Remuneration

This section consists of the following:
• 2010 Remuneration Report of the Board.
• Remuneration of the Non-executive Board members.
• Long-term incentive plans.

2010 Remuneration Report of the Board

The 2010 Remuneration Report of the Board, as drawn up by the Compensation committee, contains an account of the manner in which the Remuneration Policy for the CEO was implemented in 2010, and is planned to be implemented in 2011.

Remuneration of the CEO, including his function as Executive Board member

The General Meeting, upon the proposal of the Board, determines the Remuneration Policy for the CEO, including for his function as Executive Board member.

The remuneration of the CEO shall, with due observance of the Remuneration Policy, be determined by the Board.

Remuneration Policy for the CEO

The Remuneration Policy for the CEO was adopted by the AGM on May 11, 2005 and was most recently amended by the AGM of May 14, 2008. The Remuneration Policy is published on Gemalto’s web site.

The Remuneration Policy also serves as a guidance to establish the senior management remuneration (not addressed in this report).

The objectives of the Remuneration Policy and the remuneration policy for the management are to attract, retain and reward talented staff and management, by offering compensation that is competitive in the industry, motivates management to surpass the Company’s business objectives and aligns the interests of management with the interests of the shareholders. The Company considers that it has a balanced set of clearly defined objectives and performance targets that do not encourage the CEO to take risks that are not in line with the adopted strategy and which are within the Company’s risk appetite.

The compensation package of the CEO consists of four elements: (i) base salary, (ii) variable incentive, (iii) long-term or deferred incentive and (iv) a fixed fee as Executive Board member of Gemalto N.V.

The compensation of the CEO is calibrated by comparison to a group of other relevant companies, particularly continental European high-tech and industrial companies (the ‘Comparison Group’) and surveys are performed by Towers Watson, an independent internationally recognized firm of compensation specialists.

Positioning of the Remuneration Policy

The table below, located within the 'Compensation package of the CEO' summarizes the positioning of the Remuneration Policy by comparison with the Comparison Group and applies to the compensation package of the CEO.

Compensation package of the CEO

The table below, located within the 'Compensation package of the CEO' sets out:

  • Key elements of the compensation package of the CEO.
  • Compensation of the CEO for the financial year 2010.

Positioning of the Remuneration Policy

Types of compensation Policy relating to compensation  
Overall compensation Assuming that challenging but achievable targets
set by the Board have been met, the overall
compensation is set to be about the 60th percentile
by comparison with the remuneration practices of
the Comparison Group.
In case of exceptional performance, the total compensation is set to be in the upper quartile.
Total Reference Compensation (‘TRC’), i.e. base salary and a fixed fee as Executive Board member of Gemalto N.V. The TRC is targeted around 50th percentile by
comparison with the Comparison Group.
 
Variable incentive The total variable compensation at 100% (on-target)
achievement of all objectives is designed to be clearly
above 50th percentile, with an average over the years
of about 60th percentile by comparison with the Comparison Group.
 
Long-term or deferred incentive The long-term or deferred incentive part of the total
compensation package for the CEO is designed to
be clearly above 50th percentile by comparison with
the Comparison Group, which may be the upper
quartile in case of exceptional performance.
 

Compensation package of the CEO

  Key elements of the compensation package of the CEO Compensation of the CEO for the financial year 2010
Short-term  
Total Reference Compensation (‘TRC’) The TRC is fixed and reviewed every year, but not necessarily adjusted every year. The TRC of the CEO was adjusted effective February 1, 2010 to €670,000 (including a fixed fee as Executive Board member of Gemalto N.V. of €35,000).  
Variable incentive The variable compensation of the CEO, based on the achievement of personal and financial objectives, ranges from 0 to 180% of the TRC. A variable incentive of 120% of the TRC is payable on achievement of 100% of on-target performance by reference to a predefined set of personal and financial objectives.

In case of exceptional performance in excess of the 100% (on-target) achievement of objectives, the variable compensation can be increased so that the total variable compensation can reach up to 180% of the TRC.

The personal and financial objectives for variable compensation typically relate to short-term (annual) performance targets and are key drivers for value creation and growth in shareholders ’ value. Part of the variable compensation is related to Gemalto’s financial results, e.g. revenue, cash flow and operating income, and is determined by the Board on the recommendation of the Compensation committee on an annual basis. The remainder depends on success in achieving a limited number of specific strategic, tactical or individual objectives, also determined annually by the Board on the recommendation of the Compensation committee.

Below a minimum performance threshold, the variable compensation for financial performance is zero. The compensation is 120% at target level and at a maximum of 180% at stretch level. This compensation is calculated using two linear interpolation scales from threshold to target and from target to stretch.

In exceptional cases, the Board may add a discretionary amount.
€1,148,820 (143% of on target Variable Incentive, 172% of TRC).

For 2010, the CEO’s financial targets accounted for 2/3 of the variable compensation and were:
  • Revenue: 4/15 of the variable compensation.
  • Profit from Operations: 4/15 of the variable compensation
  • Free cash flow: 2/15 of the variable compensation.
The personal targets, accounting for 1/3 of the CEO’s variable compensation, depended on his specific responsibilities and were defined as measurable actions linked with the success and development of Gemalto.

In accordance with best practice provision II.2.13 (b) of the Dutch corporate governance code, the Compensation committee, and subsequently the Board, analyzed the possible outcomes of the variable compensation components and how they may affect the compensation of the CEO.
 
Long-term or deferred incentive
Global Equity Incentive Plan (‘GEIP’) Under the GEIP and the French Sub-Plan, the CEO may receive options, restricted share units and/or share appreciation rights (jointly referred to as ‘Awards’). For further information, please see 'Global Equity Incentive Plan' below.

The Board is authorized to grant to the CEO annually any combination of Awards, including any awards, as defined in the GEIP, similar in substance and/or nature, with a maximum value equivalent to the value of 250,000 options valued by reference to any of the generally recognized valuation methods applied in a manner as approved by the Board.
Grant of 32,500 RSU, if conditions allow for 100% vesting. The number of RSU granted may be either zero or may vary, with a linear sliding scale between 100% and 200% vesting, from 32,500 RSU to 65,000 RSU.

This corresponds to a cost that varies from €877,104 to €1,754,207 for Gemalto depending on the multiplier effect of the RSU conditions. The cost will be expensed over 36 months.

Vesting occurs in March 2013, if both a performance condition and a service condition are met. The performance condition being the Company achieving a target level of Profit from Operations for 2010.
 
Global Employee Share Purchase Plan (‘GESPP’) Under the GESPP, the Company may offer eligible employees, including the CEO, the opportunity to purchase shares in the Company at a discount to the prevailing market price. The discount of the purchase price of the shares is 15% based on the lesser of the value of the shares on the first and last day of the offering period.

The CEO may participate in the GESPP (as well as in any future similar plans), through a ‘Fonds Commun de Placement d’Entreprise’.

(‘FCPE’), in which case the FCPE subscribes to Gemalto shares and the CEO receives in exchange units of the FCPE.
The CEO participated to the 2010 GESPP, subscribing for €20,000 (plus €984.79 Company matching) for which he received 685.35 FCPE units.  
Other benefits  
Pension The CEO does not benefit from any special pension plan provided by Gemalto, other than the mandatory legal pension system in France.

There are no agreed arrangements for early retirement of the CEO.
€58,013

Costs for 2010 for the CEO’s mandatory French legal pension scheme.
 
Employee benefits The CEO enjoys any and all benefits that may be applicable to French employees. The CEO enjoyed any and all benefits that were also applicable to French employees.  

Global Equity Incentive Plan (‘GEIP’): Awards and Conditions

Awards    
Options When granting options, the Board applies performance and vesting conditions, as set out below. The exercise price of options is equal to the average of the Gemalto share closing price on the Euronext Paris Stock Exchange during the five trading days preceding the grant date. The options do not benefit from any discount.
Restricted share units (‘RSU’) A RSU is a right to acquire shares in exchange for the RSU. There is no purchase price to be paid to acquire a RSU. When granting a RSU, the Board applies performance and vesting conditions, as set out below. At any time after the granting of a RSU, the Board may accelerate the vesting of such RSU. Under no circumstances, except in case of death, shall the delivery of shares related to a RSU occur prior to the second anniversary of the date of grant.

Except in case of death, the sale of shares acquired pursuant to the exchange of the RSU may not occur prior to the expiration of a two-year period from the date delivery of the shares.
Share appreciation rights (‘SAR’) A SAR is a right to receive the difference between the fair market value of a share on the exercise date and the exercise price of the right being exercised. So far, the Company has not granted SAR to the CEO
Conditions    
Performance factors Awards may be granted or vest on the basis of the achievement of specified financial or personal performance conditions, as included in the Remuneration Policy. In 2010, Awards made during the year were subject to the Company achieving a target level of Profit from Operations for 2010.
The Board expects to consider applying similar performance conditions for future grants.
Vesting in certain circumstances In addition to any performance conditions, Awards have generally been subject to vesting over a specified future period of time. However, any option rights granted to the CEO will vest automatically upon any decision to terminate the appointment of the CEO and will remain exercisable for the full term of the option, notwithstanding any early termination provided in the GEIP and the relevant Sub-Plan, and all other eventual equity-based schemes will continue to vest even after the date of termination. These termination arrangements do not apply where the employment of the CEO with Gemalto International SAS or the Company is terminated for willful misconduct (‘faute lourde’ within the meaning established by the French Supreme Court case law).

Under specific circumstances, the Board has the discretionary power to grant unconditional options (e.g. in case of new hire).

The table below summarizes information on Awards granted to the CEO in previous years, in accordance with best practice provision II.2.13 (d) of the Dutch corporate governance code.

Options

             
Date of grant Number Value at grant
date
(Un)conditional Date of vesting Value at vesting
date
End of lock-up Exercise price (€)
June 2006 200,000 €1,269,781 Unconditional (past
performance related)
June 2010 (4 years
after date of grant)
€1,408,000 Not applicable 23.10
Sept 2008 150,000 €1,049,761 Unconditional (past
performance related)
Sept 2012 (4 years
after date of grant)
Not applicable Not applicable 26.44

RSU

             
Date of grant Number Value at grant
date
(Un)conditional Date of vesting Value at vesting
date
End of lock-up Value at end of
lock-up
Sept 2007 The number may vary from 0 to 80,000 with a maximum multiplier of 3 €1,727,828 Conditional Dependent on whether thresholds are reached before Dec 31, 2009 or before Dec 31, 2010      
66% vested in 2008 €1,424,544 2011 Not applicable
84% vested in 2009
(in total 150%)
€2,026,080 2011 Not applicable
As per Dec 31, 2010, the remainder of the RSU were not vested and hence were forfeited      
Oct 2009 65,000 €1,689,377 Conditional Oct 2012 Not applicable Oct 2014
(if vested)
Not applicable
March 2010 The number
may vary from 0
to 32,500 with a
maximum
multiplier of 2
€877,104 Conditional March 2013 Not applicable March 2015
(if vested)
Not applicable
Contracts of employment

Mr. O. Piou was appointed as CEO in 2004 for a term of four years until the AGM of 2008. He was reappointed on May 14, 2008 as Board member with the title of CEO for a term of four years until the AGM of 2012. Mr. O. Piou has an employment contract (originally dated 1981), not limited in time, governed by French law with Gemalto International SAS, a Gemalto subsidiary. He has a six-month notice period.

If Gemalto terminates Mr. O. Piou’s employment contract, he is entitled to a severance payment equal to one year of reference salary. The reference salary used to calculate this payment will be the annual gross salary paid under Mr. O. Piou’s employment contract during the twelve months preceding its termination, including bonuses and other discretionary cash incentives, if any, as well as the Board member fees he is entitled to.

The severance payment will be in addition to the indemnities and benefits that would be provided by French laws and regulations and the collective bargaining agreement for the Engineers and Management level Employees in the Metallurgical Industry (Convention collective nationale de la Métallurgie – Ingénieurs et Cadres). In the event of termination of his employment contract, Mr. O. Piou has a recognized seniority since 1981 and is entitled to a six-month notice period indemnity, as well as the dismissal and paid vacation indemnities.

The severance payment will not be due if the employment contract of Mr. O. Piou is terminated for willful misconduct (‘faute lourde’ within the meaning established by the French Supreme Court case law) or upon voluntary resignation of Mr. O. Piou. Details regarding the compensation of the CEO are also disclosed in note 9 to the company financial statements.

Changes to the compensation of the CEO for the 2011 financial year

The CEO’s TRC will be adjusted in 2011.

For 2011, the CEO’s financial targets will account for 2/3 of the variable compensation and are:

  • Revenue: 4/15 of the variable compensation
  • Profit from operations: 4/15 of the variable compensation
  • Free cash flow: 2/15 of the variable compensation

The personal targets for 2011 will account for 1/3 of his variable compensation and will depend on his specific responsibilities and are defined as measurable actions linked with the success and development of Gemalto.

Loans or guarantees

Gemalto does not grant personal loans, guarantees or the like to the CEO, and none were granted to the CEO in 2010, nor are outstanding as of December 31, 2010.

Deviations from the Dutch corporate governance code in terms of remuneration
  • Provision II.2.7: amendment of the vesting date of options granted to Mr. O. Piou as CEO. The CEO’s Remuneration Policy provides that, unless his employment with Gemalto International SAS or Gemalto N.V. is terminated for willful misconduct, any option rights vest automatically upon decision to terminate the appointment of the CEO and remain exercisable for the full term of the option, notwithstanding any early termination provided in the GEIP and the relevant Sub-Plan. All other equity-based schemes will continue to vest even after the date of termination. Although it is not the Company’s policy to amend conditions regarding options granted to Executive Board members during the option term, the amendment of the vesting date of the options granted to the CEO is included in the Remuneration Policy adopted by the shareholders, as proposed by the Board, as a result of the execution of the Combination agreement signed between Gemalto N.V. (at that time named Axalto Holding N.V.) and Gemplus International S.A. on December 6, 2005.
  • Provision II.2.8: maximum remuneration in the event of dismissal of Mr. O. Piou as CEO. The severance payment for the CEO is not in line with the Dutch corporate governance code, which recommends that the maximum remuneration of one year’s salary is based on the fixed remuneration component. However, the severance payment of the CEO reflects his accrued seniority with Gemalto and is included in the Remuneration Policy adopted by the shareholders, as proposed by the Board, as a result of the execution of the Combination agreement signed between Gemalto N.V. (at that time named Axalto Holding N.V.) and Gemplus International S.A. on December 6, 2005.
  • Provisions II.2.10 (ultimum remedium). Although recommended by the Dutch corporate governance code, the existing employment contract of the CEO does not specifically include the possibility to adjust the value of conditionally awarded variable compensation if it would produce an unfair result due to extraordinary circumstances. In these cases, the Company will make such adjustments as is feasible under applicable law.
  • Provision II.2.13 (e): content of the Remuneration Report, i.e. non-disclosure of the companies of the Comparison Group. Although recommended by the Dutch corporate governance code, the Company does not disclose the names of the companies in the Comparison Group. The Company compares the compensation of the CEO to those of a group of other relevant companies, particularly continental European high-tech and industrial companies and surveys are performed by Towers Watson, an independent internationally recognized firm of compensation specialists.

Remuneration of the Non-executive Board members

The remuneration of the Non-executive Board members, including the remuneration of the Chairman of the Board and the members of the Board committees is determined by the General Meeting. The remuneration is reviewed from time to time by the Compensation committee.

The remuneration structure for the Non-executive Board members (per calendar year) is as follows:

  • €200,000 for the Non-executive Chairman of the Board.
  • €65,000 for each other Non-executive Board member.
  • An additional fee of €24,000 for the chairman of the Audit committee and an additional fee of €16,000 for each member of the Audit committee.
  • An additional fee of €12,000 for the chairman of the other Board committees, and an additional fee of €8,000 for the other members of those Board committees.

The remuneration of a Non-executive Board member is not dependent on the results of Gemalto.

The Company does not grant shares or rights to acquire shares by way of remuneration to Non-executive Board members. Details regarding the remuneration of the individual Board members are disclosed in note 9 to the company financial statements.

Long-term incentive plans

Global Equity Incentive Plan

In 2004, the General Meeting adopted a Global Equity Incentive Plan (‘GEIP’) enabling the Board to grant options, RSU and/or share appreciation rights (‘Awards’) to eligible employees. A total number of 14 million shares have been made available for grant and issue under the GEIP. As of December 31, 2010 the remaining number of shares available amounts to 5,498,464. During 2010, the Board granted 380,318 RSU to eligible employees, including the CEO. For more information on the grant of RSU to the CEO, please refer to ‘Compensation of the CEO for the financial year 2010’, above.

The 2007 AGM approved a stock option plan, further to the undertakings by the Company in the Combination agreement, to exchange options to acquire Gemplus or Gemalto S.A. (formerly named Gemplus S.A.) shares for options to acquire Company shares. A total number of seven million shares are available for grant and issue under this stock option plan. So far, the Company has not made any grants under this stock option plan.

In the event the Company and/or its affiliates are absorbed by merger and liquidated, or undergo a change of control, and provided no other resolutions are adopted by the Board on such events, and subject to the terms of such resolutions, each outstanding Award not otherwise fully vested shall automatically vest so that each outstanding Award shall, immediately prior the effective date of the event, become exercisable with regards to all or part of the underlying shares and each RSU will be immediately refunded or compensated through the granting of shares, except to the extent such Award is maintained in effect by the Company, or assumed by a successor corporation or otherwise substituted by a plan giving substantially equivalent rights to the employee upon surrender of the Awards.

For more information on the grant of RSU during 2010, please refer to note 25 to the consolidated financial statements.

Global Employee Share Purchase Plan

In 2004, the General Meeting adopted a Global Employee Share Purchase Plan (‘GESPP’) enabling the Board to offer the opportunity to eligible employees to purchase shares in the Company at a discount to the prevailing market price. A total number of 3.2 million shares have been made available for issue or transfer under the GESPP. As of December 31, 2010 the remaining number of shares available amounts to 2,481,261. In 2010, the Board offered eligible employees the opportunity to participate in the plan and 39,602 shares were purchased by employees.

In order to benefit from preferential tax treatment, employees of Gemalto’s French subsidiaries are able to participate in the GESPP through a Fonds Commun de Placement d’Entreprise (‘FCPE’), in which case the FCPE subscribes to Gemalto shares and employees receive in exchange units of the FCPE. Participation in the FCPE does not give rise to direct ownership of shares or the right to acquire shares in the Company. The FCPE has an independent Board of directors and owns 166,395 shares of Gemalto as of December 31, 2010. The FCPE exercises the voting rights on these shares, without instructions from the employees who participate in the FCPE.

For more information on the participation in the GESPP during 2010, please refer to note 25 to the consolidated financial statements.

Global Equity Incentive Plan