Outlook
GF is starting the new strategy cycle 2021–2025. In this context, the Compensation Committee undertook a review of the compensation system to ensure that it is still aligned with the strategy, shareholders’ expectations, and market practice. The decision was made to adapt the compensation program as of financial year 2021.
Short-term incentive
The overall design of the STI remains unchanged, including the target in % of the annual fixed base salary for the CEO and the other members of the Executive Committee.
The weightings of the business objectives will be slightly amended, with organic sales growth accounting for 30% of the business objectives (previously 20%) and equally weighted with ROIC (also 30%, previously 40%).
Environment – Social – Governance (ESG) objectives will be a dedicated separate element in the STI with a weighting of 10% and will not be included in the individual objectives as in the past years. The objectives will be specifically set for the individual divisions and their sustainability strategy and roadmap.
Examples of these ESG-related objectives for 2021 include:
- Environment: Definition of measures to reduce CO2 emissions in line with science-based targets; further integration of sustainability in production technology process development;
- Social: Reduction of accident rate and severe accidents, continuation of the “zero accident” campaign;
- Governance: Development of a sustainability roadmap in context of the Strategy 2025 for the individual area of responsibility, including findings based on the recommendation of the Task Force on Climate-related Financial Disclosures (TCFD).
Weighting of the performance objectives
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CEO |
Division President |
CFO |
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Business objectives |
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Corporation level |
65% |
25% |
65% |
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Organic sales growth (30%, previously 20%) |
19.5% |
7.5% |
19.5% |
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EBIT margin (40%) |
26.0% |
10.0% |
26.0% |
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ROIC (30%, previously 40%) |
19.5% |
7.5% |
19.5% |
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Division level |
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40% |
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Organic sales growth (30%, previously 20%) |
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12.0% |
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EBIT margin (40%) |
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16.0% |
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ROIC (30%, previously 40%) |
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12.0% |
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Sustainability (new) |
10% |
10% |
10% |
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ESG |
10.0% |
10.0% |
10.0% |
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Individual objectives |
25% |
25% |
25% |
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MBO |
25.0% |
25.0% |
25.0% |
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Total |
100% |
100% |
100% |
Annual targets will be derived from the five-year strategic goals, taking into consideration the actual results in the previous year as well as the budget and forecast. These targets are discussed and approved by the Board of Directors.
Long-term incentive
The changes described below have been proposed based on feedback received from investors and proxy advisors and have been intensively discussed prior to the implementation with this target audience. The valuable feedback from these conversations has been considered for the design and implementation of the new regulations.
The main topics were the following:
- Grant value mechanism: the grant value was based on a fixed number of shares, and the value could therefore fluctuate with the share price. This will not be the case anymore, as the grant value will be based on a percentage of the fixed base salary;
- Pay-for-performance/vesting curves: a thorough analysis of the previous LTI setup, including a back-testing of the previous years’ performance assessment and vesting levels, showed some misalignments. The new vesting curves provide a better balance between pay-for-performance, reasonable leverage, and are also better aligned with market practice. The new vesting schedules allow for a low payout in case of below-target performance (but not under the threshold level of performance) and limits the maximum payout to 150% in case of extraordinary performance, which is more in line with the compensation philosophy of the company (no “all or nothing” plans).
The LTI will continue to be a performance share plan subject to a three-year vesting based on EPS growth and rTSR, followed by a two-year blocking period.
The following overview shows the main items of the new LTI plan as well as the amendments, introduced as of financial year 2021:
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Current LTI plan |
Changes |
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Grant value |
Based on a fixed number of shares: CEO: 700 shares EC: 250 shares |
Based on a percentage of the annual fixed base salary CEO: 90% EC: 60% |
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Performance objectives |
Earnings per Share (EPS) Relative Total Shareholder Return (rTSR) |
No change |
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Vesting curve EPS |
Threshold: 0% EPS growth = 50% payout Target: 20% EPS growth = 100% payout Point 30: 30% EPS growth = 150% payout Maximum/cap: 38% EPS growth = 200% payout |
Max payout reduced from 200% to new cap at 150% payout |
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Vesting curve rTSR |
Threshold and Target: median rank = 100% payout Point 75: 75th percentile rank = 150% payout Maximum/cap: 1st rank = 200% payout |
Symmetrical shift: Max payout reduced from 200% to new cap at 150% payout (75th percentile rank), threshold at 50% payout (25th percentile rank) |
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Vesting period |
3 years Followed by 2-year blocking period on vested shares |
No change |
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Termination rules |
Bad leaver: forfeiture Good leaver: full vesting at regular vesting date or accelerated (retirement, death, disability) |
Stricter definition of bad leaver including any termination except retirement, disability, death and change of control Bad leaver: forfeiture Good leaver: pro-rata vesting at regular vesting date (retirement) or accelerated (death, disability or change of control) |
Vesting curve Earnings per Share (EPS)
Vesting curve relative Total Shareholder Return (rTSR)
The Compensation Committee trusts that these changes will improve the compensation design by aligning it better with shareholder interests, ensuring a strong connection with the business strategy for the new strategy cycle 2025 and a good balance between the pay-for-performance principle and the sustainability and stability of the compensation system.
Further details on the new STI and LTI design will be provided in the 2021 Compensation Report.