Volvo 2002 Annual Report Download - page 55

to these pensions and an additional SEK 1,966,100 for family pen-
sion. The pensionable salary is the sum of 12 times the current
monthly salary, Volvo’s internal value for company car, and a five-year
rolling annual average of earned bonus which is limited to a maxi-
mum of 50% of the annual salary. Leif Johansson has twelve months
notice of termination from AB Volvo and six months on his own
initiative. If Leif Johansson’s employment is terminated by AB Volvo,
he is entitled to a severance payment equal to two years’ salary, plus
variable salary. The severance payment will be adjusted for any
income after the termination of his contract with Volvo.
Leif Johansson, the Group Executive Committee, members of the
executive committees of subsidiaries and a number of key executives
receive variable salaries in addition to fixed salaries. Variable salaries
are based on operating income and cash flow of the Volvo Group
and/or of the executive’s company, in accordance with a system
established by the Volvo Board in 1993 and reviewed in 2000 and
2001. A variable salary may amount to a maximum of 50% of an
executive’s fixed annual salary. The Group Executive Committee con-
sisted of 15 members in addition to Leif Johansson, the total fixed
salaries for these top executives amounted to SEK 53 M, variable
salaries amounted to SEK 11 M and other benefits totaled SEK 5 M.
The employment contracts of the Group Executive Committee and
certain other senior executives contain provisions for severance pay-
ments when employment is terminated by the Company, as well as
rules governing pension payments to executives who take early
retirement. The rules governing severence payments provide that,
when employment is terminated by the Company, an employee is
entitled to severance pay equal to the employee’s monthly salary for
a period of 12 or 24 months, depending on age at date of severance.
In certain contracts, replacing contracts concluded earlier, an
employee is entitled to severance payments amounting to the
employee’s monthly salary for a period of 30 to 42 months. In agree-
ments concluded after the spring of 1993, severance pay is reduced,
in the event the employee gains employment during the severance
period, in an amount equal to 75% of income from new employment.
An early-retirement pension may be received when the employee
reaches the age of 60. A pension is earned gradually over the years
up to the employee’s retirement age and is fully earned at age 60.
From that date until reaching the normal retirement age, the retiree
will receive a maximum of 70% of the qualifying salary. From the age
of normal retirement, the retiree will receive a maximum of 50% of
the qualifying salary.
Volvo currently has two option programs for senior executives, one
call option program and one program for employee stock options.
The option programs have no dilutive effect on Volvo’s outstanding
shares. The options may only be exercised if the holder is employed
by Volvo at the end of the vesting period. However, if the holder’s
employment with Volvo is terminated for any reason other than dis-
missal or the holder’s resignation, the options may be exercised in
part in relation to how large part of the vesting period the holder has
been employed. If the holder retires during the vesting period, he or
she may exercise the full number of options.
In October 1998, Volvo announced a call option program with two
subscriptions, one in 1999 and one in 2000. For the first subscrip-
tion in May 1999, options were subscribed to approximately 100
senior executives. For the second subscription in April 2000, options
were subscribed to approximately 60 senior executives.
The call options subscribed in May 1999, which can be exercised
from May 18, 1999 until May 4, 2004, give the holder the right to
acquire 1.03 Series B Volvo shares for each option held from a third
party. The exercise price is SEK 290.70. The price of the options is
based on a market valuation and was fixed at SEK 68.70 by Trygg-
Hansa Livförsäkrings AB. The number of options corresponds to
apart of the executive’s variable salary earned. A total of 91,341
options were subscribed. The options were financed 50% by the
Company and 50% from the option-holder’s variable salary.
The second subscription took place in April 2000. These options
can be exercised from April 28, 2000 until April 27, 2005, and give
the holder the right to acquire one Series B Volvo share for each
option held from a third party. The exercise price is SEK 315.35. The
price of the options is based on market valuation by UBS Warburg
and was fixed at SEK 55.75. The number of options corresponds to
a part of the executive’s variable salary earned. A total of 120,765
options were subscribed. The options were financed 50% by the
Company and 50% from the option holder’s variable salary.
In January 2000, a decision was made to implement a new incen-
tive program for senior executives within the Volvo Group in the form
of so-called employee stock options. The decision covers allotment
of options for 2000 and 2001. In January 2000, a total of 595,000
options were allotted to 62 senior executives, including President
and CEO Leif Johansson, who received 50,000 options. The exe-
cutives have not made any payment for the options. The employee
stock options allotted in January 2000 give the holders the right,
from March 31, 2002 through March 31, 2003, to exercise their
options or alternatively receive the difference between the actual
price at that time and the exercise price determined at allotment. The
exercise price is SEK 239.35, which is equal to 110% of the share
price at allotment. The theoretical value of the options at allotment
was set at SEK 35, using the Black & Scholes pricing model for
options. Volvo has hedged the committments (including social costs)
relating to a future increase in share price, through a Total Return
Swap. Should the share price be lower than the exercise price at the
closing date, Volvo will pay the swap-holder the difference between
the actual share price and the exercise price at that time for each
outstanding option.
In May, 2001, the second allotment within the employee stock
option program took place. The allotment which was based on the
fulfillment of financial goals, covered a total of 163,109 options to
71 senior executives, including President and CEO Leif Johansson,
who received 13,600 options. The executives have not made any
payment for the options. These employee stock options give the
holders the right, from May 4, 2003 through March 31, 2004, to
exercise their options or alternatively receive the difference between
the actual price at that time and the exercise price determined at
allotment. The exercise price is SEK 159, which is equal to 100% of
the share price at allotment. The theoretical value of the options at
allotment was set at SEK 22, using the Black & Scholes pricing
model for options. Volvo has hedged the committments (including
social costs) relating to a future increase in share price, through a
Total Return Swap. Should the share price be lower than the exer-
cise price at the closing date, Volvo will pay the swap-holder the dif-
ference between the actual share price and the exercise price at that
time for each outstanding option.
All obligations related to the employee stock option plans, includ-
ing the Total Return Swaps, are marked to market on a continuing
basis, any change in the obligation is recorded in the income state-
ment. In 2002 the cost for the employee stock option plans amount-
ed to SEK 36 M (income 15, cost 50), at December 31, 2002 the
provision related to these options amounted to 70.
No employee stock options were allocated in 2002 due to the
fact that the targets for 2001 were not achieved.
There were no payments for profit-sharing to employees for 2002,
2001 and 2000.