Although consultative votes on compensation reports have not been mandatory in Switzerland, they have long been established as part of standard “say-on-pay” practice. Around two-thirds of Swiss Performance Index (SPI) companies subject to the Ordinance against Excessive Compensation in Listed Companies held such a vote during the 2022 annual general meeting (AGM) season. And trends for the voting results are clear:
During the 2022 AGM season, the average approval rate was 87%, which is within the range of the past seven years of 84 – 88%.
Consultative votes are often used as a warning signal before binding votes are rejected: Thus, the results of the consultative votes are on average significantly below (about 4 - 8 percentage points, p.p.) those of the binding votes on the total compensation for the Board of Directors (on average 94% approval) and the Executive Board (on average 91% approval).
Each year, approximately one in five compensation reports is approved with an approval rate of less than 80%, which can generally be interpreted as an expression of considerable dissatisfaction by investors. In such cases, the Compensation Committee is expected to substantially respond and report on the measures taken in the next Compensation Report.
The compensation-related votes are an essential part of the annual “shareholder engagement” process and provide valuable insights into shareholders’ point of view regarding selected compensation topics. This is often also used to detect the overall sentiment regarding the general governance structure. In addition, an advisory vote on the compensation report for companies listed in Switzerland that vote prospectively on variable compensation is mandatory as of the Annual General Meeting 2024.
An in-depth review of voting results allows Boards and Compensation Committees to identify potential pain points and set priorities for the agenda of the next AGM cycle.
Typical reasons for dissatisfaction expressed by shareholders are:
While the first three points are often prioritized in the processing of shareholder feedback, considerations about communication are sometimes taken up faster in the tightly scheduled meetings of the Board of Directors.
How can shareholders be made aware of the compensation approaches and how can one thus contribute to a higher degree of satisfaction, which ultimately also translates into a higher approval rate? Which guiding principles should the Board of Directors follow to achieve “better” compensation communication?