Remuneration Report

The Remuneration Report includes two sections:


• Part I - Describes the current Executive Board remuneration policy, which was adopted by the Annual General Meeting of Shareholders in 2005 and subsequently adjusted in 2007, 2010 and 2011

• Part II - Provides details of the remuneration received by the Executive Board for 2011


Remuneration principles


The Executive Board’s remuneration policy is designed to meet four key objectives:


• Support the business strategy - We align our remuneration programmes with business strategies focused on creating long-term growth and shareholder value, while maintaining a tight focus on short-term financial results,

• Pay for performance - We set clear and measurable goals for our short-term variable pay and long-term variable award and pay higher compensation when goals are exceeded and lower compensation when goals are not met,

• Pay competitively - We set target remuneration to be competitive with other multinational corporations of similar size, value and complexity, and

• Pay fairly - We set target remuneration to be internally consistent and fair. We regularly review internal pay relativities between the Executive Board and senior managers and aim to achieve consistency and alignment where possible.


The Executive Board remuneration policy is simple and transparent in design and consists of the following key elements:


Peer group


A new global labour market peer group was adopted by the Annual General Meeting of Shareholders in 2011. The median of this global labour market peer group is a reference point for the target compensation of the CEO and CFO. Each year, the Remuneration Committee evaluates the peer group to ensure it remains relevant and may recommend adjustments to the Supervisory Board. For 2011 the peer group consisted of the following companies:


• Anheuser-Busch InBev (B)

• Carlsberg (DK)

• Coca-Cola (US)

• Colgate-Palmolive (US)

• Danone (F)

• Diageo (UK)

• Henkel (G)

• Kimberley-Clark (US)

• KraftFoods (US)

• L’Oréal (F)

• PepsiCo (US)

• Philips (NL)

• SABMiller (UK)

• SaraLee (US)

• Unilever (NL)


Two companies from the labour market peer group, KraftFoods and Sara Lee have announced to split into two independent publicly traded companies in 2012. Based on our selection criteria established in 2011 (sector, revenue and geographic spread), the Supervisory Board will decide in 2012 on their replacement.


Base salary


Base salaries are determined by reference to a relevant peer group of companies and are targeted to be at the median level of the peer group. Every year, peer group and base salary levels are reviewed and the Remuneration Committee may propose adjustments to the Supervisory Board for approval taking into account external peer group data and internal pay relativities. For 2012 the peer group has been defined as mentioned above. The base salaries for both 2011 and 2012 are EUR1,050,000 for the CEO and EUR650,000 for the CFO.


Short-term variable pay


The short-term variable pay (STV) is designed to drive and reward the achievement of HEINEKEN’s annual performance objectives. Through its payout in both cash and investment shares it also drives and rewards sound business decisions for the long-term health of Heineken N.V. and aligns Executive Board and shareholder interest.


The target STV opportunities for both 2011 and 2012 are 140 per cent of base salary for the CEO and 100 per cent of base salary for the CFO. The STV opportunity is for 75 per cent based on financial and operational measures and targets, and for 25 per cent on individual leadership measures and targets. At the beginning of the year, the Supervisory Board establishes the new performance measures, their relative weights and corresponding targets based on HEINEKEN’s business priorities. These measures and their relative weights are reported in the Annual Report up front. The STV awards for 2012 will be subject to four performance measures, viz. Organic Net Profit beia Growth (20 per cent), Free Operating Cash Flow (20 per cent), Organic Gross Profit beia Growth (35 per cent) and individual leadership targets (25 per cent).
 At the end of the year, the Supervisory Board reviews the Company’s and individual performance against the pre-set measures and targets, and approves the STV payout levels based on the performance achieved.
 The performance on each of the measures is reported in the Annual Report after the end of the performance period.

For threshold, target and maximum performance the following STV payout as a per cent of target applies:


• Threshold performance - 50 per cent of target 

• Target performance - 100 per cent of target 

• Maximum performance - 200 per cent of target.


The payout percentage for performance between these performance levels is on a straight-line basis.


The CEO and CFO are obliged to invest at least 25 per cent of their STV payout in Heineken N.V. shares (investment shares), to be delivered by the Company; the maximum they can invest in Heineken N.V. shares is 50 per cent of their STV payout (to their discretion). These investment shares will then be blocked for five calendar years, regardless of whether they stay in service of Heineken N.V., to link the value of the investment shares to long-term Company performance. After the blocking period the Company will match the investment shares 1:1, i.e. one matching share is granted for each investment share. Matching entitlements will be forfeited in case of dismissal by the Company for an urgent reason (‘dringende reden’) within the meaning of the law, or in case of dismissal for cause (‘gegronde reden’) whereby the cause for dismissal concerns unsatisfactory functioning of the Executive Board member. With this ‘deferral-and-matching’ proposition a significant share ownership by the Executive Board is ensured, creating an increased alignment of interest with shareholders. 


The Supervisory Board may, at its sole discretion in determining the final payout, adjust the STV amount that would have been payable under the plan rules downwards or upwards if the payout based on plan rules would produce an unfair result due to extraordinary circumstances. The Supervisory Board can also recover from the Executive Board any STV payment in cash, investment shares or matching shares made on the basis of incorrect financial or other data (clawback provision).


Long–term variable award


The long-term variable award (LTV) is designed to drive and reward sound business decisions for the long-term health of HEINEKEN and to align the Executive Board and shareholder interest. 


The target LTV opportunities for both 2011 and 2012 are 150 per cent of base salary for the CEO and 125 per cent of base salary for the CFO. Each year, a target number of performance shares is conditionally awarded, the vesting of which is, since the award of 2010, contingent on HEINEKEN’s performance on four key fundamental financial performance measures.


• Organic Gross Profit beia Growth - a measure to drive top-line growth - the key measure of Company strength

• Organic EBIT beia Growth - a measure to drive operational efficiency

• Earnings Per Share (EPS) beia Growth - a measure of overall long-term Company performance

• Free Operating Cash Flow - a measure to drive focus on cash.


These four performance measures have equal weights to minimise the risk that participants over-emphasize one performance measure to the detriment of others. At the beginning of each performance period, the Supervisory Board establishes the corresponding targets on these performance measures based on HEINEKEN’s business priorities. The targets are considered to be commercially sensitive and are not disclosed at that moment. At the end of the performance period, the Supervisory Board reviews the Company’s performance against the pre-set measures and targets, and approves the LTV vesting based on the performance achieved. The performance on each of the measures is reported in the Annual Report after the end of the performance period.


For each performance measure, a threshold, target and maximum performance level is set with the corresponding performance share vesting schedule:


• Threshold performance - 50 per cent of performance shares vest

• Target performance - 100 per cent of performance shares vest, and

• Maximum performance - 200 per cent of performance shares vest.


Vesting between these performance levels is on straight-line basis. 


The Supervisory Board may, at its sole discretion adjust the amount of shares that would have vested under the plan rules based on the above described vesting schedule downwards or upwards if the vesting of shares based on plan rules would produce an unfair result due to extraordinary circumstances. The Supervisory Board can also recover from the Executive Board any shares which vested on the basis of incorrect financial or other data (clawback provision).


The vested performance shares that remain after withholding income tax are subject to an additional holding restriction of two years.


Pensions


The members of the Executive Board can either participate in a Defined Contribution Plan or in a Capital Creation Plan. In the Capital Creation Plan the Executive Board member elects to receive as income the Defined Contribution premium amounts from the pension scheme, less an amount equivalent to the employee contribution. Both the CEO and the CFO participate in the Capital Creation Plan. 


As from 2012 the Executive Board pension plan and the Capital Creation plan have been fully aligned with the corresponding plans for the Top Executives under Dutch employment contract below the Executive Board. The implications going forward are that the employer pension expense is reduced by a good 10 per cent (for a given level of performance).

The following table gives details of the remuneration received by each member of the Executive Board for 2011. 


¹ The short-term variable pay relates to the performance year 2011 and becomes payable in 2012. Both CEO and CFO have chosen to invest 50 per cent of this value in Heineken N.V. shares (investment shares). Matching entitlements on these investment shares are not included in the figures.


² The long-term variable award relates to the performance period 2009-2011.


Realisation 2011 short–term variable pay


The STV awards for 2011 were subject to four performance measures: Organic Net Profit beia Growth (20 per cent), Free Operating Cash Flow (20 per cent), Organic Gross Profit beia Growth (35 per cent) and individual leadership targets (25 per cent). The Supervisory Board determined the results against the pre-set targets on these measures as follows:


• Organic Net Profit beia Growth - above target performance

• Free Operating Cash Flow - above target performance

• Organic Gross Profit beia Growth - between threshold and target performance

• Individual leadership targets - above target performance


The resulting total STV payment over 2011 will be equal to 120 per cent of payout at target level for both the CEO and the CFO.


The Supervisory Board conducted a scenario analysis with respect to possible outcomes of the STV awards for 2011.


The table below provides an overview of the investment shares that were awarded as part of STV payments but that are blocked awaiting 1:1 matching by the Company, provided the conditions thereto are met:


¹The number of shares awarded in relation to the STV-payout over 2011 and beyond is determined by dividing the value of the investment shares at grant date by the closing share price of the date of publication of the annual results over that same year. For 2011 this date shall be 15 February 2012.

²The number of shares awarded in relation to the STV-payout over 2010 was determined by dividing the value of the investment shares at grant date by the closing share price of 21 April 2011, the date on which the AGM approved the remuneration policy 2011.


Realisation 2009-2011 long-term variable award


After 2011 the conditional performance shares awarded in 2009 are subject to vesting. Vesting of these performance shares, the last shares that were awarded before adoption of the new remuneration policy per 2010, is determined by Total Shareholder Return (TSR) over a three-year performance period relative to a performance peer group. The performance peer group consists of European branded consumer goods companies with which HEINEKEN competes in capital markets and includes the following companies:


• Anheuser-Busch InBev (B)

• Carlsberg (DK)

• Danone (F)

• Diageo (UK)

• Henkel (G)

• LVMH (F)

• Nestlé (CH)

• L’Oréal (F)

• SABMiller (UK)

• Unilever (NL)


Before the adoption of the 2010 Remuneration Policy, the target annual LTV opportunity for the CEO was 100 per cent of base salary and for the CFO 75 per cent of base salary. If HEINEKEN’s TSR is higher than that of the median of the performance peer group, the performance shares vest according to the following schedule:


For the period 1 January 2009 - 31 December 2011, HEINEKEN ranked seventh in its performance peer group. As a result, the performance shares awarded in 2009 do not vest in 2012 and no vested shares are allocated to the members of the Executive Board. 


The Supervisory Board conducted a scenario analysis with respect to possible outcomes of the LTV awards made in 2011 and previous awards made.


The table below provides an overview of outstanding LTV awards (awards made but not yet vested as of 31 December 2011):


¹ Determined according to plan rules, using the closing share price of 31 December of the year preceding the grant.


² Within five business days immediately following the publication of the annual results of the Company, to occur after completion of the performance period.


Currently there are no vested LTV awards subject to the two-year lock-up period, as the awards made in 2007 and 2008 did not result in any shares being vested in 2010 and 2011 respectively.


Supervisory Board Heineken N.V.


Amsterdam, 14 February 2012