5.2 Management Board compensation

Compensation report

5. Compensation for the financial year

5.1 Board of Directors compensation

The tables in this section are audited by the external auditor.

The following table shows the compensation for the individual members of the Board of Directors for the 2017/18 and 2016/17 financial years.

The total compensation in the 2017/18 financial year was CHF 2.9 million, nearly the same amount as in the previous year. After the reduction of the total compensation in 2011, no changes have been made over the last six years, and in consequence the structure and individual levels of total compensation for the Board of Directors have not changed during that entire period. The current total compensation is in line with the respective benchmark and publicly available surveys for members, the Vice Chairman, and the Chairman of the Board of Directors. The current structure of the total compensation of the Board of Directors shows a slightly higher fixed compensation (cash retainer and restricted shares) than the market norm, but substantially lower committee fees. This reflects current working practice according to the organizational rules.

No other compensation was paid for additional services beyond the total compensation disclosed in the tables below. No loans were granted by Sonova or any other Group company to present or former members of the Board of Directors in the 2017/18 financial year, and no such loans were outstanding as of March 31, 2018. Furthermore, neither Sonova nor any other Group company has granted any loans to related parties of present or former members of Board of Directors.

Sonova has revised its Board compensation reporting to align with the approach used in the vote by the Annual General Shareholders’ Meeting on the maximum aggregate total compensation amount. In order to provide for appropriate predictability of the amount put forward for the prospective voting, as of the 2018 Annual General Shareholders’ Meeting Sonova will not include employer social security contributions in the vote on the maximum aggregate total compensation amount of the Board of Directors. Sonova will continue to report employer social security contributions paid in the respective compensation tables. This updated reporting approach will ensure full alignment between compensation reporting and voting approaches.

Note that the Board of Director amounts reported in the tables do not necessarily correspond to the amounts voted as the reporting period follows the Sonova financial year, whereas the voting follows the period between Annual General Shareholders’ Meetings. For transparency, we include also a reconciliation table for approved versus actual total compensation for the members of the Board of Directors for the period between Annual General Shareholders’ Meetings in section 5.1.2.

in CHF	2017/18
		Cash retainer (fixed fee)	Meeting attendance fee/ expenses 1)	Total cash compensation	Value of restricted shares 2)	Total compensation	Employer’s social insurance contribution (AHV/ALV) 3)
Robert F. Spoerry 4) Chairman of the Board of Directors Chairman of the Nomination and Compensation Committee		500,000	2,500	502,500	295,212	797,712	54,572
Beat Hess Vice-Chairman of the Board of Directors Member of the Nomination and Compensation Committee		122,500	8,000	130,500	156,406	286,906	16,912
Stacy Enxing Seng Member of the Nomination and Compensation Committee		107,500	8,000	115,500	156,406	271,906	19,076
Michael Jacobi Chairman of the Audit Committee		125,000	8,000	133,000	156,406	289,406	42,408
Anssi Vanjoki Member of the Audit Committee		107,500	8,000	115,500	156,406	271,906	19,076
Ronald van der Vis Member of the Audit Committee		107,500	7,500	115,000	156,406	271,406	39,245
Jinlong Wang		100,000	6,000	106,000	156,406	262,406	18,434
Lynn Dorsey Bleil		100,000	5,500	105,500	156,406	261,906	18,434
Total (active members)		1,270,000	53,500	1,323,500	1,390,054	2,713,554	228,157

The compensation shown in the table above is gross and based on the accrual principle.

1) Attendance fees and expenses are based on the number of meetings attended by each member of the Board of Directors (no attendance fees for the Chairman).

2) The tax value at grant differs from the value at grant by reduction of 6% per year of restriction and reflects that once the restricted shares have been granted, they are then blocked over a restriction period of five years and four months for the Chairman of the Board of Directors and four years and four months for the other members of the Board of Directors. The discount, which reflects the practice of the Swiss tax authorities, also takes account of the fact that restricted shares are not tradable and cannot be pledged and are therefore subject to the full share volatility during the blocking period. In addition, for tax purposes the volume-weighted average price on grant date was used whereas the fair value per share corresponds to the closing price at grant date. Calculation of the value of restricted shares: Tax discounted value per restricted share at grant date for the Chairman of the Board of Directors was CHF 109.14, and for the other members of the Board of Directors CHF 115.68.

3) Employer social security contributions on the cash retainer and the tax value of options exercised and restricted shares granted during the financial year. The total compensation including the employer social security contributions in the financial year, amounts to CHF 2,941,711 (approach applied for the purposes of the 2017 Annual General Shareholder Meeting vote).

4) Including work and attendance in the Nomination and Compensation Committee and Audit Committee.

in CHF	2016/17
		Cash retainer (fixed fee)	Meeting attendance fee/ expenses 1)	Total cash compensation	Value of restricted shares 2)	Total compensation	Employer’s social insurance contribution (AHV/ALV) 3)
Robert F. Spoerry Chairman of the Board of Directors Chairman of the Nomination and Compensation Committee		500,000	2,500	502,500	289,699	792,199	54,199
Beat Hess Vice-Chairman of the Board of Directors Member of the Nomination and Compensation Committee		122,500	9,500	132,000	153,135	285,135	16,801
Stacy Enxing Seng Member of the Nomination and Compensation Committee		105,979	9,000	114,979	153,135	268,114	18,416
Michael Jacobi Chairman of the Audit Committee		125,000	9,000	134,000	153,135	287,135	20,104
Anssi Vanjoki Member of the Audit Committee		107,500	9,000	116,500	153,135	269,635	18,922
Ronald van der Vis Member of the Audit Committee		107,500	8,500	116,000	153,135	269,135	18,889
Jinlong Wang		100,000	7,000	107,000	153,135	260,135	18,281
Lynn Dorsey Bleil 4)		79,726	6,000	85,726	153,135	238,861	16,879
Total (active members)		1,248,205	60,500	1,308,705	1,361,644	2,670,349	182,491
John J. Zei 5)		22,089	4,500	26,589		26,589	1,527
Total (including former members)		1,270,294	65,000	1,335,294	1,361,644	2,696,938	184,018

The compensation shown in the table above is gross and based on the accrual principle.

1) Attendance fees and expenses are based on the number of meetings attended by each member of the Board of Directors (no attendance fees for the Chairman).

2) Calculation of the value of restricted shares: Tax discounted value per restricted share at grant date for the Chairman of the Board of Directors CHF 95.48, and for the other members of the Board of Directors CHF 101.21. The discount takes into account a reduction of 6% per year of restriction and reflects the fact that once the restricted shares have been granted, they are then blocked over a restriction period of five years and four months for the Chairman of the Board of Directors and four years and four months for the other members of the Board of Directors.

3) Employer social security contributions on the tax value of RSUs vested, options/SARs exercised and restricted shares granted during the financial year.

4) New member of the Board of Directors since June 2016.

5) John J. Zei retired from the Board of Directors at the Annual General Shareholders’ Meeting from June 14, 2016. He has entered into an independent consulting service agreement with Sonova starting July 1, 2016. There are no other anticipated reasonable expenses on the part of consultant for which Sonova will provide reimbursement.

5.1.1 Historical compensation for the members of the Board of Directors

After the reduction of the total compensation in 2011, no changes have been made over the last six years, and in consequence the structure and individual levels of total compensation for the Board of Directors have not changed during that entire period. The current total compensation is in line with the respective benchmark and publicly available surveys for members, the Vice Chairman, and the Chairman of the Board of Directors. The current structure of the total compensation of the Board of Directors shows a slightly higher fixed compensation (cash retainer and restricted shares) than the market norm, but substantially lower committee fees. This reflects current working practice according to the organizational rules and is determined and supported by benchmarks and publicly available surveys.

5.1.2 Approved versus expected total compensation for the members of the Board of Directors

For the period from the 2017 Annual General Shareholders’ Meeting to the 2018 Annual General Shareholders’ Meeting, the total compensation paid to the Board of Directors is expected to be CHF 2.9 million. This is within the limit of CHF 3.0 million as approved by the AGM 2017.

in CHF 1,000	Approved for AGM 2016 – AGM 2017	Effective for AGM 2016 – AGM 2017	Approved for AGM 2017 – AGM 2018	Estimate for AGM 2017 – AGM 2018
AGM approval year	2016		2017
Total compensation 1)	3,000	2,899	3,000	2,934

Breakdown total compensation:
Fixed fees including meeting attendance and expenses	1,463	1,328	1,453	1,326
Mandatory employer’s social security contributions	185	209	185	217
Tax value of restricted shares	1,352	1,362	1,362	1,391

Number of members of the Board of Directors	8	8	8	8

1) Includes mandatory employer social security contributions in line with the respective AGM compensation approvals. For the 2018 and future AGMs, these contributions will not be included in the votes on the maximum aggregate total compensation amount of the Board of Directors. Sonova will continue to report employer social security contributions in the respective compensation tables.

5.2 Management Board compensation

The tables in this section are audited by the external auditor.

Overall, Sonova achieved solid results with many parts of the Group achieving new records. Overall, the financial targets set by the Board of Directors for the financial year were slightly exceeded. This is reflected in the financial compensation of the members of the Management Board. For the assessment of the target achievement, the one-time costs related to the AudioNova acquisition were excluded.

The system of Variable Cash Compensation is outlined in more detail in section 4.3 of this report. The following key performance indicators are used to assess the performance of the management in addition to individual qualitative targets: at the Group level, sales, EBITA, EPS and FCF; and on business level in addition ASP and Opex. The overall payout ratio of the target Variable Cash Compensation was 119.3%, above previous year with 116.3%.

Group sales were just below its target. While the hearing instruments business exceeded its growth target, the retail and cochlear implants business was held back by a weak performance in the US and selected other markets.

EBITA achievement in the hearing instruments segment exceeded the target, driven by excellent pricing discipline and a general high focus on Opex control. The cochlear implants business did not fully meet its target despite strict cost containment measures, due to an adverse sales mix. However, the results were significant above the previous year.

EPS was in line with EBITA development. The Group overall slightly exceeded its target both in EBITA and EPS.

FCF was overachieved also due to a higher achievement in EBITA.

Individual qualitative targets of the management were over achieved on average.

The ROCE target, which is relevant for the vesting of the long-term equity award plan (EEAP), was exceeded. Since there is no provision for over-achievement in the EEAP, the vesting is capped at target, namely at 100%. The EEAP target achievement was therefore 100%.

The highest total compensation for a member of the Management Board in the 2017/18 financial year was paid to Arnd Kaldowski. He was appointed on October 1, 2017 in the role of COO and will take up the role of CEO as of April 1, 2018. As discussed below, the COO’s compensation has been already set at the level of his future compensation as CEO. This compensation further includes a one-time replacement award for forfeited deferred compensation entitlements granted by his former employer. This award takes the form of an extraordinary, non-recurring performance option grant of CHF 1,000,000. Depending on the EPS CAGR per year, the cliff vesting of the options after a five-year period is as follows:

EPS CAGR per year is below 8%:
no cliff vesting occurs and granted performance options are forfeited
EPS CAGR per year at 8%:
50% of granted performance options vest
EPS CAGR per year is at or above 12%:
100% of granted performance options vest

The number of performance options allocated between 8 – 12% EPS CAGR per year is calculated by linear interpolation.

For the period from October 1, 2017 until March 31, 2018, Arnd Kaldowski’s fixed base salary was CHF 450,000 (CHF 900,000 annualized), and the target VCC was CHF 400,000 (CHF 800,000 annualized). The actual VCC payout for performance in the 2017/18 financial year amounted to CHF 499,488, whereas the maximum potential variable cash payout would have been CHF 800,000 (annualized).

In addition, a regular equity grant (EEAP) with an equity compensation mix of 62.5% in options and 37.5% in PSUs was granted to Arnd Kaldowski with a 2018 fair value of CHF 1,300,000 (full year). His compensation also includes an employer’s social security contribution (AHV/ALV) of CHF 62,511, employer’s pension contributions of CHF 56,363, and other fringe benefits such as expenses and housing.
The reported total compensation for the COO, Arnd Kaldowski, is higher than that of the CEO, Lukas Braunschweiler. This is due to a combination of factors including:

A one-time, non-recurring performance option grant, to replace, to a limited extent, awards for forfeited compensation entitlements with his former employer.
Compensation benchmarks taking into account the significantly increased size of Sonova.
In parallel, during the transition period (October 1, 2017 until March 31, 2018), Lukas Braunschweiler has seen his responsibilities reduce to a 50% full-time equivalent, with a corresponding decrease in base salary and VCC target.

The following table shows the compensation of the CEO and of the other members of the Management Board for the 2017/18 financial year (10 members) and for the 2016/17 financial year (13 members). The CEO’s compensation for the 2017/18 financial year is separately disclosed, even though he was not the highest paid member of the Management Board. The CEO’s reduced total compensation is reflective of his reduced responsibilities during the transition period following the appointment of Arnd Kaldowski. In the 2017/18 financial year, the average variable cash payout for performance to Management Board members, including the highest paid member of the Management Board, was 119.3%, whereas the respective average overall payout ratio was 116.3% in the previous year. The total compensation of CHF 16.9 million for the 2017/18 financial year is above the total of CHF 14.1 million for the previous year. The total compensation of CHF 16.9 million is the result of the reduction in total number of members of the Management Board in the 2017/18 financial year, along with a higher VCC payout due to better Group, business, and individual objective achievements, and an increase in the EEAP grant value due in part to transitional EEAP arrangements. Furthermore, it includes the total compensation of the COO, including a one-time grant of performance options for forfeited deferred compensation entitlements granted by his former employer. The fixed base salaries remained almost unchanged.

The structure of total compensation of the members of the Management Board has not changed compared to the previous financial year, aside from the replacement of RSUs with PSUs under the EEAP (see section 4.3 for more information). For the 2018/19 financial year, only modest increases to the current levels of compensation are foreseen. As a basic principle, such changes as are applicable will be kept small and selective, and always aligned to data from executive compensation surveys and published benchmarks from companies of similar size.

No other compensation was paid for additional services beyond the total compensation disclosed in the tables below. No loans were granted by Sonova or any other Group company to present or former members of the Management Board in the 2017/18 financial year, and no such loans were outstanding as of March 31, 2018. Furthermore, neither Sonova nor any other Group company has granted any loans to related parties of present or former members of the Management Board.

Sonova has adopted a revised Management Board compensation reporting to align with the approach used in the vote by the Annual General Shareholders’ Meeting on the maximum aggregate total compensation. In order to provide for appropriate predictability in prospective voting, as of the 2018 Annual General Shareholders’ Meeting Sonova will not include employer social security contributions in the vote on the maximum aggregate total compensation amount of the Management Board. Sonova will continue to report employer social security contributions in the respective compensation tables. This updated reporting approach will ensure full alignment between compensation reporting and voting approaches.

in CHF	2017/18
		Fixed base salary	Variable salary 1)	Fringe benefits	Employer’s pension contribution	Total cash compen- sation	Value of PSUs (RSUs) 2)	Value of options 3)	Total compensation	Employer’s social security contribution 4)
Lukas Braunschweiler, CEO		600,000	472,293	60,630	123,712	1,256,635	393,736	656,236	2,306,607	109,159
Arnd Kaldowski, COO 5)		447,092	499,488	61,886	56,363	1,064,829	487,451	1,812,475	3,364,755	62,511
Other members of the MB 6)		3,486,080	2,137,192	397,152	703,281	6,723,705	1,648,008	1,648,390	10,020,103	975,336
Total		4,533,172	3,108,973	519,668	883,356	9,045,169	2,529,195	4,117,101	15,691,465	1,147,006

The compensation shown in the table above is gross and based on the accrual principle.

1) The variable salary will be paid out only when the Group’s audited financial statements for the fiscal year have been publicly disclosed by Sonova Group HQ and publicly disclosed by the Group in its consolidated financial statements.

2) Fair value per PSU at grant date CHF 118.63. Fair Value on PSUs is based on 100% target achievement; this is an appropriately balanced approach, taking account of the possibility of either over- or under-achievement. RSUs granted only to Lukas Braunschweiler. Fair value per RSU at grant date CHF 140.62.

3) Fair value per option at grant date CHF 20.77. For Arnd Kaldowski this also includes the one-time, non-recurring performance option grant with a value of CHF 21.09.

4) Employer social security contributions including the tax value of options exercised and RSU’s vested during the financial year. The total compensation including the employer social security contributions in the financial year amounts to CHF 16,838,471 (approach applied for the purposes of the 2017 Annual General Shareholder Meeting vote).

5) Member of the Management Board since October 1, 2017 in the role of COO and to transition to the role of CEO as of April 1, 2018. Total compensation for the period from October 1, 2017 until March 31, 2018.

6) Including Sarah Kreienbühl and Franz Petermann for the full 2017/18 until contractual end date.

in CHF	2016/17
		Fixed base salary	Variable salary 1)	Fringe benefits	Employer’s pension contribution	Total cash compen- sation	Value of RSUs 2)	Value of options 3)	Total compensation	Employer’s social security contribution 4)
Lukas Braunschweiler, CEO		800,000	590,845	48,700	127,306	1,566,851	393,630	656,239	2,616,720	125,058
Other members of the MB 5)		3,477,041	2,139,261	321,574	700,532	6,638,408	2,006,858	2,007,385	10,652,651	696,223
Total		4,277,041	2,730,106	370,274	827,838	8,205,259	2,400,488	2,663,624	13,269,371	821,281

The compensation shown in the table above is gross and based on the accrual principle.

The total compensation of CHF 14,090,652 reported in the 2016/17 compensation report corresponds to the sum of total compensation plus employer’s social insurance contribution (ALV/ALV).

1) The variable salary will be paid out after the end of the financial year.

2) Fair value per RSU at grant date CHF 125.68.

3) Fair value per option at grant date CHF 16.99.

4) Employer social security contributions (AHV/ALV) on the tax value of RSUs vested and options exercised during the financial year.

5) Including Jan Metzdorff for the full 2016/17 financial year as member of the Management Board as well as in his new role as President HI Wholesale US.

5.2.1 Historical variable cash compensation for the members of the Management Board over the last five years

The above chart illustrates that the design of the VCC is effective: in line with Sonova’s ambitious target–setting, substantial progress needs to be made to reach the target (100%).

5.2.2 Approved versus actual total compensation for the members of the Management Board

The approved maximum aggregate total compensation amount of the Management Board of CHF 15.4 million for the 2017/18 financial year was planned for a Management Board of 10 members at that time. With the new appointment of Arnd Kaldowski, (COO) on October 1, 2017, the total approved compensation amount payable was increased to CHF 20.02 million (including the one-time, non-recurring performance option grant) in accordance with Art. 27 of the Articles of Association.

The actual total compensation for the Management Board for 2017/18 financial year was CHF 16.9 million, which is, less than the allowable CHF 20.02 million.

In the past, the maximum aggregate total compensation amount available for the members of the Management Board included mandatory employer’s social security contributions in line with the respective AGM compensation approvals. For the 2018 AGM and future AGMs, these contributions will not be included in the votes on the maximum aggregate total compensation amount of the Management Board. Sonova will continue to report employer’s social security contributions in the respective compensation tables.

The EEAP calculation applies fair value at grant, taking account of the possibility of either over- or under-achievement. Fair Value on PSUs is based on 100% target achievement; this is an appropriately balanced approach, taking account of the possibility of either over- or under-achievement. The actual number of shares allocated for each PSU will depend on the achievement of pre-determined performance conditions, and ranges from 0 to 2 shares per PSU. Actual achievement will be disclosed following vesting in each respective financial year.