5.2 Management Board compensation

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 2020/21 financial year (9 members from the 2020 AGM) and for the 2019/20 financial year (8 members). The total compensation in the 2020/21 financial year was CHF 2.6 million (2019/20: CHF 2.9 million).

Board of Directors compensation

in CHF	2020/21
		Cash retainer (fixed fee) 1)	Expenses 2)	Total cash compensation	Grant value of restricted shares	Total compensation	Employer’s social insurance contribution (AHV/ALV) 3)
Robert F. Spoerry 4) 5) Chair of the Board of Directors Chair of the Nomination and Compensation Committee		15,450	1,500	16,950	369,011	385,961	17,858
Beat Hess Vice-Chair of the Board of Directors Member of the Nomination and Compensation Committee		138,162	3,500	141,662	159,519	301,181	16,460
Lynn Dorsey Bleil Member of the Audit Committee		122,529	3,000	125,529	159,519	285,048	18,425
Lukas Braunschweiler		104,219	2,500	106,719	159,519	266,238	245,809
Stacy Enxing Seng Member of the Nomination and Compensation Committee		122,529	3,500	126,029	159,519	285,548	18,460
Michael Jacobi Member of the Audit Committee		126,076	3,500	129,576	159,519	289,095	15,634
Ronald van der Vis Chair of the Audit Committee		139,318	3,000	142,318	159,519	301,837	19,610
Jinlong Wang		104,219	2,500	106,719	159,519	266,238	17,098
Adrian Widmer 6)		77,063	–	77,063	159,519	236,582	14,811
Total		949,566	23,000	972,566	1,645,164	2,617,730	384,165

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

1) As of the 2020 AGM, fee payment is aligned with the term of office (instead of the financial year). For the transition, catch up payments in a total amount of CHF 178,111 had to be made in June 2020.

2) Travel expenses are paid only for attended meetings. No travel expenses paid from 2020 AGM to 2021 AGM due to COVID-19.

3) Employer social security contributions on the cash retainer, the tax value of income derived from outstanding EEAP awards (former CEO) and restricted shares granted during the financial year.

4) Including NCC and AC work and attendance.

5) Amount of CHF 15,450 included under Cash retainer was not paid out, but covers the netting of the social security contributions on the restricted shares.

6) Member of the Board of Directors since June 2020

in CHF	2019/20
		Cash retainer (fixed fee)	Expenses 1)	Total cash compensation	Grant value of restricted shares	Total compensation	Employer’s social insurance contribution (AHV/ALV) 2)
Robert F. Spoerry 3) Chair of the Board of Directors Chair of the Nomination and Compensation Committee		476,343	2,500	478,843	372,664	851,506	52,535
Beat Hess Vice-Chair of the Board of Directors Member of the Nomination and Compensation Committee		132,541	4,500	137,041	161,000	298,041	15,713
Lynn Dorsey Bleil Member of the Audit Committee		117,532	4,500	122,032	161,000	283,033	17,757
Lukas Braunschweiler		100,000	4,000	104,000	161,000	265,000	376,364
Stacy Enxing Seng Member of the Nomination and Compensation Committee		117,532	4,500	122,032	161,000	283,033	17,757
Michael Jacobi 4) Member of the Audit Committee		129,058	4,500	133,558	161,000	294,559	15,491
Ronald van der Vis Chair of the Audit Committee		133,489	4,000	137,489	161,000	298,489	18,856
Jinlong Wang		100,000	4,000	104,000	161,000	265,000	16,515
Total (active members)		1,306,494	32,500	1,338,994	1,499,667	2,838,662	530,988
Anssi Vanjoki 5) Member of the Audit Committee		21,795	3,000	24,795		24,795	1,785
Total (including former members)		1,328,289	35,500	1,363,789	1,499,667	2,863,456	532,773

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

1) Expenses are based on the number of meetings attended by each member of the Board of Directors (attendance fees discontinued from the 2019 AGM forward).

2) Employer social security contributions on the cash retainer, the tax value of income derived from outstanding EEAP awards (former CEO) and restricted shares granted during the financial year.

3) Including NCC and AC work and attendance.

4) Including a compensation of CHF 10,000 for the term of office for extraordinary, supplemental work and contribution during the transition to the new Chair of the Audit Committee as well as on the hiring process for a new member of the Board of Directors.

5) Member of the Board of Directors until June 2019

Explanatory comments to the compensation tables

Note that the amounts reported for members of the Board of Directors in the tables do not necessarily correspond to the amounts voted on at the AGM, as the reporting period follows the Sonova financial year, whereas the voting follows the term of office – the period between AGMs.

The 2020/21 financial year table reflects the current COVID-19 related compensation measures: The Chair of the Board of Directors waived his entire 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 waived 20 percent of their cash retainer and committee fees for the term of office from the 2020 AGM until the 2021 AGM.

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

The total compensation paid to the Board of Directors for the period from the 2020 AGM to the 2021 AGM is expected to be CHF 2.4 million. The value of the cash retainer waived by the Chair of the Board of Directors for this term of office (from the 2020 AGM to the 2021 AGM) equals CHF 0.5 million, that for the other members of the Board of Directors equals CHF 0.2 million in total. The total compensation is within the limit of CHF 2.6 million approved by the 2020 AGM.

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

in CHF 1,000	Approved for AGM 2019 – AGM 2020	Effective for AGM 2019 – AGM 2020	Approved for AGM 2020 – AGM 2021	Expected for AGM 2020 – AGM 2021
AGM approval year	2019		2020
Total compensation	2,900	2,735	2,600	2,426

Breakdown total compensation:
Fixed fees including expenses 1)	1,363	1,235	875	780
Market value of restricted shares	1,537	1,500	1,725	1,646

Number of members of the Board of Directors	8	8	9	9

1) Fixed fee amounts for AGM 2020 – AGM 2021 reflect the impact of the COVID-19 related measures outlined in this report.

5.1.2 Other compensation, loans, and credit for current and former members of the Board of Directors and related parties

No other compensation was paid to current members of the Board of Directors for additional services beyond the total compensation disclosed in the tables above. No other compensation was paid to former members of the Board of Directors beyond the total compensation disclosed in the tables above.

In the year under review, no payments were made to individuals who are closely related to any current or former member of the Board of Directors.

No loans were granted by Sonova or any other Group company to current or former members of the Board of Directors in the 2020/21 financial year, and no such loans were outstanding as of March 31, 2021. Furthermore, neither Sonova nor any other Group company has granted any loans to related parties of current or former members of the Board of Directors.

5.2 Management Board compensation

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

5.2.1 Compensation awarded for the 2020/21 financial year

As outlined before, our basic principle is that any compensation changes for the Management Board are made only if and when they are deemed necessary and appropriate. Such changes are generally in line with those across the organization, with a primary focus on the variable compensation components, and they can be differentiated in cases such as, for example, a change to a positionʼs responsibilities. They are also aligned with data from executive compensation surveys and published benchmarks from companies of similar size.

In line with the decision of the Board of Directors mentioned earlier in this compensation report, no salary increases were given to any member of the Management Board in the 2020/21 financial year. Additionally, the CEO waived 50% of his base salary, and each of the other Management Board members 20% of their base salary, from April 2020 until September 2020.

Variable Cash Compensation performance outcomes 2020/21

The system of the VCC is outlined in more detail in section 4.3 of this report. The following KPIs are used in addition to ESG and individual qualitative targets to assess the performance of the Management Board: at the Group level, sales, EBITA, EPS and FCF; and additionally, on the business level, ASP and OPEX.

Given the need to adapt to an uncertain and rapidly changing economic situation, more dynamic rolling VCC targets were set for the 2020/21 financial year, and firmly governed as circumstances continued to change. These actions are described in this compensation report. On an annualized basis, the overall Group sales target was exceeded at 125.6%, driven by growth investments and strong execution of product launches. Given the volatility introduced by the COVID-19 pandemic, the achievement differed between the different assessment periods, with overachievements in the first and second quarters being partly compensated by lower achievements in the second half-year (against significantly increased targets). While the hearing instruments and audiological care business exceeded their growth target, the cochlear implant business was below target.

In the overall annualized assessment, the hearing instruments segment contributed well to the Groupʼs EBITA target achievement. This was driven by the timely launch and strong execution of structural optimizations, as well as by the faster than anticipated rebound of business volumes during the pandemic. EBITA in the cochlear implant segment was below target despite structural cost improvements. This was primarily due to lower than anticipated demand following the voluntary field corrective action at the end of the 2019/20 financial year and the slower rebound of the cochlear implant segment due to COVID-19 related restrictions on hospital capacity.

As a consequence, and mainly driven by the stronger than anticipated hearing instrument performance, Group EBITA and EPS targets were overachieved on an aggregated basis for the full year at 137.1% and 138.4% respectively. The assessment of these targets was undertaken based on the adjusted metrics as disclosed in the financial review of this Annual Report. Driven by the strong business performance for most of the financial year and the strong collection of accounts receivables, realized FCF was a multiple of the target.

ESG targets for the second half of the financial year were defined around seven categories, with energy and climate, as well as employee engagement, set as a target for all Management Board members. Additionally, members each had a selection of targets set depending on their role and responsibilities. These included product quality and customer satisfaction, product reliability, environmentally friendly packaging, business ethics and legal compliance, as well as human rights and responsible supply chain. On average, ESG targets for management were slightly under-achieved at 90.1%.

Individual qualitative targets for management were, on average, slightly overachieved at 110.5%.

As disclosed earlier in this report, the VCC achievement for the 2020/21 financial year is capped at 100.0%. Therefore the overall target achievement for the CEO is 100.0% (2019/20: 105.2%) and between 77.6% and 100.0% (2019/20: 75.7% - 106.9%) for the other members of the Management Board. The average variable cash payout to Management Board members, including the CEO, was 96.8%, whereas the equivalent average overall payout ratio for the previous year was 115.5%.

As outlined in the introduction to this compensation report describing the compensation related short-term measures taken in response to COVID–19, the VCC payout to members of the Management Board for the 2020/21 financial year is capped at target (100% versus 200% normally).

The highest total compensation for a member of the Management Board in the 2020/21 financial year was paid to Arnd Kaldowski, CEO.

The following tables show the compensation of the CEO and of the other members of the Management Board for the 2020/21 financial year (9 members) and for the 2019/20 financial year (9 members).

Management Board compensation

in CHF	2020/21
		Fixed base salary	Variable compensation 1)	Fringe benefits	Employer’s pension contribution	Total cash compen- sation	Value of PSUs 2)	Value of options 3)	Total compensation	Employer’s social security contribution
Arnd Kaldowski, CEO		709,615	800,000	69,515	111,231	1,690,361	609,375	1,015,625	3,315,361	125,508
Other members of the MB		2,817,903	1,459,448	291,180	486,524	5,055,056	1,449,500	1,449,500	7,954,056	908,102
Total		3,527,519	2,259,448	360,695	597,754	6,745,417	2,058,875	2,465,125	11,269,417	1,033,610

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

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

2) Fair value per PSU at grant date CHF 198.67. Fair Value of PSUs provided by a third party based on the Monte Carlo pricing model; this is an appropriately balanced approach, taking account of the possibility of either over- or under-achievement. The settlement will be determined based on actual performance achievement prior to the vesting in June 2024 and the PSUs are blocked after vesting to arrive at the total mandatory restriction period of five years from grant date.

3) Fair value per option at grant date provided by a third party based on the "Enhanced American Pricing Model” (including the impact of the restriction period based on a “Black-Scholes Model”) of CHF 39.90. The options are blocked after vesting to arrive at the total mandatory restriction period of five years.

in CHF	2019/20
		Fixed base salary	Variable compensation 1)	Fringe benefits	Employer’s pension contribution	Total cash compen- sation	Value of PSUs 2)	Value of options 3)	Total compensation	Employer’s social security contribution
Arnd Kaldowski, CEO		900,000	986,560	74,944	109,338	2,070,841	562,500	937,500	3,570,841	110,466
Other members of the MB		3,138,129	2,147,971	356,124	515,913	6,158,137	1,649,000	1,649,000	9,456,137	888,687
Total		4,038,129	3,134,531	431,068	625,251	8,228,978	2,211,500	2,586,500	13,026,978	999,153

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

2) Fair value per PSU at grant date CHF 266.80. Fair Value of PSUs provided by a third party based on the Monte Carlo pricing model; this is an appropriately balanced approach, taking account of the possibility of either over- or under-achievement. The settlement will be determined based on actual performance achievement prior to the vesting in June 2023 and the PSUs are blocked after vesting to arrive at the total mandatory holding period of five years from grant date.

3) Fair value per option at grant date provided by a third party based on the "Enhanced American Pricing Model” (including the impact of the holding period based on a “Black-Scholes Model”) of CHF 33.34. The options are blocked after vesting to arrive at the total mandatory holding period of five years.

Explanatory comments to the compensation tables:

The total compensation of CHF 11.3 million for the 2020/21 financial year is below the total of CHF 13.0 million for the previous year.
The fixed compensation is reduced compared to the previous year given the COVID–19 related compensation measures.
Furthermore, the COVID–19 related capping of the VCC at 100% contributed to the reduction.
The total EEAP grant value awarded increased as a result of a combination of selective increases.

5.2.2 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 Sonovaʼs ambitious target–setting, substantial progress needs to be made to reach the target (100%).

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

The actual total compensation for the Management Board for the 2020/21 financial year was CHF 11.3 million. This figure is below the maximum aggregate compensation amount of CHF 15.3 million approved at the 2019 AGM for the 2020/21 financial year.

The approved compensation for EEAP applies fair value at grant, which is based on 100% target achievement; this is an appropriately balanced approach, taking account of the possibility of either over- or under-achievement for PSUs. 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 upon vesting in each respective financial year.

Additional information to support the shareholder votes on compensation can be found in the invitation to the 2021 AGM.

5.2.4 Executive Equity Award Plan performance outcomes 2020/21

Options

The vesting of the options is subject to a pre-defined ROCE target. As outlined in the introduction to this compensation report describing the compensation related short-term measures taken in response to COVID-19, it was anticipated that the ROCE target would possibly need to be suspended for the time being. However, given the strong management of profitability, along with the efficiency of employed capital during the outbreak of COVID-19, the Board decided to not apply the suspension. In the 2020/21 financial year, the ROCE target was exceeded. Since there is no provision for over-achievement in the EEAP, the vesting of the options is capped at target, namely at 100%.

Performance Share Units

The PSUs vest based on relative TSR measured against a pre-defined basket of peers. The number of shares allocated for each vested PSU between the 20th and 80th percentile is calculated by linear interpolation within a range of 0% to 200%. The PSUs awarded under the EEAP 2018 vest in June 2021 based on the performance period ending on March 31, 2021

The actual TSR was 46.5%, which corresponds to a 77.0% percentile rank relative to the peer group, and results in a 189.9% vesting.

5.2.5 Other components

As reported in the 2017/18 compensation report, upon his hiring, the CEO was awarded a one-time, non-recurring performance option replacement award for forfeited compensation entitlements granted by his former employer, with a fair value at grant of CHF 1,000,000.

The COVID–19 crisis caused the market to shrink significantly, thereby impairing Sonovaʼs growth strategy during an interim period. The Board of Directors therefore reviewed the terms of the option grant as follows: The EPS performance target remains as originally set, namely to grow EPS to CHF 9.34 (8% vesting) and CHF 11.21 (12% vesting) per share.

The performance period will be extended to April 1, 2025. The CEO may elect to have the options vest at the original date of April 1, 2023 or in the interim year on April 1, 2024. The expiry date of the options (September 27, 2027) remains unchanged.

As a result of this potential change of the performance period, the fair value of the options granted (initially CHF 1,000,000) does not increase.

5.2.6 Other compensation, loans and credits for current and former members of the Management Board and related parties

No other compensation was paid to current or former members of the Management Board beyond the total compensation disclosed in the tables above.

No payments were made to individuals who are closely related to any current or former member of the Management Board.

No loans were granted by Sonova or any other Group company to current or former members of the Management Board in the 2020/21 financial year, and no such loans were outstanding as of March 31, 2021. Furthermore, neither Sonova nor any other Group company has granted any loans to related parties of current or former members of the Management Board.