25. Share-based payments

Management Incentive Schemes

a) Long-Term Incentive, LTI

With effect from January 1, 2020, the LTI for the members of the Management Board consists of two different long-term variable compensation components, the NORMA Value Added Bonus (NOVA-Bonus) and the Environmental, Social and Governance Bonus (ESG-Bonus).

In fiscal year 2020, the accounting assessment of the newly implemented LTI components under IFRS has not been finalized due to a lack of specific commentary. For this reason, they were initially recognized as provisions for employee benefits in the fiscal year. The accounting treatment under IFRS 2 - Share-based Payment was not finalized until fiscal year 2021 and is presented below. The amounts of EUR 196 thousand recognized as provisions in fiscal year 2020 was not retrospectively adjusted due to immateriality for the net assets, financial position and results of operations of NORMA Group and is therefore presented in the same way as in the previous year’s financial statements. In the fiscal year 2021, the correct presentation was made by adding the relevant components of the LTI classified as equity-settled within retained earnings in equity and reducing the corresponding provisions.

i. NOVA-Bonus

The NOVA-Bonus corresponds to the percentage of the average increase in value from the current and the three previous fiscal years. The annual increase in value is calculated using the following formula:

NORMA Value Added = (adjusted EBIT × (1 – t)) – (WACC × invested capital)

The calculation of the first component is based on the consolidated earnings before interest and taxes (Group EBIT) for the fiscal year and the average corporate tax rate (t). The second component is calculated from the Group cost of capital (WACC) multiplied by the capital invested. The Group’s weighted average cost of capital (WACC) is derived from the base interest rate, the market risk premium and the beta factor. The base interest rate is derived from the interest rate structure data of Deutsche Bundesbank (three-month average from October 1 to December 31). The market risk premium represents the difference between the expected return of a risky market portfolio and the risk-free interest rate. NORMA uses the recommendation of the Institut der Wirtschaftsprüfer (IDW) to determine this risk premium. The beta factor represents the individual risk of a share compared to a market index. It is first determined as the average value of the unindebted beta factors of the peer group and then adjusted to NORMA’s individual capital structure. The cost of equity is calculated by adding the risk-free interest rate and the weighted country risk of NORMA Group to the product of the market risk premium and the indebted beta factor of the peer group. The credit spread used to calculate the cost of debt was determined on the basis of the terms of the current external financing of NORMA Group. Invested capital is calculated from consolidated equity plus net financial liabilities as of January 1 of the fiscal year. The NOVA-Bonus is limited to a maximum of 200% of the annual salary. The Company may pay the payout amount in cash or in shares of NORMA Group SE. If paid out in cash, the Management Board obligates itself to use 75 % of the net payout amount to purchase shares of NORMA Group SE. The Supervisory Board may, at its reasonable discretion, resolve to issue shares in whole or in part instead of a cash payment. Regardless of whether the Company pays the amount due in cash or shares, 75 % of the NOVA-Bonus’ net payout must be invested in shares of NORMA Group SE.

The Management Board member may not dispose of the shares for four years. Dividends and subscription rights will be made freely available to the Management Board member. If a Management Board member takes office in the current fiscal year or does not work for the Company for a full twelve months in a fiscal year, the LTI will be reduced proportionally (pro rata). Upon termination of the employment contract, a Management Board member may dispose of their shares only after twelve months of leaving the Company. With the termination of the executive position upon request of the Management Board or for an important reason, future claims for the variable part of the LTI are no longer valid.

NORMA Group classifies the compensation as a whole as share-based compensation. Due to the past practice of cash payment in connection with the current lack of a legal possibility to use this remuneration to acquire own shares or to perform a conditional capital increase, NORMA Group classifies the share of the remuneration that is not subject to the share acquisition and holding obligation, i.e., 25% of the NOVA-LTI, as a cash-settled share-based payment. The remaining 75% of the compensation is classified as an equity-settled share-based payment because the beneficiaries will ultimately receive shares of NORMA Group due to the share purchase and holding obligation.

The fair value of each tranche is determined at the beginning of the performance period on the basis of expected increases in value and adjusted on an ongoing basis. Internal company planning data is used for this purpose. It is based on financial plans approved by the management for a five-year period. In view of the input factors used for this valuation, the fair values determined are to be classified as Level 3 fair values.

The NOVA bonus developed as follows in the fiscal year:

The resulting personnel expense is recognized pro rata over the respective three-year performance period, taking into account the employment period. In the case of tranches not yet allocated that take into account fiscal years for which the service has already been rendered, this means that the start of recognition of the expense already begins two years prior to allocation.

The personnel expense for the 75% of the NOVA-LTI classified as equity-settled is transferred to retained earnings. For the remaining 25%, the personnel expense is recognized by forming a corresponding provision.

In total, the provision for the NOVA-LTI amounted to EUR 70 thousand as of December 31, 2021 (Dec 31, 2020: EUR 188 thousand), of which EUR 0 thousand (2021: EUR 188 thousand) will be paid out in fiscal year 2022.

ii. ESG-LTI

The ESG-Bonus was adopted in fiscal year 2020 for the first time. It is granted in annual tranches. Each tranche has a term of four years. A tranche begins on January 1 of the grant fiscal year and ends at the end of December 31 of the third year following the grant fiscal year (ESG performance period). The amount paid out under the ESG-Bonus depends on the achievement of environmental, social and governance targets. For the tranche of 2020, the reduction of CO₂-emissions was defined as a target. The target amount of the ESG-Bonus is 20% of the fixed annual salary. The payout amount is limited to a maximum of 100% of the target amount. The Company can pay out the ESG-Bonus in cash or in Company shares. In the case of cash payment, the members of the Management Board are obliged to purchase shares in the Company for the entire net amount paid out and to hold these shares for a period of one year (obligation to purchase and hold share). The Company’s Supervisory Board may decide at its reasonable discretion to issue shares in the Company in whole or in part in lieu of a cash payment. In this case, the members of the Management Board are also obliged to hold 100% of the shares issued for a period of one year. If a member of the Management Board enters the Company’s service in the current fiscal year or does not work for the Company for a full twelve months in a fiscal year, the LTI is to be reduced on a pro rata basis.

NORMA Group classifies the remuneration as share-based payment. The compensation is classified as “equity-settled” due to the obligation to purchase and hold shares.

The fair value of each tranche is determined at the beginning of the performance period based on expected target achievement and adjusted on an ongoing basis. Internal company planning data is used for this purpose. It is based on financial plans approved by the management for a five-year period. In view of the input factors used for this valuation, the fair values determined are to be classified as Level 3 fair values.

The ESG LTI developed as follows in the fiscal year:

The resulting personnel expenses are recognized pro rata over the respective four-year performance period, taking into account the period of employment, and transferred to retained earnings.

b) Short-Term Incentive, STI

The STI is a performance-based bonus that takes into account the absolute performance indicator adjusted EBIT (earnings before interest and taxes, adjusted for acquisitions) of NORMA Group, on the one hand, and, on the other hand, the relative total shareholder return (TSR) of NORMA Group SE in relation to a peer group. The payout amount of the STI is calculated from a starting value and an adjustment to the target achievement of the TSR in the grant year. The calculation is shown in the following formula:

Payout amount = Initial value (= average adjusted EBIT x individual STI percentage) x TSR adjustment factor

The initial value results from multiplying the average EBIT, adjusted for acquisitions, in the fiscal year for which the STI is granted and the two fiscal years preceding the grant year (arithmetic mean) by the individual STI percentage specified in the service contract. The individual STI percentage is 0.33% for the Chairman and 0.22% for the other members of the Management Board. In a second step, this initial value is then multiplied by the TSR adjustment factor and the result represents the payout amount. The TSR is defined as the percentage change in the stock market price during the grant year, including notionally reinvested dividends and all capital measures. In other words, the TSR is a measure of how the value of a share commitment has developed over a period of time and takes into account both dividends accrued during the period and any share price increases that may have occurred. In the current compensation system, the share yield is taken into account as a relative performance factor. The TSR adjustment factor is determined by measuring the TSR development (share price and dividend development) of NORMA Group SE in relation to the TSR development of the companies in the peer group during the grant fiscal year. Depending on the results of the comparison, the starting value of the STI is adjusted upwards by 20% if a position in the peer group is reached above the 75th percentile and downwards by 20% if a position in the peer group is reached below the 25th percentile; the TSR adjustment factor is thus limited to the range of 0.8 to 1.2. The peer group currently consists of the following 15 listed companies with a size, structure and industrial sector comparable to NORMA Group: Bertrandt AG, Deutz AG, DMG Mori AG, ElringKlinger AG, Gerresheimer AG, Jungheinrich AG, König & Bauer AG, Leoni AG, SAF-Holland S.A., Schaeffler AG, SGL Carbon SE, Stabilus S.A., Vossloh AG, Wacker Neuson SE and Washtec AG. The Supervisory Board is entitled to adjust the peer group for future assessment periods before the beginning of the respective assessment period.

The payment amount (= base value x TSR adjustment factor) is limited to a maximum of 180% of the basic annual salary; the initial value (= average adjusted EBIT x individual STI percentage rate) is limited to a maximum of 150% of the fixed annual salary. The short-term variable compensation for the past fiscal year is to be paid out in the following year after approval of the Consolidated Financial Statements by the Supervisory Board. If the Management Board member did not work for the Company for a full twelve months in a fiscal year, the annual bonus will be reduced accordingly.

NORMA Group classifies the compensation as a cash-settled share-based payment. The expense from the remuneration is recognized in personnel expenses with the creation of a corresponding provision.

In total, the provision for the STI amounted to EUR 578 thousand as of December 31, 2021 (Dec 31, 2020: EUR 950 thousand), of which EUR 578 thousand will be paid out in fiscal year 2022.

c) Matching Stock Program (Ended in 2017)

The Matching Stock Program (MSP) for the Management Board provides a long-term incentive to commit to the success of the Group. The MSP is a share-based option. To this end, the Supervisory Board specifies a number of share options to be granted each fiscal year with the proviso that the Management Board members make a corresponding personal investment in the Group. In line with the new Management Board contracts, the MSP was closed. The last allotment of options was in fiscal year 2017.

The shares involved in the share options are those shares allocated or acquired and qualified as part of the MSP defined in the Management Board contract. The number of share options is calculated by multiplying the qualified shares held at the time of allotment by the option factor specified by the Supervisory Board. A new option factor is set for every tranche. The first tranche was allocated on the day of the IPO.

The holding periods for all tranches were four years and have been already expired.

Non-forfeitable claims out of the options are earned pro rata over the respective performance period. The exercise price for the outstanding tranches will be the weighted average of the respective closing price of the Group’s share on the 60 trading days directly preceding the allocation of each tranche. Dividend payments by the Group during the vesting period are deducted from the exercise price of each tranche.

The options of a tranche can only be exercised within a period of two years following the expiration of the holding period. In order for an option to be exercised, the weighted average of the last ten trading days must be at least 1.2 times that of the exercise price. The pay-out is limited to 2% of the average (adjusted) EBITA (tranches 2015, 2016 and 2017) during the holding period (cap). When the option is exercised, the Group can decide whether to settle the option in shares or cash. As in the previous year, NORMA Group classified the stock options as a cash settlement.

The determination of fair value, which is the basis for determining the pro rata provision on the balance sheet date, was carried out using a Monte Carlo method. The expected volatilities are set to be the historical volatility of the three-year period before the valuation date. Due to the cash settlement, the options are valued on each balance sheet date and the resulting changes in fair value are recognized through profit or loss, whereby the prorated expenses were ratably recognized over the performance period.

The option rights granted under the MSP changed as follows in the fiscal years 2021 and 2020:

In the fiscal year 2021, a payment in the amount of EUR 365 thousand was made for the exercised option rights of the Tranche 2017 (2020: no payment).

The total provision for the MSP amounts to EUR 26 thousand as of December 31, 2021 (Dec 31, 2020: EUR 1,059 thousand).

d) Long-Term Incentive Plan

In the fiscal year 2013, NORMA Group installed a share-based, long-term, variable compensation component for executives and certain other groups of employees (Long-Term Incentive Plan).

The Long-Term Incentive Plan (LTI) is a share-based payment, cash-settled plan that takes into account both the performance of the Company and the share price development.

The participants receive a preliminary number of share units (virtual shares) at the start of the performance period based on a percentage of the respective base salary multiplied by a conversion rate. The conversion rate is determined based on the average share price of the previous 60 trading days of the calendar year prior to the grant date. Once four years have elapsed, the number of share units granted at the start of the performance period is adjusted based on the performance the Company has achieved, incorporating both the targets defined during the performance period and the Company / regional factor.

The goal achievement factor, measured by adjusted EBITA, as well as the Company / regional factor are applied as performance targets. The goal achievement factor is based on the adjusted EBITA of NORMA Group. The absolute adjusted EBITA target is determined for every year of the performance period based on the budgeted value. After conclusion of the four-year period, the yearly recorded adjusted EBITA values are defined as a percentage in relation to the target values and averaged out over the four years. Allocation occurs above a goal achievement ratio of 90%. Between 90% and 100% goal achievement, every percentage point amounts to 10 percentage points of goal achievement factor. Between 100% and 200% goal achievement, the goal achievement factor grows by 1.5 percentage points per percentage point of goal achievement.

The Company factor is determined by the Group Senior Management based on the Company’s development, as well as the development in relation to comparable companies. In addition to this, the development of free cash flows is taken into account when determining the factor. At the discretion of the Group Senior Management, unanticipated developments can also be taken into account and the Company factor corrected either downward or upward accordingly. The factor can assume values between 0.5 and 1.5.

The factor takes into account the results of the region as well as the region-specific characteristics and is used as an adjustment factor for plan participants with regional responsibility.

The value of the share units is then determined at the end of the fourth calendar year based on the average share price of the last 60 days of trading in this fourth year. In case the calculated Long-term Incentive pay-out exceeds 250% of the initial grant value, the maximum pay-out is capped at 250%. The value determined is paid out to the participants in cash in May of the fifth year.

The LTI is a Group-wide and global compensation instrument with a long-term orientation. Due to the coupling to the development not only of the stock price, but also the Company’s performance, the LTI provides an additional incentive to create value through value-based action, aligned with the goals of NORMA Group.

The determination of fair value, which is the basis for determining the pro rata provision on the balance sheet date, was performed using a Monte Carlo simulation. Due to the cash settlement of the virtual share units, the fair value is measured on each balance sheet date and the resulting changes in the fair value are recognized in income or loss. The allocation of the expenses is made on a pro rated basis over the performance period.

The share units granted under the LTI changed as follows in the fiscal years 2020 and 2021:

In the fiscal year 2021, no payment was made out of this program (2020: Tranche 2016: EUR 90 thousand).

In total, the provision for the LTI amounts to EUR 1,534 thousand as of December 31, 2021 (Dec 31, 2020: EUR 1,685 thousand), whereof EUR 0 thousand were exercisable.

e) Share-Based Payments with Tax Withholding

According to the tax law applicable in Germany, NORMA Group is obliged to withhold an amount for the tax liability of the beneficiary member of the Management Board or employee, if they are subject to payroll tax in Germany, in relation to share-based payments and to pay it to the tax authorities on behalf of the respective beneficiary. This also applies to equity-settled share-based payments (NOVA-LTI; ESG-LTI). NORMA Group settles these on a net basis, i.e. by withholding/buying back the number of shares whose value on the payment date corresponds to the beneficiary's tax liability. In the fiscal year, an amount of EUR 63 thousand was paid to the tax authorities from the NOVA-LTI (2020: EUR 0 thousand).

f) Expenses from Share-Based Payment

The net expense/income from share-based compensation recognized in employee benefit expenses in the fiscal year was as follows: