As explained at the outset, the remuneration report has in the past been the subject of controversy and discussion by some of BKW’s shareholders and the general public. In particular, remuneration in the form of restricted shares has been criticised since the allocation of shares does not take account of future performance and the share price used to convert the allocation amount into a number of shares was aligned with the average share price of 2014 and 2015 (thus representing a substantial discount compared with the current share price at the time of allocation). Moreover, the shareholders have also indicated that the remuneration of the Group Executive Board is high in comparison with other companies in which the public sector has a majority stake.
On the basis of the shareholder feedback and the review into the Group Executive Board’s remuneration system that was carried out in 2019, the Board of Directors has decided to update the remuneration system as described below.
The transitional model explained earlier will apply to the CEO. Following the transition phase, the new Group Executive Board remuneration system will also apply to the CEO.
BKW is both listed on the stock exchange and has a majority stake that is held by the public sector. Nevertheless, the role of the Canton of Bern is limited to its position of shareholder, with the associated opportunities and risks that entails. BKW has neither a statutory nor an agreed mandate from the Canton of Bern, and does not benefit from any public guarantee of possible losses. The relevant market for recruitment of talent for BKW largely consists of listed industrial companies of a similar size and complexity, and not from public-sector companies. Accordingly, the BKW remuneration policy must be aligned with the policies of other listed companies in Switzerland; the remuneration practices of these companies differ considerably from those in the public sector.
At the same time, the form of the remuneration system must take account of the fact that some parts of BKW operate in a regulated environment that excludes the capacity for short-term or long-term profit maximisation. In addition, the long-term nature of investments in the Energy and Grid businesses mean that the inclusion of misleading and disproportionate short-term incentives in the remuneration structure should be avoided. The investment horizon for production and grid infrastructure is at least 30 years, if not longer. It is therefore a legitimate approach for the remuneration system to be conservative with less of a short-term perspective and to encourage long-term ties between the Group Executive Board and the company.
In all other aspects the remuneration structure adheres to the common model of listed companies and comprises a base salary, short-term variable remuneration and long-term share-based remuneration. As already mentioned, the short-term variable component is set at a comparably low level. In contrast, the share-based remuneration component has grown disproportionately in recent years, since the number of shares was calculated on the basis of BKW’s average share price in 2014 and 2015 (i. e. before the implementation of the current strategy) and the BKW share price and thus shareholder value has grown extremely well thanks to the successful strategy implementation. With effect from 2021, the remuneration structure will be modified to reflect a more balanced approach between the short-term variable and long-term share-based payments. The adjustments to the system do not have the objective of reducing salaries. Fundamentally, the targets for both of the elements are set at 30 % of the base salary. Now, however, a more performance-oriented variable component of remuneration as demanded by various shareholders and institutions has been put in place. Instead of capping the short-term variable remuneration at 100 % achievement of a target, the maximum payment can now reach up to 200 % of the target value (i. e. 60 % of the base salary). The value of the long-term variable component develops in parallel to the price of the allocated shares during the blocking period.
The Group Executive Board’s remuneration will be structured as follows:
Over recent years, the level of remuneration has been gradually aligned with the market. During its strategic transformation, BKW has changed significantly and with more than 10,000 employees has generated CHF 3,129 million in sales, and has a reported stock exchange value of more than CHF 5.2 billion. The total remuneration of the Group Executive Board has been adjusted accordingly in recent years. Nevertheless, the total remuneration of Group Executive Board members is below the market median compared with the companies described above.
As already stated, the target value for the short-term variable remuneration will be 30 % of the base salary. This represents an increase compared with the current system and will partially offset the lower allocation value of the share-based remuneration, which is described further below.
The definition of the STI is set on the basis of the budgeted operating net profit and now also on the basis of the relative return on shares. The operating net profit is calculated excluding any return from the investments in the decommissioning and disposal funds since these are managed by the funds’ management committee and are therefore not within the control of the BKW Group Executive Board. The addition of the relative return on shares as a measurement of performance also means that the interests of the management are more strongly aligned with those of shareholders, and that the performance of BKW relative to comparable companies that are included in the SMCI is also taken into account. The weighting is 75 % in favour of EBIT and 25 % for the relative return on shares.
To strengthen the dependency of the STI on performance, the disbursement factor (relative to the target bonus) is between 0 and 200 %. Any performance measurement that falls short of 75 % of the target equates to a disbursement factor of zero. A performance measurement that achieves 125 % or more of the target is rewarded by a disbursement factor of 200 %. The disbursement factor increases in a linear fashion for the performance measurements band between 75 % and 125 %. The maximum level of the STI is always 200 % of the target bonus, i. e. 60 % of the base salary. Therefore, a performance measurement of more than 125 % will not result in a disbursement of more than 200 % of the target bonus.
Furthermore, the Remuneration and Nomination Committee decided to adjust the disbursement factor calculated on the basis of the quantitative targets by a range of – 10 to + 10 percentage points. This adjustment is based on an assessment of the qualitative targets and may produce different results for different members of the Group Executive Board in exceptional cases. The qualitative target for 2021 is, in particular, the repositioning of the Energy business within the volatile European energy markets.
Once the target bonus of 200 % has been reached no further increase is possible.
At the request of the Remuneration and Nomination Committee, the Board of Directors may reduce or dispense entirely with the disbursement in exceptional circumstances, irrespective of the performance measurement. Such exceptional circumstances may arise in particular if the company’s existence is under threat and the payment of dividends or/and any profit-sharing payments due to employees are to be cancelled. In this case (exceptional situation), there is no legal entitlement to short-term variable remuneration.
The Remuneration and Nomination Committee discussed the form this remuneration component at length and agreed to continue the practice of allocating shares with a three-year blocking period and without ties to future performance. The reason for this decision lies in BKW’s remuneration policy, the primary aim of which is to make a link between company performance, shareholder interests and remuneration. At the same time, it is a fundamental belief at BKW that the remuneration system should be simple and stable, i. e. that it should not constitute significant leverage so that instead the Group Executive Board can focus on the company’s long-term success. This is fully in line with the circumstances of a company, where parts of its activities take place in a regulated environment and are thus not fully capable of pursuing maximum profits. The performance components are measured against the trajectory of the share price since the shares are subject to a three-year blocking period and the Group Executive Board is thus rewarded for a rising share price. There is no additional leverage effect to avoid false incentives.
The allocation amount will now use the average price of the BKW share during the two previous years before the point of allocation for the conversion into a number of shares (instead of using the average price from 2014 and 2015 as was previously the case). The allocation amount will be 30 % of the base salary. This redesigned structure for the long-term variable remuneration does, however, result in a reduction in this proportion of the remuneration compared with previous years. Since the purpose of the system review was not to achieve salary reductions given an equivalent level of performance and success, this reduction will be offset by increases in base salary and short-term variable remuneration.
The allocation of shares is done annually, in the first quarter of the calendar year that follows the assessment year. Shares are transferred to the plan participants following the decision of the Board of Directors on disbursement of a dividend. There shall only be an entitlement to an allocation of shares if the Board of Directors proposes to the General Meeting that a dividend be paid from the profits of the assessment year. If no dividend is to be paid owing to economic reasons, the entitlement to an allocation of shares for the corresponding year is lost in full.