initiativeagainstrip-off sala-ries”hadbeencollected,cameasasurprise(atleastmoresothanthetypicallegislativedevelopmentwhichproceedsinwidelydiscussedsteps).

OursampleconsistsofallthecompaniesthatwerelistedintheSPIduringtherespectiveeventwindowandthathadalongenoughpricehistorytocovertheestimationwindow.Afterexclusionduetothelatterreason,weendedupwith219and220firmsforthefirstandsecondwindow,respectively.

Todeterminethemarketreactiononthespecifieddate,weuseddataoftheofficialdailyclosingpricesoftheSPIconstituentcompaniesasavailableontheThomsonDatastreamdatabase.Wefirstuseddatafrom250daysupuntiltwodaysbeforetheeventtoestimateamodelofsharepricemovementsthatrelatesreturnsonstockstoreturnsoftheoverallmarket(theSPI).ThisisinthespiritoftheCapitalAssetPricingModel.Withthisstandardapproach,wecalculatedpredictionsofwhatthereturnsoneachstockshouldhavebeenintheeventwindow,i.e.onthedayof(andthedayimmediatelybeforeandafter)therelevantevent.Thisistheso-callednormalreturn.Takingthedifferencebetweenthenormalreturnandtheactual(observed)returnyieldstheabnormalreturnforeachstockthatisduetotheevent.Besidesasinglestock-by-stockconsideration,weinvestigatedtherelationbetweencompanysizeandcompensa-tionlevelsontheonehandandabnormalreturnsontheotherhandbyaggregatingthefirmsintosuitablequintileportfolios.ForthesecalculationsandforthemeasurementofthemonetaryimpactoftheInitiative,wecollecteddataonthefree-floatadjustedmarketvalueoftheSPIcompanies,i.e.themarketcapitalisation.

9)WagnerandWenk(2010),Say-on-PayinSwitzerland,UniversityofZurich,2010,availableatwww.pwc.ch/reward.


Table 2: The impact on the Swiss stock market of Say-on-Pay Initiatives

February26,2008“Abzocker-Initiative”passes100,000signatureshurdle

February10,2010SVPannouncesbackingof“Abzocker-Initiative”

A.AveragereactionofSPIcompanies(equal-weighted) –1.34%[–1.81%;–0.88%]

–0.54%[–0.95%;–0.12%]

B. Totaleffects:value-weightedreactioninCHFMillionforthe5sizequintilesseparately

Quintile1(smallest) –8.93[–29.71;+11.85]

–21.62[–31.06;–12.18]

Quintile2 –92.27[–116.14;–68.40]

–5.97[–85.50;+73.77]

Quintile3 –270.51[–359.38;–181.64]

–78.13[–242.02;+93.78]

Quintile4 –1,326.76[–1,935.02;–718.51]

34.48[–453.82;+516.82]

Quintile5(largest) +2,936.96[+2,411.66;+3,462.26]

–226.73[–965.7;+786.95]

C.Totaleffect:value-weightedreactionin%duringthree-dayeventwindow

+0.11%[+0.07%;+0.16%]

–0.03%[–0.23%;+0.16%]

D.Totaleffect:value-weightedreactionin%duringthree-dayeventwindowforquintiles1to4

–2.32%[–3.07%;–1.58%]

–0.13%[–1.34%;+1.08%]

Notes:Thetableshowsannouncementseffectsintheeventwindow(–1/+1)dayswithintherespectiveevent.Thenumbersaresurpriseeffects,i.e.theynetouttheexpectedreturnormarketcapitalisationchangeand,therefore,showthecausaleffectofthetwoevents.Numbersinsquarebracketsdescribethe95%confidenceintervals.Ifanintervalhasbothpositiveandnegativenumbers,thismeansthattheeffectisnotstatisticallysignificantfromzeroata95%confidencelevel.Effectsthatarestatisticallysignificantlydifferentfromzeroarehighlighted.

Themainresultsweredescribedinthetext.Table2presentssomemoredetailedresults.


First,asshowninsectionAofTable2,theaveragesurprisereturnofallSPIcompaniestogetherwasstronglynegative,at–1.34%onthefirstdateand–0.54%ontheseconddate.Theseeffectsarestatisticallyhighlysignificant.Theseareunweightedaverages;thatis,thesenumbersprovideinsightintohowaninvestorwhoheldaportfoliowithallcompaniesintheSPIinidenticalproportionsfaredontherespectivedates.Putanotherway,thisreflectsthefactthatasignificantmajorityofcompa-niesreactednegatively.

Next,onemightexpectdifferenteffectsforbigandsmallcompanies.Therefore,weanalyzedthereactionwithinfivesizequintiles,i.e.consideringseparatelythegroupofthebottom20%,thenext20%,andsoonintermsofmarketcapitalisationatthetimeoftheevent.InsectionBofTable2,wepresentthesurprisemarketcapitalisationchangeintheeventwindowwherewithineachquintilewealsoweightthecompaniesbytheirsize.Intuitively,thiscorrespondstoaninvestorholdingcompaniesintheproportionof(roughly)theSPIindex.Thestrikingresultisthattheon-averagenegativereactionis,infact,concentratedinthesmalltomediumcompanies:whereasthequintileofthelargestcompanies(roughlythe40largestSwisscompanies)benefited.WeestimatethatforthisgrouproughlyCHF 1.7bn(=1.33+0.27+0.09+0)werelostonthestockmarketduetothelaunchofthe“Abzocker-Initiative”.Ourresultsalsoimplythatabiggeramount,CHF 2.9 bn,wasgainedforthelargestcompanies.WhentheSVPjoinedin,itseemstherewaslittleextraeffectonthestockmarketwhenconsider-ingvalue-weightedresults(exceptinthegroupofthesmallestcompanies);seetheright-mostcolumn.

ThesefindingsarebroughttogetherinpartsCandDofTable2,whereweconsidertheresultsinpercentageterms.ConsideringalloftheSPI,value-weightingtheresults(accordingtosize)impliesthattherewasasmall,significantlypositiveeffectofthe“Abzocker-Initiative”.Ontheotherhand,whenlookingatallthecompaniesexceptthebiggest20%,wefindastatisticallyandeconomicallysignificantvaluedestructionduetothefirstevent,ontheorderof2.3%ofthemarketcapitalisation.Wenotethatanalyzingtheimpactaroundthisparticulardayislikelytounderstatetheeconomicsignificanceofshareholders’sayonexecutivepay.Afterall,neitherthelaunchofthe“Abzocker-Initiative”northehelpoftheSVPguaranteeimplementationintolaw.


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Forfurtherinformationaboutthissurveyorourservicesinthefieldofcompensationplanningforexecutivesandapplicablegovernance,disclosureandaccountingrequirements,pleasecontact:

Dr.RobertW.KuipersPartner,HRSConsultingPricewaterhouseCoopersPhone:+41587924530Email:[email protected]

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OtherrecentPwCpublicationsonthesubjectofExecutiveCompensation&CorporateGovernance:

• GlobalEquityIncentivesSurvey2009(English)• Ispayforperformanceaforceforgood?

www.pwc.ch/reward

Ifyouwouldlikefurthercopiesofthissurveyoroftheabovepublications,pleasecontact:

HeidiFässlerHRSConsultingPricewaterhouseCoopersBirchstrasse1608050ZurichSwitzerland

Phone:+41587924531Email:[email protected]

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pwc.ch/reward




2007 2008 2009 07/08 08/09 07/09 2007 2008 2009 07/08 08/09 07/09

Upper Quartile 2,568,379 2,388,785 3,070,609 –6.99% +28.54% 19.55% 906,043 932,560 751,464 +2.93% –19.42% –17.06%

Median 1,200,000 844,723 1,330,867 –29.61% +57.55% 10.91% 430,500 581,876 560,591 +35.16% –3.66% +30.22%

Lower Quartile 520,869 397,564 670,599 –23.67% +68.68% 28.75% 278,750 261,000 305,640 –6.37% +17.10% +9.64%

Highest 14,624,000 15,228,951 15,116,196 +4.14% –0.74% 3.37% 10,625,656 7,418,000 7,418,000 –30.19% 0.00% –30.19%

Average 2,328,611 2,424,636 2,954,167 +4.12% +21.84% 26.86% 1,231,812 906,415 862,602 –26.42% –4.83% –29.97%

Lowest 0 0 256,570 0.00% n/a n/a 0 0 144,000 0.00% n/a n/a

Board of Directors


2007 2008 2009 07/08 08/09 07/09 2007 2008 2009 07/08 08/09 07/09

Upper Quartile 400,000 375,053 400,034 –6.24% +6.66% +0.01% 221,000 218,217 223,975 –1.26% +2.64% +1.33%

Median 296,030 279,869 317,407 –5.46% +13.41% +7.22% 169,000 154,500 158,423 –8.58% +2.54% –6.26%

Lower Quartile 176,265 170,000 192,799 –3.55% +13.41% +9.38% 105,919 106,250 105,050 +0.31% -1.13% –0.82%

Highest 5,027,381 2,901,796 5,274,667 –42.28% +81.77% +4.92% 3,255,621 4,107,000 4,107,000 +26.15% 0.00% +26.15%

Average 377,953 363,552 400,572 –3.81% +10.18% +5.98% 248,103 239,510 230,052 –3.46% -3.95% –7.28%

Lowest 0 0 0 0.00% 0.00% 0.00% 0 0 0 0.00% 0.00% 0.00%


2007 2008 2009 07/08 08/09 07/09 2007 2008 2009 07/08 08/09 07/09

Upper Quartile 12,618,250 8,185,720 12,518,763 –35.13% +52.93% –0.79% 4,058,039 3,469,390 3,664,328 –14.51% +5.62% –9.70%

Median 7,727,944 5,351,799 5,861,461 –30.75% +9.52% –24.15% 2,750,174 2,520,853 2,178,500 –8.34% –13.58% –20.79%

Lower Quartile 4,792,787 3,770,484 3,935,927 –21.33% +4.39% –17.88% 1,788,900 1,581,127 1,383,553 –11.61% –12.50% –22.66%

Highest 22,280,000 20,544,032 20,471,929 –7.79% –0.35% –8.12% 12,024,884 7,062,808 7,840,619 –41.27% +11.01% –34.80%

Average 9,326,781 6,943,456 8,191,353 –25.55% +17.97% –12.17% 3,814,715 2,939,052 2,948,413 –22.95% +0.32% –22.71%

Lowest 1,704,000 1,814,702 1,819,000 +6.50% +0.24% +6.75% 1,012,836 930,824 710,000 –8.10% –23.72% –29.90%

pwc.ch/reward

pwc.ch/reward




2007 2008 2009 07/08 08/09 07/09 2007 2008 2009 07/08 08/09 07/09

Upper Quartile 2,568,379 2,388,785 3,070,609 –6.99% +28.54% 19.55% 906,043 932,560 751,464 +2.93% –19.42% –17.06%

Median 1,200,000 844,723 1,330,867 –29.61% +57.55% 10.91% 430,500 581,876 560,591 +35.16% –3.66% +30.22%

Lower Quartile 520,869 397,564 670,599 –23.67% +68.68% 28.75% 278,750 261,000 305,640 –6.37% +17.10% +9.64%

Highest 14,624,000 15,228,951 15,116,196 +4.14% –0.74% 3.37% 10,625,656 7,418,000 7,418,000 –30.19% 0.00% –30.19%

Average 2,328,611 2,424,636 2,954,167 +4.12% +21.84% 26.86% 1,231,812 906,415 862,602 –26.42% –4.83% –29.97%

Lowest 0 0 256,570 0.00% n/a n/a 0 0 144,000 0.00% n/a n/a

Board of Directors


2007 2008 2009 07/08 08/09 07/09 2007 2008 2009 07/08 08/09 07/09

Upper Quartile 400,000 375,053 400,034 –6.24% +6.66% +0.01% 221,000 218,217 223,975 –1.26% +2.64% +1.33%

Median 296,030 279,869 317,407 –5.46% +13.41% +7.22% 169,000 154,500 158,423 –8.58% +2.54% –6.26%

Lower Quartile 176,265 170,000 192,799 –3.55% +13.41% +9.38% 105,919 106,250 105,050 +0.31% -1.13% –0.82%

Highest 5,027,381 2,901,796 5,274,667 –42.28% +81.77% +4.92% 3,255,621 4,107,000 4,107,000 +26.15% 0.00% +26.15%

Average 377,953 363,552 400,572 –3.81% +10.18% +5.98% 248,103 239,510 230,052 –3.46% -3.95% –7.28%

Lowest 0 0 0 0.00% 0.00% 0.00% 0 0 0 0.00% 0.00% 0.00%


2007 2008 2009 07/08 08/09 07/09 2007 2008 2009 07/08 08/09 07/09

Upper Quartile 12,618,250 8,185,720 12,518,763 –35.13% +52.93% –0.79% 4,058,039 3,469,390 3,664,328 –14.51% +5.62% –9.70%

Median 7,727,944 5,351,799 5,861,461 –30.75% +9.52% –24.15% 2,750,174 2,520,853 2,178,500 –8.34% –13.58% –20.79%

Lower Quartile 4,792,787 3,770,484 3,935,927 –21.33% +4.39% –17.88% 1,788,900 1,581,127 1,383,553 –11.61% –12.50% –22.66%

Highest 22,280,000 20,544,032 20,471,929 –7.79% –0.35% –8.12% 12,024,884 7,062,808 7,840,619 –41.27% +11.01% –34.80%

Average 9,326,781 6,943,456 8,191,353 –25.55% +17.97% –12.17% 3,814,715 2,939,052 2,948,413 –22.95% +0.32% –22.71%

Lowest 1,704,000 1,814,702 1,819,000 +6.50% +0.24% +6.75% 1,012,836 930,824 710,000 –8.10% –23.72% –29.90%

pwc.ch/reward

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