Total remuneration of the Managing Board 2022

Introduction

Other than the positioning of the targeted Total Direct Compensation, which is at the lower quartile of the peer group, the remuneration for 2022 is aligned with the remuneration policy, and complies with EU requirements, the Dutch Corporate Governance Code and legislation.

Base salary

As at July 2022, the annual review of base salary resulted in an adjustment of 2.5%, As such, the adjustment is aligned towards the market movement for executives based in the Netherlands and peer companies.

Goals and targets incentive programs

In September 2021, DSM announced its strategic decision to fully focus its resources and capabilities to address the urgent societal and environmental challenges linked to the way the world produces and consumes food. With a growing global population, the world is facing multiple systemic and interconnected food system challenges that impact the health and wellbeing of people, animals, and the planet. Advancements in digital technology and bioscience offer realistic scalable solutions to tackle these challenges, creating new markets and innovation opportunities. With its strong combination of scientific competences and growing portfolio of nutrition and health solutions, DSM is ideally positioned to capture these opportunities.

In view of this, during 2022 DSM simplified its operating structure and reorganized its Health, Nutrition & Bioscience activities into three Business Groups, each with clear opportunities to benefit the health of people and the health of the planet, underpinning the company’s growth plans. At the time, DSM announced it was reviewing the strategic options for its Materials businesses. This resulted in the divestment of DSM Protective Materials in 2022, while the closing of the divestment of DSM Engineering Materials is approaching.

As a Health, Nutrition & Bioscience company, DSM has a purpose-led, performance-driven strategy with sustainability and innovation as key growth drivers of its long-term focused plan, underpinned by ambitious targets across People, Planet and Profit. In view of this, the company announced an acceleration in its greenhouse gas emissions reduction target (a reduction of its own emission by 59% in 2030).

Related to this, a broader set of key performance indicators (KPIs) was defined, some of which feature in our incentive programs. This relates to targets that reflect our financial performance as well KPIs reflecting our commitment to deliver on sustainability goals, since contributing to brighter lives goes hand in hand with profitable growth. The design of our Short- and Long-Term Incentive plans emphasizes the importance of building long-term growth opportunities. Targets regarding energy efficiency and greenhouse gas (GHG) emission reduction and building our portfolio of Brighter Living Solutions Plus underpin our commitment to contribute to a better world, while at the same time generating profitable growth in line with our key strategic goals (Adjusted EBITDA and Adjusted net operating free cash flow) and safeguarding employee safety and engagement (definitions are provided in the respective paragraph).

A comprehensive scenario analysis was conducted when the current Remuneration policy was prepared. The analysis confirmed that neither the structure of the incentive schemes nor the nature of the goals would result in inappropriate pay-out levels. DSM’s Remuneration policy is designed in the interest of long-term value creation, as is confirmed by a range of factors, including:

• The pay mix: the target value of the LTI has twice the target value of the STI
• The mandatory re-investment of any STI achieved in LTI and the vesting of the match provided on such investments is subject to targets with a long-term horizon
• The targets set for the STI or underlying the LTI grants are consistent with DSM’s longer-term strategic financial and sustainability objectives

By this means, the structure of the policy is designed to ensure that the pursuit of short-term objectives does not prevail over the delivery of long-term results.

Short-Term Incentive (STI) 

This report includes the STI achievement for 2022, payable in April 2023, and based on the base salary paid in 2022. Targets were set ahead of the STI cycle, in accordance with the Remuneration policy and with reference to the prior year, the budgets and the business plans for the performance year, ensuring that achievement of the threshold, target or maximum pay-out out are appropriately challenging.

Definitions of goals set for 2022 STI (total at-target weight is 50% of annual base salary):

• Adjusted EBITDA (weighting 12.5%): sum of the operating profit plus depreciation and amortization, adjusted for material items of profit/loss following acquisitions/divestments, restructurings and other circumstances deemed necessary
• Adjusted net operating free cash flow (10%): cash flow from operating activities, corrected for the cash flow of the Alternative Performance Measures (APM) adjustments, minus the cash flow of capital expenditures and drawing rights
• Net sales growth (2.5%): net organic sales growth
• Brighter Living Solutions Plus (BLS+) (5%): DSM applies a Sustainable Portfolio Steering methodology to identify, and further develop sustainable, innovative solutions that deliver sustainability benefits within the value chain. Brighter Living Solutions Plus are those products, services and technologies that, considered over their life cycle, offer a sustainability benefit recognized by key stakeholders, underpinned with substantiating evidence, whilst having no urgent negative signals. The set-up enables us to align the impact of our products more closely with the UN Sustainable Development Goals (SDGs) 
• Employee Engagement (5%): based on the High-Performance Norm in the industry
• Individual goals (10%): in 2022, the Managing Board/Executive Committee shared a team target

The financial measures reflect our strategic growth ambitions while the targets related to Brighter Living Solutions Plus, Employee Engagement and Safety relate to our Sustainability Commitments.

Within DSM’s STI scheme, pay-out brackets are defined, considering the nature of the goal. A minimum threshold is set for each goal; an achievement below this threshold results in no pay-out with respect to that target. Over-performance results in a pay-out exceeding 100% where the maximum achievement is capped at 200% of the ‘at-target’ weighting of the respective goal. Goals, targets and pay-out schedules were defined at the beginning of the year, with defined brackets between ‘threshold’ and ‘maximum’. The following table provides an overview of the realization of the 2022 STI targets.

Considering the challenging business environment, DSM delivered strong results in 2022. As in 2021, our net sales growth target was overachieved (8% in 2022, compared with 13% in 2021). Although pricing actions to counter higher energy and raw materials costs delivered increased revenues, the price-cost gap remained significant for parts of the business. The realization (for 2022 representing total group with DSM Protective Materials included until August 31, 2022) of both the Adjusted EBITDA target and the Cash Flow target therefore remained below their respective thresholds. In 2021 a maximum achievement of these goals had been recorded. Our Safety performance during 2022 was disappointing by our own high standards. Although our safety performance did not contribute to the STI in 2022, we remained on track in terms of our other sustainability targets. Our Brighter Living Solutions Plus score improved, attaining 67% in 2022 versus 64% in 2021. Given the significant external and internal changes the organization underwent, we are proud to report that Employee Engagement improved to a level of 77% compared to 75% in 2021. This resulted in an on-target achievement. It also indicates that our employees are supportive of our ongoing transformation to become a leading Health, Nutrition & Bioscience company. The combined realization resulted in a 2022 STI pay-out, as shown below. 

Short-Term Incentive deferral & matching

As included in the Offering Circular, the STI deferral & matching scheme will be canceled in view of the intended merger with Firmenich and settled in cash. Regarding performance year 2022, no PSUs will be granted to eligible persons under the respective deferral & matching plans. Instead, a payment in cash will be made. This will equate to the amount of the maximum deferral percentage (i.e., 50% of the STI achieved) that would have applied under the respective DSM Share Matching Plan over performance year 2022 and also what MB members have consistently deferred in the last years. The achievement of the STI over 2022 is therefore multiplied by a factor of 1.5. This resulted in a mark-up of the STI of €177,833. This figure is not included in the above table (the amount of the STI deferred over performance year 2021 was €409,944, converted to 2,506 PSUs). 

Long-Term Incentive (LTI)

2022 and 2023 grant

On 31 March 2022, 8,500 Performance Shares Units (PSUs) were granted to each of the Co-CEOs (2021: 10,000). The grant is based on the annual base salary applicable on the grant date and the average share price in January of the year of grant. The fact that the number of PSUs granted in 2022 is lower compared to the previous year is a result of the share price appreciation between both grant dates.

For performance year 2023, final approvals are yet to be made regarding the remuneration of the Executive Committee with regards to the question of whether a grant will be made and – if a grant is confirmed – the number of equity-related instruments to be granted.

Goal setting

Targets were set ahead of the LTI cycle, in accordance with the remuneration policy, ensuring that achievement is realistic but challenging. The following goals were set for the LTI grants:

• Total Shareholder Return – TSR (weighting 25%): sum of capital gain and dividends paid, representing the total return to shareholders; the relative ranking (within the peer group) reflects the overall performance relative to our peers
• Return on Capital Employed – ROCE (25%): operating profit as percentage of weighted average capital employed
• Energy Efficiency Improvement – EEI (25%, as of the 2022 grant 15%): the reduction of the amount of energy used per unit product (known as energy efficiency) on a three-year rolling average basis
• Greenhouse Gas Emissions – GHGE (25%, as of the 2022 grant 35%): absolute structural reduction of greenhouse gas emissions in kilotons.

Vesting 2019 grant

The performance period of the PSUs granted in 2019 was completed by year-end 2021: the actual vesting was on 31 March 2022. This concerns the PSUs granted under the Long-Term Incentive plan as well as the PSUs granted under the STI deferral & matching plan. The following vesting schemes applied.

On the back of a strong share price appreciation, our Total Shareholder Return performance remained strong. As in 2021, we ranked second, resulting in an achievement of 145% of target. This figure equates to the vesting of 97% of the number of Performance Share Units initially granted and linked to this goal. At 14.3%, the ROCE target resulted in a vesting of 50% of target (or 33% of PSUs granted, related to this goal); the 2021 realization against this target remained below the threshold. In terms of Energy Efficiency, DSM realized an improvement of 14% over the performance period. In terms of greenhouse gas emissions, DSM realized an absolute reduction over the performance period of 1,058kt on average. As a result, the vesting related to both sustainability goals was at maximum level. The below table provides an overview of the vesting (i.e., conversion to shares) on 31 March 2022 of the number of Performance Share Units granted in 2019: 82.5% (123.75% of target) of the Performance Share Units granted under the Long-Term Incentive plan vested (compared to 74.2% in 2021), whereas all Performance Share Units granted in 2019 under the STI deferral & matching scheme vested in 2022.

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 applicable to all participating DSM employees. The company provides accident insurance cover, a company car, and a fixed representation allowance in line with market practice.

Total remuneration

Actual total remuneration for 2022 is fully aligned with the remuneration policy. The following table provides an overview of the total remuneration expense for the company in relation to the Managing Board in accordance with IFRS rules (these costs are not necessarily equal to compensation paid or the cash-out for DSM).

Total remuneration expenses incurred in 2022 were higher than in 2021. The differences between the two years are mainly attributable to variable compensation. The Short-Term Incentive concerns the incentive accrued for in 2022. As explained herein, this figure has been multiplied by a factor of 1.5 to offset the cancelation of the STI deferral & matching plan in view of the intended merger with Firmenich. The total amount is 35% lower than in 2021. The expense for share-based compensation is approximately €0.7 million higher in 2022 than in 2021. This is for two reasons: first, the fact that the 2022 amount includes different grants, and second, the additional cost considered in 2022 in view of the Long-Term Incentive grants made in 2021 and 2022. As included in the Offering Circular, PSUs granted in 2021 and 2022 under the Long-Term Incentive plan shall vest on the vesting date as initially determined at the grant date. Such vesting shall be based on the average of the vesting result achieved over the vesting that occurred in 2020, 2021 and 2022. Considering IFRS accounting standards, this results in an additional expense of €0.5 million for each of the Co-CEOs.