New compensation system
Flexible management compensation remains a bone of contention in Switzerland. However, a verdict on salary systems is clear – aligning the interests of the managers with those of the shareholders through performance-related remuneration is often not met.
UBS and Credit Suisse stocks have shown poor performance while some of their managers have become multi-millionaires. This has resulted in much heated debate, including at the recent Credit Suisse general shareholder assembly, which discussed how high-ranking managers received bonuses while Credit Suisse suffered substantial losses in 2015 and 2016.
The board of directors of the Bank of Liechtenstein (LLB) has increasingly seen such discussions as a burden. According to the chairman of the board, Hans-Werner Gassner, in the past LLB's compensation wage regime was linked to net profits. However, this became unsatisfactory. At the beginning of 2013, LLB (which is listed on the Swiss Stock Exchange SIX) introduced a new compensation system based on a compensation model by the Zurich business professor Ernst Fehr and his consultancy Fehr Advice.
No windfall gains
In order to measure management performance, the long-term return on equity (ie, stock price developments and dividends paid resulting in total shareholder return) of an LLB share is compared with the performance of 28 financial institutions from eight countries. General economic developments such as financial industry deregulation or the overall interest rate situation – which may lead to higher share prices – have no effect on management compensation.
The LLB board of directors has defined a so-called 'target remuneration' for the members of the group management – of which 67% is fixed and 33% is variable. Members of the group management receive the entire target remuneration if the performance of the LLB shares corresponds to the total shareholder return of the 28 benchmark banks. If the title of the LLB develops better, group management members' variable compensation doubles. However, LLB considers this an unlikely scenario, as LLB's competitors do not sleep. Conversely, if the total shareholder return falls by 40% of the performance of the other institutions, LLB management will not receive the variable part of their compensation. There is a three-year vesting period and LLB's board is discussing whether past events justify a reduction in share allocation.
If LLB makes a loss for three consecutive years, the management loses its entitlement to the non-vested LLB shares of the year concerned.
The LLB payroll system is comparatively straightforward. LLB's compensation report consists of nine pages, while the Credit Suisse report has 36 pages. LLB believes that its compensation scheme must be straightforward enough to explain to any layperson. Further, qualitative factors and individual target agreements do not play a role in assessing the group management's variable compensation.
Conversely, Credit Suisse weighs qualitative criteria by 30%. Its managers are measured based on whether they have promoted new talents, strengthened partnerships or improved the Credit Suisse reputation as a whole. LLB believes that such qualitative criteria are difficult to assess (if assessable at all) and will be reflected in the long-term development of LLB shares.
For further information on this topic please contact Thomas Rihm at Rihm Rechtsanwälte by telephone (+41 44 377 77 20) or email ([email protected]). The Rihm Rechtsanwälte website can be accessed at www.rihm-law.ch.