Short-term incentive (annual bonus)

Base salary

The objective of the base salary is to enable recruitment and retention of top managers of a major international company.

The base salaries of members of the Board of Management increased by 0.75 percent in 2010.

Short-term incentive (annual bonus)

The objectives of the short-term incentive are to reward economic value creation (EVA) and EBITDA growth for our shareholders and other stakeholders, to measure individual and collective performance and to encourage progress in the achievement of long-term strategic objectives.

As of 2009, the performance-related short-term incentive is linked to the EBITDA of the company, in addition to EVA and the individual and qualitative personal targets of the members of the Board of Management. More specifically, 35 percent of the short-term incentive opportunity is linked to EBITDA, 35 percent is linked to EVA and 30 percent remains linked to individual and qualitative personal targets, including non-financial targets. EVA and EBITDA are based on the financials of the company in constant currencies. EVA is seen as a measure for creating long-term value. The variable remuneration components of the remuneration policy (including the long-term incentives) will therefore continue to be predominantly of a long-term nature.

On the outcome of the three short-term incentive elements (EVA, EBITDA and personal targets), the Supervisory Board applies an overall rating based on the principles of the Performance and Development Dialog, AkzoNobel’s appraisal system. For the Board of Management, the rating includes a reasonableness test, in which the Supervisory Board critically assesses the actual ambition level of the performance targets in light of the assumptions made at the beginning of the year. It also includes an assessment of the progress made in achieving long-term strategic objectives. This method for short-term incentive determination is also the basis of the compensation framework for executives in the company.

The EVA performance measure is used in order to encourage the Board of Management to create long-term value for the company’s shareholders and other stakeholders. EVA is calculated by deducting from net operating profit after taxes (NOPAT) a capital charge representing the cost of capital calculated on the basis of an average return investors expect.

Please refer to the Report of the Board of Management section which for the actual 2010 EVA and EBITDA performance used in the short-term incentive. The EVA of the sum of the business units is used as the basis for calculating the EVA element of the short-term incentive for the Board of Management.

The EVA and EBITDA elements of the short-term incentive have a performance threshold level of 80 percent and a maximum performance level of 120 percent of the targeted EVA and EBITDA respectively. The target EVA and EBITDA are determined annually by the Supervisory Board. The pay-out of the short-term incentive will never exceed 100 percent of base salary for members of the Board of Management and 150 percent of base salary for the CEO (see the Remuneration elements section). Qualitative individual and collective targets are set in the context of the medium-term objectives of the company and qualify as commercially sensitive information. AkzoNobel will not disclose all the targets. However, the targets for 2010 included goals set with respect to operational and functional excellence, delivering on the strategic plans, talent development and delivering on the ICI synergies.

The Supervisory Board assesses the progress made in achieving long-term strategic objectives and the actual ambition level of the performance targets in light of the assumptions made at the beginning of the year. The Supervisory Board ensures that targets are realistic and sufficiently stretching. In accordance with the requirements of the Dutch Corporate Governance Code, the Remuneration Committee, before setting the targets to be proposed for approval by the Supervisory Board, carried out a scenario analysis of the possible financial outcome of meeting target levels, as well as maximum performance levels.

In late 2009, the Board of Management and the Supervisory Board considered the company’s 2009 results in light of the economic climate and the need to find the right balance between short and long-term incentives. As a result, they decided to strengthen the link between the remuneration of the Board of Management and the medium and long-term targets of the company by deferring receipt of 50 percent of the short-term incentive for 2009 in the case of Mr. Wijers, CEO, and 25 percent of the short-term incentive for 2009 in the case of the other members of the Board of Management. Receipt of this deferred payment was made subject to the company achieving its medium-term target of an EBITDA margin of 14 percent. The company achieved this EBITDA margin target ahead of planning in mid-2010. This was shared with the financial markets and a new growth strategy was announced which focuses more on an absolute EBITDA increase than an EBITDA margin percentage. As a result, the Supervisory Board decided that this justifies the pay-out of the deferred short-term incentive for 2009 in February 2011.

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