Compensation Report

1. Governance and methods determinating 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 up 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 to the Board of Directors (Articles 32 and 34);
• Principles of compensation and the allocation of listed shares to the members of 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 Nomination and Compensation Committee

According to the Articles of Association, the Annual General Meeting elects annually and individually at least two and a maximum of four members of the Board of Directors to the Nomination and 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 2021 General Meeting, shareholders elected the following members of the Nomination and Compensation Committee:

The responsibilities of the Committee have been expanded for the term of office starting from the Annual General Meeting 2021. The Nomination and Compensation Committee is now also responsible for dealing with nomination matters. Its responsibilities are set out in the Articles of Association (www.zehndergroup.com/en/investor-relations/corporate-governance; Article 27) and Organisational Regulations (www.zehndergroup.com/en/investor-relations/corporate-governance; Article 4.3.) and include the following:

• 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 determination of compensation-related performance objectives for the Group Executive Committee;
• 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 amendments to the Articles of Association affecting the remuneration system compensating the members of the Group Executive Committee;
• Submission of proposals to the Board of Directors relating to the appropriate size and balanced composition of the Board of Directors, the majority of whose members should be independent, and determining the criteria for independence;
• Development and presentation of criteria for election or re-election to the Board of Directors or the appointment as a member of the Group Executive Committee;
• Evaluation of potential members of the Board of Directors on the basis of the defined criteria and making a statement to the Board of Directors regarding their nomination to the attention of the General Meeting;
• Assessment of proposals from the CEO to the Board of Directors regarding the appointment or dismissal of members of the Group Executive Committee and, if necessary, submission of a statement to the Board of Directors;
• Review of succession and contingency planning at the Group Executive Committee level;
• Provision of information to the Board of Directors on all events relating to the Nomination and Compensation Committee that are not directly within the responsibility of the Board of Directors;
• Submission of proposals to the entire Board of Directors regarding the total amount of compensation 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 Compensation Report;
• Submission of proposals to the entire Board of Directors regarding the approval of external mandates for members of the Group Executive Committee.

The levels of authority between the Nomination and Compensation Committee, the Board of Directors and the Annual General Meeting are summarised by the following table.

Responsibility levels

The Nomination and Compensation Committee meets as often as business matters require, generally before the meetings of the entire Board of Directors, which take place at least four times a year. In 2021, the Nomination and Compensation Committee held four meetings of two hours each on average, which were attended by all members.

During the year in review, the Nomination and Compensation Committee carried out an analysis of the company pension scheme arrangements for members of the Group Executive Committee, evaluated an adjustment of the compensation model for the Board of Directors and put forward a motion for approval by the Board of Directors. In other respects, the Nomination and Compensation Committee conducted its regular activities, including its annual review of the compensation policies, taking into consideration the feedback by shareholders on the compensation programmes and their disclosure in the Compensation Report, as well as the setting of the compensation of the individual members of the Board of Directors and Group Executive Committee and the preparation of the Compensation Report and remuneration proposals for the Annual General Meeting.

As part of the expanded range of tasks carried out since the Annual General Meeting 2021, the Nomination and Compensation Committee assesses the performance of the CEO and the members of the Group Executive Committee each year and prepares the succession planning for the Board of Directors and Group Executive Committee based on a defined set of criteria.

For specific agenda items, the Chairman of the Board of Directors, the Vice Chairman and/or the CEO attend the meetings in an advisory capacity. The Chairman of the Nomination and 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 parts thereof in case of their own compensation and/or performance being discussed. After each meeting, the Chairman of the Nomination and 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 Nomination and Compensation Committee is entitled to bring in external consultants regarding specific compensation issues. During the year 2021 , the Nomination and Compensation Committee appointed Klingler Consultants to review the company pension scheme for the members of the Group Executive Committee. The company does not hold any other mandates from Zehnder Group. The Nomination and Compensation Committee is also supported by internal experts, such as the Director Group Human Resources.

1.3 Method determinating compensation

In order to ensure competitive compensation levels allowing key talent to be attracted and motivated on a long-term basis, the compensation of executives is regularly benchmarked against that of executives from comparable international industrial companies featuring similar market capitalisation, revenue, profitability, headcount and geographical reach as the Zehnder Group. The following companies were used for comparison purposes as regards the CEO and other members of the Group Executive Committee: Arbonia, Belimo, Bobst, Bossard, Burckhardt Compression, Burkhalter, Bystronic (formerly Conzzeta), Daetwyler, Feintool, Forbo, Gurit, Huber+Suhner, Interroll, Komax, Landis+Gyr, Metall Zug, Meier Tobler, Phoenix Mecano, Rieter, Schweiter and Starrag. The universe of companies remains unchanged when compared to the reference companies of the previous year. Executives attaining the defined performance objectives are generally awarded target compensation at a median level of the relevant benchmark data.

In 2020, Willis Towers Watson performed a benchmarking survey for the compensation of the Board of Directors. The report was designed to provide the Nomination and Compensation Committee with a basis for analysing and setting the compensation of the Board of Directors for the 2021/2022 period of office.

Willis Towers Watson also performed a benchmarking review for the compensation of the Group Executive Committee in 2020. For this purpose, the data of industrial benchmark companies (as described above) have 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 forms the basis in setting compensation with regard to aspects such as benchmarking and the definition of the compensation structure and levels. In addition, the grading system is also being used for talent management (succession planning and people development).

The benchmarking data constitutes just one factor taken into consideration by the Nomination and Compensation Committee to determine the compensation of members 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 the responsibilities actually borne by that member. The performance of the company in any given year has a direct impact on the variable compensation actually paid to the members of the Group Executive Committee over the short and long term through the profit-sharing plan.