2020 Remuneration Guidelines and Long-Term Incentive Plans · 2020-04-08 · willistowerswatson.com...

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Kindred

2020 Remuneration Guidelines and Long-Term Incentive Plans

13 March 2020

Shareholder presentation

© 2020 Willis Towers Watson. All rights reserved.


In preparation for the implementation of EU SRD in Sweden in 2020, Kindred’s Remuneration Committee undertook in 2019 an extensive review of Kindred’s LTIP plans and remuneration practices

Based on this review we concluded that Kindred would benefit from an introduction of a stock option plan, supplementing the performance share plan (focus on financial performance), by focusing on driving share price growth and further improve the alignment with long-term shareholder value creation. The stock option plan will be offered to 20 participants in Kindred based in Sweden, UK and Malta.

When seeking shareholder approval at the 2020 annual general meeting for the new stock option plan we have consulted with Kindred’s largest shareholders. The conclusion from the consultations is that most large investors are in favour of the plan, but we have received valuable feedback from some investors perceiving the subsidy levels for the Swedish participants to be above what they can accept.

We have outlined in this presentation the key features of our LTIPs and Remuneration Policy, and we welcome your comments and feedback. Based on the latest feedback we have decided to decrease the subsidy level. The revised subsidy is aimed to balance the requirement of Kindred’s investors and to keep the plan attractive for participants

© 2020 Willis Towers Watson. All rights reserved.2

2020 Kindred Long-Term Incentive (LTI) PlansIntroduction/setting the context


2020 Kindred Remuneration GuidelinesSummary overview

The 2020 Remuneration Guidelines are subject to shareholder approval at the 2020 Annual General Meeting and will apply to the CEO and Executive Management (EM)

Compared to the 2019 Guidelines, 2020 Guidelines: Have been updated based on the new EU SRD requirements, Include share ownership requirement, and Include no increases to 2019 policy levels

3© 2020 Willis Towers Watson. All rights reserved.

Fixed elements STI LTIA separate AGM item not

outlined in detail

Other

• Salary shall be fair and competitive reflecting the executive’s responsibilities, skills and performance

• Pension and benefits follow the competitive market practice in the applicable country of executives’ employment or residence.

• Cash-based and paid annually

• Aligned with strategic priorities with an outcome linked to measurable targets

• The maximum variable pay opportunity for cash-based variable pay will be approved by the Board of Directors on an annual basis taking into account business context, individual role, geographic location and market practice, subject to an overall cap of 100% of base salary

• Typically share- and option based

• Three-year vesting period

• Linked to pre-determined financial and/or share or share price related performance criteria

• Aligning senior executives' incentives with the interest of shareholders

• Share ownership requirement

• A degree of flexibility with regards to changes

a) in EM composition

b) in company structure, organisation, ownership and business strategy

c) required to serve the long-term interest or sustainability of the company


2020 Kindred LTI PlansSummary overview

A stock option plan to drive/reward long-term shareholder value and performance share plan to reward financial performance:


Linkage to Shareholder Value

Low

Hig

hR

isk/

Rew

ard

ratio

HighLow

2020 Stock Option Plan

2020 Kindred LTIP

2020 Performance Share Plan

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Guiding principles for stock option plan design

The proposed stock option plan design outlined on the following slides has addressed all the points of investor concern in 2018, and is based on the following principles: Limited eligibility – stock option plan will apply only to most senior positions, who have line-of-

sight to Kindred’s share price performance Simple plan design with full alignment with shareholders’ interests – share price growth is the

only performance measure, and it complements Kindred’s performance share plan that rewards achievement of financial measures

Enforces share ownership culture – we will introduce stock ownership requirement to ensure our senior executives build up and hold a meaningful stake in Kindred,

Cap on the final outcome – total pay-out under the stock option plan will be subject to an overall cap, and

Cost- and tax-effective plan design – individuals outside Sweden will in general pay income tax and social security on their gains from Share Options. In Sweden where options are taxed as capital rather than income.


2020 Kindred Stock Option plan


2020 Kindred Stock Option planProposed plan design


Highly performance-based stock option plan with own investment requirement for Swedish participants Swedish participants are required to purchase the stock options at market value (valued according to Binomial

valuation methodology) The stock options can be exercised after a three year vesting period Each stock option entitles the participant to purchase at exercise one Kindred share at a price of 120% of the Kindred

share price at grant during a two-year exercise period The gain for each option is capped at 5x the share price Total term of five years to ensure a long term view for the participants

2019 2020 2021 2022

Kindred share price development (illustrative)

Value for the participant

Vesting period Exercise period

2025

Exercise price (120% of share price at grant)

Share price at grant

2020 2021 2022 2023

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2020 Kindred Stock Option planOwn investment requirement

Swedish participants are required to have own skin in the game by purchasing the stock options at market value. As the stock options are purchased, the gain of the options is taxed as capital gain at exercise making this tax effective and cost effective plan design in Sweden for both participants, the company and shareholders

Employee own investment varies from 50% - 75% of the stock option purchase price. The reason for partly subsidising the investment is to make the option grant more affordable for the participants, ensuring a high participation rate and retention

The investment is subsidised at the start of the plan to ensure high participation rate, with a requirement to repay the subsidy if a participant leaves within 3 years of the stock option grant to ensure retention


Participant category

Grant value (% of base salary)

Own investment(% of grant)

Estimated annual monetary investment

Market practice own investment

(% of grant)

CEO 40% 75% 1,950,000 SEK 25%-50%

Category 2 – Senior Executives 25% 50% 300,000 SEK 25%

Category 3 – Key Executives 15% 50% 80,000 SEK 0%

Investment for Swedish based participants

Parameter Detail

Capped annual dilution 1.00% of total shares outstanding

Estimated annual cost (max) 58mSEK for all plans granted 2020

Options exercise price, % 120% of share price at grant

Total option life 5 years: 3 vesting period + 2 exercise period

Cap on gain 5x the share price

Stock option valuation Binomial valuation

Key design features


Company (n=12) Design type Grant year

Subsidy, % of purchase cost Timing of subsidy % of shares allocated

for stock option planAddtech Financial options 2018 100% After two years 0.40%Atrium Ljungberg Financial options 2018 67% 75% upfront and 25% after three years 0.14%Beijer Ref Financial options 2018 50% Upfront 1.00%Hemfosa Fastigheter Financial options 2019 100% 50% after two years, 50% after three years 0.83%Indutrade Financial options 2017 120% 50% after two years, 50% after three years 0.58%Modern Times Group Financial options 2019 25-75% Upfront 0.67%NetEnt Financial options 2019 70% After three years 0.40%Nolato Financial options 2019 50% Upfront 1.00%Nyfosa Financial options 2019 100% 50% after two years and 50% after three years 1.15%Ratos Employee stock options 2019 50% Upfront 0.47%Sagax Financial options 2019 50% Not disclosed 0.27%Thule Financial options 2017 100% End of warrants' term 2.20%

2020 Kindred Stock Option planOwn investment requirement


The suggested subsidy level of 25%-50% for Swedish participants is lower than the Swedish market practice

The subsidy is paid upfront and structured as a retention tool by requiring the participants to pay back the subsidy if they leave the company


2020 Kindred Performance Share Plan Proposed LTI plan design

Simple performance share plan awarding shares after 3 years subject to meeting key financial performance conditions: Number of shares to be awarded is determined based on Kindred’s performance over 3-year

performance period Actual outcome and achievement of performance conditions to be disclosed the year following the

performance period Number of shares vesting at threshold is 25% and 100% at max, with linear interpolation in

between


2019 2020 2021 2022 2023 2024

2019 LTIP Vest Q1/Q2

2021 LTIP

Gross Contribution, Free Cash Flow per Share and EBITDA

2020 LTIP

Performance period

Vest Q1/Q2

Vest Q1/Q2

Performance period

Performance period

Gross Contribution, Free Cash Flow per Share and EBITDA

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2020 LTIP awardsLTIP award levels and split between performance shares and stock options

At the moment the LTIP structure is covering performance shares only. From 2020 and onwards the award is to be split between performance shares and stock options, outlined in the table below.


Participant categoryStock

Option grant(% of base salary)

Performance share grant(Amount in SEK)

LTIP award(% of base salary)

Weighting of LTIP awardStock

optionsPerformance

shares

CEO 40% 1,790,000 70% 60% 40%

Category 2 – Senior Executives 25% 597,000 50% 50% 50%

Category 3 – Key Executives 15% 298,000 35% 45% 55%

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2020 Kindred LTIPsTotal cost and dilution calculation

Maximum number of shares for total 2020 grant is capped at 1% of outstanding shares Kindred’s historical practice of using non-dilutive shares (treasury shares) continues On an accumulated basis the three outstanding plans of 2018-2020 will amount to around 1.6%

of the shares outstanding


2017 LTIPvesting in 2020 2018 LTIP 2019 LTIP 2020 LTIP

Number of participants in total 149 179 200 200

Max number of shares - PSP- All participants 421,695 368,316 717,334 607,113

Max number of options - SOP- 20 participants (top key executives) - - - 1,902,972

Number of shares and options % of shares outstanding 1 0.19% 0.16% 0.32% 1.11%

1 Based on 226.9 million outstanding shares for 2020 LTIP (source: Capital IQ Q4 2019).

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Input parameters Value CommentCurrent share price 49.1 Last close price as at 24 January 2020

Options exercise price, % 120%

Options exercise price, SEK 59.6 120% of ten day average close price

Volatility 34.3% Based on 5 year backward-looking daily close prices

Dividend yield 8.5% One year average dividend yield

Risk free rate 0.0% 10 day average market rate of 5 year Swedish government bond is negative

Option life 5 years 3 year vesting + 2 year exercise period

Stock option value 4.88 SEK Binomial valuation. The option price is 9.9% of the share price.

Dividend yield: for final calculations we would use the most recent dividend of 2.20 SEK against the share price used for option valuation (e.g. most recent 10 day volume

weighted average). Applying that assumption to the current evaluation would result in an estimated dividend yield of

4.5% and a stock option price of 7.4 SEK.


2020 Kindred LTIPsTotal cost and dilution calculation

Maximum cost for the annual grant to all participants is expected to be around 58mSEK For the stock option plan participants the total estimated maximum 2020 LTIP cost is 26mSEK, of which 11.5mSEK

is associated with the stock option plan On an accumulated basis the plan cost for the outstanding 2018-2020 plans will amount to

around 126mSEK


2017 LTIPvesting in 2020

2018 LTIP 2019 LTIP 2020 LTIP

Number of participants 149 179 200 200

Max number of shares - PSP- All participants

421,695 368,316 717,334 607,113

Max number of options - SOP- 20 participants (top key executives)

- - - 1,902,972

Estimated total costs at 50% vestingProgram cost, mSEK1 9.0 9.0 19.0 29.0Cost for social security charges, mSEK2 2.0 2.0 4.0 6.0

Estimated total costs at 100% vestingProgram cost, mSEK1 19.0 18.0 38.0 49.0Cost for social security charges, mSEK2 4.0 4.0 8.0 9.0

1 Based on 10% employee turnover and 10% annual share price increase. Share price at grant is assumed to be 49.1 SEK.2 Based on 10% annual share price increase, from share price at grant of 49.1 SEK and warrant value at grant of 4.9 SEK. Average social security tax rate of 31.42% in Sweden, 10% in Malta and 14.3% in UK.


2020 Kindred LTIPsPay out scenarios

The pay out and social security cost for 2020 annual grant of the categories eligible for the stock option plan is illustrated below

The assumed annual share price growth is 10%


Assumed annual employee turnover is 10%.- Values are gross pay outs in mSEK No. Participants

LTIP 2020 cost(PSP and Options)

Social security cost(PSP and Options)

Sweden (Financial stock option)At 50%

fulfilmentAt 100%

fulfilmentAt 50%

fulfilmentAt 100%

fulfilment

Category 1 1 3.8 5.0 0.6 1.0Category 2 3 2.5 3.5 0.7 1.0Category 3 3 1.0 1.6 0.3 0.5

UK (Employee stock option)Category 2 5 5.4 7.1 0.8 1.0Category 3 5 2.3 3.2 0.3 0.5

Malta (Employee stock option)Category 2 1 1.0 1.3 0.1 0.1

Aggregated 18 16.0 21.7 2.8 4.1



The pay out and social security cost for 2020 annual grant of the categories eligible for the stock option plan is illustrated below

Calculations are based on an assumed three year share price growth of 100% and 500%


LTIP 2020 cost – PSP and OptionsAssumed annual employee turnover is 10%.- Values are gross pay outs in mSEK No.

Participants

Pay out100% share price growth

Social security cost100% share price growth

Pay out500% share price growth

Social security cost500% share price growth

Sweden (Financial stock option)At 50%

fulfilmentAt 100%

fulfilmentAt 50%

fulfilmentAt 100%

fulfilmentAt 50%

fulfilmentAt 100%

fulfilmentAt 50%

fulfilmentAt 100%

fulfilment

Category 1 1 19.3 21.1 5.4 6.0 111.9 117.3 34.5 36.2Category 2 3 11.0 12.6 3.4 3.9 61.8 66.6 19.3 20.9Category 3 3 4.2 5.0 1.3 1.5 22.9 25.3 7.2 7.9

UK (Employee stock option)Category 2 5 26.6 29.3 3.8 4.2 153.6 161.8 22.0 23.1Category 3 5 10.9 12.3 1.6 1.8 62.3 66.3 8.9 9.5

Malta (Employee stock option)Category 2 1 4.8 5.3 0.5 0.5 27.3 29.0 2.7 2.9

Aggregated 18 76.8 85.6 16.0 17.9 439.8 466.1 94.6 100.5



The CEO pay out of stock option plan, assuming exercise at vesting This is the individual with the highest potential pay out


CEO examplemSEK

Financial options -25% subsidy

Pre tax grant value, SEK 2.6Investment, SEK 1.95Grant value % of base salary 40%Number of options 639,344

Option FMV, SEK 4.88Option FMV, % of share price 9.9%Strike price % of share price 120%Vesting period 3Exercise period 2

Pay outs post tax, SEK0% share price increase 010% share price increase 3.215% share price increase 8.420% share price increase 14.126% share price increase1 21.682% share price increase2 131.6

Assumptions

Current share price 49.1

Options exercise price, % 120%

Options exercise price, SEK 59.6

Price per option 4.88

Capital gain tax 30%

Income tax 60%

Annual share price increases

1 100% share price increase over three years2 500% share price increase over three years


2020 Kindred LTIPsSummary


Stock option plan Performance share plan

Own investment, participants need to have their “own skin in the game”

Entrepreneurial feel and upside potential

Further enhancing the alignment with shareholders’ interests

Drive company financial performance and retain key talent

Line-of-sight for all participants, easy to understand

Three year performance period, provides a long term focus

Kindred is confident that the proposed 2020 LTIPs will incentivise LTIP participants and drive long-term shareholder value through more targeted plan designs

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2020 Remuneration Guidelines and Long-Term Incentive Plans · 2020-04-08 · willistowerswatson.com...

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