Overview of Executive Compensation system
(1) The Decision Policy regarding the Content of Individual Compensations of Directors
The Company has established a policy regarding decisions of the content of individual compensations for Directors at the Board meeting held on May 13, 2021 and has revised a part of the content at the Board meeting held on May 19, 2022, November 30, 2023, and May 18, 2026. The outline is as follows.
1) Compensation Policy
Compensations to Directors are designed based on the following ideas.
- Compensation system with a compensation level that can secure and maintain excellent human resources
- Compensation system that motivates sustainable growth over the medium to long term and contributes to the increase of the value of the Company and shareholder value
- A transparent, fair and rational compensation system accountable to stakeholders
2) Level of Compensations
The level of compensations to Directors is set aiming to provide the high level compensations in the industrial circle, referring to the levels of other companies learned from the surveys of external specialist institutions. Specifically, the Company will mainly compare companies within the top 100 companies by market capitalization among the companies listed on the Tokyo Stock Exchange, and also refer to the levels of major domestic pharmaceutical companies.
3) Composition of compensations
Directors (excluding Outside Directors)
It is designed to encourage management efforts from a short-term to medium-long-term perspective and appropriately to be able to reward the results by the composition of four compensations such as basic, fixed compensation, annual performance-based bonuses, which is a variable compensation serving as short-term incentive, and restricted share-based compensation and medium-term performance-based share compensation serving as long-term incentive. Retirement benefit system is not adopted.
Outside Directors
Compensation to Outside Directors who are in charge of management oversight and are not in the position to take charge of business execution is only basic, fixed compensation. Incentive bonuses and retirement benefit system are not adopted.
4) Ratio of the composition of compensations
The composition of compensations to Representative Director, President and CEO is designed to have its ratio of 40% as basic compensation, 30% as annual performance-based bonuses, 15% as restricted share-based compensation and 15% as medium-term performance-based share compensation when achieving the performance target of 100%.
The ratio of the composition of compensations of other Directors (excluding Outside Directors) will be determined in consideration of the responsibilities and the level of compensation according to the ratio of composition of compensation of Representative Director, President and CEO.
Compensation to Outside Directors is only basic, fixed compensation.
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5) Basic compensation
Basic compensation to Directors shall be paid on one regular day of each month during their tenure, and the amount of individual compensation is determined according to the compensations policy and the level of compensations.
6) Annual performance-based bonuses (short-term incentive)
The amount of the annual performance-based bonus, which constitutes short-term incentive compensation, shall be determined based on the net income attributable to the parent company’s owners for the relevant fiscal year, revenue, the degree of achievement of the earnings forecast for the core operating profit ratio (Note 1) announced at the beginning of the fiscal year, and the degree of achievement of the targets and objectives set for each executive at the beginning of the fiscal year.
The calculation formula for the payment amount, as well as the evaluation ratio and mechanism for the annual performance-based bonus, shall be as follows.
(Note 1) Core operating profit ratio: An indicator of the business’s intrinsic profitability, calculated by excluding core operating profit or loss from operating profit.
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1. Calculation formula for annual performance-based bonus
Bonus payment amount = Standard amount by position ＊ Achievement of annual targets (revenue + core operating profit ratio + profit attributable to owners of the Company)＊ performance evaluation
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2. Achievement of annual targets (evaluation ratio and mechanism)
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3. Performance evaluation
It will be converted into a coefficient and calculated according to the degree of achievement of each Director’s goals and tasks set at the beginning of the fiscal year.
- Performance evaluations for the Executive Chairperson, President, CEO, and COO will be determined after consultation with the Compensation Committee.
- Performance evaluations for the Executive Chairperson, President, CEO, and COO will be determined after consultation with the Compensation Committee.
7) Restricted share-based compensation (Long-term incentives)
The Company grants, every year in principle, shares with transfer restriction until the time immediately after resignation or retirement of a Director. The objective of the system is to give incentives to sustainably increase the value of the Company and to promote sharing the same value between shareholders and Directors for as long as possible by having the restricted shares. The total number of the ordinary shares of the Company to be issued or disposed of is 240 thousand shares or less per year (if a share split of the Company’s ordinary shares (including a gratis allotment of the Company’s ordinary shares) or a share consolidation occurs, or if there is any other reason that requires adjustment of the total number, Daiichi Sankyo will adjust the number in a reasonable range as necessary according to the split or consolidation ratio.).
When restricted share-based compensation is paid, monetary compensation receivables will be paid to Directors based on a resolution of the Board of the Company, and Directors will pay all of the paid monetary compensation receivables as in-kind contribution assets of the Company’s ordinary shares and will be issued them.
When delivering the Company’s ordinary shares, a restricted share allotment agreement will be concluded between the Company and each Director, and Directors shall not freely transfer, set security interests or otherwise dispose of the Company’s ordinary shares allotted under the allotment agreement for a certain period of time specified in the allotment agreement.
In the allotment agreement, (1) if a Director of the Company retires or resigns during the transfer restriction period, the Company shall acquire all of the restricted shares without consideration unless otherwise such the retirement or resignation is admitted by the Board that it has justifiable reasons such as expiration of terms of office, death or others, and (2) if a Director retires or resigns due to expiration of term, death or other reasons deemed justified by the Board during the service provision period, the Company shall rationally adjust the number of shares for which the restrictions will be released and the timing of the release as necessary and acquire the restricted shares which the restrictions will not be released free of charge, will be included.
The number of restricted share-based compensation to be delivered shall be the number of shares of the Company’s ordinary shares, which is the amount of restricted share-based compensation for each position divided by the closing price of the market price of the Company’s ordinary share on the day before the allotment resolution by the Board.
8) Medium-term performance-based share compensation (Long-term incentives)
- The Medium-term performance-based share compensation n, which constitutes long-term incentive, will be a trust-type share compensation system that has the nature of performance share (performance-based share compensation) characteristics for Directors (excluding Outside Directors) and the Corporate Officers (hereinafter “the Target Directors & Officers”). This compensation system is designed to promote management practices that prioritize the enhancement of shareholder value over the medium to long term.
- The trust period for the fiscal year covered by the mid-term business plan (hereinafter the “Target Period”).
- The number of shares of the Company, etc., to be granted to the Target Directors & Officers, will be determined based on share grant points calculated by multiplying the cumulative value of points granted during the Target Period—based on position—by a performance-linked coefficient at a fixed time each year. The performance-linked coefficient will be determined within a range of 0% to 200% based on the degree of achievement against target values for the Company’s performance indicators for the final fiscal year of the Target Period (for Target Period beginning in fiscal year 2026, the indicators adopted will be revenue, operating profit, ROE, relative TSR, R&D progress, and sustainability indicators), and one share of the Company’s ordinary shares will be granted for each point. Furthermore, if a stock split (including a gratis allotment of the Company’s ordinary shares) or a reverse stock split of the Company’s ordinary shares occurs during the trust period, or if any other circumstances arise that require an adjustment to the number of points, the number of points will be adjusted within a reasonable range as necessary, in accordance with the split ratio or reverse split ratio. The total number of the Company’s ordinary shares, etc., to be delivered to the eligible directors, etc., during the target period shall be capped at the number obtained by multiplying the maximum number per fiscal year (500,000 shares) by the number of fiscal years in the target period (2.5 million shares for the initial target period, which covers five fiscal years). The timing of the grant of the Company’s shares, etc., to the Target Directors & Officers, shall, in principle, be after their retirement; furthermore, 50% of the shares to be granted shall be converted into cash and paid out for the purpose of funding the payment of withholding income tax and other taxes. The payment of shares and cash shall be made through the Mitsubishi UFJ Trust and Banking Corporation’s Executive Compensation BIP (Board Incentive Plan) Trust.
- If the Company is unable to deliver the Company’s shares, etc., to the Target Directors & Officers, through this trust due to circumstances such as the inability to amend the trust agreement or make additional contributions to the trust for valid reasons, or for other valid reasons, the Company may pay the eligible directors, etc., an amount of money reasonably calculated based on the number of shares and the share price of the Company’s shares, etc., that should have been delivered under this system, within the limit of the funds contributed by the Company.
9) Clawback provision
Daiichi Sankyo will set forth a clawback clause that can request for the refund of part or all of the compensation received for annual performance-based bonuses and medium-term performance-based share compensation by the resolution of the Board after consultation with the Compensation Committee in the event that a material accounting error or fraud, or record of a significant impairment loss occurs.
This clause will be applied from the fiscal 2021 annual performance-based bonus and medium-term performance-based share compensation and will be applied for all periods thereafter.
10) Malus provision
In the event of any violation of laws and regulations or serious violations of internal regulations, etc., the Board shall, after consulting with the Compensation Committee, resolve not to grant or pay any part or all of the share-based compensation linked to medium-term performance based share compensation, including the issuance of Company shares under the share issuance system and the payment of the proceeds from the sale of such shares.
11) Compensation governance and decision-making process
- The Compensation Committee has been established as an advisory body to the Board to ensure the appropriateness of compensation for Directors and the transparency of the decision-making process. The Compensation Committee consists of only Outside Directors, with one Outside Audit & Supervisory Board Member participating as an observer, and the chairperson is appointed by mutual appointment of the members.
- The Compensation Committee fully discusses the compensation policy, the level of compensations, the composition of the compensation, the ratio of the composition of compensations, Clawback provision, Malus provision,the compensation governance and decision-making process, amount of annual performance-based bonuses, allocation of restricted share, and result of medium-term performance-based share compensation. In addition, the Compensation Committee discusses and confirms the detailed design of indices for the achievement of each compensation, and also verifies the compensation levels for each position.
- The amount of compensation for each individual Director of the Company is first deliberated by the Compensation Committee, and then based on the deliberation results, each type of the compensation will be determined by a resolution of the Board within the total amount of compensation resolved at the General Meeting of Shareholders.
As stated in the above policy, the Compensation Committee fully discusses the compensations policy, the level of compensations, the composition of the compensation, the ratio of the composition of compensations, Clawback provision, Malus provision,the compensation governance and decision-making process, amount of annual performance-based bonuses, allocation of restricted share, and result of medium-term performance-based share compensation. The content of individual compensation for Directors in the current fiscal year is also decided by the Board after being first deliberated by the Compensation Committee. We judge that the content of the Company’s compensation governance is in line with the above-mentioned policy regarding decisions of the content of individual compensation for Directors.
Total amount of consolidated compensation for each Director in fiscal 2025
- This report is only for those whose total consolidated compensation is 100 million yen or more.
- The amount of “restricted share-based compensation” and “medium-term performance-based share compensation” above represents the amount recorded as expenses for restricted share-based compensation and medium-term performance-based share compensation in fiscal 2025.
(2) The Decision Policy regarding the Content of Individual Compensations of Audit & Supervisory Board Members
The outline of the decision policy regarding the content of individual compensations of Audit & Supervisory Board Members is as follows.
- Compensation to Audit & Supervisory Board Members is only basic, fixed compensation in view of the role of oversight of management and no position to take charge of business execution.
- The level of basic compensations is set aiming to provide high level compensations in the industrial sector, referring to the levels of other companies learned from the surveys of external specialist institutions. Specifically, a group of companies is selected for comparison from the top 100 listed companies on the Tokyo Stock Exchange with the largest market capitalization. The Company also refers to the levels of other leading domestic pharmaceutical companies.
- The amount of the compensation for each Audit & Supervisory Board Member has been determined through the discussion and with the unanimous consent in the Audit & Supervisory Board meetings within the total amount of the compensation approved by the General Meeting of Shareholders.