Implementation of the remuneration policy in 2014

The Supervisory Board ensures that the remuneration policy, and its implementation, are aligned with the company’s objectives. Both the policy itself, and the checks and balances applied in its execution, are designed to avoid incidents where members of the Board of Management – and senior executives for whom similar incentive plans apply – act in their own interest, take risks that are not in line with our strategy and risk appetite, or where remuneration levels cannot be justified in any given circumstance.

To ensure that remuneration is linked to performance, a significant proportion of the remuneration package is variable and dependent on the short and long-term performance of the individual Board member and the company. Performance targets must be realistic and sufficiently stretching and – particularly with regard to the variable remuneration components – the Supervisory Board ensures that the relationship between the chosen performance criteria and the strategic objectives applied, as well as the relationship between remuneration and performance, are properly reviewed and accounted for, both ex-ante and ex-post.

In accordance with the requirements of the Code, the Remuneration Committee, before setting the targets to be proposed for adoption by the Supervisory Board, has carried out scenario analyses of the possible financial outcomes of meeting target levels, as well as maximum performance levels, and how they may affect the level and structure of the remuneration of the members of the Board of Management.

We aim to maintain overall remuneration levels that are at the median level of the external market. For benchmarking purposes, a peer group has been defined by the Supervisory Board. The peer group currently consists of the following companies:

  • Royal Ahold
  • Arkema
  • Clariant
  • Royal DSM
  • Heineken
  • Henkel
  • Royal KPN
  • Lafarge
  • Royal Philips
  • Randstad
  • Reckitt Benckiser
  • Solvay

The Remuneration Committee consults professional independent remuneration experts to ensure an appropriate comparison. It further reviews the impact on pay differentials within the company, which is taken into account by the Supervisory Board when the overall remuneration is determined. When other benefits are granted, the Supervisory Board ensures that these are in line with market norms.

For communication purposes, the table Compensation Board of Management 2014 (below) presents an overview of the remuneration of the members of the Board of Management who were in office in 2014. See note 22 of the Consolidated financial statements for more details. The implementation of the remuneration policy in 2015 will be a separate agenda item at the 2015 AGM.

Compensation Board of Management 2014

 

 

 

 

 

 

 

in €

 

Ton Büchner
Chief Executive Officer

 

Keith Nichols 1
Chief Financial Officer

 

Maëlys Castella 2
Chief Financial Officer

1

Until June 30, 2014.

2

Since September 15, 2014.

3

Costs relating to share awards (performance-related share plan and share-matching plan) are non-cash and relate to the expenses following IFRS2. For Mr. Nichols a reversal of costs is reported in connection with the forfeiture of his LTI entitlements due to his voluntary departure.

4

Other post-contract benefits refers to payments intended for building up retirement benefits other than those included in Post-contract benefits.

5

Other emoluments refers to social security cost. For Mr. Nichols this refers to the employer’s contribution in the UK.

6

Other compensation refers to compensation for living expenses (Mr. Nichols) and a company car (Mrs. Castella).

Base salary

 

834,000

 

308,000

 

176,800

Short-term incentive

 

783,000

 

308,000

 

106,100

Share awards 3

 

1,233,100

 

-766,000

 

Post-contract benefits

 

 

 

 

 

 

Other post-contract benefits 4

 

325,000

 

147,900

 

28,800

Other emoluments 5

 

8,500

 

278,700

 

2,600

Other compensation 6

 

 

 

36,800

 

2,800

Total remuneration

 

3,183,600

 

313,400

 

317,100

Base salary

The base salary of the Chief Executive Officer increased by 1.7 percent in 2014. The base salary of the Chief Financial Officer, Mr. Nichols, remained unchanged.

Short-term incentive (annual bonus)

The objectives of the short-term incentive in 2014 were to reward performance on ROI, OPI and OCF, to measure individual and collective performance and to encourage progress in the achievement of long-term strategic objectives. On the outcome of the short-term incentive elements (ROI, OPI, OCF and personal targets), the Supervisory Board applies a reasonableness test in which the actual ambition level of the performance targets is assessed critically in light of the assumptions made at the beginning of the year. It also includes an assessment of the progress made with the strategic objectives under prevailing market conditions.

The targets ROI, OPI and OCF have been determined by the Supervisory Board. Qualitative targets are set and assessed by the Supervisory Board in the context of the medium-term objectives of the company. AkzoNobel will not disclose all the targets, as they are considered commercially sensitive information. However, the targets for 2014 included goals set in relation to delivering on the company’s communicated performance improvement.

OPI and OCF are based on the company’s financial results in constant currencies. ROI is calculated by determining the ratio of operating income over invested capital using the numbers as reported. OPI was calculated as the number reported for IFRS purposes, in constant currencies. OCF was calculated as EBITDA minus the change in operating working capital and capital expenditures in constant currencies. In 2014, upon a minor correction in accordance with the policy, the performance against the targets set for ROI, OPI and OCF was as follows:

2014 performance on financial measures

 

 

 

Measure

 

Payout as % of target

ROI

 

81

OPI

 

83

OCF

 

84

It is important to note that the external fraud case in Chicago (US) significantly impacted all three financial performance metrics. (See Risk management chapter for more information).

Long-term incentives

The objectives of our long-term incentive plan are to encourage long-term sustainable economic and shareholder value creation – both absolute and relative to competitors – and to align Board of Management interests with those of shareholders, as well as ensuring retention of the members of the Board of Management. Performance-related shares are considered to provide a strong alignment with shareholders’ interests.

Stock option plan

Stock options were conditionally granted for the last time in 2007 and vested for the last time in 2010. As the total option term was seven years, the last stock options that vested under the stock option plan could be exercised until the expiration date in 2014. No stock options were outstanding at year-end 2014.

Performance-related share plan

In line with the remuneration policy, as applicable in previous grant years, vesting of 50 percent of the shares conditionally granted in 2012 under the performance-related share plan (in respect of which the performance period ended on December 31, 2014) was linked to AkzoNobel’s relative sustainability performance by taking AkzoNobel’s average position in the RobecoSAM ranking.

For all conditional grants made in 2012, the relevant vesting scheme has been determined by the Supervisory Board as follows:

Average position in RobecoSAM ranking during performance period

 

 

 

Rank

 

Vesting (as % of half of conditional grant)

1

 

150

2

 

125

3

 

100

4 – 6

 

75

7 – 10

 

50

11 – 15

 

25

Below 15

 

0

AkzoNobel was placed first in 2012, 2013 and 2014 in the relevant RobecoSAM ranking. As a result, AkzoNobel’s sustainability performance during the period 2012 to 2014 resulted in a vesting of 150 percent for this part of the long-term incentive.

For the 2012 award, the remaining 50 percent was linked to AkzoNobel’s relative total shareholder return (TSR) performance compared with the companies in a defined peer group.

Independent external specialists conduct an analysis to calculate the number of shares that will vest according to the TSR ranking. In order to adjust for changes in exchange rates, all local currencies are converted into euros. The relative TSR performance is compared with a peer group as determined by the Supervisory Board.

The peer group currently consists of the following companies:

  • Arkema
  • DuPont
  • Kansai Paint
  • Kemira OYJ
  • Nippon Paint
  • PPG Industries
  • RPM Industrial
  • Sherwin-Williams
  • Solvay
  • Valspar Corporation

This peer group is reviewed on a regular basis to ensure that the companies in the group remain appropriate peers. Occasionally, changes need to be made, particularly if one of the companies in the peer group is taken over. The Supervisory Board will see to it that, to the extent reasonably possible, a replacement has no impact on the company’s relative TSR ranking.

The following vesting scheme has been applied in respect of the conditional grants made in 2012:

TSR vesting scheme for the conditional grants

 

 

 

Rank

 

Vesting (as % of half of conditional grant)

1

 

150

2

 

135

3

 

120

4

 

100

5

 

75

6

 

50

7

 

25

8 – 11

 

0

AkzoNobel’s TSR performance during the period 2012 to 2014 resulted in a ninth position within the ranking of the peer group companies. This ranking did not result in any vesting of shares for the TSR part of the share plan.

Based on the company’s combined sustainability and TSR performance, the final vesting percentage of the 2012 conditional grant after including the dividend yield during the performance period (determined to be 9.62 percent), equaled 82.22 percent.

This resulted in a total vesting of 82.22 percent of the shares that were conditionally granted in 2012. Upon its ex-post review of the relationship between the chosen performance criteria and the strategic objectives applied, and of the relationship between remuneration and performance, the Supervisory Board, given the importance of the link between the variable remuneration and the company’s strategic ambitions, decided not to make any correction in respect of the definitive award.

The number of performance-related shares conditionally granted under the 2014 plan amounted to 22,300 for the CEO. The CFO left the company and was not awarded any shares. In addition, the newly appointed CFO did not receive an award of shares in 2014.

As of 2013, a different vesting scheme applies in respect of conditional share grants. The vesting scheme includes ROI performance with a weight of 35 percent, TSR ranking with weight of 35 percent and RobecoSAM ranking with a weight of 30 percent. No further amendments have been made to the sustainability and TSR schemes. The Supervisory Board has set the ROI metric applied in the LTI for 2014 and to be achieved by the end of 2016 as follows:

ROI vesting scheme of conditional grant series 2014-2016

 

 

 

Performance

 

Vesting (as % of 35% of conditional grant)

≥ 17%

 

150

15%

 

100

13%

 

50

< 13%

 

0

A performance between the above points will be measured on a linear scale.

In accordance with provision II.2.13d of the Code, the schedule at the end of this remuneration report sets (i) the number of at-target shares conditionally granted; (ii) the number of shares which have vested; (iii) the number of shares held by members of the Board of Management at the end of the lock-up period; (iv) the face value at the conditional share grant, at vesting and at the end of the lock-up period respectively.

In accordance with the company’s Articles of Association, the Code and the rules of the performance-related share plan, the number of shares to be conditionally granted to members of the Board of Management is determined by the Supervisory Board, within the limits of the remuneration policy and the maximum number of shares as adopted and approved, respectively, by the AGM. The Supervisory Board has decided that where, in the event of a takeover, the payout under the performance share plan is between 100 percent and 150 percent, it will, at its discretion – taking into account the performance of the company prior to the takeover bid – decide whether the projected outcome is fair and may decide to adjust the vesting upwards or downwards within the bandwidth mentioned. This does not affect the discretion the Supervisory Board has to correct the variable remuneration of the Board of Management upwards or downwards in exceptional circumstances. It is noted that a takeover would not influence the RobecoSAM sustainability ranking of the company nor the ROI performance, therefore the Supervisory Board will, under such circumstances, primarily take into account the company’s TSR performance.

Claw back and value adjustment

In 2014, there was no cause for a claw back or value adjustment by the Supervisory Board.

Shareholding requirements and share-matching

The table below summarizes the shares acquired by the relevant members of the Board of Management in 2014 that would, subject to the conditions of the share-matching plan, qualify for matching by the company. See also Note 22 of the Consolidated financial statements.

Qualifying shares

 

 

 

Board members

 

Qualifying shares acquired in 2014

Ton Büchner

 

2,450

Maëlys Castella

 

Shares obtained by members of the Board of Management under the performance-related share plan are taken into account for share ownership purposes (but not for matching purposes) as soon as they have become unconditional. This includes vested shares that are to be retained during the blocking period of two years after vesting.