Accounting policy

Remuneration policy decided at the Annual General Meeting in 2011
The Annual General Meeting of 2011 decided upon principles for remuneration and other employment terms for the members of Volvo's group management. The decided principles can be summarized as follows: 
 
The guiding principle is that remuneration and other employment terms for company management, shall be competitive to ensure that Volvo can attract and retain skilled persons in group management. The fixed salary shall be competitive and shall reflect the individual's area of responsibility and performance.
 
In addition to the fixed salary a variable salary may be paid. The variable salary may for the CEO amount to a maximum of 75% of the fixed salary and for the other senior executives a maximum of 60% of the fixed salary. The variable salary shall be based on the fulfilment of improvement targets or certain financial targets for the Volvo Group and/or the organizational unit for which the executive is responsible. These targets are decided by the Board of AB Volvo and can be related, for example, to operating income and/or cash flow. 
 
The Annual General Meeting can also decide on a share, or share-based, incentive program. At the Annual General Meeting 2011, as proposed by the Board of AB Volvo, it was decided to implement a long-term share-based incentive program consisting of three annual programs covering each of the financial years 2011, 2012 and 2013.

In addition to fixed and variable salary, normally other customary benefits, such as company car and company healthcare are provided. In individual cases, accommodation benefits and other benefits may be provided.

In addition to pension benefits provided by law and collective bargain agreements, the members of group management domiciled in Sweden can be offered a defined-contribution pension plan whereby the amount of the individual's pensions comprises the premium paid and any return. Members of group management resident outside Sweden, or resident in Sweden but having a material connection to or having been resident in a country other than Sweden, can be offered pension solutions that are competitive in the country where the members are, or have been, resident or to which the members have a material connection, however primarily defined-contribution pension solutions.

With regard to notice of termination of employment for members of group management domiciled in Sweden, the notification period is 12 months if the company terminates the employment and six months if the individual terminates the employment. In addition, the employee is entitled to a severance pay of 12 months' salary if the employment is terminated by the company. Members resident outside Sweden or resident in Sweden but having a material connection to or having been resident in a country other than Sweden can be offered notice periods for termination and severance payments that are competitive in the country where the members are or have been resident or to which the members have a material connection, however primarily arrangements that are similar to what is valid for members domiciled in Sweden.

The Board of AB Volvo may deviate from the remuneration policy if there are specific reasons to do so in an individual case. The Board has decided on one such deviation by approving that the variable salary for the President of Volvo Aero can exceed 60% of the fixed annual salary if certain conditions related to the potential divestment of Volvo Aero are met.

Fee paid to the Board of Directors
According to a resolution adopted at the Annual General Meeting 2011, the fee to the Board of Directors appointed at the Annual General Meeting for the period until the close of the Annual General Meeting 2012 shall  be paid as follows: The Chairman of the Board should be awarded SEK 1,800,000 and each of the other members SEK 600,000 with exception of the President and Chief Executive Officer of AB Volvo. In addition, SEK 300,000 should be awarded to the chairman of the audit committee and SEK 150,000 to each of the other members of the audit committee and SEK 100,000 to each of the members of the remuneration committee.

Terms of employment and remuneration to the CEO and Deputy CEO
As of August 31, 2011, Leif Johansson retired from the position as President and Chief Executive Officer (CEO) of AB Volvo and was replaced by Olof Persson from September 1, 2011. The President and CEO is entitled to a remuneration consisting of a fixed annual salary and a variable salary. The variable salary is based on operating income in relation to the same period last year and/or cash flow for six months moving periods up to a maximum of 75% of the fixed annual salary.

For the financial year 2011, Leif Johansson received a fixed salary of SEK 8,640,000 and a variable salary of SEK 5,913,000. The variable salary corresponded to 68% of the fixed salary. Other benefits, mainly pertaining to car and housing, amounted to SEK 329,621 in 2011. Olof Persson received for the period as President and CEO of AB Volvo during 2011 a fixed salary of SEK 3,840,000 and a variable salary of SEK 2,880,000. The variable salary corresponded to 75% of the fixed salary. Other benefits from September 1, 2011, mainly pertaining to car and housing, amounted to SEK 234,897.

During his period as Executive Vice President and Deputy CEO of AB Volvo from May 1 until August 31, 2011, Olof Persson received a fixed salary of SEK 2,245,000 and a variable salary of SEK 1,111,275. The variable salary corresponded to 50% of the fixed salary. For this period, other benefits, mainly pertaining to car and housing, amounted to SEK 60,830. 

Leif Johansson was covered by the Volvo executive pension plans, Volvo Management Pension (VMP) and Volvo Executive Pension (VEP). Olof Persson is covered both by pension benefits provided under collective bargain agreements and by the VMP and VEP plans. The retirement benefit under the Volvo executive pension plans is a defined-contribution plan with refund protection. The disability pension is a defined-benefit plan. Contributions to VMP and VEP are not tax-deductible, the benefit from the insurance is not taxable to the company, but pension paid will be tax-deductible. The pensionable salary consists of the annual salary and a calculated variable salary component. The premium for the VMP is SEK 30,000 plus 20% of the pensionable salary over 30 income base amounts and the premium for VEP is 10% of pensionable salary. There are no commitments other than the payment of the premiums. The disability pension for Olof Persson amounts to 50% of pensionable salary. The right to disability pension is conditional to employment and will cease upon termination of duty.

The President and CEO of AB Volvo is also covered by Volvo Företagspension, a defined contribution plan for additional retirement benefit. The premium is negotiated each year. For 2011 the premium amounted to SEK 512 a month.

Pension premiums 2011 for Leif Johansson amounted to SEK 3,317,621 and for Olof Persson, for the period as President and CEO and for the period as Executive Vice President and Deputy CEO, to SEK 1,943,988 and 559,811 respectively.

Olof Persson is also participating in the long-term share-based incentive program decided by the Annual General Meeting 2011. Based on ROE for 2011, Olof Persson will receive 97,109 shares during 2014/2015 related to 2011 if all program conditions are met (see further information under Long-term incentive program below). The amount of taxable benefit related to these shares is determined at the time of allotment.  

Olof Persson has a six-month notice of termination on his own initiative and twelve months' notice of termination from AB Volvo. If terminated by the company within three years from entering the position as President and CEO, Olof Persson is entitled to a severance payment equivalent to twelve months' salary. Thereafter, he is not entitled to severance payments.

Remuneration to other senior executives

Fixed and variable salaries
Members of group management and a number of senior executives receive variable salaries in addition to fixed salaries. Variable salaries are in most cases based on the fulfillment of certain improvement targets or financial targets. The targets are decided by the Board of Directors in AB Volvo and can, for example, relate to operating income in relation to corresponding period previous year and/or cash flow for a six month rolling period. During 2011, a variable salary could amount to a maximum of 60% of the fixed annual salary.

For the financial year 2011, fixed salaries amounted to SEK 58,225,074 and variable salaries amounted to SEK 23,875,016 for members of group management excluding the CEO and the Deputy CEO. Group management comprised, in addition to the CEO and Deputy CEO, 16 members at the beginning of the year and 16 members at the end of the year. Other benefits, mainly pertaining to car and housing, amounted to SEK 7,243,479 in 2011. Group management, excluding the CEO and the Deputy CEO, will receive 576,965 shares during 2014/2015 related to 2011 under the long-term share-based incentive program if all program conditions are met (see further information under Long-term incentive program below).

Severance payments
The employment contracts for members of group management and certain other senior executives contain rules governing severance payments when the company terminates the employment. For members domiciled in Sweden, the rules provide that, when the company terminates the employment, an employee is entitled to severance payment equivalent to twelve months' salary. In certain older contracts, the payment could equal 24 months' salary depending on age at date of severance. In agreements concluded after the spring of 1993, severance pay is reduced, in the event the employee gains employment during the severance period, with an amount equal to 75% of the income from the new employment. In agreements concluded after the spring of 2004, severance pay is reduced by the full income from the new employment. With few exceptions, the severance payment is equal to twelve months' salary.

Members having a material connection to a country other than Sweden can be offered notice periods for termination and severance payments that are competitive in the country to which the members have a material connection.

Pensions
Members of group management and certain other senior executives are offered pensions that are competitive in the country in which the person is or have been domiciled or in the country to which the person is essentially connected.

Previous pension agreements for certain senior executives stipulated that early retirement could be obtained from the age of 60.  Agreements for retirement at age 60 are no longer signed, and are instead replaced by a defined-contribution plan with pension premium payments at the longest to the age of 65 years. The premium constitutes 10% of the pensionable salary. 

Earlier defined-benefit pension plans, which entitled the employee to 50% of the pensionable salary after normal retirement age, have in Sweden been replaced by a defined-contribution plan. The pension plan includes employees born before 1979 and is a complement to the collective agreement regarding occupational pension. The premium constitutes of SEK 30,000 plus 20% of the pensionable salary over 30 income base amounts. The pensionable salary consists of the twelve times the current monthly salary and the average of the variable salary for the previous five years. Pension premiums amounted to SEK 29,143,321 for other members of group management in 2011.

Volvo Group's total costs for remuneration and benefits to senior executives
Costs for total remuneration and benefits to the members of group management in 2011 are pertaining to the following: fixed salary SEK 110 million (89); variable salary SEK 43 million (39); other benefits SEK 12 million (10) and pensions SEK 46 million (51). The cost related to the long-term share-based incentive program is reflected over the vesting period and amounted to SEK 26 million (0) for 2011. Total costs for members of group management include social fees on salaries and benefits, special pension tax and additional costs for other benefits. The remuneration model of the Volvo Group is to a main part designed to follow changes in the profitability of the Group.

Long-term incentive program 
The Annual General Meeting held in 2011 approved a long-term share-based incentive program for up to 300 participants and comprising the years 2011 to 2013. The program consists of three annual programs for which the measurement periods are each of the respective financial years. A prerequisite for participation in the program is that the participants invest a portion of their salary in Volvo shares and retain these shares and continue to be employed by the Volvo Group for at least three years after the investment has been made. Under special circumstances, it is possible to make exceptions to the requirement of continued employment (so called "good leaver" situations).

The AB Volvo Board is, in the event of exceptional conditions, entitled to limit or omit allotment of performance shares. In addition, if the Annual General meeting of AB Volvo resolves that no dividend shall be paid to the shareholders for a specific financial year, no matching shares are alloted for the year in question. Shares are granted under the program during the respective financial year. At the end of the three year vesting period, the main rule is that the participants will be allotted one matching share per invested share and, assuming that the Volvo Group's ROE (return on equity) for the particular financial year amounts to at least 10 percent, a number of performance shares. Maximum allotment of performance shares corresponds to seven shares for the CEO, six shares for other members of group management and five shares for other participants in the program for each invested share, subject to ROE reaching 25 percent. ROE for 2011 was 23.1%, which means that number of performance shares reached about 90 percent of the maximum grant. Allotment of shares will be made through Volvo owned, earlier re-purchased, Volvo shares. Participants in certain countries will be offered a cash-based version of the incentive program. For participants in these countries, no investment is required by the participant and the program does not comprise an element of matching shares. Allotment of shares in this version is replaced by a cash allotment at the end of the vesting period. Other program conditions are similar between the programs. 

Long term incentive program (share settled plan version)
    Shares granted conditional under the plan but not yet alloted (in thousand shares)  
  Vesting year Beginning of the year Granted 2011 Cancelled/ forfeited 2011 Allotments during 2011 End of the year Cost 2011 (SEK M) (1
Year 2011 incentive program 2014/2015 0 2,488 (11) (1) 2,476 69.8

1) The fair value of the payments is determined based on the share price at the grant date reduced by the discounted value of expected dividends connected with the share during the vesting period. The cost for the program is recognized over the vesting period. The cost includes social security cost.

The cost for the cash-based version of the incentive program amounted to SEK 4 million including social security cost during 2011.

A number of program participants that are leaving the company has been determined to be "good leavers" and are therefore entitled to accumulated allotment of shares. During 2011, 929 shares have been alloted to participants, and an additional 203,520 shares will be alloted to participants when the employees leave the company.

The total cost for the 2011 incentive program over the period 2011 to 2014 is estimated to SEK 273 million including social security cost. Actual cost will be impacted by changes in the share price.

  2011   2010
Average number Number of of which   Number of of which
of employees employees women, %   employees women, %
AB Volvo          
Sweden 171 49   198 51
           
Subsidiaries          
Sweden 24,793 20   23,313 20
Western Europe 24,241 17   23,515 17
Eastern Europe 6,220 21   5,768 22
North America 15,380 18   12,429 19
South America 6,080 14   5,264 14
Asia 22,915 11   21,205 10
Other countries 2,448 17   2,558 15
Group total 102,248 18   94,250 17
           
  2011   2010
Board members(1 Number at of which   Number at of which
and other senior executives year-end women, %   year-end women, %
AB Volvo          
Board members(1 14 14   12 17
CEO and GEC 17 6   17 6
           
Volvo Group          
Board members(1 898 13   929 12
Presidents and other senior executives 1,034 17   1,053 15
1) Excluding deputy Board members.
Wages, salaries 2011   2010
and other Board and of which variable Other   Board and of which variable Other
remunerations, SEK M Presidents(1 salaries employees   Presidents(1 salaries employees
AB Volvo 31.5 9.9 199.2   26.2 8.0 184.6
Subsidiaries 770.9 175.5 36,036.9   1,005.0 104.8 32,647.4
Group total 802.4 185.4 36,236.1   1,031.2 112.8 32,832.0
Wages, salaries 2011   2010
and other remu-              
nerations Wages,       Wages,    
and social salaries Social Pension   salaries Social Pension
costs, SEK M remun. costs costs   remun. costs costs(4
AB Volvo(2 230.7 68.1 34.0   210.8 60.8 59.1
Subsidiaries 36,807.8 8,583.5 3,437.0   33,652.4 8,308.8 3,514.8
Group total(3 37,038.5 8,651.6 3,471.0   33,863.2 8,369.6 3,573.9

1) Including current and former Board members, Presidents and Executive Vice Presidents.
2) The Parent Company's pension costs, pertaining to Board members and Presidents are disclosed in Note 3 in the Parent Company.
3) Of the Group's pension costs, 96.8 (146.6) pertain to Board members and Presidents, including current and former Board members, Presidents and Executive Vice Presidents. The Group's outstanding pension obligations to these individuals amount to 337.7 (334.4).
4) In certain countries, such as Sweden, part of social cost relate to pensions. In previous years, Volvo has reclassified such portion of social cost to pension cost for Swedish group companies. In the 2011 Annual Report, these pension related components of social cost has not been reclassified to pension cost, which makes for a better comparison with other Swedish companies. Pension cost for 2010 has been adjusted downwards with an amount of SEK 1,166 million compared to the 2010 Annual Report.  

The cost for non-monetary benefits in the Group amounted to 1,876.8 (1,554.3) of which 68.8 (59.3) to Board members and Presidents.

The cost for non-monetary benefits in the Parent Company amounted to 9.6 (9.0) of which 1.9 (1.7) to Board members and Presidents.