Short-term incentives (STI)
Fortum’s STI programme is designed to support the achievement of the company’s financial and other relevant targets on an annual basis. All employees are covered by the programme or alternatively by a business specific or a comparable local variable pay arrangement.
The Board of Directors determines the performance criteria and award levels for the Fortum Executive Management. The awards are based on the achievement of Group financial performance, divisional targets, and individual targets. The target incentive opportunity is 20% and the maximum incentive opportunity is 40% of the annual base salary. The Board of Directors assesses the performance of the President and CEO and the members of the Fortum Executive Management on a regular basis.
Awards for other employees are based on a combination of Group, divisional, functional and personal targets. The targets are set in annual performance discussions held at the beginning of the year. Awards under the STI programme are paid solely in cash.
In addition to the STI programme, other variable pay mechanisms may be used to reward employees for limited specific purposes, e.g. projects with significant importance and impact on Fortum level or to reward for extraordinary commitment and effort. The use of such mechanisms are approved according to the principles and within the lines set out in the Fortum Remuneration Policy.
Long-term incentives (LTI)
The purpose of Fortum’s long-term incentive programme is to support the delivery of sustainable, long-term performance, align the interests of management with those of shareholders and assist in committing and retaining key individuals.
Fortum’s LTI programme provides participants with the opportunity to earn company shares. Under the LTI programme and subject to the decision of the Board of Directors, a new LTI plan commences annually.
The Board of Directors approves participation of the Fortum Executive Management members in each annually commencing LTI plan. Subject to a decision by the Board of Directors the President and CEO is authorised to decide on individual participants and potential maximum awards for other participants than the Fortum Executive Management in accordance with the nomination guidelines approved by the Board of Directors. Participation in the LTI plan precludes the individual from being a member in the Fortum Personnel Fund.
Each LTI plan begins with a three year earnings period, during which participants may earn share rights if the performance criteria set by the Board of Directors are fulfilled.
If the minimum performance criteria are not exceeded, no shares will be awarded. If performance is exceptionally good and the targets approved by the Board of Directors are achieved, the combined gross value of all variable compensation cannot exceed 120% of the person’s annual salary in any calendar year.
After the earnings period has ended and the relevant taxes and other employment-related expenses have been deducted, participants are paid the net balance in the form of shares.
For LTI plans commencing in 2013 onwards, any shares awarded to Fortum Executive Management members are subject to a three-year lock-up period in accordance with the State-Ownership Guidelines in force at the time the LTI plan was introduced. Subject to a decision by the Board of Directors, the lock-up period can be reduced to one year for those Fortum Executive Management members whose aggregate ownership of Fortum shares is greater than or equal to their annual salary. For other participants (i.e. below the Fortum Executive Management), the lock-up period is one year. For LTI plans commencing prior to 2013, the lock-up period is three years for all LTI plan participants.
If the value of the shares decreases or increases during the lockup or retention period, the participant will carry the potential loss or gain.
To reflect the changes in the State-Ownership Guidelines in 2016, for LTI plans commencing in 2017 and beyond, the share awards will not be subject to a minimum lock-up period. However, Fortum Executive Management members whose aggregate ownership of Fortum shares does not yet fulfil the shareholding requirement are required to retain at least 50% of the shares received until the required level of shareholding is met.
The Board of Directors has the right to revise the targets set in the incentive plans, deviate from the payment based on achievement of the set earnings criteria, or to discontinue any ongoing incentive plan. Remuneration that has been paid out without grounds shall be reclaimed in accordance with the regulations on returning an unjust enrichment and remuneration. A payment which has been influenced by the recipient’s unethical conduct, may be recovered based on the terms of the LTI programme.
The Nomination and Remuneration Committee is using independent advisors in support of its work.