Compensation Study for Chairperson and CEO in Austria, Germany and Switzerland

HCM DACH 70

hcm.com

June 2017

2 H C M D A C H 7 0

3 Executive summary

5 Data sample

6 Terminology

7 Board Chairperson Compensation level Compensation design

11 ChiefExecutiveOfficer Compensation level Compensation structure Variable compensation design

21 Overall view on CEO compensation

23 About the authors

24 About HCM International

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Board Chair compensation level and structureThe key factors explaining the differences in total direct

compensation levels for the Board Chair are company size and

localgovernancepractices.Notably, industryaffiliationdoes

not seem to play amajor role in explaining the differences

in total direct compensation, which amounts to EUR 363

thousand at median for the HCM DACH 70 companies in 2016.

Thelarge-sizedfirmspayamediantotaldirectcompensation

of EUR 559 thousand, whereas the corresponding figure

for the small-sized companies is around EUR 82 thousand.

The Board Chairs at Swiss companies are compensated

with total direct compensation of EUR 1.2 million at median,

mostly due to specifics of governance regime. In Austria,

mostly represented by small-sized companies, the median

compensation for the role of a Board Chair is the lowest (EUR

73thousand).Notably,almost80percentoftheSwissfirms

compensate their Board Chairs with a combination of cash and

equity,whereasGermanandAustriancompaniesofferalmost

entirely cash pay packages.

CEO compensation levelIn linewith thefindings for theBoardChair, the total direct

compensation level for the CEO is primarily driven by company

size and local governance practices and amounts to EUR 4.6

million at median. The median total direct compensation for

thelarge-sizedfirmsamountstoEUR7.6millionincontrastto

EUR 3.1 million for the small-sized companies.

The highest median pay of EUR 8.5 million is observed

at health care companies whereas the lowest pay is in the

financial sector, where median total direct compensation

amountstoEUR4.0million.Thisgapismostlyduetospecific

industry practice as well as size composition of the industries.

CEO compensation structureAlso, the structure of the CEO compensation package is

mainly influenced by the firm’s size and country-specific

market practices, whereas industry affiliation has a smaller

impact, mostly attributable to the differences in legal

requirementsforfinancialcompanies.

The proportion of variable compensation is typically larger at

higher compensation levels, corresponding on average to 60

percent for the small-, 65 percent for the mid- and 76 percent

for the large-sized companies (68 percent at median for HCM

DACH 70 companies).

Executive summary

BOARD CHAIR COMPENSATION

EUR 363 thousand at median

EUR 559 thousand for large-sized companies

CEO COMPENSATION

EUR 4.6 million at median

EUR 7.6 million for large-sized companies

CEO COMPENSATION STRUCTURE

68% of compensation in variable awards

41% of compensation deferred

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ANNUAL BONUS OPPORTUNITY

100% of base salary at target

200% of base salary at maximum

PERFORMANCE MEASURES FOR BONUS

89% offirmsuse earning measures

40% of bonus determined by individual performance

LTI INSTRUMENTS

49% of time-based awards in restricted shares

61% of performance-based awards in performance shares

On average, the portion of long-term incentive (LTI) awards

corresponds to 41 percent of the total direct compensation.

This figure is higher for larger companies – 51 percent, in

contrastto29percentforthesmall-sizedfirms.

In termsofdifferencesacrosscountries, thecompensation

structure in Swiss firms is characterized by higher deferral

rates than in German firms (52 percent vs. 38 percent on

average). Smaller Austrian companies give more weight to the

fixedpay,withadeferralrateof23percentonaverage.

CEO variable compensation designAnnual bonus plans are typically designed with a target

opportunity of 100 percent of base salary and a cap of 200

percent of base salary at median. Median cap values range from

160percentofbasesalaryformid-sizedfirmsto225percent

forlargeones.Bothcountry-andindustry-specificcorporate

governancepracticesinfluencevariablecompensationdesign.

More than a half of companies apply deferral mechanisms to

a portion of the earned annual bonus. Deferral rates under

annual bonus plans typically range from 30 to 50 percent with

a three-year vesting period. When deferred, an annual bonus

is most often converted into fully taxed but blocked shares or

restricted shares.

With regard to the KPIs used for annual bonus plans, the

majority of companies (63 percent) apply a combination

of individual and corporate KPIs. On average, individual

performance determines 40 percent of total bonus awarded to

a CEO. The most popular annual bonus KPIs used by the HCM

DACH 70 companies are earnings measures (89 percent).

Restricted shares (49 percent of plans) are the most

popular instruments for time-based LTI awards, whereas

performance shares are preferred for LTI plans with

performance conditions during the vesting period (61

percent of plans). Total shareholder return (TSR) tops the list

oftheappliedKPIs(63percentoffirms)andisusedinmajority

of cases in combination with earnings measures.

The payout opportunity is capped at 100 percent of the

granted award for 31 percent of the analyzed plans with

performance-based vesting, whereas 69 percent of the plans

reward the overachievement of the performance targets and

have a median payout opportunity of up to 200 percent of the

granted award.

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The HCM DACH study covers 70 companies included in

the following indices:

■ SMI–SwissMarket Indexcomprising the20 largest

Swiss-listed companies;

■ DAX–GermanStock Indexof30selectedbluechip

stocks traded on the Frankfurt Stock Exchange;

■ ATX–AustrianTradedIndexmadeupofthe20most

liquid stocks traded on the Vienna Stock Exchange.

To increase the comparison relevance for our readers,

the data is analyzed by country, size, and industry groups.

Threesizegroupswereformedbasedonthecompanies’

market capitalization as of December 31, 2016, as follows:

■ Large-sized: companies with market capitalization of

EUR 30 billion or above;

■ Mid-sized: companies with market capitalization

between EUR 10 and 30 billion;

■ Small-sized: companies with market capitalization of

EUR 10 billion or less.

The industry segmentation was based on the Industry

ClassificationBenchmark (ICB). Fouroutof ten industry

groups are reported throughout the study: Consumer

Goods, Financials, Health Care and Industrials (which

represent 50 companies and 77 percent of the market

capitalization of our sample).

Figure 1 shows the average market capitalization and the

number of companies representing each country and

industry group in the HCM DACH 70 data.

The analysis focuses on publicly available data related to

compensation of Board Chairs and CEOs, disclosed in the

companies’ annual reports. The Board Chairs and CEOs

who were not in office for the full year were excluded

from any trend analysis. Board Chairs with executive

responsibilities were also not considered in this study.

For transparency reasons, the relevant sample sizes were

reported throughout the study as part of tables and graphs.

The analysis deals with the total direct compensation

components only, excluding social securities, pensions,

expenseallowances,otherbenefits,replacementawards,

severance payments and gains from share purchase

Data sample

2

3

6

3

5

1

3

7

2

6

3

4

2

1

2

2

1

8

5

2

1

1

7

10

3

20

6

14

2

2

3

3

Sw

itze

rlan

d

Ger

man

y

Aus

tria

ConsumerGoods

Financials

Health Care

Oil & Gas

Technology

Industrials

Telecom

Utilities

Note: bubble size corresponds to average market capitalization, number label corresponds to number of companies in an industry-country group.

ConsumerServices

HC

M D

AC

H 7

0

BasicMaterials

Figure 1: Sample of companies by industry

and country

programs. The variable compensation attributable to

the years under review (accrued or granted, rather than

paid out) was analyzed. Where possible, long-term

incentive awards were estimated at their fair value at

grant. In addition, the companies providing insufficient

compensation data for the analysis were not included in

the samples.

6 H C M D A C H 7 0

Terminology

Base salary

Annual salary received over a 12-month period excluding

any other payments or allowances.

Total annual bonus

Actual annual bonus paid (to be paid) for the considered

financialyearincludinganydeferredportionoftheannual

bonus.

Immediate variable compensation

Actual annual bonus paid (to be paid) for the considered

financial year as well as any allocated unblocked equity

awards or a portion of the equity award with the vesting

period not exceeding 12 months.

Immediate compensation

The sum of base salary and immediate variable

compensation.

Long-term incentive awards

Variable awards, where the blocking/vesting period is

longer than 12 months comprising:

Deferred cash

Contingent rights to cash payment with the vesting

subjected to the satisfaction of continued employment.

Blocked shares

Fully taxed shares subject to a blocking period during

which they cannot be sold.

Restricted shares

Contingent shares with the vesting subject to the

satisfaction of continued employment.

Stock options

(Contingent) rights to buy shares sometime in the

futureataspecifiedprice.

Debt-linked instruments

Interest-paying deferred cash vehicles whose payout is

dependent on the attainment of capital strength ratios.

Carried interest

Deferred cash vehicles that are funded through carried

interest realized in private equity deals.

Performance cash

Contingent rights to cash payment with the vesting

subjected to the satisfaction of continued employment

and/or performance targets achievement.

Performance shares/units

Contingent rights to shares/units with the vesting

subject to the satisfaction of continued employment

and performance targets achievement.

Performance options

(Contingent) rights to buy shares sometime in the

futureataspecifiedpricesubjecttothesatisfactionof

performance targets.

Total direct compensation

The sum of immediate compensation and long-term

incentive awards.

Total compensation

Total direct compensation plus pensions and other

benefits, including special payments for pensions,

expense allowances, life insurance, severance and/or sign-

on payments, etc.

Weighted average duration of the total direct

compensation (years)

All elements of the total direct compensation have been

considered depending on their vesting periods and

schemes as described in annual reports, with zero duration

assigned to immediate compensation.

Sensitivity of executive compensation to company

performance (points)

The HCM has developed a rating system with zero

sensitivity points for immediate cash awards, 100

sensitivity points for fully taxed but blocked shares, and

350 sensitivity points for deferred instruments with a

maximum pay-out opportunity of more than 200 percent;

all other plans are assigned with zero to 350 sensitivity

points accordingly.

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Compensation levelBoard Chair compensation generally increases with

company size. As shown in Figure 2, the size factor

explains 53 percent of the variation in total direct

compensation in Germany, Austria and Switzerland in

2016.

The same pattern is highlighted in Figure 3, where

Board Chair median compensation is shown along a

size, country and industry split. The figures vary from

EUR 82 thousand for small-sized companies to EUR

559 thousand for large-sized firms. Such variations in

total direct compensation seem to be reasonable since

time commitment and responsibilities of the Board of

Directors generally increase with company size and

business complexity.

Furthermore, country pay differences are more

significant than those at size level in 2016. In Switzerland,

the median total direct compensation is around 17 times

higher than in Austria and almost four times higher than

in Germany. It is worth noting that the compensation

level for Board Chair and Board members in Switzerland

usually tends to be rather high when compared to the

rest of the world1.

The high level of compensation in Switzerland can be

explainedbycorporategovernancepractices,specifically

bythelevelofBoardChairs’involvementinthecompanies’

administration: the Swiss Code of Best Practice for

Corporate Governance (Swiss Code) recommends that

theBoardofDirectorsdefinescompany’sstrategicgoals

and the ways to achieve them, as well as manages risks

andfinancialmatters.

In contrast, the German Corporate Governance

Code (German Code) emphasizes the consulting and

supervisory role of the Board of Directors. Austrian

companies see the Board of Directors as a supervisory

body only, which implies a potentially smaller time

commitment. Consequently, Board Chairs in Austria

often serve in a presiding role in several (three to five)

companies simultaneously.

Board ChairpersonT

ota

l dir

ect c

om

pens

atio

n (E

UR

mill

ion)

Market capitalization (EUR billion)

0.02

0.06

0.40

1.10

3.00

8.00

0.15

R² = 53%

3.5 10.0 25.5 75.0 190.01.3

Figure 2: Link between Chairperson compensation level and company size

HCM DACH 70 (n=58)

1 HCM follows compensation practices globally, covering 17 countries. Please refer to HCM Swiss 100 and HCM Global 300 reports for further information.

8 H C M D A C H 7 0

Figure 3: Median total direct compensation for a Chairperson

(EUR thousand)

341

538

300

81

1'227

322

73

335

344

420

332

HCM DACH 70 (n=53)

Large-sized (n=20)

Mid-sized (n=19)

Small-sized (n=14)

Switzerland (n=18)

Germany (n=25)

Austria (n=10)

Consumer Goods (n=6)

Financials (n=16)

Health Care (n=6)

Industrials (n=11)

363

559

300

82

1'239

335

73

337

378

461

335

20162015

9 H C M D A C H 7 0

When looking at price levels in the aforementioned

countries as one of the drivers of executive

compensation, it appears that the price level in

Switzerland is more than 40 percent higher than in

Austria and Germany1.Thesedifferencesmayalsohave

contributed to the large compensation gap.

The compensation of Board Chairs is relatively stable

across the various industries studied. Minor variations in

medianlevelsareratherattributabletospecificsizeand

country composition than to industry practice.

The level of total direct compensation has hardly changed

as compared to 2015 (0.9 percent increase at median,

when looking at individual companies). The increase in

compensation levels is observed primarily at German

companies,aswellasatcompaniespertainingtofinancial

and health care groups.

Compensation designTypically, the total direct compensation of non-executive

Chairpersons is composed of cash, non-performance-

based equity awards, or a combination of both. As Figure

4 highlights, the vast majority of companies in the HCM

DACH 70 (72 percent) grant cash compensation only,

three percent grant equity compensation only and

25 percent grant both cash and equity. The decision

varies with local compensation practices and corporate

governance rules.

The use of share awards is most common in Switzerland,

where almost 80 percent of the Board Chairs are

remunerated with a mix of cash and equity. Indeed,

Switzerland is the only European country, in which equity

is used as part of Board Chair compensation by the

majority of publicly-traded companies2.

German and Austrian companies typically prefer cash-

only compensation. All Board Chairs at the analyzed

Austrian firms, and at all but one German firm are

compensated solely in cash.

Most often, equity compensation takes the form of fully

taxed, blocked shares. Blocked shares are fully taxed

up-front and imply an immediate transfer of ownership,

but are blocked for subsequent period of time. Blocked

shares have a sale and/or pledging restriction typically

lastingforthreetofiveyears.Restrictedshareawards–

so called “pay for stay” plain equity instruments have a

vesting solely subject to a service condition. Restricted

shares are rarely a part of the Board Chairs compensation

package.

It is worth mentioning that, even though most German

companies do not grant equity compensation to their

Board Chairs, some of them require their Board members

to invest a portion of the cash compensation (typically

25 percent) in company shares. This shareholding

requirement can also be viewed as an indirect way

to implement equity awards in the Board Chairs’

compensation package.

Cash compensation most often takes the form of

fixed compensation including base, committee and

attendance fees. In addition, one fifth of the German

companies under review grants performance-related

compensation,basedonfinancialresultsofthecompany

(e.g. earnings per share, dividend per share, etc.).

1 Information based on OECD statistics. 2 HCM follows compensation practices globally, covering 17 countries. Please refer to HCM Swiss 100 and HCM Global 300 reports for further information.

1 0 H C M D A C H 7 0

Figure 4: Total direct compensation structure for a Chairperson

(Percentage of companies)

72% 3% 25%

Cash Cash & equityEquity

57%

56%

58%

54%

55%

75%

27%

59%

53%

68%

43%

44%

42%

46%

45%

25%

73%

41%

47%

32%

HCM DACH 70 (n=15)

Large-sized (n=7)

Mid-sized (n=6)

Small-sized (n=2)

Switzerland (n=14)

Germany (n=1)

Austria (n=0)

Consumer Goods (n=1)

Financials (n=6)

Health Care (n=3)

Industrials (n=2)

(Average percentage of total direct compensation for companies with cash & equity)

Cash Equity Not enough data points.

1 1 H C M D A C H 7 0

Compensation levelSimilarly to the Chairperson’s pay, Chief Executive

Officer’s (CEO’s) compensation tends to increase

with company size. Figure 5 illustrates a trend analysis

of compensation vis-à-vis company size. Based on

regression data, size explains more than 65 percent of

variation in total direct compensation.

Figure6presentsthemediancompensationfiguresfrom

a size, country, and industry perspective. The median

total direct compensation reaches EUR 3.1 million for

the small-sized companies and is 2.4 times higher at

the large-sized companies (EUR 7.6 million). Given the

increased responsibilities and business complexity of

the blue-chip companies, entity size is a key driver of the

compensationleveldifferences.

Thevariation inCEO’s totaldirectcompensation isalso

observed at the country level. Notably, the Austrian

sample is composed of rather small-sized companies,

which report a median compensation which is 2.3 times

lower than in Germany and 3.1 times lower than in

Switzerland. Swiss and German companies analyzed are

comparable in terms of size, however, the total direct

compensation in Switzerland is EUR 6.0 million at median

Chief Executive OfficerT

ota

l dir

ect c

om

pens

atio

n (E

UR

mill

ion)

Market capitalization (EUR billion)

R² = 65%

3.5 10.0 25.5 75.0 190.01.30.4

1.1

3.0

8.0

21.0

Figure 5: Link between CEO compensation level and company size

HCM DACH 70 (n=43)

1 Information based on OECD statistics.

whereas the respective figure for Germany is EUR 4.4

million. Such a gap can be explained by the differences

in the purchasing power of the same compensation

package. The price level in Switzerland is more than 40

percent higher than in Germany1, which is commensurate

with the pay level gap in the two countries.

Thesize-to-pay link isalsotruefordifferences inCEO’s

total direct compensation among selected industries.

Forexample,thegapinpaybetweenfinancialcompanies

andfirmsfromotherindustriesisattributabletothesize

differences.However, industry-specific trends also play

a role. For example, while the industrials and financials

groups are comparable in terms of size, the median pay

for financial institutions (EUR4.0million) ismuch lower

than for industrial companies (EUR 6.4 million), which

mostlikelyreflectscloserpublicattentiononthefinancial

industry.

The left-hand side of Figure 6 also presents compensation

levels in 2015. When looking at individual companies in the

sample, no significant changes in compensation levels

as compared to the previous period were observed (0.1

percent increase at median).

1 2 H C M D A C H 7 0

Figure 6: Median total direct compensation for the role of CEO

(EUR million)

20162015

4.5

8.0

4.1

2.6

6.0

4.4

2.0

5.8

4.0

8.3

5.5

HCM DACH 70 (n=33)

Large-sized (n=11)

Mid-sized (n=14)

Small-sized (n=8)

Switzerland (n=11)

Germany (n=18)

Austria (n=4)

Consumer Goods (n=5)

Financials (n=6)

Health Care (n=4)

Industrials (n=6)

4.6

7.6

4.1

3.1

6.0

4.4

1.9

5.2

4.0

8.5

6.4

1 3 H C M D A C H 7 0

Compensation structureThe structure of total direct compensation reflects

the split between short-term fixed compensation

(base salary), short-term variable (immediate variable)

compensation and long-term incentive (LTI) awards.

It reflects the degree to which an executive officer is

incentivized to deliver specific company results. For

instance, in general, a deferral of incentive awards can

be an effective tool to address risk concerns, aligning

executives’ paywith sustainable companyperformance

and discouraging excessive risk taking. As highlighted in

Figure 7, the way the public companies in the HCM DACH

70 set compensation packages for CEOs is driven by the

size of the company, industrial sector, and prevailing legal

and corporate governance requirements.

The portion of base salary decreases with the increased

size of the company, ranging from 40 percent at

small-sized companies to 24 percent of total direct

compensation at large-sized companies. Larger

differences are observed in the portion of LTI awards.

Notably, the portion of LTI awards typically increases with

the compensation level, which in turn correlates with

the size of the company. Long-term incentive awards

amount to51percentat the large-sizedfirms,whereas

this portion accounts for about 30 percent of total

compensation at smaller companies.

It can be observed that a larger company size implies

broader responsibilities for Chief ExecutiveOfficer and

increased attention from the investment community,

which translates into more performance-sensitive pay

packages. CEOs at larger companies are often required

todemonstrateaspecificsetof skills inorder to leada

large organization with a greater degree of business

complexity and global scope. In this environment,

compensation packages tend to mimic the structure of

other large corporations worldwide, regardless of local

and industry practices.

When lookingatcountrygroups,some localdifferences

in pay structure can be observed. While Swiss and

German companies are comparable in terms of size and

base salary portions, CEOs in Switzerland are granted a

larger portion of compensation in long-term incentive

awards (52 percent) than in Germany (38 percent). The

compensation packages for the CEOs in Austria, which

is predominantly composed of smaller-sized companies,

are more heavily weighted towards base salary (43

percent of total compensation on average).

Certain differences in total direct compensation

structure can be observed when looking at selected

industries. Financial companies stand apart with the

largest proportion of base salary (36 percent), the

smallest weighing of immediate variable compensation

(18 percent), and almost a half of the compensation

package in long-term incentive awards (46 percent). This

is consistent with the overall tendency in the financial

industry to avoid excessive risk taking by increasing the

fixedcomponentofcompensationpackageanddeferring

a significant part of annual bonus. Industrial companies

defer a comparable portion of long-term awards (44

percent), which reflects the riskier compensation

practices with a long-term outlook, which is common for

this sector.

Health care companies defer even more in long-term

awards (60 percent on average), which is explained by

thepayspecifics in thissector. Inparticular,healthcare

(especially pharmaceutical and biotech) companies

contribute a significant part of their revenues towards

research and development activities, which tend to

materialize in the long term.

1 4 H C M D A C H 7 0

Figure 7: Average structure of total direct compensation for the role of CEO

32%

24%

35%

40%

29%

31%

43%

28%

36%

21%

30%

27%

25%

27%

31%

19%

31%

34%

43%

18%

19%

26%

41%

51%

38%

29%

52%

38%

23%

29%

46%

60%

44%

HCM DACH 70 (n=43)

Large-sized (n=15)

Mid-sized (n=18)

Small-sized (n=10)

Switzerland (n=15)

Germany (n=22)

Austria (n=6)

Consumer Goods (n=7)

Financials (n=10)

Health Care (n=4)

Industrials (n=9)

Base salary Immediate variable compensation

Long-term incentive awards

1 5 H C M D A C H 7 0

Variable compensation designAnnual bonusAs in thepreviousperiod, all analyzedcompaniesoffered

annual bonus plans for their CEOs in 2016. Based on

performance results, realized annual bonuses vary

between 75 and 160 percent of base salary (interquartile

range). CEOs of approximately half of Swiss and German

companies earned a lower annual bonus compared to 2015

which reflects deteriorated performance results rather

than changes in the compensation design.

Figure8 illustrates keyfindingswith regard to thedesign

of annual bonus plans at the HCM DACH 70 companies.

In particular, it presents bonus opportunities provided

to CEOs, as well as the average portion of annual bonus

deferred1.

Target bonus rates vary significantly depending on size,

industry, and country. Again, target bonus opportunities

correlate with the size of a company, which implies a higher

target bonus as percent of base salary at larger companies.

GermanandSwisscompanies’targetbonusratesareclose

to100percentatmedian.Inaddition,financialcompanies

demonstrated below average target bonus opportunities

(90 percent of base salary at median).

The size-to-pay link is also true for annual bonus caps –

they increase directly with the size of the company. Median

values range from 160-170 percent of base salary for mid

andsmallfirmsto225percentforlargefirms.Thisfinding

supports trends in the compensation structure – larger

companies generally grant riskier compensation packages

in order to incentivize superior performance.

The Austrian sample shows the lowest maximum bonus

opportunities for CEOs – 135 percent of base salary at

median. In contrast, CEOs in Swiss and German companies

offerabonuspotentialof200percentofbasesalary.The

reason for this difference is because Swiss and German

companies are usually less restrictive in annual bonus

design and often allow for higher payouts in case of superior

performance (in some cases reaching 500 percent of base

salary).

Themedianbonuscapsvary significantlywithin selected

industries, ranging from 150 percent of base salary for

financial companies to 250 percent of base salary for

health care companies. Industrial companies are closer to

the overall trend of the HCM DACH 70 with a cap of 195

percent. Consumer Goods companies tend to have higher

maximum bonus opportunities, mainly due to a greater

prevalence of larger companies in this group.

Annual bonus payouts can be distinguished between two

common approaches: the bonus is either paid out shortly

after the end of the financial year (immediate variable

compensation), or a portion of annual bonus is deferred,

with the payout occurring later in the future. The bonus

deferral framework is considered an instrument that

encourages sustainable growth and ensures that short-

term achievements will not hurt long-term performance.

More than a half of companies apply deferral mechanisms

to a portion of annual bonus earned. Minimum deferral rates

required under annual bonus plans typically range between

30 and 50 percent with a three-year vesting period. The

right-hand side of Figure 8 shows the average deferral rates

applied to the annual bonus.

Deferral mechanisms can also be perceived as a way to

increase the riskiness of the compensation paid to the CEO.

Consequently, the portion of annual bonus deferral is the

highest for larger companies (48 percent on average). The

long-term orientation of compensation packages is further

supported by the stand-alone long-term incentive plans.

German firms offer the lowest average deferred bonus

portion (43 percent), as compared to Austrian (48 percent)

and Swiss (50 percent) companies. Annual bonus deferral

is a legal requirement for banks under CRD IV as a tool

to prevent excessive risk-taking. As a result, financial

companies set higher minimum deferral rates (54 percent

on average) as compared to consumer goods (39 percent)

and industrials (50 percent) sectors. On the other hand,

health care companies demonstrate the highest average

deferral rate of 58 percent as compared to other industries,

again as a result of prevalence of larger companies in the

sample.

The deferred annual bonus is most often converted into

blocked or restricted shares. These plans are further

considered as a part of the long-term incentive awards.

With regard to the KPIs used for the annual bonus plans,

1Pleasenotethatthesampleanalyzedinthissectionmaydifferfromtheonesinthe“CompensationLevel”and“CompensationStructure”sectionsduetothelevelofdetaildisclosedbyfirmsregardingcompensationdesign.

1 6 H C M D A C H 7 0

Figure 8: Annual bonus opportunity and payout timing

(Percentage of base salary at median) (Percentage of bonus on average)2

200%HCM DACH 70 100% 54% 46%

225%Large-sized 135% 52% 48%

160%Mid-sized 85% 53% 47%

170%Small-sized 100% 59% 41%

200%Switzerland 100% 50% 50%

200%Germany 100% 57% 43%

135%Austria¹ 52% 48%

235%Consumer Goods 150% 61% 39%

150%Financials 90% 46% 54%

250%Health Care 160% 42% 58%

195%Industrials 100% 50% 50%

Maximum

Target Immediate payout

Deferred payout

¹ Not enough data points for target bonus opportunity. ² For companies with deferred annual bonus only.

1 7 H C M D A C H 7 0

the majority of the reviewed companies (63 percent) apply

a combination of individual and corporate performance

metrics. On average, individual performance determines

40 percent of total annual bonus awarded to a CEO.

In terms of corporate measures, the majority of the

firms apply one to three financial performance metrics

to determine the annual bonus. In particular, earnings

measures are popular in all groups and are used by 89

percent of the HCM DACH 70 firms. In addition, large-

sized companies often look at qualitative performance,

such as social responsibility, customer satisfaction or

research and development.

In Switzerland, earnings measures are often supplemented

by revenue targets. Austrian companies typically combine

earnings and return measures. Companies pertaining to

the consumer goods sector additionally consider revenue

measures and qualitative criteria. Financial firms more

oftenutilizeriskcapitalKPIs,overallefficiencymeasures,

as well as qualitative performance targets.

Long-term incentive awardsAlmostallanalyzedHCMDACH70companiesofferlong-

term incentive (LTI) plans to their CEOs in addition to

annual bonus awards. The background of the LTI award

decisionand itssize isdefinedbythe fundingapproach.

This decision plays an important role in building an

appropriate motivation framework for executives. Thus,

LTIplanscanbeclassifiedas:

■ Long-term incentive awards with a performance-

driven grant level, i.e. financed by realized

performance, typically deferred annual bonus; or

■ Long-term incentive awards with a budgeted grant

level,i.e.pre-definedorfixedintermsofanabsolute

amount or number of shares/units.

Both funding approaches are almost equally utilized

among the HCM DACH 70 companies. Performance-

drivengrantsaremorepopularamongfinancialfirms(68

percent of LTI plans) in form of a deferred part of annual

bonus, as described in the previous section.

When considering the vesting of LTI awards, it can be

distinguished between:

■ Time-based vesting awards – subject to a service

condition or deferred payout with no additional

performance conditions (e.g., deferred cash or

blocked shares); and

■ Performance-based vesting awards – with vesting

being dependent on the achievement of particular

targets.

Almost 80 percent of the analyzed companies apply

performance vesting conditions to their CEO’s long-

term incentive plans. These plans are sometimes

supplemented by time-based vesting awards. This is true

for the whole HCM DACH 70 sample, irrespective of size,

country, or industry.

Awards with time-based vestingFigure 9 illustrates the utilization of LTI instruments with time-

based vesting across different size, country, and industry

groups. Overall, restricted shares (49 percent of plans)

and blocked shares (33 percent of plans) are the most

popular time-based instruments within the HCM DACH

70. Deferred cash plans represent 16 percent of plans,

while stock options are rarely used (2 percent). Over the

last few years, stock options have become a less popular

instrument for LTI plans at the European companies.

Large companies often grant several types of LTI

awards and blocked shares are frequently used as a

complementary instrument to performance-vesting

awards. Overall, the prevalence of blocked shares increases

with the size of the company (ranging from 10 percent at

small-sizedfirmsto50percentatlarge-sizedfirms).

Restricted share plans dominate in Germany and Austria

(60 and 63 percent of plans, respectively), whereas blocked

shares are more popular in Switzerland (40 percent of

plans). Deferred cash plans are commonly offered by

Swiss and Austrian companies (27 and 25 percent of plans,

respectively). Switzerland is the only country using stock

options. Additionally, CEOs in Austrian companies are

less often awarded blocked shares than those in Swiss or

Germanfirms.

Considerabledifferencesintheapplicationoftime-based

instruments are seen at the industry level. For example,

deferredcash ismostoftenusedatfinancialcompanies

1 8 H C M D A C H 7 0

Figure 9: Time-based long-term incentive instruments

(Percentage of plans)

HCM DACH 70 (43 plans)

Large-sized (14 plans)

Mid-sized (19 plans)

Small-sized (10 plans)

Switzerland (15 plans)

Germany (20 plans)

Austria (8 plans)

Consumer Goods (6 plans)

Financials (14 plans)

Health Care (7 plans)

Industrials (4 plans)

Deferred cash Blocked shares

Restricted shares

16%

0%

16%

40%

27%

5%

25%

43%

15%

33%

50%

31%

10%

40%

35%

12%

50%

14%

14%

75%

49%

43%

53%

50%

27%

60%

63%

50%

43%

57%

25%

2%

7%

0%

0%

6%

0%

0%

14%

Stock options

1 9 H C M D A C H 7 0

(43 percent of plans) as a typical tool for deferring annual

bonus.Stockoptionsareonlypresentatfirmsinthehealth

care sector. Restricted shares are preferred over blocked

shares among companies in the financial and health

care sectors (43 and 57 percent of plans, respectively),

whereas blocked shares represent around 75 percent of

all plans utilized among industrial companies. Consumer

goods equally use blocked and restricted shares for their

time-based vesting LTI awards.

Restricted share awards commonly vest over three or

four years. A forfeiture clause, under which unvested

awards may be cancelled in the case of early employment

termination, is mentioned by near a half of restricted

share plans. Also, 20 percent of plans are subject to an

additional clawback provision (i.e. a contractual agreement

underwhichabeneficiary isobligedto repayaportionof

the compensation to the company in case of involvement

in fraudulent behavior, intentional misconduct or material

misstatementofthecompany’saccounts).Blockedshares

impose a sale and/or pledging restriction typically lasting

for three or four years. The vesting period for deferred cash

planstypicallylastthreeorfiveyears.

Awards with performance-based vestingFigure 10 summarizes the prevalence of certain LTI

instruments with performance-based vesting across

differentsize,countryandindustrygroups.

In 2016, performance shares (61 percent of plans) and

performance cash (27 percent of plans) were preferred by

the HCM DACH 70 companies for LTI plans with performance

conditions applied during the vesting period. Performance

option plans are used to a limited extent (11 percent of

plans), whereas debt instruments / carried interest plans are

offeredonlyamonglargeSwissfinancialinstitutions.

Performance shares are the most popular instrument

among all size groups, especially at the mid-sized companies

(70 percent of plans). Performance cash plans are commonly

utilized at the small-sized companies (35 percent of plans).

A split by countries also reflects the differences in

corporate governance practices within the HCM DACH 70.

Performance shares are the most widespread instrument

in Switzerland and Austria (82 and 64 percent of plans,

respectively). Instead, German companies tend to offer

their CEOs either performance cash (42 percent of plans)

or performance shares or equivalents (45 percent).

Notably, performance shares and option plans operated

by German companies are mostly based on cash

settlements, i.e. the CEO receives cash equivalent of

shares or options at the end of the performance period.

This can be explained by the drawback of share awards:

since equity-based awards are granted every year, a higher

level of dilution may be accumulated in the long-run.

Moreover, the issuing of stock options must be written

in the company bylaws and approved by shareholders.

In case of shareholder non-approval of the respective

provisions, companies must settle option awards in cash.

Performance share plans also prevail in most industry

groups. The only exception are companies in consumer

goods sector, where mostly performance cash plans are

used(67percent).Thisisamatterofcountry-specificrules

and sample composition: most performance-based plans

in consumer goods industry are operated by firms from

Germany, where the performance cash instrument prevails.

With regard to duration, the performance period for

the LTI plans commonly lasts three or four years. For

performance-based LTI plans, typically one performance

metricisused.Totalshareholderreturn(TSR)–measured

onanabsolutebasisorrelativetoaspecifiedpeergroup

/ index– tops the listof theappliedKPIs (63percentof

firms).

The payout opportunity is capped at 100 percent of

the granted award by 31 percent of the analyzed plans,

while 69 percent of plans reward the overachievement

of the performance targets and have a median payout

opportunity of up to 200 percent of the granted award.

A forfeiture clause is disclosed in about 60 percent of

plans with performance-based vesting, mainly by Swiss

and German companies. About 22 percent of analyzed

performance-based vesting plans additionally include a

clawback provision.

2 0 H C M D A C H 7 0

Figure 10: Performance-based long-term incentive instruments

(Percentage of plans)

HCM DACH 70 (64 plans)

Large-sized (27 plans)

Mid-sized (20 plans)

Small-sized (17 plans)

Switzerland (22 plans)

Germany (31 plans)

Austria (11 plans)

Consumer Goods (6 plans)

Financials (17 plans)

Health Care (8 plans)

Industrials (16 plans)

Performance cash Performance shares

Performance options

27%

29%

15%

35%

5%

42%

27%

67%

29%

0%

12%

61%

56%

70%

59%

82%

45%

64%

33%

65%

88%

63%

11%

11%

15%

6%

9%

13%

9%

0%

12%

25%

1%

4%

4%

6%

Debt-linked instruments / carried interest

2 1 H C M D A C H 7 0

Overall view on CEO compensation

HCM has elaborated a concept of “sensitivity-duration”

analysis that allows to estimate the relative risk exposure

of a compensation package, measured from the following

two perspectives:

■ Weighted average sensitivity of total direct

compensation to the long-term company

performance; and

■ Weighted average duration of total direct

compensation.

Sensitivity is assessed using a rating system that

accountsforthefinancialnatureoflong-termincentive

instruments as well as maximum payout opportunities

under LTI plans.

By definition, any immediate compensation has zero

sensitivity. As a reference point, 100 sensitivity points

are assigned to blocked shares to reflect the sensitivity

of an ordinary shareholder to company performance. The

more uncertainty there is around the LTI award payout,

the more sensitivity points will be assigned. Therefore,

performance-based long-term incentives have a higher

sensitivity than time-based awards and awards with a

larger maximum payout opportunity are considered more

sensitive.

The weighted average duration of total direct

compensation is measured based on a vesting schedule

for each element of the pay package. Any compensation

payable within 12 months as well as any annual bonus

accrued for the year under review are considered to have

zero duration.

Figure 11 depicts the relationship between the weighted

average duration of a compensation package, its

sensitivity to the long-term company performance and

the size of the compensation allocated to the Chief

ExecutiveOfficer.

A direct relationship between the amount of total

direct compensation and its duration can be observed

– larger companies tend to defer a higher proportion

of compensation for longer time periods. Generally,

CEOs “wait” from 0.9 to 1.8 years (interquartile range)

for the payout of their total direct compensation. The

median duration period amounts to 1.5 years. In 2016,

the maximum sensitivity score amounted to about 203

points, whereas the longest weighted average duration

reached 6.7 years.

The sensitivity of executive pay to long-term company

performance also increases with the size of the total direct

compensation granted and typically varies between 54

(lower quartile) and 131 sensitivity points (upper quartile).

Whenlookingatdifferentcountries,CEOcompensationin

Switzerland has a longer duration and a higher sensitivity

onaveragewhencomparedtoGermanfirms.Ontheone

hand, this is the result of a compensation structure that is

skewed towards LTI awards in Switzerland. On the other

hand, an overwhelming majority of LTI plans in Switzerland

are granted in performance shares, which have the

highest sensitivity according to the HCM methodology.

Few Austrian companies grant deferred awards to their

CEOs and these awards represent a small part of the

compensation package.

In general, industry affiliation is an important factor

explaining variation in duration and sensitivity, which is

influenced by a company’s business cycle and overall

view on sustainable performance. Health care sector

demonstrates above median sensitivity scores and longer

duration periods. This is conditioned by its competitive

and fast moving environment that requires setting

ambitious goals for the CEO, being often translated into

the use of performance-based LTI plans and possibility of

a higher payout opportunity.

The financials industry is also placed in the upper right

corner in Figure 11. This is rather determined by the

regulatory environment, requiring deferral of part of the

compensation in order to avoid excessive risk-taking on

the long run.

2 2 H C M D A C H 7 0

Sen

siti

vity

(poi

nts)

Weighted average duration (years)

Interquartile range

Interquartile range

NOVARTIS

ROCHE

LAFARGEHOLCIM

NESTLE

UBS

SWATCH GROUP

ADECCO

SAP

BMW

SCHOELLER-BLECKMANN

20

40

60

80

100

120

140

160

180

200

220

1.0 2.0 3.0 4.0

Switzerland Germany Austria

7.0

Size of a bubble corresponds to the total direct compensation of a CEO

0.00

Figure 11: Sensitivity and duration of total direct compensation

HCM DACH 70 (n=43)

2 3 H C M D A C H 7 0

Olga Beregova is a Partner with HCM International

Ltd. During her 13 years of professional experience in

consultancy she has successfully steered extensive

compensation and governance changes for Swiss and

international companies, both private and public. Her

expertise extends across multiple industries which

include manufacturing, consumer products, energy,

financial services, technology, telecommunications and

transportation. Olga Beregova holds a Master’s degree

in Finance and Capital Markets from University of Zurich

and in Linguistics from Kiev State University of Foreign

Languages.

olga.beregova@hcm.com

Kateryna Bulda has more than seven years of professional

experience in research, analytics, corporate finance and

regulatory framework. At HCM, Kateryna Bulda specializes

in the assessment of payout/risk profiles of executive

management plans, in the design and implementation of

compensation schemes for Boards of Directors, as well

as in general corporate governance matters. Kateryna

Bulda holds a Master’s degree in Financial Management

from the Kiev National Economic University, including four

semesters at the University of Konstanz. Kateryna Bulda

has also gained the title of Certified Financial Manager

from the DVFA in Frankfurt am Main, having enhanced her

expertise in asset management and capital markets.

kateryna.bulda@hcm.com

About the authors

2 4 H C M D A C H 7 0

HCM International (HCM) is a leading independent

international advisory firm specializing in the strategic

aspects of Governance, Finance, and Compensation,

with deep experience across various industries and

in the advising of boards, board committees, senior

management, and control functions.

HCM’s partners, managers, and analysts work in its

offices in Zurich, Geneva and Kiev. They are bolstered

by our global partners in the US, UK, France, Australia,

Singapore, and China, which allow us to reach all

major markets and support companies of all sizes,

from large multinationals and public institutions, to

mid-sized and smaller companies, including those

preparing for an IPO.

Zurich

Mühlebachstrasse 23/25

CH-8008 Zurich

Phone +41 44 560 33 33

international@hcm.com

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8 rue des Charmilles

CH-1203 Genève

Phone +41 22 339 88 50

geneva@hcm.com

Our mission is to support companies and other

organizations tackle the ever important question:

“How to measure, steer and allocate value creation?”

We also cover risk and compliance as these also a

ect value. The “value question” is of core interest

not only to Owners, Board of Directors and Senior

Management, but also increasingly to institutional

investors, proxy advisors, HR and control functions,

regulators, and international standard setters.

HCM is Chair of the Global Governance and Executive

Compensation Group.

About HCM International

HCM International Ltd.Mühlebachstrasse 23/25CH-8008 Zurich

Phone: +41 44 450 33 33contact@hcm.comhcm.com