Guidelines for Incentive Pay

General Guidelines for Incentive Remuneration of the Board and Management in Bavarian Nordic A/S

In agreement with the Companies Act § 69b, the Board of Bavarian Nordic A/S (hereafter known as "the Company") has drawn up the following guidelines for Incentive remuneration for the Company's Board and Executive Management, as registered in the Danish Commerce and Companies Agency. The Board has decided that the guidelines shall currently also apply for incentive remuneration of the other members of the Company's Executive Management who are based in Denmark. Reference to Executive Management in these guidelines therefore includes the Company's registered Management. Members of the Executive Man­agement who are employed in the Company's foreign subsidiaries may receive different forms of incentive remuneration.

After thorough consideration, the Board has found it appropriate to retain and continue the Company's previ­ous policy governing incentive remuneration of Management and other employees. The new requirements, stipulated in the Companies Act § 69b for stock-exchange listed companies, has provided opportunity to re-evaluate the previous informal policy, such that a formal policy has now been drawn up with the current guidelines.

The guidelines cover all incentive remuneration of the Board and Executive Management, which is defined as variable remuneration, including share-based and performance-based programs in which the amount of the remuneration is not known in advance. These guidelines are for remuneration which is in addition to the fee/remuneration that the Board and Executive Management are entitled to, and which is not covered by the Companies Act § 69b.

History and general principles
Since its establishment, the Company has operated with incentive remuneration programs for management and employees in the Company and its subsidiaries. The provision of such schemes has been, and contin­ues to be, in accordance with that offered by comparable operations and is to ensure focussed and stable development of the Company's business.

In recent years, the Company has run several share-based programs in which subscription options (warrants) have been allocated to the Board, Executive Management, and certain other employees in the Company and its subsidiaries. Furthermore, phantom shares have been allocated to all employees in the Company. One sub­sidiary has also issued share options to its employees and management.

Furthermore, the Company has, to a limited extent, utilised performance-based programs in the form of cash bonus schemes for certain leading employees, including members of the Executive Management. At the present time, Executive Management is included in cash bonus programmes.

The policy of the Company is that remuneration of the Board and Management must be competitive and comparable to remuneration in other Danish and international operations with which it is natural to compare the Company. It is important to recruit, retain and motivate competent and loyal members to Company man­agement, and in the opinion of the Company, remuneration, including incentive remuneration, is an important element of this.

It is the opinion of the Board that incentive-based remuneration of both the Board itself and the Executive Management contributes positively to motivating the recipient to giving that extra effort needed to achieve short-term and long-term goals. Share-based schemes in particular create a focus of interests between Management and shareholders, which helps to secure the shareholders interest in increased value creation in the Company.

Remuneration to top management in the Company comprises for the Board (i) a fixed fee, and (ii) participa­tion in share-based incentive programs.

For Executive Management, remuneration comprises:

  1. wages, pension contributions, company car schemes, certain other personal benefits. 
  2. cash bonus schemes, and 
  3. participation in share-based incentive programs.

Guidelines for cash bonus programs
The Board has assessed that incentive remuneration in the form of cash bonus can be advantageously offered to the Executive Management with the purpose of, within a short timeline, promoting specific and measurable results within the business area in which the member is influential.

The cash bonus programs comprise annual determination of the maximum bonus that can be paid to indi­vidual members of the Executive management if they meet all their targets for that year. The maximum cash bonus comprises an amount equivalent to six months' basic wage as of the end of the last tax year. The bonus is only paid out if the targets linked to the bonus are met. If no targets are met, no bonus is paid out.

Bonus is paid proportionally with respect to the met, pre-defined specific targets which have been set for that person. In part, budget targets related to turnover targets and profit before tax are agreed and in part specific goals. Where possible and appropriate, bonus payments can also be proportional to the extent to which the set goals have been met. Targets for the Managing Director are set by the Board and for other members of the Executive Management by the Managing Director and the Chairman of the Board. Targets for the Managing Director are set by the Board, and for other members of the Executive Management by the Managing Director and the Board Chairman.Bonus targets are set in the fourth quarter for the following year but can, in exceptional cases, be linked to targets which extend over a longer period of time.

For each member of the Executive Management, the total estimated value of the Company's annual bonus program may comprise a maximum of 6/12 of that year's basic wage (cf. above).

In exceptional cases, separate agreements may be entered with Executive Management which can result in payment of a bonus of up to an additional 1 year's basic wage for that member of the Executive Manage­ment. Typically, such agreements would be expected to be entered for a given event, e.g. takeover of a con­trolling shareholding in the company; implementation of a takeover bid; an Executive management member's continued employment up to a given time either defined by date or a period after the occurrence of a given event.

Guidelines for share-based schemes
The Board has assessed that incentive remuneration in the form of share-based schemes can be advan­tageously offered to both the Board and Executive Management with the purpose of promoting and achiev­ing long-term goals and strategies for the Company, and thereby contributing to the Company's development and growth.

Share-based schemes can apply to both the Board and Executive Management.

Share-based programs must, in accordance with the Company's current policy, be primarily based on free allocation of subscription options (warrants), however, the Company can also, after considered evaluation, design the share-based schemes using call options, conditional shares or similar, under compliance with these guidelines for incentive remuneration of the Board and Management.

The Board submits a motion to the Annual General Meeting for a resolution on the issue of subscription op­tions or authorization to the Board to issue subscription options.

Prior to submission of the motion for the resolution, the Board must assess the need for the alloca­tion/authorization. The Board must assess to what extent the allocation/authorization is relevant for the shareholders interests with respect to value-creation in the Company, and based on the principles of good corporate governance, and relevant legislation.

Prior to submitting the motion for a resolution on allocation or exploitation of authorization, the Board must assess to what extent the total number of shares which can be subscribed to in outstanding subscription option programs (allocated, but not yet taken up) and the intended program, constitute a suitable and normal level compared to the total number of shares in the Company. It is the opinion of the Board that the total number of shares which can be subscribed to based on the subscription options allocated to the Board, Ex­ecutive Management and other employees in the Bavarian Nordic Group, should not exceed 10 % of the total number of shares in the Company.

The motions for a resolution from the Board must be based on the following framework for share-based in­centive remuneration:

  • For every allocation/authorization, it must not be possible to allocate the Board more than 15 % of the total number of subscription options which are issued or can be issued with respect to a given allocatio­n/authorization.
  • An individual member of Executive Management must as a maximum only be allocated 20 % of the total number of subscription options which are issued or can be issued in accordance with a given alloca­tion/authorization.
  • To ensure that the value of the share-based remuneration does not reach an unintended level in relation to other remuneration, the Board must, at recommendation to the General Meeting for allocation and/or at exe­cution of authorization on allocation, ensure that the value of the subscription options which are allocated to the Executive Management for each member of Executive Management, does not, at the time of allocation, exceed a value equal to that person's current basic yearly wage.For the Board, the number of subscription options allocated to each Board member within one calendar year may not exceed entitlement to subscribe to more than 5,000 shares at a nominal share value of DKK 10 (as of 1 April 2008 equivalent to a value of DKK 381,628 in accordance with the Black and Scholes formula. The value of the subscription options must be based on the Black-Scholes formula. 
  • Individual allocations must occur after recommendation by the Board and are finally approved at a Board meeting. For each allocation, the Board must assess to what extent the number recommended for each re­cipient reflects the recipient's participation in achieving the long-term targets and strategies of the Company. 
  • Allocation can take place once for a given scheme, or the Board can, after evaluation, decide that the scheme shall comprise continuous allocations over a longer period.
  • No subscription options can be used to subscribe to shares before at the earliest two years and at the latest six years after the allocation date, thus a scheme can run for a maximum of six years from the allocation date.

    It must be possible to exercise allocated subscription options in one or more of at least four trading windows during a two-year period. The trading windows must be placed in extension of publication of the Company's annual/interim reports.
  • The utilization price must be set at a price equivalent to an average of the market price over a period of at least 10 and maximum 30 stock-exchange working days prior to the allocation date, with a supplement of minimum 15%, however such that the utilization price must comprise at least a price equivalent to the Com­pany's average exchange-listed price on the day of the formal decision on allocation of subscription options.
  • The right to utilization of subscription options in connection with termination of employment shall for Execu­tive Management be primarily regulated by the provisions of the Share Option Act, or on conditions equivalent to this. For the Board, all rights are retained, even in the event of resignation from the Board prior to the exercise period.
  • Other terms and conditions for company law issues including regulation clauses in connection with financial restructuring or company restructuring, dividend payments, practical issues relating to exercise, the underlying shares, tax management, etc., must be determined taking into consideration current regulations and in ac­cordance with standard practice for similar schemes in other companies with which the Company can be compared.

As an example of value determination of existing programs, refer to the note on personnel costs and the notes on subscription options in the Company's Annual Report.

Approval/Publication
The current general guidelines for Incentive remuneration for the Board and Executive management in Bavarian Nordic A/S has been dealt with and approved at the Annual General Meeting of the Company on 29 April 2008, and applies until the General Meeting decides to change the guidelines.