The key principles for Clariant’s Short-Term Incentives (STI) and Long-Term Incentives (LTI) are to reduce complexity, increase transparency, and ensure a coordinated and unified »One Clariant« approach throughout all employee groups and countries. Therefore, success, in terms of bonus payouts, will generally be measured only based on relevant financial Group Performance Indicators. Only if Clariant is successful, profits can be shared with employees.

The following variable compensation programs are currently in place for Clariant:

STI: Short-Term Incentive Plans (cash bonus)

1. Group Management Bonus Plan (GMBP) – started in 2010
2. Group Employee Bonus Plan (GEBP) – started in 2010/2011
3. Global Sales Incentive Plan (G-SIP) – started in 2011

LTI: Long-Term Incentive Plans (equity-linked incentives)

1. Performance Share Unit (PSU) Plan – started in 2013, last grant in 2018
2. Group Senior Management – Long-Term Incentive Plan (GSM-LTIP or Matching Share Plan) – started in 2010, last grant in 2018 (for 2017)
3. Clariant Long-Term Incentive Plan (CLIP) – started in 2019
4. Restricted shares for the Board of Directors – started in 2012

002 Clariant Incentive Scheme Landscape

¹ Number of positions as of 31 December 2019
² ML: Management Level

The Performance Cycle of Clariant is based on a 12-month rotation, which starts in November each year with objective discussions focusing on the next business year. Group Performance Indicators (GPI), top priorities, and related projects are included. In January, alignment meetings take place with key leaders of the company in order to cascade GPI objectives and priorities for the new year.

003 ANNUAL PERFORMANCE CYCLE

4.1. Short-Term Incentive Plans (cash bonus)

1. The Group Management Bonus Plan (GMBP) is anchored in the overall Performance Cycle at Clariant. Through intensive discussions and systematic alignment meetings, this cycle ensures a challenging business-specific target agreement for each Business Unit (BU) and Service Unit (SU).
   
   The individual amount of bonus payments generated in a year is determined by the achieved result of the Clariant Group measured against defined objectives. The achievement is calculated by means of three elements: financial result of the Group, financial results of the BUs or SUs, and defined top priorities (Group Performance Indicators and strategic projects) SEE FIGURE 004.
   
   As Clariant Performance Cycle agreements with each BU lead to challenging business-specific target settings, the maximum bonus payout is explicitly capped at 100% (= target). The target settings for 2019 were defined in the fourth quarter of 2018. As outlined in the remuneration structure (see paragraph 3), Clariant aims for a higher bonus target than the norm in international markets; thus, this 100-percent approach ensures overall competitive positioning compared with other companies.
   
   The annual evaluation of the achievement of objectives and allocation of funds for the GMBP is conducted by the CoC in February, following the respective financial year, and approved by the Board of Directors. This system ensures that the bonus payments granted to employees are closely aligned with the Group’s overall results.

004 Group Management Bonus Plan (gmbp) 2019

¹ Discontinued operations are BU Pigments and BU Masterbatches.
² Continuing operations are BUs Industrial & Consumer Specialties, Catalysts, Additives, Functional Minerals, Oil and Mining Services.
³ Q1, Q2, and Q3 inventory in % of annualized quarterly sales
Legend: aei = after exceptional items; BU = Business Unit; CLNX = Clariant Excellence; COMA= Contribution Margin; EBITDA= Earnings Before Interest, Taxes, Deprecation and Amortization; LC= Local Currency; LTAR= Lost-time Accident Rate; OTIF= On-Time- and In-Full deliveries; ROIC= Return on Invested Capital

2. Cash bonus for non-management levels: The Group Employee Bonus Plan (GEBP) represents a globally aligned and standardized bonus plan for all legal entities around the world. In general (where legally compliant and possible), all legal entities will apply the global Group Achievement or a combination of Group Achievement and local Top Priorities as the bonus payout. The maximum bonus payout is capped at 100% (= target). Some countries in Asia and Latin America reward part of the GEBP for blue-collar employees in the form of a local productivity scheme to improve site/plant performance. Since 2017, employees in the Clariant Shared Service Centers in Poland and India have received 50% of their GEBP in the form of a »Global Business Services – Shared Service Center Bonus Plan (GBS-SSC)« to offer a competitive incentive focused on quality and productivity.
3. Cash bonus for the sales force: The Global Sales Incentive Plan (G-SIP) aims to incentivize premier sales performance and growth by focusing on the individual sales performance and underlying Key Performance Indicators in the areas of sales, margin, and trade receivables. Each objective is weighted and can be monitored using existing reporting systems. Thus, the direct impact of individual success on payout can be easily tracked. In 2011, the global rollout started, and in 2019, approximately 1 100 employees were included worldwide. Employees can participate only in one global bonus plan (G-SIP or GMBP/GEBP).

4.2. Long-Term Incentive Plans (equity-linked incentive)

Clariant offers equity-based compensation for approximately 240 senior managers worldwide (EC and ML 1 – 4).

1. The Performance Share Unit (PSU) Plan was introduced in 2013 and was last granted in 2018. Its key objective was a strong commitment to higher profitability for Clariant and therefore the achievement of strategic targets.

Clariant’s Performance Share Unit Plan has a three-year vesting period. The vesting is conditional upon achievement of the performance target (check after three years). The relevant underlying Key Performance Indicator is EBITDA (before exceptional items) in percentage of sales, and the performance target is to be at or above the median of a defined peer group. If vesting and performance targets are achieved, one PSU will be converted to one Clariant share. For PSUs granted in 2016, the performance criteria were checked in summer 2019. The comparison with the peer group revealed that Clariant missed the relevant performance hurdle (the median of the group); therefore the PSUs for all participants were forfeited in September 2019.

PSU participation was limited to the Executive Committee and selected senior managers of ML 1 – 4 (approximately 1.4% of employees). Eligible participants received a fixed number of PSUs in accordance with an underlying share price defined over a 10-day trading period.

If an employee should voluntarily leave Clariant before the vesting period (three years) expires, all rights to shares that have not yet been transferred at that point in time become invalid. In the event of retirement, disability, or death of the participant, the employee (or the estate and/or heirs of the participant in the event of death) will receive an immediate vesting on a pro-rata basis in accordance with published regulations. The vested PSUs remain subject to the performance condition and will be allocated only at the end of the vesting period.

In the event that a participant has substantially contributed to a financial loss, issues resulting in restatement of financial results, reputational damage, or substantial breach of legal or regulatory requirements, including internal policies, the Board of Directors can decide to cancel any outstanding PSUs.

2. Group Senior Management – Long-Term Incentive Plan (GSM-LTIP) = Matching Share Plan

The Matching Share Plan was started in 2010 and granted for the last time in 2018 for the annual year 2017. It required a personal investment in Clariant shares and fostered the commitment of key managers (EC and ML 1 – 3) to the long-term success of Clariant. Under this plan, senior managers had to invest 20% of their annual cash bonus (GMBP) in Clariant shares (= investment shares). Thus, this plan supported senior managers in meeting their requirement to permanently hold a minimum of 20 000 and up to 100 000 shares, depending on their management level. New participants had six years to fulfill the required investment thresholds.

The investment shares are blocked and held in a custody account for a period of three years. At the end of the blocking period, the participant is entitled to obtain for each investment share an additional share free of charge (= matching share). This matching is subject to the condition of continued employment with Clariant throughout the blocking period. In the event of termination of employment before the end of the blocking period, the right to receive Matching Shares lapses. In the event of retirement, disability, or death, a cash amount will be paid instead, equal to the pro rata temporis portion (considering employment during the blocking period).

The senior managers who did not participate in this plan, or did not invest according to the plan regulations, would have their target cash bonus (GMBP) decreased by 50% and would forfeit the eligibility to participate in any Long-Term Incentive Programs (including the PSU Plan) for the following bonus year.

As the CoC had decided to discontinue the Matching Share Plan, no deductions for investment shares from the actual 2018 bonus payout in 2019 were made. The bonus was fully paid in cash instead.

3. Clariant Long-Term Incentive Plan (CLIP)

After five years without any plan changes, the Compensation Committee had decided to amend the Long-Term Incentive Plans for senior management starting in 2019 to better reflect Clariant’s strategic targets and to ensure a competitive remuneration package to senior managers reflecting market best practices. Based on intensive benchmarking, the new plan was designed. This revised Long-Term Incentive Plan aims to provide a closer alignment of underlying Key Performance Indicators with the shareholder perspective and to represent an attractive and competitive incentive for senior management.

The CLIP was granted for the first time in April 2019. Participation in the CLIP is limited to the Executive Committee and senior managers of ML 1 – 4 (approximately 1.4% of employees).

The CLIP represents an equity-based award in the form of Performance Share Units with a three-year vesting period. The CLIP grant per individual is defined as a fixed percentage of the annual base salary for management levels ML 1 – 4 and as a fixed amount for EC members SEE FIGURE 001. Relative Total Shareholder Return (rTSR)and Economic Profit have been selected as underlying Key Performance Indicators. The number of PSUs is determined by dividing the individual grant value by the Fair Market Value of a PSU at the grant date. In accordance with the Accounting Standards Codification, the Monte Carlo valuation methodology is applied to determine the grant date Fair Market Value to measure the performance of the rTSR component. To calculate the Economic Profit component, the market value of Clariant shares at the grant date is adjusted by the present value of future dividends. The vesting is conditional upon achievement of defined performance targets. Vesting will only occur if at least a threshold performance level as defined by the Board of Directors has been achieved. Vesting can take place at any level between 0% and 100% of the granted PSU volume. The Key Performance Indicators will be measured independently.

At vesting, each PSU will be converted into one Clariant share. Should an employee voluntarily leave Clariant before the vesting period (three years) expires, all rights to shares that have not yet been transferred at that point in time become invalid. In the event of retirement, the employee will receive an immediate vesting on a pro-rata basis in accordance with published regulations. The vested PSUs remain subject to the performance condition and will be allocated only at the end of the vesting period. In the event of disability or death of the participant, the employee (or the estate and/or heirs of the participant in the event of death) will receive an immediate vesting on a pro-rata basis. The vested PSUs will be released form the performance condition and will be settled in cash.

In the event that a participant has substantially contributed to a financial loss, issues resulting in restatement of financial results, reputational damage, or substantial breach of legal or regulatory requirements, including internal policies, the Board of Directors can decide to cancel any outstanding PSUs.

Participation in CLIP is tied to share ownership targets that have to be achieved within 5 years:

• CEO: 150 000 shares
• EC: 80 000 shares
• ML 1 – 4: up to 30 000 shares depending on management level

4. Restricted shares for the Board of Directors

This share plan, introduced in 2012, allocates shares of Clariant Ltd to members of the Board of Directors. Board members will receive a fixed portion of the annual fee allocated in the form of shares subject to a blocking period (»Restricted Shares«). The blocking period is three years from the date they are allocated. From the first business day after the blocking period, the Board member may freely dispose of and trade these shares without any further restrictions (legal restrictions will remain applicable). The allocation is made once a year, at the end of the mandate year, four weeks prior to the Annual General Meeting (AGM).

The value of a grant is determined by the role and responsibility see Structure of compensation for members of the Board of Directors.