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.
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 and 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 fulfill 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. Benefits mainly include insurance and health care plans as well as pension coverage, where applicable. SIG’s pension benefits, for members of the Group Executive Board employed with a Swiss employment contract, exceed the legal requirements of the Swiss Federal Law on Occupational Retirement, Survivors and Disability Pension Plans (BVG) and are in line with the benefits offered by other international companies. Members of the Group Executive Board who are under a foreign employment contract are insured commensurately with market conditions and with their position. The plans vary in accordance with the local competitive and legal environment and are structured in accordance with local practice and in line with local legal requirements.
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).
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 targets for multiple key performance indicators (“KPIs”), including financial aspects as well as an ESG element, that are derived from SIG’s business strategy and activities. Incorporating an ESG target in SIG’s short-term variable compensation underlines the on-going commitment to contribute to the sustainability component in SIG’s business strategy and activities. The objective of the EcoVadis methodology is to assess the quality of a company’s sustainability management system through its policies, actions, and results. The assessment focuses on 21 criteria which are grouped into four areas: Environment, Labour & Human Rights, Ethics, and Sustainable Procurement. These areas encompass a wide range of activities within the Company and involve in some way a large number of employees.
The targets for both the financial KPIs and the ESG KPI 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 for financial KPIs, a financial target achievement level is identified based on the budget of the respective year. In addition, the members of the Group Executive Board are compensated on the Company’s ESG performance. 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. This leads to more ambitious target curves to achieve the maximum payout.
The basis for ESG target setting is an increased EcoVadis rating year-on-year as it is the goal of SIG to continuously improve the level of our ESG performance activities. The target is set to require an improvement in the Company’s EcoVadis score to meet the target and thereby aligning compensation with the Company’s ambition to remain a leader in ESG matters.
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 Company’s overall or group performance. To strengthen the focus for these members with regional responsibility on their region’s targets, the Board decided to increase for them the weighting of regional targets from 50% to 60% and decreasing the weighting on Group targets to 40%. With this adjusted target weighting, the Group Executive Board members’ regional responsibility should be further underlined while balancing the overarching goal of group-wide success and alignment.
For other Group Executive Board members’ with a primary group focus, including the CEO and CFO, performance is assessed based on group performance only. The framework is illustrated in Figure 12.
In 2021, the target individual short-term incentive equals 100% of the base salary for the CEO and between 67% and 83% of the respective base salaries for other members of the Group Executive Board. Information regarding the target achievement levels will be provided in a later section of this report.
|
|
KPIs |
|
Weight 2021 |
|
Members of the Group Executive Board WITHOUT regional responsibility |
|
Members of the Group Executive Board WITH regional responsibility |
---|---|---|---|---|---|---|---|---|
Group |
|
Group adjusted EBITDA |
|
55% |
|
100% |
|
40% |
|
Group core revenue |
|
20% |
|
|
|||
|
Group free cash flow |
|
20% |
|
|
|||
|
EcoVadis Scoring (sustainability metric) |
|
5% |
|
|
|||
Regional |
|
Regional adjusted EBITDA |
|
50% |
|
|
|
60% |
|
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 vesting 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 2021, the LTIP grant in CHF amounted to 189% of the base salary for the CEO and between 102% and 173% of the base salary for other members of the Group Executive Board.
After the three-year vesting period, a certain number of the granted PSUs vest, depending on the performance of SIG. 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) |
|
Adjusted earnings per share (EPS) |
|
Free cash flow (FCF) |
---|---|---|---|---|---|---|
Weight |
|
50% |
|
25% |
|
25% |
Description |
|
Total shareholder return measured relative to the SPI® ICB Industry 2000 ”Industrials“ Total Return |
|
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. Furthermore, 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.
The threshold, target and cap (together the “targets”) performance levels for the three LTIP performance measures for the 2021 grant are illustrated in Figure 14 and were set by the Compensation Committee based on a robust, stringent approach supported by HCM International Ltd., an external, independent advisor. 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 2021 grant.
Since the first grant under the current LTIP was in 2019, the first vesting will occur in 2022. Relevant information around the vesting will be disclosed in the Compensation Report for the year 2022.
FIGURE 14: OVERVIEW OF THE VESTING CURVE OF THE LTIP 2021
Performance measures |
|
Threshold |
|
Target |
|
Cap |
---|---|---|---|---|---|---|
3-year total shareholder return measured relative to the SPI® ICB Industry 2000 “Industrials” Total Return Index |
|
–16% of index |
|
–0% compared to index |
|
+10% of index |
3-year cumulative diluted adjusted earnings per share |
|
69.6% of target |
|
100% target as set by the Board of Directors |
|
123.3% of target |
3-year cumulative free cash flow |
|
83.1% of target |
|
100% target as set by the Board of Directors |
|
114.5% of target |
In addition to not meeting the threshold, other circumstances under which no PSUs vest include various forfeiture clauses relating to termination of employment during the vesting period of the LTIP.
Since 2021, the LTIP awards are subject to a clawback provision. In case of a financial restatement due to material non-compliance of the Company with applicable financial reporting requirements, or in the case of fraudulent behaviour or other wilful misconduct by a plan participant, the Board of Directors may review the specific facts and circumstances and take clawback actions.
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.
For the Group Executive Board members excluding the CEO, the fixed components (annual base salary and pension benefits/other benefits) vary between 37% and 45% (39% on average) of the total target compensation and the variable components vary between 55% and 63% (61% 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 contractual severance payments or any change of control provisions other than accelerated vesting and/or unblocking of unvested share awards from the LTIP.
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 eight members of the Group Executive Board active during 2021, with two of them joining in the course of the year. The total regular compensation for the Group Executive Board amounted to CHF 11.8 million, while the total compensation, including payments to two former members who left the Group Executive Board in the course of 2020 as well as accrual bookings for a non-compete agreement, sums up to 14.7 million.
Table 2: Total compensation of the Group Executive Board in 2021, including information of the prior year
CHF1 |
|
Group Executive Board (including the CEO) 2021 |
|
Group Executive Board (including the CEO) 2020 |
|
Highest payment 2021 Samuel Sigrist |
|
Highest payment 2020 Rolf Stangl |
||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Annual base salary |
|
2,771,577 |
|
3,222,482 |
|
700,000 |
|
875,000 |
||||||||||||||||||||||
Pension benefits |
|
461,446 |
|
524,930 |
|
129,121 |
|
129,619 |
||||||||||||||||||||||
Short-term variable compensation2 |
|
3,232,186 |
|
2,524,156 |
|
1,109,479 |
|
875,000 |
||||||||||||||||||||||
Long-term variable compensation (granted)3 |
|
4,175,000 |
|
4,900,000 |
|
1,325,000 |
|
1,600,000 |
||||||||||||||||||||||
Other benefits4 |
|
453,095 |
|
336,092 |
|
39,416 |
|
32,204 |
||||||||||||||||||||||
Social security contributions5 |
|
756,048 |
|
877,957 |
|
256,147 |
|
265,302 |
||||||||||||||||||||||
Total regular compensation |
|
11,849,352 |
|
12,385,6176 |
|
3,559,163 |
|
3,777,125 |
||||||||||||||||||||||
Payments to former executives7 |
|
2,482,407 |
|
– |
|
– |
|
– |
||||||||||||||||||||||
Accruals for non-compete agreements |
|
380,5188 |
|
3,017,8769 |
|
– |
|
1,898,74610 |
||||||||||||||||||||||
Total compensation |
|
14,712,277 |
|
15,403,493 |
|
3,559,163 |
|
5,675,871 |
||||||||||||||||||||||
|
The accruals in 2021 for a non-compete agreement of CHF 0.4 million are disclosed in the context of a personnel change in the Group Executive Board and will be payable in 2022 and 2023. With regard to the LTIP, this personnel change resulted in the forfeiture of 47,786 PSUs out of the 2019, 2020 and 2021 grants, representing a total value (at grant fair value) of CHF 0.8 million.
Please refer to note 31 of the consolidated financial statements for an overview of the annual PSUs granted since 2019 and outstanding PSUs.
Approved versus total regular compensation for the Group Executive Board
The total compensation for the Group Executive Board for 2021 is CHF 14.7 million (including social security contributions) which is below the maximum aggregate compensation amount of CHF 18.0 million, which was approved at the Annual General Meeting on 21 April 2020 for 2021. This amount includes CHF 2.5 million relating to payments to two former members of the Group Executive Board who left the Group in 2020 plus the effect for accrual bookings related to a non-compete arrangement, signed in 2021, with a member of the Group Executive Board who will leave the GEB by 31 December 2021.
STIP performance assessment
For 2021, the members of the Group Executive Board received base salary, Short-Term Incentive Plan, 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, as illustrated in Figure 16 below, financial KPIs were overachieved in 2021. The Company was able to improve its EcoVadis Scoring in 2021 versus the prior year. Nevertheless, the target achievement for the STIP was just partly reached. This underlines the desire of the Company to have continuous improvement in ESG which underscores its ambitious target setting. Please refer to the Corporate Responsibility Report for further information pertaining to the Group’s environmental and sustainability performance.
The target achievement for the 2021 STIP was 158.5% for the CEO (82.9% in 2020) and between 98.5% and 181.0% for the other members of the Group Executive Board (84.8% to 128.0% in 2020).
Assessment of actual compensation paid/granted to the Group Executive Board
In comparison to the previous year, the total regular compensation of the Group Executive Board slightly decreased by 4.3% despite the higher STI achievements. There are several factors that impacted the level of actual compensation paid to the members of the Group Executive Board in 2021, which can be summarised as follows:
- Personnel changes in the Group Executive Board: One member of the Group Executive Board left the Company in the course of 2020 and has not been replaced, while the positions of the two members who left the Group as of 31 December 2020 have been replaced. In connection with the replacements, the salary levels and compensations were re-assessed. As a consequence of the acquisition of the remaining 50% shares of the Group’s two joint ventures in the Middle East in February 2021, a new member joined the Group Exective Board. He took on the newly created role of President and General Manager of Middle East and Africa (“MEA”), with responsibility for the business of the former joint ventures in the new segment MEA.
- Impact of currency exchange rates: Four members of the Group Executive Board are paid in foreign currencies. Their compensation is converted into Swiss francs for the disclosure in this report and has changed due to shifts in currency exchange rates even though the compensation amount in local currency has remaind unchanged. This leads to slightly different compensation levels in comparison to the previous reporting period.
Figure 17 illustrates the 2021 actual compensation mixes for the CEO and the Group Executive Board, which underlines the strong focus on the short- and long-term variable compensation elements.
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. Since the introduction of this plan, a PSU grant has been made yearly. For an overview of the annual PSU plans and the outstanding PSUs, refer to note 31 of the consolidated financial statements.