Compensation Report

1. Governance and method of determination of compensation

1.1 Shareholders’ involvement

The Annual General Meeting approves the maximum compensation amounts paid to the Board of Directors and to the Group Executive Committee, each in a binding vote. The provisions of the Articles of Association of Zehnder Group AG (www.zehndergroup.com/en/investor-­relations/­corporate-governance; Article 16) foresee that the Annual General Meeting votes ­annually and prospectively on each of the aggregate compensation amounts as follows:

• the maximum total compensation of the Board of Directors for the period to the next Annual General Meeting;
• the maximum total compensation of the Group Executive Committee for the current fiscal year.

The Articles of Association of the Zehnder Group AG (www.zehndergroup.com/en/investor-­relations/­corporate-governance; Article 32 ff.) include the following provisions on compensation:

• Principles of compensation and the allocation of listed shares for the Board of Directors (Articles 32 and 34);
  
• Principles of compensation and the allocation of listed shares for the Group Execu­tive Committee (Articles 33, 34 and 36);
  
• Additional amount for payments to members of the Group Executive Committee appointed after the vote on compensation at the Annual General Meeting (Article 37);
• Loans, credit facilities and post-employment benefits for members of the Board of Directors and of the Group Executive Committee (Article 35).

1.2 Compensation Committee

According to the Articles of Association, the Annual General Meeting annually and individually elects at least two and a maximum of four members of the Board of Directors to the Compensation Committee, for a term of office of one year until the conclusion of the next Annual General Meeting. Members are eligible for re-election. At the 2019 General Meeting, shareholders elected the following members of the Compensation Committee:

As determined by the Articles of Association (based on Article 27), the Compensation Committee has the following ­responsibilities:

• Submission of proposals to the entire Board of Directors regarding the compensation system for the Board of Directors and the Group Executive Committee;
• Submission of proposals to the entire Board of Directors regarding the total compensation amounts of the Board of Directors and of the Group Executive Committee to be submitted to vote at the ­Annual General Meeting;
• Submission of proposals to the entire Board of Directors regarding the individual compensation of the Chairman and other members of the Board of Directors;
• Submission of proposals to the entire Board of Directors regarding the individual compensation and the employment terms and conditions of the CEO and other members of the Group Executive Committee;
• Submission of proposals to the entire Board of Directors regarding the determination of compensation-related performance objectives for the Group Executive Committee;
• Submission of proposals to the entire Board of Directors regarding the Compensation Report;
• Submission of proposals to the entire Board of Directors regarding amendments to the Articles of Association in respect of the compensation system for the Group Executive Committee;
• Submission of proposals to the entire Board of Directors regarding the approval of external ­mandates of members of the Group Executive Committee.
  

The levels of authority between the Compensation Committee, the Board of Directors and the Annual General Meeting are summarised in the table below.

Responsibility levels

The Compensation Committee meets as often as the business requires, generally before the meetings of the full Board of Directors, which take place at least four times a year. In 2020, the Compensation Committee held four meetings of an hour and a half each on average, which were attended by all members. The Compensation Committee conducted its regular activities during the year, including the annual review of the compensation policy, taking into consideration the feedback of external shareholders about the compensation programmes and their disclosure in the Compensation Report, the benchmarking of the compensation of the Board of Directors and the Group Executive Committee, the review of employment contracts for the individual Group Executive Committee members, and the determination of the individual remuneration of the members of the Board of Directors and the Group Executive Committee, for the attention of the full Board of Directors.

On 1 April 2020, the Compensation Committee proposed to the Board of Directors that the compensation for the Board of Directors be temporarily reduced by 10% due to the negative impact of the coronavirus pandemic on the Zehnder Group’s business activities. The Board of Directors approved this reduction and it was applied to retainers in cash and shares plus committee fees. Additionally, the Compensation Committee temporarily reduced the annual base salaries of the Group Executive Committee members by 10% in 2020 following a proposal by the Group Executive Committee. After a careful review of the business situation in the second half of 2020, the temporary reduction in the compensation for Board of Directors members and the annual base salaries of the Group Executive Committee members was revoked on 1 October 2020, six months after its introduction.

For certain agenda items, the Chairman of the Board of Directors and/or the CEO participate in the meetings in an advisory capacity. The Chairman of the Compen­sation Committee may invite other executives as appropriate. However, the Chairman of the Board of Directors and the executives do not partici­pate in the meetings, or periods of meetings, during which their own compensation and/or performance are being discussed. After each meeting, the Chairman of the Compensation Committee reports on the activities of the committee to the Board of Directors. The minutes of the meetings are available to the full Board of Directors.

The Compensation Committee is entitled to bring in external consultants regarding specific compensation issues. In 2020, the Compensation Committee tasked Willis Towers Watson with benchmarking the compensation of the Board of Directors and Group Executive Committee. KPMG was also tasked with reviewing the employment contracts for the Group Executive Committee members to ensure their compliance with tax regulations and national insurance legislation. The Compensation Committee is also being supported by internal experts, such as the Head of Group Human Resources.

1.3 Method of determination of compensation

In order to ensure competitive compensation levels that allow to attract key talents and keep them motivated over the long term, the compensation of executives is regularly benchmarked with that of executives from other international industrial companies with similar market capitalisation, revenue, profitability, headcount and geographical reach to the Zehnder Group. The following companies were used for comparison purposes for the CEO and other members of the Group Executive Committee: Arbonia, Belimo, Bobst, Bossard, Burckhardt Compression, Burkhalter, Conzzeta, Daetwyler, Feintool, Forbo, Gurit, Huber+Suhner, Interroll, Komax, Landis+Gyr, Metall Zug, Meier Tobler, Phoenix Mecano, Rieter, Schweiter and Starrag. Executives who are fulfilling their tasks at the expected performance level are generally awarded target compensation at median level of the relevant benchmark data.

In 2020, Willis Towers Watson performed a benchmarking exercise for the compensation of the Board of Directors. The report was designed to provide the Compensation Committee with a basis for analysing the compensation of the Board of Directors for the 2021/2022 period of office. Willis Towers Watson also performed a benchmarking exercise for the Group Executive Committee’s compensation in 2020. For this purpose, the data of industrial benchmark companies (as described above) has been compiled by Willis Towers Watson from their existing database for each function of the Group Executive Committee in the country of employment of the respective member and by using the job grading methodology of Willis Towers Watson. The grading system is the basis for compensation activities such as benchmarking and determination of the compensation structure and levels. In addition, the grading system is also used for talent management (succession planning and people development).

While the benchmarking data is one factor considered by the Compensation Committee to determine the compensation of the Group Executive Committee, other factors are considered as well, such as the internal compensation structure (equity), the profile of the  Group Executive Committee member (skill set, experience, seniority) and affordability to the company. The performance of the company in any given year has a direct impact on the variable short-term and long-term compensation actually paid to the  Group Executive Committee member through the profit-sharing plan.