Compensation and Performance Overview 2018

Lonza’s compensation philosophy is designed to attract and retain talent through competitive compensation programs. Lonza’s compensation programs are performance-based, linking employee rewards with company and individual performance. Executive compensation is aligned with the short-term and long-term objectives of Lonza; results are measured based on achievement of specific goals that are aligned with the short-term and long-term objectives. Our performance goals are selected to achieve a balance between desired short-term and long-term outcomes. In this way, we encourage strategic decisions for competitive advantage and discourage executives from taking unnecessary or excessive risks that would threaten the reputation or sustainability of the Company. The financial impact of the Capsugel integration was excluded from the CORE results which are relevant for the short-term incentive plan (STIP) payout and long-term incentive plan (LTIP) vesting.

During 2018 Lonza actively engaged with shareholders to address matters raised at last year’s Annual General Meeting (AGM) and to present and discuss the planned changes to Executive Committee compensation which were approved by the shareholders at the 2018 AGM. These changes were required to reflect the transformative changes in the Company and resulting changes to the level of responsibility and complexity of the roles of the Executive Committee as a result of a number of acquisitions, most notably Capsugel in 2017; including significant organic growth and the global presence of operations, as well as sustained performance delivery. A further consideration was to ensure market competitiveness with the Mid-Term Guidance outlining the development of a CHF 7.5-billion global revenue organization by 2022.

In addition to the changes in compensation, the Board of Directors also confirmed three key additions to the terms of compensation for the Executive Committee and CEO: 1) that base salaries would be frozen at 2018 levels for three years, except in the case of a promotion or substantive business expansion; 2) expanding the clawback provisions to be in line with emerging best practices aimed at covering all aspects of compensation in instances of misconduct, material misstatement of performance and error in calculation of performance; and 3) increase the minimum shareholding requirements for the CEO and EC members. In response to shareholder feedback, the Board of Directors also reviewed Lonza’s disclosure practice regarding the performance targets of the LTIP. Investors broadly confirmed the relevance of ROIC and CORE EPS as performance criteria. In contrast to other potential, but less relevant, criteria for the LTIP, such as total shareholder return (TSR), the strategic nature of both criteria does not allow a prospective disclosure of exact targets. However, the Board of Directors understands the importance of providing reassurance to investors that these targets are challenging and therefore decided to provide enhanced transparency in regard to LTIP targets in advance, commit to targets exceeding market guidance, as well as to a comprehensive and exact disclosure of targets and target achievement on a retrospective basis (see section 4.6). Lonza remains committed to actively engaging with all stakeholders to ensure our compensation approach rewards sustained strong performance, ensures market competitiveness and aligns with the shareholder interests.

For 2018 Lonza’s overall financial performance vs. STIP targets was as follows:

2018 STIP Payout1: Financial Targets2

million CHF

 

2018
Actual performance

 

Target
weighting
in %

 

Achieved
in %

 

Proposed 2018
payout in %
(weighted)

 

 

 

 

 

 

 

 

 

1

See section 4.3 – Performance-Related vs. Fixed Compensation

2

Financial targets account for 80% of the total STIP weighting; individual performance accounts for the remaining 20% weight. For Executive Committee members only financial targets apply, the overall target achievement in 2018 was 140.1% (2017: 200%)

CORE EBITDA

 

1,547.4

 

50.0

 

148.8

 

74.4

Sales (at target FX rates)

 

5,805.7

 

15.0

 

172.2

 

25.8

Operational cash flow

 

844.9

 

15.0

 

81.9

 

12.3

Lonza’s overall financial performance in 2018 vs. LTIP targets for 2016 was determined by the Nomination and Compensation Committee (NCC) to approximate the financial performance required to meet Lonza’s challenging strategic goals and support Lonza’s three-year plan. The 2016 LTIP performance was as follows (plan vested on 31 January 2019):

2016 LTIP Financial Performance1

 

 

Actual performance

 

Payout in %

 

 

 

 

 

1

Three-year cycle completed 31 December 2018. See section 4.6 – Long-Term Incentive (LTIP) for more details

CORE EPS (earnings per share)

 

CHF 11.97

 

200

CORE RONOA (return on net operating assets)

 

28.01%

 

200