Compensation of the Board of Directors and the Executive Committee

In view of the specific compensation-related challenges in 2018, and aiming for enhanced transparency also by means of a clearly structured Compensation Report, this section will contain the following chapters:

1. Compensation of the Board of Directors for 2018

In 2018, the Board of Directors received a total compensation of CHF 2’637’654 (previous year: CHF 2’694’962). Of this total, CHF 1’225’730 was in the form of cash fees (previous year: CHF 1’271’869); CHF 1’155’000 was in RSU (previous year: CHF 1’155’000) and CHF 256’923 was in the form of social security contributions (previous year: CHF 268’093).

This is a decrease of 2.1% from the previous year, which was due to changes to the members of the Board in 2018. The structure and level of the Board compensation remained unchanged compared with the previous year.

The portion of compensation delivered in RSU amounts to 56% of the cash compensation for the Chairman, and to between 106% and 165% for the other active members of the Board of Directors. The RSU are subject to a staged three-year vesting period.

Compensation of the Board of Directors (audited)

At the 2018 and 2017 AGM respectively, shareholders approved a maximum aggregate compensation amount of CHF 2’984’000 for the Board of Directors for the period of office from the 2018 AGM until the 2019 AGM and of CHF 2’897’000 for the period of office from the 2017 AGM until the 2018 AGM. The table below shows the reconciliation between the compensation that is/will be paid out for the two periods of office and the maximum aggregate compensation amounts approved by the shareholders.

Reconciliation between the reported Board compensation and the amount approved by the shareholders at the Annual General Meeting

As of December 31, 2017 and December 31, 2018, there were no outstanding loans or credits granted to the members of the Board of Directors, former members of the Board of Directors or related parties (audited).

In 2017 and 2018, no compensation was granted to former members of the Board of Directors or related parties (audited).

2. Compensation of the Executive Committee for 2018

In 2018, the Executive Committee received a total compensation of CHF 16’703’113 (previous year: CHF 13’956’248). Of this total, CHF 7’773’076 was in cash (previous year: CHF 8’109’048); CHF 4’462’417 was in PSU (previous year: CHF 3’785’036); CHF 2’066’420 was in pension and social security contributions (previous year: CHF 1’783’861), and CHF 2’401’200 was in other payments (previous year: CHF 278’302).

Compensation of the Executive Committee (audited)

The total compensation of CHF 16’703’113 awarded to the members of the Executive Committee for the 2018 financial year is within the maximum aggregate compensation amount of CHF 21’163’000 that was approved by the shareholders at the 2017 AGM.

No severance payments to members of the Executive Committee were made during the reporting year.

As of December 31, 2017 and December 31, 2018, there were no outstanding loans or credits granted to the members of the Executive Committee or former members of the Executive Committee (audited).

In 2017 and 2018, no compensation was granted to former members of the Executive Committee or related parties except for the step-up in fair value on outstanding PSU of leavers, according to footnote 3 of the compensation table above. The additional compensation resulting from this step-up is included in the table above (audited).

3. Compensation for the Executive Committee: pay-for-performance assessment

In 2018, we continued our expansion and growth strategy by successfully completing three acquisitions:

The US sanctions against Russia did not impact ongoing operational performance, and we continue to proceed on a strong sustainable growth path. In the following, we elaborate further on how the relevant business performance impacted the variable compensation models of our Executive Committee. More detailed information about Sulzer’s operational and strategic performance in 2018 can be found in the financial report.

a) Total compensation and pay ratio

In 2018, the Executive Committee received a total compensation of CHF 16’703’113 (previous year: CHF 13’956’248). This is an overall increase of 19.7% from the previous year. The main reason for this increase is the reevaluation of the outstanding PSU fair value, incurred in 2018, resulting from the added TSR floors in the PSP 2016 and 2017.

For the entire Executive Committee, the variable component represented 129% of the fixed component (base salary, other – however without one-time step-up in value on outstanding PSU – pension and social security contributions). This pay ratio reflects Sulzer’s high-performance orientation. Further, it represents the company’s strong emphasis on aligning the interests of the Executive Committee and the shareholders to create long-term shareholder value and profitable growth.

On a like-for-like basis (EC members employed in both 2018 and 2017), the base salaries of the EC members increased by 1.8% on average. Regarding cash bonus payments and LTI amounts, see the following paragraphs.

b) Short-term incentive (cash bonus payouts)

In 2018, Sulzer again made good progress towards its transformation goals. Financial targets were exceeded despite an unsupportive energy market environment, and operational performance was not hit by the US sanctions against Russia in April 2018. We grew through acquisitions but also organically in all divisions. The financial component of the bonus ranged from 98% to 129% of targeted payout (on average 118%) and significant progress on our transformation path led to a high level of achievement of individual objectives. This translated into an overall bonus payout factor ranging from 96% to 150% (on average 124%) for the members of the Executive Committee.

c) Long-term incentive (PSP)

On a like-for-like basis, the value of long-term incentives (LTI) newly granted in 2018 remained unchanged compared with the previous year, which corresponds to the ongoing operational performance and growth of the company. Thus, no changes to the grant values were required. The protection of a fair performance measurement by means of the introduction of the pre-April minimum TSR target achievement level in May 2018 resulted in a one-time step-up in value of outstanding PSU (PSP 2016 and PSP 2017) as disclosed in the audited compensation tables. No further adjustments are planned.

The PSP 2016 vested on December 31, 2018. The relevant key performance indicators were opEBITA growth, opROCEA and relative TSR over the three-year period from 2016 to 2018. Operational performance in this period was very good, even beyond expectations. The result was a total payout factor of 191% for the PSP 2016, which fairly reflects the extraordinary growth and performance, both against budget targets and against market peers, in the three-year period from 2016 to 2018.

The PSP 2015 vested on December 31, 2017. As the final payout calculation was made based on the volume-weighted average share price of the three months following vesting date (January to March 2018), the vesting level could not yet be disclosed in the 2017 Compensation Report. For these awards, the peer group had to be updated, with the newly merged TechnipFMC (former peer group company Technip) being replaced by Xylem, chosen out of a proposal of three companies from the predefined successor list of companies. The overall vesting of the PSP 2015 amounted to 164%. 

Overall, the PSP vesting levels fairly reflected the extraordinary operational performance, also against direct peers, over the respective three-year performance cycles, so Sulzer fully achieved the desired strong link between sustainable company performance and competitive long-term incentive payouts. In a nutshell, the resulting overall vesting levels can be summarized as follows:

The vesting level of the PSP 2017 will be shown in the Compensation Report for 2019.