Note 3 Personnel information and remuneration of management and auditors

A total of 57 MSEK (69) of the Group’s pension costs relates to Boards and presidents. The Group’s pension liability to these persons amounted to SEK 184 M (221). Correspondingly, 8 MSEK (32) of the Parent Company’s pension costs related to the Board of Directors and presidents. The Parent Company’s pension liability relating to these persons amounted to 60 MSEK (61).

Employee profit-sharing program

To promote a performance that is favorable to the Group’s long-term development and also to stimulate continued employee loyalty, Sandvik has had a profit-sharing system for all employees in wholly owned companies in Sweden since 1986. The Group’s return during 2011 implied an allocation of 216 MSEK (250) to the profit-sharing foundation.

3.5 Information on remuneration of the Board of Directors and senior executives

Guidelines

The guidelines for the remuneration of Sandvik’s senior executives were adopted at the Annual General Meeting in 2011. They are designed to ensure that Sandvik, from a global perspective, can offer market-based remuneration in order to attract and retain qualified employees.

Components of remuneration

The total remuneration package is distributed between fixed salary, annual variable salary, long-term variable salary (cash and share-based), pension and other benefits, such as company car, free housing, health insurance and severance benefits. It is intended that the components shall jointly form a well-balanced remuneration and benefit program that reflects the individual’s performance and responsibility as well as the Group’s earnings trend.

Long-term incentive program

In 2006, the Board decided to implement a cash-based program for long-term variable salary (LTI – Long-Term Incentive). Based on a common goal perception for executives, specialists and shareholders, the program was to form a link to future performance goals aimed at the long-term enhancement of the value of the company. This was to be achieved through an overall shared Group and business area focus on and governing towards profitable growth. An additional purpose was to improve the possibilities to recruit and retain key employees in the Group.

A LTI program was decided for each of the years 2008, 2009 and 2010. Some 400 Sandvik employees participated in the programs on a global basis. The programs applied for a three-year period, with any settlement paid after the third year of each program. The 2008 program was concluded in 2010, but resulted in no settlement in 2011. Any settlement for the 2009 program will take place in 2012 and for the 2010 program in 2013.

Under these programs, there is a direct link between performance, added value, and remuneration. There is an annual maximum outcome related to the participant’s fixed salary in December of the third year. The outcome of the LTI program is conditional upon meeting measurable goals, established by the Board, for certain key ratios that create shareholder value linked to the company’s growth, profitability and capital efficiency over a three-year period. For members of Group Executive Management, the maximum payment from the LTI program is 40-50% of the annual fixed salary.

Amounts attributable to these programs are expensed and reserved continuously, based on assumptions regarding goal achievement. In 2011, no long-term variable salary was paid. The 2008 LTI program covering the years 2008-2010 resulted in no settlement, since the performance targets set by the Board of Directors were not met.

During the year, a provision of 49 MSEK was made for the 2010 long-term variable salary program, of which 2.7 MSEK pertained to Group Executive Management. No provisions were made for the cash-based 2009 LTI program.

The 2011 Annual General Meeting resolved in accordance with the Board’s proposal to replace the cash-based LTI program with a new share-based LTI program. The program is aimed at about 400 senior executives and key individuals in the Sandvik Group and encompasses a maximum total of 11,719,690 Sandvik shares. The program participants have the option of receiving an allotment of employee stock options that entitle the employee to acquire Sandvik shares after three years at a set exercise price (“performance shares”), on condition that certain performance targets linked to the Sandvik Group’s growth in value – Sandvik Value Added (SVA) – are met. For the President, senior executives and certain top-level executives, a personal investment in Sandvik shares (“saving shares”) corresponding to 10% of fixed annual pre-tax salary for 2011 is required in order to receive allotment of employee stock options. Provided that such a personal investment in Sandvik shares is made, these executives will also receive allotment of rights (“matching rights”) that entitle the executive to acquire Sandvik shares after three years at a set exercise price (“matching shares”).

Employees who were offered and agreed to participate in the program received allotment of employee stock options on 30 June 2011. The total number of employee stock options allotted to about 400 senior executives and key individuals in the Sandvik Group could entitle acquisition of a maximum of 11,647,300 performance shares.

Employee stock options were allotted as follows: the President (category 1) received 145,000 employee stock options, senior executives (category 2) received a maximum of 87,000 employee stock options per person and four other employee groups (categories 3-6) received between 21,750 and 43,500 employee stock options.

The employee stock options are non-transferrable. Each employee stock option entitles the employee to acquire one performance share. The amount of the allotted employee stock options that will eventually provide entitlement to the acquisition of performance shares depends on the trend in Sandvik Value Added (SVA) over the 2011-2013 fiscal years compared with the 2010 fiscal year.

Employee stock options can be utilized to acquire performance shares not earlier than three and not later than five years after the allotment of the options.

The utilization of the employee stock options to acquire performance shares requires continued employment at Sandvik. For those executives investing personally in Sandvik shares, the utilization of employee stock options to acquire performance shares also requires that all acquired saving shares are held for a three-year period after allotment of the employee stock options. The Chairman of the Board is entitled, in specific cases, to grant exemptions from this requirement.

The total number of matching rights allotted to the executives investing personally in Sandvik shares provides entitlement to the acquisition of a maximum of 72,390 matching shares.

The matching rights are non-transferrable. The participant is allotted one matching right for each saving share acquired. Each matching right entitles the holder to acquire a matching share. Matching rights can be utilized to acquire matching shares not earlier than three and not later than five years after the allotment of the matching rights. The utilization of matching rights to acquire matching shares requires continued employment at Sandvik and that all acquired saving shares are held for a three-year period after the allotment of matching rights. The Chairman of the Board is entitled, in specific cases, to grant exemptions from the requirement that saving shares be held for a three-year period.

When employee stock options are utilized to acquire performance shares, the participant is to pay, for each performance share, an amount corresponding to 110% of the average volume-weighted price paid for the Sandvik share on the NASDAQ OMX Stockholm during a period of ten trading days immediately following the 2011 Annual General Meeting. When matching rights are utilized to acquire matching shares, the participant is to pay for each matching share an amount corresponding to 75% of the average volume-weighted price paid for the Sandvik share on the NASDAQ OMX Stockholm during a period of ten trading days immediately following the 2011 Annual General Meeting. The average volume-weighted price paid was determined at 117.20 SEK. A theoretical value of an employee stock option and matching right was calculated based on the Black & Scholes option pricing model. The basis of the calculation included a share price of 117.20 SEK and expected volatility of about 32%. The theoretical value amounts to 17 SEK per employee stock option and 33.10 SEK per matching right.

The Board is entitled to decide to introduce an alternative incentive solution for key individuals in those countries where the allotment of employee stock options or matching rights, or the utilization of employee stock options or matching rights to acquire performance and matching shares, is not suitable.

In accordance with IFRS 2, the total expense for the 2011 LTI program amounted to 201 MSEK excluding social costs, of which 11 MSEK for the President and other senior executives. During the year, a provision of 67 MSEK, excluding social costs, was established for the 2011 LTI program, of which 3.8 MSEK for the President and other senior executives. The employee stock options and matching rights are expensed as an employee expense (excluding social costs) over the vesting period and are recognized directly against equity. The amount recognized is continuously revised throughout the vesting period of the employee stock options and matching rights. Social costs are expensed during the vesting period of the employee stock options and matching rights based on the change in value of the employee stock options and matching rights.

Number and exercise price

The expected volatility was determined by analyzing the historical volatility of Sandvik AB and some comparable listed companies. When determining the expected maturity, assumptions were made regarding expected behavior patterns for utilizing the employee stock options and acquired matching rights among the program participants.

Preparation and decision-making process

The Board’s Remuneration Committee prepares issues relating to Group Executive Management’s remuneration. The Committee met four times during the year. Issues dealt with included the distribution between fixed and variable salary, the magnitude of any pay increases and the long-term variable incentive program. The Board discussed the Remuneration Committee’s proposals and made a decision, using the Committee’s proposal as guidance.

Based on the Remuneration Committee’s proposals, the Board decided on the remuneration of the President for 2011. The President decided on remuneration to other senior executives after consultation with the Remuneration Committee. The Remuneration Committee performed its task supported by expertise on remuneration levels and structures. For information on the composition of the Committee, refer to the Corporate Governance Report.

Remuneration of the Board and senior executives

The Board

Fees to the Chairman and other external Board members are paid in accordance with the resolution at the Annual General Meeting. No Board fees are paid to the President and the employee representatives.

President and other senior executives

The following guidelines approved by the Annual General Meeting for remuneration of senior executives were applied for 2011:

The Board’s motion concerning guidelines for remuneration of senior executives is designed to ensure that the Sandvik Group, from a global perspective, can offer remuneration at the market rate and that is competitive to attract and retain skilled personnel to Sandvik’s Group Executive Management. Group Executive Management’s remuneration comprises fixed salary, annual variable salary and long-term variable salary in the form of a cash salary and/or shares in Sandvik AB. The components are intended to create a well-balanced remuneration and benefit program that reflects the individual’s performance and responsibility and the Group’s earnings trend. The fixed salary, which is individual and differentiated based on the individual’s responsibility and performance, is determined based on market-rate principles and is reviewed annually. Payment of annual variable salary requires fulfillment of annually established goals. The goals are related to the company’s earnings and to measurable goals within the individual’s area of responsibility. The annual variable salary for Group Executive Management may not exceed 75% of fixed salary. The long-term variable salary requires fulfillment of measurable goals, set by the Board, pertaining to certain key ratios that create shareholder value linked to the company’s growth, profitability and capital efficiency over a three-year period. The long-term variable cash salary may not exceed 50% of the fixed annual salary. Long-term variable remuneration may also be paid in the form of shares in Sandvik AB through participation in a share-based incentive program encompassing the offer of acquiring employee stock options and matching rights. The program, which shall have been adopted by the Annual General Meeting, shall contain the principal conditions that certain categories of top-level senior executives are required to have invested personally in the Sandvik share, that the vesting period is three years subject to the requirement that the individual remain an employee for this entire period and that the allotment of shares shall be related to performance criteria linked to the company’s growth, profitability and capital efficiency - Sandvik Value Added (SVA). Group Executive Management’s other benefits shall correspond to what could be considered reasonable in relation to generally accepted practice in the market. The benefits comprise pension, company car, housing, medical insurance and severance pay. The pension benefits for Group Executive Management are based on fixed salary or gross salary paid in cash and shall be defined-benefit or defined-contribution solutions. Normally, retirement is at age 62. Retirement age for the President is 60. Normally, severance payment is made when employment is terminated by the company. Any other income from employment is deducted from the severance pay, which is between 12 and 18 months for persons under 55 years of age and between 18 to 24 months for persons over 55. No severance amount is paid to employees who resign from the company. The Board shall have the right to deviate from the guidelines resolved by the Annual General Meeting, if, in individual cases, there is a special reason for this. The sphere of senior executives encompassed by the proposed guidelines is the President and other members of Group Executive Management.

The Board’s motion for remuneration of senior executives to be applied in 2012

The Board proposes that for 2012, the Annual General Meeting resolve to apply the following revised guidelines for remuneration of senior executives:

The Board’s motion concerning guidelines for remuneration of senior executives is designed to ensure that the Sandvik Group, from a global perspective, can offer remuneration at the market rate and that is competitive to attract and retain skilled personnel to Sandvik’s Group Executive Management. Group Executive Management’s remuneration comprises fixed salary, annual variable salary and long-term variable salary in the form of salary and/or shares in Sandvik AB. The components are intended to create a well-balanced remuneration and benefit program that reflects the individual’s performance and responsibility and the Group’s earnings trend. The fixed salary, which is individual and differentiated based on the individual’s responsibility and performance, is determined based on market-rate principles and is reviewed annually. Payment of annual variable salary requires fulfillment of annually established goals. The goals are mainly related to the company’s earnings and to measurable goals within the individual’s area of responsibility. The annual variable salary may not exceed 75% of annual fixed salary. The long-term variable cash salary requires fulfillment of measurable goals, set by the Board, pertaining to certain key figures that create shareholder value linked to the company’s growth, profitability and capital efficiency – Sandvik Value Added (SVA) – over a three-year period. The maximum payment of long-term variable cash salary is 50% of the annual fixed salary. Long-term variable remuneration may also be provided in the form of shares in Sandvik AB by participating in a share-based incentive program that includes the right to be allotted employee stock options and matching rights. The program, which shall have been adopted by the Annual General Meeting, shall contain the principal conditions that certain categories of top-level senior executives are required to have invested personally in the Sandvik share, that the vesting period is three years subject to the requirement that the individual remain an employee for this entire period and that the allotment of shares shall be related to performance criteria linked to SVA. Group Executive Management’s other benefits shall correspond to what could be considered reasonable in relation to generally accepted practice on the market. The benefits comprise pension, company car, housing, medical insurance and severance pay. The pension benefits for Group Executive Management are based on fixed salary or gross salary paid in cash and shall be defined-benefit or defined-contribution solutions. Normally, retirement is at age 62. Retirement age for the President is 60. For other members of Group Executive Management who are not Swedish citizens, the retirement age follows local rules and practice. Normally, severance payment is made when employment is terminated by the company. The President has a notice period of 24 months with no severance pay. For other members of Group Executive Management, a notice period of 12 months generally applies. Severance pay is six months salary for persons under 55 years of age and 12 months for people aged 55 and over for members of Group Executive Management who are Swedish citizens. Other members of Group Executive Management generally receive 12 months salary in severance pay. For all other benefits, local market practice applies in each specific country. Any other income from employment is deducted from the severance pay. No severance amount is paid to employees who resign from the company. The Board shall have the right to deviate from the guidelines resolved by the Annual General Meeting, if, in individual cases, there is a special reason for this. The sphere of senior executives encompassed by the proposal is the President and other members of Group Executive Management.

Remuneration and other benefits pertaining to 2011 expensed during the year

Remuneration and other benefits during the year

In accordance with the resolution at the Annual General Meeting, the total fee to the external directors elected at the Meeting amounts to 4,500,000 SEK. Of this amount, 1,500,000 SEK (on an annual basis) is payable to the Chairman of the Board (Anders Nyrén) and 500,000 SEK to each of the other external Board members (Johan Karlström, Fredrik Lundberg, Hanne de Mora, Egil Myklebust, Simon Thompson and Lars Westerberg).

In addition to these amounts, the Annual General Meeting resolved that an additional fee should be paid for the committee work to committee members elected by the Meeting, in an amount totaling 475,000 SEK to be divided between the members of the Audit Committee (Hanne de Mora 175,000 SEK, Anders Nyrén 150,000 SEK and Simon Thompson 150,000 SEK) and in an amount totaling 325,000 SEK to be divided between the members of the Remuneration Committee elected by the Meeting (Egil Myklebust 100,000 SEK, Anders Nyrén 125,000 SEK and Lars Westerberg 100,000 SEK).

Effective 1 February 2011, Sandvik’s CEO and President, Olof Faxander, was paid an annual fixed salary of 9,900,000 SEK and received the fringe-benefit value of housing and car provided by the company. In addition, a variable salary of maximum 75% of the fixed salary is paid. The variable salary for 2011 amounted to 1,020,938 SEK.

Olof Faxander is entitled to retire with pension at age 60. A premium of 35% of his annual fixed salary is reserved annually.

In the event of termination of employment by the company, Olof Faxander has a notice period of 24 months with no severance pay.

For other members of Group Executive Management, pension age is 62. Pension between the age of 62 and 65 will amount to 65% of fixed salary up to 30 price base amounts, 50% of fixed salary between 30–50 price base amounts, and 25% of fixed salary in the interval 50–100 price base amounts (15 years is required for full accrual). No pension insurance policies have been taken out for pensions through age 65 and, at 31 December 2011, the obligation for pensions vested through that date amounted to 24,502,041 SEK.

The pension from age 65 to the other members of Group Executive Management is arranged through the ITP Plan and a supplementary defined-contribution plan under which the company each year contributes 20–30% (depending on age) of fixed salary portions in excess of 20 price base amounts. Alternatively, this group may be encompassed by the ITP Plan 1 and a supplement of a maximum of 5% for salary portions exceeding 7.5 income base amounts if this solution has been chosen in 2008 under the offering to all salaried employees at Sandvik who were covered by the ITP 2 plan and supplementary plan at the time. In such a case, the previous system with the ITP 2 plan and the supplementary plan will not apply. Of the seven remaining members of Group Executive Management employed on 31 December 2011, four people are encompassed by the ITP 1 plan and three people remain in the ITP 2 plan and a supplementary plan. Severance pay is paid in the event that the company terminates employment. The severance pay equals 12–18 months’ fixed salary in addition to the six-month notice period. For both the President and other members of Group Executive Management, any earned income is offset against the severance pay.

3.6 Audit fees

Fees and remuneration to the Group’s auditors were as follows:

Audit refers to the statutory audit of the financial statements, the accounting records and the administration of the business by the Board of Directors and the President, and auditing and other review procedures performed in accordance with agreements or contracts. This includes other procedures required to be performed by the company’s auditors as well as other services caused by observations during the performance of such examination and other procedures.

Tax consultancy services relate to services in the tax area. Other services essentially comprise advice in areas closely related to the audit, such as advice on accounting issues and due-diligence services in connection with acqusitions.