Architecture of Compensation of the Members of Group Management

The compensation for Members of Group Management includes the following elements:

• fixed base salary;
• variable compensation: short-term and long-term incentives;
• benefits and perquisites.

Annual base salaries are established based of the following factors:

• scope, size, and responsibilities of the role, skills required to perform the role;
• external market value of the role;
• skills, experience, and performance of the individual in the role.

To ensure market competitiveness, base salaries of the Members of Group Management are reviewed every year, taking into consideration the company’s capacity to pay, benchmark information, market movement, economic environment, and individual performance.

The performance bonus is a short-term variable incentive, designed to reward the collective performance of the Group and its regions and the individual performance over a time horizon of one year. This variable compensation allows executives to participate in the Group’s success, while being rewarded for their individual performance.

The performance bonus target (i.e., bonus at 100% target achievement) is reviewed annually and is expressed as a percentage of base salary. It amounts to 100% for the CEO and ranges from 58% to 100% for the other Members of Group Management. For the CEO and the four Members of Group Management with a global role, Group performance accounts for 100% of the performance bonus. For the other three Members of Group Management responsible for a region, Group performance accounts for 80% of the performance bonus, while the achievement of regional objectives accounts for 20% of the performance bonus.

The performance measures for the Group are proposed by the Nomination and Compensation Committee and approved by the Board of Directors. The Group performance is measured in two ways:

• The relative performance of the Group compared to a peer group of companies, accounting for 60% of the performance bonus for all Members of Group Management. The relative performance includes the EBIT (earnings before interest and tax) improvement during the year with 40% weight and net sales growth during the year with 20% weight;
• The absolute performance of the Group against own-set targets. The absolute performance consists of the reduction of GHG emissions per ton sold with a weight of 10%, a safety target with a weight of 10% for all Members of Group Management, as well as an absolute EBIT target at Group level, with a weight of 20%, for all Members of Group Management with a global role (functional roles).
  

Relative Group performance

Relative EBIT and net sales performance are measured based on an evaluation provided by an independent consulting firm, Obermatt. This benchmark compares and ranks Sika against the performance of a selected peer group of 22 companies, all industrial firms which were chosen because they have a comparable base of products, technology, customers, suppliers, or investors, and are thus exposed to similar market cycles.

The intention is to reward Group Management based on the relative performance of the Group because absolute performance may be strongly impacted by market factors that are outside the control of management.

For both EBIT and net sales improvements, the objective is to reach the median performance of the peer group, which corresponds to a 100% payout factor. There is no payout for any performance below the lowest quartile of the peer group. Performance at the lowest quartile of the peer group corresponds to a payout factor of 50%. Performance at the uppermost quartile leads to a 150% payout factor, and being the best in the peer group leads to a 200% payout factor. Any payout factor between those levels is interpolated linearly.

Absolute Group performance

The sustainability objectives recognize the importance of mitigating the company’s impact on the environment and to encompassing sustainability in the measurement of the performance of Group Management. It is an objective to reduce GHG emissions (scopes 1 and 2) as well as to promote a safety culture and to reduce accidents by increasing safety measures. For 2023, the objective was a 4% reduction of GHG emissions per ton sold compared to 2022 GHG emissions per ton sold and to achieve a reduction of the Lost Time Accident (LTA) rate by 10% compared to 2022. For 2023, the individual performance component for People & Projects was discontinued and replaced with the safety target.

The Group EBIT objective is measured as a year-on-year improvement. For 2023, the objective was to improve Group EBIT by 15% compared to 2022.

The region and individual performance include performance objectives that are set as part of the annual performance management process. For the CEO and for the other Members of Group Management, they are reviewed and approved by the Nomination and Compensation Committee.

Region performance (20% of the overall performance bonus) includes performance objectives linked to the region under responsibility. These objectives either contribute to the top-line growth, bottom-line profitability, or the efficient management of the company’s capital. In 2023, the Nomination and Compensation Committee decided to focus on EBIT (expressed as an improvement versus previous year).

Individual performance (0% of the overall performance bonus in 2023, but 10% in previous years and again in 2024) includes performance objectives in the area of people management or key projects (People & Projects).

At the beginning of the following year, the actual performance achievement is compared with the objectives that were set for the business year. The level of achievement for each objective corresponds to a payout percentage for that objective, which is always between 0% and 200%.

The overall bonus payout is capped and cannot exceed 150% of the performance bonus target. The performance bonus is paid out in March of the following year.

For 2024, the structure of the performance bonus will be adjusted to reflect the Strategy 2028. The Group performance will account for 70% of the performance bonus with 20% based on net sales growth (unchanged), 40% based on relative EBITDA improvement (previously based on relative EBIT improvement), 10% on safety with reduction of Lost Time Accident (LTA) rate (unchanged), and 20% based on Group EBITDA (previously EBIT) for functional roles. The GHG emissions reduction will be included in the LTI plan and will therefore be discontinued in the STI. For regional roles, 20% of the performance bonus will be based on regional EBITDA (previously EBIT). Finally, for all Group Management roles, 10% of the performance bonus will be based on individual objectives (suspended in 2023).

Sika’s compensation policy is designed to also align a significant portion of compensation of Group Management to the Group’s long-term performance and to strengthen Group Management’s alignment with shareholders’ interests. The LTI target is reviewed annually and amounts to 100% of the annual base salary for the CEO, and ranges from 58% to 100% for the other Members of Group Management.

The LTI plan is a performance share unit (PSU) plan. At the beginning of the vesting period, a number of PSUs are granted to each Member of Group Management. The PSUs vest after a period of three years, conditionally upon fulfilling two equally weighted performance conditions, the ROCE, and relative TSR. The ROCE objective is determined at the beginning of the vesting period by the Board of Directors and is measured at the end of the vesting period as the average ROCE of the first year, the second year, and the third year of the vesting period. Acquisitions are excluded from the ROCE calculation in the year of acquisition and for two additional calendar years. The relative TSR is measured in relation to a peer group as a percentile rank and the objective is to reach the median of the peer group. The peer group consists of all companies of the peer group used for the performance bonus as disclosed on page 186, with one exception: as Hilti is not listed, it is not included in the peer group for the LTI.

For both performance conditions, the maximum achievement level is capped at 200%; however the overall vesting level for the LTI is capped at 150%. This is in line with the compensation philosophy of the company to align pay with performance and to keep the incentive plan leverage at a reasonable level. The final share allocation is determined after the three-year performance period, based on the following vesting rules:

The shares are allocated at their market value (closing price at grant date on the SIX Swiss Exchange), in the month of the AGM in the year following the three-year vesting period. In some countries where the allocation of shares may be illegal or impractical, the award may be settled in cash after the performance period.

In the event of termination of employment, the unvested PSUs are forfeited except in case of retirement, disability, death, change of control, or liquidation. In the event of termination due to retirement or disability, the unvested PSUs vest at the normal vesting date, prorated for the number of months that have expired from the grant date until the termination date and based on the effective performance. In the event of a termination of employment due to death, liquidation, or a change of control, unvested PSUs are subject to accelerated vesting, prorated for the number of months that have expired from the grant date until the termination date and based on an achievement of 100%.

For 2024, the structure of the LTI will be adjusted to reflect the Strategy 2028. The performance conditions will include ESG targets with a weight of 20% consisting of a GHG emissions reduction target (scope 1 and 2) with 10% weight, a water discharge reduction target with 5% weight, and a waste disposal reduction target with 5% weight. The other performance indicators will continue to be the relative TSR and the ROCE, each with a weighting of 40%. ROCE will be measured relative to peer companies, similar to relative TSR.

Clawback and malus provisions apply to both the performance bonus and the long-term incentive plan. In the case of financial restatement due to non-compliance with accounting standards or fraud, and/or in the case of violation of law or of internal rules by a Member of Group Management, the Board of Directors may deem any performance bonus payment and/or unvested PSUs to be forfeited (malus provision) or may seek reimbursement of any paid performance bonus and/or allocated shares under the long-term incentive (clawback provision) within a period of three years after the year of restatement or of the fraudulent/non-compliant behavior.

The Members of Group Management are required to own at least a minimum multiple of their annual base salary in Sika shares within five years of their appointment to Group Management, as set out in the table below.

In the event of a substantial rise or drop in the share price, the Board of Directors may, at its discretion, amend that time period accordingly.

To calculate whether the minimum holding requirement is met, all vested shares are considered, regardless of whether they are blocked or not. However, unvested PSUs are excluded. The Nomination and Compensation Committee reviews compliance with the share ownership guideline on an annual basis.

As Group Management is international in its nature, the members participate in the benefits plans available in the country of their employment contract. Benefits consist mainly of retirement, insurance, and healthcare plans that are designed to provide a reasonable level of protection for the employees and their dependents in respect to the risk of retirement, disability, death, and illness. The Members of Group Management with a Swiss employment contract participate in Sika’s pension plans offered to all employees in Switzerland. These consist of the pension fund of Sika (“Pensionskasse Sika”), in which base salaries up to an amount of CHF 139,650 per annum are insured, as well as a supplementary plan, in which base salaries in excess of this limit are insured up to the maximum amount permitted by law. Sika’s pension funds exceed the legal requirements of the Swiss Federal Law on Occupational Retirement, Survivors, and Disability Pension Plans (BVG). Members of Group Management under foreign employment contracts are insured commensurately with market conditions and with their position. Each plan varies in line with the local competitive and legal environment and, at a minimum, in accordance with the legal requirements of the respective country.

Moreover, an early retirement plan is in place for members of the top management of Sika. The plan, entirely financed by the employer, is administered by a Swiss foundation. Beneficiaries may opt for early retirement from the age of 60, provided that they have been in a top management position for at least five years. Benefits under the plan are twofold:

• Fixed pension payment until the age of legal retirement. The amount of pension depends on the last fixed salary and the actual age at early retirement.
• Partial financing of the reduction in the regular pension due to early retirement. The amount, which may be received as a life-long pension payment or as a capital contribution, depends on the actual age at early retirement and benefits already accrued in existing pension plans. This portion of the plan is only applicable to beneficiaries insured under a Swiss pension plan.
  

Members of Group Management are also provided with certain executive perquisites, such as a company car allowance and other benefits in kind, according to competitive market practice in their country of employment. The monetary value of these other elements of compensation is evaluated at fair value and is included in the compensation tables below.

The Members of Group Management are employed under employment contracts of unlimited duration and are all subject to a notice period of one year. Members of Group Management are not contractually entitled to termination payments, or any change of control provisions, other than the early vesting of PSUs mentioned above. Their contract may foresee non-competition provisions that are limited in time to a maximum of two years and which allow compensation up to a maximum of six months.