Remuneration for the Board of Management

The Policy is designed to enable the Board of Management to achieve the company’s objectives, while balancing the perspectives of shareholders and other key stakeholders. The focus on performance is achieved by including both short- and long-term incentives, to ensure that the Board of Management reaches the annual expected level of performance, while bearing in mind the sustainability of the company.

The remuneration principles that apply for the Board of Management are aligned with those applied more broadly in the company. This provides a shared sense of purpose and direction at different management levels and a shared reward when success is achieved.

When implementing the Policy, the Remuneration Committee consults with external remuneration professionals to obtain appropriate benchmark data, and on other matters where it requires independent advice.

Variable remuneration provides an incentive to realize long-term value creation. For the short term, the Supervisory Board sets operational targets over a one-year period that are crucial to the company and are pre-conditions to value creation. The biggest portion of the remuneration packages of Board of Management members is directly aimed at strategic priorities that will contribute to building sustainable long-term value creation, with targets for the return for shareholders and the return on invested capital. Following the separation of Specialty Chemicals, a one-off long-term incentive to reward bringing value creation at a higher level has been added for the performance period 2018-2020.

Prior to agreeing on incentives, the Remuneration Committee conducted 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.

In 2020, the labor market peer group, as referred to in the Policy, consisted of the following companies:

The table below specifies the elements of the Remuneration Policy, describing purpose, design and the link to our company strategy, as well as their (potential) value.

The table below gives an overview of the remuneration of the members of the Board of Management who were in office in 2020. Although we temporarily suspended our financial ambition as a result of COVID-19, no changes were made to the incentive plans of the Board of Management.

Base salary

The Remuneration Committee reviewed the salaries of members of the Board of Management during the year, considering 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 2.75% of base salary were agreed, effective as of January 1, 2020:

• Thierry Vanlancker, CEO: €1,033,500
• Maarten de Vries, CFO: €695,500

Short-term incentive (STI)

In 2020, the financial objectives of the short-term incentive were return on sales (ROS) and operational cash flow (OCF), with each metric having a weighting of 35%. The individual and qualitative objectives reflect progress towards the achievement of long-term strategic objectives, with a weighting of 30%.

The company does not disclose the exact actual targets, as these are considered commercially sensitive. In view of transparency, we categorize our target realization as follows: zero pay-out, below target, at target, above target or maximum pay-out. In 2020, the achievement on ROS was above target and the achievement on OCF was below target.

In determining the outcome of the STI elements, 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, taking into account the impact of COVID-19. The test also included an assessment of the progress made with the strategic objectives under prevailing market conditions.

The Remuneration Committee subsequently determined that bonus payments for the Board of Management would be:

• Thierry Vanlancker, CEO: €1,139,124 (110.22% of salary)
• Maarten de Vries, CFO: €498,256 (71.64% of salary)

No matching shares were granted to the CEO or CFO in 2020, as this arrangement has been suspended for the period 2018 to 2020. The value of the share-matching plan for these three years is invested in the 2020 Performance Incentive Plan.

Long-term incentives (LTI)

Conditional grant LTI Share Plan 2020-2022

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 2020, 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 determined based on the average share price of an AkzoNobel common share in the two weeks following publication of the annual results on February 12, 2020:

• 18,747 shares were conditionally granted to Thierry Vanlancker, CEO
• 12,616 shares were conditionally granted to Maarten de Vries, CFO

Vesting of the conditional grant is linked to two performance metrics: return on investment (ROI) and relative total shareholder return (TSR), equally weighted and independently determining 50% of the LTI vesting. The Supervisory Board reviews ROI performance measure and target each year and ensures that both are directly linked to the strategic direction.

The performance level determines: (i) the performance level below which no shares vest; (ii) the performance level at which the target number of shares vest; and (iii) the performance level at which the maximum number of shares vest.

TSR is measured relative to an industry peer group, consisting of the following nine companies:

This industry peer group is reviewed on a regular basis to ensure that the companies in the group remain appropriate peers.

The vesting schedule that will apply to the relative TSR metric is listed in the table below. When making the performance assessment, the TSR result of AkzoNobel is included within the ranked peer group.

Vesting of the LTI Share Plan 2018-2020

Under the LTI Share Plan 2018-2020, a conditional grant of 20,200 shares was made to the CEO and a conditional grant of 17,200 shares made to the CFO.

In line with the Remuneration Policy, vesting of 50% of the shares conditionally granted is linked to AkzoNobel’s ROI performance. The company’s ROI performance at the end of the performance period was reviewed by the Supervisory Board. The Supervisory Board recognized that the initial ROI target was not fully in line with the company’s new strategy. They decided not to adjust the target, but to apply their discretionary power and to evaluate performance against the ROI target as defined and communicated at the beginning of 2020. This resulted in a vesting of 106% for this specific part of the long-term incentive.

For the 2018 conditional grant, 50% 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.

AkzoNobel’s TSR performance during the period 2018 to 2020 resulted in the sixth position within the ranking of the peer group companies. This ranking resulted in a vesting of 50% for this part of the long-term incentive.

Based on the company’s combined ROI and TSR performance, the final vesting percentage of the 2018 conditional grant – after including the dividend yield of 14.37% during the performance period – equaled 89.21%.

The Remuneration Committee determined that:

• Thierry Vanlancker would vest 18,020 shares, subject to a further two-year holding requirement. At December 31, 2020, these shares had a market value of €1,583,237
• Maarten de Vries would vest 15,344 shares, subject to a further two-year holding requirement. At December 31, 2020, these shares had a market value of €1,348,124

An overview of all shares awarded, or due to, Board of Management members is shown on this page.

2020 Performance Incentive Plan

The 2020 Performance Incentive Plan is an exceptional, one-off plan to incentivize improvement of the company’s return on sales (ROS), put in place and approved by the AGM following the divestment of Specialty Chemicals. It supports achievement of 15% ROS (excluding unallocated corporate center cost) by the end of 2020, presented to shareholders as financial guidance towards upper quartile industry performance.

The Supervisory Board set the ROS to be achieved by the end of 2020 as shown in the table below.

In determining the outcome of the Performance Incentive Plan, 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 and the decision to pause and suspend the 15 by 20 ambition. The test also included an assessment of the progress made with the strategic objectives under prevailing market conditions.

Actual ROS performance was 15.0% (excluding unallocated cost). The Remuneration Committee subsequently determined that payments for the Board of Management would be:

• Thierry Vanlancker, CEO: €2,067,000 (200% of salary)
• Maarten de Vries, CFO: €1,391,000 (200% of salary)

Claw back and value adjustment

In 2020, there was no cause for a claw back or value adjustment by the Remuneration Committee.

Loans

The company does not grant loans, advance payments or guarantees to members of the Supervisory Board, members of the Executive Committee or any family member of such persons.

Shareholding requirements and share matching

As of December 31, 2020, CEO Thierry Vanlancker held 43,518 shares, of which 1,720 qualified for share-matching under the Share-Matching Plan on a ratio 1:1. The matching shares were conditionally granted in 2018 and will be released in 2021, subject to the terms of the Share-Matching Plan. Shares acquired in 2020 by the CEO contribute towards his required shareholding. On December 31, 2020, he fulfilled this requirement by holding the equivalent of 370% of his annual base salary in shares.

As of December 31, 2020, CFO Maarten de Vries held 5,678 shares. The shares acquired by the CFO during 2020 contribute towards his required shareholding. On December 31, 2020, he did not yet fulfill the shareholding requirement of 150%, as the shares represented a value at that date of 72% of his annual base salary.

Shares obtained by members of the Board of Management under the performance-related share plan are taken into account for share ownership purposes as soon as they have become unconditional. This includes vested shares to be retained during the blocking period of two years after vesting.

Comparative information

In compliance with point (b), paragraph 1 of Article 9b of the EU Directive on long-term shareholder engagement, we present on this page:

• The annual change of remuneration of each individual member of the Board of Management
• The performance of the company
• The average remuneration on a full-time equivalent basis of company employees over at least the five most recent financial years

Over the last few years of transition, the company’s performance fluctuated significantly as the table below shows. In 2018, net profit increased sharply, mainly due to the divestment of Specialty Chemicals, with a deal result of €5,811 million after tax. The transition was also reflected in the development of remuneration. Restructuring due to discontinued operations, for example, resulted in a reduction of the average salary per employee, followed by increases when operations stabilized and profits increased again. In 2018, the increase in average salary was also influenced by the inclusion of a one-off €57 million pension cost for the UK guaranteed minimum pension equalizations.

The pay ratio between the total compensation of the CEO in 2020 and the total compensation of an AkzoNobel employee (calculated as an average of all employees as of December 31, 2020) is 99.2* (2019: 65.0).

*The increase is mainly due to the 2020 Performance Incentive Plan payment. Without this one-off special payment the ratio would have been 62.3.

Post-contract compensation

Board of Management members 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. Contributions are paid over the base salary in the current year and vary depending on the Board member’s age.

Board contracts

Agreements for members of the Board of Management are concluded for a period not exceeding four years. After the initial term, re-appointments 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 legal retirement age.