4.6 Details of Incentive Plans Audited

This subsection describes the plan details of the Short­-Term Incentive Plan (STIP) and the Long­-Term Incentive Plan (LTIP):

Short-Term Incentive (STIP)

History and Participation

 

The Board of Directors implemented the current STIP for the majority of the Group’s employees, including the members of the Executive Committee. More than 95% of our employees participate in short-­term incentive plans, either in the STIP program or in a local bonus program.

Effective 2016 the NCC made the decision to introduce shareholding requirements for the Executive Committee and further align the Executive Committee with the interests of shareholders. In support of this strategy, the STIP will pay out in cash or in shares based on the Executive’s individual holdings of Lonza shares.

The 2017 STIP Program operates for Executive Committee members as follows:

Objective

 

The STIP provides the potential for an annual incentive based on the financial performance of the Group and the performance of the participant.

Definition of Targets

 

The performance criteria are set annually based on the company’s short-­term objectives and assessed for achievement at the end of the year against the defined financial performance results. Defined financial performance results are derived from the audited financial results 2017.  Note: the financial impact of the Capsugel integration was excluded from the CORE results which are relevant for the STIP payout. 

STIP CEO Other Executive Committee members
     
STIP target as % of base salary 1 100% 75%
Performance targets
  • 50% CORE 2 EBIT
  • 15% Lonza sales
  • 15% Operational free cash flow
  • 20% Individual targets for Executive Committee members (for 2017: CORE EBIT 10%, sales 5% and operational free cash flow 5%)     
Form of payout
  • 100% in cash if CEO holds shares equivalent to 2 times base salary (CEO) and other Executive Committee members 1 times base salary 3 in Lonza shares
  • 50% in cash and 50% in Lonza shares if Executive Committee member does not meet minimum requirements
Payment timing The STIP is paid to the members of the Executive Committee in May 2018 after the approval of the Shareholders’ Meeting

Long-Term Incentive (LTIP)

History and Participation

 

The LTIP is an equity-­based plan introduced in 2006 for the Executive Committee and a segment of key employees.

Objective

 

The LTIP has been designed to align the interests of participants with those of Lonza’s shareholders and to serve as a retention tool. LTIP participants are eligible to receive a number of Lonza shares at the end of the vesting period, provided that certain challenging performance conditions are met at the end of the three-year performance period.

Equity Awards

 

Under the LTIP, participants are awarded the right to receive a number of Lonza registered shares in the future. Depending on the level of the job, the target equity award grant is between 10% and 100% of the annual base salary. The grant is made at target and the payout level can be between 0% and 200%. The Executive Committee members, including the CEO, have a target of 100% of base salary with payout levels between 0% and 200% maximum. Any proration is applied in relation to the entire length of the three­-year performance period.

The LTIP plan design is determined at the beginning of the three-­year performance period. For 2017 the plan design included minimum, target and stretch goals. The 2017 LTIP budget value for the Executive Committee was approved as submitted at the AGM 2017 and administered in accordance with this approval.

Vesting will depend on achievement of the performance conditions and cannot exceed the maximum amount (200%) of granted equity awards.

Restriction and Vesting  

 

The central feature of the plan is that key participants will only receive title and ownership of the shares after a three-­year vesting period and only if the performance metrics required for vesting are partially or fully met.

Vesting Targets  

 

For the 2017 and 2016 LTIP the performance metrics were CORE EPS and CORE RONOA with 50% weight for each measure. For more details, see note 25 in the Financial Report.

With the payout value directly linked to these key financial metrics, these two measures focus on Lonza’s financial performance that will drive the valuation of Lonza with investors. The value of the LTIP will be ultimately driven by the share price at the time of payout, further linking the LTIP to the interests of the shareholders.

Overview of Vesting Conditions for LTIP

 

For the years 2017 and 2016, the vesting of up to 50% of the granted equity awards depends on growth of CORE EPS achieved during Lonza’s three fiscal years and the vesting of up to 50% of the granted equity awards depends on growth of CORE RONOA achieved during Lonza’s three fiscal years.

Performance Metrics for CORE EPS Approved at AGM 2017 (LTIP 2017)1

 

  • The minimum threshold to be reached at year-­end 2019 was determined by the NCC to be significantly higher than the CORE EPS achieved on 31 December 2016 (which was CHF 7.81). If this minimum threshold is not reached, the payout will be zero. If this threshold is reached, 50% of the equity awards granted under CORE EPS will vest.
  • If the target is reached, 100% of the equity awards granted under CORE EPS will vest. CORE EPS is an internal, sensitive financial target which is not disclosed at this time.
  • The maximum was determined to approximate 110% of the CORE EPS at target. If such level of CORE EPS is reached, 200% of the equity awards granted under CORE EPS will vest.

Performance Metrics for CORE RONOA Approved at AGM 2017 (LTIP 2017)1
 

  • The minimum threshold to be reached at year­-end 2019 was determined by the NCC to be significantly higher than the CORE RONOA achieved on 31 December 2016 (which was 21.5%). If this minimum threshold is not reached, the payout will be zero. If this threshold is reached, 50% of the equity awards granted under CORE RONOA will vest.
  • If the target is reached, 100% of the equity awards granted under CORE RONOA will vest. CORE RONOA is an internal, sensitive financial target which is not disclosed at this time.
  • The maximum was determined to approximate 110% of the CORE RONOA at target. If such level of CORE RONOA is reached, 200% of the equity awards granted under CORE RONOA will vest. 

Treatment of LTIP in Change of Control Situations  

 

Under the LTIP rules, if a Change of Control occurs, all unvested granted shares shall immediately vest and the granted price shall be the price at which the shares are sold in the transaction resulting in the Change of Control.

Actual Performance and Payout for the LTIP 2015
 

The total 2014 LTIP payout equaled 100%.

Performance under the 2015 LTIP exceeded the target for CORE EPS, generating a 200% payout on 50% of the total award. Performance under the 2015 LTIP exceeded the target for CORE RONOA, generating a 200% payout on the remaining 50% of the total award. The total 2015 LTIP payout equals 200%.  The financial impact of the Capsugel integration was excluded from the CORE results which are relevant for the LTIP payout. 

2015 LTIP

  Actual performance Payout in %
CORE EPS (Earnings Per Share)1 CHF 11.1 200
CORE RONOA (Return on Net Operating Assets)1 27.1% 200
Total payout   200