Heineken Annual Report & Accounts 2008

Remuneration report

The remuneration policy and structure reflects the strategic ambitions of the Company and takes into account internal and external circumstances. The policy seeks to maintain a tight focus on both short-term and long-term strategic results. A review of the policy is conducted every two years. The existing policy was approved in the Annual General Meeting of Shareholders in 2005 and adjusted in 2007. Adjustments to the policy, as from 1 January 2009, will be submitted to the Annual General Meeting of Shareholders 2009.

Remuneration Executive Board as from 2007

The remuneration package of the Executive Board includes a base salary, a short-term incentive and a long-term incentive. Base salary accounts for 33 per cent of the total remuneration package at target level for the CEO and 40 per cent for the CFO. Target percentage for both the short- and long-term incentive is 100 per cent of base salary for the CEO and 75 per cent for the CFO. The equal division of variable pay between short- and long-term incentive ensures a balanced focus, on both short- and long-term performance.

The Company aims to achieve consistency in the structure of the remuneration packages of both Executive Board members and senior Heineken executives. The variable elements in Executive Board members’ remuneration are more strongly emphasised than those of senior executives, reflecting the principle of increasing performance sensitivity in line with the impact on Group results.

Both internal pay relativities and relevant market data are used to define the remuneration package for the Executive Board. For market data, a specific labour market is defined.

The reference for market data according to the existing policy is primarily other Dutch multinational companies. To reflect the specific business of Heineken a minority of continental European companies that operate in the branded consumer products markets are included. The labour market peer group consists of the following companies:

• Akzo Nobel (NL),
• Anheuser-Busch InBev (B),
• Henkel (G),
• Koninklijke Ahold (NL),
• Koninklijke DSM (NL),
• Koninklijke KPN (NL),
• Koninklijke Numico (NL)*,
• Koninklijke Philips (NL),
• Nestlé (CH),
• L’Oréal (F),
• Reed Elsevier (NL),
• TNT (NL),
• Unilever (NL).

*

Replacement of Koninklijke Numico N.V., following its take-over, is part of the revised policy as per 2009.

Base salary

The members of the Executive Board are paid at the median of the labour market peer group. This represents €750,000 for the CEO and €550,000 for the CFO.

Short-term incentive

The focus of the short-term incentive is on annual operational performance. Organic net profit growth is the measure used to assess the operational performance of Heineken on a one-year basis and accounts for 75 per cent. Each year, the Supervisory Board determines an ambitious, yet realistic organic net profit growth target. The threshold level of payout is set at 60 per cent of target. A linear payout curve applies. Part of the payout is subject to meeting an acceptable cash conversion rate. The remaining 25 per cent is linked to yearly personal targets. The specific targets are commercially sensitive and cannot be disclosed. At target level, the short-term incentive level for the CEO is €750,000 and for the CFO €412,500. The maximum payout will not exceed 1.5 times the target level.

As not all targets were met in 2008, the pay out for the 2008 bonus of the Executive Board is 81.5 per cent of target, translating into a short-term bonus of €611,250 for the CEO and €336,187 for the CFO.

Long-term incentive

The long-term incentive plan for the Executive Board, in effect since 1 January 2005, is a performance share plan. A similar plan was implemented for senior management in 2006. Each year a number of performance shares are conditionally awarded, the vesting of which is subject to meeting a stretching performance target after three years. The value of the performance shares at target level for 2008 for the CEO is €750,000 and for the CFO €412,500. The performance condition according to the existing policy is Total Shareholder Return (TSR), measured over a three-year period, relative to a performance peer group. The performance peer group is different from the labour market peer group and includes companies with which Heineken competes for shareholder preference. It is composed of other brewers, but also includes European companies operating in the branded consumer products market. The performance peer group consists of the following companies:

• Anheuser-Busch InBev (B),
• Cadbury (UK),*
• Carlsberg (DK),
• Danone (F),*
• Diageo (UK),
• Henkel (G),
• LVMH (F),
• Nestlé (CH),
• L’Oréal (F),
• SABMiller (UK),
• Unilever (NL).

*

Following its take-over, Anheuser-Busch has been replaced in the performance peer group by Cadbury. The replacement has effect as of the plan period 2006 – 2008. Following its take-over, Scottish & Newcastle has been replaced in the performance peer group by Danone. The replacement has effect as of the plan period 2006 – 2008.

If, over a three-year period, Heineken performs better than the median of the peer group a proportion of the performance shares will vest. A linear vesting schedule applies from position 6 to position 1. At position 3 the targeted amount of performance shares will vest. At position 1 the maximum number of performance shares will vest. This is 1.5 times the target amount of shares. The net vested shares are subject to a holding restriction of two years.

At the end of 2008 Heineken was ranked as follows for the running LTIP performance period:

• Period 2008 – 2010: 10th
• Period 2007 – 2009: 8th
• Period 2006 – 2008: 8th

Heineken is acquiring the shares that are required for vesting.

The Executive Board performance share allocation at target level is as follows:

• For the year starting 1 January 2006, based on the share price of €26.78 at 31 December 2005, 15,777 performance shares for the CEO and 12,136 performance shares for the CFO. On the basis of the fulfilment of the performance condition (TSR ranking for the LTIP performance period 2006 – 2008 at eighth position), no performance shares will vest.
• For the year starting 1 January 2007, based on the share price of €36.03 at 31 December 2006, 20,816 performance shares for the CEO and 11,449 performance shares for the CFO. These will vest, subject to the fulfilment of the performance condition, in 2010.
• For the year starting 1 January 2008, based on the share price of €44.22 at 31 December 2007, 16,960 performance shares for the CEO and 9,328 performance shares for the CFO. These will vest, subject to the fulfilment of the performance condition, in 2011.

Pensions

The pension policy (as from 2006) is based on the principle of defined contribution. Executive Board members can choose to participate in the Defined Contribution Plan or to allocate, within the fiscal rules, the amounts into a Capital Creation option. In the Defined Contribution Plan, apart from the survivor’s pension, a separate lump sum of two times base salary will be paid in the event of death whilst in service.

In the Capital Creation option the Executive Board member may elect to receive as income the Defined Contribution premium amounts from the pension scheme, less an amount equivalent to the employee contribution. Instead of a survivor’s pension, a lump sum of, depending on age, ten, eight, six or four times base salary will be paid, in the event of death whilst in service.

The retirement age is 65, but individual Executive Board members may retire earlier with a reduced level of benefit. Contribution rates are designed to enable the current Executive Board members to retire from the Company at the age of 62.

Contracts

The contracts of the Executive Board are for an indefinite period of time. The general notice period is six months for the Company and three months for the members of the Executive Board. There is no specific scheme in the event of dismissal.

Shares held by the Executive Board

As at 31 December 2008, in addition to the above-mentioned performance shares, Mr. van Boxmeer held 9,244 shares of Heineken N.V. and Mr. Hooft Graafland held 6,544 shares of Heineken N.V.

Mr. Hooft Graafland held 3,052 shares of Heineken Holding N.V. as per 31 December 2008.

Remuneration Supervisory Board

The amounts paid to the members of the Supervisory Board are stated in note 33 of the financial statements. These amounts came into force in 2006. The General Meeting of Shareholders determines the remuneration of the Supervisory Board.

Shares held by the Supervisory Board

As at 31 December 2008, Mr. de Carvalho held 8 shares in Heineken N.V. The other Supervisory Board members do not hold any of the Company’s shares, convertible bonds or option rights. As at 31 December 2008 Mr. Van Lede held 2,656 shares in Heineken Holding N.V. and Mr. de Carvalho held 8 shares in Heineken Holding N.V.

Adjustments to the Remuneration policy for the Executive Board as from 2009

The Supervisory Board adopted the following adjustments to the remuneration policy as from 2009, which are submitted to the Annual General Meeting of Shareholders for approval. The key principles of the 2005 remuneration policy (and adjustments in 2007) will not change, but fixed and variable pay are adjusted to be in line with a new Labour Market Peer Group (LMPG).

Long-term Incentive Plan Awards

	At 1  January  2008	Awards  granted  during  the year	Awards  vesting  during  the year	Awards  lapsed  during  the year	At 31  December  2008	Target level  value of  awards at  grant date
	Number	Number	Number	Number	Number	in thousand EUR
Van Boxmeer
– 2005	14,244	–	14,2441	–	–	349
– 2006	15,777	–	–	–	15,7772	423
– 2007	20,816	–	–	–	20,816	750
– 2008	–	16,960	–	–	16,960	750
Hooft Graafland
– 2005	13,250	–	13,2501	–	–	325
– 2006	12,136	–	–	–	12,1362	325
– 2007	11,449	–	–	–	11,449	412.5
– 2008	–	9,328	–	–	9,328	412.5

¹

This number is the gross entitlement. As Heineken N.V. fulfilled the tax payment obligations related to vesting on their behalf, the amount of Heineken N.V. shares received was a net amount (9,244 shares for Mr. Van Boxmeer and 6,544 shares for Mr. Hooft Graafland).

²

None of these awards will vest.

Labour market peer group

Through acquisitions and new brewery constructions over 2007 and 2008 Heineken has built positions in new markets, and strengthened positions in some existing markets. In this way the footprint of the Company has changed considerably over the last two years. To reflect this, a new LMPG has been adopted changing from a predominantly Dutch peer group to a broader group of European- and UK-based multinational companies operating in the brewing and branded consumer products sectors:

Labour market peer group as from 2009

• Akzo Nobel (NL),
• Anheuser-Busch Inbev (B),
• Cadbury (UK),
• Carlsberg (DK),
• Danone (F),
• Diageo (UK),
• Henkel (G),
• LVMH (F),
• Nestlé (CH),
• L’Oréal (F),
• Reckitt Benckiser (UK),
• Koninklijke Philips (NL),
• SABMiller (UK),
• Unilever (NL).

Remuneration data from the peer group companies is scaled to reflect the size of Heineken, a technique commonly used by independent remuneration experts.

Base salary

The base salary policy for the Executive Board is the median level of the labour market peer group. The median of the new labour market peer group is substantially higher than the 2008 base salary levels. In view of the current exceptional economic conditions, the Executive Board wishes to freeze their 2008 base salary levels, being €750,000 for the CEO and €550,000 for the CFO for 2009, which the Supervisory Board respects.

Short-term incentive

The median level of short-term incentive in the new labour market peer group, as a percentage of base salary, is similar to that of the old labour market peer group, so there is no change in level of incentive. At target level, the short-term incentive for the CEO is 100 per cent of base salary and for the CFO 75 per cent. The maximum payout is set at a multiple of 1.5 times the target level.

The focus of the short-term incentive performance measures remains on annual operational performance. In 2008 organic net profit growth accounted for 75 per cent of the incentive opportunity, and special annual targets accounted for the remaining 25 per cent.

For 2009, to reflect the evolving priorities of the Company, 50 per cent of the incentive opportunity will be linked to organic net profit growth, 25 per cent to free operating cash flow, and 25 per cent to special annual targets.

Long-term incentive

The median level of long-term incentive in the new labour market peer group, as a percentage of base salary, is above that of the old labour market peer group. Consequently, the target levels will increase. For the CEO the target level will increase to 150 per cent of base salary and for the CFO to 100 per cent of base salary, relative to the current levels of 100 per cent and 75 per cent respectively.

Based on the share price as per 31 December 2008 of €21.90, for 2009 this corresponds at target level to 51,370 performance shares for the CEO and 25,114 performance shares for the CFO. These will vest, subject to the fulfilment of the performance condition, in 2012. The TSR performance peer group is different from the labour market peer group and includes companies with which Heineken competes for shareholder preference. It is composed of other brewers, and also European- and UK-based multinational companies that operate in the branded consumer products market. Following acquisition activity in 2007 and 2008, the TSR performance peer group is as follows:

TSR Performance Peer Group

• Anheuser-Busch InBev (B) (formerly InBev),
• Cadbury (UK) (replaced Anheuser-Busch as from the 2006 – 2008 performance period),
• Carlsberg (DK),
• Danone (F) (replaced S&N as from the 2006 – 2008 performance period),
• Diageo (UK) (replaced Numico as from the 2005 – 2007 performance period),
• Henkel (G),
• LVMH (F),
• Nestlé (CH),
• L’Oréal (F),
• SABMiller (UK),
• Unilever (NL).

In each case when a company leaves the TSR performance peer group it is replaced from the beginning of all current performance periods.

The requirements of the new Dutch Corporate Governance code, dated 10 December 2008, II.2.10 (upward/downward clause) and II.2. 11 (claw-back clause) will be included In the Long- and Short-Term Incentive Plans.