Performance share plan

Under the performance share plan, shares are conditionally granted to the members of the Board of Management.

Vesting of these shares is conditional on the achievement of certain performance targets during a three-year period and a continuation of the contract of employment. Achievement of the performance targets is determined by the Supervisory Board in the first quarter of the year following the three-year period. The number of vested shares is increased by the dividend paid over the three-year performance period.

Because sustainability is considered key to our long-term future, 50 percent of the conditional grant of shares is linked to the average ranking of the company in the relevant Dow Jones Sustainability Index (DJSI) during the three-year performance period. In respect of the conditional grant in 2009, the vesting schedule has been determined by the Supervisory Board as follows:

It is noted that a takeover would not influence the ranking of the company on the DJSI and therefore dilutes any share-based remuneration to be received by the Board members as a result of a takeover. AkzoNobel ranked second in the relevant DJSI in 2010.

The remaining 50 percent of the conditional grant of shares is linked to AkzoNobel’s Total Shareholder Return (TSR) compared with the performance of the companies in our peer group. Independent external specialists will conduct an analysis to calculate the number of shares that will vest according to the TSR ranking. The determination of the final ranking (and thus the vesting of shares) will be reviewed by the company’s auditors at the end of the performance period. In order to adjust for changes in exchange rates, all local currencies are converted into euros. The retention period for the shares expires five years after the conditional grant.

The relative TSR performance is compared with the following peer group:

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

The following vesting scheme applies as of 2009 for the conditional grants:

AkzoNobel’s TSR performance over the period 2008 through 2010 resulted in an 11th position within the ranking of the peer group companies. Consequently, the final vesting percentage of the 2008 grant equaled zero percent, resulting in no definitive grant of shares.

The number of performance-related shares conditionally granted in 2010 amounted to 24,400 for the CEO and 18,300 for the other members of the Board of Management.

In accordance with provision II.2.13d) of the Dutch Corporate Governance Code, the schedule on page 76 sets out for 2005 onwards (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 Dutch Corporate Governance Code and the rules of the performance share plan, the number of shares to be conditionally granted to members of the Board of Management is determined by the Supervisory Board using the face value method. The number of shares is set within the limits of the remuneration policy as adopted by the shareholders. The face value method means that the number of conditionally granted shares is set by dividing the policy level of shares by the share price at the beginning of the year of the conditional grant.

The Supervisory Board has decided that where, in the event of a takeover, the pay-out under the performance share plan is between 100 percent and 150 percent, the Supervisory Board will, taking into account the performance of the company prior to the takeover bid, at its discretion decide whether the projected outcome is fair and may decide to adjust the pay upwards or downwards within the bandwidth mentioned. This undertaking does not affect the discretion the Supervisory Board has to correct the variable remuneration of the Board of Management upwards or downwards as provided in provision II.2.10 of the Dutch Corporate Governance Code.

The 2010 Annual General Meeting of shareholders approved a claw back provision in the remuneration policy for the Board of Management. This provision provides the Supervisory Board with the option to claw back variable pay components paid to members of the Board of Management in the event that such variable pay components were based on financial information which is shown within a certain period of time to be materially incorrect.

During the course of 2010, the Remuneration Committee reflected further on current policy and the balance between short and long-term compensation and the company’s targets. As a result, the Supervisory Board will propose to the Annual General Meeting of shareholders for 2011 to amend the remuneration policy.

As of 2011, the CEO of the company will be required to build up, over a five-year period from the date of appointment, and then hold, at least three times his or her gross base salary in AkzoNobel shares for the duration of his or her tenure as CEO. The other members of the Board of Management will be required to build up, over a five-year period from the date of appointment, and then hold, at least one time their gross base salary in AkzoNobel shares for the duration of their tenure.

The CEO and other Board members are expected, for these purposes, to use both their long-term incentive and their short-term incentive in the manner set out below.

The proposed amendment to the remuneration policy entails introducing a requirement that Board members who have not yet achieved this minimum holding requirement invest one third of the short-term incentive they receive (net after tax and other deductions) in AkzoNobel shares. As further encouragement to build up the minimum holding requirement, Board members who invest a second third of their short-term incentive in shares will have such shares matched by the company, one on one, after three years from the date of purchase of the shares (up to a maximum of one third of the short-term incentive), on condition that the Board member showed a sustained performance during the three-year period. The Supervisory Board will use its discretion to decide whether this condition has been met.

Board members who continue to invest their short-term incentives in whole, or in part, in shares after the minimum holding requirement has been reached will have the opportunity to have such shares matched subject to the same conditions, except that such shares will be matched with one share to every two shares thus acquired up to a maximum of two thirds of the short-term incentive.

The Supervisory Board will propose a further amendment to the remuneration policy at the Annual General Meeting of shareholders for 2011. As a further improvement to the way in which the sustainability performance of the company is measured for the purposes of the performance share plan, the proposal is to use the percentile score of the company in the SAM ranking instead of the ranking in the Dow Jones Sustainability Index. This change will increase the transparency and robustness of the system applied.