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Compensation report (English only)/Letter to the shareholders

Paying for sustainable performance

Winterthur, February 23, 2021

Dear Shareholder,

On behalf of the Board of Directors and the Nomination and Remuneration Committee (NRC), I am pleased to present the compensation report for 2020. I appreciated the ongoing opportunity in 2020 to work together with my colleagues and our stakeholders towards ensuring that the Sulzer compensation structure continues to reflect best practice standards, proves to be attractive and competitive for employees, rewards sustainable performance and drives value creation for our shareholders.

After a good start to 2020, COVID-19 turned the world upside down. It comes as no surprise that Sulzer has also been heavily challenged by COVID-19 and its economic impact. However, I am proud to say that Sulzer has proven to be extremely resilient this year. We achieved this thanks to our broad regional presence and a balance between early and late-cyclical business. And most importantly – thanks to the support of our employees and the enormous team effort. This also includes the great performance of our Executive Committee which, through its swift action and thoughtful measures, has been instrumental in successfully managing the COVID-19 consequences.

Executive Committee’s compensation

Our Executive Committee’s compensation framework is a modern and tailor-made system designed to lead Sulzer successfully through the coming years:

  • A significant portion of variable compensation ensures a strong pay-for-performance orientation.
  • Performance criteria are selected to provide appropriate incentives to achieve operational and strategic goals, thereby ensuring strong alignment with Sulzer’s corporate strategy.
  • Variable compensation is granted in the form of performance share units, which are subject to malus and clawback provisions, to align interests of the Executive Committee with those of shareholders.
  • Share ownership guidelines oblige the Executive Committee members to hold Sulzer shares for the term of their office.
  • Compensation levels are competitive and in line with market practice to attract and retain highly qualified employees, who will keep Sulzer on the road to success – even in the face of difficult circumstances.

Paying for performance: our year 2020

In 2020, Sulzer continued its strategic investments in sustainable technology leaders to complement its portfolio and provide innovative cutting-edge solutions for a more environmentally friendly future.

We implemented the following changes in 2020 with regard to the Executive Committee’s compensation model:

  • A fourth performance category was introduced for measuring individual performance in the short-term incentive plan: “Environmental, Social, Governance (ESG)”. ESG considers aspects such as improvements in health and safety, emissions, water and energy efficiency or initiatives and actions taken to increase employee and community engagement or efforts in R&D for more efficient or sustainable products such as eco-packaging, biopolymers or energy-efficient pumps.
  • Share ownership guidelines were implemented to align interests of the Executive Committee with those of shareholders and further strengthen the equity culture. Members of the Executive Committee are obliged to hold part of their shares until the end of their service period. The value of the shares to be held is set at 200% of the annual gross base salary for the CEO and 100% of the annual gross base salary for the other members of the Executive Committee.
  • The threshold for total shareholder return performance in the industrial peer group will be set “back to normalˮ at the 25th percentile (for details see special report 2019).
  • The Board has decided to adjust the international peer group. Due to M&A activities, Weir Group was replaced by Andritz, which was the predefined successor in case of necessary adjustments to the international peer group.

The short-term measures applied to the compensation plans in 2020 with regards to COVID-19 are explained in detail in the special report.

Otherwise, the general compensation model and structure for Executive Committee members remained unchanged. There was no increase in base salaries, target short-term incentives levels or regular performance share plan grant amounts and there will also be none in 2021. The CEO received the last tranche of the special grant under the performance share plan which was granted in 2019 due to the exceptional performance during and after the US sanctions in 2018, and was spread over 2019 and 2020 (for details see special report 2019).

The aggregate Executive Committee compensation is below the maximum amount previously approved by the Annual General Meeting for the respective period. Including potential payments made over time, aggregate compensation decreased by 4.7% year on year and by 11.2% like for like, considering we increased the number of Executive Committee members by one at year-end 2019.

Board of Directors compensation

The aggregate Board of Directors compensation paid in 2020 was below the maximum amounts previously approved by the AGM for the respective periods. No changes to Board compensation were deemed necessary.

The aggregate Board of Directors compensation paid in 2020 was 10.4% higher than in 2019, due to the appointment of Mr. Alexey Moskov as a new member of the Board in 2020, thus returning to the former size of the Board of Directors.

Governance

The Nomination and Remuneration Committee (NRC) performed its regular activities in 2020, including making recommendations to the Board for EC performance targets, as well as for compensation of Board, CEO and EC. You will find further information on the NRC’s activities, as well as compensation models and governance, in the following pages.

At the AGM in 2021, you will be asked to vote on the maximum aggregate compensation for the Board for its 2021–2022 term and on the maximum aggregate compensation for the EC for 2022. For the third consecutive year, the maximum aggregate compensation for the Board will remain flat. Notwithstanding the addition of the new EC member, the maximum aggregate for the EC will be the same as for 2021.

As per practice, this compensation report will be submitted for a non-binding, consultative vote to our shareholders. We encourage and pursue open, regular dialogue with our stakeholders. Your constructive input is highly valued and appreciated as we continue to improve and align our compensation system. On behalf of Sulzer, the NRC and the Board, I thank you for your supportive feedback and for your continued trust in our company.

Sincerely,

Gerhard Roiss
Chairman of the Nomination and Remuneration Committee