Compensation plays an important role in attracting and retaining qualified and experienced leaders. When determining pay packages, companies face the challenge of harmonizing their own business and compensation strategies, shareholders’ expectations, leaders’ individual perspectives and also public opinion.

So, what does the typical pay package for leaders in Swiss financial services (FS) companies look like? How much do executives and board members earn in total, what elements form part of total compensation to which extent – and do leaders in FS companies really earn more than in other industry sectors? And what are the latest trends regarding long-term incentives? Our new “Swiss Leaders - Compensation Survey 2016” gives some insights in these question. In the following a few snapshots, with a focus on SMI and SMIM companies.

Chairmen of the board

On average for 2015, a chairman of the board in an FS company earned 3’312 tCHF (almost identical to previous year) and 1’216 tCHF in SMIM companies (+8.42%). This confirms the trend of the past years that takes SMIM board compensation closer to SMI board compensation. This is also due to the fact that board responsibility, especially in the FS industry, is becoming increasingly complex and requires more active involvement, expertise and strategic leadership, also for companies outside the SMI. In order to make informed and sound compensation decisions, specific compensation-related knowhow is also increasingly required and appreciated in boards.

The ratio between the compensation of the chairman and the average compensation of other board members is 6.9 in SMI FS companies and 4.7 in SMIM FS companies, respectively. This ratio is substantially higher than between CEOs and other executives, which underpins the particularly challenging role of a chairman within the board. Even if not having an executive role, many chairmen over the last years have been facing a much higher need to get involved into detailed and complex topics on a much more frequent basis, e.g. with respect to regulatory developments in the FS industry.

Executives

The average total compensation for the highest-paid executive (usually the CEO) slightly increased by 1-7%, depending on segment. The resulting total pay package for a CEO on average was at 8’468 tCHF in SMI FS companies and 2’909 tCHF in SMIM FS companies. This can be considered a normal development, without extraordinary leaps. Having said that, across almost all segments the average compensation is higher than the median compensation. This is typical for a rather small sample with a handful of very large companies and consequently often higher pay packages than the majority of other companies in the same segment: A few upper outliers lift the average, whereas the median position remains broadly unchanged. Thus, the spread of compensation levels mirrors the diversity in the Swiss market, even within FS companies (e.g. in terms of size), and is not necessarily due to a specific compensation practice of companies.

The ratio between the highest-paid and other executives is 1.72 (SMI FS) and 1.84 (SMIM FS), respectively.

Myth or reality?

Do leaders in FS earn more than in other industries? Not necessarily. When looking at the SMI companies, FS leaders indeed often earn more than non-FS leaders. However, amongst SMIM companies, non-FS CEOs received higher pay packages than FS CEOs, and also average fees to board members (incl. chairman) are higher in non-FS than in FS. So, differences between industries can be observed in certain areas, but the actual reasons for such observations should be carefully analyzed. Other factors, such as company size, global reach, market for specialists and business development, play an equally important role, which also shows in the fact that non-FS CEOs in the SMIM on average earn more than FS CEOs.

Bottom line, the assumption that FS leaders earn more than in other industries is only true for certain areas – and even there not necessarily driven by industry differences only, but equally by other factors. Thus, especially when looking at the broader market, it’s rather a myth – maybe, as so often, with an occasional grain of reality.

Long term incentives increasingly used

In terms of compensation structure, our main observation is that long-term incentives still represent a substantial part of executive compensation packages. In SMI FS companies, CEOs receive more than half of the total compensation in long term incentives (LTI) – which is similar to SMI non-FS companies. For other executives it is 44%.

Performance share units (PSUs) are still the most popular LTI instrument: 85% of SMI companies, 68% of SMIM companies and 11% of other companies offer PSUs to their executives. While often proclaimed to be dead, stock options seem to live on quite well: 30% of SMI companies and 18% of SMIM companies still offer stock options to executives.

Usually, LTI plans in Switzerland have a cliff vesting of three years. There is a broad variety of performance conditions in the Swiss LTI plans; total shareholder return (TSR), although an important measure, is not as predominant as in other jurisdictions, as it is only seen in 24% of the Swiss plans.

Market trends are good – tailored compensation approaches better

This underpins our main recommendation in this respect: Whatever the market majority does, is certainly an input worth to assess in more detail, but it might not be the best fit for each and every company. Each company should analyze thoroughly, based on their preferences, aims and possibilities, what the best plan, performance conditions and further plan parameters are. Many Swiss companies pursue such a bespoke approach, which results in a diverse picture of market trends.

For members of the board of directors, 28-60% of the companies (depending on segments) pay part of the board fees in the form of restricted shares. While variable compensation for non-executive board members, especially if subject to operational performance conditions, is often being challenged from a governance perspective, a fixed value in the form of restricted shares (or sometimes a fixed number of shares) can be seen as a balanced middle way between generally granting fixed compensation to a board but still including a certain link to the ongoing share price performance of the company, thus also focusing on market implications of strategic decisions. In addition, granting restricted shares may provide for a beneficial tax treatment in Switzerland, which is also one of the reasons why restricted shares for board members are more popular in Switzerland than in other jurisdictions.

Further details, also for substantially smaller companies, can be found in our Swiss Leaders - Compensation Survey 2016. Please contact Marc Seematter for your personal copy.

Marc Seematter, Director

Marc is a Director and leads the Reward team of Deloitte in Switzerland. He focuses on advising both domestic and international, listed and private companies on all aspects of compensation. Marc has deep experience in designing and implementing incentive schemes, in executive compensation advisory as well as in compliance with regulatory requirements to compensation structures in Switzerland (i.e. ordinance against excessive compensation in listed companies OaEC, “Minder” ordinance) and disclosure in compensation reports.

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