3. Remuneration policy and structure

3.1 Outlook for the remuneration system as of 2019

As part of the fundamental review of the remuneration system and remuneration structures, the Board of Directors has adjusted the fixed and variable salary components. These components will now be aligned to the annual target salary (not, as previously, to the salary at contract signing). The CEO thus receives 40% of his target salary in the form of fixed remuneration and 60% in the form of variable remuneration (20% relating to short-term and 40% to long-term). For other members of the Implenia Executive Committee, the ratio is 50% fixed and 50% variable (of which 20% are short-term and 30% long-term).

The short-term remuneration (Short-Term Incentive, STI) has also been adjusted for 2019, particularly with regard to the STI financial targets. Financial targets for division heads are now based not only on the Group results, but also on divisional results.

The Board of Directors has also decided to end the previous practice, where a number of shares determined at contract signing are allocated, and replace it with a performance-related Long Term Incentive Plan (LTI), under which Performance Share Units (PSU) earned over a period of three years are allocated if certain pre-defined targets are met.

Finally, a shareholding guideline was introduced for the Implenia Executive Committee and the Board of Directors in order to further strengthen the alignment between their interests and those of shareholders.

In 2019, the remuneration system for executive management and the Implenia Group is being further revised, with particular reference to the structure of the new organisation and strategy.

Remuneration structure for executive management

Short-Term Incentive Plan for the Implenia Executive Committee (as of March 2019)

As before, the STI accounts for about 20% of total remuneration. The weighting between financial targets (70%) and individual targets (30%) is unchanged. Financial targets for the CEO and functional heads are calculated on the basis of the same two indicators as before: Group EBITDA (35%) and Group invested capital (35%). By contrast, financial targets for divisional heads are calculated on the basis of four indicators: Group EBITDA (15%), Group invested capital (15%), divisional EBITDA (20%) and divisional invested capital (20%).

Long-Term Incentive Plan for the Implenia Executive Committee (as of March 2019 year)

The LTI amount corresponds to a fixed percentage of base salary per function level (100% of base salary for the CEO, 60% of base salary for other IEC members), which at the beginning of the performance period is translated for each person into a specific number of future subscription rights in the form of Performance Share Units (PSU). These PSU are subject to a three-year vesting period. They are only paid out if the person achieves the performance indicators set at the time of allocation. The Nomination and Remuneration Committee has decreed that the relevant performance indicators are the return on equity in the form of relative Total Shareholder Return (rTSR), and consolidated earnings per share (EPS). These two performance indicators have equal weighting. Performance measurement for the LTI starting in 2019 takes place for the period 1. January 2019 to 31. December 2021.

The achievement or otherwise of the targets is assessed at the end of the performance period. Depending on the level of target achievement, the number of PSU will be converted into participation rights at a conversion rate of between 0% and 200%, and settled in shares of Implenia Ltd. These shares and PSU are still subject to a clawback clause that can be triggered by factors including qualified infringements of the Code of Conduct.

Shareholding Guidelines for the Implenia Executive Committee IEC (as of 1 January 2019)

In order to further strengthen the long-term commitment of the Implenia Executive Committee, and to reconcile its interests even more closely with those of Implenia Ltd.’s shareholders, a shareholding guideline is being introduced as of financial year 2019. Within five years of the rule coming into effect or of their appointment, Members of the Implenia Executive Committee should hold the equivalent of at least 300% (CEO) or at least 150% (other members of the Implenia Executive Committee) of their base salary in Implenia Ltd. equity rights.

To determine whether the minimum shareholding has been complied with, all shares, with and without blocking period, as well as the PSU granted at the beginning of the performance period are taken into account. The Nomination and Remuneration Committee reviews this share ownership once a year.

Shareholding Guidelines for the Board of Directors (as of 1 January 2019)

A shareholding guideline is also being introduced for the Board of Directors as of financial year 2019. Within three years of their initial election to the Board of Directors, Members of the Board should own shares of Implenia Ltd. worth the equivalent of at least 100% of their annual basic remuneration.

To determine whether the minimum shareholding has been complied with, all shares, with and without blocking period are taken into account. The Nomination and Remuneration Committee reviews this share ownership once a year.

3.2 General remuneration policy principles

Implenia’s remuneration structure, which applies to all employees, has several levels and is based on a transparent, performance-oriented remuneration policy. Remuneration at Implenia

• is fair, appropriate, transparent and competitive;
• establishes a link to long-term sustainable corporate development;
• takes account of the level of responsibility, the quality of the work and the size of the workload for each function;
• puts the company in a position to attract and retain highly qualified staff so that it can reach its strategic goals.

The remuneration structure includes fixed and performance-related remuneration components that are in line with the corporate strategy, and that take account of the competition and the growth dynamic, as well as reflecting Implenia’s functional level model.

An individual’s target remuneration depends on their area of responsibility and the complexity of their function. The remuneration structures are designed to ensure that remuneration is closely pegged to the relevant market medians.

The most important factor when determining the actual salary is the employee’s overall performance. Since 2012, Implenia has operated a formalised annual target setting and performance appraisal process.

3.3 Governance rules

The principles for setting remuneration paid to Members of the Board of Directors and executive management are governed by the Articles of Association approved by shareholders. These Articles of Association include rules about the composition of remuneration for the Board of Directors (Art. 22a) and for executive management (Art. 22b). Executive management remuneration is composed in particular of the maximum remuneration under the short-term performance plan and the allocation of equity securities under the long-term incentive plan.

Further details of these rules can be found in the Articles of Association on Implenia’s website:
https://www.implenia.com/goto/corporategovernance/2018/en/Articles-of-Association-20180327.pdf

3.4 Remuneration structure for the Board of Directors

Board of Directors’ fees

Under Art. 22a of the Articles of Association, payments to the Board of Directors consist of the remuneration until the next Annual General Meeting, plus any estimated social security charges and contributions to social security and pension institutions, as well as additional insurance charges and other fringe benefits that are paid by the company and that qualify as remuneration. The Board of Directors can determine that a portion of the remuneration is paid in shares. In this case, it defines the conditions, including the time of allocation and valuation, and decides on the retention period.

Members of the Board of Directors receive only an annual fixed remuneration. This ensures their independence when exercising their supervisory role. Two-thirds of the remuneration of the Members of the Board of Directors is paid in cash and one third in the form of shares of Implenia Ltd.; these shares are blocked for a period of three years from the date of allocation. The Members thus have a direct financial interest in Implenia’s share performance. This blocking period continues to apply in the event of regular resignation from the Board of Directors, except in cases of disability and death.

The amount of remuneration for each function (Chairman, Vice Chairman, Chairman of the Audit Committee, Chairman of the Nomination and Remuneration Committee, Member) is set after taking account of the entitlements detailed in the Rules and Regulation on the Remuneration of Members of the Board of Directors of Implenia Ltd. Remuneration of the Board of Directors remained unchanged in the 2018/2019 term of office.

The number of shares is calculated by taking the average price of Implenia Ltd. shares during the month of December in the relevant year of office. The allocation is made on the first trading day in January.

The level of Board remuneration is shown in the following table:

Expenses

Members of the Board of Directors have some of their expenses reimbursed based on the Rules and Regulation on the Remuneration of Members of the Board of Directors of Implenia Ltd. and in accordance with the rules for the Members of the Group Executive Board (see section 3.5 below).

Pension benefits

Statutory social security contributions due on remuneration paid to Members of the Board of Directors are paid by Implenia Ltd. No contributions were or are made to insurance or pension institutions and no additional insurance charges were or are paid.

3.5 Remuneration structure for Group Executive Board

Remuneration was previously made up of four components:

• fixed basic salary in cash;
• variable short-term and performance-related remuneration in cash;
• remuneration under the long-term incentive plan in the form of blocked shares;
• Pension benefits and fringe benefits.

The modalities applying to the CEO’s remuneration were based on the same principles as used for the other Members of the Group Executive Board for 2018. Owing to the planned changes to the whole remuneration system, the allocation of shares to the new CEO was from the start defined as an amount in Swiss francs (rather than as a number of shares). The weighting of the remuneration elements is set from the start as 40% fixed base salary, 20% short-term and 40% long-term performance-based remuneration.

According to Art. 22b para. 2 of the Articles of Association, the short-term components of remuneration are based on objective performance values relating to the Group’s and/or a business segment’s results, to goals calculated in comparison to the market, other companies or comparable parameters, and/or to individual goals, the achievement of which is usually measured during a one-year period. According to Art. 22b para. 3 of the Articles of Association, the long-term components of remuneration are based on the company’s long-term growth, and allow employees to participate appropriately in such growth.

Finally, Art. 22b para. 4 of the Articles of Association states that the executive management’s remuneration takes the form of cash, shares, comparable instruments, units and non-cash benefits or services. The Board of Directors can also stipulate that if a predefined event such as a change of control or termination of an employment contract occurs, exercise conditions and exercise periods or retention periods can be shortened or cancelled, remuneration may be paid on the assumption that goals are achieved, or remuneration may be forfeited.

Remuneration paid to members of executive management is regularly reviewed based on the principles described under section 3.2 above. In addition to the market comparison, function, performance, experience and effort are taken into account. Discretion is used in the weighting of these criteria.

The remuneration of members of executive management is also analysed periodically by external consultants to ensure it is competitive, appropriate and in line with the market. In the fourth quarter of 2018, global management consultancy Korn Ferry / Hay Group was asked to carry out a detailed review. This was done using a reference market of eleven companies that have recruited from Switzerland’s top executive market to fill similar roles. The emphasis here is on companies from industrial sectors, or those providing services to industry, that are comparable to Implenia Ltd. in size (number of employees, revenue, etc.) and business activity. The reference market included the following companies: Alpiq AG, Bucher Industries AG, dormakaba Holding AG, Geberit AG, Georg Fischer AG, Landis+Gyr AG, Lonza Group AG, OC Oerlikon AG, Schindler Aufzüge AG, Sika AG and Sulzer AG. Data-based, country-specific referencing was also carried out as part of the job grading. The Korn Ferry / Hay Group had no further mandates with Implenia Ltd.

Basic salary in cash

The basic salary in cash is paid out every month in equal instalments; it previously accounted for around 55% of annual target income when the employment contract was signed, and was determined using the following factors:

• scope, tasks and responsibility of the position;
• Market-standard remuneration;
• Personal skills and experience.

Variable remuneration (current)

Annual variable remuneration is based on personal performance and Implenia’s corporate performance. Annual variable remuneration is paid as a percentage of annual target income (previously around 20% on contract signing). It is only paid if the defined performance targets are achieved. Exceeding or failing to achieve one or all of the targets leads to an increase (of up to 200%) or a reduction (down to 0%) of this remuneration component.

Annual variable remuneration depends on the attainment of previously defined individual, qualitative targets in accordance with Management by Objectives (previously 30%), and on the achievement of Implenia Ltd.’s financial targets (previously 70%). These financial targets are determined on the basis of the annual budget of Implenia Ltd. The basis for assessment has so far been made up of:

a) 50%: achievement of the budgeted Group EBITDA; and
b) 50%: achievement of the budgeted invested capital at Group level.

The structure of variable remuneration is being adjusted in 2019 as part of the transition to a divisional management structure (see section 3.1).

Remuneration in blocked shares (current)

Apart from the share allocation for the new CEO, shares were previously allocated as a fixed number of shares, which did not usually change for the duration of the contract. The share component was defined as a percentage – around 25% – of annual target income when the employment contract is signed. The value of the allocated shares in Swiss francs was calculated using the closing price on the last trading day of the financial year (for 2018: 28 December 2018; for the former CEO there was an allocation of 12,500 of the shares contractually due to him in 2018 on 30 June 2018, based on the share price on 29 June 2018, and 12,500 on 31 December 2018, based on the share price on 28 December 2018, see table on pages 192-193). These shares are usually transferred at the end of the reporting year. The allocation of shares for a Member of the Group Executive Board thus always takes place at the end of February of the following year based on the average closing price for the month of January. For the new CEO, the number of shares to be transferred was calculated on the basis of the net average closing price for the last five trading days prior to transfer (see table on pages 192-193).

The share-based remuneration system still used in the reporting year 2018 is gradually being replaced in early 2019 by an LTI (see section 3.1).

These shares may not be sold or pledged or be encumbered in any other way during the three-year period following allocation. The blocking period carries on even if the employment relationship ends. This restriction on the right of disposal does not affect dividends, subscription rights in the event of capital increases, or the exercise of voting rights. If the employment relationship is terminated, entitlement to shares is calculated pro rata.

The shares allocated to the new CEO in 2018, a claim for repayment exists in certain cases for shares still blocked (clawback clause).

Expenses

As well as the expenses rules that apply to all employees, members of executive management are also covered by additional rules for senior employees to provide lump-sum compensation for representation and out-of-pocket expenses. Both sets of rules are approved by the responsible cantonal tax authorities.

Pension benefits

There are no special pension benefits for members of executive management. Pension and social costs comprise the employer’s contribution to social insurance and to the mandatory and supplementary occupational benefits cover.

Employment contracts

Members of the Group Executive Board have permanent employment contracts that can be terminated on notice of twelve months at most. They are not entitled to contractual joining or leaving payments (“golden hellos”, “golden parachutes”, “golden handshakes”, etc.). Employment contracts usually include anti-competition clauses, though these never extend for more than twelve months.

In order to ensure that he take up his office at Implenia Ltd. as soon as possible, the new CEO terminated the ongoing employment contract with his previous employer prematurely, which meant that he had to forego share allocations and other entitlements. A smaller part of the loss thus incurred by the new CEO has been replaced as follows: based on the share price on the five trading days prior to his commencement of office at Implenia, he received blocked Implenia Ltd. shares of the same value as the former employer has confirmed that it would have allocated to him (“replacement award”).