Base salary

The objective of the base salary is to enable recruitment and retention of top managers of a major international company.

The base salaries of members of the Board of Management increased by 3 percent in 2011.

Short-term incentive (annual bonus)

The objectives of the short-term incentive are to reward economic value creation (EVA) and EBITDA growth for our shareholders and other stakeholders, to measure individual and collective performance and to encourage progress in the achievement of long-term strategic objectives.

The performance-related short-term incentive is linked to the company’s EVA and EBITDA and the individual and qualitative targets of the members of the Board of Management. More specifically, 35 percent of the short-term incentive opportunity is linked to EVA, 35 percent is linked to EBITDA and the remaining 30 percent is linked to individual and qualitative targets, including non-financial targets. EVA and EBITDA are based on the company’s financial results in constant currencies.

On the outcome of the three short-term incentive elements (EVA, EBITDA and personal targets), the Supervisory Board applies an overall rating based on the principles of the Performance and Development Dialog, AkzoNobel’s appraisal system. For the Board of Management, the rating includes a reasonableness test, in which the Supervisory Board critically assesses the actual ambition level of the performance targets in light of the assumptions made at the beginning of the year. It also includes an assessment of the progress made with the strategic objectives under current market conditions. This method for short-term incentive determination is also the basis of the compensation framework for other executives in the company.

The EVA performance measure is used in order to encourage the Board of Management to create long-term value for the company’s shareholders and other stakeholders. EVA is calculated by deducting from net operating profit after taxes (NOPAT) a capital charge representing the cost of capital calculated on the basis of an average return investors expect.

The EVA and EBITDA elements of the short-term incentive have a performance threshold level of 80 percent and a maximum performance level of 120 percent of the targeted EVA and EBITDA respectively. The target EVA and EBITDA are determined annually by the Supervisory Board. The pay-out of the short-term incentive will never exceed 100 percent of base salary for members of the Board of Management and 150 percent of base salary for the CEO. Qualitative targets are set in the context of the medium-term objectives of the company and qualify as commercially sensitive information. AkzoNobel will not disclose all the targets. However, the targets for 2011 included goals set with respect to operational and functional excellence, delivering on the strategic plans and talent development.

Please see the Report of the Board of Management chapter in the Strategy section for the actual 2011 EVA and EBITDA performance used in the short-term incentive. The EVA of the sum of the business units is used as the basis for calculating the EVA element of the short-term incentive for the Board of Management. In 2011, the minimum threshold for pay-out regarding the EVA target was not met, whereas for EBITDA the performance outcome was above the threshold. Upon its ex-post review of the relationship between the chosen performance criteria and the strategic objectives applied, and of the relationship between remuneration and performance, the Supervisory Board, given the importance of the link between the variable remuneration and the company’s strategic ambitions, decided not to make any upward correction and (hence) no payments were made to members of the Board of Management in respect of the EVA component of the short-term incentive, whereas the EBITDA component paid out at 68 percent of target.

In order to stimulate share ownership, the members of the Board of Management have the opportunity to invest part of the net pay-out of their short-term incentive in AkzoNobel shares. This is further addressed in the paragraph regarding share holding requirements and share matching.

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