Compensation

The compensation policies adopted by Pirelli aim to ensure fair remuneration in line with the individual’s contribution to the success of the Company, recognising the performance and quality of the individual’s professional input, in a philosophy of sustainable remuneration. Such policies have a dual aim: on the one hand, they seek to attract, retain and motivate the best human resources; on the other hand, they seek to promote conduct that is as consistent as possible with corporate culture and values.

Compensation policies and processes for the executive group are managed by the central HR department, while for non-executive personnel they are handled on a country basis.

Following the organisational changes that took place at Pirelli between May 2012 and 2013, this year the executive population has reassessed the weight of its organisational positions. This is the prerequisite for proper management of numerous HR processes, including, for example, the salary review process, which verifies both internal pay equity and competitiveness with the external market, and the process by which the population is segmented into the various “broad bands” applied by Pirelli, which are in turn anchored to various systems of compensation, such as short term and long term incentive plans.

The following events are reported in regard to management compensation policy.

Once again for 2013, the Pirelli Board of Directors approved the General Remuneration Policy that establishes general principles and Guidelines followed by Pirelli to (i) determine and (ii) monitor application of the remuneration practices relating to:

  • the Directors holding specific positions, the General Managers and Executives with strategic responsibilities;
  • the senior managers and the other executives of the Group.

For the individuals at the top of the organisation and for senior managers, the Pirelli Remuneration Policy has distinctly attractive characteristics by aiming at the third quartile of the benchmark market (as compared with commonly used benchmarks), and characteristics consistent with the benchmark market for the remainder of management, in order to attract, motivate and retain those resources who possess the professional qualities that the Group needs to pursue its goals profitably.

The Policy is defined in such a way as to align the interests of management with the priority goal of value creation that is sustainable over the medium-long term, through the creation of an effective and verifiable link between remuneration, on the one hand, and individual and Group performance on the other hand.

The remuneration structure of management, which is defined with the aid of companies specialised in executive compensation and on the basis of international benchmarks, is composed of three principal elements:

  • fixed component: for those Directors holding specific positions, the fixed component is approved by the Board of Directors when they are appointed and for their entire term; for the remainder of management, the fixed component is determined at the time they are hired and may be periodically revised to account for their performance, assumption of new responsibilities, and the market remuneration trend for the position held by the individual employee;
  • variable annual component (MBO): this is defined as a percentage of the fixed component with growing percentages according to the position held and considering the benchmarks for each job position. According to the beneficiary, this component tends to reward the annual performance of the Group, the Company and/or the department to which the employee belongs;
  • variable long-term component (LTI plan): this too is set as a percentage of the fixed component and is designed to reward the medium-term, and thus sustainable performance of the Group.

Once again in 2013, and in accordance with market best practices, the impact of the (short-term and medium-term) variable component on the aggregate remuneration of Group management remained very high, which means that there is a strict correlation between remuneration and performance.

Entering into the specific operating characteristics of the incentive plans existing in 2013, it is seen how most of Group management participates in an annual incentive plan (MBO) tied to achievement of Group and/or business unit and/or country annual earnings/ financial targets and the qualitative assessment resulting from the PM Tool. This was introduced for the first time in the MBO 2012, and makes it possible to attribute greater significance to organisational behaviour (how), and not just the achieved results (how much) in accordance with a remuneration logic that is sustainable over time.

In regard to medium-long term incentives, on February 28, 2014 the Pirelli Board of Directors resolved in favour of premature termination of the management Long Term Incentive (LTI) plan adopted in 2012 to support the goals for the 2012-2014 three-year period, without any full or pro-rated payment of the three-year incentive.

The Board of Directors simultaneously approved the adoption of a new plan –applicable to all Executives– related to the targets set out in the 2014-2016 period contained in the Industrial Plan 2013-2017 presented on November 6, 2013, whose guidelines had already been previewed on that occasion.

The decision to terminate the previous LTI and to introduce the new one stemmed from the fact that in November 2013 Pirelli had presented its new Industrial Plan for the four-year period 2014-2017. This plan marks a significant departure from the plan presented in November 2011, partly in light of the changed economic context and industry performance. Termination of the old LTI and introduction of the new one highlights this discontinuity and makes it possible to give the necessary motivational push to incentive plans supporting realisation of the new business objectives.

The “new” LTI plan was resolved on proposal by the Remuneration Committee and with the favourable opinion of the Board of Statutory Auditors, in relation to the parties for which this opinion is required. In the part tied to Total Shareholder Return, the LTI 2014-2016 plan will be submitted for approval by the Shareholders’ Meeting called to approve the Annual Financial Report at December 31, 2013.

Consistently with the variable compensation mechanisms adopted at the international level, the three-year LTI 2014-2016 plan is entirely self-financed as in the past, given that the related liabilities are included in the profit and loss figures of the Industrial Plan.

The “new” LTI Plan includes an on/off condition, represented by the creation of value over the threeyear period, and the following three targets:

  • Total Shareholder Return (TSR) for the Group, with an aggregate target weight of 60% of the LTI bonus;
  • Return on Sales (ROS) for the Group, with an aggregate target weight of 30% of the LTI bonus;
  • position of Pirelli in selected global sustainability indicators, with an aggregate target weight of 10% of the LTI bonus.

The functioning of the TSR target is in turn broken down into two, mutually independent “sub-targets”:

  • absolute TSR (with a target weight of 40% of the total LTI bonus);
  • relative TSR in terms of a panel of selected peers (target weight 20% of the LTI bonus).

The Plan expires on December 31, 2016 and sets April 2017 as the date for any payment of the accrued longterm incentive to the plan participants, on condition that at December 31, 2016 their mandate and/or employment relationship have not terminated (for any reason) – if they should be terminated for any reason before December 31, 2016, no payment of the threeyear incentive will be made either in full or on a prorated basis.

The Chairman and Chief Executive Officer of Pirelli & C., top management and Group executives in general participate in the LTI 2014-2016 Plan.

At the same time the new LTI Plan was adopted, it was decided to introduce several changes and improvements to the annual incentive system (MBO) that during the three-year period 2014-2016 will no longer be interrelated with the three-year LTI Plan, but will offer a form of payment deferred to the following year of a portion (25%) of the annual accrued incentive, on condition that the MBO for the following year is accrued. Payment of an additional amount equal to a variable percentage of the entire MBO accrued during the previous year will be paid according to the degree that the MBO is achieved in the following year (this mechanism is envisaged to be rolling for the entire three-year period 2014-2016). This deferral mechanism means that the time when part of the variable longterm period amounts accrued will actually be paid in 2018, insofar as it is conditioned on the degree to which the financial year 2017 results are achieved (and thus two years after conclusion of the three-year period covered by the LTI 2014-2016).

These implemented modifications set the following principal goals:

  • reinforce the alignment of management interest with that of stakeholders;
  • preserve unchanged the allocation of total remuneration between the fixed component, the variable annual component and the variable longterm component (confirming that the variable part has a major impact overall).