Regulation of Say on Pay: Engineering Incentives for Executives and Directors – Experiences from the United States and Implications for Regulation in Switzerland

The debate about the compensation of executives and directors is a discussion about incentives and agency costs. This article analyzes basic tools to reduce agency costs and also assesses the ongoing debate about the future regulation of the compensation of executives and directors. It draws upon legislative experience from the United States. Recently proposed legislation in Switzerland attempts to empower shareholders with the draft of the Swiss Code of Obligations (CO). The main motivation behind this draft law is the reduction of excessive executive compensation. Directors and shareholders with a higher degree of independence might be less conflicted in their decisions but they might also have a lack of firm-specific know-how. In effect, this could lead to weaker bargaining power of directors in relation to executives when they have to contract for new employment agreements with their executives. Moreover, shareholders often do not have the time or ability to process complex disclosure about executive compensation. This will lead to uninformed voting behavior of rationally apathetic shareholders. Additionally, some shareholders, e.g., institutional investors, may prefer to stay on good terms with the CEO or directors because they want to have a good longterm relationship with the board and the executives. This article advises against implementing a specific salary cap for so called “very high compensation” and also advises against the implementation of tax burdens for executive compensation.