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 and CTO), 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 principle of paying a predefined share of profit individually determined for each function, which are additionally modified by a set of multipliers. For the financial year 2020/21, the formula for the CEO and other EC members in Group function roles (CFO and CTO) was harmonized with the formula of the COO functions to include sales growth and net working capital (NWC) multipliers aiming to further strengthen the accountability for the efficient use of the company’s financial resources and a growth-driven value creation.
The STI formula is illustrated below.
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 either on a combination of the company’s net income growth and the Group sales 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 Group or 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) as well as 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. Effects from acquisitions and divestments as well as other special effects that have a material impact on the financial results, are excluded so that the financial results are comparable to the previous year. There were no significant adjustments made in the reporting year.
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 measured 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 Nomination and Compensation Committee (NCC). For the CEO, the NCC Chair formulates a proposal that is subject to the approval of the NCC. 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 third 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 other two-thirds 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 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).
Prior to September 2020, TSR was measured relative to companies of the SMIM – of which dormakaba was part of. Effective 21 September 2020, dormakaba no longer belongs to the SMIM. The NCC subsequently reviewed the performance peer group and concluded that the SPI Industrials is a more appropriate peer group based on the size and relevance of companies in the index. An index was selected as a performance benchmark because of the insufficient number of direct competitors of dormakaba that are publicly listed. Therefore, the SPI Industrials as an index of companies of comparable size listed on the SIX Swiss Exchange was the most appropriate alternative. The long-term incentive award continues to provide for a 100% vesting for performance on median.
The EPS growth target is fully aligned with dormakaba’s organic sales growth ambition 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 restricted shares remain blocked and the performance share units are forfeited without any compensation. If a participant is terminated for cause, restricted shares that are blocked at the time of termination must be returned to the company 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 reporting periods 2020/21 and 2019/20 have come from dormakaba treasury.
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. The grant in September 2021 will consist of 100% performance share units and the allocation of restricted shares will be discontinued.
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 sign-on awards, 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 NCC 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 2020/21
In comparison to the previous year, total direct compensation (TDC) of the EC increased by 4%. There are several factors that impacted the level of actual compensation paid to the EC in the 2020/21 financial year, which are summarized below.
- Changes in EC composition: Riet Cadonau stepped down as CEO on 31 March 2021. His successor, Sabrina Soussan, joined the company as designated CEO on 1 January 2021 and took over as CEO as of 1 April 2021, leading to concurrent CEO level compensation payment for a three-month period. As part of her onboarding, Sabrina Soussan received one-time relocation support as well as a replacement award in lieu of the forfeited compensation at the previous employer. Further details can be found below.
- Base salary changes: considering the pandemic none of the EC members’ target base salaries were adjusted at the beginning of the reporting period as part of the regular compensation review. In the context of the pandemic and as a sign of solidarity with the global workforce, the EC members voluntarily agreed to a reduction in monthly base salary of 10%, starting from May 2020 and ending in October 2020, hence affecting four months of the reporting period. Overall, the annual basic compensation paid out decreased by 6%.
- STI payout: the STI payout formula is based on performance improvements versus previous year (and not on the achievement of budgeted targets). The STI payout of the EC members reflects the underlying financial performance in the reporting year, especially the increase in the Group net income which is the main driver of the STI payout for the CEO and EC members with global responsibility (CFO, CTO). All segments (COOs) contributed to the organic growth and an improved profitability compared to the previous year (improved EBITDA margin) except for AS AMER. In the reporting year, the STI payout of EC members is 96% of the annual base salary on average (previous year 70%). A payout of 78% of annual base salary (on average) for the EC members corresponds to the level of originally expected performance for the financial year 2020/21. For the former CEO, the STI payout is capped to 150% of annual base salary (pro-rated for the time spent in the role), as foreseen by the Article of Incorporation 24. For the new CEO, a pre-determined STI amount was paid out for the period of her onboarding as designated CEO (1 January to 31 March 2021) as per her employment contract. As of 1 April, the regular STI calculation methodology applied.
- LTI grant in September 2020: to determine the individual grant size (nominal value), the allocation criteria in place for several years (described under section 3.2) such as individual performance in the 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 slightly increased compared to previous year. For the departing 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 2019/20 (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 2019/20)*
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) and implement Information Security Management System (ISMS).
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. Sustainability: prepare for Science Based Targets initiative (SBTi). IT: continue to implement the defined IT strategy.
*This information is disclosed in summarized form for confidentiality reasons.
The replacement award for the new CEO relates to the forfeited equity compensation at the previous employer and was fully granted in the form of equity. The replacement award amounts to CHF 619,583 in restricted shares and CHF 631,583 in PSU granted at the hiring date on 1 January 2021. The shares are subject to a blocking period of 8 months, 1 year and 8 months, and 2 years and 8 months, respectively. The PSU are subject to a vesting period of 8 months, 1 year and 8 months, and 2 years and 8 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, 2019 and 2020, vesting in 2021, 2022 and 2023 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 2017 vested in September 2020 based on the EPS growth over the three-year vesting period at a vesting level of 96.1%. The share price at vesting amounted to CHF 527.00 compared to CHF 975.00 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 67% (excluding benefits and social security contributions) and increased (previous year 62%) due to increase predominantly in STI payout. Variable compensation paid out in shares accounted for 30% of the TDC (previous year 33%), 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 2019, the shareholders approved a maximum aggregate amount of CHF 18,000,000 for the EC for the financial year 2020/21. The compensation effectively awarded of CHF 13,652,662 is within the limit approved by the shareholders. This includes the replacement award for the new CEO in the amount of CHF 1,251,166. Further details can be found above.
As of 30 June 2021, 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.