2019Leadership

Remuneration report 2019

Introduction by the Chair of the Remuneration Committee

In 2019, DSM put forward a revised remuneration policy Managing Board and Supervisory Board Koninklijke DSM N.V. to the Annual General Meeting (AGM). We highly appreciated the dialogue with a number of our shareholders and representatives of institutional investors and the virtually unanimous support of the AGM (over 97% votes in favor). This first Remuneration report is in line with adjusted legislation and EU-guidelines based on the EU Shareholders' Rights Directive, and explains the application of the respective policies in 2019.

DSM is recognized as a purpose-led company, creating long-term value for all its stakeholders and society at large across the three dimensions of People, Planet and Profit. Our scientific expertise and innovation capabilities help us to find answers to some of the world's biggest challenges and to grow our business at the same time. The deployment of our Strategy 2021: Growth & value – Purpose led, Performance driven is supported by our remuneration policy. The design of our short and long-term incentive plans emphasizes long-term growth opportunities in the domains of Health, Nutrition and Sustainable Living. Targets on energy efficiency and greenhouse gas reduction, as well as a shift in portfolio toward Brighter Living Solutions, underpin our commitment to sustainability while ensuring financial performance in line with our key strategic goals (Adjusted EBITDA and Adjusted net operating free cash flow). Obviously, our remuneration policy is designed to attract and retain the talent we require to achieve our Strategy 2021 and sustainable success in the long term.

In 2019, DSM continued to deliver improvements in customer-centricity, large innovation projects, as well as cost control and operational excellence, resulting in sound results and reflected in remuneration as presented in this report.

This Remuneration report provides a summary of the remuneration policy Managing Board Koninklijke DSM N.V. and the Supervisory Board Koninklijke DSM N.V. respectively as well as an overview of the remuneration of the members of the Managing Board and the Supervisory Board in the financial year 2019. The full, legally superseding remuneration policy as approved by the AGM is published on our website. This report is prepared in accordance with the relevant parts of Section 135 Book 2 of the Dutch Civil Code.

Pauline van der Meer Mohr
Chair Remuneration Committee

Remuneration Managing Board Koninklijke DSM N.V. 2019

Summary remuneration policy Managing Board Koninklijke DSM N.V.

The remuneration policy Managing Board Koninklijke DSM N.V. (as approved by the 2019 AGM; 97.48% in favor) is designed to engage qualified leaders driving our purpose, enabling DSM to engage our people and other stakeholders and ultimately to achieve results – by putting customers first and by delivering on our promises. The policy provides a clear focus to improve company performance and to enhance purpose-led long-term value creation across multiple dimensions (profit: economical/financial, planet: ecological/sustainability and people: including societal) while acknowledging the societal context and recognizing the interests of all our stakeholders (especially our customers, employees, shareholders, as well as society at large).

The remuneration is linked to company and individual performance. Based on the short and long-term strategic objectives as well as our business drivers, results are measured on the basis of specified targets, balancing short- and long-term outcomes, serving the interests of all our stakeholders. In order to be competitive and to ensure alignment internally, Total Direct Remuneration offered by DSM approaches the median — from below — of a predefined peer group. Reward levels are benchmarked to the Dutch/European (no US companies) labor market peer group, while plan design of various reward components is reviewed against (the broader perspective of) best market practices.

The full version of the remuneration policy Managing Board Koninklijke DSM N.V., as approved by the 2019 AGM, is available on the company website. The following table specifies the elements of the remuneration policy describing purpose, design and link to our company strategy as well as their (potential) value.

Total remuneration Managing Board 2019

Actual remuneration 2019 is fully aligned with the remuneration policy which complies with EU requirements and Dutch legislation. Mr. Sijbesma's term as CEO and Chairman of the Managing Board / Executive Committee Koninklijke DSM N.V. and as member of the Managing Board, i.e., as Managing Director under the Articles of Association of the Company, expired as of 15 February 2020. In view of a proper handover to his successors and to finish certain projects, Mr. Sijbesma remains employed until 1 May 2020, observing the terms and conditions of the employment agreement. The terms and conditions of Mr. Sijbesma's leaving as part of a planned succession process are in line with DSM policies and practices. Mr. Sijbesma will not receive any severance payment and/or transitional compensation. Details reported here for Mr. Sijbesma concern the full calendar year 2019.

Base salary

Considering the general increase or market movement for DSM executives in the Netherlands and adjustments made by peer-group companies, base salaries have been adjusted; on average the adjustment amounts to 2.2% (CEO 1.9% and other members of the Managing Board 2.4%).

As of 15 February 2020, the annual base salary of Geraldine Matchett and Dimitri de Vreeze amounts to €925,000 in view of their appointment as Co-CEO as per the same date.

Short-Term Incentive (STI)

This report includes the STI achievement 2019, payable in March 2020. Targets were set ahead of the STI cycle, in accordance with the remuneration policy and budgeted results for the current year, ensuring that achievement of threshold, target or maximum payout are challenging. A scenario analysis was conducted prior to final approval of the targets by the Supervisory Board.

The company does not disclose the exact actual targets, as these qualify as commercially sensitive information, though the targets set are fully in line with the published strategic, financial and sustainability goals of the company. The overall average achievement of the Managing Board members for performance year 2019 amounts to 54% (2018: 80%) of annual base salary. The realization of the financial targets has been assessed by KPMG. In addition, KPMG assessed the validation process for non-financial targets.

In view of transparency, we categorize our target realization as follows: zero pay-out, below target, at target, above target or maximum pay-out. In 2019, the target achievement of the Adjusted EBITDA performance was below target. The achievement on Adjusted net operating free cash flow was above target. The target regarding Net sales growth was not achieved (zero pay-out). The many efforts to improve our Safety performance resulted in an above-target realization. Although the overall engagement score over 2019 was comparable to 2018, the target realization dropped to at target level, since the target was raised. Performance regarding portfolio management measured by Brighter Living Solutions, remained at target.

The combined realization resulted in a 2019 STI pay-out as included in the overview below.

Short-Term Incentive deferral & matching (STI)

In addition to the mandatory deferral (25% of STI achieved), the Managing Board members decided to convert an additional 25% (maximum possible) of the STI achieved in 2019 into shares. This means that all Managing Board members converted 50% of their STI (100% of the cash after tax) into this long-term incentive, representing their trust and focus on the long term. A 1:1 grant of PSUs was implemented, amounting to 8,898 PSUs in total (2018: 9,864), the following table provides an overview. For more information see the section on 'Equity based compensation' in this Remuneration report.

Long-Term Incentive (LTI)

2019 and 2020 grant
In 2019, 18,500 Performance Shares Units (PSUs) (2018: 17,000) were granted to the CEO. The 2019 grant to the other Managing Board members amounted to 12,500 PSUs (2018: 11,000).
The 2020 grant equals 12,500 PSUs for each Co-CEO, Geraldine Matchett and Dimitri de Vreeze. Feike Sijbesma is not eligible for a grant in 2020. Any grant equals the maximum number of PSUs that may vest.

Goal setting and vesting scheme
Targets were set ahead of the LTI cycle, in accordance with the remuneration policy, ensuring that achievement of threshold, target or maximum vesting are challenging. A scenario analysis was conducted.

Vesting 2016 grant
The performance period of the PSUs granted in 2016 was completed by year-end 2018: the actual vesting was on 31 March 2019. This concerns the PSUs granted under the Long-Term Incentive plan as well as the PSUs granted under the STI deferral & matching plan. Since all targets were achieved at maximum, all PSUs granted also vested (maximum vesting). The following vesting schemes applied (given its business-sensitive nature, the ROCE-vesting scheme is not disclosed).

The table provides an overview of the number of PSUs granted in 2016 that vested (i.e., converted to unconditional shares) in 2019.

Pension and other benefits

Participation in the basic pension plan provided by the Dutch pension fund (Stichting Pensioenfonds DSM Nederland — PDN) to all DSM employees in the Netherlands is mandatory for the Managing Board. Regarding pensionable salary not covered by the basic pension plan, a company-paid pension contribution as determined by the Supervisory Board applies. This contribution can be used by Managing Board members to participate in the so-called Net Pension Plan under conditions as applicable to all participating DSM employees.
The company provides an accident insurance, a company car and a fixed representation allowance in line with market practice.

Total remuneration

Actual remuneration 2019 is fully aligned with the remuneration policy. The latest benchmark conducted, demonstrated that DSM lags the median of the labor market peer group, also considering the pay-out scenarios of the incentive schemes. For the CEO, the total remuneration is in the lowest quartile of our own — Dutch/European — benchmark. For the other Managing Board members, it is in the second quartile but below the median. The difference would become even bigger if the benchmark comparison were made with a global peer group (i.e., including US-based peers).

The table provides an overview of the total remuneration expense for the Managing Board (the cost reported for DSM, are not in all cases the compensation paid nor the cash outflows for DSM).

Equity-based compensation

Overview of outstanding equity compensation

The table below provides an overview of outstanding PSUs (granted under the LTI and STI deferral & matching scheme respectively). The main conditions of the share-based compensation are:

The table below provides an overview of stock options held by members of the Managing Board. Mr. de Vreeze received these stock options prior to his first appointment as a Managing Board member. During 2019, he exercised 18,000 stock options; the shares were sold for an average share price of €94.44. 

For employee information, as required by section 383d Book 2 of the Dutch Civil Code, reference is made to Note 27, 'Share-based compensation'. As at 31 December 2019, 3,020,830 (2018: 5,616,235) of the total number of treasury shares outstanding were held for servicing management, personnel share option rights and performance share unit plans.

Shareholding obligation

In addition to the performance shares held on the basis of vested grants under the DSM Stock Incentive Plan, all members of the Managing Board have invested in DSM shares, emphasizing their confidence in the company and its strategy. These shares were bought through private transactions with private funds (including shares purchased through STI deferral). The table provides an overview of the number of shares held at year-end.

All Managing Board members significantly exceed the shareholding obligation (300% of base salary for the CEO; 200% of base salary for other Managing Board members).

Company performance versus remuneration over time

Five-year review of company performance and Managing Board remuneration

The following table provides an overview of the development of the remuneration of the members of the Managing Board over the past five years, the development of company performance and the average remuneration of other employees (excluding the Managing Board members and discontinued operations). Total remuneration for Managing Board members are the remuneration expenses calculated in accordance with IFRS as included in the annual reports of the relevant years. The table provides an overview of company performance based on Adjusted EBITDA, share price (year average) and the reduction of greenhouse gas emissions.

Typically, the share of total remuneration that is at risk varies for different employee segments and geographies, due to the impact of incentive schemes. Whereas the percentage of variable pay as a percentage of total remuneration is highest for the CEO/Managing Board (at target 150%), it may be limited or nil for other employee segments or in certain countries (also as a result of CLA negotiations). Based on performance, the results of the respective incentive schemes (and therefore the impact on total remuneration) varies over time. The average remuneration of all other employees (excluding the Managing Board) is not only influenced by factors such as differences in the pay mix (as mentioned above), or changes in exchange rates, but also factors related to the composition of the employee polulation such as the impact of acquisitions and divestments, restructuring, in- and outflow of personnel.

DSM's performance in terms of (profit) growth, share price increase and greenhouse gas emissions reduction has been very good over the last five years, as shown in the above table. The Managing Board's total remuneration expenses (including the achievements on short and long-term incentive schemes as well as pension expenditures), developed in line with the improving performance of the company. The year-on-year change in base salary of the CEO and Managing Board members remains below the year-on-year change in the average base salary of the employees in the Netherlands. Average total remuneration cost of other employees (globally) concern all employee cost as included in Note 5 of the Consolidated Financial Statements. The flattening of the change in the last three years is to a large extent caused by M&A activities and restructuring of our operations, while the adjustments of exchange rates also had an impact. The year-on-year change of the average base salary in the Netherlands, as well as average employee cost globally, are influenced by the fact that the composition of the underlying employee population changes from year to year as a consequence of among others retirements, new hires, restructurings, and M&A activities.

Pay ratio

Under the Dutch Corporate Governance Code companies are required to publish a pay ratio. As the Code does not provide a definition of the pay ratio, the calculation method applied will vary per company, which will make the pay ratio data incomparable. The pay ratio per company will also differ year on year, since the variable pay (as a percentage of annual base salary) of the CEO/Managing Board is typically much higher (150% at target) than the variable pay of the comparable average employee group (limited or no variable pay component), and this variable pay will fluctuate with business results. On top of that, different regions of the world have different pay structures, so acquisitions/divestments, growth in certain areas and foreign exchange rates will equally influence the pay ratio. DSM complies with the Dutch Corporate Governance Code in providing a pay ratio, as measured per 31 December 2019.

The pay ratio calculated versus the Dutch employee remuneration average was 25:1 (2018: 26:1) (compared to CEO remuneration) or 19:1 (2018: 20:1) (compared to average Managing Board remuneration). This is based on total cost of €530 million in the Netherlands (which includes the remuneration of the Managing Board and has been deducted in the ratio calculation) and a headcount in the Netherlands of 3,960 as at 31 December 2019.

The ratio of total remuneration, including annual base salary, STI, LTI and other benefits such as pension (as reported in this Remuneration report) versus the average of total global employee (i.e., including Dutch) remuneration, is for the CEO 41:1 (2018: 40:1). The pay ratio of the average Managing Board total remuneration versus the average of total global employee remuneration is 32:1 (2018: 31:1). The increase is due to the higher number of shares that now vested (so a lower number of shares that were forfeited over the period 2016-2018) of the total number of shares that were granted in 2016, due to the good performance of the company.

However, if the pay ratio is calculated on the basis of the estimated vesting percentage, so without the additional non-cash vesting of shares for the series 2016–2018, the pay ratio compared to the Dutch employee average for the CEO would be 20:1 (2018: 22:1) and for the average of the Managing Board remuneration 15:1 (2018: 17:1). Compared to the total global employee remuneration, these would be 33:1 (2018: 34:1) for the CEO and 25:1 (2018: 26:1) for the average of the Managing Board.

Underlying data for the pay ratio calculation can be retrieved from the table 'DSM's remuneration expense for the Managing Board' (including table notes) in the section 'Total remuneration' of this Remuneration report, as well as from the table 'Geographical information' in Note 4, and Note 5, 'Net sales and costs'. Data for the Netherlands are explicitly mentioned as they are not directly retrievable.

Remuneration Supervisory Board Koninklijke DSM N.V. 2019

Summary of the remuneration policy Supervisory Board Koninklijke DSM N.V.

The remuneration policy is designed to engage qualified leaders with the right balance of personal skills, competences and experience required to oversee (the execution of) the company's strategy, its performance and long-term value creation, recognizing the interests of all stakeholders. In line with the Dutch Corporate Governance Code, the remuneration is not linked to company and individual performance. As a reference, the remuneration of the Supervisory Board is benchmarked to market practice, predominantly against AEX companies, given the company's country of domicile. The total fixed remuneration should approach the median of the reference market. The full version of the remuneration policy Supervisory Board Koninklijke DSM N.V. as approved by the 2019 AGM is available on the company website.

The table below summarizes the key elements of the remuneration policy, describing purpose, design and (potential) value.

Total remuneration 2019

Committee overview

The Supervisory Board members are assigned to the various committees.

Total Remuneration

The table provides an overview of total remuneration provided in 2019; as of 8 May 2019, the revised policy as approved by the 2019 AGM applies.

In line with the remuneration policy, no variable compensation applies, and Supervisory Board members do not participate in any pension scheme. No extraordinary items apply. The total spent in 2019 was higher compared to 2018. This is based on an extension of the Supervisory Board in view of succession planning and the renewal of the remuneration policy that allows for an adjustment of the annual fixed fees by an average of 20% (note that the last adjustment of fees took place in 2016).

Benefits and loans

Members of the Supervisory Board are not eligible for any benefit programs offered by the company (or any beneficiary) to its employees, neither have any loans been provided.

Equity based compensation

As confirmed in the remuneration policy, Supervisory Board members do not receive any equity-based compensation. They are, however, encouraged to hold privately owned shares. At year-end 2019, Pauline van der Meer Mohr held 1,529 shares (2018: 1,529); Victoria Haynes held 300 shares (2018: 300) and John Ramsay held 1,057 shares (2018: 1,057). No other member of the Supervisory Board held shares in the company during 2019.

Remuneration over time

The table provides an overview of the total remuneration of the Supervisory Board members over a five-year period. A comparison of the development of total remuneration compared to company performance is not provided, as the Supervisory Board's total remuneration is not linked to company performance (Dutch Corporate Governance Code and remuneration policy Supervisory Board Koninklijke DSM N.V.).

Closing remarks and shareholder vote

The company did not provide any loans to any member of the Supervisory or Managing Board. The company website contains an overview of the main terms and conditions of employment of both Co-CEOs.

The 2019 AGM approved the remuneration policy Supervisory Board Koninklijke DSM N.V. (98.45% in favor) as well as the remuneration policy Managing Board Koninklijke DSM N.V. (97.48% in favor). The total remuneration delivered in 2019 is aligned with the respective remuneration policies: no deviations or derogations applied. As in 2018, no revision or claw-back of any incentives occurred in 2019.

The remuneration for the financial year 2019, as described in this report, is subject to an advisory vote at the 2020 AGM. Questions raised in the 2019 AGM regarding remuneration items have been addressed in the respective meeting, reference is made to the minutes of the meeting, posted on the company website. As a result, there were no specifics raised that needed to be addressed in this Remuneration report.