Remuneration principles for the Board of Management

Wärtsilä's remuneration policy is designed to attract, retain and motivate executives by providing compensation solutions that reward them for their performance in delivering business results.

The remuneration arrangements for the Board of Management consist of fixed and variable, performance related, pay as follows:

totalreward

Fixed pay

The fixed remuneration paid to the President & CEO and to the other members of the Board of Management consists of a monthly base salary and fringe benefits. Base salaries are reviewed annually taking into account company and individual performance and market conditions. Benefits include a company car, private medical insurance and participation in a company pension scheme.

The President & CEO and members of the Board of Management participate in company specific pension schemes in addition to any statutory requirements. The nature of the supplementary pension schemes and retirement ages vary and are generally based on the retirement scheme of the national social security system to which the person in question belongs, and are either defined benefit or defined contribution based. The President & CEO participates in a defined contribution based system with a company contribution comprising 20% of the salary.

Variable pay

The Board of Directors determines the incentive schemes for the Board of Management and the principles underlying them. The Board of Directors also decides on other possible long-term incentive schemes for senior management, unless they are by law determined by the Annual General Meeting. The Board of Management decides on bonus schemes for other directors and managers.

Short-term incentive schemes
The Group operates a bonus scheme, which is implemented globally and is designed to provide incentives for achievement of and reward for delivery of the short-term business plan. The bonus is based on the Group's profitability and agreed personal targets. Around 3,000 directors and managers are covered by this scheme.

For the President & CEO and the Board of Management, performance is based on the achievement of the company's profitability and other financial targets for the financial year, as set by the Board of Directors. The short-term incentive opportunity is capped at 100% of the annual base salary for the President & CEO, and 65% of the annual base salary for the other members of the Board of Management. Bonuses are paid in cash shortly following the year-end.

Wärtsilä's employees also participate in bonus or profit-based incentive schemes. These are applied in the majority of countries where Wärtsilä operates according to that country's legislation, or they take the form of local bonus or profit-sharing schemes. All in all, 80% of the company's employees are covered by the Group's bonus schemes and various other performance-related incentive schemes.

Long-term incentive scheme
Around 100 senior managers, including the President & CEO and the Board of Management, participate in Wärtsilä's long-term incentive scheme.

The objective of the long-term incentive scheme is to align the interests of senior management with those of Wärtsilä’s shareholders by creating a long-term equity-related interest for the participants. In so doing this promotes shareholder value creation and drives a long-term performance culture in Wärtsilä.

The long-term incentive scheme has a three year performance period. Under the scheme, participants are awarded "bonus rights". The value of a bonus right at the end of the performance period is based on the growth in value of the share price between the three month period immediately preceding the performance period and the last three months of the performance period. The end share price may include a value for part or all of the normal and extraordinary dividends paid by the Wärtsilä Corporation during the performance period.

Valuation of the bonus rights:

valuation_en

To ensure an appropriate level of reward, an upper limit is set for each award cycle, capping the maximum value for each bonus right. The bonus rights are paid-out in cash, but the President & CEO and the Board of Management members are expected to acquire Wärtsilä shares with 50% of the net value received until they have achieved their required share ownership level.

Share ownership policy

Each Board of Management member is expected to accumulate and, once achieved, maintain a share ownership in Wärtsilä that at least corresponds to the individual’s annual gross base salary.

Contractual terms for the President & CEO

The base salary of the President & CEO is EUR 785,000 p.a. He is entitled to participate in the short- and long-term incentives schemes according to the terms and conditions described above. The President & CEO is eligible to take retirement upon reaching the age of sixty-three (63). His pension scheme is determined according to a defined contribution based system. The retirement pension contribution is equivalent to 20% of the annual salary. Remuneration paid to the President & CEO if dismissed by the company corresponds to 18 months’ salary plus a six months’ period of notice salary.

Remuneration of the Board of Management

Board of Management's total remuneration in 2017

TEUR
Board of Management Salary and
short-term
benefits
Pension
contributions
Short-term
incentives1
Long-term
incentives2
Total
Jaakko Eskola, President & CEO 785 156
295 410
1 645
Pierpaolo Barbone, President, Services and Deputy to
the CEO
425 88
105
410
1 028
Other members of the Board of Management 2 162 493 441 1 587 4 863

1 Relates to the annual bonus for 2016 performance, which was paid in 2017
2 Relates to the 2013 long-term incentive cycle, which was paid in 2017

Short-term incentive schemes

Board of Management's performance target structure for the short-term incentives is as follows:

shortterm

A sliding scale of targets was set for each measure.

Short-term incentive for 2016 performance
Performance against the group targets was as follows:

shortterm2016

The bonus paid-out, on average, at 50% of the maximum for the Board of Management, and 50% of the maximum for the President & CEO.

Short-term incentive for 2017 performance
The same performance measures and weightings apply to the annual bonus for 2017 performance, which will be paid in 2018. Performance against the group targets was as follows:

shortterm2017

Bonuses for 2017 will pay-out, on average, at 35% of the maximum for the Board of Management, and 31% of the maximum for the President & CEO. The bonuses will be paid in March 2018.

Short-term incentive for 2018 performance
There are no proposed changes to the operation of the short-term incentive plan for 2018. The performance measures, weightings and maximum limits will be the same as those applying in 2017.

Long-term incentive schemes

The table below sets out details of the realised and outstanding awards under Wärtsilä's long-term incentive scheme. The scheme applies to Wärtsilä’s senior management, consisting of approximately 100 directors, including the Board of Management. The value delivered is based on the share price development during the three-year performance period.

Performance period 2014-2016 2015-2017 2016-2018 2017-2019
Number of bonus rights granted 1 846 000 2 076 000
1 962 000
2 139 000
Starting share price, EUR 37.05 44.25
47.47
48.57
Measurement period for comparison
share price
Q4 2016 + 50% of
dividends paid
Q4 2017 + 100% of
dividends paid
Q4 2018 + 100% of
dividends paid
Q4 2019 + 100% of dividends paid
Maximum value per bonus right, EUR 10.00 10.60
13.84
18.21
Final comparison share price, EUR 42.17 60.10
-
-
Final value per bonus right, EUR 5.12 10.60 - -
Payment date February 2017 February 2018 February 2019 February 2020

The bonus rights are paid-out in cash, but the President & CEO and the Board of Management members are expected to acquire Wärtsilä shares with 50% of the net value received until they have achieved their required share ownership level.

In January 2018, the Board of Directors decided on the long-term incentive plan for 2018-2020. The plan operates according to the same principles as in the previous years.

Board of Management's share ownership in Wärtsilä on 31 December 2017

Board of Management No. of shares
Jaakko Eskola 8 481
    Change in 2017 2 061
Pierpaolo Barbone 7 277
    Change in 2017
1 677
Päivi Castrén 4 933
    Change in 2017 963
Javier Cavada Camino 0
    Change in 2017 0
Kari Hietanen 5 211
    Change in 2017 937
Roger Holm 0
    Change in 2017 0
Atte Palomäki 4 831
    Change in 2017 962
Marco Ryan 0
    Change in 2017 0
Marco Wirén 4 905
    Change in 2017 1 265


Evaluation

The Board of Directors monitors the Group’s short- and long-term incentive schemes and evaluates the achievement of the targets on which they are based. The incentive schemes for 2017 were found to be well balanced and in accordance with market practices. The Board of Directors was satisfied that the rewards paid during the year were appropriate given the company's performance.

Further information on Board of Management remunerations can be found in the Consolidated Financial Statements, Note 28. Related party disclosures.


Related information:

Salary and remuneration report

© 2018 Wärtsilä