Remuneration principles and policy for the Board of Management

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

The remuneration mix for the Board of Management consists of fixed and variable, performance related, pay. The objective is to have a good balance of rewarding elements. These comprise a fixed pay level guaranteed to be market competitive, supported by short- and long-term incentive schemes to drive company performance and to reward accordingly.

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 the company’s and the individual’s performance, and the market conditions.

The members of the Board of Management are provided private medical insurance and life insurance. They are also offered a company car benefit. Taking into consideration Wärtsilä's emphasis on environmental responsibility, hybrid or low emission cars are recommended.

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. They 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.

Variable pay

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 financial targets, business specific targets, as well as agreed team and personal targets. Around 3,000 directors and managers are covered by this scheme. 

For the President & CEO and the Board of Management, the payment 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 each country's legislation. Alternatively, 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 within Wärtsilä.

The long-term incentive scheme has a three year performance period. Under the scheme, participants are awarded incentive rights. The value of an incentive 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 Wärtsilä Corporation during the performance period.

Valuation of the bonus rights:

 

To ensure an appropriate level of reward, an upper limit is set for each award cycle, capping the maximum value for each incentive right. The incentive 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. The schemes launched as of 2019 will be paid out in shares to promote shareholder value creation by strengthening the alignment of senior management interests with those of Wärtsilä’s shareholders.

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.

Governance

The Board of Directors determines the levels and underlying principles of the fixed pay, as well as the incentive schemes for the President & CEO and other Board of Management members. 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.

Contractual terms for the President & CEO

The base salary of the President & CEO is EUR 862,200 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 2018

¹ Relates to the annual bonus for 2017 performance, which was paid in 2018.
² Relates to the 2015-2017 long-term incentive cycle, which was paid in 2018.

Short-term incentive schemes

The Board of Management's performance target structure for the short-term incentives is described in the table below. A sliding scale of targets was set for each measure:

Short-term incentive for 2018 performance
The above performance measures and weightings apply to the annual bonus for 2018 performance.

Performance against the group targets was as follows:

 
As the performance outcomes were below the target thresholds, no bonuses were paid out.

Short-term incentive for 2019 performance
There are no proposed changes to the operation of the short-term incentive plan for 2019. The performance measures, weightings, and maximum limits will be the same as those applying in 2018.

Historical development of performance outcome
The performance measures and weightings have remained consistent during the past years. Actual performance against the group targets during 2016-2017 is shown below.

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. The values reflect the share split effective March 2018.

* The share issue without payment (share split) approved by Wärtsilä Corporation’s Annual General Meeting on 8 March 2018 increased the total number of Wärtsilä shares to 591 723 390. The figures in the above table have been restated accordingly.

The incentive 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 2019, the Board of Directors decided on the long-term incentive plan for 2019-2021.The structure was renewed so that reward will be paid out in shares, in order to better promote shareholder value creation by strengthening the alignment of senior management interests with those of Wärtsilä’s shareholders. The incentive scheme 2019 comprises 6,542,000 incentive rights. It is based on the share price development during a three-year period, with a starting share price of EUR 16.76. The reward cannot exceed EUR 6.56 per incentive right and it takes into account 100% of dividends paid out during the performance period and reinvested in the Company’s shares. The 2019 scheme will be due for payment in February 2022.

Board of Management's share ownership in Wärtsilä on 31 December 2018

* The changes in holdings reflect the increased number of shares resulting from the share issue without payment (share split), which was approved by the Annual General Meeting on 8 March 2018.

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 2018 were found to be well balanced and in accordance with market practices. The Board of Directors was satisfied that the payout outcome was appropriate given the company's performance.

Further information on Board of Management remunerations can be found in the Consolidated Financial Statements, Note 30. Related party disclosures.

Related information:
Salary and remuneration report