1. Introduction by the Chairman of the Nomination and Compensation Committee

Dear Shareholders

The purpose of our compensation system is to attract, engage, and retain employees; to inspire best-in-class performance; and to encourage behavior aligned with Sonova’s values. We are keen to ensure that our compensation principles and system properly reward performance and stay closely aligned with the market and the interests of our shareholders.

Over the past years, we have developed and implemented an attractive, effective, and sustainable compensation system. For members of the Management Board we have introduced a new performance criterion in the Executive Equity Award Plan (EEAP) and have implemented claw-back and forfeiture provisions in the employment agreements. Building on many changes made over the past years, we have continued to optimize our compensation system. These continuous efforts are carefully led in order to ensure underlying understanding, acceptance, and trust; and we are convinced that this investment will ensure a sustainable long-term compensation system that is closely aligned with our principles and the market.

Through the 2017/18 financial year, we further reviewed our compensation system, taking into account our ongoing dialog with our shareholders and proxy advisors and reflecting market trends and best practice principles.

As part of this review, and as indicated in the 2016/17 compensation report, we implemented changes to the EEAP for the 2017/18 financial year. We amended the EEAP for members of the Management Board, reflecting best practice principles and long-term trends in the market. Up to this year the EEAP equity split has been based on a mix of performance options (options) and restricted share units (RSUs) with a performance target. As of this financial year the equity grant consists of options and performance share units (PSUs). The PSUs are measured on relative Total Shareholder Return (rTSR) against a recognized index. More details on the structure of PSUs is provided later in the report. The revision of the EEAP was developed and designed in close cooperation with an external consultant, one of the leading international firms in the areas of compensation and value-based management. This external consultant is independent, was systematically evaluated, and holds no other mandate with Sonova.

In addition, the Sonova share ownership guidelines have been reviewed and are now based on holding a defined value of shares rather than a fixed number of shares.

In 2017/18 financial year, Sonova appointed a new Chief Operating Officer (COO) who will assume the position of the Chief Executive Officer (CEO) from the beginning of the new financial year. His total compensation has been aligned with his future role and duties as the new CEO. Additional compensation has been paid to replace, to a limited extent, awards for forfeited compensation entitlements with his former employer.

In the 2017/18 financial year further efforts were made to increase levels of disclosure, including detail on the rationale for selected performance objectives under the Variable Cash Compensation Plan (VCC) and EEAP as well as more detailed description of target fulfillments.

Regarding compensation levels, there were:

At the 2018 Annual General Shareholders’ Meeting, you will have the opportunity to express your opinion on our compensation principles and system by way of a consultative vote on this compensation report. We will also ask for your approval on the maximum aggregate total compensation amounts to be awarded to the Board of Directors for the period from the 2018 Annual General Shareholders’ Meeting until the 2019 Annual General Shareholders’ Meeting, and to the Management Board for the 2019/20 financial year.

Transparency remains high on our agenda, building further on prior year improvements, such as those relating to our short-term cash incentive award under Sonova’s Variable Cash Compensation plan. This compensation report also includes clear disclosure on the revised EEAP and share ownership guidelines.

On behalf of the Board of Directors, I would like to thank you for your continued support. We hope that you find this report informative and we are confident that our compensation system rewards for performance in a balanced and sustainable manner, and aligns well with the shareholders’ interest.

Yours sincerely,

Robert Spoerry
Chairman of the Nomination and Compensation Committee