5 Compensation, participations and loans

5.1 Content and stipulation procedure of compensation and the participations programmes


5.1.1 Responsibility and stipulation procedure

The Group Nomination & Compensation Committee (see point No. 3.5.2 “Composition of all Board of Directors’ committees, their tasks and terms of reference”), which is composed solely of independent members of the Board of Directors, proposes the principles and regulations governing the compensation for the members of the Board of Directors, on the one hand, and the Group Executive Board, on the other hand, as well as the amount of the compensation for the members of the Board of Directors and the Group Executive Board. The Board of Directors “in corpore” approves the principles and regulations governing compensation and specifies the amount of the compensation for the members of the Board of Directors and the Group Executive Board.

In 2013, the consultancy group FehrAdvice & Partners AG was called in for the formulation of the Group Executive’s compensation model. In addition, Towers Watson was commissioned in 2014 to compare compensation in relation to the functions of the Group Executive Board. This comparison comprised between six and eleven banks and between twelve and eighteen positions per function represented in the Group Executive Board.

The decision regarding the amount of the compensation of the members of the Board of Directors and the Group Executive Board is made at the discretion of the Board of Directors. The members of the Group Executive Board are not present at the discussion and the decision concerning the amount of their compensation. In accordance with Art. 12, para. 2 of the Law on the Liechtensteinische Landesbank, the Board of Directors must inform the Government about the compensation ruling specified for the Board. The Liechtensteinische Landesbank does not submit the entire compensation of the Board of Directors or the Group Executive Board to the General Meeting of Shareholders for approval and also waives conducting an advisory vote on compensation.

5.2 Statutory regulations on compensation, participation and loans

On 20 November 2013, the Federal Council adopted the Ordinance against Excessive Compensation in Listed Companies (OaEC), which came into force on 1 January 2014. It applies to Swiss public companies whose shares are listed on an exchange in Switzerland or abroad. It does not apply to foreign companies listed in Switzerland.

The Liechtensteinische Landesbank is not subject to the OaEC and has not issued any regulations on compensation, participation and loans.

5.3 Details in the same manner as Art. 14 to 16 OaEC

According to the Regulatory Board Communiqué No. 2 / 2014 of 1 September 2014, No. II, all companies listed on SIX Swiss Exchange should have to disclose the same information on corporate governance. Issuers that are not subject to the regulations of the OaEC have to therefore publish details about the compensation of the members of the Board of Directors and the Board of Management in the same manner as Art. 14 to 16 of the OaEC.

5.3.1 Fundamentals

The European Union set down compensation standards in the EU directive 2010 / 76 / EU. As a member of the EEA, Liechtenstein is committed to incorporating this directive into national law. As at 1 January 2012, Liechtenstein fulfilled the necessary requirements through the implementation of Appendix 4.4 to the ordinance on banks and securities firms (Banking Ordinance).

On 18 August 2011, the Board of Directors of LLB approved Group “Compensation Standards” for Liechtensteinische Landesbank AG and its Group companies based on Appendix 4.4 of the Banking Ordinance; it came into force on 1 January 2012. It regulates the framework for the Group-wide compensation policy, in particular, in regard to its alignment to risk management. It stipulates the basis, values and objectives and sets out the minimum requirements for the design of the compensation systems. In addition, it regulates Group-internal and Group-external reporting as well as related responsibilities. In order to implement the Group “Compensation Standards” for Liechtensteinische Landesbank AG the Board of Directors also passed “Compensation Standards” that came into force on 1 April 2012.

The Group regulation applies to the Board of Directors, the Group Executive Board, senior managers exercising control functions, risk takers as well as to employees who receive an overall compensation comparable to that of the Group Executive Board and whose decisions have a significant influence on the risk profile.

The compensation for employee work performance complies with the business strategy as well as with the goals and values of the LLB Group and is based on the following principles:

  • Sustainability and risk adjustment: Compensation practices have to contribute to long-term corporate development. They must support risk management and the pursuit of both continuous increases in the company’s value and long-term client and employee retention. Compensation policy has to offer incentives in a manner that allows for adequate risk behaviour by individual persons in order to counteract any conflicts of interest between the optimization of one’s own compensation through risk taking, on the one hand, and the interests of the bank in regard to risk optimization, on the other.
  • Performance and success orientation: Compensation practices also have to reward both individual performance and company related performance. Focus on the Group’s success promotes and is in line with the LLB Group’s long-term business interests. Acknowledging individual performance serves performance motivation, the management of individual performance contributions towards achieving company goals as well as the retention of top performers.
  • Foundation of trust: The design of the compensation regulations and processes is based on a mutual foundation of trust between employees and employers.
  • Simplicity, clarity and comprehensibility: The compensation regulations and models are to be kept simple, clear and comprehensible. Employees as well as third parties should be able to easily understand the basic concepts.
  • Fair remuneration in accordance with responsibilities and management levels: Compensation assessment also has to consider the workload as well as the degree of responsibility and reflect the different management level requirements in a clear and fair manner.
  • Group orientation: Compensation also has to promote Group orientation. It aims to further commitment towards Group success and increased identification with the Group through employee participation in the long-term development of values and in shared ownership by means of an appropriate share option scheme.

The principles and regulations governing the compensation of the members of the Board of Directors and the Group Executive Board are reviewed annually. The amount of the compensation for the members of the Board of Directors and the Group Executive Board is determined each year.

5.3.2 Compensation model

Board of Directors

The Board of Directors stipulates the amount of compensation of its members in accordance with their duties and responsibilities. The members of the Group Executive Board receive a fixed compensation, which is paid in cash as well as in the form of an entitlement to acquire LLB shares. The number of LLB shares is calculated on the basis of the average share price in the last quarter of the financial year. The entitlement to acquire LLB shares is subject to a blocked period of three years. The members of the Board of Directors do not receive any variable compensation. Members of the Board of Directors do not profit from the additional benefits for staff (fringe benefits) or from their preferential conditions on bank products. Business relations with them are subject to the same conditions that apply to comparable transactions with third parties.

On account of legal provisions, no severance payment may be made in the event of the termination of a mandate (Art. 21, para. 2 of the law concerning the control and supervision of public companies).

Group Executive Board

The compensation model of the LLB Group is geared towards rewarding performance. This means that above-average performance has a positive effect on and underaverage performance has a negative effect on the amount of compensation. Furthermore, the compensation model places the focus on sustainable and long-term oriented actions.

Compensation model: Group Executive Board

The total target compensation for each member of the Group Executive Board is fixed. It consists of a fixed compensation (67 %) and a variable target compensation (33 %). The total target compensation for the members of the Group Executive Board was determined on the basis of a compensation comparison carried out by the Towers Watson company. The total target compensation corresponds to the compensation due to a member of the Group Executive Board if the total shareholder return of the LLB share corresponds to the total shareholder return of the peer group. Besides the fixed compensation, the variable compensation is also insured in the staff pension scheme (age, death, invalidity). The new compensation model also contains a bonus-malus provision. The members of the Group Executive Board receive more or less than their total target compensation depending on whether the total shareholder return of the LLB share exceeds or falls below the total shareholder return of the peer group. The maximum bonus possible is 200 percent of the variable total target compensation and the maximum malus possible is 0 percent of the variable target compensation. This means that the variable compensation is limited to the total amount of the fixed compensation.

The fixed compensation is paid in cash. The amount of the variable compensation is determined by the Group performance. The Board of Directors can adjust this for individual performance by +/− 10 percent of the variable total target compensation within the framework of the Management by Objectives (MbO) process. The Group performance is measured using the relative Total Shareholder Return (TSR), that is, the “Market Adjusted Performance Indicator” (MAPI). This is done by comparing the TSR of the LLB share in relation to the TSR of a peer group. The peer group is broadly diversified, comprising a group of 29 banks. Its composition is discussed and evaluated annually by the Group Nomination & Compensation Committee.

Geographic distribution of the 29 banks in the peer group:

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Liechtenstein

1

Switzerland

12

Austria

3

Germany

1

France

4

Italy

4

Great Britain

1

UAE

3

The relative Total Shareholder Return (MAPI) compares management performance with the performance of a group of banks. Market effects can be eliminated from the performance indicator by comparing performance with a peer group. The MAPI is therefore free of external market effects. It is calculated by FehrAdvice & Partners AG.

If the MAPI is zero percent, which means that the Total Shareholder Return of the LLB share corresponds to the Total Shareholder Return of the peer group, the members of the Group Executive Board receive their variable total target compensation. The variable compensation is linearly dependent on the MAPI. No variable compensation is paid if the MAPI is minus 40 percent or less. If the MAPI is 40 percent or more, the maximum variable compensation is paid, which is capped at 200 percent of the variable target compensation. The variable compensation comprises a short-term incentive (STI) and a long-term incentive (LTI). The STI is paid in cash in the first quarter of the following year. The LTI is paid in the form of an entitlement to acquire LLB shares. The distribution between the STI (50 %) and the LTI (50 %) is internally regulated. The number of LLB shares for the LTI is calculated on the basis of the average share price in the last quarter of the financial year. The LTI is subject to a blocked period of three years. The three-year period remains in force even after termination of employment. After three years, the entitlement to acquire shares is transformed into a right to the transfer of the corresponding LLB shares. The share entitlement can be withdrawn or reduced if – during the three-year period – there are significant changes in the assessment of performances and / or risk behaviour of the member of the Group Executive Board. Furthermore, the entitlement to acquire shares in a particular year lapses if the average Group result of the previous three years is negative. At the end of the three-year period, the Group Nomination & Compensation Committee examines whether the prerequisites for the entitlement have been met. The Committee submits its decision to the Board of Directors for a final decision.

LTI with claw-back mechanism

LTI with claw-back mechanism (bar chart)

The employment relationship of the members of the Group Executive Board is stipulated in individual employment contracts. The period of notice is four months. The contracts of employment do not contain any special clauses, such as, for example, severance compensation following the termination of employment or even in the event of a change in control.

The Liechtensteinische Landesbank extends the preferential conditions on bank products customary in the banking industry to all its employees (including the Group Executive Board). This mainly takes the form of limited preferential interest rates on mortgage loans and credit balances. Standard market conditions apply to all transactions made by the Board of Directors with the Bank.

5.3.3 Elements

For the 2014 business year, the members of the Board of Directors received a fixed compensation of CHF thousands 714. Contributions to pension schemes and other welfare schemes amounted to CHF thousands 103. The fixed compensation was paid in cash as well as in the form of an entitlement to acquire LLB shares. The entitlement to acquire LLB shares is subject to a blocked period of three years.

For the 2014 business year, the members of the Group Executive Board received a fixed compensation of CHF thousands 3’067 and a variable compensation of CHF thousands 909. Contributions to pension schemes and other welfare schemes amounted to CHF thousands 989. The fixed compensation was paid in cash. The variable compensation was paid in cash (50 %) as well as in the form of an entitlement to acquire LLB shares (50 %), which is subject to a blocked period of three years. The number of shares for the share-based compensation corresponds to the average share price of the last quarter of 2014 (CHF 39.27). The variable compensation for the members of the Group Executive Board was, on average, approximately 29.6 percent of the fixed compensation, that is, 15.5 percent of the entire compensation.

In comparison with the previous year, the entire compensation of the members of the Board of Directors increased by CHF thousands 32, that is, by 3.4 percent. This increase in the compensation of the members of the Board of Directors is particularly due to the fact that the Board of Directors has had seven members again since 9 May 2014. In 2014, the compensation of the members of the Board of Directors increased by CHF thousands 600, that is, 11.4 percent, which is mainly due to variable compensation. The MAPI was 12.95 percent, which corresponds to an achievement of targets of 132.4 percent. The variable compensation therefore corresponds to 132.4 percent of the variable compensation targets.

The entire compensation of the members of the Board of Directors and the members of the Group Executive Board in the 2014 business year is reported on an accrual basis. The variable compensation was booked to the 2014 income statement. Payment of the STI to the Group Executive Board will be made in the first quarter of 2015. The entitlement to acquire LLB shares by the Board of Directors and the Group Executive Board (LTI) is subject to a blocked period of three years.

Details of the compensation and participations of members of the Board of Directors and the Group Executive Board as well as loans to them can be found in the Notes to the consolidated financial statement of the LLB Group in “Related party transactions”.

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