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5. Compensation framework for the Group Executive Board

Compensation overview for the Group Executive Board

Compensation for the members of the Group Executive Board is provided through the following main components: Annual base salary and pension benefits/other benefits, which together form the fixed compensation component, a Short-Term Incentive Plan (“STIP”) and a Long-Term Incentive Plan (“LTIP”), which together form the variable compensation component presented in Figure 11. Compensation principles are reviewed by the Compensation Committee on a regular basis.

FIGURE 11: ILLUSTRATIVE OVERVIEW OF COMPENSATION FRAMEWORK OF THE GROUP EXECUTIVE BOARD IN 2020

Illustrative overview of compensation framework of the Group Executive Board in 2020 (illustration)

Fixed compensation components:

Annual base salary

The base salary is the main fixed compensation component paid to the members of the Group Executive Board at SIG. It is paid in cash in twelve equal monthly instalments unless local law requires otherwise. The level of base salary is determined by the specific role performed and the responsibilities accepted thereunder. It rewards the experience, expertise and know-how necessary to fulfil the demands of a specific position. In addition, the market value of the role in the location where the Company competes for talent is considered.

Pension benefits/other benefits

As the Group Executive Board is international in its nature, the members participate in the benefit plans available in the country of their employment contract. Pension benefits are provided through SIG’s regular pension plan. Members of the Group Executive Board who are under a foreign employment contract receive benefits in line with local current market practice. Besides the pension coverage, benefits mainly include insurance and health care plans. In addition to this, the Group Executive Board members are also provided with certain executive perquisites and benefits in kind according to competitive market practice in the country of their employment (e.g. company cars).

Members of the Group Executive Board with a Swiss employment contract, for example, also receive a lump-sum cash payment as reimbursement for business and representational expenses, in accordance with the expense policy document approved by the cantonal tax authority of Schaffhausen.

The fair value of these benefits is part of the compensation and disclosed in Table 2.

Variable compensation components:

The variable compensation consists of a short-term incentive and a long-term incentive component.

Short-Term Incentive Plan (“STIP”)

Under the STIP, the members of the Group Executive Board are rewarded for the achievement of pre-defined annual financial targets for key performance indicators (“KPIs”) that are derived from SIG’s business strategy. The targets are determined by the Board, based on the recommendation of the Compensation Committee each year in advance, following a well-established process. To calibrate the achievement curve for the following year, a target achievement level is identified based on the budget of the respective year. Minimum and maximum performance achievement levels are defined considering, among other metrics, the previous year’s performance level as well as the notion that higher payouts should require proportionally higher levels of performance achievement, which leads to more ambitious target curves to achieve the maximum payout. To determine the payout, the performance against each KPI will be assessed individually in a range from 0% to 200% and then combined according to the assigned weightings (see Figure 12). The overall payout is capped at 200% of the target amount and can fall to zero should the minimum performance achievement level not be attained.

Group Executive Board members who have regional responsibilities have KPIs reflecting their regional as well as the group-related performance. The same weighting is assigned to group and regional KPIs for members who have such responsibilities. Other Group Executive Board members’ performance, including the CEO and CFO, is assessed based on group performance only. The framework is illustrated in Figure 12.

In 2020, the target individual short-term incentive equals 100% of the base salary for the CEO and between 67% and 82% of the respective base salaries for other members of the Group Executive Board.

FIGURE 12: OVERVIEW OF THE GROUP EXECUTIVE BOARD STIP COMPENSATION FRAMEWORK IN 2020

Overview of the Group Executive Board STIP compensation framework in 2020 (illustration)

KPIs

 

Weight 2020

 

Members of the Group Executive Board WITHOUT regional responsibility

 

Members of the Group Executive Board WITH regional responsibility

Group

 

Group adjusted EBITDA

 

60%

 

100%

 

50%

 

Group core revenue

 

20%

 

 

 

Group free cash flow

 

20%

 

 

Regional

 

Regional adjusted EBITDA

 

50%

 

 

 

50%

 

Regional core revenue

 

30%

 

 

 

Regional adjusted Operating Net Working Capital (ONWC) as a % of revenue

 

20%

 

 

Long-Term Incentive Plan (“LTIP”)

The LTIP offers eligible employees the opportunity to participate in the long-term success of SIG, thereby reinforcing their focus on longer-term performance and aligning their interests with those of shareholders. The following provides an outline of the plan specifics.

The mechanics behind the LTIP are illustrated in Figure 13. At the beginning of each three-year performance period, a certain number of Performance Share Units (“PSUs”) is granted to each participant, which represents a contingent entitlement to receive SIG shares in the future. The number of granted PSUs depends on (i) the individual LTIP grant level in CHF, determined by the Board each year but never exceeding 200% of the base salary of any member of the Group Executive Board, including the CEO, and (ii) the fair value of one PSU at the grant date. In 2020, the LTIP grant in CHF amounted to 183% of the base salary for the CEO and between 107% and 183% of the base salary for other members of the Group Executive Board.

FIGURE 13: OVERVIEW OF THE PRINCIPLES OF THE LTIP

Overview of the principles of the LTIP (illustration)
1 SPI® ICB Industry Industrials (Return) Index

After the three-year performance period, a certain number of the granted PSUs vest, depending on the performance of SIG over the period. The number of PSUs vested in SIG shares may vary between 0% and 200% of the granted PSUs and is based on the achievement of the following three weighted performance measures.

Performance measures

 

Relative total shareholder return (rTSR)

 

Earnings per share (EPS)

 

Free cash flow (FCF)

Weight

 

50%

 

25%

 

25%

Description

 

Total shareholder return measured relative to the SPI® ICB Industry Industrials (Return) Index

 

SIG’s cumulative diluted adjusted earnings per share

 

SIG’s cumulative free cash flow

To determine the multiple of the granted PSUs ultimately vested in SIG shares, the performance against each performance measure will be assessed individually in a range from 0% to 200% and then combined according to the assigned weightings. This means that a low performance in one performance measure can be balanced by a higher performance in another performance measure. Overall, the combined vesting multiple will never exceed 200%. If the performance of each of the three performance measures lies below the respective minimum performance requirement, the resulting combined vesting multiple would be 0% and consequently no PSUs would vest. Additionally, if the absolute TSR falls below zero over the respective performance period, the vesting factor of the relative TSR metric would be capped at 1.0.

In setting the targets, the Compensation Committee has been supported by HCM International Ltd., an external independent adviser. Investors’ return expectations on market value, stock risk profile, investment projections and current profitability levels were taken as a starting point and translated into EPS and FCF targets, using multifactor valuation models and statistical analyses in order to establish an appropriate link between LTIP payouts and the value created for investors. The results of the outside-in approach were assessed against historical company performance, as well as equity analysts’ expectations and the strategic plan as approved by the Board, to reinforce the Compensation Committee’s and Board’s confidence in the overall quality and robustness of the EPS and FCF targets. The Compensation Committee discussed different options for target setting and the corresponding vesting curves for each performance measure and submitted a recommendation to the Board, which approved the respective vesting curves for the LTIP 2020 grant, illustrated in Figure 14.

FIGURE 14: OVERVIEW OF THE VESTING CURVE OF THE LTIP 2020

Performance measures

 

Threshold
(0% vesting)

 

Target
(100% vesting)

 

Cap
(200% vesting)

3 years total shareholder return measured relative to the SPI® ICB Industry Industrials (Return) Index

 

-16% of index

 

-0% compared to index

 

+10% of index

3 years cumulative diluted adjusted earnings per share

 

64.6% of target

 

100% target as set by the Board of Directors

 

135.4% of target

3 years cumulative free cash flow

 

62.5% of target

 

100% target as set by the Board of Directors

 

137.5% of target

Other circumstances under which no PSUs vest include various forfeiture clauses relating to termination of employment during the performance period of the LTIP.

Compensation mix

Figure 15 illustrates the compensation mix for the CEO and the Group Executive Board at target level. This compensation mix reflects SIG’s high-performance orientation and represents the Company’s strong emphasis on aligning the interests of the Group Executive Board and the shareholders to create long-term shareholder value and profitable growth, by making a large part of compensation dependent on the achievement of long-term goals.

FIGURE 15: OVERVIEW OF THE COMPENSATION MIX FOR THE CEO AND THE GROUP EXECUTIVE BOARD (EXCL. CEO) AT TARGET LEVEL

For the Group Executive Board members excluding the CEO, the fixed components (annual base salary and pension benefits/other benefits) vary between 32% and 48% (38% on average) of the total target compensation and the variable components vary between 52% and 68% (62% on average) of total compensation.

Employment conditions for the Group Executive Board

All members of the Group Executive Board have employment contracts of unlimited duration and a notice period of 12 months, ensuring compliance with the Swiss Ordinance Against Excessive Compensation in Listed Stock Companies and other applicable laws and regulations. The employment contracts may provide, for a period of up to one year post-termination, compensation for adherence to non-compete clauses. Payment for the non-compete period, if any, amounts to a maximum of one year’s compensation, unless otherwise required by local law. Such contracts do not include any severance payments or any change of control provisions other than accelerated vesting and/or unblocking of unvested share awards.

In the event of a change of control, the LTIP will automatically terminate and all outstanding PSUs vest as of the date of the change of control (which will be defined by the Board if unclear). There are generally no special arrangements in place from which the Group Executive Board members (as well as the Board members) could benefit in divergence from other plan participants.

Compensation awarded to the Group Executive Board (Audited)

Table 2 summarises the total compensation for the six members of the Group Executive Board active during 2020 and one member who left in the course of the year. The total compensation for the Group Executive Board amounted to CHF 12.4 million.

TABLE 2: TOTAL COMPENSATION OF THE GROUP EXECUTIVE BOARD IN 2020, INCLUDING INFORMATION OF THE PRIOR YEAR

CHF1

 

Group Executive Board (including the CEO) 2020

 

Group Executive Board (including the CEO) 2019

 

CEO, Rolf Stangl
2020

 

CEO, Rolf Stangl
2019

Annual base salary

 

3,222,482

 

3,214,722

 

875,000

 

875,000

Pension benefits

 

524,930

 

536,405

 

129,619

 

129,518

Short-term variable compensation (paid)2

 

2,524,156

 

3,410,295

 

875,000

 

1,224,720

Long-term variable compensation (granted)3

 

4,900,000

 

4,700,000

 

1,600,000

 

1,600,000

Other benefits4

 

336,092

 

331,256

 

32,204

 

28,916

Social security contributions5

 

877,957

 

966,097

 

265,302

 

303,876

Total regular compensation

 

12,385,6176

 

13,158,775

 

3,777,125

 

4,162,030

Accruals for non-compete agreements7

 

3,017,876

 

 

1,898,746

 

1

Exchange rates 2020: EUR/CHF 1.07034; THB/CHF 3.0013; CNY/CHF 13.60521; BRL/CHF 18.41503.
Exchange rates 2019: EUR/CHF 1.11282; THB/CHF 3.20216; CNY/CHF 14.39436; BRL/CHF 25.23583.

2

Represents effective short-term variable compensation for 2020 which will be paid in 2021, after the publication of SIG’s audited consolidated financial statements.

3

Amount granted under the LTIP; the number of PSUs that vests depends on the achievement of the performance targets. The number of granted PSUs is equal to the participants’ granted amounts under the LTIP divided by the fair value of one PSU at the grant date (CHF 15.05 for the 2020 PSU plan, see note 31 of the consolidated financial statements for additional details).

4

Comprises payments related to additional insurances, car benefits and other allowances and benefits.

5

Employer social security contributions include estimates for the Short-Term Incentive Plan attributable to 2020 which will be paid in 2021 as well as for the Long-Term Incentive Plan at target level on accrual basis.

6

Including compensation for one member who left the Company in August 2020.

7

This item includes accruals for payments for non-compete agreements to three members of the Group Executive Board who left the Company in August (one member) and as of 31 December 2020 (two members), including the CEO. The amount includes employer social security contributions on accrual basis.

The one-time effect for non-compete agreements of CHF 3.0 million is disclosed in the context of personnel changes in the Group Executive Board and will be payable in 2021 and 2022. With regard to the LTIP, these personnel changes resulted in the forfeiture of 341,414 PSUs out of the 2019 and 2020 grants, representing a total value (at grant fair value) of CHF 4.2 million.

These forfeitures are reflected in Table 4, which gives an overview of the PSUs granted under the 2019 and 2020 grants.

Approved versus total regular compensation for the Group Executive Board

The total compensation for the Group Executive Board for 2020 of CHF 12.4 million (including social security contributions) plus the extra one-off compensation of CHF 3.0 million relating to non-compete arrangements for three members who left the GEB in 2020, is below the maximum aggregate compensation amount of CHF 18.0 million, which was approved at the Annual General Meeting on 11 April 2019 for 2020.

STIP performance assessment

For 2020, the members of the Group Executive Board received base salary, Short-Term Incentive Plan and Long-Term Incentive Plan and pension and other benefits, in line with the compensation framework, as detailed in Figure 11. For the Group as a whole, 2020 results, as illustrated in Figure 16 below, were below the targets for Group adjusted EBITDA and Group core revenue, while the Group free cash flow KPI has been overachieved.

FIGURE 16: 2020 PERFORMANCE AT GROUP LEVEL RELEVANT FOR STIP PERFORMANCE ASSESSMENT

2020 Performance at Group Level relevant for STIP performance assessment  (illustration)

The target achievement for the 2020 STIP was 82.9% for the CEO (140% in 2019), not reflecting the termination agreement with the CEO, and between 84.8% and 128.0% for the other members of the Group Executive Board (85% to 142% in 2019).

Assessment of actual compensation paid/granted to the Group Executive Board

In comparison to the previous year, the total compensation of the Group Executive Board, excluding the one-time non-compete accruals, decreased by 5.9%. This movement is mainly caused by the performance-related aspects regarding the STIP as well as some exchange rate movements. There were no significant increases in base salaries nor in target STIP levels versus the previous year.

Figure 17 illustrates the 2020 actual compensation mix for the CEO and the Group Executive Board, which underlines the strong focus on the short- and long-term variable compensation elements.

FIGURE 17: OVERVIEW OF THE ACTUAL COMPENSATION MIX IN 2020 FOR THE CEO AND THE GROUP EXECUTIVE BOARD (EXCL. CEO) (REFLECTS THE AMOUNT GRANTED UNDER THE LTIP)

Performance Share Unit Plan

In 2019, the PSU plan was introduced, and the members of the Group Executive Board and selected other members of management were granted PSUs for the first time. A PSU grant occurred again in 2020. Table 3 gives an overview of the PSU grants since 2019 and Table 4 shows the status of outstanding PSUs.

TABLE 3: OVERVIEW OF PERFORMANCE SHARE UNIT GRANTS

 

 

2020

 

2019

Grant date

 

01.04.2020

 

01.04.2019

Vesting date

 

31.03.2023

 

31.03.2022

Fair value of one PSU at grant date

 

CHF 15.05

 

CHF 9.49

Granted numbers of PSUs

 

342,198

 

537,414

Thereof granted to members of the Group Executive Board

 

325,586

 

495,263

TABLE 4: PERFORMANCE SHARE UNIT STATUS

 

 

2020

 

2019

As of 1 January

 

537,414

 

Granted PSUs

 

342,198

 

537,414

Vested PSUs

 

 

Forfeited PSUs throughout the respective year

 

(341,414)

 

Outstanding as of 31 December

 

538,198

 

537,414