3. Compensation governance

3.1 Board of Directors composition, competence and independence

Board of Directors composition

As determined in Art. 1 of the Organizational Regulations and in Art. 1 of the Rules on Board Operations and Procedures, the Board of Directors plans the succession of its members and defines the criteria for selecting candidates so that the composition is well-balanced in terms of size, professional skills, international experience, and diversity in general. Sonova ensures that newly elected members receive appropriate introduction and orientation and that the members of the Board of Directors receive further training with respect to their responsibilities.

The current composition of the Board of Directors represents a good mix of competencies, age, and diversity. The average age is 60 years and the average length of service is 7.9 years. As a general rule, the Board of Directors shall not nominate for re-election a candidate for the Board of Directors who has completed his or her 70^th year of age, although in justified individual cases the Board of Directors can make an exception.

Board of Directors competence

The Board of Directors competence process evaluates each member of the Board of Directors against a set of pre-defined competencies and skills. The competencies relate to specific requirements which are relevant for Sonova and are compiled in the Board of Directors competence matrix. More information on the Board of Directors’ competences can be found in the corporate governance report.

Board of Directors independence

We consider all members of the Board of Directors as independent. Board of Directors fees are structured for consistency with principles of independence; members therefore only receive fixed fees paid in the form of a cash retainer and non-discounted shares with a blocking period of five years and four months (Chairman of the Board of Directors) or four years and four months (all other members of the Board of Directors). The allocation of shares strengthens alignment to shareholders’ interests.

In addition, members of the Board of Directors receive committee retainers for their services on Sonova’s committees. Independent members of the Board of Directors do not receive performance-related compensation, severance payments or benefits.

Length of service is not deemed to be a relevant criterion for independence. On the contrary, the Board of Directors considers that the choice of individual personality, freedom to express oneself in meetings and committees, as well as experience and diversity, are important for the optimal composition of the Board of Directors.

Moreover, all members of the Board of Directors are considered to be independent, according to Art. 14 of the Swiss Code of Best Practice for Corporate Governance and Art. 6 lit. c of the Organizational Regulations, if they personally or in association with related persons have not been a member of the Management Board over the last 3 years, and have no or only comparatively minor business relations with the Company. According to these rules all members of Sonova’s Board of Directors are considered to be independent.

3.2 Nomination and Compensation Committee

As determined in the Articles of Association, the Organizational Regulations, and the Nomination and Compensation Committee Charter of Sonova Holding AG, the NCC supports the Board of Directors in the fulfillment of its duties and responsibilities in the area of compensation and personnel related matters. Its tasks and responsibilities include, among others:

Approval and authority levels on compensation matters:

The NCC consists exclusively of independent and non-executive members of the Board of Directors, who are elected individually and annually by the Annual General Shareholders’ Meeting. For the period under review, the NCC consisted of Robert F. Spoerry (Chairman of the Board of Directors), Stacy Enxing Seng, and Beat Hess.

The NCC meets as often as business requires but at least three times per year. In the 2017/18 financial year, it held four meetings covering, among others, the following pre-defined recurring agenda items:

Considerable time is invested e.g. to prepare meetings and conduct interviews.

As a general rule, the Chairman of the Board of Directors, the CEO, and the Group Vice President Corporate Human Resource Management participate in the meetings of the NCC. However, they do not take part in the section of the meetings where their own performance and/or compensation are discussed.

There is a closed session (without participation of any executive or guest) after each NCC meeting. The Chairman of the NCC reports to the Board of Directors on its activities and recommendations after each meeting and the minutes of the meetings are available to the full Board of Directors

3.3 Governance and shareholders’ involvement

Authority for decisions related to compensation is governed by the Articles of Association.

The prospective maximum aggregate total compensation amounts to be awarded to the Board of Directors and the Management Board is subject to a yearly binding shareholders’ vote at the Annual General Shareholders’ Meeting. The provisions of the Articles of Association foresee that shareholders vote prospectively: on the maximum aggregate total compensation for the Board of Directors for the period until the next ordinary Annual General Shareholders’ Meeting, and for the Management Board for the following financial year. In addition, Sonova submits the yearly compensation report to a consultative shareholders’ vote at the Annual General Shareholders’ Meeting, so that shareholders have an opportunity to express their opinion about the compensation of the previous financial year.

Over the past several years Sonova has engaged in ongoing dialog with shareholders and proxy advisors and has made significant efforts continuously to improve its compensation disclosure, both in terms of transparency and level of detail provided about its principles and system of compensation. The positive outcome of the consultative votes in recent years indicates that shareholders welcome this approach.

Matters to be voted on at the 2018 Annual General Shareholders’ Meeting:

The maximum aggregate total compensation amount for the Board of Directors comprises fixed compensation components, including a cash retainer and restricted shares as well as committee fees and additional meeting attendance fees and travel allowance (as applicable).

The maximum aggregate total compensation amount for the Management Board (including the CEO) comprises:

Fixed compensation components:

Variable compensation components:

Therefore, the maximum aggregate total compensation amount submitted to shareholders’ vote is potentially higher than the actual amount of total compensation for the members of the Management Board based on the performance achieved in the financial year. The total compensation amount for Management Board will be disclosed in the compensation report of the respective financial year, which will be subject to a consultative shareholders’ vote at the Annual General Shareholder’ Meeting.

We are convinced that the binding prospective votes on the maximum aggregate total compensation amounts, combined with a consultative retrospective vote on the compensation report, provide Sonova’s shareholders with a far-reaching “say on pay”.

Sonova pays mandatory employer’s social security contributions (AHV/ALV) for both the Board of Directors and Management Board in accordance with applicable law. These contributions will not be included in the maximum aggregate total compensation amounts for the purposes of the applicable votes at the 2018 and future Annual General Shareholders Meetings. Such employer social security contributions cannot be forecasted accurately. However, the contributions paid are disclosed in the compensation report in compliance with Sonova’s reporting obligations.

Articles of Association

With regard to the compensation of the members of the Board of Directors and the Management Board, the Articles of Association were revised in 2014 and approved by the shareholders at the 2014 Annual General Shareholder’ Meeting. The Articles of Association include the following provisions on compensation:

The Articles of Association are available in their entirety online: www.sonova.com/en/investors/articles-association

3.4 Process of determining compensation

Benchmarks and external consultants

Sonova periodically reviews the total compensation of members of the Management Board, comparing data from executive compensation surveys and published benchmarks from companies of similar size in terms of market capitalization, revenue, number of employees, geographic reach, etc., and/or which are operating in related industries. The level and mix of the different compensation components are determined, along with other considerations, with reference to those benchmarks.

Performance management

The actual compensation of the members of the Management Board in a financial year depends on the performance of the Group and/or respective business unit, as well as on individual performance, which is assessed through the formal annual performance review process. Financial, business unit, and individual performance objectives are approved at the beginning of the financial year and achievements against those objectives are assessed at the end of the financial year, according to Sonova’s performance appraisal process.