Implementation of the remuneration policy in 2015

The Supervisory Board is responsible for ensuring 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 total 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. In 2015, the peer group consisted of the following companies:

  • Royal Ahold
  • Arkema
  • Clariant
  • Royal DSM
  • Heineken
  • Henkel
  • Royal KPN
  • LafargeHolcim
  • 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 determining the overall remuneration. 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 2015 (below) presents an overview of the remuneration of the members of the Board of Management who were in office in 2015. See note 21 of the Consolidated financial statements for more details. The implementation of the remuneration policy in 2016 will be a separate agenda item at the 2016 .

Compensation Board of Management 2015

 

 

 

 

 

in €

 

Ton Büchner
Chief Executive Officer

 

Maëlys Castella
Chief Financial Officer

1

Costs relating to share awards (performance-related share plan and share-matching plan) are non-cash and relate to the expenses following IFRS 2.

2

Post-contract benefits refers to payments intended for building up retirement.

3

Other emoluments refers to social security cost.

Base salary

 

859,000

 

585,000

Short-term incentive

 

915,800

 

405,400

Share awards 1

 

1,303,600

 

236,300

Post-contract benefits 2

 

356,700

 

87,800

Other emoluments 3

 

8,200

 

8,200

Total remuneration

 

3,443,300

 

1,322,700

Base salary

The base salary of the CEO increased by 3 percent in 2015. The base salary of the CFO increased by 1.7 percent.

Short-term incentive (annual bonus)

The objectives of the short-term incentive in 2015 were to reward performance on , 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 applied a reasonableness test in which the actual ambition level of the performance targets was assessed critically in light of the assumptions made at the beginning of the year. The test also included an assessment of the progress made with the strategic objectives under prevailing market conditions.

For 2015, the targets for ROI, OPI and OCF have been determined by the Supervisory Board. Qualitative STI targets were set and assessed by the Supervisory Board in the context of the medium-term objectives of the company. AkzoNobel does not disclose all qualitative targets, as they are considered commercially sensitive information. However, the targets for 2015 included goals set in relation to delivering on the company’s communicated performance improvement.

is calculated by determining the ratio of over 12 months using reported numbers. OPI was calculated as the number reported for IFRS purposes, in constant currencies. The definitions and calculations were identical to those applied in 2014. OCF was calculated as minus the change in operating working capital and capital expenditures, all in constant currencies. In 2015, the performance against the targets set for ROI, OPI, OCF and qualitative targets was as follows:

2015 performance on STI metrics

 

 

 

Measure

 

Payout as % of target

 

126

OPI

 

127

OCF

 

87

Qualitative targets

 

100

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.

Performance-related share plan

In line with the remuneration policy, vesting of 35 percent of the shares conditionally granted is linked to AkzoNobel’s ROI performance. For the shares conditionally granted in 2013 under the performance-related share plan (in respect of which the performance period ended on December 31, 2015), the Supervisory Board has set the ROI to be achieved by the end of 2015 as follows:

ROI performance range series 2013-2015

 

 

 

 

 

 

 

 

 

Threshold

 

Target

 

Maximum

Vesting (as % of 35% of conditional grant)

 

50%

 

100%

 

150%

Target

 

12.5%

 

14.0%

 

16.5%

AkzoNobel’s ROI performance at the end the performance period was reviewed by the Supervisory Board and adjusted for currency effects and exceptional items. This resulted in a vesting of 129 percent for this part of the long-term incentive.

For the 2013 conditional grant, 30 percent was linked to AkzoNobel’s relative sustainability performance by taking the company’s average position in the RobecoSAM ranking. The following vesting scheme has been applied in respect of the conditional grants made in 2013:

Average position in RobecoSAM ranking during performance period

 

 

 

Rank

 

Vesting (as % of 30% 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 2013, 2014 and 2015 in the relevant RobecoSAM ranking. As a result, AkzoNobel’s sustainability performance during the period 2013 to 2015 resulted in a vesting of 150 percent for this part of the long-term incentive.

For the 2013 conditional grant, the remaining 35 percent was linked to AkzoNobel’s relative performance compared with the companies in a defined peer group. Independent external experts conducted 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 were converted into euros. The relative TSR performance was 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 ranking.

The following vesting scheme has been applied in respect of the conditional grants made in 2013:

TSR vesting scheme for the conditional grants

 

 

 

Rank

 

Vesting (as % of 35% 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 2013 to 2015 resulted in an eighth 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 ROI, sustainability and TSR performance, the final vesting percentage of the 2013 conditional grant – after including the dividend yield during the performance period (determined to be 7.96 percent) – equaled 97.48 percent. 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 2015 plan amounted to 22,500 for the CEO and 15,300 for the CFO.

In accordance with provision II.2.13d of the Code, the schedule at the end of this Remuneration report sets out (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 2015, 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 2015 that would, subject to the conditions of the share-matching plan, qualify for matching by the company. See also Note 21 of the Consolidated financial statements.

Qualifying shares

 

 

 

Board members

 

Qualifying shares acquired in 2015

Ton Büchner

 

2,252

Maëlys Castella

 

305

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.

Post-contract compensation

The members of the Board of Management receive contributions towards post-contract benefits, which are defined as a percentage of income as determined by the Supervisory Board. Currently, they are based on age. For the CEO, the contributions are paid over the base salary in the current year and the short-term incentive related to that year. The contributions will therefore vary depending on the performance during the year and the age of the Board member. For the CFO, these contributions are paid on base salary only.

Board contracts

Agreements for members of the Board of Management are concluded for a period not exceeding four years, in accordance with the Code. After the initial term, reappointments may take place for consecutive periods of up to four years each. The notice period by the Board member is subject to a term of three months. Notice by the company shall be subject to a six-month term. Members of the Board of Management normally retire in the year that they reach the legal retirement age. The contractual arrangements allow the Supervisory Board to request the CEO to resign between the age of 60 and the legal retirement age for effective succession planning within the Board. In such an exceptional situation, the CEO will be entitled to the “fixed” remuneration component until the date of retirement.

Remuneration policy planned by the Supervisory Board for the next financial year and subsequent years

In 2015, the Supervisory Board conducted a review of the remuneration policy, to assess whether it was still aligned with the external market and the objectives of the company.

The metrics applied for the short-term incentive in 2015 (ROI, OPI, OCF) will continue to be applied in 2016. However, the Supervisory Board will propose to the AGM to add one additional metric to be applied in 2016.

Further details will be provided in the Notice of Meeting for the 2016 .

The metrics applied for the LTI (ROI, TSR and sustainability) will continue to be applied in 2016. The targets and ranges have been set at a challenging but realistic level, based on the company’s strategic goals formulated during the year. The vesting schemes for the TSR and sustainability performance remain unchanged. The target and ranges for the ROI metric will not be disclosed as they are considered commercially sensitive information.

AGM

Annual General Meeting of shareholders.

ROI (return on investment)

This is a key profitability measure and is calculated as operating income as a percentage of average invested capital.

ROI (return on investment)

This is a key profitability measure and is calculated as operating income as a percentage of average invested capital.

Operating income

Operating income is defined in accordance with IFRS and includes the relevant incidental items.

Invested capital

Total assets (excluding cash and cash equivalents, investments in ­associates, the receivable from pension funds in an asset position, assets held for sale) less current ­income tax payable, deferred tax liabilities and trade and other payables.

EBITDA

Operating income before depreciation, amortization and incidental items.

ROI (return on investment)

This is a key profitability measure and is calculated as operating income as a percentage of average invested capital.

TSR (total shareholder return)

Used to compare the performance of different companies’ stocks and shares over time. It combines share price appreciation and dividends paid to show the total return to the shareholder. The relative TSR position reflects the market perception of overall performance relative to a reference group.

TSR (total shareholder return)

Used to compare the performance of different companies’ stocks and shares over time. It combines share price appreciation and dividends paid to show the total return to the shareholder. The relative TSR position reflects the market perception of overall performance relative to a reference group.

AGM

Annual General Meeting of shareholders.