Architecture of compensation
Compensation of the Board of Directors
The compensation regulation applicable to the Board of Directors is reviewed periodically based on competitive market practice and retains its validity for several years.
In order to guarantee the independence of the members of the Board of Directors in executing their supervisory duties, their compensation is fixed and does not contain any performance-related component. The annual overall compensation for each member of the Board of Directors depends on the responsibilities carried out in the year under review. The compensation is partially delivered in cash (fee) and in restricted shares.
Compensation model: Board of Directors
Members of the Board receive a fixed fee and additional fees for special tasks such as committee chairmanship, vice-chairmanship or committee membership. The fees are paid in cash in January for the previous calendar year. Actual expenditures will be reimbursed.
In addition, each member of the Board receives a fixed number of GF shares. The value of the share-related compensation is calculated on the basis of the closing share price on the last trading day of the reporting year. Those shares are granted at the end of December and are restricted for a period of five years.
The compensation of the Board of Directors is subject to regular social security contributions and is not pensionable.
Compensation of the Executive Committee
The principles of compensation of the Executive Committee members, as described above in the section “Principles of compensation” are set-out in a regulation and retain their validity for several years. They were last reviewed by the Compensation Committee in 2015.
The compensation of the Executive Committee includes the following elements:
- –Fixed base salary in cash
- –Performance-related short-term incentive in cash
- –Share-based remuneration (long-term incentive)
- –Benefits such as pension and social insurance funds
Compensation model: Executive Committee
Fixed base salary
The fixed base salary is determined primarily on the basis of the following factors:
- –Scope and complexity of the role, as well as the skills required to perform the role;
- –Skills, experience and performance of the individual in the role;
- –External market value of the role.
Fixed base salaries of the Executive Committee members are reviewed every year on the basis of those factors and adjustments are made according to market developments and to the company’s affordability.
The short-term incentive is a variable incentive designed to reward the achievement of business objectives of the Corporation and its divisions, as well as the fulfillment of individual performance objectives as defined within the MBO process, over a time horizon of one year.
The business objectives are set by the Board of Directors in accordance with the long-term strategy. They include absolute financial figures and are set for a period of several years in order to ensure sustainable and long-term performance. The business objectives are: organic sales growth (excluding acquisitions and divestures), EBIT margin (EBIT in relation to sales) and Return on Invested Capital (ROIC). The following rules apply:
- –The short-term incentives are expressed as a target in % of annual fixed base salary;
- –The maximum short-term incentive amounts to 150% of the target short-term incentive;
- –The achievement for each objective is capped at 150%;
- –The highest weighting is on the organization, the executive is responsible for;
- –The hurdles and targets are defined on a divisional level to reflect the difference in businesses.
For each objective, the Board of Directors sets a target level and a threshold level (hurdle) of achievement under which there is no payout. The payout factor for achievement levels between the hurdle and the target is calculated by linear interpolation. While the hurdles and the targets are valid for a period of several years, the achievement against those is measured on a yearly basis and leads to a payout factor for this portion of the variable incentive. The hurdle for the ROIC is set on a level clearly over the average cost of capital of the Corporation.
The individual objectives are set within the MBO process at the beginning of the year. They are clearly measurable. At the end of the year, the achievement against each individual objective is assessed and leads to a payout factor for this portion of the variable short-term incentive.
The short-term incentive plan regulation includes the provision of forfeiture in case of dismissal based on fraud.
Short-term incentive in % of annual fixed base salary
The target short-term incentive amounts to 100% of the annual fixed base salary for the Chief Executive Officer and to 60% of the annual fixed base salary for the other members of the Executive Committee. Short-term incentive pay-outs are capped at 150% of target level.
The weighting of the business and individual objectives for the Chief Executive Officer and the other Executive Committee members is described in the following chart:
Weighting of the business and individual objectives (target level of performance/payout factor)
Thresholds and targets for the corporate business objectives
Long-term incentive (share-based remuneration)
The metrics of the long-term incentive plan have been designed to fit with GF’s Strategy 2020, focusing on long-term sustainable value creation for employees, customers, and shareholders. The incentive is based on one Key Performance Indicator, Earnings per Share (EPS), measured over a prospective three years performance period, in order to:
- –Align the interests with those of GF’s shareholders;
- –Allow to participate in the long-term success of GF;
- –Foster and support a high performance culture.
The Key Performance Indicator, EPS, is measured over a prospective three years performance period in relation to the last 10 years average value; this ensures that full business cycles are taken into account when measuring the achievement levels. Share buybacks or capital increases would be neutralized and would have no impact on the EPS value.
The initial Grant is expressed as a number of shares, based on the length of employment in the year x-1 (pro-rated based on twelve months). The number of granted shares will be divided into a number of restricted shares (RS) and a number of performance restricted shares (PS), as follows:
RS will be blocked for 5 years, PS for 2 years after the vesting period of 3 years.
For the Plan year x-1, the RS and PS are granted at 1 January, year x (Grant Date). The RS vest immediately; the vesting of the PS is subject to meeting the following performance criteria:
- –Should the average EPS value over the 3 years vesting period (year x+3) be equal to the average EPS value of the previous 10 years, 100% of the granted PS will vest at the Vesting Date.
- –Should the average EPS value over the 3 years vesting period (year x+3) be above 150% of the average EPS value of the previous 10 years, 200% of the granted PS will vest at the Vesting Date (cap).
- –Should the average EPS value over the 3 years vesting period (year x+3) be below 50% of the average EPS value of the previous 10 years, all granted PS will forfeit (hurdle).
- –For achievements in between 50% and 150% the calculation is linear.
Whereas the Vesting Date of the granted PS is defined as the day 3 years after the Grant Date and five working days after the official disclosure of the EPS value of the relevant business year.
The grant value of the share is based on the closing share price on the last trading day of the reported business year. The shares are automatically unblocked in case of termination, liquidation or change of control. The shares of the share-based compensation program are either treasury shares or are repurchased on the market.
The long-term incentive plan regulation includes the provision of forfeiture in case of dismissal based on fraud.
Note: Performance Shares
A simulation with possible scenarios quickly shows that, even if the economy continues doing well and EPS increases over the vesting period, the number of shares granted would only increase moderately compared to the previously existing scheme with a fixed number of shares. Conversely, if the economic situation would deteriorate and EPS go down significantly, the amount of granted performance shares would slide below or well below the amount of fixed shares granted under the previous scheme. The Board of Directors therefore firmly believes this scheme to be appropriate and fair for all parties.
There is no obvious peer group for GF given its diversified portfolio. In addition, division peers are mostly private companies (GF Automotive, GF Piping Systems) or Japanese conglomerates (GF Machining Solutions). Therefore, the Board of Directors decided to compare the average EPS during the vesting period to the average of the previous ten years.
Benefits consist primarily of retirement and insurance plans that are designed to provide reasonable retirement remuneration as well as a reasonable level of protection against risks such as death and disability. All members of the Executive Committee have a Swiss employment contract and participate in the pension fund of GF offered to all Swiss-based employees, in which only the fixed base salary is insured. The pension fund exceeds the minimum legal requirement of the Swiss Federal Law on Occupational Retirement, Survivors and Disability Pension Plans (BVG) and is in line with commensurate market practice. For top-management positions, including the members of the Executive Committee, an early retirement plan is in place. The plan is entirely financed by the employer and is administered by a Swiss foundation. Beneficiaries may opt for early retirement from the age of 60, provided that they are enrolled with the Swiss Social Security and have been employed by GF at least for ten years.
Members of Executive Management do not receive any special benefits. They are entitled to a representation lump-sum allowance and to reimbursement of business expenses in accordance to the expense rules applicable to all employees at management levels employed in Switzerland. The expense regulation has been approved by the relevant cantonal tax authorities.
The contractual agreements with the Chief Executive Officer and the Executive Committee members foresee a notice period of maximum 12 months. There are no entitlements to severance payments.