4 Compensation of the Executive Committee

4.1 Principles

Objective and Benchmarks

Lonza’s objective is to pay the members of the Executive Committee (EC) a base salary in line with the median for the market as described below, with the potential for executives to earn above-median compensation through a combination of competitive short-term and long-term incentive programs if the company outperforms its financial targets. These incentive plans are designed to align the Executive Committee’s objectives with the interests of our shareholders. The total compensation (base salary, variable elements and fringe benefits) of the members of the Executive Committee is benchmarked on a regular basis against a peer group of the relevant industry and reflects the defined Healthcare Continuum® strategy of Lonza.

The following peer groups were used in 2017 to assess total compensation for the Executive Committee. In an effort to reflect sufficient relevant data as well as to ensure competitiveness for talent, the primary peer group served as the essential base. The Swiss market data of the secondary peer group was used to validate the conclusions. The US market peer group was used solely for information purposes. No further amendments were made in 2018.

Peer Groups

Primary peer group

 

Secondary peer group

1

Arkema, Astra Zeneca, BASF, Bayer, Beiersdorf, Clariant, Croda International, DSM Koninklijke, Evonik Industries, Givaudan, Henkel, Hikma Pharmaceuticals, Lanxess, Merck, Novartis, Qiagen, Reckitt Benckiser, Roche Holdings, Sonova, Symrise, UCB, Umicore, Wacker Chemie

2

ARYZTA AG, Barry Callebaut AG, Emmi AG, Forbo Holding AG, Geberit AG, Georg Fischer AG, Logitech International S.A., OC Oerlikon Corporation AG, Panalpina Welttransport (Holding) AG, Sonova Holding AG, Sulzer

3

Alere, Allergan plc, Baxter BioPharma Solutions, Becton Dickinson Bioscience, Bristol Myers Squibb, Catalent, Mylan Inc., 3M Drug Delivery Systems, Parexel, Perrigo Company, Pfizer CentreOne, Thermo Fischer Clinical Services, West Pharmaceutical Services, Zoetis Inc.

4

Ashland, Celanese Corporation, Danaher, Estee Lauder, Eastman Chemical Company, FMC Corporation, International Flavors and Fragrances Inc., Westlake Chemical Corporation

 

 

 

European pharmaceutical / chemical sector businesses (all data adjusted to reflect differences in revenue and market value)1

 

Swiss companies similar in size to Lonza in other sectors2

 

US pharmaceutical3 or chemical4 companies similar in size to Lonza

For the alignments made to the base salary of the EC and the CEO please refer to the applicable charts in Section 4.3 and Section 4.4.

4.2 Compensation Components

The compensation of the members of the Executive Committee consists of the following components:

Base Salary

The base salary is paid in cash and determined for each position considering the responsibilities of the position and performance of each member of the Executive Committee.

Short-Term Incentive Plan (STIP)

The company provides the members of the Executive Committee with a Short-Term Incentive Plan. Performance metrics are defined for each financial year; achievement determines the payout of STIP. The STIP in principle pays out in cash, though it is converted to 50% shares when shareholding requirements are not met. For details regarding the STIP, please refer to Section 4.6 – Short-Term Incentive Plan (STIP).

Long-Term Incentive Plan (LTIP)

The LTIP is designed to align the interests of the Executive Committee with those of Lonza’s shareholders and to serve as a retention incentive for the executives. The LTIP is a 100% equity-based plan with conditional equity awards vesting after three years according to performance conditions. Executive Committee members are awarded the right to receive a number of shares in Lonza in the future, provided that certain performance-related conditions are achieved. For more details regarding the LTIP, please refer to Section 4.6 – Long-Term Incentive Plan (LTIP).

Benefits

The Executive Committee’s compensation package also includes certain benefits, e.g. pension plans and other benefits, such as a car, expenses allowance, health insurance and (if applicable) tuition fees.

4.3 Aggregate Compensation of the Executive Committee

The table below shows the breakout of the Executive Committee Compensation.

Executive Committee’s Compensation1

million CHF

 

2018

 

2017

 

 

 

 

 

1

Average of 5.0 members in 2018 and average of 4.9 members in 2017. Fridtjof Helemann was appointed to the Executive Committee effective 1 February 2017

2

The achievement for 2018 was 140.1% (2017: 200%) and will be paid out in April 2019 after and subject to the approval of the Shareholder’s Meeting

3

Social security, pension fund and other benefits (see section 4.2).The social security and pension fund amounts disclosed on this line represent the full costs of the employer contributions for 2017 and 2018. The table shows the fair value of the other benefits

4

All EC members meet the minimum shareholding requirement in 2018 (see section 4.6)

5

The fair value in 2018 and 2017 was calculated using the market value at grant date. It is possible that the eventual value at vesting will be higher or lower (or even zero)

Cash payments and benefits

 

 

 

 

Base salary

 

3.800

 

3.312

Short-term incentive (cash)2

 

4.833

 

4.458

Post-employment benefits / other benefits3

 

1.870

 

1.741

 

 

 

 

 

Share-based payments

 

 

 

 

Value of STIP paid out in shares4

 

0

 

1.238

Value of LTIP equity at market value5
(number of equity awards 2018: 18 925, 2017: 17 805)

 

4.900

 

3.221

 

 

 

 

 

Total

 

15.403

 

13.970

 

 

 

 

 

Ratio of fixed compensation to the performance-related components of compensation

 

49.41%

 

47.45%

The increase of the base salaries resulted from adjustments made in line with the AGM shareholders’ vote in May 2018. Principal reasons for these adjustments of the base salary and the LTIP are the following:

  • The organic and inorganic growth of Lonza over the last two years resulted in an increase of more than 50% in the workforce combined with sustained increasing performance;
  • The transformative acquisition and integration of Capsugel, in addition to several bolt-on acquisitions, has resulted in a global presence as well as an increase in major manufacturing and R&D sites spanning three continents (Americas, EMEA and APAC);
  • As a result of the growth in the last two years and also Lonza’s inclusion in the Swiss Market Index (SMI), all EC members have expanded responsibilities. With the greater recognition and enhanced reputation of Lonza, the turnaround capabilities and sustained performance delivery of its EC members are also increasingly recognized externally.

The overarching driver of the changes was to strengthen the strategic focus on the long-term company direction along the Healthcare Continuum® and aligning with shareholder interests.

The proposed STIP payment for 2018 reflects Lonza’s results across all key performance indicators. Compared with the STIP payout for the 2017 financial year, the proposed STIP amount for the 2018 financial year represents a decrease of 15.2%. This decrease is as a result of the lower target achievement of 140.1% versus 200% for 2017. Note that for 2018 (including the vesting of LTIP 2016 in January 2019) all EC members fulfilled the minimum shareholding requirements and therefore no STIP was paid out in shares (2017: CHF 1.238 million was paid out in shares).

The number of LTIP Equity Awards increased in 2018 (2018: 18,925 versus 2017: 17,805) due to an increase in the base salaries and the increase of the percentage targets for the CEO from 100% to 150% and for the EC members from 100% to 125% – as approved by shareholders at the 2018 AGM. The value of LTIP Equity Awards in CHF increased from CHF 3.221 million in 2017 to CHF 4.900 million in 2018 accordingly.

No loans or credits were outstanding as of 31 December 2018. During 2018, no payments (or waiver of claims) were made to current or former Executive Committee members nor to persons closely linked to them. No member of the Executive Committee benefits materially from any contract between a Lonza company and a third party.

Performance-Related vs. Fixed Compensation

As illustrated below (in million CHF), Lonza’s strong financial performance has largely maintained the ratio of performance-related to fixed compensation.

Performance-Related vs. Fixed Compensation 2018 (pie chart)
Performance-Related vs. Fixed Compensation 2017 (pie chart)

4.4 Highest Compensation Paid to a Member of the Executive Committee

The table below shows the breakout of the compensation of the highest-paid individual.

Compensation of the Highest-Paid Individual1

million CHF

 

2018

 

2017

 

 

 

 

 

1

Incentive (STIP) for the reporting year. The 2017 STIP was paid in May 2018; the 2018 STIP will be paid in April 2019 after and subject to AGM shareholders’ approval. The CEO already meets the shareholding requirement and will therefore receive full cash payout of STIP 2018. The STIP was calculated using base salary of 31 December 2018

2

Social security and pension fund as well as company car and health insurance. The social security and pension fund amounts disclosed on this line represent the full costs of the employer contributions for 2017 and 2018. The table shows the fair value of the other benefits

3

The fair value in 2018 and 2017 was calculated using base salary and market value at grant date (31 January 2018). It is possible that the eventual value will be higher or lower (or even zero)

Cash payments and benefits

 

 

 

 

Base salary

 

1.150

 

1.055

Short-term incentive (cash)1

 

1.681

 

2.200

Post-employment benefits / other benefits2

 

0.527

 

0.514

 

 

 

 

 

Share-based payments

 

 

 

 

Value of LTIP equity at market value3
(number of equity awards 2018: 6 373, 2017: 5 583)

 

1.650

 

1.010

 

 

 

 

 

Total

 

5.008

 

4.779

 

 

 

 

 

Ratio of fixed compensation to the performance-related components of compensation

 

43.02%

 

41.61%

The 2018 increase of base salary and the LTIP Equity Award budget was approved by shareholders at the AGM in May 2018.

The proposed STIP amount for the 2018 financial year represents a decrease of 23.6%.

4.5 Compensation for Departing Members of the Executive Committee

There were no departing members of the Executive Committee in 2018 or 2017.

4.6 Details of Incentive Plans

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 or profit-sharing program.

Effective 2018 the NCC took the decision to increase shareholding requirements for the Executive Committee and further align the Executive Committee with the interests of shareholders. The shareholding requirements from 2 to 3 times base salary for the CEO and from 1 to 2 times base salary for the other EC members. To support this strategy, the STIP will pay out in cash or in shares based on the Executive’s individual holdings of Lonza shares.

The 2018 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 ahead of the annual bonus cycle and 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 2018 financial results. Note: the financial impact of the Capsugel integration was excluded from the CORE results which are relevant for the STIP payout.

1

Payout range equals 0%–200%

2

CORE results exclude exceptional items such as restructuring charges, impairments and amortization of acquisition-related intangible assets, which can differ from year to year

3

As measured on 31 December of the plan year

STIP

 

CEO & other Executive Committee Members

 

 

 

Base salary STIP target as % of base salary1

 

100%–75%

Performance targets

 

– 50% CORE EBITDA2
– 15% Lonza sales
– 15% operational free cash flow
– 20% individual targets for Executive Committee members – For 2018: CORE EBITDA 10%, sales 5% and operational free cash flow 5%

Form of payout

 

100% in cash if CEO holds shares equivalent to 3 times base salary (CEO) and other Executive Committee members 2 times base salary3 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 executive in April 2019 after and subject to the approval of the Shareholders’ Meeting

Long-Term Incentive Plan (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 150% 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 have a target of 125% and the CEO has a target of 150% of base salary with payout levels between 0% and 200% maximum. Any proration is applied in relation to the entire three-year performance period.

The LTIP plan design and target setting is determined at the beginning of the three-year performance period. For 2018 the plan design included minimum, target and stretch goals. The 2018 LTIP budget value for the Executive Committee was approved as submitted at the AGM 2018 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 2018 LTIP the performance metrics were CORE earnings per share (EPS) and return on invested capital (ROIC), with 50% weight for each measure. For more details, see note 25 in the Financial Report (CORE EPS and CORE RONOA for the year 2017).

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 year 2018, 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 ROIC achieved during Lonza’s three fiscal years.

For the year 2017, 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 2018 (LTIP 2018):

CORE EPS is an internal, sensitive financial target. For competitive and ad hoc publicity reasons, Lonza does not disclose at this stage the absolute CORE EPS target at year-end 2020. The target was recommended by the Nomination and Compensation Committee and approved by the Board of Directors on 7 March 2018 to approximate the CORE EPS required to meet Lonza’s challenging strategic goals and support Lonza’s mid-term plan.

  • The minimum threshold to be reached at year-end 2020, as determined by the Nomination and Compensation Committee, is approved by the Board of Directors and set at a higher level than the CORE EPS basic achieved on 31 December 2017. If the minimum threshold is not reached at year-end 2020, the pay-out will be 0. If the threshold is reached, 50% of the equity awards granted under the CORE EPS vesting condition will vest.
  • The threshold was determined to approximate 109% of the CORE EPS of the threshold set for the performance target for the LTIP 2017-2019. If that level of CORE EPS is reached, 50% of the equity awards granted under the CORE EPS vesting conditions will vest.
  • If the target is reached, 100% of the equity awards granted under the CORE EPS vesting condition will vest. In the event that the maximum defined target level were to be achieved, 200% of the equity awards granted under the CORE EPS vesting conditions would vest.
  • The maximum was determined to be above the prorated 2022 Mid-Term Guidance and is a double-digit figure above the threshold. In the event that the maximum defined target level were to be achieved, 200% of the equity awards granted under the CORE EPS vesting conditions would vest.

Performance Metrics for CORE ROIC Approved at AGM 2018 (LTIP 2018):

  • Following extensive consultations during the fall of 2017, investors indicated a preference to replace CORE RONOA, return on net operating assets, with another return measure as long-term performance indicator. This change is driven mainly by Lonza’s acquisitions in recent years.
  • ROIC, return on invested capital, is defined as adjusted operating profit divided by invested capital. This measures the return the company generates on its investments both organic (e.g. capital projects such as the biological manufacturing of IbexTM Solutions in Visp, (CH) expansion of single-use bioreactors in Singapore and cell and gene therapy in Portsmouth, NH and Houston, TX (USA)) and inorganic (e.g. goodwill and intangibles from acquisitions). The measure is a reflection of the effect of decisions taken by EC members and senior management over the course of the LTIP plan period.
  • The minimum threshold to be reached at year-end 2020 is determined by the Nomination and Compensation Committee and is approved by the Board of Directors at a higher level than at year-end 2017.
  • If the minimum threshold is not reached, 0% of the equity awards granted under the ROIC vesting conditions will vest. In the event that the maximum defined target level were to be achieved, 200% of the equity awards granted under the ROIC vesting conditions would vest.

Vesting of 200% of the LTIP equity awards granted would require the achievement at year-end 2020 of CORE EPS and ROIC at challenging levels compared with our 2022 Mid-Term Guidance (pro rata). As shown in the past, Lonza has consistently set challenging LTIP targets in application of the pay-for-performance principle. The performance required for maximum vesting for both criteria is set above the prorated mid-term guidance and is a double-digit figure above the threshold performance. Targets and target achievement will be fully disclosed in the 2020 Remuneration Report.

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 2016

The total 2015 LTIP payout equaled 200%.

Performance under the 2016 LTIP exceeded the target for CORE EPS, generating a 200% payout on 50% of the total award. Performance under the 2016 LTIP also exceeded the target for CORE RONOA, generating a 200% payout on the remaining 50% of the total award. The total 2016 LTIP payout therefore equaled 200%. The financial impact of the Capsugel integration was excluded from the CORE results which are relevant for the LTIP payout.

2016 LTIP

 

 

Actual performance

 

Payout in %

 

 

 

 

 

1

CORE results exclude exceptional items such as restructuring charges, impairments and amortization of acquisition-related intangible assets, which can differ from year to year

CORE EPS (earnings per share)1

 

CHF 11.97

 

200

CORE RONOA (return on net operating assets)1

 

28.01%

 

200

Total payout

 

 

 

200

4.7 Compensation in Case of Termination2

2 Cases such as death, disability and retirement are not covered in this section

All executive agreements comply with the Swiss Ordinance Against Excessive Pay for Stock-Exchange-Listed Companies. The following outlines the specific termination-related topics included in the agreements of the Executive Committee members and the STIP and LTIP rules and administrative guidelines and practices.

Notice Period

All members of the Executive Committee are subject to a 12-month notice period.

Base Pay and Benefits

All members of the Executive Committee who terminate their employment will receive their base pay during the 12-month notice period and will be eligible for the benefits relating to the 12-month notice period, such as lump-sum expenses, pension fund plans, health and accident insurance, company car, family/children allowances according to their respective employment agreement.

STIP Payouts in the Event of Termination1

1
This summary of consequences in case of termination is based on plan rules applicable to STIP 2018

Resignation by the Executive Subject to applicable law, if a member of the Executive Committee resigns at any time prior to distribution of STIP awards, such member will not be entitled to any award with respect to the plan year in which their employment is terminated, except if (i) the termination as a result of such resignation occurs after 31 December of the plan year and (ii) the executive was not released from his obligation to work.

Termination by the Company Without Cause Any member of the Executive Committee whose employment is terminated by the Company without cause will be entitled to a prorated STIP payment relating to the notice period.

Termination by the Company for Cause Any member of the Executive Committee whose employment is terminated by the Company for cause will not be entitled to the STIP payment relating to the current year (year of termination).

STIP in Change of Control Any member of the Executive Committee whose employment is terminated by the Company without cause or who terminates the employment due to good reason (such as his function/duties/responsibilities being altered or the Company or the successor to Lonza Group Ltd failing to confirm to the executive in writing that no such alteration is intended) within 18 months following a change of control will be entitled to an STIP payment during the termination notice period (pro-rata), based on actual (to the extent that it may be determined) or presumed achievement and, if and to the extent that the executive is released from an obligation to work, based on assumed target achievement (100%).

LTIP Payouts in the Event of Termination

Resignation by the Executive Any member of the Executive Committee who resigns will forfeit the right to receive a transfer of any unvested LTIP awards.

Termination by the Company Without Cause Any member of the Executive Committee whose employment is terminated by the Company without cause will have unvested shares vest on a pro rata basis based on the number of months worked (including the notice period) during the 36-month performance period for the 2017 and 2018 grants.

Termination by the Company for Cause Any member of the Executive Committee whose employment is terminated by the Company for cause will forfeit the right to receive a transfer of any unvested LTIP shares.

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

Non-Compete Clause

Under the terms of the employment agreement of the Executive Committee, members whose employment is terminated agree that they will not, for a period of six months following the end of the notice period, be partially or fully employed by any entity that materially competes with the Company or any of its business segments. In case of a breach of the non-competition clause, the executive shall pay damages to the Company. As compensation for the period of non-competition, the executive will receive a monthly consideration equal to the executive’s last monthly base salary minus any new income the executive earns in the relevant month.

The Company may elect to fully or partially release the departing Executive Committee member from this non-competition obligation no later than ten (10) months prior to the end of the notice period.

Clawback

Any compensation (including fringe benefits) under the employment agreement of the Executive Committee members is subject to clawback or forfeiture if the compensation is not approved at the AGM. In an effort to bring clawback provisions into line with emerging best practice the clawback principle was extended in 2018 to cover the annual bonus and long-term incentive in instances of misconduct, material misstatement of performance and error in calculation of performance.