The rules demand a link between bonuses and long-term performance to reduce excessive risk taking. Companies will also be expected to be more transparent about remuneration policies to shareholders.

The Swiss Financial Market Supervisory Authority (Finma) presented its revised regulations on Wednesday that will come into effect on January 1, 2010. Switzerland is one of a handful of countries, including the Netherlands and France, to produce something concrete from months of global talks on the issue.

Leading financial institutions will now be obliged to prove that bonuses do not encourage the type of risky behavior that has caused so much chaos in the last year. Variable pay should be held back for a number of years and would be reduced or forfeit in the case of poor results.

"Remuneration schemes can create false incentives which may lead to inappropriate risks being entered into, threatening the business and profitability of a financial institution and, atthe end of the day, its stability," Finma stated.

Companies will now have to prove that their total compensation schemes, including base pay and extra payments such as golden handshakes, do not compromise their overall stability.

Concessions made

Following a consultation period, the new rules have been watered down to apply only to the country's seven biggest banks and five largest insurance companies. But Finma could impose the regulations on smaller institutions if deemed necessary.

Another concession Finma granted was allowing firms to appeal if foreign-based operations faced competitive disadvantage. This would most likely apply to the United States where big bonuses are back in fashion, and Swiss banks could lose out in the war for talent.

Finma spokesman Alain Bichsel argued that other countries were soon expected to follow suit with their own compensation restrictions. "We don't want to harm the international activity of our big banks," he told swissinfo.ch.

The Swiss Bankers Association said it was "satisfied" with the final regulations. "It is a positive sign that Finma did not give in to popular demands to impose a bonus cap," spokesman Thomas Sutter told swissinfo.ch.

Hans Geiger, former professor of Zurich University's Swiss Institute of Banking and Finance, believes the new rules may help Swiss banks in the long run.

"It makes sense for clients and shareholders to do more business in a country with a more secure system," he told swissinfo.ch.

Not everyone is happy

However, other reaction was mixed. The Swiss Insurance Association said the sector had created stability rather than destruction during the financial crisis and had completely different risk principles to banks.

"It remains to be seen to what extent the changed guidelines impairs the international competiveness of our members," President Erich Walser said in a statement.

Swiss entrepreneur Thomas Minder, who is behind a popular initiative to cap bonuses and increase the rights of shareholders, said the rules did not go far enough. Limiting pay to risk was dangerous as risk was subject to too many uncontrollable variables, he argued.

Credit Suisse had criticised the original proposals as going "too far in many areas and can therefore lead to competitive distortions". Both it and UBS have recently restructured their compensation policies, but neither would comment on the finalised Finma rules.

Alain Bichsel told swissinfo.ch that Finma would check in the new year to see if the banks' changes had gone far enough.

Matthew Allen, swissinfo.ch