IV. Compensation for the Group Management 2022

i. Compensation goals and principles

Compensation plays a central role in recruitment and retention of employees. Thus, compensation also influences the company’s future success. Lindt & Sprüngli is committed to performance-based compensation in line with the market standards aligning the long-term interests of shareholders, employees, and customers. Therefore, the compensation system at Lindt & Sprüngli pursues the following five goals, which were refined and updated in 2022:

1. Ensure the alignment of management activities with the long-term interests of shareholders,
2. Anchor Lindt & Sprüngli’s strategy in the compensation landscape,
3. Attract and retain highly qualified talent and be an attractive employer,
4. Motivate employees to excellent performance in the long term,
5. Emphasize “pay-for-performance” by considering appropriateness of cost of compensation in relation to results.

Lindt & Sprüngli attaches great importance to employee retention, which manifests itself particularly in the exceptionally low turnover rate over many years. This is of great importance for a premium product manufacturer with a long-term strategy. Compensation principles at Lindt & Sprüngli are meant to have a medium and long-term effect and to be sustainable. Continuity is a high priority for Lindt & Sprüngli.

The rules and principles governing the compensation (including performance-based compensation) of the members of the Group Management and the allocation of equity securities, conversion rights, or option rights to members of the Group Management are set out in Article 26bis paragraphs 3–7 of the Articles of Association. Regulations governing the amount of pension benefits outside the occupational pension scheme for members of the Group Management are set out in Article 26bis paragraph 8 of the Articles of Association.

• Articles of Association

ii. Compensation framework

The compensation of the members of Group Management consists of a combination of (1) fixed compensation (Base Salary, allowances, and other benefits as well as pension benefits), (2) a short-term performance-based compensation (Cash Bonus) and (3) a long-term performance-based compensation (Option Plan) in the form of options for participation certificates, in each case consistent with their respective positions.

Lindt & Sprüngli seeks to ensure that actual compensation of the members of Group Management is linked to the business performance by delivering a substantial portion of compensation in the form of variable, performance-based compensation. Additionally, a significant part of the variable compensation is deferred and vests only after a vesting period of up to five years (as illustrated below), further underlining the importance of long-term success and value creation for our shareholders.

The following table illustrates the split of the total compensation of the members of the Group Management. At target level, the total compensation consists of 26% fixed compensation and 74% variable compensation for the CEO (prior year: 28% fixed compensation and 72% variable compensation) and 34% fixed compensation and 66% variable compensation for the other members of the Group Management (prior year: 38% fixed and 62% variable), assuming a target level of the grant under the Option Plan of 100% of Base Salary.

The aggregate amount of target compensation is based on the requirements and responsibilities of the recipient and is regularly reviewed within the Group by means of horizontal and vertical internal comparisons. In addition, when new appointments are made, the CNC considers comparative data for the consumer goods sector, with respect to the specific vacancy for the appointment. Generally, the CNC reviews the compensation level of Group Management members on an annual basis, considering responsibility, contribution, competitiveness, experience, and external benchmarks, and issues recommendations to the Board of Directors.

The periodic external benchmarking involves a comparison of the level and structure of Group Management compensation with, most recently, 15 Swiss listed companies that are similar to Lindt & Sprüngli in terms of size (based on market capitalization, taking into account companies with a market capitalization between 0.4–1.7x Lindt & Sprüngli’s market capitalization of approx. CHF 30bn as of end of 2021) and industry affiliation (understood in a broader sense, approximated by non-financial companies). The peer companies for this benchmark were the same as for the Board of Directors mentioned above, i. e. Alcon, Barry Callebaut, Emmi, Ems-Chemie, Geberit, Givaudan, Kühne + Nagel, Lafarge Holcim, Schindler, SGS, Sonova, Straumann, Swatch, Swisscom, VAT (Peer Group).

The last benchmarking for the Group Management compensation was undertaken in 2022 and confirmed that the Group Management compensation level (calculated based on the assumption of the satisfaction of all targets) is broadly in line with the target range as defined by the CNC (at median) and that the current compensation approach does not significantly deviate from market practice. Specifically, the benchmarking showed that the total compensation level of the CEO (calculated based on the assumption satisfaction of all targets) is positioned at median within the Peer Group, as targeted by the CNC. Irrespective of the latest benchmarking, certain structural changes were resolved to be made to the Group Management compensation framework and will be applicable starting form 2023 (see the chapter “Outlook to the compensation framework 2023” for details).

iii. Compensation elements

a) Fixed compensation: Base Salary, allowances, and other benefits and pension benefits

The Base Salary reflects the particular functional level, competencies, and expertise, as well as experience and a baseline level of sustained expected performance of each member of the Group Management. It is paid out on a monthly basis in twelve or thirteen, respectively, equal cash installments.

In addition, members of Group Management receive allowances and other benefits in line with competitive market practice, including entitlement to a company vehicle and to participate in the company’s pension plans.

b) Short-term performance-based compensation: Cash Bonus

The goal of the Cash Bonus is to reward individuals for collective as well as individual achievements of annually set targets in relation to predetermined key performance indicators (KPIs). The KPIs are derived from the annual business plan and the business strategy focusing on sustainable organic sales growth accompanied by continuous improvement in profitability. The individual performance achievements for the Cash Bonus are measured predominantly (65%) based on quantitatively measurable financial KPIs and to a lesser extent (35%) based on qualitative targets related to overall responsibility and leadership. Financial KPIs comprise the main metrics of annual Group performance for the relevant year, being growth (organic sales growth) and profitability (EBIT margin increase) aspects. For those members of Group Management who have responsibility on regional or country level, financial targets on regional or country level, respectively, are also taken into account, along with Group targets. These include metrics such as net trade sales (NTS) and controllable operating profit (COOP). Qualitative KPIs include elements relating to overall responsibility (such as setting strategic priorities, advancing business opportunities, and organizational topics) as well as leadership and conduct-related focus areas (including embracing of change, facilitation of communication and collaboration as well as talent management). Non-financial targets may depend on the individual function and in particular refer to the implementation of the strategy as well as to defined leadership and conduct criteria, including promotion of Environment Social Governance (ESG) and Diversity & Inclusion (D&I) efforts.

The relevant targets for each of the underlying KPIs and metrics against which performance is measured at the end of the annual performance period are set by the CNC and, for the CEO, by the Board of Directors, respectively, on an annual basis, taking into account the current performance of the Group, the immediate strategic priorities as well as the short-term requirements to fulfill longer-term visions. Internal financial and individual qualitative targets for the short-term performance-based compensation are considered commercially sensitive information. For this reason, the explicit disclosure of the latter in the Compensation Report is not warranted, but please find a review on the achievement of the performance targets for the financial year 2022 in the following chapter.

The potential payout range for the Cash Bonus is defined for each member of Group Management as a percentage of its Base Salary and the actual amount paid out can vary between a minimum amount and a maximum amount, each defined as a percentage of the Base Salary, as summarized in the table below.

In general, the target level will be paid out in case the predefined targets of the relevant KPIs are fully achieved. In case target KPIs are not achieved, the Cash Bonus is reduced and may even be zero. This means that there may be no (guaranteed) bonus if (collective or individual) targets are not fully or partially met. Should KPI targets be overachieved, the payout of the Cash Bonus may also be above the target payout level, but the payout is in any case capped by the maximum amount, being an amount equal to 200% of Base Salary for the CEO and an amount between 60–180% of the individual Base Salary for other Group Management members. Translating these percentages into an implied upside potential, the maximum Cash Bonus that may be paid out for a specific financial year is capped at 200% of the target Cash Bonus for the CEO and members of Group Management.

The payment of the Cash Bonus in cash is made in spring of the following year once the determination regarding the level of achievement of the performance targets has been made. Forfeiture of unsettled short-term compensation and clawback provisions for settled short-term compensation apply in a range of events, enabling the company to seek repayment where appropriate.

c) Long-term performance-based compensation: Option Plan

The purpose of the Option Plan is to reward sustained business success, to incentivize the creation of overall shareholder value and hence to align Group Managements’ interests with those of shareholders, and to retain key members of the Group’s senior management.

Under the Option Plan, a certain value of stock options may be awarded to members of the Group Management and other selected key employees (the Participants). Each option carries the right to subscribe to one participation certificate (subscription ratio 1:1) and becomes exercisable during a predefined exercise period following the expiration of a pre determined vesting period (as further described below). Based on the assumption that the strategic efforts of Group Management result in a long-term growth of the share price of the company, options are considered by the Board of Directors as an optimal instrument to achieve a stringent pay-for-performance approach and remunerate members of the Group Management in line with the shareholders’ experience.

The total amount in Swiss Francs available to be awarded under the Option Plan for a given financial year is determined by the Board of Directors, upon recommendation of the CNC, annually at the beginning of the year. Options are typically granted in January and transferred to the Participants under the Option Plan in April. For each member of the Group Management, the grant levels as amounts in Swiss Francs are determined on an individual basis and can range between 0 – 200% of the relevant Base Salary*.

* For 2023, the possible grant levels under the Option Plan were amended. For details, see the chapter “Outlook to the compensation framework 2023” of this Compensation Report.

The individual grant levels for a particular year are determined by the Board of Directors (upon proposal by the CNC) with respect to the CEO, and, by the CNC with respect to the other members of the Group Management, in each case based on multiple factors, mostly assessed on an individual level, including*

1. the overall Group performance during the preceding financial year,
2. the performance of the Group company headed by the Participant or at which the Participant is employed,
3. importance of the Group company’s profit contribution to the entire Lindt & Sprüngli Group, and
4. the profit development of the Group company in relation to the other Group companies.

* For 2023, the criteria for the determination of the grant levels under the Option Plan were amended. For details, see the chapter “Outlook to the compensation framework 2023” of this Compensation Report.

The price at which options may be exercised corresponds to the average closing prices of the participation certificates of Chocoladefabriken Lindt & Sprüngli AG on the five trading days on SIX Swiss Exchange prior to grant in the month of January of the respective year. In accordance with the Option Plan, options are subject to vesting periods of three (35%), four (35%), and five (30%) years and can be exercised during an exercise period of seven years from when they were initially granted. Options which are not exercised during the exercise period become forfeited. Therefore, Participants will only be able to benefit from the options granted under the Option Plan if the market price of the participation certificates has increased over the applicable vesting period. The Board of Directors is of the opinion that the Option Plan with its respective link to the company’s share price leads to a very strong long-term alignment of Group Management with the shareholders’ interest. The value per option at the time of grant is determined by way of binomial statistical models in accordance with the relevant accounting standards (see also note 27 Share-based payments in the Financial Report). The number of options to be granted to each member of Group Management is calculated by dividing the individual grant level amount in Swiss Francs awarded to the respective Participant by the aforementioned value per option at the time of grant.

According to the Option Plan, any granted but unvested options are forfeited immediately in the event that notice of termination is given at any time and for any reason, with or without cause, by the employer or the employee, whereas any vested options remain exercisable for a limited period of time. Forfeiture of unsettled or unexercised long-term compensation and clawback provisions for settled awards apply in a range of events, enabling the company to seek repayment where appropriate.

iv. Compensation

Compensation of the members of Group Management for the years 2022 and 2021 is shown in the following table. The valuation of the option-based compensation for 2022 and 2021 is based on the respective market values at the time of grant.

An amount of CHF 18 million was approved by the General Meeting of May 4, 2021, as the maximum aggregate amount of compensation for 2022 for the Group Management, whereby approx. CHF 17 million were utilized in 2022. The total compensation of the Group Management for 2022 was higher than for the previous year due to full achievement of the relevant targets, which resulted in higher payouts of Cash Bonuses, as well as due to replacements and appointments of members of the Group Management, while the aggregate number of Group Management members at the end of the reporting year compared to the end of the previous year remained unchanged.

No use was made of the supplementary amount pursuant to Article 15bis paragraph 5 of the Articles of Association.

No loans and credits were granted to current or past executive and non-executive members of Group Management.

In 2022, the total amount of the aggregate Cash Bonuses awarded to the members of Group Management amounted to CHF 5.112 million (previous year: CHF 3.981 million). For Dr Dieser Weisskopf (CEO until 30 September 2022), the effectively paid Cash Bonus amounted to CHF 1,650 million, corresponding to 138% of his Base Salary (121% in 2021). For the other Group Management members, the effectively paid cash bonus was on average 80% of the relevant Base Salary (71% in 2021). In the financial year 2022, the corporate financial targets set for the year under the short-term performance-based compensation program were overachieved. Specifically, regarding profitability and organic sales growth. All members of Group Management also achieved their annual individual qualitative targets by showing great leadership, embracing change, and continuous innovation.

In 2022, the total amount of the option grants awarded under the Option Plan to the members of Group Management (other than the previous CEO), amounted to CHF 4.153 million (previous year: CHF 3.110 million). For each of the members of the Group Management (other than the CEO), this corresponds to a grant of on average 100% of the relevant Base Salary (in the previous year, on average 89% of the relevant Base Salary). The individual levels of grant were determined by the CNC based on the criteria mentioned above.

The option grant awarded to the former CEO (until 30 September 2022) under the Option Plan amounted to CHF 1.688 million (previous year: CHF 1.583 million), corresponding to 141% of his Base Salary (previous year: 132% of his Base Salary). The Board of Directors decided upon recommendation of the CNC.

For details on outstanding options, refer to chapter Particpiations of this Compensation Report.

The total remuneration of the former CEO (in function until 30 September 2022, employed until 31 March 2023) amounted to CHF 4,601 million in 2022 (previous year: CHF 4,296 million), with this amount being in line with the median pay-out of the Peer Group.