Remuneration for the Board of Management

Summary of the Remuneration Policy for the Board of Management

The Remuneration Policy is designed to incentivize the Board of Management to achieve the company’s objectives, while considering market competitive standards, ratio between fixed and variable pay, the perspectives of shareholders and other key stakeholders and environmental, social and governance (ESG) related contributions of the company.

The focus on pay-for-performance is achieved by including both short and long-term incentives that are aligned with the company strategy to realize long-term sustainable value creation. 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 contribute to building sustainable long-term value creation, with targets for return on invested capital, adjusted EBITDA, revenue growth and specific ESG goals.

Goal setting is crucial to drive pay for performance in alignment with the company’s strategy, and to ensure that decisions made – and results delivered – are aligned with the interests of AkzoNobel’s stakeholders. The Supervisory Board sets goals, their respective weight and targets (i.e. metrics) for the respective performance year under the STI and LTI scheme, considering: (1) Company strategy; (2) Focus on long-term value creation; (3) Historical performance, business future outlook and circumstances and priorities; (4) Stakeholder expectations. Goals must be stretching yet achievable.

The Remuneration Committee conducts scenario analyses of the possible financial outcomes of meeting different performance levels (threshold and below, at target and maximum), and how it affects the structure and value of the Board of Management’s total remuneration. Unintended consequences of providing incentives that are too attractive and support inappropriate risk-taking are avoided by selecting a total direct compensation pay mix at target consisting of around 25% of base salary and defining maximum opportunities and targets which closely reflect AkzoNobel’s overall performance.

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

CEO pay-mix 2022 in %

CFO pay-mix 2022 in %

Labor market peer group

As an international company, AkzoNobel must remain attractive to high caliber members of the Board of Management. The reference group consists of companies of similar scale, complexity and geographic reach to AkzoNobel. Despite being a global company, only companies headquartered in Europe (consisting of AEX-listed companies and industry peers) are included to reflect local pay practices.

The labor market peer group against which remuneration levels are compared consists of the following European-only companies:

As AkzoNobel aims to outperform its sector peers and attract high caliber members of the Board of Management, the competitive reference point for total remuneration is set at a total remuneration package that positions between median and third quartile of the labor market peer group (around the median of the labor market peer group for base salary and STI, and between median and third quartile for LTI).

Overview of the Remuneration Policy elements

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

Remuneration for the Board of Management in 2022

Actual remuneration for the reported financial year is aligned with the Policy. Thierry Vanlancker handed over his responsibilities as CEO and Chair of the Board of Management to Greg Poux-Guillaume on November 1, 2022. Greg Poux-Guillaume joined AkzoNobel on October 1, 2022, to ensure a smooth transition.

The table above gives an overview of the actual remuneration of the members of the Board of Management who were in office in 2022. A split between the proportions fixed versus variable remuneration paid is shown below. Fringe benefits consist of social security contributions and car arrangements. For Greg Poux-Guillaume, fringe benefits also include temporary housing contributions. Post-contract compensation is intended for build-up of retirement benefits instead of pension contributions. IFRS 2 expenses relating to share awards include non-cash expenses of the performance-related share plan and Share-Matching Plan. The values stated in the table for the market value at year-end for multi-year variable LTI are based on the number of shares that became unconditional during the year, multiplied by the share price. This share price was €62.56 on December 31, 2022, for the shares that became unconditional in 2022. As no shares became unconditional in 2022, the value in the table is zero.

CEO fixed vs performance-linked

CFO fixed vs performance-linked

End of service terms Thierry Vanlancker as CEO and Chair of the Board of Management

Thierry Vanlancker was reappointed at the AGM in 2021 until the AGM in 2023. As his successor was found sooner, the Supervisory Board agreed with Thierry Vanlancker that he would step down as CEO and Chair of the Board of Management as of November 1, 2022. He continues as advisor until the end of his management agreement at the 2023 AGM. The termination of his management agreement, of which the key elements were published upon his reappointment at the AGM in April 2021, is executed in accordance with the management agreement and AkzoNobel’s Remuneration Policy for the Board of Management. This means that Thierry Vanlancker continues to be entitled to his base salary until the end of the management agreement. Thierry Vanlancker’s entitlements to the short and long-term incentives over the financial year 2022 are further described below. The 2021 and 2022 long-term incentive grants will vest on a pro-rata basis, calculated over the period until the end date of the management agreement. Thierry Vanlancker is not entitled to the short-term incentive over the financial year 2023, is not entitled to participate in the share-matching related to the 2022 STI payment, and will not receive a conditio­nal share grant in 2023. In compliance with the Dutch Corporate Governance Code and the management agreement, the severance payment upon termination of the management agreement will not exceed one annual base salary.

Based on performance against the financial and non-financial targets as further described in this Remuneration report, Thierry Vanlancker receives a short-term incentive payment of €469,260 (39.81% of salary).

The existing LTI grants (2020-2022, 2021-2023 and 2022-2024 LTI plans) will vest time pro-rated at the regular vesting dates, subject to achieved performance at the end of the respective performance period. Shares that may vest under these plans will be subject to the holding period of two years. In 2020, 18,747 shares were granted conditionally. After applying the final vesting percentage of 0%, the entire 2020 conditional grant has been forfeited. The 26,713 shares that were conditionally granted in 2021 and the 25,578 shares conditionally granted in 2022 will be pro-rated, calculated over the period until the end date of the management agreement, to respectively 20,777 (28/36 of 26,713) and 11,368 (16/36 of 25,578) conditional shares. After vesting, an additional two-year holding period applies.

The 2,708 potential matching shares will be pro-rated as well, resulting in 903 potential matching shares. These shares will be matched upon termination of the management agreement in April 2023.

Base salary

The base salary of the CEO, Greg Poux-Guillaume, was presented at the EGM on September 6, 2022, and effective from his start date in the company on October 1, 2022. The 2022 base salary for the CFO, Maarten de Vries, was presented at the AGM on April 22, 2022, and made retroactively effective from January 1, 2022:

• Greg Poux-Guillaume, CEO: €1,225,000
• Maarten de Vries, CFO: €727,750

Short-Term Incentives (STI)

In 2022, the financial objectives of the short-term incentives were adjusted operating income (OPI) and free cash flow (FCF). The non-financial objectives encompassed initiatives central to the company’s transformation plan, such as price and working capital management.

They also anticipated a CEO transition later in the year, for which a smooth handover is essential to maintaining AkzoNobel’s momentum. Although the personal objectives are directional in nature, a number of these objectives for 2022 are quantified and therefore allowed for an objective evaluation
of progress achieved towards targets, which resulted in a weighted performance score of 132.7%:

• The Board of Management had the objective to focus on margin management by keeping pricing ahead of raw material and logistics cost inflation. In 2022, the company managed to offset raw material and freight increases through price increases and margin expansion of €186 million (target: €100 million), with actual performance on pricing strategy ending up at 143%
• The Board of Management executed disciplined cost control and reduced inventories. In the second half of 2022, the additional reduction in operating expenses amounted to €31 million (target: €25 million). Reduction of inventories amounted to €263 million (target: €200 million), resulting in an actual performance of 122%
• In 2022, gender targets were set for all businesses and functions to increase female representation as part of leadership accountability, with the goal of having 30% female executives by 2025. In 2022, the company landed above its annual target of 25% with 26% female executives. A global engagement survey among employees was conducted, similar to previous years. In 2022, the overall OHI score was 72 (target: 72), with the senior executive population scoring in the top decile. Finally, the Supervisory Board wanted to ensure a proper and complete handover of responsibilities to the new CEO. On November 1, the Supervisory Board concluded that the handover was completed successfully and that the Board of Management had put in significant effort to ensure a proper induction of the new CEO. This brings the overall weighted performance on the organizational health objectives to 133%

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. The 132.7% achieved on personal objectives by the Board of Management contrasts with the 0% payout on financial objectives, a discrepancy which could leave the impression of excessively lenient personal targets, but the Supervisory Board does not believe this is the case here.

It’s important to note that all targets for 2022 were finalized a few weeks before the start of the war in Ukraine, which severely impacted the wider economy and Europe in particular. Even though the assumptions made at the beginning of 2022 did not foresee the drastic macro-economic developments which impacted the performance of the company, the Supervisory Board took the feedback received from shareholders, and the commitment made following shareholder outreach to not make changes after the fact, to heart. As such, it neither adjusted the targets nor did it apply discretion to the evaluation of those targets. While this had a limited impact on personal objectives – which are largely independent of the economic context and measure performance on a given metric versus that metric’s baseline – it had a drastic effect on financial objectives, which are measured against a performance baseline extremely sensitive to the macro-economic context. In other words, while there was strong realization of personal targets which had a positive impact on the financial performance, that impact was diminished by the deterioration of the economic environment very early in the year, which rendered our budget obsolete, but for which we did not adjust our evaluation of performance.

The Supervisory Board recognizes the efforts made by the Board of Management to counter the difficulties presented by the macro-economic environment and realizes that the impact on financial performance would have been more severe without their efforts and contributions through their personal performance. Despite the below threshold performance on the financial objectives, the Supervisory Board is of the opinion that the Board of Management is deserving of its 132.7% payout on its personal objectives which, for context given the zero pay-out on financial objectives, results in a total STI 2022 pay-out of slightly below 40% of target.

As included in the summary of the main elements of the management contract of Greg Poux-Guillaume, which was published upon his nomination for appointment at the EGM on September 6, 2022, Greg Poux-Guillaume is entitled to an at target, pro-rated bonus pay-out for the performance year 2022.

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

• Thierry Vanlancker, former CEO €469,260 (39.81% of salary)
• Maarten de Vries, CFO: €231,788 (31.85% of salary)
• Greg Poux-Guillaume, CEO: €306,250 (100% of salary)

Share-Matching Plan

The Share-Matching Plan reiterates the importance of share ownership, which underpins alignment over the long term. In addition to the required investment of 25% of STI proceeds (net after tax and other deductions), both the CEO and the CFO decided to invest another 25% – totaling the maximum investment of 50% of total net STI proceeds for 2022.

The Share-Matching Plan was suspen­ded for STI payments made in the years 2019, 2020 and 2021. For this reason, no matching shares have been received by Board of Management members in 2022.

Long-Term Incentives (LTI)

Conditional grant LTI share plan 2022-2024

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 2022, Greg Poux-Guillaume received a conditional grant of shares equivalent to 27/36^th of the face value of 200% of his annual base salary (pro-rated) as approved by the EGM, while Maarten de Vries received a conditional grant of shares equivalent to the face value of 150% of his annual base salary. 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 22, 2022:

• 19,936 shares were conditionally granted to Greg Poux-Guillaume, CEO
• 11,844 shares were conditionally granted to Maarten de Vries, CFO

Vesting of the conditional grant is linked to four performance metrics shown (see the first table below).

Revenue growth as weighted average is compared with a defined industry peer group, consisting of the following companies in the paints and coatings sector: Sherwin-Williams, Nippon Paint, PPG, Axalta and BASF Coatings. Organic growth rates to calculate the performance take into consideration price, mix, volume growth and exclude the effects of exchange rates and mergers and acquisitions. For Axalta and Sherwin-Williams, only organic growth percentage of the Performance Coatings business growth is taken into consideration.

The ESG targets consist of four equally weighted targets related to our approach to sustainability (see the second table below).

In the course of 2022, the Supervisory Board determined for each target: (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.

Vesting of the LTI share plan 2020-2022

Under the LTI share plan 2020-2022, a conditional grant of 12,616 shares was made to the CFO. As the CEO joined AkzoNobel on October 1, 2022, no conditional grant was made in 2020 to the CEO under this LTI share plan.

In line with the Remuneration Policy, vesting of 50% of the shares conditionally granted in 2020 was linked to AkzoNobel’s ROI performance, which was reviewed at the end of the perfor­mance period by the Supervisory Board.

The Supervisory Board set the threshold for ROI, excluding unallocated cost, at 17% and the maximum at 25%. As ROI performance was below threshold in 2022, the corresponding vesting percentage for this specific part of the long-term incentive is 0%.

The other 50% of the conditional grant was linked to AkzoNobel’s relative total shareholder return (TSR) performance compared with the companies in the following defined industry peer group:

In line with last year, following the acquisition of Tikkurilla by PPG, the Remuneration Committee decided to freeze Tikkurilla’s share price at €14.23. This share price was calculated as the average closing share price in the four weeks before the acquisition was publicly announced. Independent external experts conducted an analysis to calculate the number of shares that would 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 2020 to 2022 resulted in the eighth position within the ranking of the peer group companies. This ranking resulted in a vesting of 0% for this part of the long-term incentive, as shown in the table below.

Based on the company’s combined ROI and TSR performance, the final vesting percentage of the 2020 conditional grant is zero. The Remuneration Committee determined that based on this performance, no shares would vest for Thierry Vanlancker and Maarten de Vries.

Overview – number of performance-related shares

An overview of shares awarded, or due to, Board of Management members is shown below.

Claw back, value adjustment and loans

In 2022, there was no cause for a claw back or value adjustment by the Remuneration Committee. The
company does not grant loans, advance payments or guarantees to members of the Supervisory Board, members of the Board of Management or any family member of such persons.

Shareholding requirements and share-matching

Board of Management members are expected to build up a shareholding requirement in the company. The minimum shareholding requirement must be accrued within five years. This includes privately purchased shares and vested shares granted under AkzoNobel share-based compensation plans. The minimum shareholding requirement is 300% of annual base salary for the CEO and 150% of annual base salary for the CFO.

As of December 31, 2022, CEO Greg Poux-Guillaume held zero shares. CFO Maarten de Vries held 21,766 shares. Shares acquired by the CFO during 2022 contribute towards his required shareholding. On December 31, 2022, he fulfilled this requirement by holding the equivalent of 187% of his annual base salary.

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

There were no shares that qualified for share-matching under the Share-Matching Plan in 2022. Reference is made to the table above on outstanding potential matching shares.

Board contracts

Agreements for Board of Management members are in principle 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.

At the 2022 AGM, CFO Maarten de Vries was reappointed for a four-year period. His reappointment was supported with 99.96% of the votes. At the 2022 EGM, CEO Greg Poux-Guillaume was appointed for a period ending at the AGM to be held in 2027. His appointment was supported with 99.37% of the votes.

The notice period by the Board member, and by the company, shall be subject to a six-month term. In the event that a Board member is not reappointed, or the agreement ends for other reasons than urgent cause or serious culpable acts or omissions by the Board member, a one-off gross severance payment will be made, equal to the annual gross base salary in force at the time of the agreement’s termination. Members of the Board of Management normally retire in the year they reach legal retirement age.

Comparative information

Internal pay ratios are a relevant input factor for determining the appropriateness of the implementation of the Remuneration Policy, as recognized in the Dutch Corporate Governance Code. In 2022, the ratio between the annual total compensation for the CEO and the average annual compensation for an employee was 59.8 (2021: 115.7). Further details on the development of these amounts and ratios over time can be found below.

Over the years of transition, between 2018 and 2020 the company’s financial performance fluctuated significantly as the table on this page shows. In 2018, net profits were exceptionally high, 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. In 2018, the increase in average salary was influenced by the inclusion of a one-off €57 million pension cost for the UK guaranteed minimum pension equalizations.

In 2020, total rewards (including benefits) for the Board of Management included a one-off special payment for the 2020 Performance Incentive Plan, which incentivized improvement on the company’s return on sales (ROS). The plan was put in place and approved by the AGM following the divestment of Specialty Chemicals.

In 2021, total rewards (including benefits) for the CEO included a one-off special share grant to compensate for the loss of shares due to the two-year reappointment and the fact that shares granted as from 2021 will only vest on a pro-rated basis.

2022 presented us with the continued impact of the COVID-19 pandemic, the geo-political consequences of the war in Ukraine, shortages and significant price increases in raw materials and transportation. This volatile business climate had a severe impact on the results of the company. Consequently, all financial components of the Short and Long-Term Incentives did not meet the threshold and delivered no pay-out. This reduced performance linked payments in the current financial year.

The annualized total compensation for Thierry Vanlancker reduced by 65% compared with 2021, to €1,912,210 versus €5,514,195 in the previous year. This reflects the fact that his Short-Term Incentive paid out around half and no shares granted under the LTI plan 2020 vested. Compared with 2021, the annualized total compensation for Maarten de Vries reduced by 48%.

AkzoNobel aims to attract and retain high caliber members of the Board of Management. Competitive and motivating remuneration packages are an important element of such attraction and retention. The significant reduction in compensation of the CFO in 2022, coupled with the projected limited vesting of the 2021 Long-Term Incentive plan – which vests at the end of 2023 and was based on the abandoned €2 billion EBITDA target – is a cause for concern. The Supervisory Board decided not to apply any discretion to mitigate this impact in 2022 and does not intend to apply discretion to the 2021 Long-Term Incentive plan, in line with last year’s feedback from our stakeholders. Specific retention measures for the CFO may therefore be proposed for shareholder consideration.