Composition and functioning of the Compensation Committee

The Compensation Committee is chaired by the Deputy Chairman of the Board of Directors, Richard Roy. The other members are the chairmen of the Finance Committee (Torsten G. Kreindl) and the Audit Committee (Theophil Schlatter) as well as the representative of the Swiss Confederation, Hans Werder. As Chairman of the Board of Directors, Hansueli Loosli attends committee meetings but has no voting rights.
The Committee met four times in the 2012 financial year. All members were present at the meetings, each of which lasted approximately two hours. No teleconferences were held. The CEO and CPO (Chief Personnel Officer) attend the meetings in an advisory capacity, unless the agenda items exclusively concern the Board of Directors or the CEO and CPO themselves, in which case the CEO and CPO are not present. Minutes are kept of the meetings. The Chairman reports orally on the activities of the Compensation Committee at the next meeting of the Board of Directors.

Remuneration paid to the Board of Directors

Principles

The remuneration reflects the level of responsibility and scope of activities performed by each member of the Board of Directors. The remuneration is reviewed every December for the following year to ensure it is still appropriate. In December 2011 the Board of Directors opted not to adjust its remuneration for the 2012 financial year. This decision was based on the following benchmarks: the study on remuneration for the 30 listed companies in the Swiss Leader Index (SLI) for the 2010 business year, which was conducted by Towers Watson, a consulting firm which is active worldwide in the field of top management remuneration, and the publicly accessible study by ethos on management compensation at the 48 largest exchange-listed companies in Switzerland (SMI and SMIM) in the 2010 business year.

Remuneration

The remuneration plan provides for a basic salary plus individual allowances and meeting attendance fees. No variable performance-related components are paid out. The Chairman is paid a basic emolument of CHF 385,000 net and the other members of the Board of Directors CHF 120,000 net each. Each member of the Finance and Audit Committees is entitled to remuneration of CHF 10,000 net, while each member of the Compensation Committee receives an equivalent individual functional allowance. In addition, the Vice-Chairman and the Chairman of the Finance and Compensation Committees are each entitled to an allowance in an amount of CHF 20,000 net. The Chairman of the Audit Committee receives CHF 50,000 net. The representative of the Swiss Confederation receives CHF 40,000 net for the special duties related to his function. Meeting attendance fees are also paid (CHF 1,250 net for a whole day and of CHF 750 net for a half-day). Out-of-pocket expenses are reimbursed on the basis of actual costs incurred. No significant non-cash benefits are paid.
The members of the Board of Directors are required to draw 25% of their basic remuneration including individual allowances in the form of shares. Swisscom then increases the amount to be invested by 50%. Remuneration (excluding meeting attendance fees) therefore comprises two-thirds cash and one third shares. The amount of the share purchase obligation can vary in the case of members who join, leave or take over or give up a function during the year. The shares allocated based on their tax value, rounded up to whole numbers of shares, and are subject to a three-year blocking period. In future, the members of the Board of Directors will also undertake to maintain a minimum shareholding of an annual emolument (basic emolument plus an individual allowance). This must be implemented within four years after election to the Board of Directors. The shares which are allocated in April of each reporting year are recorded at market value as of the acquisition date, if purchased (usually three weeks before allocation), or at the market value on the date of allocation, if treasury shares are allocated. In April 2012, 1,927 shares were allocated to the members of the Board of Directors (prior year: 1,895 shares) with a tax value of CHF 310 per share (prior year: CHF 346). The market value was CHF 361 per share (prior year: CHF 412).
Total remuneration paid to the individual members of the Board of Directors for the financial years 2012 and 2011 is presented in the tables below, broken down into individual components. As regards the disclosure of non-cash benefits and expenses, these are dealt with from a tax point of view. Accordingly, neither non-cash benefits nor expenses are included in reported compensation. Remuneration is lower year-on-year, due mainly to the fact that in the previous year the number of Board members was increased for a period of four months.

Remuneration paid to the Group Executive Board

Principles

In keeping with Swisscoms general remuneration policy, remuneration paid to the Group Executive Board consists of a fixed basic salary in cash and a variable performance-related component in cash and shares as well as fringe and additional benefits (in particular company car) and retirement benefits. The Board of Directors may also at its own discretion reward exceptional individual performance in the form of a bonus in cash or shares. In the case of one member of the Group Executive Board, part of the fixed remuneration takes the form of shares which, like the variable performance-related share of profits, are paid out in April of the year following the reporting year. The shares are allocated on the basis of their tax value, rounded up to whole numbers of shares, and are subject to a three-year blocking period.
As a rule, the Compensation Committee reviews individual remuneration paid to members of the Group Executive Board every three years of employment. Besides individual performance, the amount of the remuneration depends on the market rate for the position and the function, with the latter carrying greater weight. Relevant benchmarks are used. The following three comparative studies carried out by the renowned consultancy firms Towers Watson and Aon Hewitt are all based on data available in 2011 and were used by Swisscom as benchmarks:The Top Executive Remuneration study by Towers Watson covers 23 companies in various sectors, with headquarters in Switzerland. More than half are represented in the SMI and have average revenues of CHF 8 billion and an average workforce of 14,000 (FTEs). The Swiss Headquarters Executive Total Compensation Measurement Study by Aon Hewitt covers 98 Swiss companies and international groups in all sectors, with global or regional headquarters in Switzerland, average revenues of CHF 3.3 billion and an average workforce of 8,900. The international European Executive Survey, also produced by Aon Hewitt, covers 33 European groups, mainly telecommunications companies, with average revenues of CHF 34 billion and an average workforce of 78,000 (FTEs). Due to their numerous reference companies, these studies provide the basis for a representative comparison. In the evaluation of these studies, Swisscom took into account factors such as sector, revenue, number of employees and location. During the reporting year the remuneration of one Group Executive Board member was adjusted to reflect these benchmarks and to bring the salary into line with the market.

Targets for the variable performance-related component

The targets underlying the variable performance-related component are reviewed annually in December for the coming year by the Board of Directors following a proposal submitted by the Compensation Committee. The relevant targets set for the reporting year are based on the Swisscom Groups budget figures for 2012.
Three target levels are defined: Group (excluding Fastweb), Customers and Segments. All members of the Group Executive Board are measured against Group targets (excluding Fastweb) and customer targets and, depending on their function, against targets of other segments for which they are responsible. Group targets consist of financial targets, while customer targets are measured by improvements in customer interaction/satisfaction in the customer group for which the Group Executive Board member is responsible. Additional targets tailored to the relevant position of each Group Executive Board member consist of financial and non-financial targets.
The following table illustrates the target structure valid for Group Executive Board members in the year under review, showing the three target levels, individual targets and the respective weighting.

Swisscoms target structure aims to strike a balance between financial performance and market performance, taking into account the specific area of responsibility of the individual Group Executive Board member.
Depending on their function, Group Executive Board members receive a variable performance-related component of between 40% and 117% of their fixed basic salary if they meet their targets. The amount of the performance-related component paid out depends on the extent to which the targets set by the Compensation Committee are achieved. When defining these targets, the level of achievement (from overachievement to underachievement) is defined as a basis for calculating the target value. Special factors can also be taken into account such as an unscheduled acquisition or divestment. If targets are exceeded, additional remuneration up to a maximum of double the variable performance-related component may be paid.

Payment of the variable performance-related component

The variable performance-related component is determined in the following year once the consolidated financial statements become available, on the basis of the targets fixed in the year under review, and is paid in April of the following year. Members of the Group Executive Board receive 75% of the variable performance-related component in cash and 25% in shares, with the exception of one member who receives 64% in cash 36% in shares. During the period under review no bonuses for outstanding individual performance were awarded. The shares are allocated on the basis of the tax value, rounded up to whole numbers of shares, and are subject to a three-year blocking period. The share-based compensation for the reporting period is increased by a factor of 1.19 to reflect the difference between the market value and the tax value. The market value is determined as of the acquisition date of the shares in case of their purchase (usually three weeks prior to allocation) or, if treasury shares are allocated, as of the date of allocation. Shares for the year under review will be allocated in April 2013. A total of 3,170 shares with a tax value of CHF 310 per share and a market value of CHF 361 per share were allocated to members of the Group Executive Board in April 2012 for the 2011 financial year. In April 2011, a total of 3,128 shares with a tax value of CHF 346 per share and a market value of CHF 412 per share were allocated for the 2010 financial year.

Achievement of targets

Group targets (excluding Fastweb) were achieved in the year under review and in some cases were slightly exceeded. Customer targets in the individual segments were largely achieved and in some cases exceeded. Fastwebs targets were largely achieved. The other targets of the segments were also largely achieved and in some cases exceeded.

Total remuneration

As regards the disclosure of non-cash benefits and expenses, these are dealt with from a tax point of view. The disclosed fringe benefits therefore only include a share in a company car. Reported pension benefits (amounts which give rise to pension entitlements or increase pension benefits) encompass all savings, guarantee and risk contributions paid by the employer to pension plans.
The following table shows total remuneration paid to the members of the Group Executive Board for fiscal years 2012 and 2011, broken down into individual components and including the highest amount paid to one member. Any remuneration paid to those stepping down from the Group Executive Board includes the respective maximum remuneration up to the end of the notice period in the year under review or previous year. Two members of the Group Executive Board stepped down in the year under review. Subsequent to stepping down, one member of the Group Executive Board received remuneration during the year under review for advisory services provided as support for the interim solution. No additional remuneration was paid and hence no termination benefits are reported. One member of the Group Executive Board received compensation as reparation for deferred entitlements to share and option plans which were forfeited as a result of joining Swisscom. In the year under review the ratio of the basic salary (total CHF4,353 million) to the variable performance-related bonus (total CHF 4,318 million) was 50.2% to 49.8%. The total remuneration paid to the CEO rose by 16.6%. The increase in remuneration paid to the CEO and the other members of the Group Executive Board is mainly due to higher target achievement.

Planned adjustments to remuneration system as per 2013

The remuneration system for the Group Executive Board was revisited in the year under review. In order to strengthen the focus on the long-term performance of Swisscom, members of the Group Executive Board will in future be obliged to hold a minimum number of Swisscom shares. The minimum shareholding to be held by the CEO shall be equivalent to two years’ basic salary. The remaining members shall maintain a shareholding equivalent to one year’s basic salary. The shareholding must be acquired within a four-year period. To this end, Group Executive Board member have the opportunity to draw a higher proportion of the variable performance-related component of their salary in shares. The variable performance-related component is now capped at 130% (previously 200%).

Clause on change of control

The employment contracts of the members of the Group Executive Board do not contain a clause relating to change of control. The contracts can be terminated subject to a twelve-month notice period. No termination benefits are payable in addition to the salary payable for a maximum of twelve months.

Additional remuneration

The members of the Group Executive Board are not entitled to separate remuneration if they hold any Board of Director mandates either within or outside the Swisscom Group. With the exception of Hugo Gerber, who received remuneration for his mandate as a member of the Board of Directors of the Swisscom Group company Worklink AG, no other members of the Board of Directors or the Group Executive Board received any additional remuneration for mandates performed for Swisscom Ltd or any of its subsidiaries.

Remuneration for former members of the Board of Directors or Group Executive Board

With the exception of compensation paid to one member of the Group Executive Board after stepping down, for advisory services provided as support for the interim solution, no remuneration was paid to former members of the Board of Directors or the Group Executive Board in the year under review. Nor was any remuneration paid to persons closely related to members of the Board of Directors or the Group Executive Board. Information on the meaning of closely related persons can be found in Note 13 to the financial statements of Swisscom Ltd.

Loans and credits granted

In the 2012 financial year, Swisscom Ltd provided no guarantees, loans, advances or credit facilities of any kind either to former or current members of the Board of Directors or Group Executive Board or to persons closely related to them. Nor are there any receivables of any kind outstanding.

Shareholdings of the members of the Board of Directors and the Group Executive Board

Blocked and non-blocked shares held by members of the Board of Directors and the Group Executive Board or persons closely related to them as at 31 December 2012 and 2011 are listed in the table below:

The voting rights of any person subject to the disclosure obligation do not exceed 0.1% of the share capital.