– Compensation report – Compensation of the Executive Committee for 2021

Compensation of the Executive Committee for 2021

Compensation of the Executive Committee: overview

In 2021, the Executive Committee received total compensation in the amount of kCHF 14’609 (previous year: kCHF 14’647). Of this total, kCHF 8’027 was in cash (previous year: kCHF 7’298); kCHF 4’486 was in PSU (previous year: kCHF 5’238); kCHF 1’938 was in pension and social security contributions (previous year: kCHF 1’965), and kCHF 158 was in other payments (previous year: kCHF 147).

Compensation of the Executive Committee

The total compensation of kCHF 14’609 awarded to the members of the Executive Committee for the 2021 financial year is within the maximum aggregate compensation amount of kCHF 19’500 that was approved by the shareholders at the 2020 AGM.

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

As of December 31, 2020, and December 31, 2021, there were no outstanding loans or credits granted to the members of the Executive Committee or former members of the Executive Committee.

In 2020 and 2021, no compensation was granted to former members of the Executive Committee or related parties.

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

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 2021 can be found in the financial report.

a) Total compensation and pay for performance relation

In 2021, the Executive Committee received total compensation in the amount of kCHF 14’609 (previous year: kCHF 14’647). This was an overall decrease of 0.3% from the previous year. Following the spin-off of medmix, one Executive Committee member left Sulzer to join medmix on September 20, 2021. As a result of this, his compensation at Sulzer in 2021 covered only the period until September 19, 2021, and not the full year as in 2020.

For the entire Executive Committee, the variable component amounted to between 110.2% and 209.0% of the fixed component (base salary, other, pension and social security contributions). This pay-for-performance relation 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 (Executive Committee members employed in both 2021 and 2020), the base salaries of the Executive Committee members remained unchanged. Regarding cash bonus payments and LTI amounts, see the following paragraphs.

b) Short-term incentive (cash bonus payouts)

Excluding the Applicator Systems division, in 2021 Sulzer increased sales strongly by 6.0% in line with its market guidance, and this despite headwinds from supply chain disruptions. Operational profitability reached a record 9.3%, beating pre-pandemic levels, with all three divisions contributing to this outstanding achievement. This year, Sulzer once again generated strong free cash flow, reaching CHF 210 million. The strong positive financial performance is an outcome of the significant progress achieved by Sulzer on its transformation path. Sulzer took early decisive actions to drive cost take-out measures in 2020 in anticipation of softer energy markets, as well as to counter the impacts of the pandemic. In parallel, Sulzer also continued to expand its market activities with increasing focus on sustainable solutions. In January 2021, Sulzer acquired Nordic Water, a leading supplier of water treatment technology. This acquisition has further strengthened its Water business — Sulzer has one of the largest complete portfolios of water pumping and treatment solutions, and Water now represents the biggest single segment in the Flow Equipment division. In the renewables market, Sulzer also advanced further — order intake in Renewables doubled organically from 2020. During the nine months until September 20, 2021, when the Applicator Systems division was spun off as medmix, the division rebounded strongly on sales, profitability and cashflow. The Applicator Systems division made its debut as a standalone listed company, medmix, on the SIX Swiss Exchange on September 30, 2021, creating close to CHF 2 billion in shareholder value.

As a result of the solid overall performance and successful strategic transformation, the financial component of the bonus ranged from 140.3% to 147.4% of targeted payout (on average 144.9%), thanks also to a high level of achievement of individual objectives. The financial performance on group level was as follows:

The individual performance ranged from 90% to 200% to consider the exceptional team performance.

In aggregate, the financial and individual performance translated into an overall bonus payout factor ranging from 127% to 163% (on average 150%) for the members of the Executive Committee.

c) Long-term incentive (PSP)

We are convinced that the conditional awards to receive Sulzer shares, subject to operational return on capital employed (operational ROCEA), operating income before restructuring, amortization, impairments and non-operational items (operational profit) and total shareholder return (TSR) performance, as well as ongoing employment through the three-year vesting period:

The PSP framework (apart from the specific performance targets for each grant cycle), eligibility and grant entitlement remained unchanged in 2021 compared to previous years. The relevant key performance indicators (KPIs) were growth in operating income before restructuring, amortization, impairments and non-operational items (operational profit growth), operational return on capital employed (operational ROCEA) and relative total shareholder return (TSR) over the three-year measurement period from 2019 to 2021.

Over this three-year period, operational profit adjusted for foreign exchange and M&A impacts grew by 34% even as we had to navigate unexpected and challenging impacts from COVID-19 in 2020 and 2021. Compared to the PSP target set by the Board, this resulted in an achievement factor of 232%.

Operational ROCEA improved significantly on the back of solid cash flow generation and strong profitability for the past three years, thanks to our determined drive for operational excellence, rigorous focus on networking capital management, strict management of capital expenditures and efforts to optimize our footprint. For the maximum 250% target achievement of operational ROCEA, the Board had set a target for Sulzer to improve by 200bps over the course of the PSP 2019 measurement period. An actual achievement of 223% was realized.

Together with a relative TSR achievement factor of 142%, which compared Sulzer’s share price development against international peers as well as against the SMIM over the PSP 2019 measurement period, the resultant total payout factor is 185% for the PSP 2019.

The payout factor results and respective weighting are as follows:

Overall, the PSP vesting levels fairly reflected the operational performance, also against direct peers, over the respective three-year performance cycles. Therefore, Sulzer fully achieved the desired strong link between sustainable company performance and competitive long-term incentive payouts.

Shareholdings of the Executive Committee

As of the end of 2020 and 2021, the members of the Executive Committee held the following shares in the company:

Shareholdings at December 31, 2021

Shareholdings at December 31, 2020

Compensation architecture for the CEO and Executive Committee members

Compensation architecture for the Board of Directors