Implementation of the remuneration policy in 2017

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 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.

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. In addition, the pay ratios are taken into account, comparing the on-target, annualized total compensation of the CEO with the average employee compensation.

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 2017, 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 2017. Mr. Büchner and Mrs. Castella stepped down from the Board of Management on July 19, 2017, and September 8, 2017, respectively. The service agreement with Mr. Büchner was terminated by mutual consent, while observing the contractual notice period of six months. Given the circumstances, the Supervisory Board found it appropriate and reasonable to provide a termination benefit in accordance with the remuneration policy and the Code, and to treat the unvested performance shares in line with our standard approach, which implies that the unvested shares granted during his active service will be retained, and the shares granted in the year of termination will be reduced time pro-rated. Mrs. Castella stepped down as CFO and went on leave of absence for health reasons. As such, no leaving arrangement is in place. Mr. Vanlancker was designated as CEO on July 19, 2017, and his remuneration is accounted for effective from this date. The successor to the CFO, Mr. Maarten de Vries, was appointed effective January 1, 2018. See Note 23 of the Consolidated financial statements for more details.

The implementation of the remuneration policy in 2017 will be a separate agenda item at the 2018 AGM.

Base salary

The base salary of the CEO, Mr. Vanlancker, was determined at an annual base salary of €950,500, effective from his day of appointment, July 19, 2017.

Short-term incentive

The objectives of the short-term incentive in 2017 were to reward performance on ROI, EBIT, 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, EBIT, 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 2017, the targets for ROI, EBIT, 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 2017 included goals set in relation to delivering on the company’s communicated strategy.

ROI is calculated by determining the ratio of EBIT over 12 months average invested capital using reported numbers. EBIT was calculated as the number reported for IFRS purposes, in constant currencies. OCF was calculated as EBITDA minus the change in operating working capital and minus 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 2017, the performance against the targets set for ROI, EBIT, OCF, revenue growth and qualitative targets was as follows:

With regards to the qualitative targets, the CEO, Mr. Vanlancker, performed 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 share plan

In line with the remuneration policy, vesting of 35% of the shares conditionally granted is linked to AkzoNobel’s ROI performance. For the shares conditionally granted in 2015 under the performance share plan (in respect of which the performance period ended on December 31, 2017), the Supervisory Board set the ROI to be achieved by the end of 2017 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 73% for this part of the long-term incentive.

For the 2015 conditional grant, 30% was linked to AkzoNobel’s relative sustainability performance by taking the company’s average position in the DJSI ranking. The following vesting scheme has been applied in respect of the conditional grants made in 2015:

AkzoNobel’s sustainability performance during the period 2015 to 2017 resulted in a vesting of 100% for this part of the long-term incentive.

For the 2015 conditional grant, the remaining 35% 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. During 2017, DuPont merged with Dow Chemical, while Valspar Corporation has been acquired by Sherwin-Williams. As the remaining performance period was relatively short, it was decided to measure their TSR performance until the day of delisting and then move with the average of the remaining peers.

The following vesting scheme has been applied in respect of the conditional grants made in 2015:

AkzoNobel’s TSR performance during the period 2015 to 2017 resulted in fifth position within the ranking of the peer group companies. This ranking resulted in a vesting of 75% for this part of the long-term incentive.

Based on the company’s combined ROI, sustainability and TSR performance, the final vesting percentage of the 2015 conditional grant – after including the dividend yield during the performance period (determined to be 13.27%) – equaled 92.65%. 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 2017 plan amounted to 27,300 for the CEO, Mr. Vanlancker.

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 in case of a change in control, the payout under the performance share plan will be 100% of all shares conditionally granted. 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.

Pay ratio

Pay ratios are taken into account, comparing the on-target, annualized total compensation of the CEO, Mr. Vanlancker, to the average employee compensation. The ratio is 58.6. The pay ratio would have been lower if calculated at the actual compensation granted to the CEO in 2017 due to the limited term in his new position.

Claw back and value adjustment

In 2017, there was no cause for a claw back or value adjustment by the Supervisory Board.

Shareholding requirements and share-matching

The table below summarizes the shares acquired by the relevant members of the Board of Management in 2017 that would, subject to the conditions of the share-matching plan, qualify for matching by the company. See also Note 23 of the Consolidated financial statements.

Shares obtained by members of the Board of Management under the performance 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 2017, the CEO, Mr. Vanlancker, held 460 shares, which is compliant with the remuneration policy’s shareholding requirement, as he has a five-year period from the date of his first appointment to build up his full shareholding requirement.

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. The contributions are paid over the base salary in the current year. The contributions will therefore vary depending on the age of the Board member.

Board contracts

Agreements for members of the Board of Management are concluded for a period not exceeding four years. After the initial term, reappointments may take place for consecutive periods of up to four years each. The notice period by the Board member and by the company shall be subject to a six-month term. Members of the Board of Management normally retire in the year they reach the legal retirement age.

Remuneration policy for the next financial year

The Supervisory Board closely monitors whether the policy and its implementation are in line with the objectives of the company. The metrics applied for the STI in 2017 were ROI, EBIT, OCF, and revenue growth. In 2018, to align with our strategy, the Supervisory Board intends to add return on sales (ROS) to the list of financial metrics, from which the Supervisory Board annually chooses up to four financial metrics and determines their relative weighting.

For 2018, the Supervisory Board envisages choosing ROS and OCF, as these are identified in our strategic plan. The targets and ranges have been set at a challenging level, based on the company’s strategic goals formulated during the year.

For the LTI, the Supervisory Board will review the current performance criteria that apply to the performance share plan and align them with our long-term strategic plan. The proposal for adjustment will be presented for approval at the 2018 AGM.