Compensation Report

This Compensation Report sets out the compensation system and the compensation paid to the members of the Board of Directors and the Management Board of Tecan Group Ltd. The report will be put to the Annual General Meeting on April 13, 2016 retrospectively for the past fiscal year for an advisory vote. The report is based on Section 5 of the Annex to the SIX Swiss Exchange Directive on Information Relating to Corporate Governance and the Ordinance Against Excessive Compensation in Listed Companies (OaEC), which took effect on January 1, 2014.

The Compensation Report contains information on the total compensation paid to members of the Board of Directors and Management Board and refers to the 2015 reporting year unless otherwise noted. The Tecan Group has a set of uniform compensation policies, which are systematic, transparent and have a long-term focus. Compensation is determined on the basis of four factors: corporate profit, individual performance, position held and the labor market. The ultimate goal of the compensation system is to attract highly qualified and motivated specialists and managers, ensure their long-term loyalty to the Company and align the interests of employees and shareholders. The variable performance component is a complementary management tool designed to promote the achievement of overriding objectives. In addition, the Performance Share Matching Plan (PSMP) – the stock ownership plan in place for all members of the Management Board since 2010 – guarantees direct financial participation in the long-term performance of Tecan's stock. In 2013, the compensation of the Board of Directors was adjusted in line with the current corporate governance recommendations for compensation systems, which stipulate only a fixed fee. Since then, therefore, members of the Board of Directors no longer participate in the performance-based PSMP, instead receiving a fixed allotment of shares in addition to a specified cash component. These shares vest fully upon completion of their term and pro rata in the event of an early exit. The total amounts for the individual members are nominally determined in Swiss francs, from which the cash component is deducted and the remainder converted into shares. As is the case with the PSMP, the value of the shares is based on the Tecan share's average closing price on the SIX Swiss Exchange during the first four months of the relevant fiscal year. The amount and composition of the compensation paid to both the Board of Directors and the Management Board is assessed and determined by the Compensation Committee. In 2013, both the amount and the composition of the compensation paid to the Board of Directors was reviewed by a consultancy firm (The Hay Group) and adjusted in line with its recommendations. In the year under review, the Compensation Committee comprised Oliver Fetzer (Chairman) and Christa Kreuzburg (member) and was elected directly by the Annual General Meeting. The CEO, CFO and Corporate Head of Human Resources regularly attend meetings in an advisory capacity. Invited members of the Management Board do not take part in discussions on agenda items concerning themselves. Minutes are kept of the meetings. The Compensation Committee proposes motions to the Board of Directors, which in turn must approve the HR and salary policies for the entire Group as well as the general conditions of employment for members of the Management Board. 

The Compensation Committee defines the compensation amounts to be paid to the members of the Management Board. The Board of Directors then reviews and approves the target achievement of the CEO and members of the Management Board and the actual bonus to be paid. The amount and type of compensation to be paid to the Board of Directors is reviewed annually by the Compensation Committee and put before the Board of Directors. Every two to three years, the compensation of the Board of Directors is benchmarked by an external specialist and, if necessary, adjustments are proposed. Each year, the Board of Directors submits a proposal to the Annual General Meeting on the maximum total compensation for the members of the Management Board for the fiscal year following the Annual General Meeting (January 1 to December 31). 

In 2014, a comparison was made of the salaries of the Management Board members by an external specialist. Compensation at Tecan was compared with a selection of companies from the Mercer Group's Western European Remuneration Guide. In particular, companies were selected from sectors such as medical devices and suppliers, pharmaceuticals, chemicals, foodstuffs, etc. The system is based on an analytical approach in which industry, value chain and size (sales volume and employees) are weighted and applied to transform each job into a relative value. Overall, the total compensation paid to members of the Management Board is in line with that of the reference companies. As for the composition of total compensation, the results also show that long-term compensation at Tecan is slightly above average and the cash component slightly below average in comparison with the reference companies. This confirmed the fundamental results of the 2012 compensation comparison for the members of the Management Board with comparable Swiss companies carried out by AON Hewitt. 

All employees of Tecan Group go through a formalized target and performance review process, which generally takes place at least once a year, shortly after the end of the fiscal year. This process forms the basis for the calculation of individual employees' performance-based pay for the preceding fiscal year. It also ensures that consistent targets are set across the Group for the new fiscal year and promotes the development of both individual employees and the Group. Personal targets are determined in the performance review process at an individual meeting with the employee's supervisor.

The compensation system for members of the Management Board and extended Management Board of Tecan Group Ltd., introduced in 2010 and unchanged since then, is based on three central pillars: a fixed cash component (fixed or base salary), a variable cash component (variable salary component) and a variable long-term stock ownership plan (Performance Share Matching Plan). For key employees at the Tecan Group, the third pillar consists of either a performance-based share plan or a performance-based option plan. The compensation system for the other employees with variable salary in most cases consists of two pillars: a base salary (fixed or base salary) and a variable component (variable salary component) based on the performance review. In addition, outstanding performance may be rewarded with one-time bonuses in the form of options. Employees are paid a fixed salary and may receive individual, performance-based, one-time spot cash bonus payments.

The compensation structure at all management levels is based on the Variable Pay Policies adopted by the Board of Directors. These call for a target salary to be determined. For members of the Management Board, the target salary is made up of a fixed component (60 % of the target salary for the CEO or 70 % for the other members) and a variable component (40 % of the target salary for the CEO or 30 % for the other members). The amount of the variable component is based on achievement of both Group financial targets and quantitative and qualitative corporate goals. The financial targets (sales and EBIT margin) are set annually by the Board of Directors in December for the following year. The composition of the variable component differs depending on the position and management responsibility. Group targets predominate (at up to 80 %) at management levels three and four and at the Management Board level, while their percentage falls to as little as 40 % at lower management levels. If the target is fully met, 100 % of the variable compensation is paid out. However, as stipulated in the Articles of Incorporation, the CEO's variable compensation may not exceed 150 % of the fixed salary and that of Management Board members may not exceed 100 % of the fixed salary. In the year under review, financial targets at Group level were exceeded overall, and a component above 100 % was paid out accordingly.

If the defined targets are exceeded, depending on the degree of exceedance, up to 200 % of the variable component may be paid out. Instead of a cash payout, members of the Management Board and extended Management Board were able in past years to invest up to 150 % of the maximum variable compensation in stock under the PSMP (“voluntary purchases”). 

Depending on the strategic and operational orientation of the fiscal year, and in order to assure continuity on the Management Board, however, the Board of Directors may also establish for members of the Management Board and extended Management Board a requirement to invest a portion of the short-term variable component in the long-term PSMP (“mandatory purchases”). Since the financial targets for fiscal year 2014 were not attained in full, this procedure was implemented for the first time in the year under review.

In addition to cash compensation, the members of the Management Board participated in the Performance Share Matching Plan (PSMP) in the year under review. This share plan is a long-term incentive (LTI) plan based on allotment of Tecan Group Ltd. registered shares to the Management Board and the extended Management Board. As in the two previous years, participation in the PSMP was extended in the year under review to a select group of key employees. The shares vest three years from the allotment date and must be returned on a pro rata basis in the event of termination on the part of the employee before the expiration of the three-year period. Employees are eligible to receive additional shares (“matching shares”) if certain predefined financial targets based on the Tecan Group's economic profit are reached three years after the allotment of shares. Participants in the PSMP are eligible for matching shares only if an economic profit was achieved. This mechanism ensures that shareholders' interests are aligned with those of PSMP participants. The economic profit target is based primarily on sales growth and EBIT targets. The factor used to calculate this matching share portion is between 0x and 2.5x, depending on the degree to which the economic profit target is attained. This means that a participant in the PSMP may be eligible for up to 2.5 matching shares per originally allotted share under the plan, plus any voluntary or mandatory purchases by members of the Management Board and extended Management Board under the plan. A formula incorporating the two components of “sales growth in local currencies” and “EBIT margin” among other factors has been devised for calculating the matching share factor, provided that a certain asset turnover is reached. The two parameters are linked, i.e. EBIT margin must be higher to achieve a specific factor if growth is low, while higher growth is required if the EBIT margin is low. The sales growth component has been given a higher weighting, and accounts for two-thirds for the purposes of calculating the matching share factor. The parameter grid is specified anew each year on a look-ahead basis for the coming three-year period in order to clearly establish the financial targets in advance. 

The size of the initial allotment of PSMP shares is approved annually by the Board of Directors based on a proposal by the Compensation Committee. In 2015, the initial allotment for Management Board members averaged 24.8 % of total compensation.

The Annual General Meeting of April 13, 2016 will be asked to approve a maximum total amount in Swiss francs for compensation of the Management Board for fiscal year 2017. The most significant factors in the calculation of this maximum amount are the estimated performance-based compensation and the number of members of the Management Board. As was the case last year, the proposal for 2017 is based on eight members.

In determining variable compensation, the calculation of this maximum amount assumes that the defined performance targets are significantly exceeded and that the threshold for the payment of 200 % of the variable component is met. The maximum matching share factor of 2.5 is also assumed for the long-term stock ownership plan, the Performance Share Matching Plan. In recent years the parameters for both components of the performance-based compensation have been significantly below these maximum values, and actual figures have been well below the annual maximum amounts. The actual figures in the two years when the three-year period had already ended were less than 50 % of the maximum.

To make the calculation of the maximum amount as transparent and comprehensible as possible, complex mathematical formulae and methods have been avoided. For example, future payments were not discounted. Likewise, in calculating the value of matching shares, no complex formula such as the Monte Carlo model was used, but simply the value of the initial allotment of shares in Swiss francs multiplied by the maximum factor of 2.5.

In table 1 on page 73, the theoretical maximum amounts from 2012 and 2013 are compared with the actual amounts in order to provide a better understanding. In 2012, the actual sum was 36 % of the maximum, while in 2013 it amounted to 59 %.

These figures are not available for the three-year cycles starting in 2014 and 2015 as the cycles of the stock ownership plan have not yet come to an end. It is, however, highly likely that the actual values will also be below the maximum value. For 2014, the payment was around 70 % of the variable component and for the three-year cycle 2012 – 2014 no matching shares can be claimed. In 2015 the average target attainment of all Management Board members was 116 %, and a matching share factor of approximately 1.1 was attained for the three-year period ending in 2015 (2013 – 2015).

If the proposed maximum total amount is not approved by the Annual General Meeting, the Board of Directors can submit new proposals to the same Annual General Meeting or call a new General Meeting if it does not submit new proposals or if the Annual General Meeting also rejects the new proposals. The Board of Directors can submit a proposal to retrospectively increase an approved total amount to the Annual General Meeting at any time.