3.5 Remuneration of the Board of Directors and senior executives

The Board

Fees to the Chairman and other external Board members are paid in accordance with the resolution at the Annual General Meeting. No Board fees are paid to the President and the employee representatives.

In accordance with the resolution of the 2018 Annual General Meeting, the total fee to the external Board members elected at the Meeting amounts to in total 6,360,000 SEK on an annual basis. Of this amount, 2,400,000 SEK is payable to the Chairman of the Board (Johan Molin) and 660,000 SEK to each of the other external Board members (Jennifer Allerton, Claes Boustedt, Johan Karlström, Helena Stjernholm, Lars Westerberg and Marika Fredriksson).

In addition to these amounts, the Annual General Meeting resolved that a fee for committee work should be paid to Board members elected by the Meeting, in an amount totalling 605,000 SEK to the members of the Audit Committee (Claes Boustedt 285,000 SEK, Helena Stjernholm 160,000 SEK and Lars Westerberg 160,000 SEK) and in an amount totalling 355,000 SEK to the members of the Remuneration Committee (Johan Molin 135,000 SEK, Johan Karlström 110,000 and Lars Westerberg 110,000 SEK).

The long-term asset manager and largest shareholder of Sandvik shares, Industrivärden, granted in 2015 the Chairman of the Board one million call options over Sandvik shares with a five year term and an exercise price of SEK 110. The options were purchased at market price.

President and other senior executives

Principles of remuneration

The following guidelines approved by the Annual General Meeting for remuneration of senior executives have been applied since the Annual General Meeting in 2018:

The remuneration of the Group Executive Management is to comprise fixed salary, variable salary, pension and other benefits. The total remuneration package should be based on market terms, be competitive and reflect the individual’s performance and responsibilities as well as the Group’s earnings trend.

The variable salary may comprise short-term incentives in cash and long-term incentives in cash, shares and /or share-based instruments in Sandvik AB. Variable salary in cash is conditional upon the fulfilment of defined and measurable goals and should be maximized in relation to the fixed salary. Long-term incentives in the form of shares and /or share-based instruments in Sandvik AB may be provided through participation in long-term incentive pro-grams approved by the General Meeting. Terms and conditions for variable salary should be designed so that the Board of Directors, if exceptional economic circumstances prevail, has the option of limiting or refraining from payment of variable salary if such a measure is considered reasonable.

In specific cases, agreements may be reached regarding one-off remuneration amounts provided that such remuneration does not exceed an amount corresponding to the individual’s annual fixed salary and maximum variable salary in cash and is not paid more than once per year and individual.

Pension benefits should be defined contribution.

Normally, severance pay is paid when employment is terminated by Sandvik. Members of the Group Executive Management generally have a period of notice of not more than 12 months, in combination with severance pay corresponding to 6–12 months fixed salary. An alternative solution may be applied to the President comprising a period of notice of 24 months and no severance pay. No severance pay will be paid when employment is terminated by the employee.

The Board of Directors is to have the right to depart from the guidelines resolved on by the Annual General Meeting if, in an individual case, there are special reasons for this.

The sphere of senior executives encompassed by the guidelines comprises the President and other members of the Group Executive Management.

The proposal for principles for remuneration that the Board intends to submit to the 2018 Annual General Meeting for resolution is presented in the Report of the Directors, in the “People” section.

President and CEO

Sandvik’s President and CEO, Björn Rosengren, was paid an annual fixed salary of 14,244,372 SEK and received the fringe-benefit value of a car provided by the company. In addition, an annual variable cash based salary of maximum 75% of the fixed salary is payable. The variable salary for 2018 amounted to 8,546,623 SEK.

Björn Rosengren is entitled to retire at age 65. A pension premium of 37.5% of his annual fixed salary is reserved annually.

In the event of termination of employment by the company, Björn Rosengren has a notice period of 12 months and 12 months’ severance pay.

Other senior executives

For other members of the Group Executive Management who are covered by a Swedish pension plan (ITP1 or ITP2), the minimum retirement age is 62.

For members that are covered by the ITP plan 1 (defined contribution) a supplement of 5% of the salary portions in excess of 7.5 income base amounts applies.

For members that are covered by the ITP Plan 2 (defined benefit), a supplementary defined-contribution plan under which the company each year contributes 25-33% (depending on age and employment start in GEM) of fixed salary portions in excess of 20 price base amounts applies. Members of the Group Executive Management employed as per 31 December 2018 are covered either by the ITP 1 or by the ITP2 occupational pension plans.

Severance pay is paid in the event that the company terminates employment. The severance pay is equivalent to 6–12 months’ fixed salary in addition to the notice period, which is 6–12 months. Any other income from employment is normally deducted from the severance pay.

Long-term incentive program

Share-based incentive program 2013

The 2013 Annual General Meeting approved the Board proposal to introduce a share-based Long-term incentive (LTI) program for that year. The program was aimed at about 400 senior executives and key individuals in the Sandvik Group and a maximum of 11,749,115 Sandvik shares could be used.

The program participants have been allotted employee stock options that entitle the employee to acquire Sandvik shares after three years at a set exercise price, on condition that certain performance targets linked to the Sandvik Group’s growth in value – Sandvik Value Added (SVA) – are met (“performance shares”). For the President, senior executives and certain top level executives, a personal investment in Sandvik shares (“saving shares”), corresponding to 10% of fixed annual pre-tax salary for the year in which the investment in saving shares is made, was required in order to receive allotment of employee stock options. Provided that such a personal investment in Sandvik shares has been made, these executives also received allotment of “matching rights” (one per saving share acquired) that entitle the executive to acquire Sandvik shares after three years at a set exercise price (“matching shares”). Employee stock options and matching rights are non-transferrable. Each employee stock option entitles the employee to acquire one performance share not earlier than three years and not later than five years following allocation of the employee stock option. The number of the allotted employee stock options that will eventually provide entitlement to the acquisition of performance shares depends on the development of SVA over the three financial years following approval of the program by the Annual General Meeting.

The exercise of the employee stock options to acquire performance shares requires continued employment at Sandvik and that all acquired saving shares are held for a three-year period after the allotment of the employee stock options.

Each matching right automatically provides entitlement to acquire one matching share not earlier than three and not later than five years after the allotment of the matching rights. The exercise of matching rights to acquire matching shares requires continued employment at Sandvik and that all acquired saving shares are held for a three-year period after the allotment of matching rights.

The exercise price to acquire a performance share or matching share equals an amount corresponding to 110% and 75%, respectively, of the average volume-weighted price paid for the Sandvik share on NASDAQ Stockholm during a period of ten trading days immediately following the Annual General Meeting that approved the program. The average volume-weighted price paid was determined for 2013 at 92.41 SEK.

For the 2013 LTI program, encompassing the years 2013–2015, no performance stock options were vested, since the performance targets set by the Board of Directors were not met. The program was discontinued in June 2018.

The number of allotted employee stock options and acquired matching rights under the 2013 program for the President and other members of the Group Executive Management on 31 December 2018 corresponds to the number of outstanding employee stock options and matching rights at year-end.

The number of allotted matching rights under the 2013 program corresponds to the number of outstanding matching rights at 31 December 2018.

The expected volatility was determined by analyzing the historical volatility of Sandvik AB and some comparable listed companies. When determining the expected maturity, assumptions were made regarding expected behavior patterns for exercising the employee stock options and acquired matching rights among the program participants.

Share-based incentive program 2015 – 2018

The 2015, 2016, 2017 and 2018 Annual General Meetings approved the Board’s proposal to introduce a performance share program for each year for about 350 senior executives and key individuals in the Sandvik Group, divided into four categories. For all participants, a personal investment is required in each separate program and the programs encompass at Grant a maximum total of 7,187,339 shares.

All program participants have invested in Sandvik shares (“investment shares”), up to an amount corresponding to 10% of their fixed annual pre-tax salary at the time of the investment.

In the LTI program 2015, 2016 and 2017, each acquired investment share entitles participants to be allotted, free of charge, after a period of three years, one Sandvik share (“matching share”). In the LTI program for 2015, 2016, 2017 and 2018, provided certain performance targets are met Sandvik shares (“performances shares”) may be allotted. The maximum number of performance shares that may be allotted for each acquired investment share depends on the category to which the participant belongs.

The number of performance shares that will finally be allotted to the participant for each acquired investment share is dependent on the development of the Sandvik Group adjusted Earnings Per Share (“EPS”) during the financial year that the investment shares were acquired, compared to adjusted EPS for the previous financial year.

In January 2015, 2016, 2017 and 2018 respectively, the Board of Directors established the levels regarding adjusted EPS for the year in question that had to be attained for allotment of a certain number of performance shares.

For the 2015 LTI program matching shares were allotted during 2018. No performance shares were allotted since the performance targets set by the Board of Directors were not met.

For the 2016 LTI program matching shares will be allotted during 2019, if all the prerequisites for allotment are met. Performance shares will be allotted since the performance targets set by the Board of Directors were essentially met.

For the 2017 LTI program matching shares will be allotted during 2020, if all the prerequisites for allotment are met. Performance shares will be allotted since the performance targets set by the Board of Directors were met.

In order for any performance shares to be allotted in the 2018 LTI program, adjusted EPS growth for the financial year 2018 must exceed 5% in relation to adjusted EPS for the financial year 2017. For the maximum number of performance shares to be allotted in the 2018 LTI program, adjusted EPS growth for the financial year 2018 must attain 15% in relation to adjusted EPS for the financial year 2017. Within the range, a proportional linear number of performance shares will be allotted.

Adjusted EPS for the financial year 2015 amounted to 4.72 SEK; year 2016 amounted to 5.48 SEK; year 2017 amounted to 7.99 SEK.

For the financial year 2018 adjusted EPS amounted to 10.41 SEK, which means that the maximum performance targets were met, and performance shares will therefore vest in 2021 subject to the requirements in the plan rules.

The allotment of matching- and performance shares, respectively, requires continuous employment and that all investment shares be held during a period of three years from the acquisition of the investment shares.

If all the prerequisites for participant´s right to allotment are met, allotment of matching shares under the 2018 LTI program will take place during 2021, and no later than 30 June 2021.

The number of allotted performance shares under the 2015-2018 LTI programs and matching shares under the 2015 – 2017 LTI programs for the President and other members of the Group Executive Management on 31 December 2018 corresponds to the number of outstanding performance shares and matching shares at year-end.

Costs for the programs

The following IFRS2 provisions were established during the year: 67.4 million SEK, excluding social costs for the 2018 LTI program, of which 8.9 million SEK for the President and other senior executives; 55.3 million SEK, excluding social costs for the 2017 LTI program, of which 8.2 million SEK for the President and other senior executives; 32.7 million SEK, excluding social costs, for the 2016 LTI program, of which 6.6 million SEK for the President and other senior executives.

The employee stock options, matching rights, matching shares and performance shares are expensed as an employee expense (excluding social costs) over the vesting period and are recognized directly against equity. The amount recognized is continuously revised throughout the vesting period of each program. Social costs are expensed during the vesting period of each program based on the change in value of the employee stock options, matching rights, matching shares and performance shares.

Preparation and decision-making process

The Board’s Remuneration Committee prepares issues relating to the Group Executive Management’s remuneration. The Committee met two times during the year. Issues dealt with included the distribution between fixed and variable salary, the magnitude of any pay increases and the long-term variable incentive program.

The Board discussed the Remuneration Committee’s proposals and made a decision, using the Committee’s proposal as a basis. Based on the Remuneration Committee’s proposals, the Board decided on the remuneration of the President for 2018. The President decided on remuneration to other senior executives after consultation with the Remuneration Committee. The Remuneration Committee performed its task supported by expertise on remuneration levels and structures. For information on the composition of the Committee, refer to the Corporate Governance Report.