Nokian clarifies executive remuneration policies

As news coverage of Finnish tyre manufacturer Nokian’s apparent involvement in fixing magazine tyre test results  got underway on 24 February, the company was taking step to clarify its pay and bonus policies. One of the key parts of the firm’s statement “regretting” tyre test “mistakes” the firm also addresses concerns related to suggestions that the alleged tyre test rigging was financially motivated: “The board of Nokian Tyres has never decided on such stock option schemes that would have encouraged cheating in tests, unlike what has been implied in the media.”

Indeed, two days earlier on 24 February, the day Nokian held its interview with Kauppalehti, the company issued a statement saying Nokian Tyres plc’s board had decided to update the group’s incentive schemes. The statement said “the update aims to clarify and improve the schemes, and to offer a competitive rewarding system for the entire personnel. The incentive scheme has long focused on options, which are due to expire in 2019.”

Specifically Nokian Tyres plc has decided to begin using a profit-related bonus scheme, which will be based on the profit made by the group. The profit-related bonus scheme will cover the entire personnel, with the exception of those covered by the share-based incentive scheme for senior executives. The new scheme will take effect in the financial period beginning 1 January 2016, and bonuses earned under the scheme will be paid into a newly established personnel fund in Finland. 50 per cent of the profit-related bonuses paid into Nokian Tyres’ personnel fund will be invested in Nokian Tyres plc shares.

“A profit-related bonus based on operating profit will increase the entire personnel’s commitment to and interest in the success of the Group as a whole. The personnel fund will enable both the company and the personnel to gain greater benefit from the money invested in bonuses than under other forms of bonus scheme,” says Ari Lehtoranta, president and CEO of Nokian Tyres.

Share-based incentive scheme

At the same time Nokian clarified the details of its share-based incentive scheme: “The aim of Nokian Tyres’ new share-based incentive scheme is to align the objectives of the owners and key personnel so as to increase the company’s value over the long term and commit key personnel to the company. The share-based incentive scheme covers approximately 5% of the group’s personnel including top management.”

The share-based incentive scheme contains three one-year earning periods: the calendar years of 2016, 2017, and 2018. The company’s board of directors will decide upon the earning criteria for the scheme at the beginning of the earning period, along with the objectives assigned to each criterion. Any bonus to be paid under the scheme for the 2016 earning period will be based on the group’s operating profit and net sales. The maximum value of bonuses to be paid for the 2016 earning period is equivalent to approximately 515,000 Nokian Tyres shares, including a portion to be paid in cash.

The scheme means managers must retain ownership of a certain number of shares for “the entire duration of their membership of the group’s management team” thereby ensuring that their success is linked to the company’s success.