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: an 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. See Figure 11.

Figure 11: illustrative overview of the compensation framework of the Group Executive Board in 2022

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 12 equal monthly instalments unless local law requires otherwise. The level of base salary is determined by the specific role performed and the responsibilities accepted within that role. 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 under 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 positions. 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 line with general market practice and Swiss law, new members joining the Group Executive Board may be granted replacement awards to compensate for forfeited compensation at prior employers caused by their joining SIG. Such replacement awards are structured on a “like-for-like” basis regarding instrument and performance conditions and never exceed the forfeited amount at the prior employer, which is verified based on written documentation provided by the recipient. If applicable, they are reported accordingly in the compensation table for the relevant financial year.

In addition, 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 (eg. 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 (for details see Figure 12) as well as an ESG element. Incorporating an ESG target in SIG’s short-term variable compensation underpins the ongoing commitment to sustainability rooted in SIG’s business strategy and activities. The assessment of achievements relating to the ESG element is based on the Company’s EcoVadis score, enabling an objective and independent measurement approach. Essentially, EcoVadis assesses the quality of a company’s sustainability management system through its policies, actions and results. The assessment focuses on 21 criteria grouped into four areas: Environment, Labour & Human Rights, Ethics and Sustainable Procurement. These areas encompass a wide range of ESG activities and have relevance for all SIG employees. The targets for both the financial KPIs and the ESG KPI are determined by the Board, based on the advance recommendation of the Compensation Committee each year, 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. Minimum and maximum performance achievement levels are defined, taking into consideration, 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 target payout for the ESG KPI requires an improvement in the Company’s EcoVadis score, thereby aligning compensation with the Company’s ambition to remain a leader in ESG matters.

To determine the payout, the performance against each KPI is 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 for each KPI not be attained.

Group Executive Board members with regional responsibilities have KPIs reflecting their regional as well as Group performance. To strengthen the focus of members with regional responsibility on their region’s KPIs, the weighting of regional targets is set at 60%, while the weighting of Group KPIs is 40%.

For other Group Executive Board members with a primary Group Function focus, including the CEO and the CFO, performance is assessed based on Group performance only. The framework is illustrated in Figure 12.

In 2022, the target individual short-term incentive equals 100% of the base salary for the CEO and between 62% and 83% of the respective base salaries for other members of the Group Executive Board. Information regarding the target achievement levels is provided later in this report.

Figure 12: overview of the Group Executive Board STIP compensation framework in 2022

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 reference price of one PSU. The reference price reflects the 20-day volume-weighted share price before the grant date as per the PSU regulations. In 2022, the LTIP grant in CHF amounted to 189% of the base salary for the CEO and between 98% and 146% of the base salary for other members of the Group Executive Board.

Figure 13: overview of the principles of the LTIP

After the three-year vesting period, a certain number of the granted PSUs vest, depending on the performance of SIG during that time. 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.

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 on one performance measure can be balanced by a higher performance on another performance measure. Overall, the combined vesting multiple will never exceed 200%. If the performance on each of the three performance measures lies below the respective minimum performance requirement, the resulting combined vesting multiple is 0% and consequently no PSUs 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 100%.

The threshold, target and cap (together the “targets”) performance levels for the three LTIP performance measures for the 2022 grant are illustrated in Figure 14 and were set by the Compensation Committee based on a robust, stringent approach supported by HCM International Ltd. The vesting curves for each performance measure under the LTIP are defined with support the balanced performance and payout situations below and above the target and allow for a realistic performance-related chance to realise vesting.

Figure 14: overview of the vesting curve of the LTIP 2022

Given the market sensitivity of the EPS and FCF targets, the Board of Directors has decided to provide additional insights into the robust target-setting process by disclosing the targets for these measures on a relative basis. 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, in order 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 2022 grant.

In addition to a failure to meet the threshold performance level, other circumstances under which no PSUs vest include various forfeiture clauses relating to termination of employment during the vesting period of the LTIP.

The LTIP awards are subject to a clawback provision. In the event of a financial restatement due to a material non-compliance of the Company with applicable financial reporting requirements, or in the event 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.

The Board has the right to allocate other, potentially non-recurring, equity-based awards to employees. Any such awards allocated to members of the Group Executive Board are reported accordingly in the compensation table for the relevant financial year.

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, 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 36% and 50% (41% on average) of the total target compensation and the variable components vary between 50% and 64% (59% on average) of total compensation as of 31 December 2022.

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 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 be terminated while settling contractual claims 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 Group Executive Board members (as well as 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 ten members of the Group Executive Board active during 2022, with three members joining at the beginning of the year and one in June, and one member leaving at the end of 2021. The total regular compensation for the Group Executive Board amounted to CHF 13.0 million, while the total compensation, including payments to the former member who left at the end of 2021, amounted to CHF 13.7 million.

Table 2: total compensation of the Group Executive Board in 2022, including comparative figures for the prior year

Approved versus total regular compensation for the Group Executive Board

The total compensation for the Group Executive Board for 2022 is CHF 13.7 million (including social security contributions), which is below the maximum aggregate compensation amount of CHF 17.0 million approved for 2022 at the Annual General Meeting on 21 April 2021. This amount includes CHF 0.7 million relating to payments to one former member of the Group Executive Board.

Short-Term Incentive performance assessment

For 2022, the members of the Group Executive Board received base salary, payments under the Short-Term Incentive Plan, awards under Long-Term Incentive Plans, 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 for 2022 were only partly overachieved. The Company was able to improve its EcoVadis score in 2022 versus the prior year and able to achieve the ambitious targets that had been set. Please refer to the Corporate Responsibility Report for further information relating to the Group’s environmental and sustainability performance.

Figure 16: 2022 performance at Group level relevant for STIP performance assessment

The target achievement for the 2022 STIP was 104.7% for the CEO (158.5% in 2021) and between 56.8% and 113.6% for the other members of the Group Executive Board (98.5% to 181.0% in 2021).

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 increased by 10.1%. With the exception of a single salary increase for a member of the Group Executive Board, based in a high-inflation country, all target salaries remained at the same level and were not adjusted within the yearly salary review. The overall movement is mainly driven by the personnel changes to the Group Executive Board with an additional three members by 31 December 2022 versus the previous year and, in addition, by the performance-related aspects of the STIP, as described previously, as well as some exchange rate movements.

Personnel changes in the Group Executive Board:

• The President and General Manager of Asia Pacific left the Group Executive Board effective 31 December 2021. Due to the Group’s growth in Asia Pacific, this role on the Group Executive Board has been split into an Asia Pacific North role and an Asia Pacific South role with effect from 1 January 2022.

• A new function of a Chief People and Culture Officer was created, effective from 1 January 2022.
• As a consequence of the acquisition of the Scholle IPN business, a new member joined the Group Executive Board in June 2022. He took on the newly created role of President of Scholle IPN.

In connection with these appointments, salary levels and compensations were reassessed.

Impact of currency exchange rates:

Seven members of the Group Executive Board are paid in foreign currencies. Their compensation is converted into Swiss francs for the disclosures in this report and has changed due to shifts in currency exchange rates even though the compensation amount in local currency has remained unchanged. This leads to slightly different compensation levels in comparison to the previous reporting period.

Figure 17 illustrates the 2022 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.

Figure 17: overview of the actual compensation mix in 2022 for the CEO and the Group Executive Board (excl. CEO) (reflects the amount granted under the LTIP)

Long-Term Incentive performance assessment

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, see note 31 to the consolidated financial statements.

As the first grant under the current LTIP was in 2019, the first vesting occurred on 31 March 2022. The share price and operational performance in the three-year period from 2019 to 2022 was strong and above the already high expectations, resulting in a total vesting multiple of 180%. In particular, the free cash flow and relative TSR performance measures were significantly overachieved, reflecting the outstanding financial performance of SIG during the performance period and the value created for our shareholders. In both cases, the vesting factor cap of 200% was applied, thereby limiting the vesting under this plan.

The composition of the total vesting multiple is illustrated in Figure 18.

Figure 18: vesting multiple of the performance share unit grant 2019 for the period 2019 to 2022