Executive compensation

EXECUTIVE COMPENSATION

Presented By:

Muhib Islam

Executive Compensation Plan and theory

Remuneration Basis and components

Regulated or voluntary disclosures

Motivation of the firm’s executive

Analysis and evaluation of statistical data from annual report

Comparison between Pharmaxis Ltd and Sigma Pharmaceuticals Ltd

*Executive Compensation

Pharmaxis Ltd (PXS)

COMPONENTS OF REMUNERATION OF EXECUTIVES

• a base salary paid in cash or packaged at the executive’s discretion within Australia Fringe Benefit’s Tax guidelines as a total cost package.

• superannuation of 9 percent of base salary;

• a variable cash incentive component payable annually dependent upon achievement of performance targets set and approved by the Remuneration and Nomination Committee.

• equity remuneration

Net Loss VS Remuneration

2007 2008 2009 2010$0

$5,000,000

$10,000,000

$15,000,000

$20,000,000

$25,000,000

$30,000,000

$35,000,000

$40,000,000

$45,000,000

$50,000,000Net Loss

Net L...

2007 2008 2009 2010$0

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

$3,000,000

$3,500,000 Remuneration

TotalExecutiveNon Execu-tive

CURRENT REMUNERATION BASIS(PHARMAXIS)

Senior Executive Non ExecutiveContract 3 years fixed term contract; 3

months notice upon terminationRetire by rotation through AGM

Salary Base salary Fixed FeeVariable incentive; average 20% of base salary in 2009 & 2008,average 21% of base salary in 2010

No variable component

Incentive paid on achievement of milestones.2010, 80% achievement rate 2009, 80% achievement rate

Fees reviewed by externaladvisors

CURRENT REMUNERATION BASIS(PHARMAXIS)

Salary Review

Annually on the 1st of Jan; market review & change in responsibility. Last increase was in 2010(4%)

Last increase in 2005/2006 based on a review by Korn Ferry International. Current year review of fees paid within sector is at best close to average

Equity Annual grant of options Sign on grant of 30,000restricted shares

Vest over 4 years, subject toperformance

Vest at 3rd anniversary

Compensation Scheme (PHARMAXIS)

2007 2008 2009 20100

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

TOTAL BonusShareCash

Regulatory and Voluntary Disclosure (Pharmaxis Ltd)

Equity Remuneration

The Pharmaxis Ltd Performance Rights Plan (ZEPOS)- Will grant options with a zero grant price and a zero exercise

price- A life of 10 years from grant date- Dependent on performance, position and salary- All factors unchanged, performance rights granted is

approximately 25% of traditional market based options.- Senior Executives will be invited by the Remuneration and

Nomination Committee to participate in this plan.


Options Senior executives including the CEO (an executive

director) are granted options each year after a review of performance by the Remuneration and Nomination Committee.

Options granted to the CEO must be subsequently approved by shareholders.

The vesting period of future option grants will change from 25% per annum commencing on the first anniversary of grant, to 100% vesting at the third anniversary of grant.

Board approval will be required before the shares issued on exercise of the options are able to be sold.


Variable Cash Incentive Individual and overall performance targets are set

by reference to the components of the Group’s annual business plan for which the individual executive is responsible (9 Key Milestones).

The typical increase in base salary as 1 January 2010 was 4%, compared to nil at 1 January 2009.

Cash Bonuses The payment of cash bonuses is dependent on the

satisfaction of performance conditions upon the discretion of the Remuneration Board.

Net Loss VS Tax Paid

1 2 3 4$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000Taxes Paid

Taxes PAID

2007 2008 2009 2010$0

$5,000,000

$10,000,000

$15,000,000

$20,000,000

$25,000,000

$30,000,000

$35,000,000

$40,000,000

$45,000,000

$50,000,000Net Loss

Net L...

Sigma Pharmaceuticals Limited(SIP)

Remuneration Basis of Top Executives of SIP

Non-Executive Directors• Reflect the size and complexity of the Company’s operations

as well as the responsibilities, accountabilities and time commitments of the Directors.

• Not linked to the performance of the Company, do not receive any performance related remuneration and are not entitled to receive performance shares, rights or options over the Company’s shares.

• Consists of base fees, committee fees and superannuation within a current aggregate fees maximum limit $1,100,000.

Executive Directors

• It is designed to ensure that Executive remuneration packages accurately reflect the Executive’s level of experience and responsibility, as well as their individual performance and the performance of the Company.


Remuneration

Year Non-Executive Executive TOTAL

2006/2007 885,751 2,354,603 3,240,354

2007/2008 946,974 1,938,718 2,885,692

2008/2009 1,046,409 1,777,041 2,823,450

2009/2010 1,074,636 1,406,708 2,481,344

2007 2008 2009 20100

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

Non-Executive Executive TOTAL

• The key principles are:

Provide market competitive remuneration to attract, motivate and retain high calibre executives

Link at-risk executive reward to the achievement of the Company’s annual performance objectives and the creation of longer term shareholder value


Motivate and reward superior performers with fair, consistent and competitive incentives

Promote opportunities for career and professional development

Foster a partnership between employees and other shareholders through employee ownership of Company shares

Relationship Between Remuneration and Performance

Total RewardTotalEmployment Cost (TEC)

Short TermIncentive (STI)

Long TermIncentive (LTI)

Total Reward

(TR)

+ + =

Fixed At Risk

Executive Total Reward comprises Fixed Remuneration (Total Employment Cost or TEC) and At RiskRemuneration, which is made up of Short Term Incentives and Long Term Incentives.

Relationship Between Remuneration and Performance

Level Fixed (%) STI (%) LTI (%) CEO/Managing Director

Executives

Senior ManagersOther Employees

38%38%

24%

24%

58% 18%

91% 9%

100% 0%

0%

0%

An appropriate target reward mix is determined for each management level with at risk rewards increasing with the level of responsibility and criticality of the employee’s role

Fixed Remuneration

Short Term Incentive• Made by Remuneration and Nomination committee

recommendation to remuneration board following approval of the company’s annual audited statements.

• Awarded when financial goals are met• Budgeted Profit after Tax and Key Performance Indicators

were chosen as the performance measure for short term executive rewards

• After review the Remuneration and Nomination committee awarded no incentive payments due to the company not achieving the budgeted profit after tax KPI

Long Term Incentive PlanCEO/MD and ExecutivesPerformance Rights granted in Oct 2004• The vesting of these performance rights is subjected to the

company’s absolute and relative Total Shareholder Return (TSR).

Performance Rights granted in Nov 2006, Oct 2007, Oct 2008 and Nov 2009

• Each of the performance right plans is subject to two separate performance conditions, relating to relative TSR performance and Earnings per Share (EPS).

An overview of the key remuneration outcomes for the financial year are as follows:

• CEO/ MD received total remuneration payments of $1,018,228 during the 2009/10 financial year.

• No Short Term Incentives were paid to the CEO/MD and Executives under the Sigma Short Term Incentive Plan for the 2008/09 and 2009/10 financial years.

• Rights arising under the 2004 Long Term Incentive Plan for the CEO/MD and the 2006 Long Term Incentive Plan for the CEO/MD and Executive have lapsed.

Overview (cont.)

• Rights arising under the 2007, 2008 and 2009 Long Term Incentive Plans for the CEO/MD and Executives have not satisfied the performance conditions to permit payment during 2009/10 financial year.

• CEO/MD and Executive remuneration review increases were consistent with the rate of inflation for 2009/10 financial year.

• Non-Executive Director fees were not increased during the 2009/10 financial year and the aggregate fees maximum limit for the Non-Executive Directors fee pool has not been increased since the 2007 Annual General Meeting.

Detailed Disclosures• For the financial year the CEO/MD and Executives have not been

awarded any Short Term Incentives payments as a result of the company not achieving the budgeted Net Profit after Tax KPI.

• Furthermore, the CEO/MD’s 2004 Long Term Incentive Plan and the CEO/MD and Executive 2006 Long Term Incentive Plans lapsed during the financial year as a result of the performance measure not being met. The CEO/MD and Executives have not and will not receive any payment under these plans. No awards were granted under the Long Term Incentive Plan in 2005. No performance rights or options have vested for the CEO/MD or Executives during the past five financial years.

Disclosure by PXS• New equity remuneration plans by PXS

• Options

Motivation of Executives based on Compensation of PXS

• Variable cash incentive• High performance to achieve high compensation• Achievement of milestones• 2010: Achievement rate 80%• 2009: Achievement rate 80%• 2008: Achievement rate 84%• Equity remuneration• Focus on creating sustainable long term value

Relationship Between Remuneration and Performance of Sigma

TotalEmployment Cost (TEC)

Short TermIncentive (STI)

Long TermIncentive (LTI)

Total Reward

(TR)

+ + =

Fixed At Risk

Disclosure by sigma• CEO/ MD received total remuneration payments of

$1,018,228 during the 2009/10 financial year.• No Short Term Incentives• Rights arising• CEO/MD and Executive remuneration review increases• Non-Executive Director fees

• Short Term Incentive

• Long Term Incentive Plan

MOTIVATIONS OF EXECUTIVES BASED ON COMPENSATION

• Main objective is to align the goals of the managers with the goals of shareholders– Short term Incentives

• Encourage Executives to meet financial goals• Reduce agency costs• Short term goals complementary of long term

sustainable growth– Long term Incentives

• Encourage Sustainable growth of the company• Reduce Agency costs

1. Pharmaxis measures the executive performance based on 9 key milestone that is related to the development of new product while Sigma measures it by company performance.

2 . There is good Corporate Governance in both companies. Remuneration and Nomination Committee was appointed to propose a remuneration strategy by evaluating the performances and setting a fair amount of compensation for the executives.

3. Short term and long term incentives were available to motivates the executives to work towards the short term and long term goals.

THE END

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Executive compensation