Pension funds insist on executive pay vote

Keystone

Pressure group Ethos has joined forces with eight pension funds to demand the right for shareholders to vote on executive salaries at five top Swiss companies.

The investment fund that campaigns for ethical corporate practice believes Switzerland lags behind many other countries that give shareholders a greater say in how much top bosses are paid.

The move by Ethos follows hard on the heels of an academic report that criticised performance related pay incentives for damaging many firms rather than achieving the desired result of increasing efficiency.

Soaring executive pay and the increasing proportion of bonuses and other performance related components has been blamed in some quarters for the current global financial meltdown. Critics accuse such pay practices of fuelling greed and short-term thinking.

Switzerland’s largest bank, UBS, is reviewing its own bonus structure after incurring some SFr45 billion ($42 billion) of losses in the subprime mortgage crisis.

Ethos has filed resolutions for next year’s annual general meetings at UBS, Credit Suisse, Nestlé, Novartis and ABB demanding the right of shareholders to vote on pay packages for top executives and board members.

Excessive risks

“The remuneration policy is a very important part of the long term success of a company. We have recently learned that the wrong incentive systems can lead to serious economic problems,” Ethos chairman Kaspar Müller told swissinfo.

“It can lead to short-term practices and to people taking excessive risks. And if the remuneration is too excessive then [bosses] might start to behave as if they it was their own company rather than act for the benefit of the whole company.”

Ethos was presenting its third annual report into executive pay that revealed the average remuneration of Swiss chief executives was nearly SFr5.5 million and double that amount for the combined role of CEO and chairman.

A separate report recently published by researchers at Zurich University has provided evidence that the increasing trend of performance related pay is having a negative impact on the fortunes of companies.

The report, entitled Management Fashion: Pay for Performance, found that the performance of companies in recent years has not kept up with the soaring pay and bonuses pocketed by top bosses.

Self serving bias

Author, Professor Margit Osterloh, told swissinfo that linking performance incentives to a company’s share price could lead to short-term strategies that benefit managers more than their firms.

“If you know in advance which criteria are important to your remuneration then it can bring out a self serving bias in decision making – even unconsciously,” she said.

“The proportion of performance related incentives in pay packages should really decrease.”

swissinfo, Matthew Allen in Zurich

Free Form: Ethos

The Swiss Foundation for Sustainable Development (Ethos) was created in 1977 by two Geneva-based pension funds and now has 75 institutional investors.

Its aim is to promote sustainable development principles and corporate governance best practice in investment activities.

It advises investment funds and asset management mandates worth SFr2.5 billion.

Ethos also carries out analyses of shareholder meetings and has a programme that promotes dialogue with companies.

Ethos executive pay report

Ethos examined the remuneration policies of 48 of Switzerland’s top companies in 2007.

It found the average CEO is paid SFr5,449,165 and chairmen earned an average of SFr2,110,096. Individuals combining both roles pocketed SFr10,746,404 on average.

Other board members took home SFr315,840 per annum while the average executive was rewarded with SFr 2,578,569.

Direct comparisons with 2006 are difficult as the rules governing the reporting of pay changed. However, the Zurich University report indicated that executive pay had increased 60% in Switzerland between 2002 and 2006.

The top Swiss earners in 2007 were Novartis CEO Daniel Vasella (SFr30 million), Credit Suisse CEO Brady Dougan (SFr22 million), Roche CEO Franz Humer (SFr21.6 million), Nestlé CEO Peter Brabeck (SFr18.7 million) and Swiss Re CEO Jacques Aigrain (SFr15 million).