UPM Annual Report 2016

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Accounts

In brief

Strategy

Businesses

Stakeholders

Governance

Salaries, fees and other benefits to the President and CEO and the Group Executive Team

Deferred Bonus Plan The Deferred Bonus Plan (DBP) is targeted at other selected key employees of the group and it consists of annually commencing plans. Deferred Bonus Plan share incentives are based on achievement of group and /or business area EBITDA targets. Each plan consists of

a one-year earning period and a two-year restriction period. Prior to share delivery, the share rewards earned are adjusted with dividends and other capital distributions, if any, paid to all shareholders during the restriction period.

President and CEO Jussi Pesonen

Other members of group executive team 1)

EUR 1,000

2016 1,049

2015 1,052

2016

2015

Salaries

3,564 1,779 6,269

3,455 1,733 1,805

Incentives

888

856 824

Share rewards

3,098

DEFERRED BONUS PLANS No. of participants (at grant)

DBP 2013

DBP 2014

DBP 2015

DBP 2016

Benefits

231

238

560 505

395 367

350 339

340 335

Total

5,065

2,759

11,843

7,231

No. of participants (at 31 December 2016) Max no. of shares to be delivered (at grant)

11 members in 2016 and 2015.

1,640,000

950,000 317,125

800,000 386,432

770,000 323,017

Estimated no. of shares to be delivered at 31 December 2016 1)

255,451

last ten years of employment calculated according to the Finnish statutory pension scheme. The costs of lowering the retirement age to 60 is covered by supplementing the statutory pension with a voluntary defined benefit pension plan. Should the President and CEO leave the company before reaching the age of 60, an immediate vesting right corresponding to 100% of earned pension (pro rata) will be applied. The retirement age of the other members of the Group Executive Team is 63. The expenses of the President and CEO’s defined benefit pension plan in 2016 were EUR 0.5 million (0.6 million), and the plan assets amounted to EUR 2.6 million (1.6 million) and obligation to EUR 1.8 million (0.9 million). Other Group Executive Team members are under defined contribution plans. In case the notice of termination is given to the President and CEO, a severance pay of 24 months' base salary will be paid in addition to the salary for six months' notice period. Should the President and CEO give a notice of termination to the company, no severance pay will be paid in addition to the salary for the notice period. For other members of the Group Executive Team, the period for additional severance pay is 12 months, in addition to the six months’ salary for the notice period, unless notice is given for reasons that are solely attributable to the executive. If there is a change in the control over the company, the President and CEO may terminate his service contract within three months and each member of the Group Executive Team may terminate his/her service contract within one month from the date of the event that triggered the change of control and shall receive compensation equivalent to 24 months' base salary.

In 2016, costs under the Finnish statutory pension scheme for the President and CEO amounted to EUR 370,000 (353,000) and payments under the voluntary pension plan were EUR 1,000,000 (1,000,000). In 2016, costs under the Finnish and German statutory pension schemes for Group Executive Team (GET) members (excluding the President and CEO) amounted to EUR 881,000 (900,000) and costs under the voluntary pension plan were EUR 818,000 (651,000). The total remuneration of the President and CEO and the members of the Group Executive Team consists of base salary and benefits, short-term incentives and long-term share-based incentives. The short-term incentive plan for the President and CEO and the members of the Group Executive Team has been linked with achievement of the predetermined financial targets of the group or business areas and individual targets. The incentives amount to a total maximum of 100% of annual base salary to the business area executives and to a total maximum of 70% of annual base salary to the other members of the Group Executive Team. For the President and CEO the maximum annual incentive amounts to 150% of the annual base salary. The expenses recognised in income statement in respect of share- based payments for the Group Executive Team were EUR 9.2 million (5.4 million). In accordance with his service contract, the retirement age of the President and CEO Jussi Pesonen, is 60. For the President and CEO, the target pension is 60% of the average indexed earnings from the

Share delivery (year)

2016

2017

2018

2019

Earning criteria (weighting)

Group/Business area EBITDA

1) For DBP 2013 and DBP 2014, the gross amount of the actual no. of shares earned.

Accounting policies The group’s long-term share incentive plans are recognised as equity- settled or cash-settled share-based payment transactions depending on the settlement. Shares are valued using the market rate on the grant date. The settlement is a combination of shares and cash. The group may obtain the necessary shares by using its treasury shares or may purchase shares from the market. PSP and DBP share deliveries are executed by using already existing shares and the plans, therefore, have no dilutive effect.

The indicated actuals and estimates of the share rewards under the Performance Share Plan and the Deferred Bonus Plan represent the gross amount of the rewards of which the applicable taxes will be deducted before the shares are delivered to the participants. The amount of estimated payroll tax accruals accounted for as share- based payment liabilities at 31 December 2016 were EUR 22.7 million (14.7 million).

3.4 Retirement benefit obligations The group operates various pension schemes in accordance with local conditions and practices in the countries of operations. Retirement benefits are employee benefits that are payable usually after the termination of employment, such as pensions and post-employment

medical care. The pension plans are generally funded through payments to insurance companies or to trustee-administered funds or foundations and classified as defined contribution plans or defined benefit plans. Defined benefit assets and liabilities recognised in the balance sheet are presented below:

2016

2015

OTHER COUNTRIES TOTAL

EURm

FINLAND UK GERMANY

Present value of funded obligations Fair value of plan assets

327 563 –396 –426 –70 137

34 –3 31

3.3 Share-based payments

963

314 504 –406 –409

29 –2 27

888

Performance Share Plan The Performance Share Plan (PSP) is targeted at Group Executive Team members and other selected members of the management. Under the ongoing plans the UPM shares are awarded based on the total shareholder return during a three-year earning period. The earned shares are delivered after the earning period has ended. Total shareholder return takes into account share price appreciation and paid dividends.

–34 –851

–33 –858

Deficit (+)/surplus (-)

104

–92

UPM offers reward and recognition with an emphasis of high performance. All UPM’s employees belong to a unified annual Short Term Incentive (STI) scheme. In addition, UPM has two long-term incentive plans: the Performance Share Plan (PSP) for senior executives and the Deferred Bonus Plan (DBP) for other key employees.

Present value of unfunded obligations

–

520

610

–

490

92 582

Net defined benefit liability (+)/ asset (-) Net retirement benefit asset in the balance sheet Net retirement benefit liability in the balance sheet 1)

–70 137

552

714

–92

517

619

–70

–

–1

–71

–92

–

–1

–93

– 137

552

95 784

–

517

100

712

PERFORMANCE SHARE PLANS

PSP 2013-2015

PSP 2014-2016

PSP 2015-2017

PSP 2016-2018

1) Net retirement benefit liability in the balance sheet includes other long-term employee benefits of EUR 33 million (35 million) in 2016.

No. of participants at 31 December 2016

Actual achievement

90.4%

100%

–

Max no. of shares to be delivered 1) to the President and CEO

About 90% of the group’s defined benefit arrangements exist in Finland, in the UK and in Germany. The group has defined benefit obligations also in Austria, Holland, France, Canada and in the US. Approximately a quarter of UPM´s employees are active members of defined benefit arrangement plans. Finland In Finland employers are obliged to insure their employees for statutory benefits, as determined in Employee’s Pension Act (TyEL). TyEL provides the employee with insurance protection for old age, disability and death. The benefits can be insured with an insurance

company or the employer can establish a fund or a foundation to manage the statutory benefits. Approximately 90% of group´s Finnish employees are insured with an insurance company and these arrangements qualify as defined contribution plans. Approximately 10 % of employees are insured with TyEL foundation (Kymin eläkesäätiö). The TyEL foundation is administered by the representatives of both the employer and the employees. The foundation has named an authorised representative to take care of its regular operations. The plan is supervised by Financial Supervisory Authority. The foundation is classified as a defined benefit plan for the benefits that must be funded nationally and is the

197,976 397,760 402,280 998,016

116,785 352,689 280,284 749,758

125,000 380,000 295,000 800,000

112,500 360,000 263,000 735,500

to other members of GET to other key individuals

Total max no. of shares to be delivered

Share delivery (year)

2016

2017

2018

2019

Earning criteria (weighting)

Operating cash flow (60%) and EPS (40%)

Total shareholder return (100%)

1) For PSP 2013–2015 and PSP 2014–2016, the gross amount of the actual no. of shares earned.

CONTENTS

ACCOUNTS

118

119

UPM Annual Report 2016

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