Board of Directors’ and Audit & Supervisory Board Members’ Compensation Policy

Subject to the approval of the proposal titled “Introduction of a Performance-based Stock Compensation Plan for Directors, etc.” submitted to the FY2021 Annual General Meeting of Shareholders held on June 23, 2022, the content of the current Directors’ and Audit & Supervisory Board Members’ compensation policy (Board of Directors’ and Audit & Supervisory Board Members’ Compensation Policy) has been changed as follows based in part on discussion by the Nominating and Compensation Committee.
EKK has established the policy below for determining compensation for Directors and Audit & Supervisory Board members. Director compensation is determined by the Board of Directors, and Audit & Supervisory Board member compensation, etc., is determined via thorough discussions with Audit & Supervisory Board members within the total amount decided at the General Meeting of Shareholders based on this policy.
In order to address the important management issues involved, including elevating objectivity and transparency regarding Board of Directors’ and Audit & Supervisory Board members’ nomination and compensation, the Company has established the Nominating and Compensation Committee as an advisory body of the Board of Directors. The committee regularly monitors matters of particular importance, such as Board of Directors’ and Audit & Supervisory Board members’ nomination and directors’ compensation, and provides appropriate recommendations to the Board of Directors. Nominating and Compensation Committee　meetings are comprised of the Board of Directors’ chairman and outside directors. The committee reviews and provides　recommendations regarding important management issues such as nominations and compensation.

a. Method of determining policy

The Policy on Director Compensation is determined by the Board of Directors, taking into account the advice of the Nominating and Compensation Committee. The Policy on Audit & Supervisory Board Member Compensation is determined through discussions with Audit & Supervisory Board members.

b. Basic policy

The Group seeks to grow stronger and more highly profitable by making unique and socially useful products backed by our technologies at a low cost around the world and providing them at reasonable prices. We believe that pursuing this policy from a medium- to long-term perspective will contribute to improving the Group’s medium- to long-term corporate value and increase stakeholder satisfaction.
In carrying out this policy, we believe that it is necessary for us to promote the motivation of the management team, including the directors of the Company, to achieve performance targets and stakeholder satisfaction from the standpoint of compensation. For that reason, we have decided to introduce new treasury stock compensation for the Company’s management that varies to a certain extent according to the degree of achievement of KPIs related to the priority measures in the Group’s medium-term management plan. Balancing this with monetary compensation that varies according to the degree of achievement of performance targets for each fiscal year, we aim to improve corporate value and stakeholder satisfaction over the medium to long term.

c. Policy for determining amount of individual compensation, etc., and method of calculation

Considering their responsibilities in improving performance in each fiscal year and increasing corporate value over the medium to long term, director compensation is broken down into three categories. These are base pay (monetary), short-term performance-linked compensation (monetary), and medium- to long-term performance-linked compensation (stock), comprised of fixed compensation, expectations for short-term results and expectations for long-term results. On the other hand, outside directors are expected to provide objective opinions and suggestions from an outside perspective that is independent from business execution, so in light of this, they are only paid base pay (monetary).
In addition, compensation for Audit & Supervisory Board members is base pay (monetary) only according to position as they are responsible for auditing the execution of duties for the Group as a whole.
Compensation may be temporarily reduced or not paid at all in the event of a sudden worsening of performance or damage to corporate value. The compensation system for the Company’s directors is set up in such a way that compensation differs according to the responsibilities of the position (chairman, president, vice president, managing director, etc.). The difference currently applied is where managing directors are 1 and the chairman and president are about 1.6 when the short-term/long-term results portion is the standard amount.

d. Policy for setting quantitative formulae for and determining other details of performance-based compensation, including performance benchmarks

Performance-based compensation is paid in an amount ranging from 0% to 200% of a baseline level, depending on performance relative to evaluation criteria.
When determining short-term performance-linked compensation, it is the Company’s judgment that maintaining and improving the profit level is the most appropriate indicator of corporate performance. As such, the degree of achievement of the initial operating profit plan, dividend amount, employee bonus amount and other matters impacting performance (natural disasters, extraordinary gains/losses, etc.) are considered.
The indicators of medium- to long-term performance-linked compensation are ratio on invested capital (ROIC) (financial indicator) and the FTSE Russell ESG score (non-financial indicator) to increase overall profitability of the Group and promote ESG management. The weight given to these items is 90% and 10%, respectively.

e. Policy for determining the content, amount, number or method of calculating non-monetary compensation, etc.

For medium- to long-term performance-linked compensation, we utilize the officer compensation BIP (Board Incentive Plan) trust system in order to increase the motivation of directors to contribute to improving the Group’s medium- to long-term performance and increasing corporate value. This plan is a system for issuing and paying the shares of the Company and share exchange price at disposal of the Company (hereinafter referred to as “the Company’s shares, etc.”) in a number corresponding to points calculated according to position/length of service and the degree of achievement, etc., of medium-term targets to eligible directors (excluding outside directors) and operating officers following the Rules for Issuance of Shares approved by the Board of Directors.

f. Policy for determining the ratio (percentage) of each type of individual compensation, etc.

The Company’s business domain is the manufacture and sale of mechanical seals, special valves, etc., and other mechanical parts in industries that include automobiles, construction equipment, general industrial machinery, semiconductors, ships and aerospace. Considering that business performance is easily affected by trends in these industries, the percentages of short-term performance-linked compensation and medium- to long-term performance-linked compensation for directors are 10% and 20% of total compensation, respectively.

g. Policy for determining the timing or terms of compensation payments

Monthly base pay is determined by the Board of Directors after the Ordinary General Meeting of Shareholders for one year beginning from the following month and is paid in a fixed amount on a fixed day every month. Short-term performance-linked compensation is determined by the Board of Directors based on the year-end financial results in accordance with the abovementioned “Policy for setting quantitative formulae for and determining other details of performance-based compensation, including performance benchmarks.” It is paid by the time of the Ordinary General Meeting of Shareholders for the financial results in question. As for medium- to long-term performance-linked compensation, following the Rules for Issuance of Shares approved by the Board of Directors, a fixed number of points calculated according to position and length of service and performance-linked points designed to incentivize achievement of the medium-term management plan, etc., are granted at a certain time every year. In principle, when the medium-term management plan ends, a number of the Company’s shares, etc., corresponding to the cumulative number of fixed points and a number of the shares, etc., corresponding to the cumulative number of performance-linked points multiplied by a performance-linked coefficient according to the degree of achievement of medium-term targets are issued and paid.

h. Policy for and method of determining individual compensation

The Board of Directors sets individual directors’ compensation amounts and the methods whereby they are set, taking into account recommendations of the Nominating and Compensation Committee. Director and Audit & Supervisory Board member compensation proposals are tabled by the Board’s chairman.
Proposed payments of compensation to Audit & Supervisory Board members are set by the Audit & Supervisory Board through consultation among Audit & Supervisory Board members.

General Meeting of Shareholders Approval of Directors’ and Audit & Supervisory Board Members’ Compensation, etc.

At the 55th Annual General Meeting of Shareholders held on June 24, 2009, shareholders approved resolutions capping directors’ aggregate compensation at ¥360 million per year and Audit & Supervisory Board members’ aggregate compensation at ¥72 million per year.
At the FY2021 Annual General Meeting of Shareholders held on June 23, 2022, shareholders approved a performance-based stock compensation plan (hereinafter referred to as “the Plan”) for the Company’s directors (excluding Outside Directors; the same applies hereinafter) and operating officers (excluding those not residing in Japan; hereinafter referred to as “Directors, etc.”). An overview of the Plan is provided below. The Plan’s compensation is paid to directors, etc., separate to the above director compensation amounts (¥360 million per year).

Overview of the Plan

The Plan is a stock compensation plan for Directors, etc. The Company will contribute an amount corresponding to the compensation for Directors, etc., to a trust, and these funds will be used to purchase shares of the Company through the trust. Shares of the Company and share exchange price at disposal of the Company (hereinafter referred to as “the Company’s shares, etc.”) are issued and paid (hereinafter referred to as “issuance, etc.”) as officer compensation according to position and the degree of achievement, etc., of the performance targets (details of the Plan are described in (b) below and thereafter).

Impact of the Company’s shares subject to the Plan on the total number of outstanding shares