Principles and Examination of Risks

The new Policy has been prepared on the basis of Policy application experience last year. Therefore, its structure has been refined and its content expanded, by incorporating in it elements that had previously been contained in the application criteria, in view of facilitating full comprehension of the link existing between the structure of management remuneration and the creation of value over the medium-long term. The new Policy also reflects the recent regulatory provisions adopted by Consob in Resolution no. 18049 of November 23, 2011 and the adoption of a new Long Term Incentive Plan. Pirelli has decided to terminate the existing plan for the three-year period 2011-2013 by proposing a new one for the three-year period 2012-2014 that is consistent with the Business Plan for that same period.

This new plan has been accompanied by adjustment of the compensation paid to Directors holding special offices, and particularly the Chairman and Chief Executive Office in the terms that will be illustrated below. Furthermore, the new Long Term Incentive Plan now includes non-financial objectives, in accordance with the Recommendations of the European Commission. The Company defines and applies a Remuneration Policy targeting particularly attractive top management and Senior Managers, aiming at the top 25% of the employment market (as measured by the commonly used benchmark), and in line with market practise for the Executives, so as to attract, motivate and retain the resources having the professional skills necessary for successful pursuit of Pirelli Group objectives.

The Policy is defined in such a way as to align Management interests with those of shareholders, pursuing the primary objective of creating sustainable value in the medium-long term through the creation of an effective and verifiable link between compensation, on the one hand, and individual and Group performance on the other.

The structure of Management remuneration, defined with the assistance of firms specialising in executive compensation and on the basis of international benchmarks, is composed of three principal elements:

  • fixed component: for Directors holding special offices, the fixed component is set by the Board of Directors when they are appointed and for their entire term, in an aggregate annual amount, and thus including any fixed components for other positions that they hold at the Pirelli Group. For the rest of Management, the fixed component is set when they are hired and may be periodically revised to take account of the performance, assumption of new responsibilities, and market salary trends for the type of position held by the individual;
  • an annual variable component (MBO): this is a pre-determined percentage of the fixed component, with percentages that rise according to the position held and considering the benchmarks for each position, with the target ranging from a minimum of 20% for Executives to a maximum of 100% for the Directors holding a special office who have been assigned specific functions. According to the beneficiary, it is designed to reward the annual performance of the Group, the company and/or the business unit to which he or she belongs. A limit has been set for the maximum MBO that can be realised, which (i) for the Executives and Senior Managers is equal to double the attainable target bonus, (ii) for the Key Managers, it is 150% of the GAS, (iii) for the General Managers it is 200% of the GAS, and (iv) for the Directors holding special offices and assigned specific functions, it is 250% of the fixed component for the principal officer (in the case of Mr Tronchetti Provera, his position held at Pirelli Tyre). Please refer to section 5, “MBO and LIT Plan” for a more detailed description of the function of the annual variable component.
  • the medium-long term variable component (LTI Plan): this too is set as a percentage of the fixed component and is aimed at rewarding Group performance during the three-year period 2012-2014. Just like the MBO bonus, a limit is imposed on the maximum realisable amount for the LTI. The current LTI plan is based on two components: the “pure” LIT Bonus and the co-investment LTI Bonus (for a description of the function of the variable medium-long term component, please see section 5).

The variable remuneration of Management is based on short and medium-long term targets sent in the annual and three-year Business plans announced to the market. In this regard, note that the risk management process is now fully integrated in the strategic planning process. This guarantees that the objectives set for realisation of the variable bonus do not expose Pirelli to managerial conduct inconsistent with an acceptable level of risk (“risk appetite”) defined by the Board of Directors when it approves the Plans.

Management remuneration is then structured in such a way as to assure balance among its components.

In particular, major weight is given to the variable component (with the medium-long term component prevailing). If the set targets are met, this component represents:

  • no less than 50% of the target-based annual total Direct Compensation for the Chairman and Chief Executive Officer, the General Managers and the Key Managers;
  • no less than 40% of the target-based annual total direct compensation for Senior Managers, and
  • no less than 30% of that parameter for Executives.

A significant portion of the annual variable remuneration for 2012 and 2013 (50% of the annual MBO) is deferred; of this 50%, half (i.e. 25% of the annual accrued MBO) is paid at the end of the three-year period 2012-2014, regardless of the accumulated results actually realised during the three-year period; payment of the other half, instead, is conditioned on achievement of the medium-long term objectives (please see section 5 for an analytical description of how the incentive mechanisms work).

The definition of a mix of targets, including nonfinancial targets, for the medium-long term variable portion avoids the preponderant weight of a single performance target. Moreover, the existence of targets for achieving a significant part of the LTI incentive based on accumulated financial parameters for the three-year period avoids conduct aimed solely at the realisation of short-term objectives to qualify for the annual bonus.

For the other components of remuneration (retirement bonuses-TFM, not-to-compete clauses, nonmonetary benefits) granted to the various members of Management, please see the sections that describe the remuneration structure for each category.