Volvo 2007 Annual Report Download - page 124
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120 Financial information 2007
Notes to consolidated fi nancial statements
Severance payments
The employment contracts for members of the Group Executive Com-
mittee and certain other senior executives contain rules governing
severance payments when the company terminates the employment.
The rules provide that, when the company terminates the employment,
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 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. Furthermore, age limit at date of notice of termination is
removed and an employee is, with few exceptions, entitled to sever-
ance pay for a period of 12 months.
Pensions
Previous pension agreements for certain senior executives stipulated
that early retirement could be obtained from the age of 60. The
defi ned pension benefi ts are vested and earned gradually over the
years up to the employee’s retirement age and are fully earned at age
60. During the period between ages of 60 and 65 the employee
receives a pension equal to 70% of the pensionable salary.
Agreements for retirement at age 60 are no longer signed, and are
instead replaced by a defi ned-contribution plan without a defi nite time
for retirement. The premium constitutes 10% of the pensionable salary.
Earlier defi ned-benefi t pension plans, which entitled the employee
to 50% of the pensionable salary after normal retirement age, have
also been replaced by a defi ned-contribution plan. The premium con-
stitutes of SEK 30,000 plus 20% of the pensionable salary over 30
income base amounts.
The pensionable salary consists of the current monthly salary times
12, Volvo’s internal value for company car, together with the average of
the outcome of the variable salary, maximized to 50% of the salary, for
the previous fi ve years.
Incentive programs
Volvo currently has two different types of incentive programs for cer-
tain senior executives outstanding, one program for employee stock
options (exercised 2006/2008) and a share-based incentive program
(allotment in 2008).
Employee stock options program
The period to exercise the employee stock options are ongoing as
from May 2, 2006, up to and including May 1, 2008. The Volvo B share
price, for options exercised during 2007, have in average been SEK
549 within a range from SEK 477 up to SEK 620 before the split and
after the split in average SEK 116 within a range from SEK 110 up to
SEK 148. The Volvo B share price, for options exercised during 2006,
have in average been SEK 375 within a range from SEK 322 up to
SEK 469.
Share-based incentive program
In 2005 the Annual General Meeting approved a share-based incen-
tive program for certain senior executives within the Volvo Group.
Allotment of a value corresponding to 167,833 shares in the program
was executed in April 2006 and was based on the fulfi llment of cer-
tain fi nancial goals determined by the Board for fi scal year 2005. The
allotment was made from Volvo’s treasury stock, with 100,833, and
cash payment corresponding to 67,000 shares. The share price at
allotment was SEK 365. The total costs for the share-based incentive
program 2005/2006 amounted to 70, whereof 21 during 2006 and
49 during 2005 and pertains to the costs for payments in shares and
in cash.
In 2006 the Annual General Meeting approved a share-based
incentive program for certain senior executives within the Volvo Group.
Allotment of a value corresponding to 480,000 shares in the program
was executed in March 2007 and was based on the fulfi llment of cer-
tain fi nancial goals determined by the Board for fi scal year 2006.The
allotment was made from Volvo’s treasury stock, with 263,667, and
cash payment corresponding to 216,333 shares. The share price at
allotment was SEK 560. The total costs for the share-based incentive
program 2006/2007 amounted to 276, where of 110 during 2007
and 166 during 2006 and pertains to the costs for payments in shares
and in cash.
The Annual General Meeting in 2007 decided on a similar program
for allotment in 2008. Allotment will be made in 2008 as certain
fi nancial goals determined by the Board for fi scal year 2007 have
been fulfi lled by the company. The cost for Volvo for the incentive
program including social fees will be approximately 332, since the
price of the Volvo B shares at the grant date, excluding dividend of
SEK 5.00 for 2007, was SEK 109.81 and the share price at December
31, 2007, was 108.50. The Annual General Meeting decided that
Volvo’s own shares may be used for allotment in this program.
The Board of Directors intends to propose that the Annual General
Meeting approve a share-based incentive program for senior execu-
tives within the Volvo Group pertaining to the 2008 fi nancial year. The
program will result in the number of eligible senior executives (includ-
ing members of Group Management) amounting to not more than
275 persons and the maximum number of Volvo shares that may be
allotted to 2,950,0001, of which CEO Leif Johansson may receive a
maximum of 40,000 shares and the other participants a maximum of
10,000–20,000 shares each. Participants not resident in Sweden at
the time of allotment may, to the extent AB Volvo considers it favour-
able from a cost or administrative perspective, instead of shares,
receive an amount in cash corresponding to the market value of the
shares at the time of allotment. Shares will be allotted provided the
Volvo Group’s return on equity (ROE), calculated on the basis of the
Volvo Group’s annual report 2008, is higher than 12%. Maximum
allotment will be effected if ROE reaches 15% and shares will be
allotted proportionally within the interval in accordance with the
Board’s instructions. The Board of Directors has decided to review
these targets for possible future programs. Assuming the said goals
are fulfi lled in full and that the Volvo share price is SEK 92 at imple-
mentation of the program, Volvo’s costs for the program, including
social fees, will be approximately 319. Another element of the pro-
posal is that treasury shares held by AB Volvo may be used to fulfi l the
company’s commitments in accordance with the program.
Remuneration policy decided at the Annual General Meeting
in 2007
The Annual General Meeting of 2007 decided upon principles for
remuneration and other employment terms for the members of Volvo’s
Group Executive Committee (“Remuneration Policy”). The accepted
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 the Group Executive
Committee. The fi xed salary shall be competitive and shall refl ect the
individual’s area of responsibility and performance.
In addition to the fi xed salary a variable salary may be paid. The
variable salary may amount to a maximum of 50% of the fi xed salary
and be based on the Volvo Group’s and/or the executive’s Group com-