Compensation architecture for the EC

15 min.

The compensation awarded to EC members is primarily driven by the success of the company. In addition to competitive fixed compensation, there is a performance-related component, which 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.

2. Benefits

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 healthcare 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 financial objectives and not on individual goals. For the financial year 2021/22, the incentive formula relates exclusively to Group results in support of the Group-wide implementation of the Shape4Growth strategy. 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 formula is built around the principle of paying a predefined share of profit individually determined for each function, which is additionally modified by 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. The growth multiplier is a combination of the company’s net income growth (capped at 1.6 in case of substantial growth) and the Group sales growth (capped at 1.4). The net working capital (NWC) multiplier depends on the Group change of net working capital compared to previous year and is capped at 1.4 in of case of substantial reduction of net working capital. The sales booster is based on the achievement of an absolute sales growth target and is capped at 1.1.

This formula is aligned to the business strategy of profitable growth because it rewards for bottom-line (Group net income) as well as top-line results (sales growth) and 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. For the relevant financial year, the Group net income was adjusted to reflect the impact of the sale of Mesker in the United States for the purpose of calculating the short-term incentive.

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.

As of the grant of September 2021, the long-term incentive is delivered fully in performance share units. Therefore, at the beginning of the plan cycle (grant date), EC members are awarded 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, market/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 company's long-term 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 granted in the form of performance share units of dormakaba subject to a three-year performance-based vesting period. 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).

The relative TSR is measured relative to the SPI Industrials index: this index was selected as the performance benchmark because of the insufficient number of direct competitors of dormakaba that are publicly listed, which does not allow for a suitable customized peer group. Therefore, the SPI Industrials as an index of companies of comparable size listed on the SIX Swiss Exchange was the most appropriate alternative.

The EPS growth target 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%.

Performance share units are usually awarded annually in September. In case of voluntary termination by the participant or if a participant is terminated for cause, performance share units are forfeited without any compensation. In case of termination without cause or retirement, performance share units are subject to a pro rata vesting at the regular vesting date. In case of disability, death, or change of control, performance share units are subject to an accelerated pro rata vesting based on a performance assessment by the BoD (see also Corporate Governance Report). The conditions for the award of performance share units are governed by the stock award plans of dormakaba.

Shares awarded in reporting periods 2021/22 and 2020/21 have come from dormakaba treasury.

The long-term incentive awards have been 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).

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 post-employement non-competition clauses for a duration of up to a maximum of two years. In cases where the company decides to activate the post-employement 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.

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 2021/22

In comparison to the previous year, total direct compensation (TDC) of the EC decreased by 10%. There are several factors that impacted the level of actual compensation paid to the EC in the 2021/22 financial year, which are summarized below.

• Changes in EC composition: Jim-Heng Lee was appointed CEO on 1 January 2022, succeeding Sabrina Soussan, who stepped down from her role as of 31 December 2021. Andy Jones was appointed to the role of President Asia Pacific on 12 January 2022, succeeding Jim-Heng Lee, and became a member of the EC. Mathias Mörtl joined the EC per 1 December 2021 as COO, a position newly created under the new strategy Shape4Growth. Bernd Brinker stepped down as CFO as per 31 March 2022 and was succeeded by Kaspar Kelterborn, who took up his responsibilities as interim CFO as of 1 April 2022 and who receives no variable compensation.
• Base salary changes: For two EC members, the target base salaries were adjusted by overall 5% in local currency to bring them in line with market requirements.
• STI payout: the STI payout formula is based on performance compared to previous year (and not on the achievement of budgeted targets). The STI payout of the CEO and EC members especially reflects the development of Group net income, which is the main driver of the STI payout and which decreased in respect to the prior year by 4.9% (excluding the effect of the divestment of the Mesker business in June 2022). In the reporting year, the STI payout of EC members is 71% of the annual base salary on average (previous year: 96%). A payout of 99% of annual base salary (on average) for the EC members corresponds to the level of originally expected performance for the financial year 2021/22.
• LTI grant in September 2021: 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, the strategic importance of the projects under responsibility, position against benchmark and retention need were considered. Based on those factors, the LTI grant size of five EC members, was increased and the LTI grant size for one EC member was decreased compared to the previous year. For other EC members, the LTI grant size remained unchanged compared to the previous year. For three EC members no LTI award was granted in September 2021, as they joined the EC after the relevant date. The strategic priorities of the CEO for financial year 2020/21 (considered for determining the grant size in the reporting year) are detailed below:

Strategic priorities of the CEO (financial year 2021/22)

The performance share units granted under the long-term incentive in September 2018 vested in September 2021 based on the EPS growth and the rTSR ranking over the three-year vesting period at a vesting level of 79.87%. The share price at vesting amounted to CHF 660.50 compared to CHF 680.50 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 55% (excluding benefits and social security contributions) and decreased (previous year: 67%) due to a decrease predominantly in STI payout. Variable equity-based compensation (excluding new joining and leaving EC members) accounted for 27% of the TDC (previous year: 30%). This is approximately in line with the compensation strategy to award 30% or more of total compensation in equity-based compensation by applying increases primarily in the long-term incentive component rather than in the other compensation elements.

The table below represents the pay mix of the CEO and EC in relation to total direct compensation (excluding benefits and social security).

At the AGM 2020, the shareholders approved a maximum aggregate amount of CHF 16,500,000 for the EC for the financial year 2021/22. The compensation effectively awarded of CHF 11,162,842 is within the limit approved by the shareholders.

As of 30 June 2022, 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.