The Ethos Foundation has issued its 2014 proxy voting guidelines. One notable feature of this edition is the principles that Ethos will apply with regard to the implementation of the ordinance of execution of the initiative “against excessive remuneration”, the so-called "Minder" initiative. Ethos recommends that companies have a separate vote for the fixed and variable remuneration components. Under no circumstances will the Foundation be able to accept, prospectively, remuneration amounts without knowing in detail the mechanisms linking compensation to performance. Moreover, in the event of outstanding performance, the variable remuneration should not exceed three times the fixed salary in order to avoid excessive risk-taking by the management.

Following the entry into force of the ordinance of execution of the Minder initiative, Ethos' voting guidelines have been supplemented to take into account the enhanced shareholder rights with regard to corporate governance and executive remuneration conferred by the initiative. Ethos specifies below under which conditions Board proposals can be accepted at shareholder general meetings.

Stricter proxy voting guidelines

Ethos requires separate votes for the fixed and variable compensation paid to executive management. Base salaries and long-term participation plans can be voted on prospectively, i.e. at the start of the applicable period. On the other hand, bonuses paid for past results should be put to approval retroactively by the shareholder meeting, i.e. at the end of the applicable period, after the relevant performance is established. Ethos will therefore not be able to accept voting in advance for a maximum bonus amount without an extremely detailed explanation of the targets which must be met for granting the requested amount.

The total amounts of remuneration which Ethos will be able to accept depend on the size and complexity of the companies in question. Nevertheless, the fixed salaries should not exceed, without justification, the median, of a group of peer companies. Total variable compensation (bonus and participation plans) should not exceed, for exceptional performance, three times the fixed salary for a CEO.

To approve the election of remuneration committee members, Ethos requests that most of the candidates are independent and do not hold executive positions at other companies. The point being that such candidates could have a personal interest in seeing average executive compensation rise across the market as a whole, leading to a ratcheting of executive remuneration.

Finally, Ethos will pay very close attention to the corporate governance rules set by companies in their articles of association. In particular, the maximum number of other mandates held by executives will need to be limited to ensure they can provide the required diligence and commitment, particularly during crises.

Remuneration levels remain high

Ethos has also released its annual survey on executive remuneration in the 100 largest companies listed in Switzerland. In the financial year 2012, remuneration remained very high averaging almost CHF 2 million for a member of executive management. Transparency regarding remuneration allocation mechanisms is still inadequate in many companies. A prospective vote for a maximum package would be equivalent to giving a blank cheque to the management, and that is not acceptable to Ethos.

The structure of remuneration systems often still falls short of best practice. Of the 42 companies which disclose the maximum potential compensation level, in 18 cases variable compensation can exceed three times the base salary. Moreover, 41 companies have a long-term participation plan without performance criteria for vesting. All the beneficiary needs to do for the shares to be released, is remain employed by the company for the set term (normally three years). In practice, these plans fail to meet their retention target, as companies which want to recruit a good manager will not hesitate to make replacement payments for the shares forgone. Surprisingly, this type of remuneration was not prohibited in the implementation of the Minder initiative.

Obligation to vote for pension funds

Given that Swiss pension funds are obliged to exercise their voting rights for companies under Swiss law from 2015, Ethos has now expanded its shareholder meeting analyses to 200 companies listed on the SPI.