This report has been prepared by the Supervisory Board of X5 Retail Group N.V. in accordance with the Dutch Corporate Governance Code. It contains the remuneration policy of the Management Board of the Company as well as the remuneration specifics of both the Management Board and the Supervisory Board for the financial year 2011. This report also addresses the way in which the remunerationsmal policy will be pursued for the financial year 2012 and beyond.
Nomination and Remuneration Committee
Apart from its responsibilities in the area of selection, appointment and assessment of the Management Board and Supervisory Board members, the Nomination and Remuneration Committee (the ‘Committee’) is responsible for:
In carrying out its work in the area of remuneration, the Committee also takes into account the assessment and remuneration of the senior management reporting to the Management Board (the “Executive Board”) and the remuneration climate in general within the Company.
The Committee prepares its proposals independently after careful consideration, including taking into account the advice of independent advisors, when necessary. These advisors do not advise the members of the Management Board personally on their remuneration.
The current members of the Nomination and Remuneration Committee are Mr. DuCharme (Chairman), Mr. Deff orey, Mr. Ashurkov and Mr. Tynkovan.
Remuneration Policy
X5’s remuneration policy and the individual employment contracts of the members of the Management Board are determined by the Supervisory Board within the framework of the remuneration policy, as adopted by the General Meeting of Shareholders in 2007, and subsequently amended (most recently in 2011), if and when required pursuant to ongoing developments and insights gained in this area, and in accordance with the Dutch Corporate Governance Code.
The objective of the remuneration policy is twofold:
The remuneration structure of the members of the Management Board includes four elements: base salary, annual incentive (performance-based cash bonus), long-term incentive (performance-based equity instrument), and other arrangements.
Upon proposal of the Nomination and Remuneration Committee, and if in the interest of the Company, the Supervisory Board may at its own discretion deviate from the remuneration policy when off ering a remuneration package to a newly appointed member of the Management Board or when amending the remuneration package of a current member of the Management Board, in the event of exceptional circumstances or if deemed appropriate.
The Supervisory Board resolved that the remuneration policy shall equally apply to members of the Executive Board.
Benchmarking with Industry Peers
As a company with operations mainly in Russia, with international exposure
due to its governance structure and listing on the London Stock Exchange,
distinct benchmarking is applied to X5 base salaries as well as variable salary
components. Base salaries are benchmarked against mainly Russian peers
while variable salary components, including long term incentive elements, are
benchmarked against western peers as well. More specifically, the peer group
applied to base salaries benchmarking is currently composed of major Russian
companies operating in different sectors of the economy, and equivalent in terms
of size of business, complexity of operations, growth dynamics and corporate
governance.
Base Salary
Base salaries are specified in the individual contracts with members of the
Management Board and reflect competence and responsibilities of a member
of the Management Board, his/her relevant experience, and other factors. The
levels of base salaries are determined by (i) benchmarking with industry peers,
as described above, and (ii) the specific responsibilities and achievements of the
individual member of the Management Board. The annual review date for the base
salary is April 1.
Annual Cash Incentive
The bonus scheme for the members of the Management Board rewards both
quantitative corporate indicators and personal, mission-related, key objectives.
Members of the Management Board receive an ‘on target’ bonus opportunity
equal to 50% of their base salary for achieving quantitative corporate indicators
and 50% of their base salary for achieving personal key objectives as set by the
Supervisory Board. An additional 50% for ‘stretch’ performance is possible in the
case of extraordinary achievement.
The Supervisory Board sets the targets for the bonus scheme at the beginning of each financial (calendar) year. The quantitative corporate indicators include net sales and EBITDA, each indicator having equal weight. The personal performance targets include targets related to divisional performance, mission-related or key project-related targets, as well as qualitative behavioral targets. Both the corporate and personal performance measures are considered success factors for the Company in the short term, while also contributing to the achievement of the long-term objectives of the Company, including in particular building out and strengthening the Company’s leading position in the Russian retail sector. X5 does not disclose the actual targets set, as this qualifies as commercially sensitive information.
Long Term Incentive
Stock Option Plan
In 2007 the Company launched its long term incentive plan for key employees
and members of the Management Board through its Employee Stock Option
Plan (the ‘ESOP’). The ESOP was approved by the General Meeting of
Shareholders on 15 June 2007. The options granted under the ESOP each
confer the right to a number of Global Depositary Receipts (‘GDRs’), each GDR
representing one fourth of an ordinary share of Euro 1 par value in the capital of
the Company. The options were granted in four tranches issued over a period of
three years (2007 through 2009). The options outstanding are conditional upon
employment with the Group. The number of options granted to Management
Board members and key employees were linked to pre-determined criteria
of participation in the program, based on the level of responsibility within the
Company.
Restricted Stock Unit Plan
The Company launched its next generation long-term incentive plan in 2010, in
the form of a Restricted Stock Unit Plan (the ‘Plan’). The purpose of the Plan is to
motivate and retain a small group of high-performance and high-potential senior
executives while increasing the commitment of such participants to the business
of X5 and promoting the alignment of their interests with those of the shareholders
of the Company. The Plan was approved by the General Meeting of Shareholders
on 25 June 2010.
The Plan provides for the annual grant of conditional rights to receive restricted stock units (‘RSUs’), subject to i) the achievement of specific performance criteria of the Group and ii) continuous employment with the Group until the completion of the vesting period. Up to one third of the conditional RSUs granted to the CEO, and up to one quarter of the conditional RSUs granted to other participants, will be subject to the employment condition only. Also members of the Supervisory Board may be granted conditional RSUs. These RSUs shall not be subject to performance criteria. The General Meeting of Shareholders determines the number of conditional RSUs granted to members of the Supervisory Board.
The number of conditional RSUs granted on any grant date shall in principle be based on 200% of each participant’s annual base salary, divided by the average market value(1) of a GDR on the relevant grant date. On the first anniversary of each respective grant date, and based on the audited Company’s financial results, the Supervisory Board shall evaluate whether the performance targets have been met. The actual number of RSUs subsequently awarded will depend on the level of achievement of the performance targets and will be either 0%, 50% or 100% of the number of conditional RSUs granted, in addition to the RSUs granted subject to the employment condition only.
The performance criteria mainly relate to (i) the performance of the Group compared to the performance of a selected group of (comparable) competitors in achieving sustained growth and an increasing presence in its markets of operation and (ii) without sacrificing the EBITDA of the Company.
All RSUs to be awarded are subject to a further two-year vesting period and the condition of continuous employment with the Group. Upon vesting, the RSUs will be converted into GDRs registered in the participant’s name, whereby each RSU is converted into one GDR. Subsequently, these GDRs are subject to a two-year lock-in period during which period the GDRs cannot be traded.
The Plan features standard “good leaver”, “bad leaver” and accelerated vesting provisions in accordance with current international market practices for long-term incentive plans.
Other Remuneration Components
A number of other arrangements may be offered to members of the Management
Board, such as expense and relocation allowance, medical insurance, accident
insurance and life insurance, in accordance with general policies approved by
the Supervisory Board. The Company’s policy does not allow personal loans
and guarantees to members of the Management Board. The Company does
not provide for pension arrangements in favor of members of the Management
Board.
Contracts of Employment
The members of the Management Board have a written contract of employment
with X5 Retail Group N.V. in the Netherlands and/or its operational Russian
subsidiaries. The fixed and variable salary components stipulated in each
employment contract reflect the relevant responsibilities of each member of the
Management Board in the Netherlands and in Russia.
The current members of the Management Board are employed and appointed for a four year period, in accordance with the Dutch Corporate Governance Code. For future new appointments to the Management Board, the term of the contract is also set at four years.
The Supervisory Board may recover from the Management Board members any variable remuneration awarded on the basis of incorrect financial information. Furthermore, the Supervisory Board has the discretionary authority to adjust the value of variable pay components originally awarded if the outcome proves to be unfair as a result of exceptional circumstances during the performance period.
The severance payment is in principle limited to a maximum of one year’s base salary (the ‘fixed’ remuneration component) of the relevant member of the Management Board. The Supervisory Board reserves the right to agree to a different amount if required under individual circumstances.
Insurance and Indemnity Arrangements
Members of the Management Board and Supervisory Board, as well as certain
senior management members, are insured under X5’s Directors and Officers
Insurance Policy.
Although the insurance policy provides for a wide coverage, X5’s directors and officers may incur uninsured liabilities. Members of the Management Board, as well as members of senior management, may be indemnified by the Company against any claims arising out of or in connection with the general performance of their duties, provided that such claim is not attributable to gross negligence, willful misconduct or intentional misrepresentation by such director or officer. In addition, the General Meeting of Shareholders approved the indemnity arrangements to be granted by the Company to members of the Supervisory Board.
Remuneration 2011
Management Board Remuneration
As described in the Corporate Governance Report on page 24, the composition of
the Management Board changed substantially in 2011. Mr. Balfe was appointed as
CFO by the General Meeting of Shareholders on 22 February 2011. On 10 March
2011 Mr. Khasis left his position as CEO of the Company. His successor, Mr. Gusev,
was appointed by the Annual General Meeting of Shareholders on 20 June 2011.
Also in 2011, Mr. Lhoest was re-appointed as Company Secretary for another
four year term.
The base salaries were determined in line with compensation levels in peer group companies, based on the salary benchmarking survey conducted annually. As per the salary review date 1 April 2011 the annual base salaries for the members of the Management Board were determined as follows (in USD):
| Position | Base Salary | |
|---|---|---|
| Andrei Gusev | Chief Executive Officer | 1,361,126 |
| Kieran Balfe | Chief Financial Officer | 638,232 |
| Frank Lho?st | Company Secretary | 382,590 |
For all three members of the Management Board the cash incentive level for the reporting year is based on partial (50%) achievement of the quantitative corporate performance indicators and full (100%) achievement of the personal performance targets. An additional 25% of base salary is awarded to the CEO and CFO for extraordinary performance during a year of transition.
For the year ended 31 December 2011 the Management Board was entitled to a total short-term compensation of USD 3,837,509 (2010: USD 3,402,025).
Compensation overview members of the Management Board for the financial year 2011 (in USD):
| Position | Base Salary 2011* |
Cash Bonus 2011** |
Share-Based Renumeration*** |
|
|---|---|---|---|---|
| Andrei Gusev | Chief Executive Officer | 1,020,846 | 1,090,194 | 757,597 |
| Kieran Balfe | Chief Financial Officer | 638,233 | 582,555 | 250,091 |
| Frank Lho?st | Company Secretary | 356,504 | 149,249 | 137,280 |
* Base salaries calculated pro rata as per 1 April 2011, if applicable.
** Bonus for the performance of the year reported and paid in cash in 2012.
*** The share-based remuneration relates to the stock option plan and the restricted stock unit plan. Costs relate to the expenses recognised in the income statement for the period; reference is made to notes 39 and 42 to the consolidated financial statements.
Mr. Khasis resigned as per 10 March 2011 while, for management transition purposes, his contract was not terminated until 1 June 2011. Mr. Khasis’ compensation for the financial year 2011 can be specified as follows (in USD):
| Position | Base Salary 2011* |
Severance Payment |
Share-Based Renumeration** |
|
|---|---|---|---|---|
| Lev Khasis | Chief Executive Officer | 1,213,719 | 2,862,536 | (17,997,945) |
* Pro rata for the period 1 January until 1 June 2011.
** The share-based remuneration relates to the stock option plan and the restricted stock unit plan. Costs relate to the expenses recognised in the income statement for the period; reference is made to notes 39 and 42 to the consolidated financial statements.
Cash remuneration amounts were paid in either Russian Roubles or Euro and converted to USD for reporting purposes, using the average USD rate for 2011 to convert RUR amounts into USD, and average cross-rate EUR/USD for amounts paid in Euro. Cash bonus amounts will be paid in either Russian Roubles or Euro and converted to USD for reporting purposes, using the closing USD rate for 2011 to convert RUR amounts into USD, and closing cross-rate EUR/USD for amounts paid in Euro. The rates are available in Note 2 to the consolidated financial statements included in this Annual Report.
Supervisory Board Remuneration
In the reporting year, the total cash remuneration of the Supervisory Board
amounts to EUR 1,170,000 or USD 1,627,746 (2010: USD 1,552,514).
Compensation overview members of the Supervisory Board for the financial year 2011 (in USD):
| Cash Remuneration 2011 | Share-Based Remuneration* | |
|---|---|---|
| Hervé Defforey (Chairman) | 347,809 | (1,987,469) |
| Mikhail Fridman | 139,124 | - |
| Vladimir Ashurkov | 139,124 | - |
| David Gould | 278,247 | - |
| Alexander Tynkovan | 166,948 | 86,561 |
| Stephan DuCharme | 278,247 | (159,567) |
| Christian Couvreux | 278,247 | 144,281 |
* The share-based remuneration relates to the stock option plan and the restricted stock unit plan. Costs relate to the expenses recognised in the income statement for the period; reference is made to notes 39 and 42 to the consolidated financial statements.
All remuneration amounts are paid in Euro and converted to USD for reporting purposes, using the average cross-rate EUR/USD. The rate is available in Note 2 to the consolidated financial statements included in this Annual Report.
Stock Options
In December 2011 the term of options granted under tranche 2 of the Employee
Stock Option Plan elapsed. Details of options exercised in 2011 and options held
as per 31 December 2011 by members of the Management Board and Supervisory
Board, are set forth below.
| Granted in 2007 |
Granted in 2008 |
Granted in 2009 |
Tranche | Vesting Date | Value Per Vesting Date* |
Exercised in 2011 |
Position 31 Dec. 2011 |
Exercise Price** |
GDR Price on Exercise Date*** |
Expiration Date**** |
|
|---|---|---|---|---|---|---|---|---|---|---|---|
| Management Board | |||||||||||
| Lev Khasis | 810,000 | 2 | 18/05/2008 | $8,237,700 | 810,000 | $28.58 | $40.82 | 01/09/2011 | |||
| 860,625 | 3 | 19/05/2009 | nil | 860,625 | $33.43 | $40.82 | 01/09/2011 | ||||
| 860,625 | 4 | 19/05/2010 | $16,515,394 | 860,625 | $13.91 | $40.82 | 01/09/2011 | ||||
| Andrei Gusev | 200,000 | 2 | 18/05/2008 | $2,034,000 | $28.58 | 16/12/2011 | |||||
| 212,500 | 3 | 19/05/2009 | nil | 212,500 | $33.43 | 20/11/2012 | |||||
| Supervisory Board | |||||||||||
| Hervé Defforey | 42,500 | 3 | 19/05/2009 | nil | 42,500 | $33.43 | 20/11/2012 | ||||
| 70,000 | 4 | 19/05/2010 | $1,343,300 | 70,000 | $13.91 | 20/11/2013 | |||||
| Stephan DuCharme | 32,500 | 4 | 19/05/2010 | $623,675 | 32,500 | $13.91 | $36.16 | 20/11/2013 |
* Intrinsic value (GDR closing price per 19 May 2008: USD 38.75; 19 May 2009: USD 15.18; 19 May 2010: USD 33.10).
** The exercise price, before adjustment, of the options under the second tranche is defined as the price equal to the Average Market Value (as defined below) per Depositary receipt as of 18 May 2007. The exercise price of the options under the third and fourth tranche is defined as the price equal to the Average Market Value (as defined below) per Depositary Receipt as of the grant dates 19 May 2008 and 19 May 2009 respectively. The Average Market Value is defined as ‘on any particular day the volume weighted average price of a Depositary Receipt over the 30 immediately preceding calendar days. The volume weighted average price is calculated using the closing price of a Depositary Receipt taken from the Official List of the LSE’.
*** Calculated on average if options are exercised on consecutive dates.
**** (1) Mr. Khasis’ employment contract terminated eff ective 1 June 2011. As allowed under the ESOP Rules, he exercised his options within three months after the employment termination date; (2) options granted under tranche 2 to Mr. Gusev elapsed on 16 December 2011.
Restricted Stock Units
In 2011 the first tranche of RSUs was awarded based on the level of achievement
of the performance targets as defined under the plan. This resulted in a 50% award
of the performance related conditionally granted RSUs, in addition to a 100%
award of the RSUs granted subject to the employment condition only. Details
of RSUs conditionally granted and awarded to members of the Management Board
and Supervisory Board are set forth below:
| Tranche | Conditional Grant 2010 |
Conditional Grant 2011 |
Tranche | RSU Value on Grant Date* |
Award Date | RSUs Awarded** |
RSU Value on Award Date* |
Vesting Date | End of Lock-Up Period | |
|---|---|---|---|---|---|---|---|---|---|---|
| Management Board | ||||||||||
| Andrei Gusev | 1 | 39,147 | 1 | $1,389,719 | 19/05/2011 | 24,467 | 880,812 | 19/05/2013 | 19/05/2015 | |
| 2 | 79,365 | 2 | 19/05/2012 | 19/05/2014 | 19/05/2016 | |||||
| Kieran Balfe | 2 | 37,214 | 2 | 19/05/2012 | 19/05/2014 | 19/05/2016 | ||||
| Frank Lho?st | 1 | 14,438 | 1 | $512,549 | 19/05/2011 | 9,024 | 324,864 | 19/05/2013 | 19/05/2015 | |
| 2 | 21,832 | 2 | 19/05/2012 | 19/05/2014 | 19/05/2016 | |||||
| Lev Khasis*** | 1 | 128,817 | 1 | $4,573,004 | 19/05/2011 | 28,626 | 1,030,536 | 19/05/2013 | 19/05/2015 | |
| Supervisory Board | ||||||||||
| Hervé Defforey | 1 | 9,024 | 1 | $320,352 | 19/05/2011 | 9,024 | 324,864 | 19/05/2013 | 19/05/2015 | |
| 2 | 9,923 | 2 | 19/05/2012 | 19/05/2014 | 19/05/2016 | |||||
| Stephan DuCharme | 1 | 7,219 | 1 | $256,275 | 19/05/2011 | 7,219 | 259,884 | 19/05/2013 | 19/05/2015 | |
| 2 | 7,939 | 2 | 19/05/2012 | 19/05/2014 | 19/05/2016 | |||||
| Alexander Tynkovan | 1 | 4,331 | 1 | $153,751 | 19/05/2011 | 4,331 | 155,916 | 19/05/2013 | 19/05/2015 | |
| 2 | 4,763 | 2 | 19/05/2012 | 19/05/2014 | 19/05/2016 | |||||
| Christian Couvreux | 1 | 7,219 | 1 | $256,275 | 19/05/2011 | 7,219 | 259,884 | 19/05/2013 | 19/05/2015 | |
| 2 | 7,939 | 2 | 19/05/2012 | 19/05/2014 | 19/05/2016 |
* RSU value on 25 June 2010: USD 35.50; RSU value on 19 May 2011: USD 36.00.
** 50% award of RSUs subject to performance test as per 19 May 2011, based on level of achievement of Plan KPIs.
*** Lev Khasis’ employment contract terminated eff ective 1 June 2011. In accordance with the rules of the restricted stock unit plan, two thirds of the number of RSUs awarded were forfeited.
Remuneration Policy in 2012 and beyond
The Nomination and Remuneration Committee is constantly monitoring current trends in design and structure of incentive plans, and will reflect on ways to further improve the balance between short- and long-term compensation, the alignment of performance, reward and talent management, as well as the alignment between management and shareholders.
The Supervisory Board
12 April 2012
(1)The Average Market Value is defined as “on any particular day the volume weighted average price of a GDR over the thirty immediately preceding calendar days. The volume weighted average price is calculated using the closing price of a GDR taken from the Offi cial List of the London Stock Exchange”.