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Partial Revision of the Remuneration System for Officers

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Mitsubishi Heavy Industries, Ltd.

At today's Board of Directors Meeting, Our Company decided to make partial revision to the "Board Incentive Plan" (hereinafter referred to as "BIP"), a stock-based compensation system (hereinafter referred to as "this system") that has been in place since 1994 for Directors (excluding Outside Directors and Directors who are Audit and Supervisory Committee members; the same shall apply hereinafter) and executive officers (hereinafter collectively referred to as "Directors, etc.") of Our Company and Our Company's major group companies. The partial revision of the stock-based compensation system for Our Company's Directors is scheduled to be discussed at the Our Company's 2015 Annual General Meeting of Shareholders (hereinafter referred to as "General Meeting of Shareholders") to be held on June 27, 2019. The details of the revision are as follows.
    • Partial revision of this system for Directors, etc. of our major group companies is subject to approval at the shareholders meetings of the companies concerned.
    • Outline of this system

      (1) Outline of BIP
      BIP is a system under which points (hereinafter referred to as "stock issue points") are awarded to Directors, etc. in accordance with their positions and performance each year, and in principle after 3 years have passed since points were awarded (hereinafter referred to as "Our Company stock, etc."), BIP deliver shares of Our Company and the cash equivalent to the proceeds from the realization of shares of Our Company in accordance with the number of points awarded (except in cases where Directors, etc. resign prior to the expiration of said period, when such delivery corresponds to the actual time period).
      Two BIP have been established, one for each of the following beneficiaries:
      "BIP-I": Director of Our Company
      "BIP-II": Our Company's Corporate Officers and Directors and executive officers of our major group companies
      After a certain period of time has elapsed, the Board of Directors, etc. will receive Our Company shares, etc. commensurate with their business performance each year. As a result, the Board of Directors, etc. will share a sense of profit with shareholders from a medium- to long-term perspective, and will undertake management that is conscious of business performance and stock prices from a medium- to long-term perspective.

    • Partial revision of this system

      Remuneration for Directors, etc. consists of basic remuneration, performance-based remuneration and stock compensation (BIP). In order to promote transition to global group management based on the 2018 Business Plan and improve business performance, however, this system was partially revised in FY2015 (hereinafter referred to as "revision of this system") in order to increase the proportion of stock compensation as a medium- to long-term incentive, to raise the remuneration for Directors, etc. to a level that is market-competitive, to create a remuneration system that is more performance-linked, and to further promote sharing of profits with shareholders by encouraging Directors, etc. to own shares.
      To ensure transparency and fairness in the compensation determination process, Our Company has decided to hold a meeting of the Executive Nomination and Compensation Advisory Council to determine the compensation of Directors. Revision of this system has also been deliberated by the Executive Nomination and Compensation Advisory Council.

    • Revision of this system for Directors of Our Company

      Our Company plans to submit the revision of this system at the General Meeting of Shareholders as follows. No substantial changes in the terms and conditions of the BIP-I will be made to the Board of Directors of Our Company other than as described below.
      (1) Maximum amount of money to be contributed by Our Company to BIP-I
      As remuneration for the Directors of Our Company, the maximum amount of money that Our Company may contribute to BIP-I is scheduled to be approved at the Shareholders Meeting to be a total of 2.4 billion yen (※ 1) for each applicable period (※ 2).
      At the expiration of the trust period of BIP-I, Our Company may continue to hold BIP-I by modifying the trust agreement and entering into an additional trust. In such a case, the BIP-I will be extended for an additional 3 years, and Our Company will make additional contributions for each extended trust period up to the maximum amount of contribution approved at the General Meeting of Shareholders, and will continue to grant points allocated to the Directors (as described in (2) below) during the extended trust period. However, in the case of making such additional contribution, if there are Our Company shares (excluding Our Company shares equivalent to the number of share issuance points granted to Directors whose issuance has yet to be completed) and monies (hereinafter referred to as "remaining shares, etc.") remaining in the trust property on the last day of the trust period prior to the extension, the total of the amount of the remaining shares, etc. and the additional contribution to be made shall be within the scope of the maximum amount of trust money approved at the General Meeting of Shareholders. The extension of the trust period is not limited to one time, and BIP-I may be renewed thereafter as well.

      (※ 1) This is the total amount of funds for the acquisition of shares by BIP-I, plus trust fees and expenses.

      (※ 2) The period covered shall be 3 consecutive business years, and if the trust period is extended, it shall be for each of the following 3 business years. At a meeting held on May 8, 2018, the Board of Directors of Our Company approved the continuation of the plan. Currently, the plan is effective for 3 fiscal years (hereinafter referred to as "current target period"), from the fiscal year ended March 31, 2019 to the fiscal year ending March 31, 2021.

      (2) Calculation Method and Maximum Number of Shares of Our Company to be Delivered to Our Company Directors through BIP-I
      Every year, Our Company grants each Director "stock issue points" calculated according to performance, etc., based on the standard points corresponding to the position of the Director in Our Company, the content of the execution of duties, responsibilities, etc. The number of stock issuance points granted to each Director per fiscal year is determined by the formula below.
      10 points represent 1 share of Our Company stock (※ 3). However, in cases where Our Company's shares that belong to BIP-I have increased or decreased due to consolidation of shares, share split, allotment of shares without contribution, etc., the number of Our Company's shares corresponding to the Points for Delivery of Shares shall be adjusted by a reasonable method according to the given ratio, etc.

      (※ 3) (10 Our Company shares consolidated into 1 share) As a result of the reverse stock split implemented on October 1, 2017, the number of shares of Our Company stock outstanding per 1 point has been adjusted from 1 to 0.1.

      In addition, the total number of share issuance points to be granted to Directors of Our Company is scheduled to be approved at a maximum of 1 million points per fiscal year, and if such resolution is adopted, the share issuance points to be granted to Directors of Our Company will be subject to such limit. Therefore, during the applicable period, the maximum number of shares (hereinafter referred to as "number of shares repurchased") to be acquired by BIP-I for issuance to Directors of Our Company will be equal to the number of shares (300,000 shares) obtained by multiplying the annual share issuance points by 3, the number of years in the trust period.

      <Formula for calculating points awarded per business year>
      Share Issue Point = Base Point (※ 4) × Performance Factor (※ 5)
      (※ 4) Base points are determined according to the position of each Director, the content of the execution of duties, responsibilities, etc.
      (※ 5) Performance factors are determined according to income before income taxes.

    • As a result of the revision, the amount of additional contribution to BIP-I and BIP-II (hereinafter referred to as "trusts") and the number of additional Our Company shares to be acquired during the current period will be discussed.

      If Our Company obtains approval for this system reform at its own shareholders meeting and the shareholders meetings of our major group companies, as the number of shares in the trusts is expected to fall short of the number of shares corresponding to the number of points to be granted to the Directors, etc. as a result of the increase in the share compensation ratio for the Directors, etc. from fiscal 2019, Our Company plans to create an additional trust within the trust for the purpose of additional acquisition of Our Company shares. The Company plans to acquire additional shares of Our Company through the trust from the stock market.
      For details on the amount of additional trust funds to be contributed by Our Company and the number of additional Our Company shares to be acquired, disclosure will be made after a decision is made by Our Company after obtaining approval of the revision of this system at Our Company's general shareholders meeting and the general shareholders meetings of our major group companies.