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). Total remuneration for Managing Board members consists of 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. While the percentage of variable pay as a percentage of total remuneration is highest for the Co-CEOs (at target 150%), it may be limited or nil for other employee segments or in certain countries (also because of collective agreements). 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 influenced not only by factors such as differences in the pay mix, or changes in exchange rates, but also by factors related to the composition of the employee population such as the impact of acquisitions and divestments, restructuring, and in- and outflow of personnel.

DSM’s performance in 2021 improved compared to 2020. Over the last five years, the performance in terms of Adjusted EBITDA, share price appreciation and greenhouse gas emissions has been outstanding. The development of the share price (as included in the table) as well as the dividends paid over the years subscribe to this. Whereas the Managing Board remuneration expenses increased in 2020 as a consequence of the CEO change, the change in 2021 is merely driven by the improved business performance, resulting in a higher STI. This demonstrates that total Co-CEO remuneration fluctuates in accordance with the fluctuations in the Short-Term Incentive and the cost of the share-based compensation. Since for employees globally a lesser portion of their total remuneration is variable, the year-to-year change of the average remuneration of our employees globally (which includes all employee costs as included in Note 5 of the Consolidated Financial Statements) shows less fluctuations. In addition, the average remuneration of all employees is impacted by merger & acquisition activities and restructuring of our operations, while the adjustments of exchange rates also had an impact. Furthermore, the year-on-year change of the 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 factors including retirements, new hires and restructurings.

Pay ratio

The pay ratio is calculated at 31 December 2021 and is based on the average remuneration expense reported for each Co-CEO and the total average employee cost. Intercompany comparisons must be made with caution, as differences in the composition of the workforce, the geographical spread or in pay structures may occur. The pay ratio will differ from year to year, since the variable pay (as a percentage of annual base salary) will differ from year to year based on company results. Given that their pay is to a larger extent at risk, such fluctuations have a higher impact at Managing Board or executive level, compared to the average variable pay of the employee group (limited or no variable pay component). The ratio will furthermore be influenced by differences in pay structures between regions, acquisitions/divestments and foreign exchange rates.

The Monitoring Committee Dutch Corporate Governance Code recommends a definition that considers ‘the hiring of external employees’ pro-rated, insofar as they are hired for at least three months during the financial year and whereby the average annual remuneration of the employees is determined by dividing the total wage costs in the financial year (as included in the consolidated annual accounts on an IFRS basis) by the average number of FTEs during the financial year. Until now, DSM calculated average annual employee remuneration based on headcount. As of 2021, this has been changed to FTE (the table below shows the impact over the last years). The calculation does not yet include ‘the hiring of external employees’, as the current data architecture does not allow a trustworthy combination of external employees (in FTE) and cost involved. Adjustments will be made to meet the criteria in due course.

At DSM, we believe that the remuneration throughout the organization should be based on the same principles and values but should also consider local regulations and practices. That means that we aim for a consistent global approach (median of the market reference) and consider local circumstances. This may, for example, result in a different pay mix between countries or for employee segments without jeopardizing our principles and values. That is how we built and internally align our remuneration policies, including the Remuneration policy for the Managing Board. Ratios do not necessarily provide a reflection of such considerations, as they ignore, among other things, the typical differences between fixed and variable pay in geographies and/or employee segments and are influenced by changing currency conversion rates as well as being vulnerable to M&A activities.

Due to the CEO change, the pay ratio dropped in 2020, since the remuneration package was set lower compared to the outgoing CEO, while equity-based compensation included series granted in the Co-CEOs’ previous role. The 2021 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 remuneration of total employees globally is 34:1 (2020: 31:1) for each of the Co-CEOs. As explained herein, the increase is merely a consequence of the higher Short-Term incentive over 2021 related to the outstanding results.

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 Segment information, and from the table Employee benefit costs in Note 5 Net sales and costs (continuing operations) to the consolidated financial statements.