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Remuneration components

Overview

The structure of the remuneration package envisaged for the various offices is defined with a view to balancing the fixed and variable components, taking the specific risk profile of the company into account, and the desire to maintain a close alignment between the level of company and individual performance and remuneration by effectively incentivising commitment, professional growth and the adoption of behaviours deemed functional for achieving the Group's corporate objectives. The total remuneration contains a balanced mix of fixed and variable components, with a focus on identifying the metrics deemed most effective to reflect the Group's long-term prospects.

The basic components involved in retribution for Hera executives are as follows:

ComponentObjective and characteristicsImplementation
Fixed compensationRecompenses professional and managerial technical skillsCompensation profile assessed on the basis of performance, experience, level of responsibility, internal consistency with respect to the evolution of the
organisation, and market benchmarks
Short-term variable compensationEncourages the achievement of strategic and financial objectives as well as the adoption of behaviours consistent with the corporate leadership modelAssignment of individual objectives linked to the Group's Balanced Scorecard system for executives and executive directors
Deferred variable compensation for retaining managersRetention measure for executives with strategic roles, high performance and high market riskReference period: three years. Bonus accrued in relation to the Group's results and the evaluation of the individual development process.
Non-monetary benefitsAn integral part of the salary package, predominantly welfare and social security in characterDefined in accordance with industry
standards and relevant company policies
CompensationSeverance compensation for the purpose of protecting the interests of the companyIn the event of early termination or revocation of the office of Director

 

 
 
  • The fixed component of compensation is usually determined by the professional specialisation and the organisational role along with related responsibilities. It is therefore a reflection of technical, professional and managerial skills.

    The levels of the fixed component of remuneration are established with respect to the specific nature of the company and its risk profile, so as to guarantee the ability to attract and retain talent with the professionalism the Group requires.


    Fixed remuneration


    For each executive, the reference salary level is determined on the basis of the weight of the organizational position held, on the basis of which a benchmarking comparison is carried out in relation to selected external markets. The benchmarking, carried out by an external company, takes into consideration a total of 244 companies, 31% of which are Italian and 69% foreign. 15.2% of the companies have more than 5,000 employees.

    These benchmarks are drawn from specialized, sector companies that carry out remuneration surveys, surveys in which the Group participates.

    On the whole, the remuneration level chosen as a reference point is in the medium band for the market (first quartile/median). These market references, combined with an evaluation of performance and managerial ability, form the basis of individual compensation reviews.

    Remuneration


    The differences between the salaries applied and those defined by labour agreements are due not only to previously established economic standards but also the amount of seniority in age (with an average of 52.8 years) and time spent within the Group (with an average of 17.5 years) for the category of managers.

  • Recipients
    The scope of the BSC system extends to include all Hera S.p.A. and Group subsidiary company Directors and Executives.  The scope includes 44 Directors and 108 Executives. A similarly arranged evaluation form is also envisaged for the Chairman and the CEO. The short-term variable remuneration envisaged by the BSC system on meeting 100% of the individual objectives involves an amount expressed as a percentage of the gross annual fixed remuneration (RAL), divided by category of recipient:

    • Chairman and CEO: 40% of the RAL
    • Directors : 25% of the RAL
    • A-class executives: 22% of the RAL
    • B-class executives: 17% of the RAL

    Executives are expected to have a maximum of two separate variable remuneration levels, based on the weight of the manager within the organization and the strategic value of the executive's duties.

    Incentive and objective-definition process
    The short-term incentive system involves assigning an individual BSC for each of the recipients. Each BSC includes a series of objectives belonging to three evaluation areas:

    • objective-oriented projects, defined according to the Group's Strategic Map, including projects (both short- and long-term) aimed at enhancing the Corporate Social Responsibility profile;
    • economic objectives of the individual Budget Units, evaluated through economic-financial type indicators;
    • evaluation based on the extent of adoption of the types of behaviour set out in the leadership model adopted by the Group.

    Each area is divided into a series of pre-set objectives, each with a specific performance indicator. The relative weight of each area under the scope of the individual BSC is different for Directors and Executives, and corresponds to the total of the weight of the individual objectives belonging to the same area.

    Performance measurement
    The Committee defines a target at the beginning of each reference period and for each objective. The amount of the bonus to be paid to each recipient is determined according to whether the set targets are actually reached (result) and the specific weight of the individual objective.

    The result of the evaluation carried out using the aforementioned individual BSC system is weighted through a company results profile, which takes into account the performance recorded by the Group with reference, for 2019, to four parameters:

    • EBITDA
    • Net Profit
    • Net Financial Position (PFN)
    • Customer Satisfaction Index (ICS)

    On the basis of the performance profile achieved by the Company on these four parameters, the weighting percentage to be applied to the individual individual results is defined in a range from 115% of the bonus (in the event of performance beyond that set out in the established company targets) and 40% of the bonus (in the event that performance is signficantly below set company targets) according to the following scheme:


    Weightinh class

    Each parameter is evaluated separately. The weighting percentage is determined by calculating the weighted average of the percentage values that come from the results of each individual indicator. All the indicators in class D cause the weighting percentage to be reduced to zero.

    For 2019, the target values of the four weighting parameters are:

    • Hera Group EBITDA: 1,067 mln
    • Hera Group Net Profit: 308 mln
    • Hera Group PFN: 2,780 mln
    • Hera Group Residential ICS: 70


    The maximum variable, short-term bonus, expressed in percentage terms of gross annual fixed compensation, varies according to the results of the incentive system and the office held by the recipient, specifically:

    • for the Executive Chairman and Chief Executive Officer: a maximum variable remuneration of 46% of the total gross fixed compensation [(46%) = maximum individual variable (40%) x maximum company weighting (115%)];
    • for directors: a maximum variable remuneration of 28.8% of the total gross fixed compensation [(28.8%) = maximum individual variable (25%) x maximum company weighting (115%)];
    • for executives: there are two distinct levels of maximum variable remuneration based on the weight of the executive within the organization and the strategic importance of the executive's tasks :, equal to 25.3%, respectively [(25.3%) = maximum individual variable (22%) x maximum company weighting (115%)] of the total gross fixed remuneration and 19.6% [(19.6%) = maximum individual variable (17%) x maximum company weighting (115% )] and of the total gross fixed remuneration.

    The following table shows a summary of the maximum variable compensation for the various categories of recipients (in the event of maximum individual performance and outperformance of all corporate targets):

    Position heldMaximum company weighting (A)Maximum individual variable (B)Maximum variable compensation (AxB)
    Chairman and Chief Executive Officer115%40%46%
    Directors115%25%28.8%
    A-class executives115%22%25.3%
    B-class executives115%17%19.6%


    The BSC system entails a series of quali-quantitative assessments for the Directors/Executives listed below:

    1. a quarterly assessment that is also shared in the management review (Management Committee):
    2. the most important strategic projects are evaluated in terms of the progress made, the obstacles that might cause a possible slowdown of the project and what might be done to resolve them;
    3. any instances of outperfomance are taken into consideration during the revised budget;
    4. the assessment of projects is quali-quantitative
    5. the evaluation of behaviors in keeping with the model takes place with the recipient's superior, who specifically assesses the executive's behavior according to the 8 dimensions identified by the leadership model:
      1. Energy and decision
      2. Realization
      3. Cooperation
      4. Influence
      5. Exellence and simplification
      6. Complexity management
      7. Innovation
      8. Valorization of people

    This assessment system (described in section 4.3) encourages management not only to achieve the individual targets set, but also to implement behaviours that give rise to intangible value inside and outside the organization, important for granting greater strength and concreteness to the company's values in the daily work of all employees.

    The table below illustrates the mechanism for measuring the bonus of a director:

    ComponentDescriptionExample: outperforming company targets and achieving the maximum individual assessmentExample: achieving company targets and maximum individual assessment
    AAnnual gross salary (EUR)100,000100,000
    BTarget bonus (100% RAL)25%25%
    CTarget bonus (EUR) = A x B25,00025,000
    DIndividual pbjectives achieved (%)100%100%
    ECompany performance weighting coefficient (%)115%100%
    FValue of the bonus paid (EUR) = C x D x E28,750 EUR25,000 EUR


    With regard to transactions of strategic importance of an exceptional nature, with significant effects on the results of the company, the Board of Directors, following the proposal of the Remuneration Committee, can award discretionary bonuses to executive directors and management with strategic responsibilities. This discretionary bonus has not been awarded to either the Chairman or the CEO.

  • In its 22 March 2016 meeting , the Board of Directors approved that a retention plan be applied to a limited number of exectives, taking into account the weight of their organizational positions and the performance evaluations they achived in the development process, and market risk.

    The Board of Directors has also deemed it appropriate to set up an annual evaluation mechanism for accessing and renewing/not renewing the aawarding of the monetary plan.

    The Board of Director's decision to introduce the retention plan stemmed from its evaluation of a series of elements:

    • since the establishment of Hera, the Group has grown significantly in terms of company size, area served and final results;
    • from the point of view of executive management, the Group has reached a composition that is the result of a careful balancing between bringing in new skillsets, coming from the market, and specific, valuable competencies already present;
    • the Group currently enjoys a strong reputation and good visibility on the market, and consequently it makes sense to engage in highly selected retention actions for those executives who hold strategic roles and display both high performance and high market risk.

    From the point of view of keeping remuneration in line with performance, the retention plan encourages a commitment to the development of individual managerial skills and the achievement of the strategic objectives of the Group in a three-year perspective.

    The evaluation parameter of developing individual managerial skills considers the level achieved by recipients in the three-year period in relation to the 8 dimensions identified by the leadership model:

    1. Energy and decision
    2. Realization
    3. Cooperation
    4. Influence
    5. Exellence and simplification
    6. Complexity management
    7. Innovation
    8. Valorization of people

    If the recipient shows maximum achievement in each of the 8 dimensions mentioned above in the three-year period, the level of individual managerial skills is included in calculating the bonus dictated by the retention plan at a maximum value of 100%.

    The incentive awarded in 2016 matured over 2016 - 2017 - 2018 and was disbursed in 2019. For the Chief Executive Officer, the maximum three-year incentive value is 100% of the fixed annual remuneration (RAL) in the event that he/she outperforms corporate targets over the three-year period.

    For the rest of Group management covered by the retention plan, the maximum three-year incentive is 100% of the gross annual fixed compensation (therefore the corresponding annual quota is equal to one third of the gross annual fixed remuneration, or 33% of the gross annual fixed remuneration) or 50% of the gross annual fixed compensation (therefore the corresponding annual quota is equal to one third of the gross annual fixed remuneration, or 16.67% of the gross annual fixed remuneration); variations in the amount of bonus assigned to various recipients is based on the weight of the organizational position, the performance evaluation achieved as part of the development process and the market risk involved.

    The evaluation parameter of "developing individual managerial skills" does not apply to the Chief Executive Officer, as these same evaluation elements are considered to already be expressed by the achievement level of Group KPIs.

    If both company performance and managerial skills are found to be below the expected level, the result will be 0%. Intermediate achievement levels between 0% and 100% are also envisaged, depending on different combinations of company performance and managerial skills achievement.

    The calculation model for the maturation of the annual retention plan quota and of the bonus to be paid after the end of the reference three-year period is shown below.


    Annual quote maturity

  • In line with best practices, the plan also involves the following main forms of insurance coverage: D&O Liability against civil responsibility towards third parties, professional and extra-professional accidental injury, death, and permanent disability due to illness. Executives who hold specific organizational positions are also to be assigned a company car for business and personal use.

    Furthermore, beginning in 2017, an incentive plan was introduced, linked to the achievement of the Group's corporate objectives, that involves paying out welfare quotas that can be spent on the services included among those of the existing corporate welfare plan.

    Payout is directly linked to the level of achievement of the Group KPIs already used as to weight the results of the BSC system following a scheme which, for each individual indicator, allows the bonus to be accessed only if performance exceeds the target associated with that indicator.

    Each indicator is evaluated separately. The overall result is determined by calculating the weighted average of the percentage values that come from the results of each individual indicator.

    The maximum value, on achieving 100% of plan objectives, is 6% of the individual theoretical variable, namely:

    • executive members: there is a maximum social bonus equal to 6% of 40% of the total gross fixed remuneration (equivalent to 2.4% of the RAL);
    • directors: there is a maximum social bonus equal to 6% of 25% of the total gross fixed remuneration (equivalent to 1.5% of the RAL);
    • executives: there are two separate levels of maximum social bonus, equal to 6% of 22% of the total gross fixed remuneration (equivalent to 1.3% of the RAL) and 6% of 17% of the total gross fixed remuneration (equivalent to 1% of the RAL), respectively;

    Furthermore, in keeping with the implementation of the Group welfare plan launched in 2016, access to a Flexible Benefit plan was established for all Group employees, involving the allocation of 385 euro in 2019.

    Finally, the entire non-managerial population of the Group is allowed to convert up to 50% of the corporate performance bonus into the goods and services included as part of the corporate welfare plan.

  • For the 2019-2021 three-year period, the retention plan is to evolve in terms of the parameter relating to the strategic objectives of the Group; three-year KPIs have been introduced that differ from those of the short-term incentive plan (BSC) and which further enhance the ability to create and share value, as well as further consolidating the Group's culture of financial solidity in the long term more fully aligned with the interests of stakeholders.

    In particular, as established by the Board of Directors at the 19 December 2018 meeting, following the proposal by the Remuneration Committee, this evolution is based on the following new elements:

    • change of objectives → differentiate the elements of evaluation of the Long-Term Incentive Plan from those of the Short-Term one (BSC) and adopt specific objectives with a clear business plan perspective;
    • modification of the disbursement Plan → for current recipients, limit the risk of them abandoning their positions at the moment of the May 2019 disbursement;
    • updating the list of potential recipients in line with the general criteria applied to 2018.

    With regard to the first macro area (change of objectives), the proposed new structure aims to increase the bonus in proportion to the degree to which the set objective has been achieved.

    Consequently, for the 2019-2021 three-year period, the type of objectives set was modified through the use of three new parameters (weighted equally):

    • economic-financial indicator: Economic Value Added (EVA) or the cumulative target value for the 2019-2021 three-year period, equal to the difference between NOPAT (Net Operating Profit After Taxes) and WACC (Weighted Average Cost of Capital) for the capital invested;
    • the year-end relationship as of 2021 between the Net Financial Position and EBITDA;
    • the target percentage of Created Shared Value (CSV) on EBITDA at the end of the 2021 financial period.

    The following diagram shows the Group's long-term strategic objectives for the new retention plan as compared to those used in the previous version:


    strategic objectives

    For the 2019-2021 three-year period, the target values of the pre-set objectives are:

    • EVA: 377 mln with a WACC of 4.5%
    • PFN/EBITDA: 2.84
    • %CSV: 40%

    The maximum among of the bonus associated with the new 2019-2021 retention plan (scheduled for disbursement in May 2022) is determined on the basis of the following calculation: the April 2022 Annual remuneration Lord (RAL) of the recipient multiplied by the percentage of allocation of the incentive (50% or 100%, depending on the percentages laid out in the attribution system described above for managers), multiplied by the level of achievement of the new pre-set corporate performance targets (maximum value of 100% in the event of exceeding all KPIs) and multiplied by the evaluation parameter of developing individual managerial skills (according to a three-year average, with a value of 100% if the assessment find maximum achievement).

    If both company performance and managerial skills are found to be below the expected level, the result will be 0%. Intermediate achievement levels between 0% and 100% are also envisaged, depending on different combinations of company performance and managerial skills achievement.

    In keeping with current functioning, the evaluation parameter of developing individual managerial skills does not apply to the Chief Executive Officer.

    With regard to the second macro area (modification of the disbursement plan), the bonus is to be paid in the month of May of the 4th year, provided that the recipient is still part of the workforce.

    In order to limit the risk of post-payment quitting - for recipients confirmed to be covered by the new Long-Term Incentive Plan - in May of the second year (i.e. in 2020) the theoretical sum accrued for the first year of the 2019-2021 three-year period (advance on the first year equal to one third of the overall three-year bonus, that is, 33.33% or 16.67% of the RAL) will instead be paid in the form of an “advance” (withheld in the event that the employment relationship is terminated).

    The payout of the remaining portion (equal to two-thirds of the bonus) is instead scheduled for 2022 (that is, at the end of the three-year period). If at the end of the period (at the end of the three-year period) the performance achieved merits a variable remuneration lower than the amount already paid as an advance, the differential will be deducted from the remuneration for the current year (fourth year).

    Finally, with regard to the third macro area (updating of potential recipients), the following general criteria apply:

    • applying the retention plan to a limited number of executives, based on gauging their organizational position, performance evaluation achieved in the development process, and seniority;
    • annual evaluation mechanism for accessing and renewing/not renewing the awarding of the monetary plan, based on the above criteria;
    • top management's responsibility in choosing recipients based on the operating model, also in view of assessment criteria based on current market risk of the professional profile in question.
  • Resignation, lay-off or termination of the employment relationship
    With the renewal of the Board of Directors that took place as part of the Chareholders' Meeting held 27 April 2017, a clause was inserted for Executive Directors establishing that, in case of removal from office (except for cases of just cause), he or she will be paid an amount, as compensation for damages, comprehensive of any other claim, equal to the sum he or she would have received as remuneration, pursuant to art. 2389 of the Civil Code in the amount of 18 monthly salaries.

    As far as executive directors with a managerial contract are concerned, termination compensation includes the notice required by the national labor contract.

    Claw-back clause
    With the renewal of the Board of Directors that took place as part of the Chareholders' Meeting held 27 April 2017, the claw-back clause was inserted that establishes ex-post corrective mechanisms for the exective directors' remuneration system.

    This clause entails the obligation to return already paid-out variable components of remuneration (or to withhold sums subject to deferral) determined on the basis of data that subsequently proved to be incorrect, and is effective from the date of appointment throughout the entire duration of the term; the request to return funds can be made once the relevant assessments have been completed, within three years of disbursement in relation to the year in which the instance occurred.

Pay for performance

The management trend has displayed growth in terms of economic results, with an increase in gross operating margin (EBITDA) of over 5% and net profit at a double-digit rate, exceeding the expectations of both the 2022 business plan and all financial analysts; financial management has also shown an improvement in the debt and EBITDA ratio, which fell below 2.48 (not considering the Ascopiave transaction). During 2019, Hera shares enjoyed one of the best performance periods since being listed on the stock exchange (2003), showing a rise of 46.2% (compared to the peer average of 31.1%) and a total shareholders' return (the shareholders' remuneration in terms of capital gain and dividends) equal to 50% (compared to the peer average of 35.9%).

In the last 3 years, the period coinciding with both the mandate of the Board of Directors and the long-term incentive system (2017-2019 retention plan), economic results have steadily improved both in terms of EBITDA, which rose by 18.5% over the three-year period, and net profit, increasing by approximately 58% (not considering the effects of the Ascopiave transaction). In the three-year period, the company's stock also performed well, showing an 78.7% increase (compared to the peer average of 73.7%) and a total shareholders' return of 91.7% (compared to the peer average of 73.7%).

The results of the 2017-2019 three-year period underline the effectiveness of the remuneration system in encouraging a management approach focused on achieving objectives that are in line with shareholder remuneration.

 
Economic growth in the 2017-2019 three-year period (mln/euro)
 
Total shareholder's return 2019 - Total shareholder's return 2017-2019


Stock options

In line with its highly conservative risk profile, Hera has chosen not to make use of volatile financial instruments such as option rights or other similar instruments.

The Group does not use benefit policies involving the distribution of stock options to its own employees.

The table below summarises the remuneration components awarded to directors and the general manager.

PositionFixed remunerationShort-term variable remunerationDeferred variable remuneration for management retentionNon-monetary benefitsCompensation
ChairmanSpuntaSpunta SpuntaSpunta
CEOSpuntaSpuntaSpuntaSpuntaSpunta
Vice ChairmanSpunta  Spunta 
Non-executive directorsSpunta  Spunta 
General Manager OperationsSpuntaSpunta Spunta 


Page updated 28 April 2020

 
 
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