– Compensation report – Compensation architecture for the CEO and EC members

Compensation architecture for the CEO and Executive Committee members

Compensation principles

The compensation of the Executive Committee is driven by the main principle of pay for performance. The compensation policy and programs are designed to reward performance, sustainable growth and long-term shareholder value creation, while offering competitive remuneration to be able to attract and retain highly qualified employees. The compensation principles are:

Risk

 

Risk exposure

Pay for performance

 

A substantial portion of the compensation is delivered in the form of variable incentives based on company and individual performance.

Strategy alignment

 

The performance criteria are selected to create adequate incentives for achieving the operational and strategic objectives.

Ownership

 

Part of the compensation is delivered in the form of company equity to foster ownership and to align the interests of executives with those of shareholders.

Market competitiveness

 

Compensation levels are competitive and in line with market practice to attract and retain highly qualified employees.

Internal equity

 

The internal compensation structure is based on a job-grading methodology applied globally.

Transparency

 

Compensation programs are straightforward and transparently explained in the compensation report.

Method of determining compensation: benchmarking

To ensure compensation levels that are competitive and in line with market practice, the compensation of the Board of Directors and of the Executive Committee is benchmarked against that of similar roles in comparable companies every one to two years. For this purpose, the NRC selected a peer group of international industrial companies headquartered in Switzerland based on their revenue and number of employees. Sulzer is positioned between the first quartile and median of the peer group.

The NRC regularly reviews the composition of the peer group, which is applied for benchmarking purposes. Having reviewed the composition in 2021, the NRC decided that from 2022, the composition of the peer group should be revised. Going forward, companies of a comparable size from the Swiss market will form the respective peer group, which is used to derive the compensation levels for the Board of Directors as well as for the Executive Committee.

Compensation benchmark

The comparison group reflects Sulzer’s ambitious business strategy:

  • ABB
  • Clariant
  • Georg Fischer
  • Lonza
  • OC Oerlikon
  • Rieter
  • Schindler
  • Sika
  • Sonova
  • Tetra Laval Group

The intention is to pay target compensation around the median of the relevant market. Nevertheless, compensation increases are not granted based on benchmark results alone. The role, responsibility and current performance of the individual Executive Committee member is assessed at the same time. A globally applied job-grading methodology fosters internal equity.

The compensation of the Executive Committee is governed by internal regulations such as the total reward policy, the bonus plan, the performance share plan and benefits plans. The compensation of the Executive Committee is reviewed by the NRC annually and, if necessary, adjusted and approved by decision of the Board of Directors based on a proposal by the NRC. The compensation of the Executive Committee is summarized as follows:

Compensation elements for the members of the Executive Committee

 

 

Base salary

 

Benefits

 

Short-term incentive plan (bonus plan)

 

Long-term incentive plan (PSP 2021)

 

Share ownership guidelines (SOG)

Main parameters

 

Function, level of role, profile of incumbent (skill set, experience)

 

Pension and social security contributions, fringe benefits

 

Achievement of annual financial and individual objectives

 

Achievement of long-term, company-wide objectives, share price development

 

Level of role

Key drivers

 

Labor market, internal job-grading

 

Protection against risks, labor market, internal job-grading

 

Operational profit, sales, operational operating net cash flow (operational ONCF)

 

Operational profit growth, operational return on average capital employed adjusted (operational ROCEA), relative total shareholder return (TSR)

 

Share price development

Link to compensation principles

 

Competitive compensation

 

Competitive compensation

 

Pay for performance, strategy alignment

 

Pay for performance, strategy alignment, ownership

 

Ownership

Vehicle

 

Cash

 

Pension and insurance plans, perquisites

 

Cash

 

Performance share units (PSU) settled in shares

 

Obligation to privately invest in Sulzer shares and to hold these shares until the end of the service period

Amount

 

Fixed

 

Fixed

 

Variable, capped at 200% of target bonus. Target bonus amounts to 90% of annual base salary for the CEO and 60% of annual base salary for the other members of the Executive Committee. Clawback provisions implemented.

 

Variable. Grant value is defined based on the Global Grade and corresponds to CHF 1’440’000 for the CEO and between CHF 330’000 and CHF 400’000 for the other members of the Executive Committee (EC). Vesting payout percentage is capped at 250% and vesting value is capped at CHF 3’600’000 for the CEO and at CHF 825’000 to CHF 1’000’000 for the other members of the EC. Malus and clawback provisions implemented.

 

CEO: 200% of base salary. Other members of the Executive Committee: 100% of base salary.

Grant/vesting/payment date

 

Monthly

 

Monthly and/or annually

 

March of the following year

 

Grant: April 1, 2021 Vesting: December 31, 2023 Share delivery: March 2024

 

Performance period

 

 

 

1 year (January 1, 2021–December 31, 2021)

 

3 years (January 1, 2021–December 31, 2023)

 

The compensation of the Executive Committee contains fixed, performance-independent elements to provide a secure income and to ensure that no unreasonable risks are taken. In order to create reasonable incentives for the Executive Committee, align the interests of the Executive Committee and shareholders, ensure pay for performance and implement the company’s strategy in the Executive Committee’s compensation, it contains also short- and long-term performance-dependent elements:

In line with the pay-for-performance principle, a significant portion (over 59%) of the compensation of the CEO and the other members of the Executive Committee consists of variable incentives based on performance. Furthermore, the compensation structure ensures sustainable long-term growth as the long-term variable compensation makes up the largest portion of the target total compensation (see “Overview of compensation elementsˮ).

Base salary (fixed, in cash)

The base salary is determined at the discretion of the Board of Directors based on the market value of the respective position and the incumbent’s qualifications, skillset and experience. An internal job-grading methodology provides orientation and fosters internal equity.

Benefits

Members of the Executive Committee participate in the regular employee pension fund applicable to all employees in Switzerland. The retirement plan consists of a basic plan that covers annual earnings up to CHF 149’125 per year and a supplementary plan in which income over this limit, up to the ceiling set by law, is insured (including variable cash remuneration). The contributions are age related and are shared between the employer and the employee.

Furthermore, each member of the Executive Committee is entitled to a representation allowance in line with the expense regulations for all members of management in Switzerland and approved by the tax authorities.

Bonus (variable, performance-based, cash remuneration)

The bonus rewards the financial performance of the company and/or its businesses, as well as the achievement of individual performance objectives over one calendar year. Performance objectives are defined at the beginning of the year during annual target setting. Achievement is assessed against each of those objectives after year-end and directly influences the variable incentive payouts.

The target bonus is expressed as a percentage of annual base salary. It amounts to 90% for the CEO and to 60% for the other members of the Executive Committee. For the CEO and the other members of the Executive Committee, 70% of the bonus is based on the achievement of financial objectives at company and/or division level, and 30% is based on the achievement of individual objectives as described below:

Category

 

Weight

 

Objectives

 

Rationale

 

 

 

CEO/CFO/ CHRO

 

Division President

Financial performance

 

70%

 

Operational profitability

 

Measure of profitability (bottom line)

 

Sulzer

 

25%

 

7.5%

Division

 

 

 

17.5%

Sales

 

Measure of growth (top line)

 

Sulzer

 

25%

 

7.5%

Division

 

 

 

17.5%

Operational operating net cash flow (operational ONCF)

 

Measure of cash generated by the revenues

 

Sulzer

 

20%

 

6%

Division

 

 

 

14%

Individual performance

 

30%

 

Cost-effectiveness

 

Objectives linked to cost reduction or optimization

 

Individual

 

15%

 

15%

Growth initiatives

 

Include initiatives that support the growth of Sulzer, such as M&A projects, breaking into new markets or new accounts

 

Individual

 

5%

 

5%

Faster and better

 

Initiatives focused on the profitability of Sulzer, with objectives linked to speed (“faster”) and quality (“better”)

 

Individual

 

5%

 

5%

ESG

 

Objectives linked to improvements in the areas of environment, employee engagement and local communities and corporate governance

 

Individual

 

5%

 

5%

 

 

 

 

 

 

 

 

Total

 

100%

 

100%

The objectives are set within the annual target-setting process. For each financial objective, the following parameters are set upfront:

  • An expected level of performance (“targetˮ), the achievement of which leads to a payout factor (on the respective performance metric) of 100%.
  • A minimum level of performance (“thresholdˮ) below which the respective payout factor is zero.
  • A maximum level of performance (“capˮ) above which the respective payout factor is capped at 200%. With respect to the financial objectives, a performance of 200% of the target figure is required to achieve a payout factor of 200%.

Between threshold and target, as well as between target and cap, the payout factor is interpolated linearly.

For information on the adjustments made to the key performance criteria due to the medmix spin-off, please refer to the section “Special report — medmix spin-off”. In order to measure individual performance, each Executive Committee member is given different personal objectives for each of the four individual performance categories (“Cost-effectiveness,ˮ “Growth initiativesˮ, “Faster and betterˮ, and “ESG”) at the beginning of the financial year. “Cost-effectivenessˮ, for example, includes objectives like cost-saving (travel spend reduction, real estate costs reduction, etc.) whereas objectives for the category “Faster and betterˮ are, among others, on-time delivery percentage improvement, employee engagement progression (measured through external opinion surveys) or health and safety accident frequency rates (AFR) reduction. “Growth initiativesˮ include, for example, successful completion of M&A actions or sales growth in specific countries. “ESG” includes 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. The CEO reviews the individual performance based on the personal objectives of each Executive Committee member, which in turn is reviewed by the NRC. The CEO’s individual performance is assessed by the NRC.

Sulzer strives for transparency in relation to pay for performance. However, further disclosure of financial and individual objectives may create a competitive disadvantage to the company, because it renders sensitive insights into Sulzer’s strategy. To ensure transparency while avoiding competitive risk, Sulzer provides a general performance assessment for each financial objective as well as the aggregated individual performance at the end of the performance cycle (see chapter “Compensation of the Executive Committee for 2021”).

On the basis of this performance assessment, a payout factor is determined for each financial objective as a result of the actual performance. The weighted average of the resulting payout factors on each performance metric will be multiplied by the target bonus amount to derive the actual bonus, which will be paid out in March of the following year.

The objectives for the bonus plan are linked to Sulzer’s strategic goal of promoting the sustainable and profitable growth of the company. They are chosen to provide different incentives for growth and shareholder value creation.

Strategic link of bonus plan

 

 

Growth

 

Profitability

 

Long-term shareholder value creation

Bonus plan

 

 

 

 

 

 

Operational profit

 

 

 

 

 

 

Sales

 

 

 

 

 

 

Operational ONCF

 

 

 

 

 

 

Cost-effectiveness

 

 

 

 

 

 

Growth initiatives

 

 

 

 

 

 

Faster and better

 

 

 

 

 

 

ESG

 

 

 

 

 

 

Performance share plan (variable, performance-based, share-based remuneration)

The long-term shareholder orientation and value creation is incentivized by a performance share plan (PSP) granting performance share units (PSUs) to the members of the Executive Committee. PSUs are a conditional right to a certain number of shares of the company, subject to ongoing employment and to the achievement of strategic/financial performance targets on group level over the three-year performance period. The PSP is based on the performance of the company over three years and aligns the interests of the participants with those of the shareholders by delivering a substantial portion of the compensation as company equity. This emphasizes and supports Sulzer’s focus on pay for performance and sustainable growth, with a long-term perspective and additional retention effect on employees.

The PSP is a plan with annual grants and is available exclusively to the members of the Executive Committee and of the Sulzer Management Group. The grant value is determined based on the level of the executive’s role and amounts to CHF 1’440’000 for the CEO and to between CHF 330’000 and CHF 400’000 (determined by the Board of Directors) for the other members of the Executive Committee. The number of PSUs granted is calculated by dividing the grant value by the three-month volume-weighted average share price before the grant date.

The key performance criteria being measured over the three-year performance period of PSU are:

  • Operating income before restructuring, amortization, impairments and non-operational items (operational profit) growth, weighted with 25%.
  • Average operational return on capital employed (operational ROCEA), weighted with 25%.
  • Relative total shareholder return (TSR) weighted with 50% and measured, other than in previous tranches, only based on the performance against international peers measured as percentile ranking
  • With respect to the adjustments made to the key performance criteria due to the medmix spin-off please refer to the section “Special report — medmix spin-off”.

Peer group for relative TSR performance of PSP 2021

International peers

  • Andritz
  • Burckhardt Compression
  • Ebara
  • Flowserve
  • ITT
  • OC Oerlikon
  • Pentair
  • Wood Group
  • Xylem

The Board of Directors can alter the composition of the peer group if deemed necessary, such as in the case of a merger or acquisition or any other change leading to a delisting or a fundamental change in the scope of the business of a peer group company. In such a situation, the Board will select new peer companies. There is a predefined successor list of companies to support the Board of Directors in the selection process. On October 28, 2021, SPX Flow, which recently divested its Pump division and now mainly focuses on dairy systems and Kirloskar Brothers, a family-owned Indian pump company have been replaced by OC Oerlikon and Burckhardt Compression, which were the predefined successors.

The Board of Directors deems these metrics to be the most relevant key performance indicators for the sustainable development of the Sulzer group, combining growth, profitability and shareholder return in comparison to the relevant peers.

For each performance condition of the PSP, a threshold, target and cap performance level is determined, which in turn determines the achievement factor. Sulzer strives for transparency in relation to pay for performance and discloses all information whose exposure cannot lead to strategic disadvantages.

Disclosure of internal financial objectives may create a competitive disadvantage for the company because it renders sensitive insights into Sulzer’s strategy. To ensure transparency while avoiding competitive risk, Sulzer provides a general performance assessment for each performance criteria at the end of the performance cycle based on the following metric (see chapter “Compensation of the Executive Committee for 2021”).

On the vesting date, the number of vested PSUs is calculated by multiplying the initial number of PSUs granted by the weighted average of the achievement factor of each performance condition. For each vested PSU, a Sulzer share will be delivered to the participant.

However, while the above-mentioned performance assessment impacts the number of PSUs vested and, consequently, the number of shares delivered, there might also be an increase in value per share over the three-year performance period, which may have a relevant impact on the actually delivered total value after three years. Therefore, the number of vested PSUs is subject to an absolute value cap representing, in each case, 2.5 times the original grant value.

The objectives for the PSP are linked to Sulzer’s strategic goal of promoting the sustainable and profitable growth of the company. They are chosen to provide different incentives for growth and shareholder value creation.

Strategic link of PSP

 

 

Growth

 

Profitability

 

Long-term shareholder value creation

PSP

 

 

 

 

 

 

Operational profit growth

 

 

 

 

 

 

Operational ROCEA

 

 

 

 

 

 

Relative TSR

 

 

 

 

 

 

In case of termination of employment, the following provisions apply:

Type of termination

 

Provision

By the employer for cause

 

Unvested PSUs forfeit.

As a result of retirement

 

Vesting and performance measurement of PSUs continues according to plan, no early allocation of the shares.

Any other reason

 

The number of unvested PSUs vest on a pro rata basis (number of months between grant date and termination date) according to the achievement factor at the end of the vesting period. There is no early allocation of the shares.

Upon the occurrence of a change of control, PSU will vest immediately on a pro rata basis, subject to a performance assessment by the Board of Directors. In such a case, the Board of Directors may also determine a cash settlement of the awards.

Malus and clawback

The Board of Directors may determine that a PSU is forfeited in full or in part (malus) or that a vested award will be recovered in full or in part (clawback) in situations of material misstatement of the financial results, an error in assessing a performance condition or in the information or assumptions on which the award was granted or vested, serious reputational damage to the company, gross negligence, or willful misconduct on the part of the participant. In 2021, the clawback clause was extended to cover bonuses, whereby Sulzer may recover in full or in part any relevant bonus compensation from Executive Committee members in situations of material misstatement of the financial results, an error in assessing a performance condition or gross misconduct of the participant.

Further information on share-based compensation can be found in note 31 to the “consolidated Financial Statements of Sulzer Ltd”.

Contracts of employment

The employment contracts of the Executive Committee are of undetermined duration and have a notice period of maximum 12 months. Members of the Executive Committee are not entitled to any impermissible severance or change of control payments. The employment contracts of the Executive Committee may include non-competition agreements with a time limit of one year and with a maximum total compensation of one annual target compensation.

Shareholding requirements

Beginning 2020, shareholding requirements for members of the Executive Committee were introduced. According to these share ownership guidelines (SOG) the 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.

Function

 

Shareholding requirement in % of base salary

CEO

 

200%

Other Executive Committee members

 

100%