2018Leadership

Remuneration policy Managing Board

This chapter outlines the remuneration policy as approved by the Annual General Meeting of Shareholders in 2013. Details of the actual remuneration in 2018 as prepared by the Remuneration Committee and approved by the Supervisory Board can be found in Note 13 of the 'Parent company financial statements', Remuneration of Managing Board and Supervisory Board.

Remuneration policy

The objective of DSM's remuneration policy is to attract, reward, motivate, incentivize and retain qualified and expert leaders that the company needs to achieve its strategic and operational objectives, with the right organizational set-up, while 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 considering the interests of all of its stakeholders. DSM sets a clear strategic direction and executes this with agility. DSM strives for high financial performance, as well as 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 their size and complexity
• The remuneration policies for the members of the Managing Board and for other Executive Committee members, as well as for 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 the 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 — from below — the median of the labor-market peer group

No adjustments to the remuneration policy for the Managing Board in 2018

There were no adjustments to DSM's remuneration policy in 2018. The policy was last adjusted in 2013. The policy is designed to provide 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 plus — for STI only — individual targets. The policy is currently under review; changes (if any) will be presented to the 2019 Annual General Meeting of Shareholders, but without changing the current Annual Base Pay, STI and LTI structure.

Labor-market peer group

To be able to attract the right leaders and to secure long-term retention of the current Managing Board members, DSM takes external reference data into account in determining adequate remuneration levels. For this purpose, a specific labor-market peer group has been defined, containing a number of Dutch and European companies that are more or less comparable to DSM in terms of size, international scope and the complexity of their business portfolio. The Supervisory Board regularly reviews this peer group to ensure that its composition is still appropriate. The latest review was conducted in the fourth quarter of 2017 and did not result in a change in the current composition of DSM's labor-market peer group. As a result of this, the labor-market peer group for 2018 consisted of the following 16 companies (eight of which are peers on the Amsterdam stock exchange, the other eight being European industry peers):

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 benchmarked against the peer group in the fourth quarter of 2017. DSM aims to offer Managing Board members a total direct compensation approaching the median of the labor-market peer group. The Supervisory Board of DSM has determined that the remuneration level of the CEO was for many years clearly lower than the median of the predetermined peer group (in the first, lowest quartile). This is due to the conservative approach of the CEO regarding his own remuneration. The remuneration of the other members of the Managing Board is between first quartile and median level.

Total Direct Compensation

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, 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):

Base salary

The policy is that the Managing Board members receive a base salary approaching 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 taking into account the 'general increase' (market movement) for DSM executives in the Netherlands, as well as the general movements of the labor-market peer group.

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):

Short-Term Incentive (STI)

Managing Board members are eligible to participate in an 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 STI 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.

STI linked to financial targets

The part of the STI that is linked to shared financial targets (for on-target performance, 25% of base salary) consists of elements related to the company's focus on delivering the financial targets of its strategy: Adjusted EBITDA, which represents an opportunity at target performance of 12.5%; gross free cash flow, with an opportunity of 10%; and organic net sales growth, with a 2.5% opportunity.

STI linked to sustainability and individual targets

The part of the STI that is linked to shared sustainability as well as to individual targets, represents 25% of base salary for on-target performance. Further refinement/adaptations of performance measures in the area of sustainability and their relative weight may take place following proper evaluation.
The following shared measures linked to sustainability are applicable for the STI:

• Brighter Living Solutions (BLS): percentage of running business that meets ECO+ and People+ criteria (products that offer a better environmental or social benefit compared to mainstream reference solutions)
• Employee Engagement Index: related to the High-Performance Norm in industry
• Safety Performance: defined as Frequency Index for Recordable Injuries

Definitions of these elements can be found in Explanation of some concepts and ratios and People.

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

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 the 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 exact actual targets, as these qualify as commercially sensitive information, though they are in line with the published strategic, financial and sustainability goals of the company. Full transparency will be given on target areas and definitions. The external auditors performed agreed-upon mandate procedures on target-setting and realization. For detailed information, see Note 13 Remuneration of Managing Board and Supervisory Board of the 'Parent company financial statements'.

Mandatory and voluntary deferral of STI

A mandatory proportion (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 holding 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 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 are 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, equally weighted, applicable for the calculation of the vesting of LTI Performance Shares:

• Relative Total Shareholder Return (TSR) performance versus a peer group
• Return on Capital Employed (ROCE) growth
• Energy Efficiency Improvement (EEI)
• Greenhouse Gas Emissions (GHGE) Efficiency Improvement

The LTI performance targets are defined as follows:

• Relative 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) growth
  This is the operating profit as a percentage of weighted average capital employed.
• 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) Efficiency Improvement
  This is the reduction of the amount of greenhouse gas emissions per unit of product. 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 (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 LTI is set at 100% of base salary for on-target performance and 150% in the case of excellent over-performance (face value; at fair value this would be 50% and 75%). The number of conditionally granted shares is set by dividing the policy level at maximum (150% of base salary) by a share price at the beginning of the year of the conditional grant; as a result of this, the number of shares granted annually may fluctuate.

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 2018 performance period consists of the following 14 companies (no change compared to 2017):

The TSR peer group reflects the relevant market which DSM's 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 growth as a performance measure

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 Efficiency Improvement as a performance measure

GHGE Efficiency Improvement 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

The following vesting scheme has been established to reflect DSM's sharpened, challenging targets for the strategy period 2016–2018:

The ROCE target and vesting scheme is not disclosed, given the business-sensitive nature, but target setting is in line with published strategic goals.

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 agreed-upon mandate procedures are performed 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). This 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 who joined DSM prior to 1 January 2013 are engaged on the basis of an individual employment agreement for an indefinite period of time. Managing Board members joining the company 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.

Share ownership

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

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 Managing Board members. These shareholdings can be built up over five years. For more information, see the position paper 'Royal DSM's position on Board Member shareholdings in the company' on the company website.

Loans

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