1. Introduction by the Chairman of the Nomination and Compensation Committee
Through almost all the 2019/20 financial year, we continued on our strong growth trajectory from the previous two years. However, as outlined earlier in the shareholders’ letter, Sonova’s performance was greatly affected during the last month of the financial year by the exceptional circumstances surrounding the COVID-19 pandemic. The Board of Directors and Management Board have therefore reviewed the environment and taken coordinated measures for Sonova to adapt to the rapidly changing situation, care for the people, preserve Sonova’s competitiveness, maintain liquidity, and be best positioned for the expected market recovery once conditions improve.
As described in this report, our compensation system is linked to the company’s strategy and business results, and aligns with the interests of our shareholders by rewarding performance in the context of the business and the market. While our compensation system has proven very effective over many years, specific short-term adjustments have to be made to ensure continued alignment during the COVID-19 related crisis.
These specific short-term adjustments to the compensation system are described in this letter and throughout the following pages. This compensation report also explains how we in the Nomination and Compensation Committee (NCC) carried out our objectives and responsibilities in the financial year. All efforts of our employees, the Management Board, and the Board of Directors during the financial year have again been focused on achieving our ambitious targets.
Even during the normal course of business, we continuously review our compensation framework, making adaptations when and if deemed appropriate, taking into consideration our ongoing dialogue with our shareholders and with proxy advisors, and reflecting our business strategy as well as relevant market trends and best practice. This review is to ensure that our compensation framework is attractive, effective in achieving what we need, and sustainable. Transparency is key for us and we continuously work on improving clarity of disclosure.
In line with this ongoing review, the NCC thoroughly discussed relevant adaptions to the compensation system as part of normal business and decided on the following key changes:
- Executive Equity Award Plan (EEAP): A restriction period post vesting is introduced for the Management Board to arrive at a total holding period of five years from the date of award for options and performance share units (PSUs) from the 2020 EEAP grant forward.
- Variable Cash Compensation (VCC):
- The specific target achievement over the 2019/20 period for each Key Performance Indicator (KPI) underlying the VCC is quantified for the first time in this report.
- To reflect Sonova’s corporate social responsibility and sustainable business approach, relevant environmental, social, and governance (ESG) targets for both existing and new business will be more formally reflected in the VCC, once business resumes to normal levels.
We pursue a considered course in compensation adjustments for our Management Board, making changes only if and when they are deemed necessary and appropriate. Such changes are generally in line with those across the organization and would usually only differ in cases such as, for example, a change to a positions responsibilities.
In line with other steps triggered by the COVID-19 related crisis and aimed at preserving our competitiveness, liquidity, and industry position for the expected market recovery, our short-term measures related to compensation include:
- The Chairman of the Board of Directors is ceding his cash retainer (net of social security contributions for the portion delivered in restricted shares) from April 2020 until the 2021 AGM.
- The other members of the Board of Directors are waiving 20 percent of their cash retainer and committee fees for the next term of office, from the 2020 AGM until the 2021 AGM.
- For the Management Board, no salary increases are being applied until later in the 2020/21 financial year.
- The CEO will voluntarily forego 50 percent of his monthly base salary and each of the other Management Board members 20 percent of their monthly base salary from April 2020 until September 2020.
- The Management Board also decided to defer 50 percent of the VCC payout for the 2019/20 financial year to later in the 2020/21 financial year.
- For the 2020/21 financial year, given the need to adapt to an uncertain and rapidly changing economic situation, more dynamic rolling VCC targets will have to be set and firmly governed as circumstances continue to change.
- Additionally, during the 2020/21 financial year, the maximum VCC payout will be capped at 100 percent (versus 200 percent normally) for Management Board members.
The Board of Directors is convinced that the EEAP continues to fulfil its purpose: ensuring long-term value creation for Sonova and alignment of the interests with shareholders. The benefit for the Management Board members will only materialize if the company’s performance and share price increase and outperform its peers. However, given the crisis and its uncertainties, and after thorough consideration, the Board of Directors has decided to suspend the ROCE performance hurdle on options for the time being as this metric does not currently represent an accurate reflection of management performance as a result of the outbreak of COVID-19 (force majeure). Moreover, the Management Board will only benefit from the options once the share price increases again, providing for the desired shareholder alignment. No changes other than the suspension of the ROCE performance hurdle are planned for the EEAP.
As announced on January 10, 2020, Adrian Widmer will stand for election to the Board of Directors at the 2020 AGM and it is planned that he will become a member of the Audit Committee. All existing Board members will stand for re-election.
Effective April 1, 2019 and as announced on November 16, 2018, Victoria E. Carr-Brendel took over as Group Vice President (GVP) Cochlear Implants of Sonova and President of Advanced Bionics, and Ludger Althoff took over as GVP Operations.
The NCC continued to perform its regular activities throughout the year, including succession planning for positions on the Board of Directors and the Management Board, performance goal setting at the beginning of the financial year and performance assessment at its end, determination of compensation for members of the Management Board, and preparation of the compensation report and of the say-on-pay votes at the AGM.
As outlined in this compensation report, the total compensation awarded to the members of the Board of Directors for this term of office is well within the limit approved by the 2019 AGM. The compensation awarded to the members of the Management Board is also within the limit approved by the 2018 AGM, even though the VCC achievement is above the previous year, thanks to excellent business performance during the eleven pre-crisis months of the 2019/20 financial year.
At the 2020 AGM, 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 of the maximum aggregate compensation amounts for the Board of Directors for the next term of office and for the Management Board for the 2021/22 financial year.
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 remain confident that our compensation system rewards for performance in a balanced and sustainable manner, and aligns well with our shareholders’ interests. We look forward to our continued dialogue.
Chairman of the Nomination and Compensation Committee