Remuneration for the Board of Management

The remuneration policy is designed to incentivize the Board of Management to achieve the company’s objectives, while balancing the perspectives of shareholders and other key stakeholders. The focus on performance is achieved by including both short and long-term incentives that are aligned with the company strategy to realize long-term sustainable value creation. Variable remuneration provides an incentive to realize long-term value creation. For the short term, the Supervisory Board sets operational targets over a one-year period that are crucial to the company and are pre-conditions to value creation. The biggest portion of the remuneration packages of Board of Management members is directly aimed at strategic priorities that contribute to building sustainable long-term value creation, with targets for return on invested capital, adjusted EBITDA, revenue growth and specific environmental, social and governmental (ESG) goals.

Prior to agreeing on incentives, the Remuneration Committee conducted scenario analyses of the possible financial outcomes of meeting different performance levels, and how they may affect the structure and value of the Board of Management’s total remuneration.

The scenarios that have been evaluated by the Remuneration Committee involve the following:

• Threshold or below: Under-performance or performance at threshold level, no STI pay-out and no vesting of LTI shares
• Target: Performance broadly in line with expectations, STI pay-out and vesting of LTI shares at target
• Maximum: Exceptional performance, STI pay-out and vesting of LTI shares at maximum
• Maximum plus: Same as maximum scenario, but a share price increase after three years of 10% is considered

The Remuneration Committee has concluded that, based on the scenarios considered and the total remuneration level in each scenario, there’s a strong relationship between pay and performance for the Board of Management. The remuneration policy also helps avoid any unintended consequences of providing incentives that are too attractive and support inappropriate risk-taking, by selecting a total direct compensation pay mix at target that consists of at least 25% of base salary and defining maximum opportunities and targets that closely reflect AkzoNobel’s overall performance.

Goal-setting is crucial to driving pay for performance aligned with the company strategy, and to ensure that decisions made – and results delivered – are aligned with the interests of AkzoNobel’s stakeholders. The Supervisory Board sets goals, their respective weight and targets (i.e. metrics) for the respective performance year under the STI and LTI scheme, considering: (1) Company strategy (2) Focus on long-term value creation (3) Historical performance, business future outlook and circumstances and priorities (4) Stakeholder expectations. Goals must be stretching yet achievable.

When implementing the policy, the Remuneration Committee consults external remuneration professionals to obtain appropriate benchmark data, and independent advice on other matters as required. The remuneration principles that apply for the Board of Management are aligned with those applied more broadly in the company. This provides a shared sense of purpose and direction at different management levels and a shared reward when success is achieved.

The following table specifies the elements of the remuneration policy, describing purpose, design and the link to our company strategy, as well as their (potential) value. The table below gives an overview of the remuneration of the members of the Board of Management who were in office in 2021. A split between the proportions fixed versus variable remuneration paid is shown in the diagram at the bottom of this page.

Base salary

The 2021 base salaries were approved at the AGM on April 22, 2021, and made retroactively effective from January 1, 2021:

• Thierry Vanlancker, CEO: €1,150,000
• Maarten de Vries, CFO: €710,000

Short-term incentive (STI)

In 2021, the financial objectives of the short-term incentive were adjusted operating income (OPI) and operational cash flow (OCF). The individual and qualitative objectives reflect progress towards the achievement of long-term strategic objectives. The tables below summarize the performance achieved.

In determining the outcome of the STI elements, the Remuneration Committee applied a reasonableness test in which the actual level of the performance was critically assessed in light of the assumptions made at the beginning of the year, taking into account the continued impact of COVID-19 and shortages (including significant price increases) in raw materials. The test also included an assessment of the progress made with the strategic objectives under prevailing market conditions.

The Remuneration Committee subsequently determined that bonus payments for the Board of Management would be:

• Thierry Vanlancker, CEO: €888,950 (77.3% of salary)
• Maarten de Vries, CFO: €439,064 (61.84% of salary)

CEO fixed vs performance-linked

CFO fixed vs performance-linked

No matching shares were granted to the CEO or CFO in 2021, as this arrangement was suspended for STI payments made in the years 2019, 2020 and 2021. The value of the Share-Matching Plan for these three years was invested in the 2020 Performance Incentive Plan.

Long-term incentives (LTI)

Conditional grant LTI share plan 2021-2023

The Remuneration Committee determines the grant levels to be made in respect of members of the Board of Management, within the limits and plans that have been approved by shareholders. In 2021, the CEO received a conditional grant of shares equivalent to the face value of 200% of his annual base salary and the CFO received a conditional grant of shares equivalent to the face value of 150% of his annual base salary. The grant price was determined based on the average share price of an AkzoNobel common share in the two weeks following publication of the annual results on February 17, 2021:

• 26,713 shares were conditionally granted to Thierry Vanlancker, CEO
• 12,369 shares were conditionally granted to Maarten de Vries, CFO

Vesting of the conditional grant is linked to four performance metrics:

Revenue growth is compared with a defined industry peer group, consisting of the following companies in the paints and coatings sector: Sherwin-Williams, Nippon Paint, PPG, Axalta and BASF Coatings.

Organic growth rates to calculate the performance take into consideration price, mix, volume growth and exclude the effects of exchange rates and mergers and acquisitions. For Axalta and Sherwin-Williams, only organic growth percentage of the performance coatings business growth is taken into consideration.

The ESG targets consist of four equally weighted targets related to AkzoNobel’s People. Planet. Paint. approach (see the following table).

The Supervisory Board determines for each target: (i) the performance level below which no shares vest; (ii) the performance level at which the target number of shares vest; and (iii) the performance level at which the maximum number of shares vest.

Special restricted share grant

At the 2021 AGM, CEO Thierry Vanlancker was reappointed for a two-year period. His reappointment was supported with 97.5% of the votes at the AGM. As part of his reappointment, Mr. Vanlancker was granted a special grant of 17,500 AkzoNobel shares to compensate for the loss of shares due to the two-year reappointment and the fact that shares granted as from 2021 will only vest on a pro-rated basis. As the special grant was not subject to performance conditions, it was decided to apply a 30% discount on the “on-target” value.

The special share grant came into effect on July 21, 2021 (i.e. the first day of the open window after the AGM) following a notification to the Netherlands Authority for the Financial Markets (Autoriteit Financiële Markten, “AFM”) and vested in full that same day. The shares have a restriction date of April 20, 2023 (or the actual date of the AGM at which Mr. Vanlancker will relinquish his position as CEO).

Vesting of the LTI share plan 2019-2021

Under the LTI share plan 2019-2021, conditional grants of 21,379 shares were made to the CEO and 14,387 shares to the CFO.

In line with the remuneration policy, vesting of 50% of the shares conditionally granted in 2019 was linked to AkzoNobel’s ROI performance, which was reviewed at the end of the performance period by the Supervisory Board. The targeted ROI of 25% – which was also applicable to the share grant in 2019 as part of the 15 by 20 strategy – was intended to deliver profitability in line with leading peers. It was initially announced by previous management in April 2017.

When the Grow & Deliver strategy was launched, the company updated its ROI ambition in 2020 from 25% to 20%, taking into account lower revenue growth, the impact of IFRS 16 and recent bolt-on acquisitions. As a result, as they did last year, the Supervisory Board recognized that the 2019 ROI pay-out curve, with an ambition of 25%, no longer aligned with the new strategy.

They applied their discretionary power to evaluate performance against the 2020 ROI pay-out curve, with an ambition of 20%. In both pay-out curves ROI is excluding unallocated cost (the metric for the LTI plans up to 2020; as of 2021, the metric is including unallocated costs). Actual AkzoNobel ROI excluding unallocated cost performance in 2021 was 19.5%. On a linear pay-out curve, with a threshold of 17%, corresponding to a pay-out of 50% an on-target of 20%, and a maximum of 25%, this resulted in a vesting of 91.67% for this specific part of the long-term incentive.

For the 2019 conditional grant, 50% was linked to AkzoNobel’s relative total shareholder return (TSR) performance compared with the companies in a defined industry peer group consisting of the following nine companies:

Following the acquisition of Tikkurilla by PPG, the Remuneration Committee decided to freeze Tikkurilla’s share price at €14.23. This share price was calculated as the average closing share price in the four weeks before news of the acquisition became public. Independent external experts conducted an analysis to calculate the number of shares that would vest according to the TSR ranking. In order to adjust for changes in exchange rates, all local currencies were converted into euros.

AkzoNobel’s TSR performance during the period 2019 to 2021 resulted in the seventh position within the ranking of the peer group companies. This ranking resulted in a vesting of 25% for this part of the long-term incentive, as shown in the table below. Based on the company’s combined ROI and TSR performance, the final vesting percentage of the 2019 conditional grant – after including the dividend yield of 13.14% during the performance period – equaled 66.0%.

The Remuneration Committee determined that:

• Thierry Vanlancker would vest 14,110 shares, subject to a further two-year holding requirement to align the long-term interests of the members of the Board of Management and our shareholders. At December 31, 2021, these shares had a market value of €1,361,615
• Maarten de Vries would vest 9,495 shares, subject to a further two-year holding requirement to align the long-term interests of the members of the Board of Management and our shareholders. At December 31, 2021, these shares had a market value of €916,268

An overview of shares awarded, or due to, Board of Management members is shown in the table.

Claw back and value adjustment

In 2021, there was no cause for a claw back or value adjustment by the Remuneration Committee.

Loans

The company does not grant loans, advance payments or guarantees to members of the Supervisory Board, members of the Executive Committee or any family member of such persons.

Shareholding requirements and share-matching

Board of Management members are expected to build up a share-holding requirement in the company. The minimum shareholding requirement must be accrued within five years. This includes privately purchased shares, and vested shares granted under AkzoNobel share-based compensation plans. The minimum shareholding requirement is 300% of annual base salary for the CEO and 150% of annual base salary for the CFO.

As of December 31, 2021, CEO Thierry Vanlancker held 74,598 shares. Shares acquired in 2021 by the CEO contribute towards his required shareholding. On December 31, 2021, he fulfilled this requirement by holding the equivalent of 626% of his annual base salary in shares.

As of December 31, 2021, CFO Maarten de Vries held 14,643 shares. Shares acquired by the CFO during 2021 contribute towards his required shareholding. On December 31, 2021, he fulfilled this requirement by holding the equivalent of 199% of his annual base salary.

Shares obtained by Board of Management members under the performance related share plan are taken into account for share ownership purposes once they have become unconditional. This includes vested shares to be retained during the two-year blocking period after vesting.

In 2021, CEO Thierry Vanlancker received 1,720 matching shares that were conditionally granted in 2018 under the Share-Matching Plan. On December 31, 2021, there were no shares that qualified for share-matching under the Share-Matching Plan.

Board contracts

Agreements for Board of Management members are concluded for a period not exceeding four years. After the initial term, reappointments may take place for consecutive periods of up to four years each. At the 2021 AGM, CEO Thierry Vanlancker was reappointed for a two-year period. His reappointment was supported with 97.5% of the votes at the AGM.

At the AGM to be held in 2022, the reappointment of the CFO, Maarten de Vries, will be scheduled. The notice period by the Board member, and by the company, shall be subject to a six-month term. Members of the Board of Management normally retire in the year they reach legal retirement age.

Comparative information

Internal pay ratios are a relevant input factor for determining the appropriateness of the implementation of the remuneration policy, as recognized in the Dutch Corporate Governance Code. In 2021, the ratio between the annual total compensation for the CEO and the average annual compensation for an employee was 115.7 (2020: 99.2). Further details on the development of these amounts and ratios over time can be found on the previous page.

Over the last few years of transition, the company’s financial performance fluctuated significantly as the table on the previous page shows. In 2018, net profits increased sharply, mainly due to the divestment of Specialty Chemicals, with a deal result of €5,811 million after tax.

The transition was also reflected in the development of remuneration. In 2018, the increase in average salary was influenced by the inclusion of a one-off €57 million pension cost for the UK guaranteed minimum pension equalizations.

In 2020, total rewards (including benefits) for the Board of Management included a one-off special payment for the 2020 Performance Incentive Plan, which incentivized improvement on the company’s return on sales (ROS). The plan was put in place and approved by the AGM following the divestment of Specialty Chemicals. In 2021, total rewards (including benefits) for the CEO included a one-off special share grant to compensate for the loss of shares due to the two-year reappointment and the fact that shares granted as from 2021 will only vest on a pro-rated basis.