# Dear Shareholders

_Source: `DeepSeekOCR_Ardian_pruned_1k/basic-materials-specialty-chemicals/LSE_ELM.L_2021/LSE_ELM.L_2021.mmd` · pages 101-107_

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Dear Shareholders,

As Chair of the Remuneration Committee (the 'Committee'), I am pleased to present the Directors' Remuneration Report for the year ended 31 December 2021. This report should be read in conjunction with the separate section on compliance under the UK Corporate Governance Code on page 80.

## Index page

Annual Statement of the Chair of the
Remuneration Committee 101
Remuneration at a glance 104

Directors' Remuneration Policy
Policy report 108
Policy table 108-112
Share ownership guidelines 112
Recruitment policy 115
Service contracts 116
Payment for loss of office 116
Treatment of incentive plans 116
Non-Executive Directors – terms of appointment 117
Shareholder engagement 117

Annual Report on Remuneration
Remuneration payable to Directors for 2021 118
Annual bonus for performance in 2021 119-120
Directors' share based awards 121
Directors' scheme interests 122
Directors' share interests 123
Payments to past directors for loss of office 124
Total shareholder return 124
CEO to all employee pay ratio 124
Relative importance of spend on pay 125
Percentage change in remuneration of the Directors 125
Statement of shareholder voting 126
Other information about the Committee's membership and operation 126
Terms of reference 126
Activities during the year 127

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## Corporate governance

## Directors' Remuneration report continued

## Remuneration Policy

As a global specialty chemicals company, Elementis offers performance-driven additives that help create innovative formulations for consumer and industrial applications. We have market leading positions in high performance ingredients in the Personal Care, Coatings and Talc markets and are the leading manufacturer of Chromium in North America. We have a global footprint, with the majority of our manufacturing sites based in the US and a talented leadership team located across the US, the UK, and the EU. Our strategy is to deliver long term sustainable shareholder value through innovation-led growth and the execution of efficiency savings. We continue to deliver solid progress against this strategy, improving both our margin and cash conversion, enabling the Company to reduce its leverage.

With regard to our Remuneration Policy, it has been purposefully designed to support our strategy detailed above. Our overall policy is set with reference to UK benchmarks, with flexibility retained to pay above UK norms where executives are recruited from overseas. Our pay model is UK-centric and includes base salary, pension and benefits, annual bonus, and a performance share plan (the same policy cascades below Executive Director level but includes restricted stock as well as performance shares in recognition of local market practice in the geographic locations in which we operate).

Remuneration is weighted towards long term variable pay which supports the long term nature of the investment decisions we make. Our performance metrics are fully aligned with strategy as set out above.

At the 2021 AGM we received shareholder approval to extend the life of our 2018 Directors' Remuneration Policy for a further year. This followed the Remuneration Committee's decision in 2019 to defer our triennial policy review process as a result of the short term uncertainty created by COVID-19. We have now undertaken a full policy review and will be proposing our refined policy to shareholders at our 2022 AGM.

In summary, the review concluded that our current policy is working effectively and is generally aligned with institutional investors' 'best practice' expectations. As a result, we are not proposing material changes to the current arrangements. The changes we are proposing are minor amendments updating the policy to mirror current market and best practice developments. The main changes are as follows:

Long term incentives: The proposed policy for the threshold level of vesting has been set such that no more than 25% of a future award may vest for achieving the threshold performance target. Whilst this level of vesting is not anticipated being applied to financial targets set for future awards (e.g. EPS and cash conversion targets where 0% vests at the threshold performance target), it is anticipated that 25% of any portion of an award set against relative total shareholder return targets would vest at the threshold performance target, mirroring standard market practice. This would apply to long-term incentives awards granted from 2022 onwards.

Share ownership guidelines: From 2022, executives will be expected to hold shares equal to the value of the lower of the actual shareholding at cessation of employment and the current guideline (200% of salary).
Investors were consulted on this approach and were supportive. It is also noted that the 2021 Remuneration Policy was updated to reflect the phased reduction to incumbent Executive Director pension levels to align with the typical rate of pension provision provided to the wider UK workforce (with alignment achieved from 1 December 2022) and the alignment of the pension policy for new Executive Directors with that in force for new joiners to the UK workforce. This update is also incorporated into the 2022 Remuneration Policy.

## Remuneration in 2021

As detailed in the Strategic report, 2021 was a year of strong performance and progress against our Innovation, Growth and Efficiency strategy. We delivered double digit revenue growth and an adjusted operating profit of \(107m, which was above our internal planning and ahead of external market expectations for the full financial year. Our performance reflected a combination of agile supply chain management, self-help actions and recovery in demand in a number of our key businesses. We also launched over 20 new products, won more than \)35m of new business and delivered $10m of in year cost savings. Further information on in year performance can be found on page 120.

## Annual bonus

As a result of the above, following the Committee undertaking a formal assessment of performance against the targets, bonuses were payable at 93% of maximum for the Executive Directors.

Further details of the targets set for 2021 and the actual performance achieved are disclosed on page 120.

## Long term incentive plan (LTIP)

The 2021 LTIP awards were granted on 6 April 2021 based on normal award levels of 200% of salary for the Chief Executive and 175% of salary for the Chief Financial Officer.

The metrics were equally weighted on EPS, TSR and cash conversion. The vesting of the award is also subject to a return on capital employed underpin which requires the Committee to consider whether the return generated is in line with the Board's expectations and, if not, to reduce the vesting to a more appropriate level. The Committee also retains discretion to reduce the number of shares on vesting should it be considered appropriate, including in the event of a perceived windfall gain.

Full details of the targets and the awards are set out on page 121. To the extent these awards vest at the end of the three year performance period, shares will be required to be held for a further two years.

The 2019 LTIP Awards that were subject to EPS growth and TSR performance targets measured over the three years to 31 December 2021 will not vest due to the required levels of threshold performance not being achieved. Further details are included on page 105.

The Committee believes that the overall incentive outturns and approach to target setting for 2021 (as detailed above) were appropriate based on the Company's performance over the whole performance period and demonstrates that the Committee has, and will continue to, set performance targets which it considers to be meaningful and appropriately stretching. As a result, the Committee is comfortable that its general approach to remuneration and the overall policy framework are working as intended.

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With regard to use of Committee discretion during the year, in March 2021, the Committee considered the performance targets relating to 2020 performance and agreed with the Executive Directors' recommendation that no bonuses be payable in 2021 for 2020 performance, despite robust performance in year.

## Remuneration in 2022

The application of the proposed policy for 2022 is largely in line with 2021 as summarised below:

Salary review: In line with the workforce in the UK and US, the Executive Directors' base salary increases will be 3% for 2022.

Pension reductions: In line with the previously communicated glidepath detailed in the 2019 Directors' Remuneration report, pension contributions for incumbent Executive Directors will continue to be reduced from 22.5% of salary to 21% of salary on 1 December 2022, which will bring incumbent Directors in line with the typical funding cost of pension benefits for UK employees as determined in 2019. Since there has been no material change to the funding cost, the Executive Directors' glidepath will result in their pension benefit (as a percentage of salary) being aligned with the typical pension provided to the majority of the UK workforce.

2022 annual bonus: There will be no change to the quantum of the Executive Director bonus opportunity and as such the CEO will have the opportunity to earn up to 150% of salary and the CFO up to 125% of salary.

As for 2021, the bonus will be based 70% against a challenging range of financial targets (50% on adjusted Group profit before tax and 20% on average trade working capital to sales ratio (AWC) on total operations), with the remaining 30% based on non-financial strategic objectives which are specific and measurable objectives that are related to the Company's strategic priorities. Within the non-financial targets we are making a change for 2022 in that we are raising the profile on sustainability to reflect our Group-wide focus. Accordingly, half of the non-financial targets will relate to sustainability including targets relating to Health & safety, Diversity, equity and inclusion and environmental. The balance of the non-financial targets will continue to relate to our strategic priorities of Innovation, Growth, and Efficiency.

Summary details of our approach to target setting are detailed on page 107 and full details of the financial target ranges and our performance against them will be disclosed on a retrospective basis in next year's report. The Committee has discretion to modify the overall amount of bonus payable to ensure it is appropriate. 50% of any bonus earned is deferred in shares for two years.

2022 LTIP Awards: Awards are expected to be granted at 200% of salary for the Chief Executive and 175% of salary for the Chief Financial Officer.

The primary performance targets will be as per the 2021 awards with 33% based on EPS, 33% based on cash conversion and 33% based on TSR performance conditions.

The EPS targets will be set based on the level of EPS achieved in 2024 with vesting to take place from 13.5 cents to 17.5 cents for threshold to maximum vesting, which runs from 0% to 100% on a straight line basis. The Committee considers the EPS target to be appropriately stretching in light of the progress made with our Company's strategy after having had regard to current internal planning and external broker forecasts for our future performance in light of current market conditions.
The cash conversion targets will again be set based on a range of 85% to 95% which aligns with the Company's publicly stated medium term target. Threshold to maximum vesting runs from 0% to 100% on a straight line basis.

TSR will continue to be assessed against the constituents of the FTSE All Share index (excluding investment trusts). Threshold vesting starting at 25% for median performance (increased from 3.85% under the 2022 Policy in line with standard market practice), increasing on a graduated basis with 100% vesting for achieving stretch targets, which for TSR will require at least upper quartile performance.

The 2022 LTIP awards will also be subject to a return on capital employed underpin. This will require the Committee to consider the vesting result determined based on the application of the EPS, TSR and operating cash conversion performance conditions in light of the return on capital employed achieved during the three year period ending 31 December 2024 relative to the Board's internal targets and planning over the period. If the Committee does not consider the vesting result appropriate in light of the return on capital employed achieved, the underpin enables vesting to be reduced to a more appropriate level. The general discretion the Committee retains will also require the Committee to consider on vesting if it believes there to have been a windfall gain and, if so, reduce the vesting level to a level considered reflective of underlying financial performance.

Context of Directors' pay within the Company

Christine Soden is the Designated Non-Executive Director (DNED) for workforce engagement. During the year we held employee focus groups in the US, China, Finland and Germany to gather employee feedback on a range of topics including pay and benefits. This followed an analysis of our employee engagement survey results and resulted in a communication and education programme started in 2021 and running throughout 2022. We continue to monitor employee engagement relative to compensation through our employee survey. This feedback was considered by the Board, which resulted in actions to ensure elements of compensation and benefits are well understood at a local level.

The Group is not required to provide disclosure of the CEO to all-employee pay ratio given the Group has less than 250 employees in the UK. However, given the external focus on pay ratios, the Committee has included full pay ratio disclosure on page 124 and is comfortable that the ratio is in line with the Company's pay policies and in line with current FTSE market practice.

The Group is also not required to report under the gender pay gap regulations. Despite this, the Group reviews gender pay on a biennial basis. The last gender pay review was completed towards the end of 2020 and a further review will take place towards the end of 2022. CEO pay ratio and gender pay are taken into account when there is a full review of the Executive Director and wider Remuneration Policy.

## Concluding remarks

The Committee believes that the Policy and our approach to implementation in both 2021 and 2022 are in the best interests of the Company and we hope that you will support the actions the Committee has taken by voting in favour at the 2022 AGM. If you have any concerns, please feel free to contact me via the Group Company Secretary at company.secretariat@elementis.com.

## Steve Good

Chair, Remuneration Committee