Compensation awarded to the Board of Directors in 2018

This section is audited according to Article 17 of the Ordinance against Excessive Compensation in Listed Stock Corporations.

 

At the Extraordinary General Meeting of June 11, 2018, shareholders approved the compensation to be paid to the Board of Directors for the compensation periods from the 2015 Annual General Meeting until the 2019 Annual General Meeting. The compensation for the periods between the 2015 Annual General Meeting and the 2018 Annual General Meeting has been paid out in 2018 and had already been disclosed in the compensation reports of the respective years 2015, 2016, and 2017.

 

In 2018, members of the Board of Directors received a total compensation of CHF 2.6 million (2017: CHF 2.8 million) in the form of a retainer of CHF 1.5 million (2017: CHF 1.7 million), committee fees of CHF 0.2 million (2017: CHF 0.2 million), social security contributions of CHF 0.2 million (2017: CHF 0.2 million), and shares of CHF 0.7 million (2017: CHF 0.7 million). The decrease in compensation compared to the previous year is due to the fact that three members of the Board of Directors stepped down with immediate effect at the Extraordinary General Meeting of June 11, 2018 and were replaced by one new member of the Board of Directors.

in CHF
Retainer
(cash)
Committees fees
(cash)
Value of
shares
Social
security
Total
2018
Paul Hälg,
Chairman
510,000
0 302,970
58,117 871,087
Urs F. Burkard,
NCC Member
62,500 12,500 22,530 7,271 104,801
Justin M. Howell, NCC Member
87,500 27,500 30,135 0 145,135
Willi K. Leimer,
AC Member
62,500
12,500 22,530 7,271 104,801
Monika Ribar,
AC Chairwoman
150,000 50,000 52,665 18,817 271,482
Christoph Tobler,
AC Member
150,000 30,000 52,665 17,345 250,010
Daniel J. Sauter,
NCC Member
150,000 30,000 52,665 17,345 250,010
Ulrich W. Suter 150,000 0 52,665 13,551 216,216
Jürgen Tinggren 62,500 0 22,530 6,350 91,380
Frits van Dijk, NCC Chairman 150,000 50,000 52,665 16,963 269,628
Total 1'535'000 212'500 664'020 163'030 2'574'550
in CHF
Retainer
(cash)
Committees Fees
(cash)
Value of
Shares
Social
Security
Total
2017
Paul Hälg,
Chairman
510,000 0 303,409 60,067 873,476
Urs F. Burkard,
NCC Member
150,000 30,000 53,055 17,759 250,814
Justin M. Howell, NCC Member 0 0 0 0 0
Willi K. Leimer,
AC Member
150,000 30,000
53,055
17,759
250,814
Monika Ribar,
AC Chairwoman
150,000 50,000 53,055 19,212 272,267
Christoph Tobler,
AC Member
150,000 30,000 53,055 17,759 250,814
Daniel J. Sauter,
NCC Member
150,000 30,000 53,055 17,759 250,814
Ulrich W. Suter 150,000 0 53,055 12,570 215,625
Jürgen Tinggren 150,000 0 53,055 15,580 218,635
Frits van Dijk,
NCC Chairman
150,000 50,000
53,055 15,973 269,028
Total 1,710,000 220,000 727,849 194,438 2,852,287

1) Includes the representation allowance for the Chairman of the Board of Directors.

2) Fair market value is defined as the average closing price of the first five trading days in April before the beginning of the year of office.

The compensation disclosed in the compensation reports always includes the respective calendar year (January to December). However, shareholders approve the compensation to be paid for the period between Annual General Meetings (May to April). The compensation paid for the periods between Annual General Meetings is disclosed below, including a comparison with the compensation amount approved by the shareholders. The amounts for the retainer in cash, the committee fees and the allocation of blocked shares have remained unchanged since 2012.

 

At the Extraordinary General Meeting of June 11, 2018, shareholders approved an aggregate maximum compensation amount of CHF 2,530,000 for the Board of Directors for the term of office from the 2018 Annual General Meeting until the 2019 Annual General Meeting. The compensation effectively paid for the portion of this term of office included in this Compensation Report (May 1, 2018, until December 31, 2018) is within the limit approved by the shareholders. A conclusive assessment for the entire period will be included in the Compensation Report 2019.

 

At the Extraordinary General Meeting of June 11, 2018, shareholders approved an aggregate maximum compensation amount of CHF 2,900,000 for the Board of Directors for the term of office from the 2017 Annual General Meeting until the 2018 Annual General Meeting. The compensation paid to the Board of Directors for this term was CHF 2,864,340 and is therefore within the approved limits.

 

At the Extraordinary General Meeting of June 11, 2018, shareholders approved an aggregate maximum compensation amount of CHF 2,870,000 for the Board of Directors for the term of office from the 2016 Annual General Meeting until the 2017 Annual General Meeting. The compensation paid to the Board of Directors for this term was CHF 2,823,755 and is therefore within the approved limits.

 

At the Extraordinary General Meeting of June 11, 2018, shareholders approved an aggregate maximum compensation amount of CHF 2,870,000 for the Board of Directors for the term of office from the 2015 Annual General Meeting until the 2016 Annual General Meeting. The compensation paid to the Board of Directors for this term was CHF 2,849,185 and is therefore within the approved limits.

 

In the year under review, no compensation was paid to former members of the Board of Directors. No compensation was paid to parties closely related to members of the Board of Directors.

 

In accordance with the Articles of Association, no member of the Board of Directors was granted a loan during the reporting year. No loans were outstanding at the end of the year under review.

Compensation awarded to the CEO and to Group Management in 2018

This section is audited according to Article 17 of the Ordinance against Excessive Compensation in Listed Stock Corporations.

 

In 2018, the members of Group Management received a total compensation of CHF 16.5 million (2017: CHF 18.7 million). This amount comprises fixed salaries of CHF 4.9 million (2017: CHF 5.5 million), short-term bonus of CHF 4.3 million (2017: CHF 5.1 million), longterm incentives of CHF 3.9 million (2017: CHF 4.1 million), other expenses of CHF 1.5 million (2017: 1.6 million) and contributions to social security and post-employment benefits of CHF 1.9 million (2017: CHF 2.4 million).

 

The highest paid individual in 2018 was Paul Schuler, Group CEO.

in CHF thousands
CEO 2018 CEO 2017
Total 20181 Total 20172
Fixed base salary 3
960 790 4,914 5,469
Performance bonus (STI) cash 4
710 601 2,987 3,865
Performance bonus (STI) shares 4
568 476 1,279 1,263
Long-term incentive (LTI) 5
1,004 1,009 3,858 4,103
Other payments 6
115
44 1,507 1,610
Social security and pension contributions 7
513
451
1,928
2,354
Total 3,870 3,371 16,473 18,664

1 Includes nine members of Group Management on a full-year basis.

2 Includes eleven members, six of whom served during the full year 2017.

3 Includes annual base salary and children/family allowances. All compensation amounts are gross payments.

4 Estimated performance bonus (STI) for the reporting year that will be paid in April of the following year, split between immediate cash and deferred shares (including matching shares). Allocation at fair market value.

5 Grant value of the LTI in the reporting year (for newly promoted members, includes pro-rata participation in previous LTI that were still in the vesting period).

6 Includes all other benefits in kind, and perquisites at fair value such as service anniversary payments, including cost allowances (tax equalization, housing, schooling, home leave) for the international assignees and international transfers.

7 Includes social security contributions, as well as contributions to company provided pension plans, including the service cost to the pre-retirement plan.

 

Explanatory comments to the compensation table:

  • The fixed compensation has decreased by 10% compared to the previous year. This is mainly due to the different composition of Group Management (nine members during the full year in 2018, versus eleven members in 2017, from which six were employed during the entire year). For the CEO, the fixed remuneration increased by 22% compared to previous year due to the full-year CEO position in 2018, while he was CEO for the half year in previous year (head of EMEA the other half year).
  • The “other” payments have decreased by 6% in line with the above.
  • The social security and pension contributions have decreased by 18% in line with the overall decrease in compensation mentioned above.
  • The performance achievement under the performance bonus was lower in 2018 than in 2017. Further details are provided below.
  • The grant value of the long-term incentive has decreased compared to the previous year by 6% in line with the above.

 

The total amount of compensation of CHF 16.5 million awarded to Group Management in 2018 is below the maximum aggregate amount of compensation of CHF 19 million approved by the shareholders at the 2017 Annual General Meeting for business year 2018.

Performance in 2018 (not audited)

The business year 2018 has been a strong year for Sika, with a 13.4% revenue growth (in local currencies 13.6%) and 5.5% profitability increase (earnings before interest and tax). In the performance bonus, Sika has outperformed the peer companies in terms of net sales growth (ranked 6th, payout of 157.5%) and matched the industry average in terms of EBIT improvement year on year (ranked 12th, payout of 99.4%). The group performance achievement is estimated at 119% (best estimate at time of publication) and will be calculated by Obermatt based on the annual report publications of the peer companies before the payout date in April 2019. This compares to a strong year 2017, where Sika outperformed its peers (6th rank on net sales growth and 7th rank on EBIT improvement), with a pay-out of 148.5%.

 

Individual performance, which is mainly measured by EBIT and net working capital improvement versus previous year, at Group and regional level, ranges from 105% to 200% for members of Group Management and amounts to 130% for the CEO. Consequently, the overall bonus payout percentage ranges from 111% to 150% (cap) for Group Management and amounts to 123% for the CEO. This compares to a payout range of 103% to 168% for Group Management and to a payout of 118% for the CEO in 2017 (average of target achievement as CEO and as Head EMEA).

In the Long-Term Incentive that has been granted in 2018 (LTI 2018–2020), 22,620 performance share units have been granted to the members of Group Management. Those PSU had an overall grant value of CHF 2.8 million and will vest on December 31, 2020, based on the average ROCE performance during 2018–2020 and upon the continuous employment of the participant.

 

In the long-term incentive that vested in 2018 (LTI 2016–2018), the performance condition of 28% average ROCE over the vesting period has been overachieved: The average three-year ROCE, excluding acquisitions, amounts to 30.6%, leading to a payout of 100% (cap). Therefore, the 24,000 units granted to the current members of Group Management (including the new CEO) have vested with a vesting value of CHF 3 million. The value at vesting is higher than the value at grant due to the positive development in the share price during the vesting period (2016–2018).

Overview of the outstanding PSU grants (includes members of Group Management as of December 31, 2018)

In the year under review, no compensation was paid to former members of Group Management. No compensation was paid toparties closely related to members of Group Management.

 

No member of the Group Management was granted a loan during the reporting year. No loans were outstanding at the end of theyear under review.

Shareholdings of the members of the Board of Directors and Group Management in 2018

At the end of 2018, members of the Board of Directors held a total of 206,240 bearer shares of Sika AG (2017: 197,520). At the end of 2018, members of Group Management held a total of 160,680 bearer shares of Sika AG (2017: 178,920). This figure includes both privately acquired shares and those allocated under the Group’s compensation schemes.

 

At the end of 2018, members of the Board of Directors and of Group Management did not hold any options.

 

Information regarding participations of the Board of Directors and Group Management in Sika AG can be found in the Sika AG Financial Statements (on page 157 of the download version of this report).

 

EQUITY OVERHANG AND DILUTION AS OF DECEMBER 31, 2018

In total as of December 31, 2018, the equity overhang, defined as the total number of share units and blocked shares outstanding divided by the total number of outstanding shares (141,781,160 registered shares) amounts to 534,690 units, 0.38%.

 

The company’s “burn rate,” defined as the number of equities (shares and share units) granted in 2018 (165,060 units) divided by the total number of common shares outstanding is 0.12%.

OUTLOOK ON COMPENSATION ARCHITECTURE FOR 2019

COMPENSATION OF THE BOARD OF DIRECTORS

Considering that the compensation of the Board of Directors has remained unchanged since 2012, the decision was made to conduct a benchmark analysis and to align compensation structure and levels to evolving market practice. Consequently, the compensation of the Board of Directors will be adjusted as follows, effective for the compensation period starting at the 2019 Annual General Meeting:

 

STRUCTURE OF BOARD COMPENSATION

in CHF in cash in shares
Retainer (gross p.a.)    
Chairman of the Board of Directors 450,000 + 30,000 allowances
(currently 480,000 + 30,000)
450,000*
(currently 300,000)
Members of the Board of Directors 125,000
(currently 150,000)
125,000*
(currently 50,000)
Committee fees (gross p.a.)    
Committee Chairman 60,000
(currently 50,000)
 
Committee members 40,000
(currently 30,000)
 

* Converted into shares based on the average closing share price in the five first trading days of April before the beginning of the year of office. Shares are allocated to the members of the Board of Directors shortly after the end of the year of office.

The shares will be subject to a three-year blocking period (currently a four-year blocking period).

 

COMPENSATION OF GROUP MANAGEMENT

Following the thorough review of the compensation system applicable to Group Management, the Nomination and Compensation Committee proposed several changes that were approved by the Board of Directors and that will be implemented as of business year 2019.

 

Performance bonus

The performance bonus will be fully paid out in cash. The voluntary deferral plan that allowed members of Group Management to invest either 20% or 40% of the performance bonus in blocked shares and to receive free matching shares, will be discontinued. This decision was made with the intention to simplify the overall compensation structure for members of Group Management with a clear distinction between short-term cash compensation (base salary and performance bonus) and long-term equity compensation (long-term incentive).

 

The performance measurement will continue to be based on relative Group performance (Obermatt benchmark) accounting for 60%, and on individual performance accounting for 40% of the total bonus opportunity. Individual performance will continue to include profitability (EBIT target of unit under responsibility) and individual objectives (People & Projects). The net working capital target will be applied selectively only considering that the company overall and all regions made substantial progress on working capital management over the last several years.

 

Long-term incentive

The long-term incentive plan has been enhanced with the introduction of relative total shareholder return (TSR) as a performance condition. Therefore, the vesting of the performance share units will be subject to the relative TSR performance with a weight of 50% and to the ROCE performance with a weight of 50%. ROCE will be measured as it was in the past (average of the three years of the vesting period). Relative TSR will be measured in relation to the peer group, following the same methodology as in the performance bonus, which means that the same peer group and the same payout curve will apply. For both performance conditions, the maximum achievement level will be capped at 200%, however the overall vesting level for the plan will be capped at 150% (currently: 100%). This is in line with the pay-for-performance philosophy of the company and prevalent market practice.

 

The relative TSR measure has been introduced to further strengthen the link between the compensation of Group Management and the interests of shareholders.

Clawback and malus provisions

Clawback and malus provisions are introduced in both the performance bonus and the long-term incentive plans. In case of financial restatement due to non-compliance to accounting standards or fraud, and/or in case of violation of law or of internal rules by a member of Group Management, the Board of Directors may deem any performance bonus payment and/or unvested PSU to forfeit (malus provision) or may seek reimbursement of any paid Performance Bonus and/or allocated shares under the long-term incentive (clawback provision) within a period of three years after the year of restatement or of the fraudulent/non-compliant behavior.