Compensation architecture for the EC15 min.
The compensation awarded to EC members 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 EC members 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 markets. Consequently, there is no predefined peer group of companies that is used globally. Rather, the benchmark companies vary from country to country based on the database of Korn Ferry Hay Group. For the CEO role, the following companies were included in the last benchmark analysis conducted in the financial year 2018/19 covering Swiss listed industrial companies of similar size in terms of market capitalization, revenue, and number of employees: Autoneum, Bucher Industries, EMS Chemie, Geberit, Georg Fischer, Landis+Gyr, Logitech, Lonza, OC Oerlikon, Sonova, and Sulzer.
As a principle, the compensation paid to the EC members must 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
EC members receive an annual base salary for fulfilling their 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.
As the EC is international in its nature, the members participate in the benefits plans available in their country of employment. Benefits mainly consist 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 EC members 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 benefits offered by the pension fund of dormakaba in Switzerland are in line with benefits provided by other Swiss multinational industrial companies.
EC members 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, EC members 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 a 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 Articles of Incorporation, the short-term incentive may not exceed 150% of the individual annual base salary for the EC members (cap).
Following the “We are ONE company” principle, the individual short-term incentive paid to the EC members is strictly based on Group and segment financial objectives and not on individual goals. For the CEO and other EC members (CFO, CTO, CMO), the incentive formula relates exclusively to Group results. For the COOs, it relates to segment results and Group results as follows:
Access Solutions (AS)
30% all AS segments, 60% own AS segment
AS segments (AMER, APAC, DACH, EMEA) are interdependent, therefore the weighting strongly encourages collaboration between AS segments and rewards for the AS collective performance and the individual performance of each AS segment in a balanced manner.
Key & Wall Solutions
Key & Wall Solutions is an independent global segment, the 30 – 70% split between Group’s and segment’s results is well balanced in terms of rewarding the collective performance of the Group and the individual performance of the segment.
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 EC members are built around the following principle: the short-term incentive consists of a predefined share of profit, which is determined for each function individually, multiplied by a growth multiplier and, for COOs, by a net working capital (NWC) multiplier (see the following illustration).
The predefined 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 net income growth or on the segment’s sales 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, for the COOs, top-line results (sales growth) and an 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.
For the financial year 2020/21, the short-term incentive formula for the CEO and other EC members in a Group function role (CFO and CTO) will be modified to include both a sales growth and a net working capital multiplier in addition to the current net income growth multiplier. This modification is intended to harmonize the incentive formulas across the entire EC and further strengthen the accountability for the efficient use of the company’s financial resources as well as growth-driven value creation. The new multipliers will be applied in similar fashion to those currently in place for the COOs:
3.2 Long-term incentive
The purpose of the long-term incentive is to give the EC 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), EC members are awarded restricted shares and performance share units of dormakaba based on 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 predefined 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 EC 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 EC 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 EC members and other members of Senior Management, which is subject to approval by the Compensation Committee. For the CEO, the Compensation Committee Chair formulates a proposal that is subject to the approval of the Compensation Committee. Pursuant to the Articles of Incorporation, the fair value of the long-term incentive at grant may not exceed 150% of the individual annual base salary for the EC members (cap).
The long-term incentive award is split into two components: one half is 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 second half 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) and the relative Total Shareholder Return (TSR) of the company over the three-year performance period. Both performance conditions are equally weighted at 50%. The vesting level 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).
TSR is measured relative to companies of the Swiss Market Index Mid (SMIM) – in which dormakaba is included as at 30 June 2020 – and provides for a 100% vesting for median performance. The SMIM was selected as a performance benchmark because of the insufficient number of direct competitors of dormakaba that are listed. Therefore, the SMIM as an index of companies of comparable size listed on the SIX Swiss Exchange was the most appropriate alternative.
In response to dormakaba having to leave the SMIM in September 2020, the performance peer group is currently being reviewed by the Compensation Committee. The results of this review will be provided in the Compensation Report 2020/21.
The EPS growth target is 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:
The vesting formula has been designed in line with market practice for Swiss publicly traded companies to combine pay for performance compensation principles and reach alignment with the long-term shareholder interest. It has both challenging targets and no excessive leverage. To reach the target, the company needs to outperform half of the peers in respect of relative TSR and needs to outperform GDP growth by 2% points on the EPS condition. While there is no payout below the threshold levels of performance, a partial payout is still possible for a performance between the threshold and the target. On the other side, an extraordinary performance is required to reach the cap of 200%.
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 or retirement, restricted shares remain blocked and the performance share units are subject to a pro rata vesting at the regular vesting date. In case of disability, 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 based on a performance assessment by the BoD (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.
Shares awarded in recent years have come from treasury shares and to a small extent from conditional capital.
The long-term incentive awards are subject to clawback and malus provisions since 2019. In certain circumstances, such as in the case of financial restatement due to material non-compliance with financial reporting requirements or of fraudulent behavior or substantial willful misconduct, the BoD may decide to suspend the vesting or forfeit any granted long-term incentive award (malus provision) or to require the reimbursement of vested shares delivered under the long-term incentive (clawback provision).
The mix between restricted shares and performance share units under long-term incentive will continue to be shifted and the transition to a fully performance based long-term incentive will be completed in the financial year 2021/22 as follows:
- Grant in September 2020: two-thirds performance share units and one-third restricted shares.
- Grant in September 2021: 100% performance share units (discontinuation of allocation of restricted shares).
4. Employment contracts
The EC members are employed under employment contracts of unlimited duration that are subject to a notice period of up to twelve months. EC members 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. The employment contracts of the EC members may include non-competition clauses for a duration of up to a maximum of two years. In cases where the company decides to activate the non-competition provisions, the compensation paid in connection with such non-competition provisions may not exceed the monthly base salary, or half of the total compensation, for a period of twelve months.
5. Shareholding ownership guideline
The EC members are required to own a minimum multiple of their annual base salary in dormakaba shares within five years of hire or promotion to the EC, as set out in the following table.
300% of annual base salary
200% of annual base salary
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 BoD may, at its discretion, review the minimum ownership requirement.
6. Assessment of actual compensation paid to the EC in the financial year 2019/20
In comparison to the previous year, total direct compensation (TDC) of the EC decreased by 8%. There are several factors that impacted the level of actual compensation paid to the EC in the 2019/20 financial year, which are summarized below.
- Changes in EC composition: one EC member left the company at the end of December 2019 and two members stepped down at the end of the reporting period. On the other hand, two individuals are reported on a pro rata basis starting from January respectively April 2020. As part of their on-boarding, these individuals received one-time relocation support. In addition, one individual received a replacement award in lieu of the forfeited compensation at the previous employer. Further details can be found below.
- Impact of currency exchange rates: six members of the EC are paid in foreign currencies. Their compensation is converted into Swiss francs for the disclosure in this report and has changed due to a change in currency exchange rates even when the compensation amount in local currency has remained unchanged. This leads to a slightly reduced compensation in comparison to the previous reporting period.
- Base salary changes: the target base salary of five EC members was adjusted at the beginning of the reporting year, to account for their individual performance and to further align them with market levels. The base salaries of the CEO and the other EC members did not change. Starting from May 2020, the EC members voluntarily agreed to a reduction in monthly base salary of 10% in the context of the Covid-19 pandemic and as a sign of solidarity with the global workforce. Overall, the annual base salaries paid out decreased by 2%.
- STI payout: the STI payout formula is based on performance improvements versus previous year (and not on the achievement of budgeted targets). A payout of 112% of annual base salary (on average) for the EC members corresponds to the level of originally expected performance for the financial year 2019/20. The STI payout of the EC members reflects the underlying financial performance in the reporting year, especially the obviously lower Group net income which is the main driver of the STI payout for the CEO and EC members with global responsibility (CFO, CTO, CMO). All segments (COOs) achieved a significantly lower profitability compared to the previous year (lower EBITDA and EBIT as well as lower EBITDA margin and EBIT margin). All segments contributed to the negative organic sales growth of the Group. In the reporting year, the STI payout of EC members is 70% of annual base salary on average (previous year 94%).
- LTI grant in September 2019: to determine the individual grant size, the allocation criteria in place for several years (described under section 3.2) such as individual performance in previous year, strategic importance of the projects under responsibility, position against benchmark and retention need) were considered. Based on those factors, the LTI grant size of two EC members was increased compared to previous year, while it was decreased for one other EC member. For the CEO and the other EC members, the LTI grant size remained unchanged compared to previous year. The strategic priorities of the CEO for financial year 2018/19 (considered for determining the grant size in the reporting year) are detailed below and have been implemented successfully.
Strategic priorities of the CEO (financial year 2018/19)*
Achieve business performance in line with guidance.
Selectively establish further acquisitions/divestments in accordance with the defined strategic priorities.
Drive the digitization initiatives (cloud-based solutions).
Supply chain management
Deliver the defined procurement savings and execute the agreed Industry 4.0 initiatives.
Ensure succession plans for key positions, strengthen leadership teams and develop/retain key talents. Implement the defined IT strategy.
*This information is disclosed in summarized form for confidentiality reasons.
The replacement awards for the (designated) COO AS AMER relate to the forfeited compensation at the previous employer. The replacement award in cash for forfeited cash compensation at the previous employer amounts to CHF 109,422. The replacement award in equity amounts to CHF 246,581 in restricted shares and CHF 161,063 in PSU to compensate for part of the forfeited LTI at the previous employer. The shares and PSU have been granted at the hiring date on 1 April 2020. The shares are subject to a blocking period of 1 year and 5 months and 2 years and 5 months, respectively. The PSU are subject to a vesting period of 1 year and 5 months and 2 years and 5 months respectively, based on the EPS and rTSR performance conditions used in the dormakaba LTI plan. The blocking period of the shares and the vesting period of the PSU mirror the restriction periods of the outstanding plans at dormakaba (LTI grants 2018 and 2019, vesting in 2021 and 2022 respectively) and broadly reflect those of the forfeited awards at the previous employer.
The performance share units granted under the long-term incentive in September 2016 vested in September 2019 based on the EPS growth over the three-year vesting period at a vesting level of 200%. The share price at vesting amounted to CHF 638.50 compared to CHF 735.50 at grant.
Variable compensation forms a major part of total direct compensation (TDC). The percentage of overall compensation paid to the EC as variable compensation in the reporting year was 62% (excluding benefits and social security contributions) and dropped (previous year 67%) due to decrease in STI payout. Variable compensation paid out in shares accounted for 33% of the TDC (previous year 32%), which is in line with the compensation strategy to award 30% or more of total compensation in equity-based compensation by applying increases primarily on the long-term incentive component rather than on the other compensation elements.
At the AGM 2018, the shareholders approved a maximum aggregate amount of CHF 18,000,000 for the EC for the financial year 2019/20. The compensation effectively awarded of CHF 12,442,335 is within the limits approved by the shareholders. This includes the replacement award for the (designated) COO AS AMER in the amount of CHF 517,066.
As at 30 June 2020, in compliance with the Articles of Incorporation, no loans or credits were granted by dormakaba to current or former EC members, or parties closely related to them. Investments held by EC members or related persons (including conversion and option rights) – if any – are listed here.