MBO and LTI Plan

The annual variable component (MBO) remunerates the beneficiary’s performance on an annual basis. The annual variable component is based on the achievement of a financial condition of access (the “on/off condition”), which in 2012 (as in the past) is linked to the net financial (liquidity)/debt position reported at the end of the financial year.

The bonus is instead calculated on the basis of different objectives according to the position held by the beneficiary.

The MBO targets for Directors holding special offices and who are assigned specific functions, for the General Managers and for Key Managers, are set by the Board of Directors on proposal by the Remuneration Committee, and are linked to the annual performance of the Group. In 2012, as in the previous year, the target for these figures is based on the quantitative benchmark of annual profitability (Group PBIT).

With the support of the Remuneration Committee, the Board of Directors audits the fulfilment of these targets at the end of the financial year on the basis of full-year performance.

The MBOs of Senior Managers and Executives are defined instead by their hierarchical superiors in collaboration with the Group Human Resources and Organisation Department and with the Group Management Control Department. In contrast with the treatment of top management, these persons may be set targets linked to the operating performance of their specific unit/function as well as qualitative/ quantitative targets linked to specific parameters of individual performance.

The Group Human Resources Department audits the fulfilment of these targets at the end of the financial year on the basis of full-year performance. A cap is set on the maximum bonus payable if the targets are exceeded, with this cap varying according to the position held and in relation to the benchmarks applicable to each individual.

In particular, in the case of MBOs granted to Directors holding special offices and who are assigned specific functions, the maximum bonus cannot be more than 2.5 times the gross annual fixed component for the principal executive position (in the case of Mr Tronchetti Provera, his position held at Pirelli Tyre), while for the General Managers it cannot be more than 2 times greater than GAS. In the case of Key Managers, the maximum bonus cannot be more than 1.5 times greater than their GAS. Finally, the maximum bonus for Senior Managers and Executives cannot be more than 2 times greater than the target-based bonus. Payment of 50% of the MBO that might be accrued in 2012 and 2013 is deferred, and part of it (50%) is conditioned on attainment of the targets set in the LTI Plan. Partly in view of furthering the attainment of medium-long term interests, since 2009 the Group has adopted a medium-long term incentive system based on achieve of the objectives set out in the three-year plan. In this context, the LTI Plan was extended in 2011 for the following three years to all members of management (except in specific cases, such as Internal Audit function managers). In March 2012, considering the launch of a “new” three-year Business Plan for 2012-2014 with significantly more challenging targets than the challenging 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 linked to the objectives of the “new” Business Plan.

As in the past, the 2012-2014 LTI Plan is open to all of management and may also be extended to those who join Group management during the three-year period and/or assume the position of Executive for internal career growth. In this case, participation is conditioned on enrolment in the Plan for at least one whole financial year, and the bonus percentages are pro-rated according to the number of months of participation in the Plan.

The 2012-2014 LTI Plan is broken down into two components:

  1. the “pure LTI Bonus”: conditioned on fulfilment 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. This bonus percentage rises according to the position held and considering the benchmarks applicable to each individual. The maximum pure LTI Bonus cannot be more than 1.5 times the bonus that may be received if the targets are met.
    If the targets are missed, the beneficiary is not vested, not even on a pro-rated basis, for distribution of the pure LTI Bonus;
  2. the “co-investment LTI Bonus”: similarly to past Plans, this includes a mechanism for “co-investment” of a portion of the MBO. The participant in the LTI Plan “co-invests” 50% of his 2012 and 2013 MBO (hereinafter, the “co-invested MBO”). Given the operating rules of the LTI Plan, half of the “co-invested MBO” is not subject to additional performance targets, and may thus be qualified as “deferred MBO.” Payment of the other half is conditioned instead on fulfilment of the three-year targets and is thus a variable medium-long term component. 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%. The “co-invested MBO” supplemented is granted in the amount of 50% of what is “co-invested” on fulfilment of the three-year targets. The variation in the supplement (up to 125% of the co-invested MBO) is based instead on additional medium-long term targets (the supplement is referred to below as the “LTI co-investment bonus”).

Like the previous Plans, the 2012-2014 LTI Plan includes a financial access condition comprised by the net cash flow of the Group accumulated over the three-year period. Another condition for access to the pure LTI Bonus consists of attainment of the value creation target, which also qualifies the recipient for the 50% supplement of the co-invested MBO.

The 2012-2014 LTI Plan introduces several innovations from previous Plans in regard to the medium-long term objectives and the metrics used to measure them.

In particular:

The following two types of targets and related weights are established for the pure LTI Bonus:

  • “Target-based value creation objective” that measures the capacity of the company to create value over the medium-long term considering the profitability of ordinary operations compared with the amount of invested capital and its cost. In particular, this target is equal to the difference between NOPAT (Net Operating Profit After Tax) and the weighted average cost of capital plus working capital.
    Fulfilment of the target-based value creation objective (determined by considering a cumulated EBIT for the three-year period corresponding to the amount set in the three-year Business Plan) qualifies the beneficiary to receive 100% of the pure LTI bonus.
    Two thirds of the difference between the targetbased pure LTI bonus and the maximum LTI bonus will be determined by the improvement in the value creation result.
    The remaining one third of the difference between the pure LTI bonus and the maximum LTI bonus is determined on the basis of a Total Shareholder Return target calculated as performance of the Pirelli stock compared with (i) the FTSE/MIB Index Total Return, periodically calculated by FTSE and present on the database of Borsa Italiana and (ii) the index composed of selected peers in the tyre sector. The prospectus provided for the Shareholders’ Meeting contains more detailed information on application of the Total Shareholder Return target.

For the LTI co-investment bonus component:

  • fulfilment of the target-based value creation objective results in return of the co-invested MBO plus a supplement of 50%;
  • the supplement of the co-invested MBO may reach a maximum of 125% on condition of satisfaction of two other objectives, unrelated to each other:
    • 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”), which is the weighted average of the ratio between operating income net of restructuring expenses and consolidated net sales accumulated during the three-year period net of nonrecurring transactions.
    • 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.
  • if the target-based value creation objective is not met, the LTI Plan participant is entitled to return of half of the co-invested MBO (return of the co-invested MBO not subject to performance conditions).

The costs for the entire LTI bonus are included in the Three-year Business Plan targets, so that the cost of the LTI plan is “self-financed” by fulfilment of the targets themselves.

The LTI Plan also promotes employee retention. If the individual’s term in office and/or employment relationship should end for any reason before the end of the three-year period, the beneficiary’s participation in the Plan terminates and consequently the pure LTI bonus will not be paid, not even on a pro-rated basis.

The portion of co-invested MBO not subject to performance conditions (i.e. deferred MBO) will be returned only if the Manager’s employment relationship is terminated for no fault of his own (and thus including natural events and demerger of the Manager’s company from the Group).

For the Directors holding special offices and assigned specific functions (which is the case of the Chairman and Chief Executive Officer, Mr Tronchetti Provera) who leave office upon expiry of their term or for no fault of their own (and thus including natural events), the co-invested MBO shall be returned with the 150% supplement while, as previously mentioned, the pure LTI bonus will not be paid, not even on a prorated basis.