4. Compensation governance

4.1 Nomination and Compensation Committee

As determined in the Articles of Association, the Organizational Regulations, and the NCC Charter of Sonova Holding AG, the NCC supports the Board of Directors in the fulfilment of its duties and responsibilities in the area of compensation and personnel related matters. Its tasks and responsibilities include, among others:

Approval and authority levels on compensation matters:

The NCC consists exclusively of independent and non-executive members of the Board of Directors, who are elected individually and annually by the AGM. For the period under review, the NCC consisted of Lukas Braunschweiler (Chair of the NCC), Stacy Enxing Seng, and Roland Diggelmann.

The NCC meets as often as business requires but at least three times per year. In the 2021/22 financial year, it held five meetings covering, among others, the following pre-defined recurring agenda items during the course of the regular meetings:

Special ad hoc items such as personnel changes at executive level are covered as and when appropriate.

As a general rule, the Chair of the Board of Directors, the CEO, and the GVP Corporate Human Resource Management & Communications (HRM) participate in the meetings of the NCC. However, they do not participate during the sections of the meetings where their own performance and/or compensation is discussed.

There is a closed session (without participation of any executive or guest) after each NCC meeting. The Chair of the NCC reports to the Board of Directors on its activities and recommendations after each meeting and the minutes of the meetings are available to the full Board of Directors.

External advisors

The NCC may decide to consult external advisors for specific compensation matters. In the 2021/22 reporting year, Aon was tasked with the performance share unit (PSU) valuation and performance measurement under the EEAP; Algofin performed the option valuation. Agnès Blust Consulting provided support in the context of the market review of compensation for the Board of Directors and the Management Board and in the preparation of this compensation report. Support and expertise are also provided by internal compensation experts such as the GVP HRM and the VP Total Reward.

The external advisors had no other mandates for Sonova during the reporting year.

4.2 Governance and shareholder involvement

Authority for decisions related to compensation of the members of the Board of Directors and the Management Board is governed by the Articles of Association.

The prospective maximum aggregate compensation amounts to be awarded to the Board of Directors and the Management Board are subject to a yearly binding shareholder vote at the AGM. The provisions of the Articles of Association foresee that shareholders vote prospectively: on the maximum aggregate compensation for the Board of Directors for the period until the next ordinary AGM, and for the Management Board for the following financial year. In addition, Sonova annually submits the compensation report to a consultative shareholder vote, so that our shareholders have an opportunity to express their opinion on the compensation of the previous financial year.

Over the past several years Sonova has engaged in ongoing dialogue with shareholders and proxy advisors and has made significant efforts to continuously improve its compensation disclosure in terms of transparency and level of detail provided about its principles and system of compensation.

Matters to be voted on at the 2022 Annual General Shareholders’ Meeting

The maximum aggregate compensation amount for the Board of Directors comprises fixed compensation components, including a cash retainer and restricted shares as well as committee fees (as applicable). The travel allowance will be discontinued as from the 2022 AGM.

The maximum aggregate compensation amount for the Management Board (including the CEO) comprises:

Fixed compensation components:

Variable compensation components:

Due to the maximum possible VCC payout, the maximum aggregate compensation amount submitted to shareholder vote is very likely to be higher than the actual amount of total compensation for the members of the Management Board based on the performance achieved in the financial year. The total compensation amount awarded to the Management Board will be disclosed in the compensation report of the respective financial year, which will be subject to a consultative shareholder vote at the AGM.

We are convinced that the binding prospective votes on the maximum aggregate compensation amounts, combined with a consultative retrospective vote on the compensation report, provide Sonovaʼs shareholders with a far-reaching “say on pay.”

Articles of Association

The Articles of Association regarding the compensation of the members of the Board of Directors and the Management Board were revised in 2014 and approved by the shareholders at the 2014 AGM. The Articles of Association include the following provisions on compensation:

The Articles of Association are available in their entirety here.

4.3 Process of determining compensation

Compensation structure and components

The compensation structure and components for the Board of Directors and the Management Board are reviewed periodically (at least every three years) to ensure they continue to be aligned with Sonovaʼs strategy as well as with market practice.

Benchmarks

Sonova conducts a benchmarking analysis of the levels of total compensation for members of the Board of Directors and of the Management Board at regular intervals (every two to three years). The benchmark reviews for the Management Board take into consideration our principles of both market and performance related compensation.

A thorough benchmarking review was conducted during the course of the 2021/22 reporting year to help ensure appropriate compensation for the Board of Directors and the Management Board both in terms of structure and overall levels.

For the Board of Directors, the review considered companies in the SMI Expanded index with a market capitalization below CHF 50 billion, and excluding financial services and real estate companies, as well as companies with a non-Swiss compensation structure. The resulting peer group consists of 26 companies: Adecco, Barry Callebaut, Clariant, Dufry, EMS Chemie, Galenica, Geberit, Georg Fischer, Givaudan, Holcim, Kühne+Nagel, Lindt, Logitech, Lonza, OC Oerlikon, Schindler, SGS, SIG Combibloc, Sika, Straumann, Swatch Group, Swisscom, Tecan, Temenos, VAT Group, and Vifor Pharma. The analysis confirmed that both the overall fees paid to members of the Board of Directors and the structure of board retainer and committee fees are in line with the market, and that the equity compensation is subject to a longer restriction period than market practice, which strengthens alignment with shareholder interests.

For the Management Board two different peer groups were considered: a Swiss general industry peer group of companies that are comparable in terms of market capitalization, revenue, industry, number of employees and geographic reach; and an international peer group of medical device companies. The Swiss peer group includes Barry Callebaut, Bucher Industries, dormakaba, EMS-Chemie, Geberit, Georg Fischer, Givaudan, Lindt & Spruengli, Mettler Toledo, OC Oerlikon, Schindler, SGS, SIG Combibloc, Sika, Straumann, Sulzer, Swatch Group, Tecan, and VAT Group. The international medical device peer group comprises Alcon, Amplifon, Cochlear, Coloplast, Dentsplay Sirona, Fielmann, Fresenius Medical Care, GN Store Nord, GrandVision, Hill-Rom, Hologic, Smith & Nephew, Demant (William Demant) and Carl Zeiss (Zeiss Meditec).

As a general outcome and compared to both peer groups, the compensation structure of the Management Board continues to be more performance oriented (and less fixed) than that of peer companies. Otherwise, the compensation structure and compensation levels are in line with prevalent market practice.

Performance management

The actual compensation of the members of the Management Board in a financial year depends on the performance of the Group and/or respective business unit, as well as on individual performance, which is assessed through the formal annual performance review process. Financial, business unit, and individual performance objectives are normally approved at the beginning of the financial year and achievements against those objectives are generally assessed at the end of the financial year, according to Sonovaʼs performance appraisal process.