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Remuneration policy for the Managing Board - Annual Report 2015 - DSM

Remuneration policy for the Managing Board

This chapter outlines the remuneration policy as approved by the Annual General Meeting of Shareholders. Details of the actual remuneration in 2015 as approved by the Remuneration Committee can be found in note 9 of the 'Parent company financial statements' on Remuneration Managing Board in 2015.

Remuneration policy

The objective of DSM’s remuneration policy is to attract, reward, motivate, incentivize and retain qualified and expert individuals that the company needs in order to achieve its strategic and operational objectives, whilst acknowledging the societal context around remuneration and recognizing the interests of DSM's stakeholders. The following elements are taken into consideration:

  • The remuneration policy reflects a balance between the interests of DSM’s main stakeholders as well as a balance between the company’s short-term and long-term strategy. As a result, the structure of the remuneration package for the Managing Board is designed to balance short-term operational performance with the medium and long-term objective of creating sustainable value within the company, while taking into account the interests of its stakeholders. DSM strives for a high performance in the field of sustainability and aims to maintain a good balance between economic gain, respect for people and concern for the environment in line with the DSM values and business principles as reflected in the DSM Code of Business Conduct.
  • To ensure that highly skilled and qualified senior executives can be attracted, motivated and retained, DSM aims for a total remuneration level that is comparable to levels provided by other (Dutch and European) multinational companies that are similar to DSM in terms of size and complexity.
  • The remuneration policies for the members of the Managing Board and for other Executive Committee members as well as other senior executives of DSM are aligned.
  • In designing and setting the levels of remuneration for the Managing Board, the Supervisory Board also takes into account the relevant statutory provisions and provisions of the Dutch corporate governance code, societal and market trends and the interests of stakeholders.
  • DSM’s policy is to offer the Managing Board a total direct compensation approaching the median of the labor-market peer group.

No adjustments to the remuneration policy for the Managing Board in 2015

There were no adjustments to DSM’s remuneration policy in 2015. The policy was last adjusted in 2013, when the Annual General Meeting of Shareholders of 3 May 2013 approved a number of changes which were aimed at:

  • aligning the remuneration policy even more with long-term stakeholder interests, in line with DSM's stated philosophy of creating long-term value for all stakeholders;
  • updating the policy in line with the most recent prevalent market practices and benchmarks for executive and board compensation; and
  • further strengthening pay for multi-dimensional, People-Planet-Profit driven performance within DSM.

The approved adjustments did not change the overall remuneration model for the Managing Board. This model is based on providing fair compensation approaching the median, and consists of a base salary and a well-balanced mix of Short-Term and Long-Term Incentives. Both the Short-Term Incentive (STI) and the Long-Term Incentive (LTI) consist of two equal parts, one of which is linked to financial targets and the other to sustainability and in addition – for STI only – individual targets.

Labor-market peer group

In order to be able to recruit the right caliber of people for the Managing Board and to secure long-term retention of the current Board members, DSM will take external reference data into account in determining adequate remuneration levels. For this purpose, a specific labor-market peer group has been defined which consists of a number of Dutch and European companies that are more or less comparable to DSM in terms of size, international scope and complexity in business portfolio. The Supervisory Board regularly reviews the peer group to ensure that its composition is still appropriate.

The labor-market peer group for 2015 consisted of the following 11 companies:

Aegon
Nutreco
AkzoNobel
Solvay
Clariant
Syngenta
Heineken
TNT Express
KPN
Wolters Kluwer
LANXESS
 

Recent mergers and takeovers have meant that this labor-market peer group has decreased in number, to below the desired number of at least 12 companies. Moreover, changes in the regulatory context mean that some of these companies have become less relevant as a benchmark for DSM. Therefore during the Remuneration Committee meetings of 7 December 2015 and 15 February 2016 it was decided that as of 1 January 2016 the labor-market peer group will consist of the following 16 companies:

AkzoNobel
KPN
ASML
LANXESS
Clariant
Lonza
Covestro
Philips (Health Tech)
Evonik
Randstad
Givaudan
Relx (Reed Elsevier)
Heineken
Solvay
Johnson Matthey
Wolters Kluwer

As part of its remuneration policy DSM will benchmark its remuneration package against the packages offered by the labor-market peer group once every three years, potentially leading to adjustments. In addition, the company may apply a yearly increase to the base salary based on the ‘general increase’ (market movement) for DSM executives in the Netherlands. The remuneration policy was last benchmarked against the peer group in Q4 2014. DSM aims to offer the Managing Board members a total direct compensation approaching the median of the labor-market peer group. The Supervisory Board recognizes that especially the CEO’s compensation is in the lowest quartile of this group, however, the Supervisory Board acknowledges the conservative position taken by the CEO regarding his own remuneration.

Total Direct Compensation (TDC)

The total direct compensation of the Managing Board consists of the following components:

  1. Base salary
  2. Variable income
    - Performance-related STI (Deferral and Share Matching Plan)
    - Performance-related LTI (Restricted Share Plan)

In addition to this total direct compensation, the members of the Managing Board participate in the Dutch pension scheme for DSM employees in the Netherlands and are entitled to other benefits, such as a company car and representation allowance.

Value as percentage of Total Direct Compensation (on target):

Table 3

A: Base Salary
50%
B: Variable income (STI + LTI)1
50%
   
Total Direct Compensation (TDC)
100%
1 LTI at discounted fair value
Base salary

On joining the Board, the Managing Board members receive a base salary that is comparable with the median of the labor-market peer group. Base salary levels are reviewed based on a three-year remuneration benchmark. In addition, the company will, when appropriate, apply a yearly increase to the base salary based on the ‘general increase’ (market movement) for DSM executives in the Netherlands, taking into account the general movements of the labor-market peer group as well. Adjustment of the base salary is at the discretion of the Supervisory Board. During the Remuneration Committee meeting of 7 December 2015 it was decided to adjust the annual base salary of the members of the Managing Board by 3.5% as of 1 January 2016. Given that, at the Managing Board’s request in light of the various cost-reduction programs being set up at the company at the time, the Supervisory Board decided to refrain from an increase in 2015, this is the first increase in base salary since that applied in 2014. Moreover, the next moment at which an increase will be considered will concern 2017, meaning that this 3.5% increase effectively covers the two-year period 2015-2016.

Variable income

The variable income part of remuneration consists of the Short-Term and Long-Term Incentives. The distribution between Short-Term and Long-Term Incentives for (on target) performance aims to achieve a proper balance between short-term result and long-term value creation. The parameters relating to the various elements of the variable income part of the remuneration are established and where necessary adjusted by and at the discretion of the Supervisory Board, taking into account the general rules and principles of the remuneration policy itself.

Distribution of variable income (on target):

Table 4

A: Short-Term Incentive (STI)
(50% base salary)
50%
B: Long-Term Incentive (LTI)1
(50% base salary)
50%
   
Total variable income as % of base salary
100%
1 LTI at discounted fair value

Short-Term Incentive (STI)

Managing Board members are eligible to participate in a Short-Term Incentive (STI) scheme. The scheme is designed to reward short-term operational performance with the long-term objective of creating sustainable value, taking into account the interests of all stakeholders.

The Short-Term Incentive opportunity amounts to 50% of the annual base salary for on-target performance (100% in the case of excellent over-performance). Half of the STI opportunity (i.e. 25% of base salary at on-target performance) is related to financial targets, the other half to sustainability and individual targets.

Table 5

Target areas
Total
Shared
Individual
       
Financial
25%
25%
0%
Sustainability and individual
25%
15%
10%
       
Total
50%
40%
10%

Short-Term Incentive (STI) linked to financial targets

The part of the STI that is linked to shared financial targets (25% of base salary at on-target) consists of elements related to the company's operational performance, being EBITDA before exceptional items, gross free cash flow and (organic) net sales growth, reflecting short-term financial results. Up until the end of 2015, the weighting given to the separate financial elements in the STI has been as follows: EBITDA 10%, gross free cash flow 7.5% and organic net sales growth 7.5% of annual base salary for on-target performance. The STI target-setting for the period as of 2016 has been aligned with DSM’s updated strategic objectives. The weighting of these elements has been adjusted to reflect the company’s rigorous focus on delivering the financial targets of its Strategy 2018: Driving Profitable Growth, namely EBITDA and ROCE growth. EBITDA represents an opportunity at target performance of 12.5%, gross free cash flow 10% and organic net sales growth 2.5%.

Table 6

Target areas
On-target
pay-out
(% of base salary)
On-target
pay-out
(% of base salary)
Financial targets
2015
2016
- EBITDA before exceptional items
10.0
12.5
- Gross free cash flow
7.5
10
- Organic net sales growth1
7.5
2.5
     
Total
25.0
25.0
1 Excluding currency fluctuations, divestments and acquisitions

The three financial-target-related Short-Term Incentive elements can be derived from the 'Parent company financial statements' on Remuneration of Managing Board and Supervisory Board.

Short-Term Incentive (STI) linked to sustainability and individual targets

The part of the STI that is linked to non-financial targets (25% of base salary at on-target) relates to shared sustainability as well as to individual targets. On a regular basis, following proper evaluation, further refinement/adaptations of performance measures in the area of sustainability and their weight take place.

As from 2013, the following shared measures linked to sustainability are applicable for the STI:

  • ECO+: percentage of successful product launches that meet ECO+ criteria
  • Employee Engagement Index: related to the High Performance Norm in industry
  • Safety Performance

The STI measures on sustainability are defined as follows:

  • ECO+ solutions
    ECO+ solutions are products and services that, when considered over their whole life cycle, offer a clearly lower environmental footprint compared to the mainstream solutions they compete with. These environmental benefits can be created at any stage of the product life cycle − from raw material through manufacturing and use to potential re-use and end-of-life disposal. ECO+ solutions, in short, create more value with less environmental impact. In line with DSM’s updated sustainability aspirations, ECO+ will be replaced by Brighter Living Solutions (ECO+ and People+ solutions) across the company as of performance year 2016.
  • Employee Engagement Index
    An Employee Engagement Survey is conducted annually either in the form of a full Survey or a shorter Pulse Survey, and focuses on a combination of perceptions that have a consistent impact on behavior and create a sense of ownership. Research has consistently shown that the four key elements (satisfaction, commitment, pride and advocacy) define engagement and link engagement to business performance metrics.
  • Safety Performance
    Defined as Frequency Index (FI) for recordable injuries.

In addition to shared sustainability targets (15%), a limited number of individual non-financial targets (10%) will apply.

Table 7

Target areas
On-target pay-out
(% of base salary)
Non-financial targets
 
- Sustainability (3 targets with an equal weight of 5% each, ECO+, Employee Engagement and Safety)
15
- Individual
10
   
Total
25

The targets are determined each year by the Supervisory Board, based on historical performance, the operational and strategic outlook of the company in the short term and expectations of the company’s management and stakeholders, among other things. The targets contribute to the realization of the objective of long-term value creation.

The company does not disclose the actual targets, as they qualify as commercially sensitive information. However, full transparency will be given on target areas and definitions. Target setting and realization are audited by external auditors. For detailed information see note 9 of 'Parent company financial statements' on Remuneration Managing Board in 2015.

Mandatory and voluntary deferral of STI

A mandatory (25%) and a voluntary proportion (up to a total maximum of 50% of the total gross STI) of the STI amount earned in a year is deferred into DSM shares with a three-year vesting period. This is linked to a one-for-one matching award on the total deferred amount under the condition that predefined performance targets and measures are met at the end of the three-year vesting period. The performance measures are equivalent to the measures under the Long-Term Incentive (LTI) Plan. The Deferral and Share Matching Plan thus provides an additional link between Managing Board remuneration and long-term sustainable value creation.

Long-Term Incentives (LTI)

The Managing Board members will be eligible to receive performance-related shares. Under the performance share plan, shares will conditionally be granted to Managing Board members. Vesting of these shares is conditional on the achievement of certain predetermined performance targets at the end of a three-year period.

The following four performance measures are applicable in equal measure for the calculation of the vesting of LTI performance shares:

  • Comparable Total Shareholder Return (TSR) performance versus a peer group
  • Return on Capital Employed (ROCE)
  • Energy Efficiency Improvement (EEI)
  • Greenhouse-gas emissions (GHGE) reduction over volume-related revenue

Up to and including the 2012 grant, only TSR performance and GHGE were applicable, which will remain the case for the 2015 realization of the 2012 grant.

The LTI performance targets can be defined as follows:

  • Total Shareholder Return (TSR)
    This is used to compare the performance of different companies’ stocks and shares over time. It combines share price appreciation and dividends paid to show the total return to shareholders. The relative TSR position reflects the market perception of overall performance relative to a reference group.
  • Return on Capital Employed (ROCE)
    This is the operating profit as a percentage of weighted average capital employed. In line with DSM’s updated strategic targets, as of 2016 the LTI target on ROCE will relate to ROCE growth as opposed to the absolute ROCE percentage used up until the end of the 2015 performance period.
  • Energy Efficiency Improvement (EEI)
    This is the reduction of the amount of energy that is used per unit of product (known as energy efficiency) on a three-year rolling average basis.
  • Greenhouse-gas emissions (GHGE) reduction
    The definition of greenhouse-gases (GHG) according to the Kyoto Protocol includes carbon dioxide (CO2), methane, nitrous oxide (N2O), sulfur hexafluoride, hydrofluorocarbons and perfluorocarbons. The scope for calculation of GHGE reduction is as follows:
    1. DSM’s direct emissions (on site or from DSM assets) mainly comprise CO2 and N2O (scope 1).
    2. DSM’s indirect emissions (emissions created on behalf of DSM in the generation of electricity or the delivery of energy via hot water or steam) relate to electricity from the grid. DSM relies on local suppliers (scope 2).

In determining the number of shares to be conditionally granted, the Supervisory Board takes into account the face value of the DSM share instead of the discounted fair value. This is in line with best practice and provides total transparency to shareholders. The policy for the value of the Long-Term Incentive is set as from 2014 at 100% of base salary when on target and 150% in the case of excellent performance (face value). The number of conditionally granted shares is set by dividing the policy level at maximum (150% of base salary as from 2014) by a share price at the beginning of the year of the conditional grant. The annual grant level will fluctuate as a consequence of this mechanism. With the introduction of the face value method, the actual number of shares granted has been kept at a similar level as when calculated on the basis of the discounted fair value method.

Granting date

The grant date of the conditional performance shares will be the last trading day of March.

TSR as a performance measure

TSR counts for the vesting of 25% of the performance shares. DSM’s TSR performance is compared to the average TSR performance of a set of predefined peer companies.

The TSR peer group for the 2015 performance period consisted of the following 12 companies:1
   
AkzoNobel
DuPont
Arkema
Kerry
BASF
LANXESS
Christian Hansen
Lonza Group
Clariant
Novozymes
Croda International
Solvay
1 The review in 2014 resulted in EMS Chemie Holding being replaced by Croda International as of 2015. The 2015 review has led to the addition of Givaudan and Evonik as of 2016.

The TSR peer group reflects the relevant market in which DSM competes for shareholder preference. It includes sector-specific competitors that the Supervisory Board considers to be suitable benchmarks for DSM.

The peer group is verified and updated by the Supervisory Board each year based on market circumstances (such as mergers and acquisitions) that determine the appropriateness of the composition of the performance peer group.

ROCE as a performance measure

ROCE (as of 2016 ROCE growth) counts for the vesting of 25% of the performance shares.

EEI as a performance measure

EEI counts for the vesting of 25% of the performance shares.

GHGE reduction as a performance measure

GHGE reduction over volume-related revenues (as of 2016 GHGE efficiency gain) in percentage points (over a three-year period) is used as a basis for the vesting of 25% of the performance shares.

Performance incentive zones

Up to and including the 2012 LTI grant, the number of shares that become unconditional after three years ('vesting') is determined on the basis of two equally-weighted factors: DSM's performance relative to the average TSR performance of the peer group and DSM's GHGE reduction over volume-related revenue. As from the 2013 grant (vesting in 2016) the vesting will be based on four measures as outlined above.

In light of the company’s updated targets for the strategy period 2016-2018, a new vesting scheme has been established to reflect DSM’s sharpened, challenging targets for the coming years, as set out in the following table.

Table 9

TSR vesting scheme
GHGE vesting scheme
Rank
% of
shares that
vest
DSM GHGE efficiency gain in % points (3 year improvement)
% of
shares
that vest
       
1
100
≥ 8.25
100
2
97
7.75 - < 8.25
83
3
93
7.25 - < 7.75
67
4
87
6.75 - < 7.25
50
5
80
6.25 - < 6.75
33
6
67
5.75 - < 6.25
17
7
50
< 5.75
0
8
33
   
9-13
0
   

Up to and including the 2014 grant (i.e. shares vesting up to and including 2017 depending on the fulfilment of performance criteria), the vesting scheme for the part of the grant related to GHGE performance was based on DSM’s reduction of GHGE over volume-related revenue as set out in the tables in the DSM Integrated Annual Report over 2013 and 2014.

Taking into account the imminent (partial) divestment of DSM Fibre Intermediates and DSM Composite Resins, a similar scheme was due to be applied for the 2015 grant, the final year of the previous strategy period.

In hindsight, the Supervisory Board has concluded that this scheme was insufficiently stretching for 2015 (and the subsequent years of the performance period). The Supervisory Board has consequently decided to apply the above, more challenging, scheme retroactively also to the 2015 grant (shares vesting in 2018 depending on fulfilment of performance criteria).

ROCE and EEI targets and vesting schemes are not being disclosed given their business-sensitive nature.

The retention period for performance shares expires five years after the three-year vesting period or at termination of employment if this occurs earlier. The final TSR performance of DSM versus its peers will be determined and validated by a bank and audited by the external auditor at the end of the vesting period.

Pensions

The members of the Managing Board participate in the Dutch pension fund Stichting Pensioenfonds DSM Nederland (PDN). The pension scheme for the Managing Board is equal to the pension scheme for the employees of DSM Executive Services B.V. and DSM employees in the Netherlands.

Contractual arrangements

Term of employment

Managing Board members appointed prior to 1 January 2013 are engaged on the basis of an individual employment agreement for an indefinite period of time. Managing Board members appointed after 1 January 2013 are engaged on the basis of a Management Services Agreement with a four-year term, to be renewed at reappointment.

Term of appointment

Members of the Managing Board appointed before 1 January 2005 are appointed for an indefinite period of time. Managing Board members appointed after 1 January 2005 are appointed for a period of four years, after which they are eligible for reappointment by the Annual General Meeting of Shareholders.

Notice period

Resignation by a member of the Managing Board is subject to three months’ notice (six months in case of a Management Services Agreement). A notice period of six months applies in the event of termination by the company.

Severance arrangement

There are no specific contractual exit arrangements for members of the Managing Board appointed before 1 January 2005. Should a situation arise in which a severance payment is appropriate for such a Board member, the Remuneration Committee will recommend the terms and conditions. The Supervisory Board will decide upon this, taking into account usual practices for these types of situations, as well as applicable laws and corporate governance requirements.

Members of the Managing Board appointed after 1 January 2005 are covered by a severance provision in accordance with the Dutch corporate governance code, which is set at a maximum of one annual base salary.

Claw-back / change-of-control

Legislation entered into force regarding the revision and claw-back of bonuses and profit sharing arrangements of board members of Dutch listed companies as of January 2014. Part of this legislation was already covered in comparable rules of the Dutch corporate governance code and consequently already included in the employment contracts of the members of the Managing Board. This regards in particular the possibility (1) to revise an incentive prior to payment, if unaltered payment of the bonus/incentive would be unreasonable and unfair, and (2) to claw back an incentive, if payment took place on the basis of incorrect information on the fulfilment of the incentive targets or the conditions for payment of the incentive. In addition, it is enacted that in the case of a change-of-control event a related increase in value of the securities that have been granted to a board member as part of his/her remuneration will be deducted from the remuneration to be paid to the board member at the time of selling these securities or when his/her board membership ends.

Share ownership

The Supervisory Board encourages the Managing Board to hold shares in the company to emphasize their confidence in the strategy and performance of the company.

As of 2013, minimum shareholding guidelines for the members of the Managing Board are applicable, equivalent to three times the base salary in the case of the CEO and one time the base salary for the other MB members. These shareholdings can be built up over five years.

Loans

DSM does not provide any loans to members of the Managing Board.

Scenario analysis

The amended Dutch corporate governance code requires that the Supervisory Board ‘shall analyze possible outcomes of the variable income components and the effect on Managing Board remuneration’. Within DSM this analysis is conducted at least every three years.

Table 10

 
Heerlen, 29 February 2016
 
The Supervisory Board
 
Rob Routs, Chairman
Ewald Kist, Deputy Chairman
Victoria Haynes
Pierre Hochuli
Eileen Kennedy
Pauline van der Meer Mohr
Tom de Swaan