Globally, there has been an on-going trend to put risk alignment, conduct-related matters, and sustainability to the forefront of corporate activities – mainly driven by regulatory requirements and proxy advisor expectations. Clawbacks are considered one possible instrument in this context.
They have been a common risk alignment tool among European banks and other financial institutions since their introduction in the EU regulatory landscape after the 2008 financial crisis. Most recently, in 2023, clawbacks became mandatory for executives of listed companies in the US.
While in other jurisdictions, including the US and the EU (merely for the financial industry), clawbacks are legally required, in Switzerland, the provision of a clawback is to some extend recommended1 but not (yet) mandatory from a legal perspective. Still, large international proxy advisors already expect companies to have clawbacks in their toolbox for effective risk alignment.
In fact, clawbacks are more and more frequently observed in Switzerland with 29% of listed companies having clawbacks in 2021 vs. 22% in 2019. Notably, larger companies are at the forefront in this regard – potentially also because they are in the spotlight and under public scrutiny when it comes to governance best practices. For example, around 80% of the SMI companies have this mechanism in place. In contrast, there are fewer medium and smaller companies which include clawbacks, but with a strong positive trend between 2019 and 2021 (SMIM: from 44% to 63%; SPI Mid: from 15% to 23%; SPI Small: from 8% to 13%).
Typically, clawbacks are foreseen for executives and majorly apply either to their entire variable compensation (51% of clawbacks), or solely to the long-term variable elements (44% of clawbacks). They usually enable the Board of Directors to reclaim the relevant compensation elements for up to three years if certain trigger events occur, such as severe misconduct (61% of clawbacks), illegal activities (54% of clawbacks) or in case of financial restatements (49% of clawbacks).
Despite the focus and scrutiny by proxy advisors, some investors and the public, there are very few publicly known cases where a clawback was actually enforced in Switzerland. This can lead to the question: Are clawbacks an effective tool to achieve the goals regarding accountability and risk alignment mentioned above? Or is it like riding a toothless tiger?
A Federal court decision from 2015 has provided some precedence for clawbacks. The main question to assess whether an award would be considered recoupable from a legal perspective is:
• Is the award considered a gratification, i.e., a discretionary element and not a variable compensation element?
This differentiation has actually been a challenge for labor law experts for a while, but the precedent case also offers some guidelines in this regard, along the following questions:
• How relevant is the variable part in the individual’s overall compensation package on a relative basis and, specifically, does it exceed five times the median Swiss salary?
Depending on these conditions, a potential clawback is enforceable – given the pre-determined trigger conditions occurred.