C3. Remuneration of senior executives

Senior executives refer to the President, who is also the CEO, the Executive Vice President, Business Unit Presidents in Essity and equivalents, and the Central Staff Managers.

Annual General Meeting guidelines for remuneration of senior executives

The 2017 Annual General Meeting (AGM) adopted the following guidelines for remuneration of senior executives.

Remuneration of senior executives will be a fixed salary, variable remuneration, additional benefits and pension. The total remuneration is to correspond to market practice and be competitive in the senior executive’s field of profession and linked to the manager’s responsibility and authority. Variable remuneration is to be limited and linked to the fixed remuneration, based on performance results in relation to annual and long-term established targets.

In the event of termination of employment, the notice period should normally be up to two years if termination is initiated by the company, and up to one year, when initiated by the senior executive. There will be no severance pay.

Pension benefits should, wherever possible, only include defined contribution pension benefits and entitle the executive to receive a pension from the age of 65. Variable remuneration is not part of pensionable income.

The Board of Directors has the right to depart from the established guidelines if there is an individual case with special grounds. The guidelines do not take precedence over compulsory conditions in accordance with labor legislation or collective agreements. Furthermore, they are not applicable to existing contracts.

Company’s application of guidelines

The company applied the guidelines approved by the AGM in the following manner.

Fixed salary

The fixed salary is to be in proportion to the individual’s position and the authority and responsibilities this entails. It is set individually at a level that, combined with other remuneration, is assessed as a market rate and competitive in the labor market in which the executive works.

Variable remuneration

Variable remuneration of the CEO, Executive Vice President and Business Unit Presidents and equivalents is maximized to a total of 100% of the fixed salary. For two Business Unit Presidents, stationed the Americas, the maximum outcome is 110–130%, while the corresponding limit for other senior executives is 90%. The program for variable remuneration is divided into a short and long-term portion. The short-term portion (“Short-term Incentive”, or STI) for the CEO, Executive Vice President and Business Unit Presidents and equivalents may amount to a maximum of 50% of fixed salary. For the Business Unit Presidents, stationed in the Americas, the maximum outcome is 60–80% of the fixed salary, while the corresponding limit for other senior executives is 40%. The STI goals set for the Business Unit Presidents are mainly based on operating cash flow, cost control, operating margin and organic sales growth for each business unit. The goal for the CEO and others reporting directly to him is based primarily on the Group’s profit before tax, operating cash flow and organic sales growth. Furthermore, for certain senior executives, a non-financial goal also applies accounting for 10–30% of the variable remuneration. The long-term portion (“Long-Term Incentive”, or LTI) may amount to a maximum of 50% of the fixed salary. The senior executive is to invest half of the variable LTI compensation, after tax withholdings, in Essity shares. The shares may then not be sold before the end of the third year after the purchase of shares in the relevant LTI program. The established LTI goal is based on the performance of the company’s B share, measured as the TSR (Total Shareholder Return) index, compared with a weighted index of competitors’ and consumer companies’ shares performance (TSR) over a three-year period.

Outcome, variable remuneration

For the CEO, Executive Vice President and Central Staff Managers, STI resulted in 28 to 36% of fixed salary for 2017. STI resulted in variable remuneration corresponding to 17 to 46% of fixed salary for the Business Unit Presidents. The LTI target was achieved for 2015–2017, resulting in a maximum outcome for the CEO and other senior executives.

Other benefits

Other benefits pertain, in some cases, to a company car, commuter reimbursement and health insurance.

Pension

The CEO has a defined contribution pension based on an annual payment, to be paid by the company, amounting to 40% of the fixed salary, and in addition to the agreed contribution the basic pension benefits in the ITP plan, with retirement pension benefits limited to a maximum salary income of 7.5 income base amounts. The retirement age for the CEO is 65. Four of the other senior executives in Sweden have a combination of defined benefit and defined contribution pension plans that entitle the executives, on reaching the age of 60 or 65, to receive a retirement pension (including national pension benefits) of up to 45% of the average salary (excluding variable remuneration) three years prior to retirement age. For full pension, the individual must have been employed for at least 20 years calculated from 40 years of age. Upon termination of employment prior to reaching retirement age, a paid-up policy is received for pension payments from age 60 or 65, on condition that the executive, after reaching the age of 40, has been employed in the Group for at least three years. In addition, beneficiaries’ pension amounts to about 50% of retirement pension. In addition to the defined benefit pension, a pension is paid based on contributions paid by the company. The contributions paid for each year of service amount to 10% of the executive’s fixed salary and are invested in a fund or traditional insurance chosen by the executive. Four senior executives in Sweden have a defined contribution pension plan (in addition to national pension benefits) into which the company pays 30 to 40% of the executives’ fixed salary, which is invested in funds or traditional insurance. Five senior executives are employed in companies outside Sweden, of whom three executives are encompassed by defined contribution pension plans and two by defined benefit pension plans.

Remuneration of senior executives

No remuneration was paid to senior executives in Essity for work in this company during the years 2015 and 2016. In conjunction with the distribution of Essity Aktiebolag (publ), costs for senior executives were allocated from SCA to Essity for the years 2015 and 2016. Remuneration of senior executives in Essity for 2017 was paid in its entirety from Essity.

Notice period and severance pay

The agreement with the CEO stipulates a period of notice of termination of two years if such notice is given by the company. The CEO has a corresponding right with a period of termination of one year. If notice is given by the company, the CEO is not obligated to serve during the notice period. The agreement has no stipulations with regard to severance pay. Between the company and other senior executives, a period of notice of termination of one to two years normally applies, if such notice is given by the company. The executive has a corresponding right with a period of notice of termination of six months to one year. The executive is normally expected to be available to the company during the notice period. The agreements have no stipulations with regard to severance pay.

Preparation and decision process for remuneration

During the year, the Remuneration Committee submitted recommendations to the Board regarding the principles for remuneration of senior executives. The recommendations encompassed the ratio between fixed and variable remuneration and the size of any salary increases. In addition, the Remuneration Committee expressed an opinion on the criteria for assessing variable remuneration and pension terms. The Board discussed the Remuneration Committee’s proposal and decided on the basis of the Committee’s recommendations. The remuneration of senior executives for the fiscal year was based on the Remuneration Committee’s recommendation and, with regard to the CEO, decided by the Board. The executives concerned did not participate in remuneration matters pertaining to themselves. When it was deemed appropriate, the work of the Remuneration Committee was carried out with the support of external expertise.

The Board’s proposal for new guidelines

The Board proposes that the 2018 Annual General Meeting adopt unchanged guidelines for remuneration of senior executives of Essity. With the salary situation prevailing in 2018 and an unchanged number of senior executives, the maximum outcome of variable remuneration could entail a cost for the Group, excluding social security costs, of approximately SEK 72m.

Obligations to former presidents and CEOs

For former presidents and CEOs, Essity has outstanding, unfunded obligations amounting to SEK 182m. These costs were recognized in previous years and comprise pension obligations that Essity assumed from Svenska Cellulosa Aktiebolaget in conjunction with the split of the Group.