Incentive systems

Guidelines and principles for remuneration to senior executives

The incentive system for the company’s business organisation is of major strategic importance for Ratos. Against this background, a remuneration and incentive system has been drawn up designed to offer competitive terms at the same time as the company’s employees are motivated to work in the interests of the shareholders.

The incentive system comprises a number of components – basic salary, variable salary, pension provisions, warrants and convertible debentures – and rests on five basic principles.

  • Ratos’s employees shall be offered competitive terms of employment in an industry where competition for qualified employees is intense
  • Both individual efforts and the Group’s performance must be linked to clear targets set by the Board
  • Variable cash salary that is to be paid to senior executives is to be linked to joint and individual targets set annually. The targets are both quantitative and qualitative and aim to fulfil Ratos’s long-term strategy and earnings trend that benefit the shareholders
  • Each year the Board sets a limit for the total variable salary, which shall amount to a maximum of approximately 0.6% of the company’s equity at the start of the financial year
  • Key people at Ratos shall be encouraged to have the same perspective as the company’s shareholders which will be achieved through reasonably balanced incentive programme where employees can share in price rises

As far as possible, pension benefits shall be defined contribution pension solutions, but certain pension benefits that follow the ITP plan are defined benefit plans. There is no agreed retirement age.

The Board shall be entitled to deviate from these guidelines if special circumstances should prevail in an individual case.

Variable cash salary for senior executives

The variable cash salary is related to the annual shared and individual targets. The targets are both quantitative and qualitative and aimed at meeting Ratos’s long-term strategy. In 2018, the criteria for and the calculation of the outcome of variable cash salary were modified, mainly by removing the criteria with respect to growth in cash flow from operations for the portfolio and the development of Ratos’s net asset value (NAV). Otherwise, the Board chose to leave the structure for variable cash salary largely unchanged as this is considered to be on market terms and appropriate.

Variable cash salary is disbursed over a two-year period and is divided into 50% for each year. However, the expense for each year’s variable salary is expensed in its entirety in the year the remuneration is earned. A ceiling has been established in relation to each senior executive’s fixed salary and can amount to a maximum of 100% of fixed salary.

Follow-up and evaluation of variable cash salary is conducted at the end of each year. Target fulfilment by the CEO and company management is followed up and evaluated by the Compensation Committee and then approved by the Board of Directors following proposal from the Compensation Committee.

Warrants and convertible debentures

The 2019 Annual General Meeting voted to introduce a long-term incentive programme for the CEO and other key personnel in Ratos consisting of convertibles and warrants (referred to below as the “Instruments”), where participants in the programme are free to decide how large a share of the Instruments offered should comprise convertibles (which extend for no more than four years) and/or warrants (which extend for no more than five years). One prerequisite for allotment of warrants is that the employee has signed an agreement regarding repurchase etc. with the company whereby the company or purchaser designated by the company has the right to repurchase warrants if the participant’s employment is terminated.

Ratos has, pursuant to the incentive programme issued and allocated a total of 1,270,000 Instruments to participants, distributed between 751,300 convertibles and 518,700 warrants, at the time of the date for the issue of the Instruments. Ratos’s convertible debentures amount to a nominal amount of just over SEK 20m. A convertible carries the entitlement to subscribe for one share at a conversion rate of SEK 27.25.

The increase in the company’s share capital may, in the event of full exercise of the Instruments, amount to no more than SEK 4,500,000 (assuming the current quota value and that no recalculation takes place in accordance with the terms and conditions), corresponding to a dilution of approximately 0.40% of shares in Ratos, based on the number of shares outstanding on the issue date for the Instruments.

The measurement of warrants was conducted in accordance with the customary pricing model (Black & Scholes), where volatility was assumed to be 26.0% and risk-free interest -0.39%. The subscription price is 125% of the volume-weighted average share price in accordance with Nasdaq Stockholm’s official stock exchange list for Class B shares between 13 May and 23 May 2019. As the warrants are being offered free of charge to participants, they will receive a benefit corresponding to the market value of the warrant at the date of the allotment (option premium). The net expense for participants, after subsidies, will be approximately 50% of the taxable benefit.

Terms of outstanding convertible debentures by June 2019

Maturity date Subscription price, SEK Conversion price, SEK/share Right to purchase no. of shares Number of convertible debentures Corresponding number of shares
2018-2022-06-08 26.64 26.64 1 724,528 724,528
2019-2023-06-07 27.25 27.25 1 751,300 751,300
        1,475,828 1,475,828

 

Terms of outstanding warrants by June 2019

Maturity date Warant value, SEK 1) Subscription price, SEK/share Right to purchase no. of shares Number of warrants Corresponding number of shares
2018-2023-06-08 3.30 36.22 1 429,811 429,811
2019-2024-06-14 3.93 33.81 1 518,700 518,700
        948,511 948,511

 

1) As the warrants are offered to the employees free of charge, the employees will thereby receive a benefit corresponding to the market value of the warrants at allocation (Warrant value). After subsidization the net cost for participant will amount to approximately 50 percent of the benefit value.

Call option programmes

Annual general meetings from 2001 up to and including 2017 have decided on call option programmes directed to senior executives and other key people within Ratos. Members of the Board of Ratos are not included in this offer. Employees have paid a market premium for the call options in all programmes. Acquisition of call options is subsidised by the purchaser receiving extra remuneration corresponding to a maximum of 50% of the option premium after deduction for 55% standard tax, whereby the remuneration is divided into equal parts for five years. Payment of remuneration is normally conditional upon continued employment and continued holding of options acquired from Ratos or shares acquired through the options. Call options are issued on treasury shares and have a maturity of four years.

Terms of outstanding call options by 24 May 2019

Maturity date Price/ option, SEK Exercise
price, SEK
Right to purchase no. of shares Number of options Corresponding number of shares
2015 Sept - 20 March 2020 6.50 51.20 1 462,100 462,100
2016 Sept - 19 March 2021 4.80 40.70 1 453,000 453,000
2017 Sept - 18 March 2022 4.50 42.80 1 242,500 242,500
        1,157,600 1,157,600

 

Synthetic options

The 2017 Annual General Meeting, like all Annual General Meetings since 2007, resolved on a cash-based option programme related to Ratos’s investments in the companies. The programme is carried out through the issue of synthetic options that are transferred at market price. The programme gives the CEO and other key people within Ratos an opportunity to share in the investment result of the individual companies. Options related to an individual investment only have a value if Ratos’s annual return on the investment exceeds 8%. According to the 2017 option programme, the total value of the issued options at the closing date will be a maximum of 5% of the difference between the actual realised value for Ratos’s investment at the closing date and the cost increased by 8% per year. Acquisitions of synthetic options are subsidised by the purchaser receiving extra remuneration corresponding to a maximum of 50% of the option premium up to 5% of Ratos’s total investment in the relevant portfolio company after deductio  for 55% standard tax, whereby the remuneration is divided into equal parts for four years and is normally conditional upon continued employment in the Ratos Group and continued holding of options acquired from Ratos.