MBO and LTI Plan

MBO

The variable annual component (MBO) remunerates the beneficiary’s performance on an annual basis.

The MBO objectives for the Directors vested with special roles, and who are assigned specific functions, for the General Managers, and for the Executives with strategic responsibilities, are established by the Board of Directors (without the persons in question being present at such decision meetings) at the suggestion of the Remuneration Committee, and the objectives are linked to Pirelli’s performance, on an annual basis.

The objectives of Senior Management and of Executives are, however, defined by their line manager, in agreement with the Group’s Human Resources and Organisation Department, and with the Group’s Management Control Department. For these positions, unlike those of Top Management, objectives may be set that are linked to the economic performance of the unit/function to which they belong, and objectives of a qualitative/quantitative nature may be set, linked to specific, individual performance parameters.

The Group’s Human Resources and Organisation Department, with the assistance of the Group’s Management Control Department, proceeds, at the end of the year, and based on final performance, to verify the level of achievement of these objectives.

Accrual of the annual variable component is subject to the achievement of an access condition (on/off) of financial type,, defined in relation to the specific role played by the beneficiary. The incentive is then calculated based on certain objectives also defined in relation to the specific role held by the beneficiary.

The following are the objectives for the various Management positions, and their weighting at target.

PositionObjectiveWeighting at target
Chairman and Chief Executive Officer / General Managers and Executives with strategic responsibility   Group’s NFP (before dividends) On/off condition
Group’s EBIT (after restructuring costs) 65%
Group’s Net Cash Flow (before dividends) 35%
Senior Managers / Headquarters Executives     Group’s NFP (before dividends) On/off condition
Group’s EBIT (after restructuring costs) 50%
Group’s Net Cash Flow (before dividends) or a functional objective with Group “scope” 30%
Individual qualitative/quantitative Performance 20%
Senior Managers / Executives of the BU/Region    Group’s NFP (before dividends) if BU; Region NFP if Region On/off condition
BU/Region EBIT (before restructuring costs) 50%
Functional objective typically with Group “scope” 30%
Individual qualitative/quantitative Performance 20%

The objectives at target represent a performance perfectly aligned with the objectives disclosed to the market. The on/off condition is set with a "tolerance margin" with respect to the budget value (Euro 658 million).

PositionObjectiveTarget objective
Chairman and Chief Executive Officer / General Managers and Executives with strategic responsibility   Group’s NFP (before dividends) On/off condition Euro 722.3 million
Group’s EBIT (after restructuring costs) Euro 928.8 million
Group’s Net Cash Flow (before dividends) Euro 321.5 million
 

There is an access threshold associated with award of an incentive equal to 75% of the achievable incentive at target; and there is also  a cap on the amount attainable.

The range of objectives is set according to the following general rules:  

  • for each target the delta between the target level and the maximum level is always equal to at least 1.5 times the delta between the target level and the "access threshold" level and
  • the penalty percentage of 25% of the bonus upon achievement of the objective at "access threshold" level is always greater than the "tolerance margin" represented by the percentage difference between the "access threshold" result and "target" result.

The final calculation of the incentive between the access threshold and the target, and between the target  and the maximum, is carried out using linear interpolation.

The following are the incentivisation percentages for the various positions.

Incentive accrued
PositionOn achievement of the access threshold objectivesOn achievement of the at target objectivesOn achievement of the objectives at maximum (cap) level
Chairman/CEO 75% of the incentive at target 100% of the compensation for the main executive role 250% of the incentive at target
General Managers 75% of the incentive at target 75% of the gross annual salary 200% of the incentive at target
Executives with strategic responsibility 75% of the incentive at target 50% of the gross annual salary 200% of the incentive at target
Senior Managers - Executives 75% of the incentive at target Between 20% and 40% of the Ral according to the position 200% of the incentive at target
   

Deferred payment of the MBO

Payment of 25% of the MBO accrued is deferred for 12 months and is subject to achievement of the MBO objectives of the following year. In particular:

  • if no MBO is accrued in the year following the year of the MBO’s accrual, the portion of MBO that was deferred the previous year is permanently "lost";
  • if the MBO's access threshold level is accrued in the year following the year of the MBO’s accrual, the portion of MBO that was deferred the previous year is returned;
  • if, in the following year, there is achievement of an MBO between the target level and the maximum level, there is disbursement - in addition to the refunding of the MBO portion deferred from the previous year - of an additional sum of between 20% and 40% of the full MBO accrued in the previous year (to obtain the results for the following year, intermediate between target and maximum, the increase of the MBO of the previous year is calculated using linear interpolation). 

LTI Plan

The LTI Plan 2014-2016, like the previous one, applies to all Management (except in specific cases such as, for example, Managers of Internal Auditing) and may also be applied to those who, during these three years, become part of the Group’s Management and/or become, for reasons of internal career development, Executives. In such an event, inclusion is subject to the condition of participating in the plan for at least one whole year, and the incentivisation percentages are adjusted based on the number of months of actual participation in the Plan.

The LTI Plan 2014-2016 contains an incentive (“LTI Award”) that is subject to achievement of the multi-year objectives, and its percentage is determined based on the gross annual fixed component / gross annual salary received by the beneficiary at the date when their participation in the Plan is established. This incentivisation percentage grows in relation to the position held, and takes into account the reference benchmark for any position.

There is an access threshold for each objective - which is associated with award of a sum equal to 75% of the incentive portion achievable at target - and there is also a cap on the amount attainable.

The LTI Award, in the event of achieving all of the objectives to the maximum level, cannot be greater than twice the incentive attainable in the event of achieving the objectives at target.

In the event of failing to achieve the access threshold for any objective, the beneficiary does not accrue any right to disbursement of the relevant portion of the incentive.

The following are the incentivisation percentages for the various positions.

Incentive accrued
PositionOn achievement of the access threshold objectivesOn achievement of the at target objectivesOn achievement of the objectives at maximum (cap) level
Chairman/CEO 75% of the incentive at target 250% of the compensation for the main executive role 200% of the incentive at target
General Managers 75% of the incentive at target 200% of the gross annual salary 200% of the incentive at target
Executives with strategic responsibility 75% of the incentive at target 167% of the gross annual salary 200% of the incentive at target
Senior Managers - Executives 75% of the incentive at target Between 50% and 167% of the Ral according to the position 200% of the incentive at target
   

The following are the LTI Plan objectives common to all Management positions, and their relative weighting at target.

ObjectiveWeighting at target
Creation of value (difference between NOPAT - Net Operating Profit After Tax - and the weighted average cost of fixed capital plus working capital) On/off condition
Group ROS (calculated as the ratio between the EBIT after cumulative restructuring costs for the three years, and cumulative sales for the three years), of the Business Unit or the Region (calculated as the ratio between the EBIT before cumulative restructuring costs for the three years, and cumulative sales for the three years) according to the organisational unit to which the Executive belongs 30%
“Absolute” Total Shareholder Return calculated as the ratio between: (average share value for the last half of 2016 - the average share value for the last half of 2013 + dividends paid in the three year period) and (average share value for the last half of 2013) 40%
Total Shareholder Return “relative” to a selected panel of peers (Michelin, Bridgestone, Goodyear, Hankook) 20%
Sustainability Indicator: Calculated in relation to the positioning of Pirelli on two indices, with equal weighting: (i) Dow Jones Sustainability World Index, ATX Auto Components sector (ii) FTSE4Good Global Index, Automobile & Parts sector. This objective is subject to achieving the access threshold of at least one of the above economic/financial objectives (no pro-rata portion of the three-year incentive will be paid out if only this objective is achieved). 10%

The target level of the economic/financial objectives is perfectly aligned with the Business Plan 2013-2017 objectives disclosed to the market at that time. Regarding the “relative” performance objectives, the target level is set to particularly challenging values.

 

PositionObjectiveTarget objective
Chairman and Chief Executive Officer / General Managers and Executives with strategic responsibility     Creation of value (difference between NOPAT - Net Operating Profit After Tax - and the weighted average cost of fixed capital plus working capital) On/off condition Creation of positive value
Group ROS (calculated as the ratio between the EBIT after cumulative restructuring costs over the three years, and cumulative sales for the three years), of the Business Unit or the Region (calculated as the ratio between the EBIT before cumulative restructuring costs for the three years, and cumulative sales for the three years) according to the organisational unit to which the Executive belongs 13.73% (of the Group)
"Absolute" total Shareholder Return calculated as the ratio between: (average share value for the last half of 2016 - the average share value for the last half of 2013 + dividends paid in the three year period) and (average share value for the last half of 2013) +47%
Total Shareholder Return “relative” to a selected panel of peers (Michelin, Bridgestone, Goodyear, Hankook) Aligned to the performance of the panel
Sustainability Indicator: Calculated in relation to the positioning of Pirelli on two indices, with equal weighting: (i) Dow Jones Sustainability World Index, ATX Auto Components sector (ii) FTSE4Good Global Index, Automobile & Parts sector. This objective is subject to achieving the access threshold of at least one of the above economic/financial objectives (no pro-rata portion of the three-year incentive will be disbursed if only this objective is achieved). Positioning in the highest decile

The range of objectives is set according to the following general rules:  

  • for each target the delta between the target level and the maximum level is always at least 1.5 times the delta between the target level and the "threshold access" level;
  • the penalty percentage of 25% of the bonus upon achievement of the target at "access threshold" level is always greater than the tolerance margin represented by the percentage difference between the "access threshold" result and "target" result.

For the TSR and ROS objectives, for intermediate results between the access threshold and the target value or between the target value and the maximum value, there will be a final calculation of the performance using linear interpolation.

The full cost of the LTI Plan is included in the economics of the Business Plan, so that its cost is “self-financed” by achieving the results.

The LTI Plan also has a retention purpose. In the event of termination of the mandate and/or of the employment relationship, for any reason, before the end of the three years, the recipient - including Directors vested with special roles, to whom specific functions are assigned (in the case of the Chairman and the CEO) - in fact ceases to participate in the LTI Plan and as a consequence, the award will not be disbursed, not even on a pro-rata basis.

Clawback clauses

“The annual (MBO) and multiannual (LTI) incentive plans adopted by Pirelli after 1 January 2015 in favour of: Directors with special offices or who are assigned specific functions, General Managers and Executives with strategic responsibility, provide, inter alia, for mechanisms known as clawbacks.

In particular, without prejudice to a remedy by any other actions permitted by law for the protection of the interests of the Company, the signing will be expected with said parties of contractual arrangements that allow Pirelli to request as return (in whole or in part), within three years after their provision, any incentives paid to individuals who, with intent or gross negligence, have been guilty of (or have contributed to) any acts, as indicated below, related to the economic/financial indicators included in the Annual Financial Report resulting in a subsequent comparative disclosure and which have been adopted as parameters for the determination of the variable bonuses of these incentive plans: 

  • proven and significant errors which result in non-compliance with the accounting standards that Pirelli considers to be applicable, or
  • proven fraudulent behaviour intended to achieve a specific representation of the financial position, net result or cash flows of Pirelli.