Implementation of the remuneration policy in 2018

The Supervisory Board, with delegated authority to the Remuneration Committee, is responsible for ensuring that the Remuneration Policy is appropriately applied and aligns with the company’s objectives. The policy itself, alongside the checks and balances in its execution, are designed to avoid incidents where members of the Board of Management – and senior executives for whom similar incentive plans apply – could act in their own interest, take risks that are not in line with the company’s strategy or risk appetite, or where remuneration levels cannot be justified in any reasonable 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 Remuneration Committee 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.

Prior to agreeing incentives, the Remuneration Committee carried out scenario analyses of the possible financial outcomes of meeting different performance levels, and how they may affect the structure and value of the Board of Management’s total remuneration. A pay ratio is also taken into account, comparing the total remuneration of the CEO and the average total remuneration for an AkzoNobel employee over the financial year.

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 Remuneration Committee. In 2018, the peer group consisted of the following companies:

The Remuneration Committee consults with external remuneration professionals to obtain appropriate benchmark data and on other matters where it requires independent advice. When making pay changes for members of the Board of Management, it evaluates the impact on pay differentials with other executives in the company. When other benefits are granted, the Remuneration Committee does so understanding market practice, plus any relevant legal or tax considerations.

The Supervisory Board has determined that, in the event of a change in control in the company, the vesting of awards made under the performance share plan will be 100% of all shares conditionally granted. This does not affect the discretion it has to correct the variable remuneration of the Board of Management upwards or downwards in exceptional circumstances.

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 2018. See Note 24 of the Consolidated financial statements for more details.

Base salary

The Remuneration Committee reviewed the salaries of members of the Board of Management in the year, having regard to market data, inflation data and the level of increases that were to be applied for AkzoNobel employees in the Netherlands, including those who are covered by a collective labor agreement. Increases to the value of 3% of base salary were agreed, to be effective from January 1, 2018:

• Mr. Vanlancker, CEO: €979,000
• Mr. de Vries, CFO: €659,000

Short-term incentive (STI)

In 2018, the objectives of the short-term incentive were to reward performance on ROS and OCF; to measure individual and collective performance; and to encourage progress towards the achievement of long-term strategic objectives, including sustainability.

The performance targets for achievement were determined by the Supervisory Board and were applied to the STI by the Remuneration Committee. 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 2018 included goals set in relation to delivering on the company’s communicated strategy, including sustainability objectives.

ROS was calculated by determining the ratio of adjusted operating income over revenue. OCF was calculated as EBITDA minus the change in operating working capital and minus capital expenditures, all in constant currencies.

In determining the outcome of the short-term incentive elements (ROS, OCF and personal targets), the Remuneration Committee 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. Taking into consideration the level of performance that the company had delivered during 2018, and achievement that had been made on a number of key strategic goals, the Remuneration Committee determined that bonus payments for the Board of Management would be:

• Mr. Vanlancker, CEO: €587,400 (60% of salary)
• Mr. de Vries, CFO: €307,753 (46.7% of salary)

A total of 1,936 matching shares were awarded to the CEO in 2018 to cover the 2017 financial year. The CFO did not earn a 2017 bonus due to his appointment date.

Long-term incentives (LTI)

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 2018-2020

The Remuneration Committee determines the grant levels to be made in respect of members of the Board of Management, within the limits and plans that have been approved by shareholders. In 2018, the CEO and CFO received a conditional grant of shares equivalent to the face value of 150% of their annual base salaries. The grant price was set based on the market closing price of an AkzoNobel common share as of January 2, 2018.

The metrics applicable to the performance-related share plan for the 2018-2020 performance period are relative TSR and ROI, equally weighted. The target and ranges for the ROI metric will not be disclosed as they are considered to be commercially sensitive information. However, the relative TSR industry peer group consists of nine companies for 2018 to 2020:

The vesting schedule that will apply to the relative TSR metric, which applies to half of the conditional target grant, is noted in the next table. When making the performance assessment, the TSR result of AkzoNobel is included within the ranked peer group.

Replacement of the share matching plan

The Remuneration Committee determined that the share matching plan will be suspended for three years, i.e. in relation to performance in the years 2018 to 2020. The value of the share matching plan for these three years will be invested in the newly-created 2020 Performance Incentive Plan. This was approved by shareholders at the 2018 AGM. In 2021, the 2020 Performance Incentive Plan will cease to apply and it is anticipated that the share matching plan, as included in the Remuneration Policy, will recommence.

2020 Performance Incentive Plan

The 2020 Performance Incentive Plan is an exceptional, one-off incentive with a cash payout based on the achievement of 15% ROS by the end of 2020. Its key objective is to incentivize the achievement of the 2020 financial guidance as presented to shareholders and deliver upper quartile industry performance.

The 2020 Performance Incentive Plan could award a payment of two times annual base salary to members of the Board of Management provided that 15% ROS is achieved by the end of 2020. The performance ranges, as set out in the below table, determine: (i) The performance level below which no payouts are made; (ii) The performance level at which 100% of base salary payout is made (threshold); (iii) The performance level at which the target payout of 200% of base salary is made; and (iv) The performance level at which the maximum payout of 400% of base salary is made.

If a change of control event over AkzoNobel were to occur during the performance period, the Remuneration Committee can test the Plan’s performance conditions and determine the terms and conditions of any payment arising from it, including the timing of it.

Pay ratio

The pay ratio compares the total compensation of the CEO against the total compensation of an AkzoNobel employee, calculated as an average of all employees as of December 31, 2018. In respect of 2018, the ratio is 56.4 (2017: 58.6).

Claw back and value adjustment

In 2018, there was no cause for a claw back or value adjustment by the Remuneration Committee.

Shareholding requirements and share matching

As of December 31, 2018, the CEO, Mr. Vanlancker, held 13,682 shares, of which 2,166 qualified for share matching under the Share Matching Plan on a ratio 1:1. The matching shares were conditionally granted during 2017 and 2018 and will be released in 2020 and 2021 respectively, subject to the terms of the Share Matching Plan. The shares acquired by Mr. Vanlancker during 2018 contribute towards his required shareholding in accordance with the Remuneration Policy (see also Note 24 of the Consolidated financial statements).

As of December 31, 2018, the CFO, Mr. de Vries, held 2,562 shares. Mr. de Vries did not have an opportunity to make a share deferral in 2018, or be granted matching shares, since he was not paid a bonus in relation to 2017 performance.

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.

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 2018 were ROS and OCF, and are intended to continue for the 2019 financial year, as they remain relevant and align with the company’s strategy.

The metrics applied for the LTIs (TSR and ROI) will continue to be applied in 2019. The vesting schemes for TSR performance will remain unchanged. The target and ranges for the ROI metric will not be disclosed as they are considered commercially sensitive information.