Implementation of the remuneration policy in 2016

The Supervisory Board is responsible for ensuring that the remuneration policy, and its implementation, are aligned with the company’s objectives. Both the policy itself, and the checks and balances applied in its execution, are designed to avoid incidents where members of the Board of Management – and senior executives for whom similar incentive plans apply – act in their own interest, take risks that are not in line with our strategy and risk appetite, or where remuneration levels cannot be justified in any given circumstance.

To ensure that remuneration is linked to performance, a significant proportion of the remuneration package is variable and dependent on the short and long-term performance of the individual Board member and the company. Performance targets must be realistic and sufficiently stretching. In addition, and particularly with regard to the variable remuneration components, the Supervisory Board ensures that the relationship between the chosen performance criteria and the strategic objectives applied – as well as the relationship between remuneration and performance – are properly reviewed and accounted for both ex-ante and ex-post.

In accordance with the requirements of the Code, before setting proposed targets for Supervisory Board approval, the Remuneration Committee carried out scenario analyses of the possible financial outcomes of meeting target levels, as well as maximum performance levels, and how they may affect the level and structure of the total remuneration of the members of the Board of Management.

The overall remuneration levels are aimed at the median level of the external market. For benchmarking purposes, a peer group has been defined by the Supervisory Board. In 2016, the peer group consisted of the following companies:

The Remuneration Committee consults professional independent remuneration experts to ensure an appropriate comparison. It further reviews the impact on pay differentials within the company, which is taken into account by the Supervisory Board when determining the overall remuneration. When other benefits are granted, the Supervisory Board ensures that these are in line with market norms.

For communication purposes, the table below presents an overview of the remuneration of the members of the Board of Management who were in office in 2016. See Note 22 to the Consolidated financial statements for more details. The implementation of the remuneration policy in 2016 will be a separate agenda item at the 2017 AGM.

Base salary

The base salary of the CEO increased by 9 percent in 2016, to an annual base salary of €936,500, effective from the date of reappointment. The base salary of the CFO increased by 4.3 percent in 2016, to an annual base salary of €610,000 effective from January 1, 2016.

Short-term incentive

The objectives of the short-term incentive in 2016 were to reward performance on ROI, OPI, OCF and revenue growth; to measure individual and collective performance; and to encourage progress in the achievement of long-term strategic objectives. On the outcome of the short-term incentive elements (ROI, OPI, OCF, revenue growth and personal targets), the Supervisory Board applied a reasonableness test in which the actual level of the performance was critically assessed in light of the assumptions made at the beginning of the year. The test also included an assessment of the progress made with the strategic objectives under prevailing market conditions.

For 2016, the targets for ROI, OPI, OCF and revenue growth were determined by the Supervisory Board. Qualitative STI targets were set and assessed by the Supervisory Board in the context of the medium-term objectives of the company. AkzoNobel does not disclose all qualitative targets, as they are considered commercially sensitive information. However, the targets for 2016 included goals set in relation to delivering on the company’s communicated performance improvement and organic growth ambition.

ROI is calculated by determining the ratio of operating income over 12 months avarage invested capital using reported numbers. OPI was calculated as the number reported for IFRS purposes, in constant currencies. The definitions and calculations were identical to those applied in 2015. OCF was calculated as EBITDA minus the change in operating working capital and capital expenditures, all in constant currencies. The revenue growth target was defined as the total revenue change versus the previous year, corrected for divestments and acquisitions, in constant currencies. In 2016, the performance against the targets set for ROI, OPI, OCF, revenue growth and qualitative targets was as follows: On the qualitative targets, the CEO performed slightly above target and the CFO above target.

Long-term incentives

The objectives of our long-term incentive plan are to encourage long-term sustainable economic and shareholder value creation – both absolute and relative to competitors – and to align Board of Management interests with those of shareholders, as well as ensuring retention of the members of the Board of Management. Performance-related shares are considered to provide a strong alignment with shareholders’ interests.

Performance-related share plan

In line with the remuneration policy, vesting of 35 percent of the shares conditionally granted is linked to AkzoNobel’s ROI performance. For the shares conditionally granted in 2014 under the performance-related share plan (in respect of which the performance period ended on December 31, 2016), the Supervisory Board set the ROI to be achieved by the end of 2016 as follows:

AkzoNobel’s ROI performance at the end of the performance period was reviewed by the Supervisory Board and adjusted for currency effects and exceptional items. This resulted in a vesting of 104.3 percent for this part of the long-term incentive.

For the 2014 conditional grant, 30 percent was linked to AkzoNobel’s relative sustainability performance by taking the company’s average position in the RobecoSAM ranking. The following vesting scheme has been applied in respect of the conditional grants made in 2014:

AkzoNobel’s sustainability performance during the period 2014 to 2016 resulted in a vesting of 100 percent for this part of the long-term incentive.

For the 2014 conditional grant, the remaining 35 percent was linked to AkzoNobel’s relative total shareholder return (TSR) performance compared with the companies in a defined industry peer group. Independent external experts conducted an analysis to calculate the number of shares that will vest according to the TSR ranking. In order to adjust for changes in exchange rates, all local currencies were converted into euros. The relative TSR performance was compared with an industry peer group as determined by the Supervisory Board.

The industry peer group currently consists of the following companies:

This industry peer group is reviewed on a regular basis to ensure that the companies in the group remain appropriate peers. Occasionally, changes need to be made, particularly if one of the companies in the industry peer group is taken over. The Supervisory Board will monitor and ensure that, to the extent reasonably possible, a replacement has no impact on the company’s relative TSR ranking.

The following vesting scheme has been applied in respect of the conditional grants made in 2014:

AkzoNobel’s TSR performance during the period 2014 to 2016 resulted in a ninth position within the ranking of the peer group companies. This ranking did not result in any vesting of shares for the TSR part of the share plan.

Based on the company’s combined ROI, sustainability and TSR performance, the final vesting percentage of the 2014 conditional grant – after including the dividend yield during the performance period (determined to be 7.63 percent) – equaled 71.56 percent. 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 correction in respect of the definitive award.

The number of performance-related shares conditionally granted under the 2016 plan amounted to 23,397 for the CEO and 15,240 for the CFO.

In accordance with provision II.2.13d of the Code, the schedule at the end of this Remuneration report sets out: (i) The number of at-target shares conditionally granted; (ii) The number of shares which have vested; (iii) The number of shares held by members of the Board of Management at the end of the lock-up period; (iv) The face value at the conditional share grant, at vesting and at the end of the lock-up period, respectively.

In accordance with the company’s Articles of Association, the Code and the rules of the performance-related share plan, the number of shares to be conditionally granted to members of the Board of Management is determined by the Supervisory Board, within the limits of the remuneration policy and the maximum number of shares as adopted and approved, respectively, by the AGM. The Supervisory Board has decided that where, in the event of a takeover, the payout under the performance share plan is between 100 percent and 150 percent, it will, at its discretion – taking into account the performance of the company prior to the takeover bid – decide whether the projected outcome is fair and may decide to adjust the vesting upwards or downwards within the bandwidth mentioned. This does not affect the discretion the Supervisory Board has to correct the variable remuneration of the Board of Management upwards or downwards in exceptional circumstances. It is noted that a takeover would not influence the RobecoSAM sustainability ranking of the company, nor the ROI performance. Therefore, the Supervisory Board will, under such circumstances, primarily take into account the company’s TSR performance.

Claw back and value adjustment

In 2016, there was no cause for a claw back or value adjustment by the Supervisory Board.

Shareholding requirements and share-matching

The table on the right summarizes the shares acquired by the relevant members of the Board of Management in 2016 that would, subject to the conditions of the share-matching plan, qualify for matching by the company. See also Note 22 to the Consolidated financial statements.

Shares obtained by members of the Board of Management under the performance-related share plan are taken into account for share ownership purposes (but not for matching purposes) as soon as they have become unconditional. This includes vested shares that are to be retained during the blocking period of two years after vesting.

At year-end 2016, the CEO held 72,736 shares and the CFO held 3,318 shares. Both members are compliant with the remuneration policy’s shareholding requirement. For the CEO, the shares purchased in 2012 and 2013 under the applicable share-matching plans were matched by the company following the Supervisory Board’s decision, recognizing consistent and sustainable performance.

Post-contract compensation

The members of the Board of Management receive contributions towards post-contract benefits, which are defined as a percentage of income as determined by the Supervisory Board. Currently, they are based on age. For the CEO, the contributions are paid over the base salary in the current year and the short-term incentive related to that year. The contributions will therefore vary depending on the performance during the year and the age of the Board member. For the CFO, these contributions are paid on base salary only.

Board contracts

Agreements for members of the Board of Management are concluded for a period not exceeding four years, in accordance with the Code. After the initial term, reappointments may take place for consecutive periods of up to four years each. The notice period by the Board member is subject to a term of three months. Notice by the company shall be subject to a six-month term. Members of the Board of Management normally retire in the year that they reach the legal retirement age. The contractual arrangements allow the Supervisory Board to request the CEO to resign between the age of 60 and the legal retirement age for effective succession planning within the Board. In such an exceptional situation, the CEO will be entitled to the “fixed” remuneration component until the date of retirement.

Remuneration policy for the next financial year

No changes in the remuneration policy are currently foreseen. The Supervisory Board will continue to closely monitor whether the policy and its implementation are in line with the objectives of the company. The metrics applied for the STI in 2016 were ROI, OPI, OCF, and revenue growth. In 2017 OPI will be replaced by EBIT as this better aligns with our external reporting. The metrics applied for the LTI (ROI, TSR and sustainability) will continue to be applied in 2017. The targets and ranges have been set at a challenging but realistic level, based on the company’s strategic goals formulated during the year. The vesting schemes for the TSR and sustainability performance remain unchanged. The target and ranges for the ROI metric will not be disclosed as they are considered commercially sensitive information.