Compensation System for Directors, Audit & Supervisory Board Members and Executive Officers

Aims of compensation for Directors, Audit & Supervisory Board Members and Executive Officers

Standards, systems and other details for the compensation and other incentives for Directors, Audit & Supervisory Board Members and Executive Officers are established on the basis of the following aims:

Securing and retaining diverse, outstanding personnel to establish and enhance our competitive advantage
Driving concerted initiatives to promote sustainable enhancement of corporate value
Sharing interests in common with shareholders

Compensation Structure for Directors, Audit & Supervisory Board Members and Executive Officers (In the case that short-term and long-term incentive payout ratio are both 100%)

Compensation for Directors (other than Outside Directors) and Executive Officers consists of a base salary, short-term incentive compensation and long-term incentive compensation. Outside Directors and Audit & Supervisory Board Members are paid a base salary only.
To achieve the ambitious targets for supporting Global Sharp Top businesses in K27, we have boosted the function of incentives to encourage bolder risk taking, and we have revised the variable compensation structure to be implemented in FY2024 onward.

Compensation Structure for the Representative Director, President, and Chief Executive Officer

We have not changed the base salary amount.
We have revised the percentages of the base salary and short-term and long-term incentive compensation for the Representative Director, President, and Chief Executive Officer to be in the ratio 1:1:1.

Figure showing compensation structure after revision for the case of the Representative Director, President and CEO. With the revision of the compensation structure ratio, the ratio of base salary, short-term and long-term incentive compensation is revised to 1 : 1 : 1.

We have revised the percentages of the short-term and long-term incentive compensation for other Directors and Executive Officers to be 30% to 70% of the base salary in accordance with rank.

Summary of Compensation System for Directors, Audit & Supervisory Board Members and Executive Officers

The short-term incentive compensation is paid as bonuses in accordance with the degree of target achievement in a single fiscal year. The evaluation indicators consist of EVA, consolidated net sales and profit, and individual performance, and the bonus payment rate varies from 0% to 200%. The long-term incentive compensation (performance-based share incentives) is a system for delivering shares and other incentives with the aim to further enhance corporate value. This system consists of a variable part that is delivered at a rate from 0% to 200% in accordance with the relevant period and targets of the mid-term plan, and a fixed part whereby a defined number of shares and other incentives are delivered annually.
The adequacy of these incentives is examined by the Compensation Advisory Committee for Directors and Executive Officers.

To encourage further enhancement of corporate value, we have partially revised the long-term incentive compensation to be implemented in FY2024 onward.

Points of revision

Introduced new evaluation indicators such as EVA and TSR(Total Shareholder Return)
Expanded the scope for delivering the company’s shares (foreign-national Directors, etc.)

Compensation Paid to Directors in FY2023

(million yen)

Category	Number of Members	Aggregate Amount of Remuneration, etc.	Components of Remuneration
			Base Salary	Short-term incentive compensation (performance- based bonus)	Long-term incentive compensation (Performance-based share incentive plan)
			Base Salary		Variable portion	Fixed portion
Directors (including, in parentheses, Outside Directors)	12 (5)	674 (89)	490 (89)	82 (-)	66 (-)	36 (-)
Audit & Supervisory Board Members (including, in parentheses, Outside Audit & Supervisory Board Members)	6 (3)	120 (47)	120 (47)	- (-)	- (-)	- (-)
Total (including, in parentheses, Outside Directors and Outside Audit & Supervisory Board Members)	18 (8)	794 (136)	610 (136)	82 (-)	66 (-)	36 (-)

* 1 The above numbers of Directors/Audit & Supervisory Board Members include two Inside Directors and one Inside Audit & Supervisory Board Member who resigned at the conclusion of the 117th Annual General Meeting of Shareholders held on March 24, 2023.
* 2 The variable portion of the long-term incentive compensation (performance-based stock compensation will be finalized as the fiscal year under review falls on the final year of the Mid-term Plan “K25.” Initially, the applicable period was set to five fiscal years up to the fiscal year ending December 31, 2025. However, since the Mid-term Plan “K27” was announced, the period is expected to be changed to three fiscal years up to the fiscal year ended December 31, 2023. As the amount of provision for long-term incentive compensation recognized for the current fiscal year is 112 million yen, while the amount of reversal of provision for prior years based on the degree of achievement of “K25” is 46 million yen, the difference between them is shown in the table above.
For Directors of foreign nationals, we plan to pay cash equivalent to the variable portion of long-term incentive compensation (performance-based stock compensation).
* 3 The maximum amounts of remuneration, etc. are as follows:
(1) Maximum aggregate amount of remuneration, etc., to be paid to Directors:
An annual amount of 630 million yen (as resolved at the 101st Annual General Meeting of Shareholders held on June 28, 2007). The Company had 15 Directors (including two Outside Directors) at the time such resolution was adopted. Such maximum aggregate amount includes the maximum annual amount of 100 million yen to be paid to Outside Directors (as resolved at the 110th Annual General Meeting of Shareholders held on March 25, 2016) but does not include the salary amounts, etc. to be paid to Directors who also serve as employees of the Company, for their service as employees. The Company had seven Directors (including three Outside Directors) at the time such resolution was adopted.
Based on a resolution adopted at the 115th Annual General Meeting of Shareholders held on March 26, 2021, the Company has introduced a performance-based share incentive plan for its Directors (excluding Outside Directors) and its Executive Officers, which shall be applicable separately from the maximum aggregate amount of remuneration, etc., for the Directors. Under this share incentive plan, trust money of up to 3.65 billion yen is contributed concerning the fiscal years subject to the Company’s mid-term plan (the initial period to be covered being the period of five fiscal years from the fiscal year ended December 31, 2021 to the fiscal year ending December 31, 2025), and the Company’s shares are acquired through a trust and are then vested, etc., through the trust, based on the evaluation indicators consisting of growth potential evaluation indicators (such as the degree of growth in overall business sales and profit, etc.), ESG potential evaluation indicators (such as evaluation by external indicators), and management potential evaluation indicators (such as evaluation of management activities by the Company’s employees). The Company had four Directors (excluding Outside Directors) at the time such resolution was adopted.

(2) Maximum aggregate amount of remuneration, etc., to be paid to Audit & Supervisory Board Members:
An annual amount of 120 million yen (as resolved at the 113th Annual General Meeting of Shareholders held on March 26, 2019). The Company had five Audit & Supervisory Board Members (including three Outside Audit & Supervisory Board Members) at the time such resolution was adopted.
* 4 Aggregate amount of remuneration, etc. paid to Outside Directors and Outside Audit & Supervisory Board Members by the Company’s subsidiaries, etc., other than the aggregate amount of remuneration, etc. paid to Outside Directors and Outside Audit & Supervisory Board Members:Remuneration paid to one Outside Audit & Supervisory Board Member for his service as an Audit & Supervisory Board Member of Kao Group Customer Marketing Co., Ltd. was 4 million yen.

Compensation Paid for Individual Directors in FY2023

Name (Director classification)	Aggregate amount of remuneration (Millions of yen)	Corporate classification	Amount of remuneration by type (Millions of yen)
			Base Salary	Short-term incentive compensation (performance-based bonus)	Long-term incentive compensation (Performance-based share incentive plan)
			Base Salary	Short-term incentive compensation (performance-based bonus)	Variable portion	Fixed portion
Michitaka Sawada (Director)	119	Submitting company	104	0	7	8
Yoshihiro Hasebe (Director)	141	Submitting company	87	29	13	12
David J. Muenz (Director)	159	Submitting company	119	23	17	0

* 1 The variable portion of the long-term incentive compensation (performance-based stock compensation will be finalized as the fiscal year under review falls on the final year of the Mid-term Plan “K25.” Initially, the applicable period was set to five fiscal years up to the fiscal year ending December 31, 2025. However, since the Mid-term Plan “K27” was announced, the period is expected to be changed to three fiscal years up to the fiscal year ended December 31, 2023. The difference between the amount of provision for the current fiscal year and the amount of provision recorded for the prior fiscal year based on the achievement of K25 performance and other factors is shown.
For Directors of foreign nationals, we plan to pay cash equivalent to the variable portion of long-term incentive compensation (performance-based stock compensation).
* 2 The table above includes information only on those whose aggregate remuneration, etc. exceeds 100 million yen.