Accounting policy

Remuneration policy decided at the Annual General Meeting in 2012

The Annual General Meeting of 2012 decided upon a policy on remuneration and other employment terms for the members of the Volvo Group Executive Team. The decided principles can be summarized as follows:

The guiding principle is that remuneration and other employment terms for the Group Executives, shall be competitive to ensure that the Volvo Group can attract and retain skilled persons to the Group Executive Team. 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 members of the Group Executive Team, a maximum of 60% of the fixed salary.

The variable salary shall be based on the fulfillment of improvement targets or certain financial targets for the Volvo Group and/or the organizational unit where the member of Group Executive Team is employed. These targets are decided by the Board of AB Volvo and can be related, for example, to operating income, operating margin and/or cash flow. The Board may under certain conditions decide to reclaim variable salary already paid or to cancel or limit variable salary to be paid to the senior executives.

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 for Group Executives and senior executives in the Volvo Group 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, members of the Group Executive Team domiciled in Sweden can be offered two different defined-contribution plans with annual premiums whereby the amount of the individual’s pensions comprises the premium paid and any return, without any guaranteed level of pension. No defined retirement date is set in the two plans but premiums will be paid for the employee until his or her 65th birthday. Members of the Group Executive Team 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 Group Executives 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. Group Executives 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 Group Executives are or have been resident or to which the member of Group Executives 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.

Fee paid to the Board of Directors
According to a resolution adopted at the Annual General Meeting 2012, the fee to the Board of Directors appointed at the Annual General Meeting for the period until the close of the Annual General Meeting 2013 shall be paid as follows: The Chairman of the Board should be awarded SEK 2,100,000 and each of the other members SEK 700,000 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 125,000 to the chairman of the remuneration committee and SEK 100,000 to each of the members of the remuneration committee.

Terms of employment and remuneration to the CEO
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 margin and six months moving cash flow. The variable salary amounts to a maximum of 75% of the fixed annual salary. For the financial year 2012, Olof Persson received a fixed salary of SEK 11,520,000 and a variable salary of SEK 1,728,000. The variable salary corresponded to 15% of the fixed salary. Other benefits, mainly pertaining to car and housing, amounted to SEK 803,238 in 2012. 

Olof Persson is covered both by pension benefits provided under collective bargain agreements and by the Volvo Management Pension (VMP) and Volvo Executive Pension (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. 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 2012 the premium amounted to SEK 536 a month. Pension premiums 2012 for Olof Persson amounted to SEK 4,970,422. Olof Persson is also participating in the long-term share-based incentive program decided by the Annual General Meeting 2011. Based on ROE for 2012, Olof Persson will receive 62,230 shares during 2015/2016 related to 2012 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 Group Executives

Fixed and variable salaries
Members of Group Executive Team 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, operating margin and/or cash flow for a six month rolling period. During 2012, a variable salary, for Group Executives excluding CEO, could amount to a maximum of 60% of the fixed annual salary.

For the financial year 2012, fixed salaries amounted to SEK 56,619,640 and variable salaries amounted to SEK 5,787,136 for Group Executives excluding the CEO. Group Executives comprised, in addition to the CEO, 15 members at the beginning of the year and 14 members at the end of the year. Other benefits, mainly pertaining to car and housing, amounted to SEK 6,127,427 in 2012. Group Executives, excluding the CEO, also participate in the long-term incentive program which was approved by the Annual General Meeting held in 2011 and is based on ROE outcome. For 2012, they will during 2015/2016 receive 257,942 shares related to 2012 if all program conditions are met (see further information under Long-term incentive program below).

Severance payments
The employment contracts for Group 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 the event the employee gains employment during the severance period, severance pay is reduced 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.

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, preferably solutions corresponding to what is present for in Sweden.

Pensions
Previous pension agreements for certain Group 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 for Group Executives excluding CEO amounted to SEK 28,018,216 in 2012.

Group 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.

Volvo Group’s total costs for remuneration and benefits to Group Executives
Costs for total remuneration and benefits to Group Executives in 2012 are pertaining to the following: fixed salary SEK 87 million (110); variable salary SEK 10 million (43); other benefits SEK 10 million (12) and pensions SEK 38 million (46). The cost related to the long-term share-based incentive program is reflected over the vesting period and amounted to SEK 27 million (26) for 2012. Total costs for Group Executives 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 sharebased incentive program for up to 300 Group and senior executives 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 allotted for the year in question.

Shares are granted under the program during the respective financial year. At the end of the 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%, a number of performance shares. Maximum allotment of performance shares corresponds to seven shares for the CEO, six shares for other members of Group Executives and five shares for other participants in the program for each invested share, subject to ROE reaching 25%. ROE for 2012 was 12.9% (23.1), which means that number of performance shares reached about 35% (90) 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 2012 Cancelled/ forfeited 2012 Allotments
during 2012
End of
the year
Cost 2012
(SEK M) 1)
Year 2011 incentive program 2014/2015 2,476 1 (18) (251) 2,208 87.5
Year 2012 incentive program 2015/2016 0 1,324 (4) 0 1,320 37.5
 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 12 (4) including social security cost during 2012, and the total liability amouned to 16 (4) as of Decmber 31, 2012.

A number of program participants that are leaving the company have been determined to be “good leavers” and are therefore entitled to accumulated allotment of shares. During 2012, including both the share settled plan and and the cash-settled plan, a total of 250,922 shares (929) have been allotted to participants, and an additional 246,917 shares (203,520) will be allotted to participants when the employees leave the company. For the cash-settled plan, a total of 1 (0) has been allotted during 2012.

The total cost for the 2012 incentive program over the period 2012 to 2015 is estimated to 148 including social security cost. Actual cost will be impacted by changes in the share price.

  2012   2011
Average number Number of of which   Number of of which
of employees employees women, %   employees women, %
AB Volvo          
Sweden 236 44   171 49
           
Subsidiaries          
Sweden 23,028 20   24,793 20
Western Europe (excl. Sweden) 22,116 18   24,241 17
Eastern Europe 6,603 21   6,220 21
North America 16,481 18   15,380 18
South America 6,150 14   6,080 14
Asia 24,798 10   22,915 11
Other countries 2,670 17   2,448 17
Group total 102,082 17   102,248 18
           
  2012   2011
Board members1)
and other senior executives
Number at
year-end
of which
women, %
  Number at
year-end
of which
women, %
AB Volvo          
Board members1) 12 17   14 14
CEO and other senior executives 16 19   17 6
           
Volvo Group          
Board members1) 691 14   898 13
Presidents and other senior executives 893 19   1,034 17
1) Excluding deputy Board members.
Wages, salaries 2012   2011
and other Board and of which variable Other   Board and of which variable Other
remunerations, SEK M Presidents1) salaries employees   Presidents1) salaries employees
AB Volvo 24.6 5.1 270.2   31.5 9.9 199.2
Subsidiaries 745.3 109.2 38,406.3   770.9 175.5 36,036.9
Group total 769.9 114.3 38,676.5   802.4 185.4 36,236.1
Wages, salaries 2012   2011
and other remu-              
nerations Wages,       Wages,    
and social salaries Social Pension   salaries Social Pension
costs, SEK M remun. costs costs   remun. costs costs4)
AB Volvo2) 294.8 90.2 83.9   230.7 68.1 34.0
Subsidiaries 39,151.6 9,590.0 4,041.9   36,807.8 8,583.5 3,437.0
Group total3) 39,446.4 9,680.2 4,125.8   37,038.5 8,651.6 3,471.0

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 Volvo Group's pension costs, 92,4 (96.8) pertain to Board members and Presidents, including current and former Board members, Presidents and Executive Vice Presidents. The Volvo Group's outstanding pension obligations to these individuals amount to 368.4 (337.7).

The cost for non-monetary benefits in the Volvo Group amounted to 2,100 (1,876.8) of which 66.1 (68.8) to Board members and Presidents.

The cost for non-monetary benefits in the Parent Company amounted to 12.8 (9.6) of which 1.7 (1.9) to Board members and Presidents.