Remuneration policy

Our Remuneration Policy (the “Policy”) was first adopted by shareholders at the Annual General Meeting (AGM) in 2005. It has undergone several amendments since then, most recently in 2018, and these changes are noted in this report.

As a major international company, it is essential that we can attract and retain high caliber executives to the Board of Management. Equally, their performance should be focused on achieving those strategic aims which promote AkzoNobel, safeguard it and create sustainable, long-term value. The Policy is designed to enable these objectives, while balancing the perspectives of shareholders and other key stakeholders. Consequently, there is alignment between our executive remuneration principles and those which apply more broadly in the company.

Total remuneration

Our Policy seeks to enable members of the Board of Management to receive market competitive levels of remuneration across all package elements. To this end, we use the median level of the external market as a reference point, which is taken from industry peers, plus a range of companies that are of a similar scale, complexity and geographic reach to AkzoNobel. When setting and reviewing remuneration levels, we also consider factors affecting our industry, alongside other relevant inputs.

Members of the Board of Management can receive a remuneration package consisting of:

• Base salary
• Performance-related short-term incentives, delivered in cash and with the ability to award matching shares
• Performance-related long-term incentive, awarded in the form of shares
• Post-contract benefits
• Other benefits

Base salary

Salaries are set by the Remuneration Committee. Salary levels are usually reviewed annually, without any commitment to increase them.

Short-term incentive (STI)

The STI is designed to give focus to a range of strategically important annual objectives, both financial and non-financial. Collectively, these objectives are targeted to deliver a level of performance which is in line with our operational plans. They do not incentivize undue risk taking or other behaviors which are contrary to the company’s interests.

The target STI is 100% of base salary for the CEO and 65% of base salary for any other member of the Board of Management. Financial performance accounts for 70% of the STI, while the remaining 30% is linked to achieving individual and qualitative goals, including sustainability and people-related targets.

At the start of each financial year, the Remuneration Committee will consider the company’s priorities and therefore how it intends to incentivize short-term performance. It will agree the metrics for inclusion in the STI, their relative weighting and targets for achievement. Up to four financial metrics can be selected from the following list:

• Revenue growth
• Adjusted EBITDA
• Adjusted operating income
• Return on sales (ROS)
• Return on investment (ROI)
• Operating income (OPI)
• Net income (to shareholders)
• Operational cash flow (OCF)

These metrics are as used or defined in our annual report, subject to minor adjustments if required, in order to provide an appropriate indicator of management’s performance.

For each target, the Remuneration Committee sets performance ranges each year. These performance ranges determine: (i) The performance level below which no payouts are made; (ii) The performance level at which 100% payout is made; and (iii) The performance level at which the maximum payout of 150% is made. In aggregate, STI awards will not exceed 150% of base salary for the CEO, and 100% of base salary for any other member of the Board of Management.

Bonus awards are paid in cash, but Board of Management members who have yet to achieve their minimum shareholding level are required to invest one-third of their short-term incentive (net after tax and other deductions) in AkzoNobel shares. A Share Matching Plan is in place to enable them to more quickly accumulate shares in the company. However, this arrangement has been suspended for bonus awards arising from performance in 2018 to 2020, since it has been replaced by the 2020 Performance Incentive Plan (more details about this plan can be found in Implementation in 2018).

Long-term incentive (LTI)

The company’s LTI plan is designed to give focus to the strategic priorities that will contribute to building sustainable long-term value creation. By making awards in equity of the company, alignment is created between the Board of Management and AkzoNobel’s shareholders.

The vehicle through which long-term performance is incentivized is the performance-related share plan. It was approved by shareholders at the AGM in 2004 and has been amended several times, most recently in 2018. Under the performance-related share plan, shares are conditionally granted to the members of the Board of Management on an annual basis, following approval from the Remuneration Committee. Since 2018, performance has been incentivized through two equally-weighted metrics, which are measured over a three-year period:

• Total shareholder return (TSR) measured relative to a competitor peer group
• Growth in return on investment (ROI)

Both of these metrics operate independently of each other and, therefore, each governs 50% of the conditional target grant. The Remuneration Committee determines the targets that comprise each metric and the peer group constituents.

A target level of performance will vest 100% of the target number of shares conditionally granted. Maximum vesting is 150% of the conditional share grant. No shares will vest if a minimum level of performance is not achieved.

Once the performance period has ended, the Remuneration Committee will assess the extent to which the targets have been met. The number of shares to vest is adjusted for dividends that were paid to shareholders over the three-year performance period. In total, the performance share plan covers five financial years, as any vested shares must be retained by the Board of Management member for a further two financial years.

Shareholding requirements

Members of the Board of Management are required to hold shares in the company for the duration of their tenure in that capacity. The shares must be accumulated over five years from the date of their appointment to the Board of Management. The holding requirements are expressed as a percentage of the executive’s annual gross base salary as follows:

• CEO 3x
• CFO 1.5x
• Any other member of the Board of Management 1x

Pay mix

The Remuneration Policy is designed to put a higher proportion of the Board of Management’s package “at risk” in the form of variable pay, i.e. derived through incentive plans. The total value of remuneration that can be earned rises with the level of performance that is delivered, and consequently the relative proportion of the fixed pay package reduces.

The charts below show the ratio between fixed and variable pay – the pay mix – for the CEO and CFO under various performance scenarios. The fixed pay component only refers to base salary, excluding post-contract benefits and other benefits. The variable component includes the STI, LTI and the share matching plan, on the assumption that these are the normal policy components for the Board of Management. Share price developments are not taken into account.

CEO target pay mix 2018

in %

CFO target pay mix 2018

in %

Post-contract benefits

Members of the Board of Management receive a contribution towards pension and similar retirement benefits, as determined by the Supervisory Board.

Other benefits

Other benefits – such as a company car – are determined by the Supervisory Board and are given to provide members of the Board of Management with a market competitive package.

Claw back and value adjustment

All variable pay components are subject to the claw back and value adjustment provisions of the Dutch Civil Code.

Loans

The company does not grant loans, advance payments or guarantees to its Board members.