The Good Board
Agenda · The board in ordinary times

Executive dismissal and compensation

The conflict structure determines defensibility. Build it before the decision, not during it.

Status
First edition · 2026-05-05
Category
Ordinary times
Last reviewed
2026-05-05

Note

References include the post-2023 provisions on executive compensation in listed Swiss companies (the former VegüV regime now integrated into Art. 732 ff. OR).

The CEO’s annual compensation is on the agenda. Or the CFO is leaving and severance terms need to be agreed. Or the board has lost confidence in a division head whose contract runs three more years. Three very different decisions — and each one exposes the same underlying structural question: who decides, on what information, with what independence from the person whose arrangements are being set. Swiss courts reviewing executive-compensation or termination decisions do not re-open the substantive judgement the board made; they examine the process by which the board arrived at it. Which means that, in practice, the conflict structure is the decision.

1. The duties that bear on this

Care and loyalty under Art. 717 OR. The standard is the procedural one familiar from Director Duties: adequate information, absence of conflict, orientation to the company’s interest. Compensation and termination decisions are measured against this standard in the same way as any other material decision; the substance is deferred to where process was sound, and examined directly where it was not.

Listed-company specific rules. For Swiss listed companies, the 2023 integration of the former VegüV into the Code of Obligations (Art. 732 ff. OR) imposes a procedural architecture that exposes board members personally on non-compliance: a mandatory compensation committee (Art. 733); the binding annual shareholder vote on aggregate board and executive compensation (Art. 735, 735a, 735b); categorical prohibitions on specific severance and transaction-bonus structures (Art. 735c); and the compensation report with audited disclosures (Art. 734 ff.).

Employment and termination law run in parallel. Swiss labour law (Art. 319 ff. OR), the Gender Equality Act, and applicable collective bargaining architectures apply independently. An executive dismissal that is corporate-law defensible can still trigger abusive- termination (missbräuchliche Kündigung) exposure under Art. 336 OR if the company cannot evidence a legitimate basis.

2. The process

  1. Identify the compensation committee or ad hoc dismissal committee. Its membership must exclude any director whose own compensation, continuity, or relationship with the affected executive conflicts them. For listed companies this is mandatory; for private companies it is highly recommended.
  2. Commission an external compensation benchmark for compensation decisions, or external employment-law advice for termination decisions. Reliance on external advice is, in Swiss doctrine, a standard route to discharging the care duty — provided the advice is independent and duly weighted.
  3. Build the record: performance assessment for compensation, defensible basis for termination. Terminations predicated on vague “loss of confidence” without documented precipitating events are durable sources of abusive-termination exposure.
  4. Separate legal advice for the company and for the executive, particularly in termination. An attempt to negotiate severance without the executive represented is a false economy: the settlement may later be partially unenforceable (notably under Art. 341 OR for renunciations during the protective period), and the negotiation creates its own record either way.
  5. Draft the termination or compensation documentation. Garden leave, non-compete, confidentiality, release, tax, and pension clauses each warrant specialist input. Omissions surface years later.
  6. Present to the full board on a documented recommendation from the committee. The full-board vote is the vote of record.
  7. Disclose as required. Listed companies: the compensation report. Private companies: the shareholders at the AGM where the D&O insurance schedule or related disclosures apply.

3. Questions to ask the committee and advisers

4. The record to leave

The committee’s commission, its external advisers' instructions and outputs, the committee’s deliberations and recommendation, the full board’s consideration and vote (with any dissent recorded), the final documentation, the shareholder disclosure, and — for terminations — the memorandum explaining the precipitating facts and the basis for dismissal. Each element is an exhibit that a later reviewer will either have or not have.

5. Failure modes

The CEO setting the CEO’s compensation. The committee’s recommendation mirrors the CEO’s own proposal; discussion is brief; the board votes it through. Three years later, in a shareholder-led derivative threat or in an activist campaign, the record reveals a compensation decision that was, substantively, the executive’s own.

Hush severance for a whistleblower. The executive’s performance record was unremarkable, they had raised compliance concerns internally, and they are offered generous severance in exchange for broad release and non-disparagement. The severance later resurfaces in the adjacent regulatory proceeding as evidence of retaliation or of purchase of silence. See the related agenda page on whistleblower reports.

Missed listed-company disclosure. A sign-on bonus, relocation allowance, or post-termination consultancy is structured to fall outside the board-approved compensation framework and goes unreported. The omission surfaces in a subsequent compensation-report review; the personal liability for directors who approved the aggregate framework is direct.

Cognitive register. Compensation decisions are particularly exposed to anchoring (Tversky & Kahneman, 1974): a benchmark placed before a committee becomes the reference point, and committees rarely depart materially from it even where circumstances warrant. Dismissal decisions engage loss aversion — the psychic cost of removing a known executive is front-loaded while the benefit of a successor is speculative — and the endowment effect makes directors overvalue the incumbent simply because the incumbent is the incumbent. The counter-measures are structural: benchmarks commissioned by the committee rather than presented by management; a written performance assessment separated in time from the continuity decision; deliberate consideration of the counter-factual — what would we do if no incumbent existed?

6. See also