Compensation report

2. Compensation policy and principles

To ensure Sonova’s success and to maintain its position as a global leading manufacturer and provider of innovative hearing care solutions and services, it is essential to attract, engage, develop, and retain the best talent available in the market. Sonova’s compensation system is designed to support this fundamental objective and is based on Sonova’s compensation principles, summarized below:

The compensation of the Board of Directors consists of fixed compensation only, paid partly in cash and partly in the form of non-discounted restricted shares. The independence of the Board of Directors in its supervisory function is reinforced by the practice that no performance-related compensation is awarded.

The compensation of the Management Board consists of fixed, and variable performance-based compensation components. The fixed base salary and benefits form the fixed components and are determined based on current market practice. Targets for the short-term and long-term incentives are defined at the beginning of each financial year and are not changed during that period. Options granted under the EEAP are not re-priced after they have been granted, regardless of whether they are in or out of the money.

Variable compensation consists of a short-term cash incentive award and a long-term equity incentive award, which are both contingent on performance:

  • The short-term cash incentive award is awarded under Sonova’s Variable Cash Compensation plan. Payout under the VCC is based on Sonova’s growth targets related to key performance indicators (KPIs), such as sales, earnings before interest, taxes and amortization/operating profit before acquisition-related amortization (EBITA), free cash flow (FCF), earnings per share (EPS), average sales price (ASP), and operating expenses (OPEX) at Group and/or business unit level. It additionally reflects the achievement of individual objectives that are defined in the annual performance review process. Therefore, the VCC rewards both the company’s success and individual performance over a one-year period.
  • The revised long-term equity incentive award under the EEAP includes the grant of options and PSUs. The vesting of the options is dependent on the return on capital employed (ROCE) performance and for the PSUs on relative Total Shareholder Return (rTSR). The EEAP reinforces the alignment between compensation and the company’s long-term performance. Moreover, it aligns the interests of the Management Board with those of Sonova’s shareholders, and fosters long-term retention of the Management Board (see section 4.3 for more information related to implementation of the revised EEAP for the 2017/18 financial year).

To avoid compensation for inappropriate risk taking or short-term profit maximization at the expense of the long-term health of the company, a cap applies to the VCC cash payout and to the number of equity awards that can be granted and subsequently vest under the EEAP. Finally, Sonova has mandatory share ownership guidelines in place for members of the Board of Directors and the Management Board. These guidelines require members to invest defined amounts in Sonova shares and thus reinforce the alignment between the interests of the Board of Directors and the Management Board with those of shareholders.