The Advisors' Blog

– Adam Shapiro and David Kahan, Wachtell Lipton Rosen & Katz

The Swiss Financial Market Supervisory Authority (FINMA) recently issued regulations addressing executive compensation at Swiss financial institutions. Notably, the regulations provide significant guidance on appropriate compensation incentives and structures, but emphatically decline to regulate pay directly.

The FINMA regulations will apply on a mandatory basis to the largest Swiss banks and insurance companies and will serve as a guideline for all other firms that FINMA supervises. Most significantly, the regulations require (1) alignment of compensation structures with risk management and promotion of long-term sustainable business objectives, (2) imposition of stock holding periods and compensation deferral arrangements under certain circumstances, (3) integration of compensation decisions with capital and liquidity planning, (4) company-established limits on sign-on bonuses and severance payments that a company may exceed only by obtaining approval from the board of directors, and (5) increased disclosure and transparency, including a comprehensive annual remuneration report from the board of directors.

FINMA rejected calls for a total ban on variable compensation, and the regulations avoid provisions that would directly regulate pay levels or that would mandate or prohibit particular compensation design structures. FINMA notes that it does not regard “a total ban or severe restrictions on variable pay” as a “useful approach” and that direct restrictions on compensation do not represent a “sensible option.” Rejecting a one-size-fits-all framework, FINMA further notes the impracticability of determining a “single appropriate arrangement” for all regulated firms within the Swiss financial sector.

FINMA’s new rules represent a sound approach from a regulator in a jurisdiction that houses a significant number of global financial institutions. The regulations establish core principles designed to ensure that compensation does not create incentives to take inappropriate risks, and impose on boards key oversight and disclosure responsibilities. At the same time, the rules recognize that long-term economic growth requires that individual institutions have the flexibility to implement programs specific to their needs and the ability to attract and retain management talent. A universal principles-based approach would place all financial institutions on a level playing field.