1. Introduction by the Chair of the Nomination and Compensation Committee
The exceptional circumstances surrounding the COVID-19 pandemic affected Sonova from the end of our 2019/20 financial year and throughout the 2020/21 financial year, particularly in the first quarter. The Nomination and Compensation Committee (NCC) therefore dedicated substantial time to the business in this context and held two meetings in addition to the regular four annual sessions.
COVID-19 related short-term compensation measures
In addition to covering regular agenda items, the Board of Directors and Management Board have reviewed the impact of COVID-19 and taken coordinated measures for Sonova to adapt to the rapidly changing situation, care for its people, preserve Sonovaʼs competitiveness, maintain liquidity, and be best positioned for market recovery once conditions improve.
As described in this report, our compensation system is linked to the companyʼs 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, also outlined in last yearʼs report, were 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 NCC met our objectives and carried out our responsibilities in the financial year. All efforts of our employees, the Management Board, and the Board of Directors during the financial year have continued to focus on achieving our ambitious targets.
Among other adjustments, the compensation related cost measures included postponing compensation increases to the next year where feasible, putting employees in some of our locations on furlough, introducing short-term work and similar arrangements. The following short-term measures related to the compensation of the Board of Directors and Management Board have been implemented:
- The Chair of the Board of Directors waived 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 waived 20% of their cash retainer and committee fees for the term of office from the 2020 AGM until the 2021 AGM.
- For the Management Board, no salary increases were applied during the 2020/21 financial year.
- The CEO waived 50% of his monthly base salary and each of the other Management Board members 20% of their monthly base salary from April 2020 until September 2020, when revenue and profitability recovered to levels similar to those of the previous year.
- The Management Board also decided to defer 50% of the Variable Cash Compensation (VCC) payout for the 2019/20 financial year; this then occurred in October 2020, when revenue and profitability returned to levels similar to those of the previous year.
- 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.
- It was also decided that the maximum VCC payout for Management Board members during the 2020/21 financial year should be capped at 100% (versus 200% normally). Even though management could outperform the financial objectives for the year, the cap at 100% was enforced.
- The COVID-19 pandemic caused the market to shrink temporarily, thereby impairing Sonovaʼs growth strategy during an interim period. To reflect this, the performance period of the CEOʼs one-time performance option award (to replace lost compensation at the former employer) has been extended, as outlined later in this report.
- As already outlined in last yearsʼ compensation report, the Board of Directors anticipated the possible need to suspend, for the time being, the ROCE performance hurdle for options under the Executive Equity Award Plan (EEAP). However, given the strong management of profitability, along with the efficiency of employed capital during the COVID-19 crisis, the Board decided to not apply this suspension.
These measures were largely already outlined in the 2019/20 compensation report.
2020/21 and 2021/22 regular compensation
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.
To reflect Sonovaʼs corporate social responsibility and sustainable business approach, relevant environmental, social, and governance (ESG) targets have been more formally reflected in the VCC from the second half of the 2020/21 financial year.
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, rolling performance target setting and performance assessment, 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.
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 positionʼs responsibilities. For the Management Board, as outlined above, no salary increases were applied during the 2020/21 financial year and such changes, if any, for the 2021/22 financial year will again be in line with those across the organization.
After the 2021 AGM, compensation of the Board of Directors will return to the levels established before the pandemic.
Changes in the Board of Directors and Management Board
As announced on February 11, 2021 and outlined in the corporate governance report, Beat Hess, Vice Chair and NCC member, will not stand for re-election as he has reached Sonovaʼs age limit for Board membership. In addition, Michael Jacobi will not stand for re-election, having served as a member of the Board of Directors since 2003 and as Chair of the Audit Committee from 2004 to 2019. All other current members will stand for re-election to the Board of Directors at the 2021 AGM. Gregory Behar and Roland Diggelmann are proposed for election to the Board of Directors at the 2021 AGM.
The Board of Directors had several sessions focusing on its succession planning. It used an assessment matrix considering the breadth and depth of competencies and experience required by Sonova to support our business and its strategies. To ensure a balanced overall board composition and long-term planning, these criteria include, among others, executive management experience and acumen, international experience, expertise in the areas of finance, M&A and human resources, industry affinity, as well as diversity in terms of background, industry, functional knowledge, nationalities, gender, and age.
The two new members of the Board of Directors proposed for election at the 2021 AGM have an outstanding executive track record in successfully leading sizeable businesses as CEOs. They bring extensive international experience and have knowledge which is very relevant to Sonovaʼs business. Furthermore, they will significantly rejuvenate the Board of Directors.
In light of these changes, and if elected/reelected at the AGM 2021, the Board of Directors will:
- Appoint Stacy Enxing Seng as Vice Chair of the Board of Directors
- Appoint Adrian Widmer as Chair of the Audit Committee
- Appoint Lukas Braunschweiler as Chair of the NCC, taking over from Robert Spoerry, with the objective to separate the role of the Chair of the Board from the Chair of the NCC
- Appoint Roland Diggelmann as a member of the NCC
As part of our ESG strategy, we strongly believe that a more balanced gender representation on the Board of Directors is in the best interests of the Sonova Group, and we are committed to achieving a 30% proportion of women on the Board well before the time this becomes a legal requirement in 2026.
As announced on February 11, 2021 and outlined in the corporate governance report, Birgit Conix will succeed Hartwig Grevener as Sonovaʼs Chief Financial Officer (CFO) as of June 2021. This will be reflected in next yearʼs compensation report.
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 2020 AGM, due in part to the temporary compensation reduction outlined above. The compensation awarded to the members of the Management Board is also within the limit approved by the 2019 AGM, again in part due to the temporary compensation reduction as well as the cap enforced on the VCC.
At the 2021 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 2022/23 financial year.
No changes to the compensation system of the Board of Directors and the Management Board are foreseen, other than those outlined in this compensation report. The specific short-term adjustments made to compensation to ensure strong shareholder alignment during the COVID-19 related crisis are lifted from the 2021 AGM and 2021/2022 financial year respectively.
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, that aligns well with our shareholdersʼ interests. We look forward to our continued dialogue.
Chair of the Nomination and Compensation Committee