So Everyone is Using Market Conditions: Great! What Does that Mean?

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Erika Morrison
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1 So Everyone is Using Market Conditions: Great! What Does that Mean? SPEAKERS Kevin McDonald, Director, Executive Compensation, Covidien (US) Dr. Thomas Schmalberger, Head of Reward & Organizational Effectiveness, OC Oerlikon, (CH) David Tuch, Partner, New Bridge Street, an Aon Hewitt Company (UK) MODERATOR Jon Burg, Associate Partner, Radford, an Aon Hewitt Company (US)

2 Market Condition an accounting term Market condition vesting of share award is related to share price e.g.: Absolute Share price target Absolute TSR target Relative TSR target Company s TSR vs. comparator group or vs. index Non-market condition vesting related to condition not related to share price e.g.: Growth in EPS Return on equity

3 Brief history Initially companies used non market based performance conditions such as growth in EPS over 3 year period but: Increasingly difficult to set robust targets Company s don t always like setting/disclosing targets Shareholders expect targets to get harder if strong past performance/prospects look easier but not weaker if poor past performance/prospects look tougher Use of relative TSR targets deals with many of these issues (note shareholders don t like absolute share price or TSR targets)

4 About OC Oerlikon OC Oerlikon provides innovative industrial solutions for the efficient and clean production of Food, Clothing, Transportation Systems, Infrastructure, Energy and Electronics. Headquartered and publicly traded (OERL) in Switzerland, we are present in 34 countries world wide with about 160 sites and nearly employees. Three years ago we sharpened our mission Strive to be your most reliable business partner, worldwide. Increase value through high-quality innovative industrial solutions, continuously. Engage highly qualified professionals. Our commitment is your success! and re-launched our core values Integrity, Team Spirit, Excellence and Innovation preparing the ground for a philosophy of «Best-in-Class».

5 «Best-in-Class» designates the position in a peer group relating to operational and market performance and applies equally to financial results, processes and culture. Topics range from operational excellence and procurement efficiency to health, safety and environmental standards and employee engagement levels. All functions are encouraged to compare against peers to learn and improve. The success is reflected in business results * Revenue (in MCHF) ( 6.4%) ( 16%) EBIT (in MCHF) (31.4%) 51 (>100%) Net Income (in MCHF) (71.9%) 5 (>100%) Diluted EPS (70.5%) 0.01 (>100%) P/E Ratio (15.6%) * Incl discontinued business Starting in 2011, we adapted our compensation strategy to the best-in-class philosophy and plan to have it implemented globally by the end of 2013.

Segment Medical Supplies $1.8B Pharmaceuticals $2.0B Medical Devices $8.

6 Spun from Tyco International in 2007 Is a global medical device and pharmaceutical manufacturing company with nearly $12 Billion in annual revenue 2012 Sales by Segment Medical Supplies $1.8B Pharmaceuticals $2.0B Medical Devices $8.1B 2012 Sales by Geography Other Americas $0.7B Asia-Pacific $1.9B Europe $2.7B United States $6.6B

7 Medical device products in the endomechancial, soft tissue repair, energy, airway & ventilation, oximetry & monitoring and vascular markets Generic and branded pharmaceuticals, active pharmaceutical ingredients, contrast agents and delivery systems, radiopharmaceuticals Medical supplies including wound care, incontinence, needles and syringes, enteral feeding, operating room kits and accessories

8 Our Mission Create and deliver innovative healthcare solutions, developed in ethical collaboration with medical professionals, which enhance the quality of life for patients and improve outcomes for our customers and our shareholders. Our Vision Deliver unmatched value to our customers by providing solutions that improve patient outcomes and healthcare delivery through clinically relevant and economically valuable innovation.

9 So how does a relative TSR target work? Most common Company vs. Peer Group Companies in an index (e.g. FTSE 100) Bespoke group of companies Less common Company vs. Index Often used when small number of comparators available Recognised index (e.g. FTSE 100) Index of bespoke group of companies % vesting 100% 80% 60% 40% 20% 0% Median Upper quartile Co TSR performance vs. peers % vesting 100% 80% 60% 40% 20% 0% Index Index + X% p.a. Co TSR performance vs. Index

10 Compensation Strategy Attract the finest talent and to motivate and reward best-in-class performance through - Base salary aligned to market level - STI aimed above the market level and at all managers and professionals - LTI aligned to market level and for Global Leaders Pay Level LTI STI Base Previous Upper Quartile Market Median LTI STI Base Current Pay-for-(Long-Term) Performance The Long-Term Incentive (LTI) is a three-year equity program aimed at motivating Global Leaders to plan and act with a long-term view. Eligibility in the LTI program was enlarged from some 30 to some 130 Global Leaders. The LTI is specifically designed for rewarding the relative increase in total shareholder return compared to the total shareholder return of relevant peers. Peers are the 27 companies we compare ourselves to in terms of operational performance as well as shareholder return. Company Sector Company Sector Jingwei Textile Bodycote Coating Lakshmi Textile Kennametal Coating Rieter Textile Textile Praxair Coating Schweiter Textile Sandvik tooling Coating Am Axle Drive Systems General Electric Industry Group Brembo Drive Systems Siemens Industry Group Carraro Drive Systems GEA Industry Group Dana Drive Systems Sumitomo Industry Group Bharat Gears Drive Systems Thyssen Krupp Industry Group BorgWarner Drive Systems ABB Swiss Industry Group Atlas Vacuum Sulzer Swiss Industry Group Gardner Vacuum Georg Fischer Swiss Industry Group Inficon Vacuum OC Oerlikon Swiss Industry Group Ingersoll Rand Vacuum Pfeiffer Vacuum

11 LTI Plan Design Performance Share Awards (PSA) LTI 2012 LTI 2013 LTI Starting Value: VWAP over first 30 days of Year 1 Ending Value: VWAP over last 30 days of Year 3 Vesting Period Performance Period Performance Condition Total Shareholder Return (TSR) Pay-for-(Long-Term) Performance Relative TSR Payout Factor Rank 3 of peer group or above 200% (Max.) Rank 10 of peer group 100% Rank 15 of peer group 80% Rank 20 of peer group or below 0% Rank Target PSA Example CHF / VWAP = PSA Payout X Factor = PSA * Factor 1.5 = PSA Effective Shares OERL * SP = CHF VWAP over the first ten trading days after publication of the previous year s financial results. Payout Factor

12 Covidien s Executive Long-term Incentive Structure Performance Share Payout Curve and Healthcare Industry Index Capped at 2.0x RSUs 20% Stock Options 40% Performance Shares 40% Stock options and RSUs have four year prorated vesting Performance shares have a three year cliff vest based on total shareholder return against an industry index Employee equity mix is 50% stock options and 50% RSUs No payout below 30 th percentile 3-year total percentile performance vs. healthcare industry index (below) Abbott CareFusion Stryker Corp. Baxter Int l Hospira Teleflex Becton, Dickinson Johnson & Johnson Thermo Fisher Boston Scientific Medtronic Zimmer Holdings C.R. Bard Cardinal Health Owens & Minor St. Jude Medical

13 Selecting a bespoke peer group low high TSR VOLATILITY (RELATIVE TO PEER GROUP) Example of how to interpret volatility and correlation analysis payouts vary significantly but on average fairly high; outcomes have little perceived link to company performance moderate variance of outcome about median, leading to partial payout in some years high likelihood of achieving both maximum and zero payouts; average result fairly high company generally close to median, leading to low average payout TSR volatility low high 70% 60% 50% 40% 30% 20% 10% Volatility vs. Correlation for each potential peer company low high TSR CORRELATION WITH PEER GROUP Ideal position 0% 0% 10% 20% 30% 40% 50% 60% low high The low correlations of these companies suggests they might not be appropriate peers TSR correlation The high correlations of the larger companies suggest they would still be appropriate peers

14 Why do shareholders like relative TSR? Alignment of interests Removes scope for management gaming the setting of target range Should take out impact of external factors that impact on performance i.e. should be a robust measure irrespective of general economic conditions/position within a cycle Should show how management have performed vs. their competitors In theory, TSR should take account of all performance indicators and market s view of future performance

15 Challenges with TSR Performance Share Plan Initially, performance shares were granted to all employees Until first payout, plan was not widely understood or valued Changes in index due to corporate transactions Continued pressure to align plan with market Communication was a challenge; solved by PeerTracker Overall plan has been a success with positive feedback from executives, the Compensation Committee and shareholders

16 Three Challenges Introducing equity-settled compensation requires some learning in terms of: Investors, in addition to customers, suppliers and staff Insider trading regulations Replacing an accounting-based with a market-based LTI plan requires a change in mindset from: My division to my corporation My business presentation to our equity story My business performance to our stock performance In addition, building an LTI plan on a «Best-in-Class» philosophy requires a change in mindset from: My comfort zone (good and better) to the edge (best)

17 More issues to consider with relative TSR? Can be seen by management as a lottery Can be difficult to select an appropriate comparator (group of companies or index) Lack of clear line of sight between actions taken by management and results Potentially difficult for management to see how they are doing unless TSR vs. published index

LTI Communication Webinar Series Twice a year we offer webinars to new and existing LTI Participants to present the LTI plan in the context of the compensation strategy, explain the plan design and

18 LTI Communication Webinar Series Twice a year we offer webinars to new and existing LTI Participants to present the LTI plan in the context of the compensation strategy, explain the plan design and demo the Administration and Communication Platform. Administration and Communication Platform We offer LTI participants an administration and communication platform from a third party to support the election of annual allocations, monitor the performance and value of their unvested and vested grants and transfer or sell their vested shares. Performance and Payout Tracker Within the administration and communication platform we provide participants with daily updates of the total shareholder return of Oerlikon and its peers as well as the associated payout factor of their grant. Performance Payout Factor Administration & Communication Platform

19 Questions?

20 Thank You! Jon Burg, FSA Radford, an Aon Hewitt Company Kevin McDonald Covidien David Tuch New Bridge Street, an Aon Hewitt Company Dr. Thomas Schmalberger OC Oerlikon

Given the new requirements of the Compensation Ordinance, the remuneration report 2014 differs from previous ones:

Given the new requirements of the Compensation Ordinance, the remuneration report 2014 differs from previous ones: Key information Business report Corporate governance report Financial report 49 Remuneration report Shareholder letter Dear Shareholders It is with pleasure that as Chairman of the Human Resources Committee