Michelin : Management and Supervisory Board compensation policies – 2021

CORPORATE GOVERNANCE REPORT

Management and Supervisory Board compensation policies for 2021 03

3.2.11 CORPORATE SOCIAL RESPONSIBILITY (CSR) COMMITTEE

100%	3	100%	1
attendance rate	members	independence	meeting

3.2.11.1 Members(1)

Since its creation in the second half of 2020, the CSR Committee has comprised:

• Monique Leroux, independent member and Chair of the Committee;

• Anne-Sophiede La Bigne, independent member;
• Jean-MichelSeverino, independent member.

3.2.11.2 Role and responsibilities

The role of the CSR Committee is described in its internal rules, available on the Group's website www.michelin.com.

The Committee's remit covers the various aspects of corporate social responsibility and it cooperates closely with the Compensation and Appointments Committee and the Audit Committee on cross- functional matters that are of interest to them.

3.2.11.3 Activities in 2020

The Committee was created in the latter part of the year and held only one meeting, on November 18, with a 100% attendance rate.

The Committee's work mainly consisted in:

• designing its processes and organizing its work;
• reviewing certain sections of the Universal Registration Document and analyzing the CSR key performance indicators;
• reviewing non-financial reporting standards and new practices followed by some companies that now incorporate certain non-financial data in their financial statements;

The CSR Committee's rules of procedure are described in its internal rules.

• analyzing the Group's ESG ratings and considering ways to improve them;
• reviewing changes in the Industrial Michelin Environmental Performance (i-MEP) indicator, which replaces the Michelin Environmental Footprint (MEF) indicator (see detailed explanation in section 4. Methodology - Environmental indicators).

The Chair of the Committee reported to the Supervisory Board on the Committee's work on December 14, 2020.

3.3 MANAGEMENT AND SUPERVISORY BOARD COMPENSATION POLICIES FOR 2021

3.3.1 GENERAL PRINCIPLES

Since 2014, the compensation awarded to the Managers and the Chairman of the Supervisory Board has been submitted to the shareholders at the Annual Meeting.

In the same way as in 2020, in application of French Act No. 2019-486 dated May 22, 2019 (the "PACTE Act") and other legal and regulatory provisions in force in 2020, at the Annual Shareholders Meeting of May 21, 2021, the General Partners and, on the recommendation of its Compensation and Appointments Committee, the Supervisory Board will ask shareholders to approve the 2021 Compensation Policy applicable to (i) the Managers and (ii) the Supervisory Board.

The Compensation Policy applicable to the Managers and the Supervisory Board is prepared and revised in accordance with the relevant laws and regulations.

Article L. 22-10-76-I of the French Commercial Code stipulates that the Compensation Policy applicable to the Managers and the Supervisory Board must be compatible with the Company's corporate interests.

1. Biographical details and other information concerning the members of this Committee of the Supervisory Board are provided in section 3.1.3.4 of this 2020 Universal Registration Document.

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03 Management and Supervisory Board compensation policies for 2021

It must contribute to its marketing strategy as well as the long- term sustainability of the business. This Compensation Policy establishes a competitive framework aligned with the Group's strategy and business environment. The policy is designed to increase medium- and long-term performance and competitiveness and is therefore in the Group's best corporate interests, in accordance with the AFEP/MEDEF Code.

The policy contributes to the Company's marketing strategy by requiring the Group's performance to be factored into the calculation of variable compensation, in particular:

• the Managers' variable compensation (annual, long-term) represents the predominant part of their total compensation; and
• the amount they receive in variable compensation depends on the achievement of objectives related to the Group's main performance indicators, which also apply to the employees of Group companies.

The policy contributes to the Company's sustainability by requiring the Group's performance to be factored into the calculation of variable compensation, in particular:

• for each Manager:
• • the performance indicators applicable to their variable compensation (annual and long-term) focus on sustained performance in line with the Group's strategy;
  • part of their long-term variable compensation consists of performance shares that are subject to vesting conditions linked to the achievement of performance objectives over several years;
  • the performance shares received when the vesting conditions have been met may not be sold for as long as they serve as a Manager;
• for the Managing Chairman, the Compensation Policy takes into account his position as General Partner with unlimited joint and personal liability for the Company's debts by deducting his annual variable compensation from the amounts due to the General Partners out of the Company's profits (if any);
• for the members of the Supervisory Board, most of their compensation as Supervisory Board member and, if applicable, member of a Committee of the Board, is based on their attendance rate at Board and Committee meetings, which are scheduled at the start of the year.

In the decision-making process for the determination and revision of the Compensation Policy, the Company has chosen to take into account the compensation and employment conditions of employees of its main French subsidiary, Manufacture Française des Pneumatiques Michelin ("MFPM" or the "Scope")(1).

For 2021, the Managers have decided to share the quantitative performance criteria and indicators defined by the Supervisory Board for their own annual variable compensation with Scope employees and eligible employees of Group companies. Concerning their long-term variable compensation, the Managers will be awarded performance shares subject to more demanding vesting conditions and criteria than those applicable to the Group's performance share plans for eligible Scope employees.

Conflicts of interest are avoided in the drafting, revision and implementation of the Compensation Policy due to the involvement of the Supervisory Board and the Compensation and Appointments Committee, whose members are all independent. The procedures for managing conflicts of interest within the Supervisory Board are described in section 3.2.6.

In accordance with the second paragraph of Article L. 22-10-76-III of the French Commercial Code, the General Partners, where the Managers are concerned, or the Supervisory Board, where the Supervisory Board members are concerned, may depart from this Compensation Policy provided that the following conditions are met:

• any departure from the Policy must be only temporary, consistent with the corporate interest and necessary to ensure the Company's long-term sustainability and viability; in addition, it may only concern the following compensation components: annual and deferred variable compensation, exceptional compensation;
• the Policy may be departed from only in exceptional circumstances, such as - for example - the currently unforeseeable effects of a health crisis and/or a systemic economic crisis, or a significant change in the Group's scope. It being specified that any change in an aspect of the Compensation Policy must be made public and justified, in particular as regards the Group's best corporate interests over the long-term;
• in the case of exceptional compensation, with payment subject to the approval of the Annual Shareholders Meeting, in accordance with the law.

The 2021 Compensation Policy is the subject of two proposed resolutions to be presented at the Annual Shareholders Meeting to be called to approve the 2020 financial statements:

• the 6th resolution concerning the policy applicable to the Managers, presented in section 3.3.2 below;
• the 7th resolution concerning the policy applicable to the members of the Supervisory Board, presented in section 3.3.3 below.

3.3.2 COMPENSATION POLICY: THE MANAGERS

This section describes the components of the Compensation Policy for the Managers. These components are presented in a proposed ordinary resolution approved by the General Partners that will be submitted for shareholder approval at the Annual Meeting to be called to approve the 2020 financial statements (6th resolution).

1. The Company has very few employees (less than five, none of whom are executive directors) and their compensation and employment conditions do not therefore represent a relevant benchmark.

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CORPORATE GOVERNANCE REPORT

Management and Supervisory Board compensation policies for 2021 03

3.3.2.1 Principles for determining compensation

The compensation of the Managing Chairman and General Partner is decided by the General Partners and is subject of a deliberation by the Supervisory Board. Then:

• the annual variable compensation is deducted from the General Partners' Profit Share, as explained in section 3.3.2.3.1 below;
• the long-term variable compensation is awarded in the form of performance shares;
• the fixed compensation is paid by a subsidiary of the Company in exchange for his services as Manager of that company.

3.3.2.2 Fixed compensation

Considering the efforts that the Michelin Group's employees and other stakeholders have been called upon to make in order to deal with the consequences of the Covid-19 health crisis, the Managing Chairman, the General Manager and the Non-Managing General Partner decided in application of the 2020 Compensation Policy and with the unanimous backing of the Supervisory Board, to:

• maintain the Managers' fixed compensation at the amounts decided at the time of their appointment in 2018, i.e., €900,000 for Florent Menegaux and €600,000 for Yves Chapot; and
• reduce this fixed compensation by 25% for the period during which employees were furloughed in 2020.

The Compensation and Appointments Committee noted that their fixed compensation for both 2018 and 2020 remained

The fixed and variable annual compensation of the General Manager and his long-term variable compensation (performance shares) are decided by the General Partners and are the subject of a deliberation by the Supervisory Board.

The Committee also reviews all amounts and benefits due, awarded or to be awarded to the Managers for the previous year by Group companies. As part of the review, the Committee particularly verifies that the amounts paid or awarded to the Managers are proportionate and consistent in terms of (i) the Group's performance and (ii) industry and market practice.

below the median fixed compensation of equivalent categories of executives of comparable companies (CAC 40 companies), as evidenced by annual surveys conducted by leading specialized consultancies.

In light of the current economic crisis and the policy of salary moderation decided for Scope employees(1) for 2021, the Managers informed the Committee that they did not want their fixed compensation to be raised in 2021.

In conclusion, the Committee proposed to keep the Managers' fixed compensation for 2021 at the level applicable since 2018, i.e., €900,000 for Florent Menegaux and €600,000 for Yves Chapot, and to recommend that these amounts be reviewed in 2022.

3.3.2.3 Annual and long-term variable compensation

Shared principles

To engage Managers more deeply in the Company's performance and encourage them to act with its long-term interests in mind, their variable compensation includes an annual portion and a long-term portion, both of which are subject to performance conditions.

This structure means that the Managers' variable compensation fluctuates partly in line with net income for the year and partly

on the basis of several additional performance conditions related to factors that are essential for the deployment of Michelin's strategy to deliver sustainable growth.

The level and terms of the Managers' compensation take into account the positions of Managing Chairman and Managing General Partner, as well as the difference in status between a Managing General Partner and a General Manager.

Annual variable compensation

Florent Menegaux, Managing Chairman and General Partner

In light of the General Partners' unlimited several personal liability for the Company's debts, the Managing General Partner(s) and the Non-Managing General Partner, SAGES, are entitled to a share of annual profit (the "Profit Share") determined on the basis defined in the Company's Bylaws.

Each year, the General Partners decide on the cap to be applied to the Profit Share attributed to the Managing General Partner(s), which constitutes the variable annual compensation of the Managing General Partner(s). The Supervisory Board defines the performance criteria and objectives applicable to this variable annual compensation of the Managing General Partner(s). This means that their interests are fully aligned with those of the shareholders, as they are paid Profit Share only if the Company makes a profit(2).

The compensation of the Managing General Partner(s) is also subject to shareholder approval in accordance with the applicable regulations, based on regulatory conditions.

1. Scope employees are all employees of MFPM (see section 3.3.1).
2. Substantially all of the Profit Share received by SAGES, Non-Managing General Partner, is credited to the contingency reserve set up in application of its Bylaws.

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03 Management and Supervisory Board compensation policies for 2021

Allocation method

The Profit Share defined in the Company's Bylaws corresponds to 12% of net profit for the year less dividends received from Manufacture Française des Pneumatiques Michelin (MFPM) and Compagnie Financière Michelin SA (CFM) (distribution of profits or reserves), capped at 0.6% of consolidated net profit for the year. It is allocated between the General Partners by mutual agreement, after consulting the Supervisory Board.

This agreement:

• sets the annual cap on the Profit Share that can be allocated to the Managing General Partner;
• describes the Profit Share allocation terms and conditions, performance criteria and the related objectives to be met by the Managing General Partner.

With effect from 2021, the purpose of the 15th and 16th draft resolutions submitted to the Extraordinary Shareholders Meeting of May 21, 2021, is to amend Articles 12 and 30 of the Company's Bylaws to modify the characteristics of the Profit Share. The main proposed changes are as follows:

• the Profit Share calculation formula would be simplified by deleting references to the Company's net income and to the dividends paid by the Company's two main subsidiaries, with the total Profit Share due to the General Partners continuing to be capped at 0.6% of consolidated net income for the year;
• the Bylaws would stipulate that the portion of the Profit Share attributable to the Managing General Partner(s) will be determined by reference to the objectives set in advance by the Supervisory Board;
• the portion of the Profit Share attributable to the Non- Managing General Partner, SAGES, would be equal to the amount attributable to the Managing General Partner(s), and no longer correspond to the balance of the Profit Share not attributed to the Managing General Partner(s);
• the Bylaws would stipulate that free shares may be awarded to the Managers, regardless of whether they are General Partners.

Calculation method

The performance targets are proposed by the Managing General Partner to the Supervisory Board's Compensation and Appointments Committee before being discussed by the Board.

In assessing the level of the Profit Share, the Compensation and Appointments Committee considers:

• AFEP/MEDEF Code recommendation 25 concerning the calculation principles and content of compensation packages;
• the intrinsic variability of the Company's profits;
• projected future profits; and
• the General Partner's unusual situation.

At each fiscal year-end, the Compensation and Appointments Committee assesses the Managing General Partner's results in relation to the applicable objectives.

The performance criteria determined by the Supervisory Board include:

• a quantitative criterion based on consolidated net income for the year, for 4% of the Managing General Partner's Profit Share (criterion also used - after adjustment - to determine the Managing Director's variable compensation);
• a quantitative criterion based on growth in Segment Operating Income (SOI), for up to 8% of the Profit Share (criterion also used to determine the variable compensation of the General Manager and all Group employees eligible to participate in the bonus scheme);
• a quantitative criterion based on growth in structural free cash flow before acquisitions, for up to 8% of the Profit Share (criterion also used to determine the variable compensation of the General Manager and all Group employees eligible to participate in the bonus scheme); if all three quantitative performance objectives are met in full, 16% of the Profit Share for the year will vest;
• quantifiable qualitative criteria based on the Group's strategic ambitions and managerial expectations, for up to 4% of the Profit Share (criterion also used to determine the variable compensation of the General Manager). These criteria concern three areas in particular: deployment of the transformations decided in 2020 to support the Group's new strategy, employee safety, and implementation of the synergies arising from recent acquisitions.

The maximum amount receivable in respect of this annual variable compensation would:

• correspond to the amount payable if all the objectives for the selected criteria were met; and
• be capped at 16% of the Profit Share for the quantitative criteria (including the criterion based on net income) and 4% of the Profit Share for the qualitative objectives. For example, assuming that the Profit Share were equivalent to the amount proposed on the basis of 2019 income (2020 net income is not a representative indicator, due to the Covid-19 crisis), the maximum amount would be €2,076,000.

The following will be applied to each criterion:

• a trigger point below which no compensation will be due;
• an intermediate tranche between the trigger point and 100% of the objective, with the compensation prorated to the achievement rate for the objective;
• 100% of the objective, corresponding to the level at which the maximum compensation for the criterion would be payable.

For reasons of confidentiality and business secrecy, and in particular to avoid disclosing information about the Company's strategy that could be used by business competitors for their advantage, the Supervisory Board has elected not to disclose details of the performance targets set for these quantitative and quantifiable criteria. However, to permit historical comparisons, the 2020 objectives set by the Supervisory Board for the quantitative performance criteria are presented in section 3.4.3 of this report.

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CORPORATE GOVERNANCE REPORT Management and Supervisory Board compensation policies for 2021 03

Yves Chapot, General Manager

Yves Chapot's annual variable compensation would be calculated on a base equal to one-and-a-half times his 2021 fixed compensation, with the same or very similar performance criteria to those used to determine the Managing Chairman's variable compensation, as presented in the above section concerning Florent Menegaux:

• quantitative performance criteria, for up to 80% of the base;
• quantifiable qualitative criteria, for up to 20% of the base;
• The maximum amount receivable in respect of this annual variable compensation would:
• • correspond to the amount payable if all the objectives for the selected criteria were met, and

• be capped at 150% of Yves Chapot's fixed compensation for 2021, representing a maximum of €900,000 for fixed compensation of €600,000.

The performance objectives will be assessed and presented in the same way as for the Managing Chairman.

For reasons of confidentiality and business secrecy, and in particular to avoid disclosing information about the Company's strategy that could be used by business competitors for their advantage, the Supervisory Board has elected not to disclose details of the performance targets set for these quantitative and quantifiable criteria. However, to permit historical comparisons, the 2020 objectives set by the Supervisory Board for the quantitative performance criteria are presented in section 3.4.4 of this report.

Long-term variable compensation: performance share rights

Effective from 2020(1), and in order to align Managers' medium- and long-term objectives with the objectives assigned to employees of Group companies, Yves Chapot's long-term variable compensation takes the form of Michelin performance share rights granted pursuant to the authorization given by the Annual Shareholders Meeting of June 23, 2020(2) concerning annual share plans for employees and the Managers.

Details of the performance criteria and related intermediate achievement rates are presented in section 6.5.4 c) of the 2020 Universal Registration Document.

Effective from 2021, the following changes will be carried out.

Firstly, the Michelin Environmental Footprint - MEF - will be replaced by the i-MEP(Industrial-Michelin Environmental Performance). Since 2005, Michelin has measured and disclosed the main impacts of its industrial activities based on the MEF indicator. This indicator now needs to be updated to reflect the extensive progress made and the emergence of new environmental challenges since its launch.

The new i-MEP indicator will track the environmental impact of the Group's manufacturing operations over the next ten years.

These adjustments are summarized in the following table:

The i-MEP will make the impacts easier to understand by focusing on five priority areas: energy use, CO2 emissions, organic solvent use, water withdrawals and stress, and waste production.

On the other hand, to strike a better balance between the People, Planet and Profit criteria, the weighting of the different performance criteria will be adjusted to bring the total share of the CSR performance criterion to 40% (two indicators) versus 30% in 2020, and the total share of the operational performance criterion to 30% (15% for each indicator) versus 40% in 2020.

The target for the stock market criterion is an outperformance of the Michelin share by 5 points over that of the Stoxx Europe 600 index. The target for market outperformance, lower than in the 2020 plan, remains very ambitious.

Regarding the engagement rate, the progress made at the end of 2020 (rate of 83%) as well as the integration of new companies recently acquired within the scope of this criteria, make any additional gain beyond the rate reached in 2020 more demanding.

Criteria		Weighting
Share price performance	The gain in the Michelin share price must be 5 points greater than that of the Stoxx Europe	30%
	600 index
Corporate social responsibility	The industrial-Michelin Environmental Performance (i-MEP(1)) indicator must be between 92	20%
performance	and 88 in the third year of the plan
	The annual increase in the average employee engagement rate(1) must exceed 1 point	20%
Operating performance	Average annual growth in revenue (excluding tires and distribution) must be between 3%	15%
	and 8%.
	Total consolidated ROCE (including acquisitions, related goodwill and equity-accounted	15%
	companies) must be between 10% and 11% in the third year of the plan (final ROCE).

(1) Annual scope based on reported figures, including acquisitions from the fourth year of consolidation in the Group's financial statements.

1. Since 2016, in response to shareholder expectations and the changing market environments in which the Group's businesses operate, the Managers' cash- settled long-term incentive bonuses were subject to the same performance criteria as those applicable to the employee performance share plans (that were not open to the Managers).
2. 25th resolution of the Annual Shareholders Meeting of June 23, 2020, adopted by a 97.02% majority of the votes cast; see section 7.1.1 of the 2019 Universal Registration Document.

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