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Top CEOs are not just paid a simple salary like ordinary employees. The number on their paycheck includes variables that can top their annual salary. SWI swissinfo.ch takes a look at how top earners in a company are paid.
It is that time of year when Swiss union Unia releases its annual report on the pay gap between top and bottom earners working for Switzerland’s largest companies. Last year, Switzerland’s top managers earned on average 143 times more than their lowest paid employees. In 2022, the pay gap was slightly lower at 1:139.
The gap is of little surprise. What is though, is the disparity between what CEOs of the same industry earn as well as how much they earn year to year. That number can increase or decrease significantly.
Vas Narasimhan of pharma major Novartis topped the list this year at CHF16.2 million, earning almost twice as much as the previous year. On the other hand, Switzerland’s other pharma giant Roche paid its CEO almost a third less, dropping from CHF15.1 million to CHF10.6 million.
Performance matters
This variability boils down to how CEOs are paid. Compensation is usually made up of a base salary and a variable component. In large companies, like the ones in the top 10 list above, the variable component is usually larger than the base salary.
The variable component of a CEO’s pay is made up of two parts: a bonus (also known as annual incentive programme or immediate variable pay) and a long-term incentive plan (also known as deferred variable pay).
According to Swiss consultancy firm HCM, the annual bonus was 67% of the median Swiss CEO base salary in 2022. This is a much higher share than other company executives whose bonus was about half their median salary.
The bonus paid out to CEOs can hinge on company earnings or revenue or both. In 2022, 66% of companies assessed by HCM used earnings as a performance metric for bonuses compared to 44% who used revenue as a yardstick. Increasingly, these payments are also linked to achieving environmental and social governance (ESG) targets. According to HCM, this trend is also more pronounced among larger companies (92% assessed) than smaller ones (46%).
Long game
Most large listed-companies worldwide have a long-term incentive plan for their CEOs in place. In 2022, 46% of Swiss companies assessed by HCM had Performance Share Units (PSUs) as their sole long-term incentive plans. PSUs are like company stock, but CEOs have to meet certain performance targets for them to be converted into shares. The performance period over which the CEO was reviewed was three years in 90% of the cases surveyed.
In addition to performance, some CEOs are also required to have “skin in the game”. Around 26% of companies required their CEOs to own a certain amount of equity in the company. According to HCM, share ownership guidelines in Swiss companies are usually set at 300% of base salary for CEOs with five years the most common timeframe set to acquire the necessary shares. So, a CEO with a base salary of CHF1 million will need to own CHF3 million in company stocks within five years of appointment.
Edited by Virginie Mangin
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