Compensation structure

Compensation of the Board of Directors

Compensation Principles

In order to ensure their independence in exercising their supervisory duties, the Members of the Board of Directors receive a fixed compensation only. The compensation is delivered partially in cash and partially in shares blocked for a period of five years, in order to strengthen the alignment to shareholders’ interests.

Compensation model

The compensation applicable to the Board of Directors is reviewed every two to three years based on competitive market practice and its basic structure is kept as constant as possible. The last benchmarking analysis was conducted in 2019 (please refer to chapter Method of determination of compensation / Benchmarking for details of the peer group). No changes were made further to this analysis and the compensation model of the Board of Directors remains unchanged since 2015.

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 compensation for each Member of the Board of Directors depends on the functions and tasks carried out in the year under review and consists of an annual basis board fee paid in cash and in blocked shares, as well as additional committee fees paid in cash. The cash fees are paid in January for the previous calendar year, while the shares are allocated in December of the respective calendar year. The shares are blocked for a period of five years. The blocking period may be lifted at the discretion of the Board of Directors in case of death and remains in place in all other instances of termination. The shares are disclosed at their market value based on the closing share price on the last trading day of the reporting year.

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Responsibility

 

Fee

 

Restricted shares

 

 

 

 

 

Basis fee

 

 

 

 

Board Membership

 

CHF 70’000

 

150 shares

 

 

 

 

 

Additional fees

 

 

 

 

Board Chairmanship

 

CHF 200’000

 

150 shares

Board Vice-Chairmanship 1

 

CHF 22’500

 

 

Audit Committee Chairmanship

 

CHF 80’000

 

 

Audit Committee Membership

 

CHF 30’000

 

 

Other Committee Chairmanship

 

CHF 40’000

 

 

Other Committee Membership

 

CHF 20’000

 

 

1 As of 18 April 2019, the additional fee for Board Vice-Chairmanship was discontinued

The compensation of the Board of Directors is subject to regular social security contributions and is not pensionable.

Shareholding ownership guideline

Members of the Board are required to hold 200% of the annual basis cash fee in GF shares. Newly elected members shall build up the required ownership within five years of their election to the Board of Directors. In the event of a substantial rise or drop in the share price, the Board of Directors may, at its discretion, amend that time period accordingly.

The minimum holding requirements are illustrated in the table below:

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Shareholding ownership requirement

 

Build-up period

Board of Directors

 

200% of annual basis cash fee

 

5 years

To calculate whether the minimum holding requirement is met, all held shares are considered regardless of whether they are blocked or not. The Compensation Committee reviews compliance with the share ownership guideline on an annual basis.

Compensation of the Executive Committee (including CEO)

Compensation principles

The compensation policy applicable to the Executive Committee is designed to attract, motivate and retain talented individuals, along the following principles:

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Fairness and transparency (internal equality)

 

Pay for performance and strategy implementation

 

Long-term orientation and alignment with shareholders’ interests

 

Market competitiveness

Compensation programs are straightforward, clearly structured and transparent. They ensure fair compensation based on the responsibilities and competencies required to perform the function.

 

A portion of compensation is directly linked to the company’s performance, to the implementation of the business strategy and to individual performance.

 

A significant portion of the compensation is delivered in form of performance shares, ensuring participation in the long-term success of the company and a strong alignment to shareholders’ interests.

 

Compensation levels are competitive and in line with relevant market practice.

Compensation model

The compensation of the Executive Committee includes the following elements:

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Fixed compensation elements

 

Variable compensation elements

 

 

Fixed base salary

 

Benefits

 

STI Performance year 2019

 

LTI Performance year 2019

Purpose

 

Ensure basic fixed remuneration

 

Ensure protection against risks such as death, disability and old age

 

Pay for annual performance

 

Pay for long-term performance Align to shareholders’ interests Participate in long-term success and align with Strategy 2020

Drivers

 

Scope and complexity of the function Profile of the individual Market practice

 

Local legislation and market practice

 

Performance against business and individual objectives

 

Long-term value creation

Performance / Vesting period

 

 

 

Year 2019

 

3 years Grant date: 1 January 2020 Vesting period: 2020 – 2022

Blocking period

 

 

 

 

Additional 2 years: 2023 – 2024

Performance measures

 

Skills, experience and performance of the individual

 

 

Organic sales growth EBIT margin ROIC Individual objectives

 

All LTI-related shares depend on performance: 50% EPS, 50% rTSR EPS-related achievement determination: Ø (EPS value years 2020, 2021, 2022) divided by Ø (EPS value years 2017, 2018, 2019) rTSR-related achievement determination: Ø (ranking in the years 2020, 2021, 2022 of GF within the SMI-Mid)

Delivery

 

Monthly cash

 

Contributions to social security, pension and insurances

 

Cash, one-off payment in March year 2020

 

Number of PS, of which 50% PS(EPS), 50% PS(rTSR)

EBIT = Earnings before interest and taxes

EPS = Earnings per share

PS = Performance shares

PS(EPS) = EPS dependent performance shares

PS(rTSR) = rTSR dependent performance shares

ROIC = Return on invested capital

Ø = Average

For the purpose of comparison, the compensation of the Executive Committee is regularly benchmarked against compensation surveys published by independent consulting firms and on publicly available compensation information of comparable multinational industrial companies (please refer to chapter Method of determination of compensation / Benchmarking for details of the peer group).

Compensation mix and caps

graphic

Maximum payouts:

Fixed base salary

The fixed base salary is determined primarily based on the following factors:

Fixed base salaries of the Executive Committee members are reviewed every year based on those factors and adjustments are made according to market developments.

Short-term incentive

The short-term incentive (STI) 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 STI is expressed as a target in % of the annual fixed base salary. The target STI amounts to 100% of the annual fixed base salary for the CEO and to 60% of the annual fixed base salary for the other Members of the Executive Committee. The STI payout is capped at 150% of target level.

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Target

 

Minimum

 

Maximum

CEO

 

100%

 

0%

 

150%

Other members of the Executive Committee

 

60%

 

0%

 

90%

Business and individual objectives for the STI

The business objectives are set by the Board of Directors in accordance with the published mid-term strategy goals. 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 include organic sales growth (excluding acquisitions and divestitures), EBIT margin (EBIT in relation to sales) and Return on Invested Capital (ROIC).

For each business objective, the Board of Directors sets a target level and a threshold level (hurdle) of achievement under which there is no payout. The hurdles and the targets are valid for a period of several years. Further, the ROIC hurdle is set at a level clearly over the weighted average cost of capital (WACC) of the Corporation in order to maximize value creation. The respective achievement level of each business objective is measured on a yearly basis and determines a payout factor for that business objective.

For the period 2016–2020, the hurdles and targets for the business objectives at Corporation level are as follows:

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Performance measure

 

Organic sales growth (at constant currencies)

 

EBIT margin

 

Return on invested capital (ROIC)

Rationale / driver

 

Maximizing growth from within (innovations, improved services, etc.)

 

Operating profitability

 

Efficiency at allocating the capital to profitable investments

Hurdle 1

 

1%

 

6%

 

14%

Strategy targets 2016–2020

 

3-5%

 

9-10% 2

 

20-24% 2

1 Achievements below the hurdle result in zero payout for the respective business objective; for the organic sales growth objective, the payout for reaching the hurdle starts at 0%, while it starts at 50% for reaching the hurdle for the objectives EBIT margin and ROIC.

2 The strategy targets for EBIT margin and ROIC have been adjusted due to the divestment of entities

The individual objectives are set within the MBO process at the beginning of the year. These objectives are clearly measurable, not duplicating the financial targets and are set in three different categories:

At the end of the year, the achievement of each individual objective is assessed and determines the payout factor for the portion of the STI related to individual objectives.

Weighting of the business and individual objectives (target level of performance/payout factor)

The weighting of the business and individual objectives for the CEO and the other Members of the Executive Committee depends on the function (the highest weight is put on the organization the individual is responsible for) and is described in the following table:

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CEO

 

Head Division

 

Staff functions

 

 

 

 

 

 

 

Business objectives

 

 

 

 

 

 

Corporation level

 

 

 

 

 

 

Organic sales growth (20%)

 

15%

 

5%

 

15%

EBIT margin (40%)

 

30%

 

10%

 

30%

ROIC (40%)

 

30%

 

10%

 

30%

 

 

 

 

 

 

 

Division level

 

 

 

 

 

 

Organic sales growth (20%)

 

 

 

10%

 

 

EBIT margin (40%)

 

 

 

20%

 

 

ROIC (40%)

 

 

 

20%

 

 

 

 

 

 

 

 

 

Individual objectives

 

 

 

 

 

 

MBO

 

25%

 

25%

 

25%

 

 

 

 

 

 

 

Total

 

100%

 

100%

 

100%

Long-term incentive (share-based compensation)

In 2017, GF introduced a revised performance-based Long-term Incentive (LTI) plan. The purpose of the LTI plan is to:

The LTI is a performance share (PS) plan. The CEO and the other Members of the Executive Committee are granted a number of PS annually based on the length of employment in the year prior to the grant. For business year 2019, the PS are granted on 1 January 2020 and their grant value is based on the closing share price on the last trading day of 2019. The PS are subject to a three-year cliff vesting followed by an additional two-year blocking period on the vested shares.

The vesting of the PS is conditional upon the achievement of two specific performance objectives over a prospective period of three years: Earnings per Share (EPS) as internal performance measure and relative Total Shareholder Return (rTSR) as external performance measure.

The number of PS granted is split as follows:

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Performance shares

 

 

 

 

 

 

 

 

PS (EPS)

 

PS (rTSR)

 

Total shares

CEO

 

Grant: 300 Vesting: 0% – 200%

 

Grant: 300 Vesting: 0% – 200%

 

Grant: 600 Vesting: 0% – 200%

Other Members of the Executive Committee

 

Grant: 125 Vesting: 0% – 200%

 

Grant: 125 Vesting: 0% – 200%

 

Grant: 250 Vesting: 0% – 200%

The Board of Directors decided to amend the target setting of the LTI starting as of 2019.

The EPS target, which is determined by the Board of Directors, is in line with the ambitious Strategy 2020 goals of GF and is measured at the end of the vesting period. Share buybacks, major acquisitions/divestitures or capital increases are neutralized and have no impact on the EPS value calculation.

The rTSR is measured as a percentile rank in relation to a peer group. The peer group consists of the companies of the SMI-Mid index, because those companies are comparable to GF in terms of organizational size, complexity and market capitalization and the SMI-Mid index reflects best the economic environment for companies listed in Switzerland. The percentile rank is evaluated on an annual basis: at the end of the vesting period, the final ranking of GF amongst the peer group is the average annual ranking over the three-year vesting period.

For both performance measures, a threshold level of performance (hurdle), under which there is no vesting of the PS, is defined, as well as the target level, corresponding to a vesting level of 100% and a maximum achievement level, for which the vesting is capped at 200%.

Both EPS and rTSR, are measured individually; hence, the vesting of the PS(EPS) cannot be compensated by the vesting of PS(rTSR) and vice-versa.

The vesting rules of the LTI plan are summarized in the table below:

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Performance measure

 

Earnings per Share (EPS)

 

Relative Total Shareholder Return (rTSR)

Description

 

EPS: (Average EPS value years x+1, x+2, x+3) divided by (Average EPS value years x, x-1, x-2)

 

TSR: starting value of Volume Weighted Average Share price (VWAP) over the first 30 trading days of the year and ending value of the VWAP over the last 30 trading days of the year. Relativity measured as the average annual ranking within the peer group (companies of the SMI-Mid Index) over 3 years.

Rationale

 

Internal measure Reflects GF’s profitability and how efficiently the Strategy is implemented

 

External measure Reflects GF’s relative value compared to the SMI-Mid market

Weighting

 

50% of the PS grant

 

50% of the PS grant

Target level

 

20% EPS growth over 3 years 100% payout

 

Relative TSR at the median of the peer group 100% payout

Maximum achievement level

 

200%

 

200%

Vesting period

 

3 years Followed by 2-year blocking period on vested shares

 

3 years Followed by 2-year blocking period on vested shares

Vesting rules

 

Threshold: 0% EPS growth over 3 years = 50% vesting Target: 20% EPS growth over 3 years = 100% vesting Point 30: 30% EPS growth over 3 years = 150% vesting Maximum: 38% EPS growth over 3 years = 200% vesting Linear interpolation in between EPS decline over 3 years: 0% payout

 

Threshold and target: 50th percentile = 100% vesting Maximum: best of all peers = 200% vesting Linear interpolation between threshold/target and maximum No vesting for performance below median

Vesting curve Earnings per Share (EPS)

graphic

Vesting curve relative Total Shareholder Return (rTSR)

graphic

The Compensation Committee is responsible for evaluating each year if extraordinary, one-time events have significantly influenced any of the performance objectives, EPS and rTSR, and, if so, to make adjustment recommendations to the Board of Directors. The explanations for such adjustments, if any, will be included in the Compensation Report of the relevant year. For 2019, no adjustments were necessary.

In case of termination for cause, the vested shares remain blocked until the end of the respective blocking periods and any unvested PS forfeit. There is no accelerated vesting of unvested PS except in case of change of control and termination following death, disability or ordinary retirement according to GF pension fund regulations. In such situations, unvested PS vest immediately based on the latest performance estimate available at time of termination. The blocking period of vested shares may only be lifted in case of change of control or death.

The shares of the LTI plan are either treasury shares or are repurchased on the market. No issuance of shares is foreseen for the LTI plan in order to avoid shareholder dilution.

Clawback and malus provisions

For the LTI, in case a lower amount would have been awarded or paid out due to misstatement of financial results or of fraudulent or willful substantial misconduct by a Member of the Executive Committee, the Board of Directors will review the specific facts and circumstances and take actions. With respect to awards granted under the LTI in respect of the years for which a restatement has to be made and/or in which the misconduct took place, the Board of Directors may determine at any time before or after the delivery of the shares to forfeit or suspend the vesting of any LTI award in full or in part (malus), require the transfer for nil consideration of some or all the shares delivered under the LTI plan (clawback) and/or require a reimbursement in form of a cash payment in respect of some or all the shares delivered under the LTI plan (clawback).

The Clawback and Malus Policy applies to the Members of the Executive Committee for the entire duration of their membership and for up to three years following the termination thereof.

Benefits

Benefits consist primarily of retirement and insurance plans that are designed to provide reasonable level of income in case of retirement 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, if they are enrolled with the Swiss Social Security and have been employed by GF at least for ten years. Ordinary retirement is at age 65.

Members of the Executive Management do not receive 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.

Contractual terms

The employment contracts with the CEO and the other Members of the Executive Committee foresee a notice period of maximum twelve months. There are no entitlements to severance payments, nor any change of control provisions, other than the early vesting and early unblocking of share awards as disclosed in the chapter Long-term incentive (share-based compensation). Their contracts may foresee non-competition provisions that are limited in time to a maximum of two years and which allow compensation up to a maximum of the last total annual compensation paid.

Shareholding ownership guideline

The CEO and the other Members of the Executive Committee are required to hold a minimum percentage of annual base salary in GF shares.

Newly appointed members shall build up the required ownership within five years of their appointment. In the event of a substantial rise or drop in the share price, the Board of Directors may, at its discretion, amend that time period accordingly.

The minimum holding requirements are illustrated in the table below:

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Shareholding ownership requirement

 

Build-up period

CEO

 

200% of annual fixed base salary

 

5 years

Other Members of the Executive Committee

 

100% of annual fixed base salary

 

5 years

To calculate whether the minimum holding requirement is met, all vested shares are considered regardless of whether they are blocked or not. Unvested PS are excluded. The Compensation Committee reviews compliance with the share ownership guideline on an annual basis.

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