Employment Incentives Comparative Guide

1. Legal and enforcement framework

1.1 Which legislative and regulatory provisions govern employee share plans in your jurisdiction?

Essentially, and depending on the circumstances, the following main frameworks may govern employee share plans in Switzerland (particularly depending on whether the issuing company is listed or not):

• employment law (Articles 319 and following of the Code of Obligations);
• corporate law (mainly Articles 620 and following of the Code of Obligations for a company limited by shares (Aktiengesellschaft) and Articles 772 and following of the Code of Obligations for a limited liability company) (Gesellschaft mit beschränkter Haftung);
• provisions on compensation within companies whose shares are listed (Articles 732 and following of the Code of Obligations);
• negotiable securities law (Articles 965 and following of the Code of Obligations);
• the Federal Act on Financial Market Infrastructures and Market Conduct in Securities and Derivatives Trading (Articles 142 and 154);
• the Federal Act on Financial Services (FinSA) (Article 35);
• the Federal Act on Data Protection;
• the SIX Swiss Exchange Listing Rules (Articles 53 and following);
• the SIX Directive on Information relating to Corporate Governance (Annex, Section 5); and
• the SIX Directive on the Disclosure of Management Transactions (Section 6).

Finally, as a soft law source, the Swiss Code of Best Practice for Corporate Governance conceptionally sets out:

• guidelines on the determination of compensation for the board of directors and executive management; and
• principles of compensation policies and compensation systems.

1.2 Do any special regimes apply in specific sectors?

Based on FinSA (Article 25) and its Ordinance on Financial Services (Articles 24 and following), financial service providers must essentially take risk-adequate organisational precautions. In this regard, their remuneration system must not create an incentive for staff to:

• disregard statutory duties; or
• conduct themselves in a manner that is detrimental to clients.

In particular:

• financial service providers must define their remuneration system in such a way that variable remuneration elements do not diminish the quality of the financial services rendered to clients; and
• there can be no mutual direct relationship between remuneration levels if a conflict of interest might arise between the activities of business units.

Further, the Swiss Financial Market Supervisory Authority (FINMA) has issued FINMA Circular 2010/1, Remuneration Schemes, which sets minimal standards for remuneration systems at financial institutions (subject to meeting certain thresholds, which apply in particular to banks, securities firms and insurance companies). In summary, this circular resolution sets out principles in particular regarding:

• the remuneration being aligned with the firm's risk policies;
• the variable remuneration being linked to the long-term economic performance of the firm;
• the variable compensation being granted according to sustainable criteria; and
• the application of deferrals or blocking periods to remuneration with a view to the future development of performance and risk.

For financial institutions that do not fall within the scope of the circular, FINMA recommends that its principles be taken into account as best practice guidelines for their remuneration schemes.

1.3 Which bodies are responsible for enforcing the legislation? What is their general approach in doing so?

While the regulatory frameworks are enforced by FINMA, the stock exchange frameworks are enforced by the respective stock exchanges themselves (eg, the SIX). For the Takeover Board, see question 10.2. The Federal Data Protection and Information Commissioner oversees matters relating to data protection and freedom of information. The supervisory bodies principally act:

• on their own upon suspicion of a breach; or
• upon due notification by a third party.

As a general first step, and if deemed necessary, an investigation will be launched to assess whether a breach of applicable regulations has occurred. During this investigation, a company:

• will typically be asked to provide information and documentation; and
• has a right to be heard.

For claims and/or entitlements based on the Code of Obligations, the legitimate party may bring a claim before the competent courts, as these essentially are civil law claims and generally no supervisory body is present. In particular, entitlements by employees potentially arising under the relevant legislation must be enforced through lawsuits before the competent courts in accordance with the applicable procedural rules.

2. Providers

2.1 What types of companies typically provide employee share plans in your jurisdiction?

The spectrum of companies that typically provide employee share plans in Switzerland is quite broad. Characteristically, employee share plans are issued by companies with share capital (Aktiengesellschaften and Gesellschaften mit beschränkter Haftung), of which the Aktiengesellschaft is by far the dominant structure. The decision to introduce employee share plans often depends on:

• industry practice;
• management decisions;
• the company's liquidity situation;
• the ownership structure/dilution;
• remuneration and incentive strategies;
• employee demographics;
• the employees' countries of residence; and
• compliance and administration efforts.

Hence, unlisted startups, small and medium-sized companies and large companies may offer some type of employee share plan.

In our experience, employee share plans are particularly popular among unlisted startups. Further, at times, unlisted small and medium-sized companies introduce management employee share plans, which grant only senior employees and/or management employees the possibility to participate. However, ownership dilution is often a crucial aspect to consider.

In certain cases and industries, selected employees can participate in employee share plans through investment/pooling vehicles.

Listed companies generally offer some type of employee share plan(s).

2.2 Can overseas employers provide employee share plans in your jurisdiction?

From a Swiss perspective, employers overseas or, for example, a holding group company abroad may offer the possibility to participate in their employee share plans to employees based in Switzerland (eg, employed via a local Swiss subsidiary). For securities law, see question 10.

Any restrictions according to foreign laws remain reserved.

3. Participants

3.1 What kinds of employees are typically invited to participate in employee share plans in your jurisdiction?

In our experience, the kinds of employees who are typically invited to participate in employee share plans will depend on:

• industry practice;
• management decisions;
• company ownership structure/dilution;
• remuneration and incentive strategies; and
• employee demographics.

In general, the employer must first decide whether to invite all employees, selected employees (selective/discretionary participation) or certain employees (defined participants) to participate. This can generally be defined rather freely in the plan documentation (see question 9.3, however). If not all employees will be invited to participate, in our experience, either:

• participation is often selective, where certain functions or ranks are defined as possible participants in the plan documentation; or
• participants are explicitly defined and linked to certain ranks (eg, senior management, executive management, etc.).

For a brief overview across companies, see question 2.1.

In most cases, hourly waged employees, temporary employees and interns/apprentices are typically excluded from participating.

3.2 Can overseas employees participate in employee share plans in your jurisdiction?

Generally, yes. See question 2.2.

3.3 Can contractors participate in employee share plans in your jurisdiction?

Where the participation is selective or defined, contractors are sometimes invited to participate as per the plan documentation. This mainly applies to startups and/or small and medium-sized companies. However, in our experience, this is not very common for listed companies.

4. Types of plans

4.1 What types of employee share plans are typically offered in your jurisdiction? What factors influence the decision on which plans to offer?

The types of employee share plans that are typically offered in Switzerland or to Swiss-based employees include:

• restricted share unit plans (RSUs);
• employee share purchase plans (ESPPs);
• performance share unit plans (PSUs);
• share matching plans;
• share option plans;
• phantom share unit plans; and
• share appreciation right plans (SARs).

Factors that influence the decision on which plans to offer may include:

• company goals;
• remuneration and incentive strategies;
• employee demographics;
• the ownership structure/dilution;
• the regulatory environment;
• industry practices;
• tax and social security implications;
• administration efforts;
• employee engagement; and
• corporate governance.

4.2 Share option plans:

(a) What option plan structures are available in your jurisdiction?

Share options essentially provide a right, but not an obligation, to buy shares in a company at a pre-defined exercise price at or during a certain period of time. If an option right is exercised, the holder may convert their right into a number of shares by paying the pre-defined exercise price per share at the time. The structure largely follows international standards. In summary, option plans are typically structured as follows in Switzerland:

• Administration of plan: Mostly the issuing company itself (or a third party) administrates the grant and exercise of option rights.
• Eligibility: Typically, a selective or defined participant concept is applied (via grant).
• Grant: A separate grant letter is sent to eligible participants as invitation to participate or as award, stating, for example:
• • the number of options granted;
  • the grant price (typically option rights are granted for free); and
  • the vesting conditions (see question 5.1(b)). In practice, structures vary mostly in terms of vesting conditions – for example, they may be linked to:
  • • performance (eg, reaching corporate milestones);
    • the elapsing of time (eg, three years); or
    • corporate events (eg, change of control, exit, etc.);
  • the exercise price (often lower than fair market value);
  • leaver rules (see question 5.1(c));
  • the term of the option; and
  • a reference to plan documentation, including further details or general rules for all these topics.
• Holding/blocking periods for shares (upon conversion), if any.
• Payment modalities of the exercise price.
• Transferability restrictions of grants.
• Clauses on taxes and social security and their administration.
• General clauses, such as on:
• • amendment of the plan;
  • termination of the plan;
  • corporate events; and
  • governing law and jurisdiction.

(b) What are the advantages and disadvantages of each?

• Advantages:
• • Potentially large upside potential.
  • A feeling of belonging/identification.
  • Less liquidity needed to launch.
  • Depending on the exercise price and purchase price, potentially tax-free capital gain possible (see question 7.1).
  • Rather free definition of triggering events/vesting conditions.
  • No obligation but right to purchase.
• Disadvantages:
• • Rather high administration efforts.
  • Dilution of ownership.
  • Risk of underperformance.
  • At times, limited comprehension of the scheme by employees.
  • Generally, no tax-free capital gain on the difference between the exercise price and fair market value (see question 7.1).

(c) What rules and requirements apply to these structures?

The rules of an option plan are typically defined in the plan documentation (typically at least a plan and grant letter(s)). In Switzerland, the plan documentation may be drafted rather freely but should address the various requirements as per the frameworks stated in question 1. For corporate governance, security law and employment law, see questions 8, 9 and 10.

4.3 Share award plans:

(a) What award plan structures are available in your jurisdiction?

Subject to any applicable vesting conditions (eg, performance or time-related – see question 5.1(b)), share award plans grant a participant shares in a company. Share award plans can be quite diverse in their modalities (see question 4.1). Hence, the structure depends on the specific concept chosen.

The share plan structure largely follows international standards. In summary, and across the various concepts, share plans are typically structured as follows in Switzerland:

• Administration of plan: The issuing company itself or a third party.
• Eligibility: All employees, unless the selective or defined participant concept is applied.
• Key metrics:
• • RSUs: Grant of shares (for free or at a reduced price), subject to certain vesting conditions (see question 5.1(b)). On fulfilment of the vesting conditions, receipt of a corresponding number of shares.
  • Performance share units: Grant of performance share units, which vest depending on the achievement of certain performance targets. Depending on performance, receipt of a corresponding number of shares upon vesting.
• Grant: A separate grant letter is sent stating, for example:
• • the number of shares/PSUs granted;
  • the vesting conditions (see question 5.1(b));
  • leaver rules (see question 5.1(c)); and
  • a reference to plan documentation, including further details or general rules on all these topics.
• Holding/blocking periods for shares, if any.
• Transferability of awards.
• Administration/accounts (eg, if shares are held by a fiduciary for the account of a participant).
• Payment and set-off against salary/bonus, if any.
• A clause on taxes and social security and their administration.
• General clauses, such as on:
• • amendment of the plan;
  • termination of the plan;
  • corporate events; and
  • governing law and jurisdiction.

(b) What are the advantages and disadvantages of each?

In summary:

• Advantages:
• • Potentially large upside potential.
  • A feeling of belonging/identification.
  • Less liquidity needed to launch.
  • Potentially tax-free capital gain possible (see question 7.1).
  • Rather free definition of triggering events/vesting conditions, if any.
  • Tax benefits for blocking periods.
• Disadvantages:
• • Rather high administration efforts.
  • Dilution of ownership.
  • Risk of underperformance.
  • At times, limited comprehension of the scheme by employees.
  • Less flexibility to use monetary value.
  • Potential blocking/holding periods/transfer restrictions.

(c) What rules and requirements apply to these structures?

The rules of a share award plan are typically defined in the plan documentation. In Switzerland, the plan documentation may be drafted rather freely but should address the various requirements as per the frameworks stated in question 1. For corporate governance, security law and employment law, see questions 8, 9 and 10.

4.4 Share purchase plans:

(a) What share purchase plan structures are available in your jurisdiction?

The structure largely follows international standards and, subject to mandatory local laws, can be designed rather flexibly. In summary, two share purchase schemes are common in Switzerland:

• ESPP: Employees can buy a limited number of shares in company, often at a reduced price.
• Share matching plan: The same as an ESPP, but for every share held/bought, according to a defined ratio, after a certain vesting period, free additional shares are awarded (matching shares).

On aggregate, they are typically structured as follows:

• Administration of plan: The issuing company itself or a third party.
• Eligibility: Generally, all employees (see common exceptions in question 3.1, however).
• Purchase price: Often a reduced share price.
• Purchase limits: Common to set limits, either by number of shares or by monetary value.
• Purchase windows: Definition of timeframes to purchase.
• Holding/blocking periods for shares, if any.
• Transferability restrictions of awards.
• Administration/accounts (eg, if shares are held by a fiduciary for the account of a participant).
• Payment and set-off against salary/bonus, if any.
• Clause on taxes and social security and their administration.
• General clauses, such as on:
• • amendment of the plan;
  • termination of the plan;
  • corporate events; and
  • governing law and jurisdiction.

(b) What are the advantages and disadvantages of each?

• Advantages:
• • Potentially large upside potential.
  • A feeling of belonging/identification.
  • Less liquidity needed to launch.
  • Potentially tax-free capital gain possible (see question 7.1).
  • Rather free definition of vesting conditions, if any.
  • Tax benefits for blocking periods.
• Disadvantages:
• • Rather high administration efforts.
  • Potentially sourcing of shares.
  • Dilution of ownership.
  • Risk of underperformance
  • At times, limited comprehension of the scheme by employees.
  • Less flexibility to use monetary value (compared to simple cash payments).
  • Potential blocking/holding periods/transfer restrictions.

(c) What rules and requirements apply to these structures?

The rules of a share purchase plan are typically defined in the plan documentation. In Switzerland, the plan documentation may be drafted rather freely but should address the various requirements as per the frameworks stated in question 1. For corporate governance, security law and employment law, see questions 8, 9 and 10.

4.5 Phantom share plans:

(a) What phantom share plan structures are available in your jurisdiction?

The structure largely follows international standards and, subject to mandatory local laws, can be designed rather flexibly. In summary, two types of phantom share plans are considered common in Switzerland:

• Phantom share plan: Participants receive cash payments based on the value of a specified number of shares, simulating the benefits of share ownership without actual equity transfer. The payout is typically linked to an increase in the company's share price over a predetermined (vesting) period.
• Phantom option plan: Participants receive cash payments based on the exercise of virtual option rights, meaning the difference between:
• • the typically fixed exercise price for the virtual option; and
  • the company's share price value at a predetermined (vesting) date.

(b) What are the advantages and disadvantages of each?

In summary:

• Advantages:
• • Potentially large upside potential.
  • Transparent anticipation of award.
  • Rather free definition of key metrics (milestones, share value increase, exit events, other business objectives).
  • No initial liquidity needed to launch.
  • No dilution of ownership.
• Disadvantages:
• • If the key metric is the share price value, regular valuation of the share price value is needed (involving increased efforts and typically adviser costs).
  • No tax benefits available, as technically cash payment.
  • Liquidity impact at the time of vesting (including due reserve creation).
  • Perceived value lower than equity.
  • Depending on the key metric, market volatility.

(c) What rules and requirements apply to these structures?

The rules of a phantom share/option plan are typically defined in the plan documentation (typically at least the plan documentation and the grant letter(s)). In Switzerland, the plan documentation may be drafted rather freely but should address the various requirements as per the frameworks stated in question 1. For corporate governance and employment law, see questions 8 and 9.

On aggregate, they are typically structured as follows:

• Administration of plan: The issuing company itself (including a determination of whether key metrics have been fulfilled).
• Eligibility: Typically, the selective or defined participant concept is applied (via grant).
• Grant: A separate grant letter is sent to eligible participants as an invitation to participate or as award, stating, for example:
• • the number of phantom shares/options granted;
  • the grant price (typically for free);
  • the vesting conditions (see question 5.1(b)). In practice, the structures vary mostly in terms of vesting conditions, such as them being linked to:
  • performance (eg, achievement of corporate milestones, share price, etc.);
  • the lapsing of time (eg, three years); or
  • corporate events (eg, change or control, exit, etc.);
  • for phantom options, the virtual exercise price (often lower than fair market value);
  • leaver rules (see question 5.1(c));
  • for phantom options, the term of the option; and
  • reference to the plan documentation, including further details or general rules for all these topics.
• Transferability restrictions on grants.
• Clauses on taxes and social security and their administration.
• Potential clauses on dividend equivalents.
• Clauses on payment in cash as a substitute for any shares:
• • in case the administration decides to do so; or
  • based on a list of defined scenarios (eg, reorganisation, termination of plan, etc.).
• General clauses, such as on:
• • amendment of the plan;
  • termination of plan;
  • corporate events; and
  • governing law and jurisdiction

4.6 What other types of long-term incentives are available in your jurisdiction? What are the advantages and disadvantages of each?

There are two long term incentive schemes that may be an option:

Deferred cash compensation scheme: This scheme is typically based on a target-based cash-bonus scheme, where the annual payouts, to a certain extent, are deferred over a predetermined vesting period (eg, three years). The payment of the deferred part(s) is typically dependent on certain conditions, mainly continued employment. This scheme is mainly found in the financial sector (see question 1.2).

• Advantages:

• Retention.
• Alignment with risk strategy (ie, reducing inappropriate short-term risk taking).
• Alignment with long-term goals.
• Reduction of tax impact on annual bonus payment.
• Liquidity management.
• No dilution of ownership.

• Disadvantages:
• • Dissatisfaction that 'earned' bonus is deferred.
  • No tax benefits for deferral later, since cash-based.
  • Liquidity impact at the time of vesting (potentially risk for participants as well).

Bonus bank: The bonus bank is a virtual account of each participant, to which bonus payments are virtually credited to or debited from on an annual basis. No bonus payments are actually paid out; rather, the amounts are virtually credited to or debited from the bonus bank. The underlying bonus is typically linked to certain company objectives and can be negative or positive. Hence, a bonus bank can also show a negative balance. Typically, the payout occurs after a certain period of time has elapsed. The idea is that specific company objectives will be achieved at the end of a set period and meanwhile are measured on an annual basis. If a positive balance results in the end, this is then paid out. Bonus banks are rather rare in Switzerland in our experience.

• Advantages:
• • Potentially, retention.
  • Alignment with long-term goals.
  • Liquidity management.
  • No dilution of ownership.
• Disadvantages:
• • No bonus payment for a certain period of time.
  • Risk that ultimately no bonus will be paid out at all (eg, if two years are good but one is really bad).
  • No tax benefits later, since cash based.
  • Liquidity impact at the time of vesting (potentially a risk for participants as well).

4.7 What rules and requirements apply to discretionary plans? In the case of recurring discretionary plans, is it possible to argue under any circumstances that these have become mandatory contractual entitlements?

The same rules apply as to the plans discussed throughout question 4. For discretionary plans:

• typically a selective eligibility concept is chosen (see question 2.1); and
• awards are granted on a discretionary basis by the competent body.

Typically, awards are granted personally via grant letter.

For mandatory contractual entitlements, depending on their nature, see question 9.

4.8 Are any types of plans prohibited in your jurisdiction?

Regarding the most common plans (see question 4.1), no.

5. Awards

5.1 Can awards involve the following features in your jurisdiction? What key concerns and considerations should be borne in mind in relation to each?

(a) Deferral

Yes. For example, for deferred compensation, see question 4.6. A type of deferral is possible through vesting on a rolling basis, according to which an award is granted with an applicable vesting period, but the award vests according to a schedule (eg, over three years, each year 33%). This has an element akin to deferral.

In any case, the company should consider:

• the accounting implications of deferring awards, based on their nature, in terms of when to recognise such expense/cost; and
• liquidity aspects (including building reserves).

(b) Performance or time-based vesting conditions

Yes, this is very common for employee share plans and cash-based awards. The conditions can be designed rather freely, depending on factors such as the participants and the scheme characteristics. For example, the conditions could comprise:

• the elapsing of time (particularly remaining employed during such time);
• business goals (eg, pre-defined milestones, revenue, number of customers, etc.);
• an increase in share value;
• exit events; or
• other business objectives.

From an incentive perspective, the conditions/targets should be realistic, in order to avoid demotivating employees. Moreover, administrative efforts may vary depending on the conditions and evaluation of their fulfilment (eg, a share price valuation).

(c) Leaver provisions

Leaver provisions are standard in employee share plans. Broadly speaking, there are two categories of leavers: good leavers and bad leavers. In Switzerland, typically – but subject to the particular plan documentation – the following scenarios are attributed to each leaver case:

• Good leavers:
• • End of the relationship due to the participant's retirement;
  • End of the relationship due to the participant's death; or
  • End of the relationship due to the participant's disability
• Bad leavers:
• • End of the relationship due to termination by the employer for cause; or
  • End of the relationship due to termination by the employee without cause.

Depending on the plan documentation, the following grounds can often be attributed to one or the other:

• end of the relationship due to termination by the employer without cause;
• end of the relationship due to termination by the employer for valid reasons; or
• end of the relationship due to termination due to restructuring.

In good leaver cases, generally the participants get to keep their awards (at times, unvested and vested, but also only vested). In bad leaver cases, they often fully lose their (unvested) awards and/or receive a lower compensation/pay out for them (eg, forced buy-back of vested awards).

For cash-based schemes, the respective award commonly lapses fully where the participant's contractual relationship with the company (or, for example, a subsidiary) is under notice.

Whether bad leaver provisions are enforceable can be a question of employment law, depending on the qualifications of any potential claims regarding the awards (see question 9).

(d) Forfeiture

Yes. Forfeitures are common in (bad) leaver scenarios (see above). Whether these are enforceable can be a question of employment law (see question 9).

For employees, it is quite common that unvested awards are forfeited if the employment relationship is under notice and terminated respectively.

(e) Post-vesting/post-employment holding periods

See above.

(f) Malus and clawback provisions

Malus and clawback provisions are occasionally found in employee share plans. However, depending on the scheme, metrics, awards and circumstances, they might not be enforceable – especially if the participant has contributed in some way to receive such awards (see also question 9). However, clawback clauses based on false calculations or alike will generally be in order.

(g) Loans provided to employees in connection with the employee share plan

While these are generally possible, they are rather rare in Switzerland. Often, bonus or salary components are (voluntarily or by way of participation in the scheme) converted into award entitlements, to make administration easier.

Moreover, for Swiss-based listed companies, the grant of loans to board members and executive management members must be permitted by the articles of association and disclosed in the remuneration report under certain circumstances (see question 8.2).

From a Swiss tax point of view, for employer loans, the following must be considered:

• Corporate tax level: It is important that the yearly published minimum interest rates (safe harbour interest rates published by the Swiss federal tax authorities (FTA)) are met. If the safe harbour rates are met, the FTA generally assumes that the rates are at arm's length without further proof required. However, if a Swiss company applies lower interest rates, the company should be able to prove that they are at arm's length. If this cannot be proven, a deemed dividend distribution will be assumed and the difference between the prevailing market interest rates and the interest rates actually charged will basically be considered as taxable income. Any deemed dividend distribution will be subject to Swiss withholding taxes of 35% (refundable through the private tax return procedure of the employee).
• Individual tax level:
• • The employee loan agreement and the interest rates on the loan must, from a Swiss tax point of view, be granted at third party (market) conditions (i.e. at arm's length. If the loan or the interest rates on the loan are not at arm's length, the difference between the market interest rates and the interest rates actually charged will be considered as benefits in kind and therefore deemed as taxable income.
  • Swiss employees who file an ordinary Swiss tax return can deduct interest on loans in their annual income tax return. However, this deduction is limited to the aggregated income from movable and immovable assets plus CHF 50,000 each year. Further, such employees can deduct the loan amount itself from their taxable assets for wealth tax purposes.
  • Professional securities dealer: If the acquisition of employee shares is mostly (> 50%) financed through loans, an individual may be considered as a professional securities dealer. A professional securities dealer cannot generate a tax-free capital gain on sales of assets. Instead, all profits and losses will be taxable or tax deductible.

6. Formal and regulatory requirements

6.1 What reporting, filing or other administrative requirements apply to (a) the rollout of and (b) participation in an employee share plan?

The reporting, filing and administrative requirements will depend on:

• the circumstances (in particular, whether the company is listed or unlisted); and
• the instruments concerned by the employee share plans.

However, in summary and in general, the following could potentially apply:

• Rollout:
• - Corporate actions & resolutions
• • Draft and approve the employee share plan (generally by the board of directors):
  • • Coordinate with third-party administration and processes to align modalities and metrics.
    • Coordinate payroll process for envisaged participation in employee share plans.
  • Amend the issuing company's articles of association, if necessary (eg, for new share classes or an increase in share capital), and file the corresponding resolutions with the Commercial Register (see generally question 8).
  • In case of a buyback programme, see question 10.2.
  • Potentially disclose grants to board members or executive management (management transactions), at companies listed on the stock exchange/SIX, in case they have a right to choose between awards (eg, cash or shares).
  • Disclose remuneration and scheme principles in a corporate governance/remuneration report, if applicable.
  • Establish a detailed register of plan participants (including share register).
• Participation:
• • Disclose remuneration and scheme principles in corporate governance/remuneration report, if applicable.
  • Potentially disclose the exercise of awards or the sale of such by board members or executive management (management transactions), for companies listed on the stock exchange/SIX.
  • Establish a detailed register of plan participants (including share register).
  • Execute payroll when participating – for example, by means of set-off from salary payment or bonus payments (including delivery and deduction of taxes at source and social security contributions, where applicable).

Employer tax reporting obligations: According to Swiss tax law, extensive reporting obligations apply where employers provide their employees with employee shares/options/restricted share unit plans or similar at grant, exercise, vesting or realisation of the respective equity-based compensation instruments (ie, a declaration in the annual salary certificate and separate annexes to the annual salary certificate are needed). The annex to the salary certificate must be prepared in accordance with the Swiss equity-based compensation ordinance.

Finally, all accounting reporting and disclosure obligations remain reserved.

6.2 What formal and substantive requirements apply to (a) the rollout of and (b) participation in an employee share plan?

The formal and substantive requirements will depend on:

• the circumstances (in particular, whether the company is listed or unlisted); and
• the instruments concerned by the employee share plans.

However, in summary and in general, see question 15.1.

For corporate governance, security law and employment law requirements/limitations, see questions 8, 9 and 10.

7. Tax and social security issues

7.1 What are the tax and social security implications for the company:

(a) On grant?

Share awards are subject to income tax and social security charges at the time of grant. The monetary benefits are taxable as employment income at the time of acquisition or allocation of the share awards. The taxable benefit corresponds to the fair market value (FMV) less any purchase price. Any blocking periods will have an impact on the taxable benefit, as blocked shares have a lower FMV than freely disposable share awards. Freely disposable options that are traded on a stock exchange are taxable at grant. The taxable amount will be calculated on the spread at grant (ie, the difference between the FMV of the shares at the date of grant less the price paid by the employee (eg, exercise price).

For shares that are not listed on a stock exchange, there is generally no FMV available. Therefore, the tax-relevant value is generally the formula value determined according to a suitable and recognised valuation method (eg, 'the 'practitioner method' according to Circular 28 of the Swiss Tax Conference; revenue multiples; earnings before interest, tax, depreciation and amortisation multiples). Forward-looking valuation methods (eg, based on a discounted cash flow valuation) are not accepted as a formula value by the Swiss tax authorities.

(b) On vesting (which, for an option, means the option becoming exercisable)?

The award (eg, restricted share unit plans (RSUs)/performance share unit plans (PSUs)) will be subject to income tax and social security charges at the time of vesting. The taxable amount is equal to the FMV of the underlying shares at the time of vesting.

(c) On exercise?

The option will be subject to income tax and social security charges at the time of exercise, provided the option is not freely disposable and is not traded on a stock exchange (see above). The taxable amount will be calculated on the spread at exercise (ie, the difference between the FMV of the shares at the date of exercise less the price paid by the employee (eg, exercise price).

(d) On the acquisition, holding or disposal of underlying shares or securities?

Share awards: Share awards are subject to income tax and social security charges at the time of grant (see above). During the holding period, shares held as of 31 December of the respective year are subject to wealth tax. Any dividend income received is typically subject to income tax. Depending on the circumstances and the grant price and sale price of the share awards, potential tax-free capital gains may be possible. This depends in particular on the holding period of share awards that are not listed.

RSUs/PSUs: The award (eg, RSUs/PSUs) will be subject to income tax and social security charges at the time of vesting (see above). The participant must also report all unvested RSU/PSU awards granted for information purposes in the wealth tax sections of the income tax return. Any shares delivered at vesting of the awards should be reported at the FMV per the end of the tax year following the vesting date. Capital gains tax should not be due on any post-vesting gain on the sale of the shares if the shares are listed. For shares that are not listed, potential tax-free capital gains may be possible. This depends in particular on the holding period of the underlying shares.

Options: The option will be subject to income tax and social security charges at the time of exercise (see above), provided the option is not freely disposable and is traded on a stock exchange (see above). The participant must also report all unvested and/or not exercised options granted for information purposes in the wealth tax sections of the income tax return. Any shares delivered at exercise of the option should be reported at the FMV per the end of the tax year following the exercise. Capital gains tax should not be due on any post-exercise gain on the sale of the underlying shares if the shares are listed. For shares that are not listed, potential tax-free capital gains may be possible. This depends in particular on the holding period of the underlying shares.

(e) In relation to any loans provided to participants within the framework of the employee share plan?

Please see question 5.

7.2 What are the tax and social security implications for participants:

(a) On grant?

See question 7.1(a).

(b) On vesting (which, for an option, means the option becoming exercisable)?

See question 7.1(b).

(c) On exercise?

See question 7.1(c).

(d) On the acquisition, holding or disposal of underlying shares or securities?

See question 7.1(d).

(e) In relation to any loans provided to them within the framework of the employee incentive scheme?

See question 7.1(e).

7.3 What other key concerns and considerations in relation to employee share plans should be borne in mind from a tax perspective (eg, corporation tax deductions)?

Corporation tax deductions: For Swiss tax purposes, the expenses for employee share plans will generally be deductible from the taxable profit of the local employing entity in Switzerland, provided that:

• the amount is booked and stated in the financial statements of the respective year (statutory financial statements are the basis for tax assessment purposes; 'authoritative principle'); and
• the recharge to the Swiss employing company is at arm's length and based on a separate recharge agreement.

The amount of the deduction will be based on the market value of the shares obtained.

The Swiss employer is free either to:

• consider all expenses for an RSU or option plan at the grant date; or
• split the expenses over the vesting period.

8. Corporate governance issues

8.1 What corporate governance rules and requirements apply to employee share plans in your jurisdiction?

As an overarching principle, under Swiss law, the determination of the remuneration strategy of a Swiss-based company falls under the competence of the board of directors. Hence, the board of directors must generally oversee the administration of employee share plans. Subject to maintaining oversight, in practice, the board of directors often delegates certain tasks and/or competencies to, for example:

• a remuneration committee;
• third-party plan administrators;
• valuation specialists; or
• compensation and benefits managers.

As outlined in question 2.1, employee share plans are predominantly implemented at companies limited by shares (Aktiengesellschaft). The sourcing of the shares is thus crucial. If insufficient securities are available to source an employee share plan, shares will need to be created or bought back (for the latter, see also question 10.2).

Depending on the specific instruments, share classes and accompanying corporate governance documentation, several steps may be required, such as:

• board resolutions approving the employee share plan or related to capital increase (see below bullet);
• shareholders' resolutions, which may include amendments to the articles of association. Such amendments might involve:
• • increasing the share capital directly;
  • establishing contingent share capital; or
  • creating a capital band that allows for flexible increases by the board; and
• notarised deeds and filings with the commercial registry related to the above (see question 8.2).

For listed companies, remuneration reports (eg, in the corporate governance report) must be executed and published. Further, depending on the circumstances, share sourcing and/or capital changes may need to be disclosed to the stock exchange / SIX.

Finally, if the company owns a certain number of own shares (eg, if it has bought them back), generally a company limited by shares (Aktiengesellschaft) may not own more than 10% of its share capital (as own shares), although certain exemptions apply.

8.2 What other key concerns and considerations in relation to employee share plans should be borne in mind from a corporate governance perspective?

Where Swiss-based listed entities grant employee share awards to their board of directors and/or executive management, the provisions on compensation within companies whose shares are listed (Articles 732 and following of the Code of Obligations) must be followed, as summarised below:

• The entity's articles of association must particularly contain provisions on:
• • the binding resolutions of the shareholders' meeting on the remuneration of the board of directors and executive management (eg, a maximum amount if done prospectively or otherwise an aggregate amount if voted on retroactively);
  • the establishment of a compensation committee and its competencies;
  • the types of (variable) remuneration (including basic principles on grants) and principles on loans, credits or pension benefits (on top of occupational benefits), if any, for the board of directors and executive management; and
  • external mandates and maximum notice period in the contracts of directors and executive management; and
• an annual remuneration report must be prepared and published (the remuneration report is regularly part of the annual business report), which particularly provides information on the total remuneration paid (including loans granted, if any) to current/former directors and/or executive management members in the relevant year. If the articles of association require that shareholders' approval be given prospectively for variable remuneration (eg, employee share awards), the remuneration report must be submitted to the shareholders' meeting for a consultative vote.

Further, according to such rules, certain remuneration payments are prohibited and some may even lead to criminal charges if paid and received respectively, such as severance payments. Moreover, any member of the board of directors or executive management of a listed company who prevents the general meeting from voting on the remuneration that the board of directors has determined for itself, the management and the advisory board will be liable to criminal prosecution.

9. Employment law issues

9.1 Do any employee consultation or notification requirements apply before an employee share plan can be rolled out in your jurisdiction?

Generally, no employee consultation or notification requirements apply before an employee share plan is rolled out in Switzerland. Potential consultation or notification requirements may apply via established works council or collective labour agreements, although this is rather rare.

9.2 Are participants in employee share plans entitled to compensation for loss of associated benefits on termination of employment? Does this vary depending on the grounds for termination?

Depending on whether the award under the employee share plan legally qualifies as (variable) salary, participants may have an entitlement to potential loss upon termination. This in particular also depends on:

• which entity is granting the awards (eg, a foreign entity);
• which law validly applies to the awards (eg, a foreign law); and
• the forum in which potential claims may be brought.

From a Swiss employment law perspective, essentially and in summary, awards either qualify as a bonus or a salary component (if not deemed a regular contractual arrangement under which the parties can agree quite freely on terms – for example, when potentially granted by a foreign group entity that is not the contractual employer).

Generally, and subject to the individual circumstances – including the amount of the total remuneration of the concerned employee and the nature of any targets/schemes (including discretionary elements) – an employee has no legal claim to a bonus, whereas they have a general claim to (variable) salary (at least to a certain extent).

Factors to consider essentially include:

• the wording of the plan documentation;
• discretionary elements in awarding employee shares;
• the regularity of awards (potentially with reservation);
• the nature of targets/vesting conditions (hard or soft targets); and
• the total remuneration of the employee (including the proportion between the award and fixed remuneration).

In case of qualification as (variable) salary, and depending on the circumstances, certain (bad) leaver provisions, forfeitures and clawbacks (including malus) may likely not be enforceable in case of a dispute.

However, even if awards are granted, for example, based on (individual) performance (as part of bonus or similar) on an annual basis and legally qualify as a bonus, the regular allocation of awards can potentially create an entitlement to the receipt of future awards. Without explicit reservation of discretionary/voluntary allocation, such entitlements generally arise after allocation for at least three consecutive years. If the awards have been granted consistently in the same amount/value, the future entitlement will generally concern the same amount/value. In case of a varied amount/value, there is a general future claim to awards, whereas the amount/value must be assessed based on the circumstances. Lastly, even in case of explicit reservation regarding discretionary/voluntary allocation each year, this may no longer hold after the expiry of 10 years.

In Switzerland, the grounds for ordinary termination will not change the above (see also below question 9.3).

9.3 Can the type or amount of a share award granted to one participant potentially affect awards granted to other participants?

From a legal perspective, and depending on the draft of the plan documentation (including the grant concept), generally not. If awards are based on individual performance and, for example, one participant receives a lower award where all participants have performed identically, there may be a claim to such award in certain circumstances. The Gender Equality Act essentially protects against gender discrimination, which could potentially ground (compensation) claims in case of proven discrimination due to gender in the award of shares under certain circumstances.

9.4 What other key concerns and considerations in relation to employee share plans should be borne in mind from an employment law perspective?

See question 13.

10. Securities law issues

10.1 What securities law rules and requirements apply to employee share plans in your jurisdiction? Do any exemptions apply?

Generally, the public offering and/or admission to public trading of securities requires the prior issuance of a prospectus according to the FinSA. However, generally no prospectus duty applies if:

• securities are offered publicly by employers or affiliated companies to their current or former members of the board, executive management or employees; and/or
• such securities are admitted to trading.

10.2 What other key concerns and considerations in relation to employee share plans should be borne in mind from a securities law perspective?

At times, listed companies, when planning to establish a (new) employee share plan, first launch a buyback programme to purchase their own listed equity securities. These buyback programmes are governed by:

• Chapter 4 of the Federal Act on Financial Market Infrastructures and Market Conduct in Securities and Derivatives Trading (FMIA), the Financial Market Supervisory Authority (FINMA) Financial Market Infrastructure Ordinance (FMIO); and
• the Ordinance of the Takeover Board on Public Takeover Offers (TOO).

The FMIO specifies for buyback programmes which behaviour is accepted and constitutes neither insider trading nor market manipulation (both within the meaning of Article 143 of the FMIA). The Takeover Board is responsible for the interpretation and application of Articles 125 to 141 of the FMIA. In contrast, compliance with the provisions on market abuse practices is supervised not by the Takeover Board, but by FINMA.

A circular of the Takeover Board lays down the requirements and conditions that must be satisfied for buyback programmes to be exempted from the ordinary takeover rules. Exemplary key regulations include the following:

• The volume of the buy-back programme may not exceed:
• • 10% of the share capital and voting rights; or
  • 20% of the publicly traded share of securities.
• The issuer may not buy back securities outside the buy-back programme for such purpose while the programme is still running.
• The buy-back programme may last for three years at most.
• The volume of buybacks on the regular trading line may not exceed 25% per day of the average daily volume traded in the 30 days prior to publication of the buyback programme.
• The issuer must:
• • publish the number of repurchased securities in each class on its website one trading day after termination of the buyback programme; and
  • provide this information to:
  • • the stock exchange/SIX and the Takeover Board; and
    • at least two financial information providers.

If the buyback programme is fully compliant with all requirements and conditions laid down in Sections 1 to 4 of the circular, a notification to the Takeover Board is essentially sufficient. Such notification must be filed at least five trading days before the launch. Thereafter, within three trading days, the Takeover Board will confirm that no order is necessary, if the requirements regarding the exemptions seem to have been fulfilled.

In all other cases, the Takeover Board will issue an order. If an order is issued, the Takeover Board may direct that the buyback programme must comply with any or all of the ordinary takeover rules.

For the avoidance of doubt, the launch of a buyback programme will characteristically constitute information that requires ad hoc disclosure at the stock exchange/SIX.

The exemption of a buyback programme from adherence to certain provisions of takeover law does not exempt the offeror from adhering to the rules of the Code of Obligations, for which the board of directors of the offeror remains responsible. See questions 8.1 and 8.2.

11. Data protection issues

11.1 What data protection rules and requirements apply to employee share plans in your jurisdiction?

Whenever the personal data of employees is processed in connection with a share plan, compliance with the applicable data protection regulations is required. In an international context, determining the applicable regime can be complex and requires careful assessment.

The Federal Act on Data Protection (FADP) applies when either the company issuing the shares or an employee is domiciled in Switzerland. Other data protection laws, such as the EU General Data Protection Regulation (GDPR), may also apply depending on the circumstances.

Among other things, the FADP requires that only personal data that is necessary for the administration of the share plan be collected and processed. Employers must ensure that employees are provided with clear and comprehensive information about the processing of their personal data in connection with the share plan, typically in the form of a privacy notice. At a minimum, the notice should include:

• the identity of the controller;
• the purposes of the processing;
• the recipients to whom the personal data will be disclosed; and
• if the personal data will be disclosed abroad, the receiving country.

For transfers to countries that do not provide an adequate level of data protection as compared to Switzerland (eg, the United States), the notice must also describe the safeguards applied by the employer to ensure an adequate level of protection of employees' personal data, such as:

• standard contractual clauses;
• binding corporate rules; or
• equivalent safeguards (eg, employee consent).

11.2 What other key concerns and considerations in relation to employee share plans should be borne in mind from a data protection perspective?

Unlike the GDPR, the FADP generally does not require a specific legal basis (eg, consent, legitimate interest) for the lawful processing of employees' personal data. However, if an employer relies on the employee's consent as a basis for data processing, it must ensure that the consent is informed, specific and freely given. In the context of an employment relationship, the requirement of freely given consent is often challenged due to the inherent imbalance of power between employer and employee. Therefore, where possible, employers should avoid basing their data processing activities solely on the consent of the employee.

Where third-party service providers are involved in the administration of the share plan (eg, share plan administrators), employers should carry out due diligence to ensure that these providers comply with data protection standards. In addition, employers must enter into data processing agreements with such providers to regulate their activities and ensure accountability.

12. Internationally mobile employees

12.1 What are the tax and social security implications if a participant in an employee share plan becomes tax resident in another jurisdiction?

If a participant did not have their tax residence in Switzerland for the entire period between acquisition and the exercise/vesting of the employee options/shares or phantom awards, on realisation of the instrument, the benefit will be taxed proportionally in relation to the total period of time spent in Switzerland during the vesting period. Such proportionate taxation is applicable in the following cases:

• The employee moves to Switzerland from abroad (import); or
• The employee moves abroad from Switzerland (export).

In such cases, the equity-based compensation instruments are granted in one country and realised in another. Usually this is relevant for employee options, share awards or phantom equity-based compensation instruments.

Employment income from imported equity-based compensation instruments that are taxed under Swiss law at the time of realisation is – subject to the exemption with progression clause – taxed only proportionately, if between the time of grant and of realisation of the equity-based compensation instruments there has been a change of residence. The monetary benefit taxable in Switzerland is calculated as follows:

The export of equity-based compensation instruments that under Swiss law are taxed on realisation has income tax consequences in Switzerland. If the employee relocates their residence abroad prior to realisation of the equity-based compensation instruments, they must be taxed at source. The monetary benefit taxable in Switzerland is calculated as follows:

The taxes due are to be collected as source tax according to a special lump-sum tax rate – also referred to as extended tax at source – by the (former) Swiss employer. This obligation also applies in particular if the monetary benefit is awarded by a foreign group entity. The reporting of the equity-based compensation instrument must be attached to the source tax declaration.

12.2 What are the tax and social security implications where a participant in an overseas employee share plan becomes tax resident in your jurisdiction?

See question 12.1.

12.3 What other key concerns and considerations in relation to internationally mobile employees should be borne in mind, from a tax perspective or otherwise, in relation to employee share plans?

It is recommended that the employer in Switzerland carefully monitor its employment withholding tax obligations, especially where participations are taxable in Switzerland during only part of the vesting period.

13. Disputes

13.1 In which forums are disputes over employee share plans typically heard?

In Switzerland, different courts/bodies may be competent to hear claims in connection with employee share plans, particularly depending on:

• the nature of the claims; and
• the dispute resolution clause in the plan documentation (subject to mandatory jurisdiction provisions).

The most common forums are:

• the employment court (or the civil court, if no separate employment court is present in the canton);
• the civil court – particularly if any claims are not qualified as employment-related;
• arbitration bodies (if the dispute resolution clause duly foresees arbitration); and/or
• the tax courts/administrative courts – for any tax and social security-related claims.

In particular when claims are employment-related, any stipulated jurisdictions in the plan documentation may not be upheld in case of dispute, as certain (limited) mandatory jurisdiction provisions apply. Especially in relation to employment-related salary claims (see question 9), an arbitration tribunal's jurisdiction could be invalidated under Swiss law.

If the issuing entity is not the contractual employer and if the employee share plan is validly governed by foreign law, the hurdle is presumably higher for an employee to bring a claim – that is, a claim that such awards constitute salary and not a freely agreed contractual arrangement (see question 9.2):

• The place of jurisdiction may be an issue; and
• Based on the chosen governing law and jurisdiction, the court will likely need to be duly convinced to assess whether an 'employment claim' is present.

It thus may be difficult for the employee to prove that the awards qualify as an 'employment claim', as there is a written employment agreement with the contractual employer. Thus, litigation could become complex.

13.2 What issues do such disputes typically involve?

The issues can be quite diverse. However, in practice, disputes (whether out of court or in court) typically involve issues such as:

• the fulfilment of performance and time criteria for vesting/payouts;
• valuation of the share price (if unlisted)/calculation of company objectives;
• treatment of awards in leaver scenarios (most common); or
• amendments to plan documentations in connection with rollovers or restructurings.

14. Trends and predictions

14.1 How would you describe the current employee share plan landscape and prevailing trends in your jurisdiction?

In recent times, employees have placed more importance on their remuneration than in the past. Hence, many employers are trying to establish attractive remuneration schemes to attract talent and foster motivation, interest alignment and retention. They are thus putting more time and effort into remuneration design, including employee share plans.

Unlisted medium-sized and large employers are increasingly keen to grant employee awards to the entire workforce, to foster motivation, interest alignment and retention. In the past, the focus was more on management and/or executive management.

14.2 Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?

Not to our knowledge.

15. Tips and traps

15.1 What would be your recommendations for the smooth rollout of an employee share plan and what potential pitfalls would you highlight?

In our experience, an employee share plan can be rolled out smoothly if holistic preparation takes place. In other words, simply looking at, for example, legal or tax aspects will not suffice. Our recommendations are as follows:

• Evaluate specific employee share plan schemes and alignment with the remuneration strategy.
• Consider pay structure, salary bands, etc for participants' overall remuneration.
• Identify legal, regulatory and tax (including social security) requirements for specific employee share plan schemes (including across different countries) during a due diligence phase.
• Assess the options to source/fund the employee share plan scheme and administration.
• Draft plan documentation (if there is a third-party administrator, in cooperation with such administrator).
• File for tax rulings, if necessary.
• Consider rollout communication, timing and summary fact sheets to promote employee comprehension and acceptance.
• Consider reporting and filings.
• Conduct regular reviews on the impact of changes in law etc.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.