Executive incentive compensation in Switzerland

Incentive compensation

What are the prevalent types and structures of incentive compensation? Do they vary by level or type of organisation?

While there is no data available for private companies, the annual PwC survey ‘Executive Compensation & Corporate Governance 2018’ found that the base salary of the chief executive officers of Swiss listed blue-chip companies never amounted to more than 30 per cent of compensation. The long-term incentives, in turn, were never less than 30 per cent (and often close to, or more than, 40 per cent) of the compensation. Other components of the compensation include performance-based cash bonuses and other payments. It is important to know that the term ‘bonus’ is not explicitly regulated under Swiss employment law. Rather, a bonus may qualify as gratification (in accordance with CO article 322d), or as salary (in accordance with CO article 322 to 322b). A bonus will likely be considered a salary component if it is determined by objective criteria, factors or targets (eg, achievement of financial or other reasonable business goals), which allow the employer no discretion in calculating the actual amount. Should a bonus qualify as salary, the employee is entitled to it as soon as the specific targets are met irrespective of any discretionary wording in the respective rules. In contrast, a bonus will generally qualify as gratification if the decision as to whether a bonus will be paid as well as its amount is at the employer’s discretion.

Are there limits generally on the amount or structure of incentive compensation? Are there limits that adversely affect the tax treatment of the compensation relative to the employer or the executive?

There are no general statutory limitations on the amount and structure of incentive compensation, but it is not possible to base an employee’s salary solely on incentive compensation without ensuring that such employee will have a minimum annual income. Companies subject to the CompO must respect the obligations and limitations set out therein. These include the mandatory and binding vote of the shareholders on the compensation of certain key employees, reporting obligations in the compensation report, and certain forms of compensation that are forbidden (see question 5). Finally, specific restrictions may apply within certain industries (eg, the banking industry, especially in connection with capital requirements).

Is deferral and vesting of incentive awards permissible? Are there limits on the length or type of vesting and deferral provisions?

As long as incentive awards qualify as gratification and not salary (see question 9), deferral and vesting of such awards is permissible under Swiss law (both as cliff and graded vesting). Gratification is compensation in addition and ancillary to the employee’s salary and it is at the sole discretion of the employer to what extent such gratification is paid, if at all. In contrast, salary is the consideration for the employee’s work and can be fixed or variable (eg, depending on achievement of certain benchmarks). Such deferral or vesting limitations on salary are null and void.

Even with regard to gratification, however, there are certain limitations. Excessively long vesting or deferral periods will likely not be upheld by the Swiss courts. Depending on the individual case or the wording of the relevant provision, further restrictions may apply in situations in which the employment relationship is terminated.

Are there limitations on the individuals or groups eligible to receive the compensation? Are there aspects of the arrangement that can only be extended to certain groups of employees?

Swiss law provides no limitations on the individuals or groups eligible to receive incentive compensation, nor are there aspects that can only be extended to certain groups of employees.

Can it be held that recurrent discretionary incentive compensation has become a mandatory contractual entitlement? Is this rebuttable?

Generally, the recurrent payment of discretionary incentive compensation will not become a contractual entitlement. According to the case law of the Swiss Federal Tribunal and a large body of Swiss scholars, however, the repeated payment of such incentive compensation without interruption and reservation during three years will suffice for an entitlement to such compensation to arise. Employers wishing to increase the degree of protection against such entitlements are advised to explicitly state with each such payment that the payment is made on a voluntary basis.

Does the type or amount of incentive compensation awarded to an executive potentially affect the compensation that must be awarded to other executives or employees?

Neither the type nor the amount of incentive compensation awarded will per se affect the compensation that must be awarded to other executives or employees. Employees contractually participating in the same compensation schemes may, however, generally not be discriminated against in equal situations. Furthermore, based on the Federal Act on Gender Equality, employees may not be discriminated against based on their sex, especially with regard to salary.

Is it permissible to require repayment of incentive compensation under certain circumstances? Are there circumstances under which such repayment is mandatory?

As a general rule, Swiss law does not allow repayment obligations of incentive compensation. There is, however, an exception to this rule for listed companies: remuneration paid to employees that is either not permissible under the CompO (see question 3) or that has not been approved by the shareholders, has to be repaid.

Can an arrangement provide that payment is conditioned on continuing employment until the payment date? Are there exceptions?

Such arrangement is only enforceable in the case where the incentive compensation is to be qualified as a purely discretionary gratification. Instead, an incentive payment may not be made subject to conditions (eg, continued employment relationship), if such incentive is to be considered as a salary component (see question 9).