Compensation Report
Performance-based compensation for the Executive Board
For years we have regarded the transparent and clear presentation of Executive Board compensation as a key element of good corporate governance. The overall compensation paid to Executive Board members comprises the following compensation components: the fixed compensation, the bonus, the Mid Term Incentive plan (MTI) as well as additional benefits (non-cash) and pension plans.
In accordance with the Act on the Appropriateness of Management Remuneration (VorstAG), which came into force on August 05, 2009, and a corresponding provision in the Rules of Procedure for the Supervisory Board, the full Supervisory Board is responsible for determining individual Executive Board compensation following preparation by the Personnel Committee. The German Corporate Governance Code as amended in June 2008 recommends that the full Supervisory Board not only discuss and review the structure of the compensation system but also resolve on the compensation system for the Executive Board including major contractual elements. For this reason, in its meeting on September 05, 2008 the Supervisory Board acting on the proposal of its Personnel Committee resolved the compensation system for the Executive Board including major contractual elements, and at the same time determined to review it regularly.
This was done most recently in the meeting on September 04, 2009. In its review the Supervisory Board established that the compensation system already largely corresponds with the parameters introduced by the VorstAG.
To ensure full conformity with the new legal bases the Supervisory Board further resolved that the compensation system be reviewed again in its details and amended as necessary. This review will require an appropriate amount of time. Discussions must be held both internally and externally with a large number of competent parties. The results of such a thorough review, which must take into account the interests of the stockholders, the Company, and its Executive Board members, were therefore not available when the compensation report was drawn up. A progress report will be given in the Annual General Meeting.
In its meeting on November 26, 2009 the Supervisory Board resolved that the compensation system for the Executive Board be presented for approval at the Annual General Meeting on January 21, 2010. Should the compensation system be amended in fiscal year 2009/2010, it will be presented for approval again at the 2011 Annual General Meeting.
Compensation system for the Executive Board of ThyssenKrupp AG
In the compensation system currently applying, criteria for the appropriateness of Executive Board compensation include the duties of the individual Executive Board member, his/her personal performance, the business situation, the success and prospects of the Company and also the prevailing level of compensation at peer companies and the compensation structure applying in the Company. The performance-related components, consisting of bonus and MTI, contain elements that are measured over several years. They therefore set long-term incentives and focus the compensation structure on the sustainable development of the Company.
Executive Board member contracts concluded since the start of the reporting year make provision for a severance payment in the event of the premature termination of Executive Board activity without cause. Severance payments are limited to a maximum of two years' compensation including benefits (severance payment cap), and compensate no more than the remaining term of office. A promise of payments in the event of premature termination of Executive Board activity resulting from a change of control does not exist.
Regarding the various compensation components: Compensation for Executive Board members comprises non-performance-related and performance-related components. The non-performancerelated components are the fixed compensation, additional benefits and pension plans, while the performance-related components are divided into the bonus and the MTI as a component with a longterm incentive effect. In the case of the fixed compensation, the bonus and the MTI the Executive Board Chairman receives a supplement of 65%.
The fixed compensation for an ordinary Executive Board member is €585,000 p. a. and is paid out as basic non-performance-related compensation in monthly installments as a salary. As from the beginning of the reporting year a review takes place regularly every two years. The next review will therefore take place at October 01, 2010.
The Executive Board members also receive additional non-cash benefits mainly comprising the tax value of real property, related incidental costs, insurance premiums and the use of Company cars for private purposes. The Executive Board members are responsible for paying tax on these additional benefits as compensation components. In principle they are available in the same way to all Executive Board members; they vary in amount according to the personal situation of the individual member.
The first element of the performance-related compensation is the bonus. In accordance with the bonus policy resolved by the Supervisory Board, the bonus amount is based equally on the development of the Group's EBT (earnings before taxes) and ROCE (return on capital employed). This means that the bonus as a performance incentive is linked to the performance indicators used in the Group. For example, if EBT is €2 billion and ROCE is 14.5%, the bonus is €1 million. Individual performance can be recognized in an amount up to 20%. Extraordinary events are ignored in determining the bonus. The bonus is paid out to the individual Executive Board members two weeks after its establishment by the Supervisory Board, generally in mid-November.
In addition to the bonus, Executive Board members receive compensation under the MTI as a variable compensation component with a long-term incentive effect. For a certain initial value, which for an ordinary Executive Board member amounts to €150,000, fictional shares are granted. These so-called stock rights are not stock options. The number of stock rights issued to an Executive Board member is determined by the average stock price in the 1st quarter of the performance period. These stock rights are recognized as part of compensation at their value at grant date, calculated in accordance with international accounting standards. More information on the MTI can be found on page 210. The number of issued stock rights under the MTI is then adjusted at the end of the respective performance period. The basis for this is a comparison of average ThyssenKrupp Value Added (TKVA) in the three-year performance period – beginning October 01 of the fiscal year in which the stock rights were granted – with the average TKVA of the preceding three fiscal years. For every €50 million change in TKVA, the number of stock rights changes by 10%. At the end of the performance period the stock rights awarded are paid out on the basis of the average price of ThyssenKrupp shares in the first three months after the end of the performance period. Payments under the MTI are limited to €1.5 million for an ordinary Executive Board member.
Pensions are paid to former Executive Board members who have either reached pension age, become permanently incapacitated for work or whose employment contract taking into account other income has been prematurely terminated or not renewed. Under the amended provisions now applied, pensions are only paid upon premature termination or non-renewal of employment contracts if the Executive Board member is at least in his/her second five-year period of office and is older than 55. The pension of an Executive Board member is based on a percentage of the final fixed salary component he/she received prior to termination of his/her employment contract. This percentage increases with the duration of the Executive Board member's appointment. In general it is 30% from the start of the first five-year period of appointment, 50% from the start of the second and 60% from the start of the third; the pension of the Executive Board Chairman is 65%. Current pensions are adjusted annually in line with the consumer price index. Under the surviving dependants' benefits plan, a widow receives 60% of the pension (previously 75%) and each dependant child (generally up to the age of 18, maximum age 25 years, in justified exceptional cases up to the age of 27) 20%, up to a maximum of 100% of the pension amount.
Total compensation granted in fiscal year 2008/2009
The following table shows the breakdown of compensation and pensions for individual Executive Board members in the 2008/2009 fiscal year. The prior-year figures are shown in square brackets:
In view of the significant drop in earnings in fiscal year 2008/2009 the Supervisory Board has decided, in line with the bonus policy, not to pay a bonus to the members of the Executive Board of ThyssenKrupp AG.
Total compensation paid to active members of the Executive Board for their work in fiscal year 2008/2009 amounted to €6.5 million (prior year: €19.8 million).
IIn the year under review, allocations to the pension accruals for active Executive Board members amounted to €3,280,000 (prior year: €3,580,000). The amount for 2008/2009 comprises service costs of €879,000 (prior year: €1,502,000) and interest costs in the amount of €2,401,000 (prior year €2,078,000). Under a no longer valid agreement, two Executive Board members will continue to receive a chauffeurdriven car and specific insurance benefits for a period of five years after entering into retirement on account of their having served on the Executive Board for over ten years. The Company has recognized pension liabilities for the future pension entitlements on the basis of IFRS.
Agreements were reached with Mr. Fechter and Dr. Köhler on the premature amicable termination of their appointments as members of the Executive Board and the cancellation of their contracts of employment at March 31, 2009. In accordance with the severance payment cap included in their contracts of employment, the severance payment due to the two gentlemen was a maximum of two years' compensation. Both gentlemen remained available to the Group in an advisory capacity for six months, i.e. until September 30, 2009, for which they received an advisory fee of €10,000 per month each. In accordance with the general rules for Executive Board members, the pension when payable for both gentlemen was set at 50% of their fixed salary.
No further payments have been promised to any Executive Board members in the event that they leave their post. In the reporting year, no members of the Executive Board received payments or corresponding promises from third parties in connection with their Executive Board positions. As in previous years, no loans or advance payments were granted to members of the Executive Board, nor were any guarantees or other commitments entered into in their favor.
The 4th installment of the MTI was paid out in 2008/2009. The value of this installment was based on the increase in the average TKVA in the three-year performance period 2005/2006 – 2007/2008 against the average TKVA in the three fiscal years 2002/2003 – 2004/2005. In the stated performance period, average TKVA increased significantly from €406 million to €1,845 million; the share price fell from €17.26 at the grant date to €15.82 at the end of the three-year performance period. On this basis, the Executive Board members received the following payments under the 4th installment of the MTI (prior-year figures in brackets): Dr. Schulz €880,000 (€2,715,000), Dr. Middelmann €667,000 (€2,057,000), Dr. Berlien, Mr. Eichler, Mr. Labonte and Dr. Mörsdorf each €533,000 (€1,645,000), Dr. Köhler €533,000 (€1,097,000) and Mr. Fechter €533,000 (€823,000). In addition, the Executive Board members were granted new stock rights at the beginning of January 2009 under the 7th installment of the MTI. Under the 5th to 7th installments of the MTI the Executive Board members also have a total of 161,875 stock rights which have been awarded but are not yet payable.
Total compensation paid to former members of the Executive Board and their surviving dependants amounted to €24.4 million (prior year: €13.7 million). In accordance with IFRS an amount of €173.5 million (prior year: €142.3 million) was accrued for pension obligations benefiting former Executive Board members and their surviving dependants.
Share-based compensation for further executives
Alongside the Executive Board, further selected executives of the Group receive part of their remuneration in the form of share-based compensation. This relates to the MTI and also to a program for the purchase of ThyssenKrupp shares at a discount.
Beginning with the 2nd installment of the MTI, which was issued in August 2004, the group of employees eligible to receive stock rights was expanded on modified terms to include the executive board members of the segment holding companies and other selected executive employees. Due to the decline in TKVA, the MTI for this group of beneficiaries resulted in income from the reversal of the accrued liability for not-yet payable stock rights in the amount of €15.6 million (prior year: expense of €0.2 million).
In addition, there exists for selected executives of the Group who are not beneficiaries of the MTI a discount share purchase plan. The model, first implemented in fiscal year 2005/2006, supplements the variable compensation related to individual company performance with a Group-related element which integrates the central performance indicator TKVA into the incentive system. The aim of this share- and value-based compensation component is to promote concentration on the Group's targets and strengthen executives' identity with the Company.
On expiry of the performance period, beneficiaries are offered the chance to purchase ThyssenKrupp shares up to a fixed euro amount at a discount, which is paid by the employer. The remaining amount is the contribution to be paid by participants. The discount amount depends on the (Group) TKVA over the performance period and can be up to 80%. These shares are subject to a three-year blocking period.
Implementation of the plan resolved for 2007/2008 was postponed to fiscal year 2009/2010. The discount share purchase plan resulted in expense of €3.0 million in the reporting year (prior year: €13.5 million). The plan was not implemented in fiscal year 2008/2009. The Executive Board of ThyssenKrupp AG decides every year on whether to renew the plan.
Appropriate Supervisory Board compensation
The compensation of the Supervisory Board is regulated in Art. 14 of the Articles of Association of ThyssenKrupp AG. It is based on the duties and responsibilities of the Supervisory Board members and on the business situation and performance of the Group.
In addition to reimbursement of their expenses and a meeting attendance fee of €500, Supervisory Board members receive compensation comprising three elements: a fixed component of €50,000 and two performance-related elements. The first is a bonus of €300 for each €0.01 by which the dividend paid out to stockholders for the past fiscal year exceeds €0.10 per share. On top of this, there is an annual compensation, based on the long-term performance of the Company, of €2,000 for each €100 million by which average earnings before taxes (EBT) in the last three fiscal years exceeds €1 billion.
The Chairman receives three times the above fixed compensation, bonus and long-term performance-based component, and the Vice Chairman double these amounts. In accordance with the German Corporate Governance Code, chairmanship and membership of the Supervisory Board committees are compensated separately. Supervisory Board members who only serve on the Supervisory Board for part of the fiscal year receive a proportionally reduced compensation amount. If a Supervisory Board member does not attend a meeting of the full Supervisory Board or a committee meeting, his/her compensation is reduced proportionally.
On the basis of the proposed dividend, members of the Supervisory Board will receive total compensation, including meeting attendance fees, of €1.9 million (prior year: €3.6 million). The individual Supervisory Board members will receive the amounts listed in the following table for the year under review; the corresponding amounts for the previous year are shown in square brackets:
Members of the Supervisory Board of ThyssenKrupp AG will additionally receive compensation of €124,206 (prior year: €223,458) for supervisory board directorships at Group subsidiaries in fiscal 2008/2009. The individual members of the Supervisory Board will receive the amounts shown in the following table:
Beyond this, as in the previous year Supervisory Board members received no further compensation or benefits in the reporting year for personal services rendered, in particular advisory and mediatory services, with the following exception. The law firm Clifford Chance, in which Supervisory Board member Dr. v. Schenck was a partner until June 30, 2009, and for which he now works in an ‘of counsel' capacity, received a total of €79,737 (prior year €89,235) for consultancy services for subsidiaries of ThyssenKrupp in the past fiscal year. As in previous years, no loans or advance payments were granted to members of the Supervisory Board, nor were any guarantees or other commitments entered into in their favor.
Former Supervisory Board members who left the Supervisory Board prior to October 01, 2008 will receive a proportion of the long-term compensation component in the total amount of €3,773 (prior year: €15,683) for the time they served on the Supervisory Board. The breakdown is shown in the following table:
Source: Annual Report 2008/2009, p. 59-65