Principles
The principles for remuneration to Sandvik’s senior executives were adopted at the Annual Meeting of Shareholders in 2007. They are designed so as to ensure that Sandvik from a global perspective can offer remuneration at the market rate, which can attract and retain qualified members.
Components of remuneration
The total remuneration package is distributed between fixed salary, annual variable salary, long-term variable salary, pension and other benefits, e.g. company car, free residence, health insurance and termination benefits. It is intended that the components together shall form a well-balanced remuneration and benefit program that reflects the individual’s performance, responsibility as well as the Group’s earnings trend.
Preparation and decision-making process
The Board’s Remuneration Committee prepares issues relating to Executive Group Management’s remuneration. The Committee met four times during the year. Issues dealt with included the distribution between fixed and variable salary, the size of any salary increases and long-term variable salary. The Board has discussed the Committee proposals and has decided guided by such proposals.
The Board based on the Remuneration Committee proposals decided the remuneration of the President for the year 2007. The President decided remuneration to other senior executives after consultation with the Remuneration Committee. The Remuneration Committee performed its task supported by expertise on remuneration levels and structures. For information on the composition of the Committee, see page 92.
Remuneration to the Board and senior executives
The Board
Fees to the Chairman and other external Board members are paid in accordance with the decision at the Annual Meeting of Shareholders. No board fees are paid to the President and the employee representatives.
President and other senior executives
The remuneration package for the President and other senior executives comprise fixed salary and variable salary with two components: an annual component based on achieved performance goals and a long-term component linked to the Company’s growth, profitability and capital efficiency over a three-year period. In addition, they receive other benefits and pension. Other senior executives are those who, together with the President, make up the Group Executive Management, the detailed composition of which is set out on page 98.
Salary
The fixed salary, which is individual and differentiated considering responsibility and performance, is determined considering market conditions and is reviewed each year.
The annual component of variable salary is based on the achievement of targets that are determined each year. The targets are mainly related to the Company’s financial results but also to measurable targets within each individual’s area of responsibility. Members of Group Executive Management may receive an annual variable salary corresponding to 50–75% of the fixed salary. For information on the long-term variable salary, see below.
Pension
The pension system for members of Group Executive Management is comprised of three parts: a basic part in the form of the ITP Plan with pension age 65, a supplementary defined-contribution scheme, and a defined-benefit pension between age 60–65 for the President and between age 62–65 for the other members.
Termination benefits
In the event Sandvik terminates the employment, and provided the termination is not caused by gross negligence, the executives are entitled to severance pay. The severance pay equals 12–18 months’ salaries for persons aged less than 55 and 18–24 months’ pay for persons aged 55 or more. Any other earned income is offset against the severance pay.
In accordance with the decision at the annual meeting of shareholders, the total fee to the external directors elected at the meeting amounts to SEK 4,250,000. Of this amount, SEK 1,275,000 (on an annual basis) is payable to the chairman of the board (Clas Åke Hedström), SEK 850,000 to the deputy chairman (Anders Nyrén) and SEK 425,000 to each of the other external board members (Georg Ehrnrooth, Sigrun Hjelmquist, Egil Myklebust, Fredrik Lundberg och Hanne de Mora).
In addition to these amounts, the annual meeting resolved that an additional fee should be paid for the committee work to committee members not employed by the Company in the amount of SEK 100,000 to each of the members of the Audit Committee (Anders Nyrén, Fredrik Lundberg and Sigrun Hjelmquist) and SEK 50 000 to each of the members of the Remuneration Committee (Clas Åke Hedström, Egil Myklebust and Georg Ehrnrooth).
Beside the pension obligation to the chairman of the board, there are no pension obligations to other board members. At 31 December 2007, the pension obligation to the chairman amounts to SEK 51,995,266 and relates to a defined benefit obligation which is not secured by an insurance policy and which refers to his period of services as president of Sandvik AB.
Effective 1 January 2007, President and CEO Lars Pettersson is paid an annual fixed salary of SEK 6,500,000, and receives benefits in the form of free residence and company car. In addition, a variable salary of maximum 75% of the fixed salary is paid. The variable salary for 2007 is estimated at SEK 3,333,000.
Lars Pettersson is entitled to retire with pension at age 60. His pension between age 60–65 will amount to 65% of the fixed salary up to 30 price base amounts and 50% of fixed salary in excess of 30 price base amounts. No pension insurance policy is taken out for his pension through age 65 and at 31 December 2007 the obligation for pension earned through that date amounts to SEK 12,947,130. His ITP Plan and a supplementary defined-contribution plan under which the Company each year contributes 40% of the fixed salary in excess of 20 price base amounts make up pension from age 65. Moreover, an agreement has been reached covering severance pay in the event that the Company terminates the employment. The severance pay equals 18 months’ fixed salary in addition to the six-month notice period.
For the other members of Group Executive Management, pension age is 62. Pension between age 62–65 will amount to 65% of fixed salary up to 30 price base amounts, 50% of fixed salary between 30–50 price base amounts, and 25% of fixed salary in the interval 50–100 price base amounts. No pension insurance policies have been taken out for pensions through age 65 and at 31 December 2007 the obligation for pensions earned through that date amounts to SEK 15,111,186.
The pension from age 65 to the other members of Group Executive Management is made up by the ITP Plan and a supplementary defined-contribution plan under which the Company each year contributes 20–30% (depending on age) of fixed salary portions in excess of 20 price base amounts. Moreover, agreements have been reached covering severance pay in the event that the Company terminates the employment. The severance pay equals 12–18 months’ fixed salary in addition to the six-month notice period. For both the President and other members of Executive Group Management, any earned income is offset against the severance pay.
Profit sharing
To promote a behavior that is favorable to the Group’s long-term development and also to stimulate continued employee loyalty, Sandvik since 1986 has a profit-sharing system for all employees in wholly-owned companies in Sweden. As from 2007, the system has been modified in order to increase transparency and elasticity and to better relate the system to the Company’s goals. Under the modified system, the maximum allocation may be higher than before, but cannot exceed SEK 250 M, and also the requirements for maximum allocation have been raised. The Group’s return during 2007 implied an allocation of SEK 238 M to the profit sharing foundation.
Share-based payments
As part of the total remuneration package, a share-based program was established in the year 2000 to offer a long-term variable salary to some 350 international executives and specialists in the Group. The program was based on an annual allocation of personnel options on Sandvik shares with a lifetime of five years and the right to exercise after three years, conditional upon continued employment. The allocation was based on Sandvik’s return on capital employed during the preceding year. While the grant as such was free of charge, the option holder must pay an exercise price for the shares. The program is based on existing shares and, therefore, does not require the issue of new shares.
Allotments under the program were made during years 2000–2004. During 2007, it was possible to exercise options granted in years 2002, 2003, and 2004.
The expense for the share-based payments, including related social security costs, recognized in the 2007 income statement was SEK 231,545.
Under a swap agreement entered into with a bank, the Company has secured the acquisition of 9,000,000 Sandvik shares (after the 5:1 split decided at the Annual Meeting of Shareholders in 2005) at a price of SEK 46.80. Of that number, 1,842,605 shares were acquired during 2007 (2,677,847 shares during 2006). In total, 7,905,987 shares have been acquired under the agreement. Under a call option fully utilized during 2006, additionally 270,000 shares (before the split) had been secured at a price of SEK 267.50. These measures limit the effects of future increases in the market price of the Sandvik share on the Company’s costs for the program and during 2007 these measures had a positive effect on results of SEK 54,549,000. Accordingly, the net effect of the share-based program and related financial arrangements during 2007 increased results by SEK 54,317,455.
Long-term variable salary
In 2006, the Board decided to implement as a long-term variable salary a cashsettled share-based program. Based on a common goal perception for executives, specialists and shareholders, the program shall form a link to future performance goals aimed at the long-term enhancement of the value of the Company. Overal common Group and business area focus on and governing towards profitable growth effect this. An additional purpose is to improve the possibilities to recruit and retain key employees in the Group.
The 2006 program runs for thee years and is settled in 2009. Under the program, there is a direct link between performance, value added, and remuneration.There is an annual maximum outcome related to the participant’s fixed salary in the third year’s December month. Some 350 Sandvik employees participate in the program. The outcome is conditional upon meeting measurable goals established by the Board for certain key ratios that create shareholder value linked to the Company’s growth, profitability and capital efficiency over a three-year period. For members of Group Executive Management, the maximum long-term variable salary can amount to 45–50% of the annual fixed salary. The estimated cost for the program over the three-year period, after adjustment of the basis for the calculation and of salary assumptions, amounts to SEK 151 M. Through 2007, two thirds of that amount has been charged to earnings.
In 2007, the Board decided to implement a corresponding cash-settled program structured as described above. The 2007 program runs for a three-year period and will be settled in 2010. The total cost for that program is estimated at SEK 169 M and one third of that amount was charged to earnings in 2007. |