Nomination and Compensation Committee Chairman’s Letter

Christoph Mäder, Chairman of the Nomination and Compensation Committee (portrait)

Christoph Mäder
Chairman of the Nomination and Compensation Committee

Dear Stakeholders,

In my role as Chairman of the Nomination and Compensation Committee (NCC) and on behalf of its fellow members, I am pleased to introduce our 2019 Remuneration Report, which adheres to the Swiss Ordinance Against Excessive Compensation for Stock-Exchange-Listed Companies. In this report, we outline the current compensation policies and the decisions made in relation to 2019 compensation for the Executive Committee of Lonza.

This year we have taken further steps to enhance our reporting on remuneration principles and outcomes. It includes: 1) my summary letter; 2) a visual “At a Glance” section presenting company performance and remuneration outcomes; 3) the use of more tables throughout the report to further support the transparency of our remuneration disclosure; and 4) consistent with our commitment in 2018, we present for the first time, retrospective target disclosure for the 2019 STIP and 2017 LTIP.

As in previous years, 2019 saw active engagement with our shareholders, the financial regulators and proxy advisors to ensure we continue to develop an open and transparent dialogue. Our discussions covered matters raised at the 2019 Annual General Meeting (AGM) following the publication of the 2018 Annual Report, as well as the changes to the Executive Committee and overall Company developments.

No changes were made to the Executive Committee Compensation Policies in 2019. The composition of the Executive Committee did however change during 2019. Mr. Funk, previously the Chief Operating Officer (COO) Lonza Pharma & Biotech (LPB), became the new Chief Executive Officer (CEO) as of 1 March 2019, following the step down of Mr. Ridinger from the role of CEO on 28 February 2019. Also as of 1 March 2019, Mr. Stoffel, previously Head of Lonza Pharma & Biotech (LPB) Strategic Growth Projects and IbexTM became Chief Operating Officer (COO) Lonza Pharma Biotech & Nutrition (LPBN) and a member of the Executive Committee. Upon both appointments, the NCC determined their compensation as per the Executive Committee Compensation Policies. Mr. Helemann retired from his role as Group Chief Human Resources Officer (CHRO) and Executive Committee member on 31 March 2019. Furthermore, it was announced in November that Mr. Funk would step down as Chief Executive Officer. Until a permanent successor is found, Mr. Baehny, the Chairman of the Board of Directors, took on the additional responsibility of Chief Executive Officer ad interim and Executive Committee member, leading the Company on a temporary basis until a successor is in place, for which a search commenced in 2019. In line with the Swiss Code of Best Practice for Corporate Governance, I was appointed Lead Independent Director by the Board of Directors.

As outlined in the 2018 AGM invitation, from July 2018, the NCC proposed that base salary levels for existing Executive Committee members would not be increased for three years. Consistent with this decision, in 2019, with the exception of promotional increases, no changes to base salary were made for Executive Committee members. The Short-term Incentive Plan (STIP) and Long-term Incentive Plan (LTIP) target award levels also remained unchanged in 2019.

We delivered strong full-year 2019 Group results, resulting in on target performance outcomes in 2019. This reflects mixed performance across the segments whereby the Pharma Biotech & Nutrition businesses performed very well with above target outcomes, and the Specialty Ingredients business fell below the expected target performance. The Lonza Group performance outcomes against all three performance targets (sales, CORE EBITDA and operational free cash flow) resulted in the STIP paying out at 102.24% of target for the Executive Committee. Overall Group performance in 2019 also had an impact on the 2017 LTIP, which vested at the beginning of this year at 161.00% of target, as a result of strong CORE EPS and CORE RONOA performance over the three year performance period.

As per our commitment to set our long-term incentive performance target above Mid-Term Guidance 2022 and in line with Lonza’s future growth ambitions, the threshold performance targets for the 2019 LTIP award were set at approximately 112% and 110% of the equivalent threshold target for the 2018 LTIP, for CORE EPS and ROIC respectively. This was first communicated in our 2019 AGM invitation and we present detail on this again. As communicated, CORE EPS and ROIC remain the most effective long-term measures of performance for Lonza. CORE EPS aligns the Executive Committee with the interests of shareholders and ROIC, which is the return the company generates on its investments (for example IbexTM), and effectively measures the outcomes of the decisions taken by Executive Committee members and senior management, over the course of the three year LTIP performance period.

Finally, during the year the NCC determined that there would be no change to Board of Director fee levels for the period AGM 2019 to AGM 2020, compared to the previous period.

On behalf of the NCC, we would like to thank our shareholders again for their continued dialogue, feedback and input. We reiterate our commitment to ensuring that the remuneration practices for the Executive Committee are aligned with our future strategy and ensure a strong on-going competitive market position. We look forward to further conversations in the coming year.

Yours sincerely

Christoph Mäder
Chairman of the Nomination and Compensation Committee

At a Glance

Lonza’s approach to compensation is designed to attract and retain talent with competitive compensation programs. Our compensation programs are performance-based, linking employee rewards with company and individual performance. Executive compensation is aligned with the short-term and long-term objectives of the wider business; results are measured based on achievement of specific short and long-term objectives. Our performance objectives are defined to achieve a balance between short-term and long-term outcomes. We encourage strategic decisions that drive competitive advantage but discourage executives from taking unnecessary or excessive risks that may threaten the financial health, reputation or sustainability of the Company.

2019 Executive Committee Compensation Policy Table

Annual base salary (ABS)

Benefits

STIP

LTIP

Shareholding guidelines

Fixed amount paid in return for the day-to-day duties and responsibilities performed

Post-employment and other benefits to complement Lonza’s total compensation offering

Short-term variable compensation component, rewards for annual company and individual performance

Long-term variable compensation component, rewards for long-term company performance. Aligns interests of the Executive Committee with Shareholders

Shareholding guideline to align interests of the Executive Committee with Shareholders

Type of compensation

 

 

 

 

100% cash

Pension and other benefits such as company car and expense allowances and insurances

100% cash; or 50% cash and 50% equity, if shareholding guidelines have not been met

100% equity vesting subject to a three year performance period

 

Levels

 

 

 

 

Consideration for

  • experience of individual;
  • direct role responsibilities; and
  • market levels observed at companies in the relevant industry to Lonza

Aligned with company wide and country specific benefits policies

Target levels:

Target levels:

 

 

 

 
  • CEO — 100% of ABS
  • Other EC — 75% of ABS


Minimum = 0% of target
Maximum = 200% of target
  • CEO — 150% of ABS
  • Other EC — 125% of ABS


Minimum = 0% of target
Maximum = 200% of target
  • CEO — 300% of ABS
  • Other EC — 200% of ABS


To be accumulated over 5 years

Performance measures

 

 

 

 

 

 

May be a mix of financial and individual measures, typically with weighting of 80% and 20% respectively

2019 was based on 100% financial measures

50% CORE EBITDA1
31.25% Lonza sales
18.75% Operational free cash flow

50% CORE EPS1
50% ROIC

 

1

CORE results exclude exceptional expenses and income related to e.g. restructuring, environmental-remediation, acquisitions and divestitures, impairments and amortization of acquisition-related intangible assets, which can differ significantly from year to year

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2019 Performance Outcomes
2019 Performance Outcomes STIP (stacked bar chart)

1 Includes 10% CORE EBITDA, 6.25% Lonza Sales and 3.75% operational free cash flow distributed from 20% individual performance element

2019 Executive Committee Total Remuneration Paymix
2019 Executive Committee Total Remuneration Paymix (stacked bar chart)

1 Compensation received by Executive Committee members who departed during 2019 (Mr. Ridinger and Mr. Funk) for the period following their departure from the Executive Committee. This includes cash payments (base salary, other benefits and STIP) and share awards (LTIP) which were made in line with contractual obligations and applicable LTIP plan rules

Board of Directors Compensation Board of Directors Annual General Meeting (AGM) 2019 to 2020 (excl. social security contributions)

In CHF

Base
Annual Fee

Committee Membership Fee

Committee Chairman Fee

Chairman of the Board of Directors1

600,000

–

–

Board of Directors Member2

200,000

40,000

80,000

 

The additional responsibilities of Vice-Chairman and Lead Independent Director3 do not attract any additional fees

Form of payout

50% in Lonza Group shares and 50% in cash. This is paid in quarterly installments during the 2019 financial year.

1

The compensation of the Chairman of the Board of Directors includes their compensation as a member of the Innovation and Technology Committee. The additional compensation for the role of Chief Executive Officer ad interim held during 2019 is included in the compensation of the Executive Committee

2

The compensation of the committee chairmen amounts to CHF 280,000 and includes the committee membership fee. In the case of multiple committee memberships, this attracts one committee membership fee only

3

The roles and responsibilities of such Lead Independent Director are consistent with sect. 19 para. 2 of the Swiss Code of Best Practice for Corporate Governance, requiring adequate control mechanisms, and commensurate to such position

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