Compensation architecture for the Executive Committee

The compensation awarded to members of the Executive Committee is primarily driven by the success of the company. In addition to a competitive fixed compensation there is a performance-related component that rewards for performance and allows members of the Executive Committee to participate in the company’s long-term value creation. The overall compensation consists of the following elements:

• Annual base salary;
• Benefits (such as retirement benefits);
• Short-term incentive;
• Long-term incentive (share-based compensation).

To ensure consistency across the organization, roles within the organization have been evaluated using the job grading methodology of Korn Ferry Hay Group. The grading system is the basis for compensation activities such as benchmarking and determination of compensation structure and levels. For comparative purposes dormakaba refers to external compensation studies that are conducted regularly by Korn Ferry Hay Group in most countries. Overall, these studies include the compensation data of 2,500 technology and industrial companies, including listed and privately held competitors in the security sector that are comparable with dormakaba in terms of annual revenues, number of employees, and complexity in the relevant national or regional market. Consequently, there is no pre-defined peer group of companies that is used globally. Rather, the benchmark companies will vary from country to country based on the database of Korn Ferry Hay Group. For the CEO role, Korn Ferry Hay Group included the following companies in the benchmark: Autoneum, Bucher Industries, EMS Chemie, Geberit, Georg Fischer, Landis+Gyr, Logitech, Lonza, OC Oerlikon, Sonova, and Sulzer (Swiss listed industrial companies of similar size in terms of market capitalization, revenue, and headcount).

The compensation paid to the Executive Committee must in principle be based on the market median in the relevant national or regional market and must be within a range of –20% to +35% of this figure. The variable component of compensation (= short- and long-term incentives) is targeted to make up for at least 50% of the overall compensation.

1. Annual base salary

Members of the Executive Committee receive an annual base salary for fulfilling their functional role. It is based on the following factors:

• Content, responsibilities and complexity of the function;
• External market value of the respective role: amount paid for comparable positions in the industrial sector in the country where the member works;
• Individual profile in terms of skill set, experience and seniority.

2. Benefits

As the Executive Committee is international in its nature, the members participate in the benefits plans available in their country of employment. Benefits consist mainly of retirement, insurance and health care plans that are designed to provide a reasonable level of protection for the participants and their dependents in respect to the events of retirement, disability, death, and illness/accident. The members of the Executive Committee with a Swiss employment contract participate in the occupational pension plans offered to all employees in Switzerland, which consist of a basic pension fund and a supplementary plan for management positions. The pension fund of dormakaba in Switzerland is in line with benefits provided by other Swiss multinational industrial companies.

Members of the Executive Committee under foreign employment contracts are insured commensurately with market conditions and with their position. Each plan varies in line with the local competitive and legal environment and is, as a minimum, in accordance with the legal requirements of the respective country.

Further, members of the Executive Committee are also provided with certain executive perquisites such as company car or car allowance, representation allowance and other benefits in kind according to competitive market practice in their country of employment.

3. Variable compensation

The variable compensation consists of a short-term incentive (STI) and long-term incentive (LTI).

3.1 Short-term incentive

The short-term incentive is defined annually as a cash payment and aims to motivate the participants to meet and exceed the company’s financial objectives, which are defined in line with the Group’s strategy. Pursuant to the Article of Incorporation 24 the short-term incentive may not exceed 150% of the individual annual base salary for the members of the Executive Committee (cap).

Following the “We are ONE company” principle, the individual short-term incentive paid to the members of the Executive Committee is strictly based on Group and segment financial objectives and not on individual goals. For the CEO and other Executive Committee members (CFO, CIO (Chief Integration Officer), CTO (Chief Technology Officer), CMO (Chief Manufacturing Officer)), the incentive formula relates exclusively to Group results. For the COOs, it relates to segment results and Group results as follows:

The business results are compared to the previous year’s results to drive a continuous improvement of the business achievements, year after year. The incentive formulas for all members of the Executive Committee are built around the following principle: the short-term incentive consists of a pre-defined share of profit, which is determined for each function individually, multiplied by the growth multiplier (see the following illustration).

The pre-defined share of profit is expressed as a percentage of Group net income or as a percentage of segment EBIT. The growth multiplier depends on the company’s or on the segment’s revenue growth compared to previous year and is capped at 1.6 in case of substantial growth; the net working capital (NWC) multiplier depends on the segment’s change of net working capital compared to previous year and is capped at 1.4 in case of substantial reduction of net working capital.

This formula is aligned to the business strategy of profitable growth because it rewards for bottom-line (Group net income or segment EBIT) and top-line results (sales growth). Further, for the COOs responsible for a segment, the formula also includes a NWC multiplier, which reflects the focus on efficient management of the company’s financial resources.

The calculation of the short-term incentive is based – just as the audited financial statements of the Group – on the actual figures recorded in the financial reporting system. Special effects that have a material impact on the financial results, such as significant acquisitions and divestments or extraordinary results representing merger-related integration costs, are excluded so that the financial results are comparable to previous year. There was no such special effect in the reporting year.

3.2 Long-term incentive

The purpose of the long-term incentive is to give the Executive Committee an ownership interest in dormakaba and a participation in the long-term performance of the company and thus to align their interests to those of the shareholders.

At the beginning of the long-term incentive plan cycle (grant date), Executive Committee members are awarded restricted shares and performance share units (former matching shares) of dormakaba on the basis of the following criteria:

• External benchmark: typical grant size of long-term incentive for a similar function in the relevant market and positioning of the individual’s total direct compensation compared to that benchmark. Total direct compensation includes fixed base salary plus short-term incentive plus allocation under the long-term incentive plan.
• Individual performance: measured against pre-defined priorities in the financial year prior to the grant, as documented within the performance management process. The long-term incentive is the only compensation program that takes into consideration the individual performance of the Executive Committee members. For each member, a list of individual strategic priorities is determined before the start of each financial year based on the mid-term plan of the Group, segment or function. At the end of each financial year, the individual performance of the member is evaluated against those strategic priorities and will be considered for the determination of the grant size of the long-term incentive in the following financial year. 
• Strategic importance: impact of the Executive Committee member's projects on the long-term company's success.
• Retention: desire to retain the person to the company and to its overall long-term value creation by offering restricted shares and performance share units subject to a three-year vesting period.

Based on the above criteria, the CEO formulates a proposal for long-term incentive awards of the individual Executive Committee members and other members of Senior Management, which is subject to approval by the Compensation Committee. For the CEO, the Chairman of the Compensation Committee formulates a proposal that is subject to the approval of the Compensation Committee. The long-term incentive award is determined as a number of shares. Pursuant to the Article of Incorporation 24 the fair value of the long-term incentive at grant may not exceed 150% of the individual annual base salary for the members of the Executive Committee (cap).

The long-term incentive award is split into two components: two-thirds are granted in form of restricted shares of dormakaba subject to a three-year blocking period. This component of the award is designed to provide participants an ownership interest in the long-term value creation of the company by making them shareholders. The remaining third of the award is granted in form of performance share units of dormakaba subject to a three-year performance-based vesting period. This component of the award is designed to reward participants for the future performance of the earnings per share (EPS) of the company over the three-year performance period. The remuneration may range from 0% to a maximum of 200% of the original number of units granted (maximum two shares for each performance share unit originally granted).

In summary, while the long-term incentive award is granted on the basis of factors related to the function (strategic importance) and the individual (positioning versus benchmark, performance, retention need), the vesting of the performance share units depends on future company performance (measured by EPS development).

Restricted shares and performance share units are usually awarded annually in September. In case of voluntary termination by the participant or termination for cause by the company, restricted shares remain blocked and the performance share units are forfeited without any compensation. In case of termination without cause, retirement or disability, restricted shares remain blocked and the performance share units are subject to an accelerated pro-rata vesting on the basis of target performance (100%). In case of death or change of control, the blocking period of the shares is lifted and performance share units are subject to an accelerated pro-rata vesting (death) or full vesting (change of control) at target performance (see also Corporate Governance Report “Changes of control and defense measures”). The conditions for the award of shares and performance share units are governed by the stock award plans of dormakaba and are identical for all participants.

Shares awarded in recent years have come from treasury shares and to a small extent from conditional capital.

The long-term incentive plan has been thoroughly reviewed during the reporting year and will be refined starting with the grants in September 2018 for financial year 2018/19.

In a first step (for the award in financial year 2018/19 that will be granted in September 2018), the grant size will be determined as a monetary amount rather than a number of shares. Further, the performance measurement will include relative total shareholder return (TSR) and EPS growth over the three-year vesting period. TSR will be measured relatively to companies of the Swiss Market Index Mid (SMIM) and will provide for a full vesting for median performance. The EPS growth target will be fully aligned with dormakaba’s communicated strategy of organic sales growth, which is to outperform weighted GDP growth by 2% points. The vesting formula for both performance indicators is illustrated below, there is no vesting below the threshold levels of performance:

In a second step (as of grant in September 2019), the mix between restricted shares and performance share units will be shifted towards more performance share units to further align to market practice: half of the grant in September 2019 will be awarded in form of performance share units and half of the grant will be awarded in form of restricted shares.

Further details on the long-term incentive plan design will be disclosed in the compensation report 2018/19.

4. Employment contracts

The members of the Executive Committee are employed under employment contracts of unlimited duration that are subject to a notice period of up to twelve months. Members of the Executive Committee are not contractually entitled to termination payments or any change of control provisions other than the accelerated vesting and/or unblocking of share awards mentioned above.

5. Shareholding ownership guideline

The members of the Executive Committee are required to own at least a minimum multiple of their annual base salary in dormakaba shares within five years of hire or promotion to the Executive Committee, as set out in the following table.

To calculate whether the minimum holding requirement is met, all vested shares are considered regardless of whether they are restricted or not. However, unvested performance share units are excluded from the calculation. The Compensation Committee reviews compliance with the share ownership guideline on an annual basis. In the event of a substantial rise or drop in the share price, the Board of Directors may, at its discretion, review the minimum ownership requirement.

6. Assessment of actual compensation paid to the Executive Committee in the 2017/18 financial year

In comparison to the previous year, total direct compensation (TDC) of the Executive Committee rose by 12%. There are several factors that impacted the level of actual compensation paid to the Executive Committee in the 2017/18 financial year, which are summarized below.

• Different composition of the Executive Committee: Alwin Berninger replaced Dieter Sichelschmidt. Both have worked for a period of six months during the reporting year and their compensation during this period has been included accordingly. However, the value of the long-term incentive for Dieter Sichelschmidt has been included in full, while Alwin Berninger will start to participate in the long-term incentive as of financial year 2018/19, as per plan rules. Further, Christoph Jacob has stepped down from the Executive Committee during the reporting year and is contractually entitled to a notice period of twelve months. The compensation during the notice period has been fully considered in the compensation amount of the reporting year, including the five months of the notice period that belong to the next financial year.
• Material changes in currency exchange rates: seven members of the Executive Committee are paid in foreign currencies (five in Euros). Their compensation is converted into Swiss Francs for the disclosure in this report. Due to the weaker Swiss Franc against other major currencies compared to the previous year, especially with the Euro, the amounts disclosed in Swiss Francs have increased even when the compensation amount in local currency has remained unchanged.
• Base salary increases: the base salaries of four Executive Committee members, including the CEO, have been adjusted during the reporting year due to change of scope of role and/or positioning to market benchmark. The base salaries of the other Executive Committee members have not changed compared to the previous financial year. The base salary increase amounts to 4.4% for the Executive Committee overall;
• STI payout: the STI payout formula is based on performance improvements from year-to-year (and not on the achievement of budgeted targets). A payout of 98% of annual base salary (on average) for the Executive Committee members corresponds to the level of expected performance for the financial year 2017/18. The STI payout of the Executive Committee members reflects the underlying financial performance in the reporting year, especially the increase in Group net income which is the main driver of the STI payout for the CEO and members of the Executive Committee with global responsibility (CFO, CIO, CTO, CMO). The financial performance of the segments (COOs) in terms of profitability, sales growth, and net working capital management was below expectations overall, with the strongest outperformance by AS APAC and AS EMEA and the weakest development by AS AMER and AS DACH. In the reporting year, the STI payout of Executive Committee members was 84% of annual base salary on average (previous year 107%). For the CEO, the STI payout was capped to 150% of annual base salary, as in previous year and as foreseen by the article of incorporation 24. The increase of the CEO’s STI payout amount compared to previous year was driven by the higher annual base salary on which the cap was applied. In fact, without applying the cap in both years, the STI amount in the reporting year would have been 24% lower than in previous year.
• LTI grant: the long-term incentive grant size was determined on the basis of several factors (described under section 3.2) including individual performance in previous year, strategic importance of the projects under responsibility, positioning against benchmark and retention need. The grant size of the CEO has been slightly increased compared to previous year because the grant size in previous year had been defined on the basis of two months as CEO of former Kaba and ten months as CEO of the merged company dormakaba. In terms of individual performance, the strategic priorities of the CEO for financial year 2016/17 (considered for determining the grant size in financial year 2017/18) have been implemented very successfully (see strategic priorities of the CEO below). For the other members of the Executive Committee, the typical grant size was higher than in the previous year, mainly since all grants have been determined on a full year basis for all Executive members (previous year: grant size for four Executive members prorated for ten months as a result of the merger). Further, the share price has increased by 32% in financial year 2017/18 compared to the financial year 2016/17. As the grant size of the long-term incentive was denominated as a number of shares, the share price evolution between both years directly impacted the monetary value of the grant.

Variable compensation forms a major part of total direct compensation (TDC). The percentage of overall compensation paid to the Executive Committee as variable compensation in the reporting year was 64% (excluding benefits and social security contributions) and remained stable (previous year: 64%). Variable compensation paid out in shares accounted to 30% of TDC (previous year: 24%), which is in line with the compensation strategy (communicated in the previous compensation reports) to award 30% of total compensation in shares by applying compensation increases primarily on the long-term incentive component rather than on the other compensation elements.

At the AGM 2016, the shareholders approved a maximum aggregate amount of CHF 18,230,000 for the Executive Committee for the financial year 2017/18. The compensation effectively awarded of CHF 14,647,636 is within the limits approved by the shareholders.

The principles stated in the compensation regulations approved by the Board of Directors in the financial year 2013/14 were again proven to be very effective in the reporting year. Rigorous implementation of these regulations guarantees consistent and transparent compensation practice based on uniform principles and criteria.

As at 30 June 2018, in compliance with the Articles of Incorporation, there were no outstanding loans or credit facilities between dormakaba and current or former members of the Executive Committee, or parties closely related to them. Investments held by members of the Executive Committee or related persons (including conversion and option rights) – if any – are listed here.