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. The policy was adopted in the Annual General Meeting of Shareholders in 2005 and the revised policy was adopted in 2007. A review of the policy is conducted every two years.
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 each of annual bonus 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-term bonus and long-term incentive ensures a balanced focus, on both short-term 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.
Heineken operates in a highly international labour market and is headquartered in the Netherlands. Consequently, the reference for market data 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 N.V.,
- Koninklijke DSM N.V.,
- Reed Elsevier N.V.,
- Koninklijke Ahold N.V.,
- Koninklijke KPN N.V.,
- Koninklijke Numico N.V.*,
- TNT N.V.,
- Unilever N.V.,
- Koninklijke Philips Electronics N.V.,
- InBev S.A.,
- Henkel KGaA,
- L’Oréal S.A.,
- Nestlé S.A.
* Replacement of Koninklijke Numico N.V., following its take-over, will be part of our next review in 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.
Annual bonus
The focus of the annual bonus 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 of the bonus opportunity. 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 of the annual bonus is linked to yearly personal targets. The specific targets are commercially sensitive and cannot be disclosed. At target level, the annual bonus level for the CEO is €750,000 and for the CFO €412,500. The maximum payout will not exceed 1.5 times the target bonus level.
Based on its overall assessment, the Supervisory Board awarded the maximum bonus, as in 2007 all targets were exceeded. This represents €1,125,000 for the CEO and €618,750 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 2007 for the CEO is €750,000 and for the CFO €412,500. The performance condition is total shareholder return, 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 Inc.,
- Carlsberg A/S,
- InBev S.A.,
- SABMiller plc,
- Scottish & Newcastle plc,
- Henkel KGaA,
- L’Oréal S.A.,
- LVMH S.A.,
- Koninklijke Numico N.V.*,
- Nestlé S.A.,
- Unilever N.V.
* Following its take-over, Koninklijke Numico N.V. has been replaced in the performance peer group by Diageo Plc. This replacement shall have effect as of the plan period 2005-2007.
If, over a three-year period, Heineken performs better than the median of the peer group a proportion of the performance shares will vest. Below median, no performance shares will vest. At sixth position, 25 per cent of the target amount will vest. A linear vesting schedule applies, with 50 per cent of the target number vesting at fifth position and 75 per cent at fourth position. At third position, the target number will vest. If Heineken is ranked first, the maximum number of performance shares will vest. This is 1.5 times the target amount of shares. The vested shares are subject to a holding restriction of two years.
For the LTIP performance period, Heineken was ranked at the end of 2007 as follows:
- Period 2007-2009: 5th
- Period 2006-2008: 3rd
- Period 2005-2007: 3rd
Heineken is acquiring the shares that will be required for vesting.
The Executive Board performance share allocation at target level is as follows:
- For the year starting 1 January 2005, based on the share price of €24.53 at 31 December 2004, 17,224 performance shares for the CEO and 13,250 performance shares for the CFO. On the basis of the fulfillment of the performance condition (total shareholder return ranking for the LTIP performance period 2005-2007 at third position), the performance shares will vest within 5 business days after the publication of the 2007 annual results as determined by the Supervisory Board in such a way that Mr Van Boxmeer is entitled to a gross amount (pro-rated to the time of appointment as CEO) of 14,244 (100 per cent of target) Heineken N.V. shares and Mr Hooft Graafland is entitled to a gross amount of 13,250 (100 per cent of target) Heineken N.V. shares. As Heineken N.V. will fulfill the tax payment obligations related to vesting, the amount of Heineken N.V. shares to be received by the CEO and CFO will be a net amount in shares.
- 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. These will vest, subject to the fulfillment of the performance condition, in 2009.
- 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 fulfillment 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 fulfillment of the performance condition, in 2011.
Pensions
In 2006 a new pension policy was introduced for current and future members of the Executive Board, reflecting the Netherlands market and Netherlands legislative changes. The arrangement 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 t he 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. As stated in the Comply or Explain Report (February 2005), on the basis of the Dutch Corporate Governance Code, provision II.2.7 cannot be complied with as it conflicts with the law.
Shares held by the Executive Board
As at 31 December 2007, except for the aforementioned performance shares, the members of the Executive Board did not hold directly any of the Company’s shares, convertible bonds or option rights.
Mr. Hooft Graafland held 3,052 shares of Heineken Holding N.V. as per 31 December 2007.
Remuneration Supervisory Board
The amounts paid to the members of the Supervisory Board are stated on page 125 of the financial statements. These amounts came into force as per 2006. The General Meeting of Shareholders determines the remuneration of the Supervisory Board.
Shares held by the Supervisory Board
As at 31 December 2007, 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 2007 Mr. Van Lede held 2,656 shares in Heineken Holding N.V. and Mr. de Carvalho held 8 shares in Heineken Holding N.V.
Supervisory Board Heineken N.V.
Amsterdam, 19 February 2008
