In March 2012, considering the launch of a “new” three-year Business Plan for 2012-2014 with significantly more challenging targets than the ones already set in the 2011-2013 Business Plan, it was decided to terminate the 2011-2013 LTI Plan prematurely by proposing the simultaneous launch of a “new” LTI Plan (Long Term Incentive Plan) linked to the objectives of the “new” Business Plan and covering the same three-year period, 2012-2014.
With its new LTI Plan, Pirelli aims to facilitate a full comprehension of the link between the structure of management remuneration and the creation of value over the medium-long term. The new Long Term Incentive Plan, indeed, also includes non-financial objectives as described in the following box, in accordance with the Recommendations of the European Commission.
The structure of Management remuneration is composed of three principal elements:
- A fixed component
- An annual variable component (Management by Objectives -MBO), which entails a pre-determined percentage of the fixed component. 50% of the annual variable remuneration for 2012 and 2013 is deferred (see “coinvestment” LTI Bonus).
- A medium-long term variable component (LTI Plan), which is also set as a percentage of the fixed component and is aimed at rewarding Group performance during the three-year period 2012-2014. The current LTI plan is based on two components; (a) the “pure” LTI Bonus conditioned on fulfillment of the three-year targets and determined as a percentage of the gross annual fixed component/GAS received by the beneficiary at the established Plan vesting date. If the targets are missed, the beneficiary is not vested, (b) the “coinvestment” LTI Bonus including a mechanism for “co-investment” of a portion of the MBO (50% of the 2012 and 2013 MBO component). Half of the “co-invested MBO” is not subject to additional performance targets, and may thus be qualified as “deferred MBO.” This portion is paid out at the end of the three year period.Payment of the other half is conditioned instead on fulfillment of the three-year targets. If the targets are met, in addition to return of the co-invested MBO, the Plan participant is entitled to it being increased by between 50% and 125% “LTI co-investment bonus”. The amount of increase depends on two additional factors:
- two thirds of the incremental difference between the supplement of 50% of the co-invested MBO and the supplement of 125% of the co-invested MBO are calculated in relation to improvement in the average return on sales target result for the three-year period 2012-2014 (“ROS 2012-2014”).
- the remaining one third of the difference between the supplement of 50% of the co-invested MBO and the supplement of 125% of the co-invested MBO is calculated on the basis of a Sustainability indicator in relation to the position of Pirelli in the following indices: (i) Dow Jones Sustainability Index, Autoparts and Tyre segment, and (ii) FTSE4Good Tyre.
It was quite complex to identify the correct non-financial indicators being able to cover all the sustainability performance areas and in a balanced way. The choice finally concerned the rating and positioning of the company in the Auto & Parts Sector of the Dow Jones Sustainability Indices and of the FTSE4Good Indices as well, according to Indices periodic assessments.Proportionally, the less the performance is, the less the connected incentive is (see attached the LTI description in the web link below).
The company was proved to be fully mature to integrate sustainability not only in group targets but also in personal targets.
As the new policy has only been approved by Shareholders’ Meeting on May 10th 2012 , the real impact cannot be determined yet. However, this approach is expected to further enhance company's engagement to sustainability targets, at all levels given the cascading of targets from Top Management to all employees categories.