Remuneration, shareholdings and loans

5.1. Principles of remuneration

The Remuneration and Nomination Committee is responsible for setting the remuneration policy as well as the remuneration of each member of the Board of Directors and Group Management. As an exception to this principle, the remuneration of members of the Remuneration and Nomination Committee is set by the Board of Directors (refer to section 3.5.2, Remuneration and Nomination Committee). The Chairman of the Board is invited to take part in setting the remuneration of members of the Board and key managers in the company, with the exception of his own remuneration.

In setting the remuneration policy, the Committee seeks to align the interests of the management bodies as closely as possible with those of the company over the medium and long term. In particular, the variable component of remuneration increases with the level of responsibility assumed by executive members, which can have a positive or negative effect on the overall remuneration of each member of management. The methods for determining the total remuneration of each executive member are optimized in such a way as to avoid favoring short-term results.

Fixed remuneration is not considered individually as a comparison factor for the Committee, which favors an overall assessment of remuneration in the company's long-term interest. Overall remuneration is therefore considered in such a way as to guarantee a level of remuneration that is comparable with the rest of the sector, taking into account the specific context of the sector of activity. The Remuneration and Nomination Committee's assessment of the terms of remuneration was based on its own opinion and on the terms applied by other companies with which it competes in hiring board members and upper managers, without referring to particular benchmarks or engaging the services of consultants. The Committee also sought to ensure that remuneration levels are in line with salaries prevalent in the regions and business sectors, also taking into account national and international practices in this matter.

The purpose of the variable component of remuneration is to align the interests of the members of Group Management as closely as possible with those of the company by having the members benefit from value creation or be penalized in the opposite situation. The variable component of remuneration depends on the Group's results (both economic and strategic), the employee's level of responsibility, and the achievement of individual objectives. Variable remunerationis not expressed as a percent of fixed remuneration.

There is currently no provision setting forth a particular allowance or benefit in the event of termination of the employment contract of a member of Group Management, a change in control or the early departure of a member of the Board of Directors.

5.2. Components of remuneration

Note 44 to the financial statements shows the breakdown of payments to members of the Board of Directors and Group Management, pursuant to Article 663bis of the Swiss Code of Obligations.

The principles governing the determination of components of remuneration are different for non-executive members of the Board of Directors and for Group Management.

Members of the Board of Directors

Overall remuneration of non-executive members of the Board of Directors includes fixed annual fees as well as an allowance for costs and other expenses incurred while performing their duties. This remuneration is paid in cash.

If specific tasks or services not within the usual scope of activities are assigned to Board members, the services rendered are remunerated on the basis of fees that correspond to market rates for the same type of services.

Members of Group Management

The total annual remuneration of members of Group Management includes a salary and a variable component. The amount of the variable component depends on the individual performance of the member in question and the strategic, economic and operational performance of the Group. The objectives are set by the Board of Directors and reflect the Group's strategy; they also represent part of the objectives of the Chief Executive Officer (CEO). The CEO sets the individual objectives of each member of Group Management. The Remuneration and Nomination Committee has discretionary authority to determine how the components of individual performance and those relating to the Group are to be weighted, in order to set the remuneration of each member of Group Management.

Remuneration is paid in cash, shares and payment in kind, including for example payment of all or part of the health insurance premium and the provision of a company car. The fixed component is in principle paid in cash. The Remuneration and Nomination Committee has discretionary authority to determine how the variable part is paid, taking into account such criteria as the share price and the dilution effect. A maximum of 50% of the variable part of remuneration is in principle paid in the form of Kudelski SA bearer shares, with the exception of a member of Group Management who does not reside in Switzerland and whose variable remuneration is paid entirely in cash. These shares are blocked for a period of 1, 3 or 7 years in accordance with the employee's wishes, but at least half of these shares must be blocked for at least three years. Members of Group Management may also take part in the share purchase plan introduced in 2004, in accordance with the terms of said plan (refer to section 2.7).

5.3. Procedure for determining remuneration levels

The Remuneration and Nomination Committee examines the remuneration policy and sets the remuneration of each member of the Board of Directors and Group Management every year, in principle during the first quarter; during the same period, the Chief Executive Officer sets the performance objectives of the members of Group Management. He presents the decisions to the Board of Directors in a meeting that is generally held during the first quarter as well. The remuneration of non-executive members of the Board of Directors and of the Remuneration and Nomination Committee is set by the entire Board of Directors in a meeting that is also generally held during the first quarter. The individuals whose remuneration is being discussed do not attend the relevant meetings of the Remuneration and Nomination Committee and of the Board of Directors.

5.4. Changes to the remuneration policy during the year under review

Apart from the fact that all the shares paid to the members of Management for the 2009 financial year were blocked, no major change was made to Kudelski Group's remuneration policy relative to the 2009 financial year.