Compensation Report
As part of the annual Corporate Governance Report, the compensation report presents the compensation system for the members of the Executive Board and Supervisory Board of ThyssenKrupp AG. The current report for the period to September 30, 2006 describes the individual compensation components and discloses compensation on an individual basis set out in the German Corporate Governance Code.
Part of the variable compensation for the Executive Board and selected executives at ThyssenKrupp is granted in the form of share-based compensation elements. These are the 1999 Long Term Management Incentive Plan (term: 5 years) and the 2003 Mid Term Incentive Plan (term: 3 years). Since February 2006, there has also been a program for selected executives enabling them to buy ThyssenKrupp shares at reduced rates (discounted share purchase).
Compensation Report as of September 30, 2007
Performance-based compensation for Executive Board
The overall compensation paid to Executive Board members consists of a number of compensation components. These are fixed compensation, a bonus, a long-term incentive component as well as additional benefits and pension plans.
The structure of this compensation system is discussed and regularly reviewed by the Supervisory Board at the proposal of the Personnel Committee. Determining the compensation of individual Executive Board members is the duty of the Personnel Committee, which decides on appropriate compensation.
Compensation is based in particular on the duties of the individual Executive Board member, his/her personal performance and that of the Executive Board as well as on the business situation, success and prospects of the Company relative to its peers.
In the future, when Executive Board contracts are concluded or renewed the following is to be included in the contract: If an Executive Board member terminates his/her Executive Board activity prematurely without cause, payments to him/her shall not exceed the value of two years' compensation including benefits. Executive Board contracts at ThyssenKrupp do not contain a promise of payments in the event of premature termination of their Executive Board activity resulting from a change of control.
Compensation for Executive Board members comprises non-performance-related and performance-related components. The non-performance-related components are the fixed compensation, additional benefits and pension plans, while the performance-related components are the bonus and the long-term incentive components.
The basic non-performance-related fixed compensation is paid out as a monthly salary. It is reviewed every three years among other things on the basis of the general salary trend in the Group. 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. As in the previous year, no loans or advance payments were granted to members of the Executive Board in the year under review.
The first component of performance-related compensation is the bonus. The bonus amount is based equally on the development of EBT (earnings before taxes) and ROCE (return on capital employed). From fiscal year 2006/2007 part of the bonus paid to the chairmen of the segment executive boards will depend on their segment's key indicators (EBT, ROCE). This means that the bonus as a performance incentive is linked to the performance indicators used in the Group and also takes into account the performance of the segments. In addition to their bonus, Executive Board members receive a variable compensation component with a long-term incentive effect under the Mid Term Incentive plan (MTI). The bonus system and MTI plan are based on a policy which was issued by the Supervisory Board Personnel Committee in 2002 and modified in 2007.
Overall compensation to active members of the Executive Board for their work in fiscal 2006/2007 was €25.4 million (prior year: €23.1 million).
The compensation includes the stock rights granted to the Executive Board members under the 5th installment of the MTI at the beginning of January 2007. The stock rights are disclosed at their value at grant date, calculated in accordance with the requirements for international accounting. The number of stock rights issued under the MTI is adjusted at the end of a three-year performance period on the basis of a comparison of the average ThyssenKrupp Value Added (TKVA) over the three-year performance period - starting from October 01 of the fiscal year in which the stock rights were awarded - with the average TKVA of the previous three fiscal years. For every €50 million change in TKVA, the number of stock rights changes by 10%. At the end of a 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.
The following table shows the breakdown of compensation for the individual Executive Board members in the 2006/2007 fiscal year. The prior-year figures are shown in brackets:
The increase in bonuses against the previous year is attributable to the considerable improvement in EBT and ROCE in the past fiscal year: EBT rose from €2,623 million to €3,330 million and ROCE from 17.9% to 20.7%.
The above table also provides details of the Executive Board members' pensions. Pensions are paid to former Executive Board members who have reached the normal age limit of currently 60 years, become permanently incapacitated for work or whose employment contract taking into account other income has been prematurely terminated or not renewed. 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%. Under a no longer valid agreement, two Executive Board members continue to receive a chauffeur-driven 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. 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 27 years) 20%, up to a maximum of 100% of the pension amount. For these future pension entitlements the Company recognizes pension accruals on the basis of IFRS. In the year under review, allocations to the pension accruals for active Executive Board members amounted to €4,790,000 (prior year: €3,755,000). This amount comprises service costs of €2,818,000 (prior year: €2,110,000) and interest costs in the amount of €1,972,000 (prior year: €1,645,000).
No further payments have been promised to any Executive Board members in the event that they leave their post. No members of the Executive Board received payments or corresponding promises from third parties in connection with their Executive Board positions in the past fiscal year.
The MTI, the 2nd installment of which was paid out in fiscal year 2006/2007, replaced the Long Term Management Incentive plan (LTMI) which expired at the beginning of 2006. The value of the 2nd installment of the MTI was based on the increase in the average TKVA in the three fiscal years 2000/2001 - 2002/2003 against the average TKVA of the three-year performance period 2003/2004 - 2005/2006. On the basis of the significant increase in average TKVA from -€291 million to €1,026 million in the performance period, and the increase in the share price from €14.24 at the grant date to €29.90 at the end of the three-year performance period the Executive Board members received the following payments under the 2nd installment of the MTI. For the purpose of comparison, the share-based compensation payments of the previous year are shown in brackets: Dr. Schulz €1,889,000 (€1,508,000), Dr. Middelmann €1,431,000 (€1,142,000), Dr. Berlien, Mr. Eichler, Dr. Kirsten and Mr. Labonte €1,145,000 (€914,000) each, Dr. Mörsdorf €859,000 (€168,000), Mr. Elliott and Dr. Köhler €763,000 (€251,000) each, and Mr. Fechter €477,000 (€209,000). Under the 3rd to 5th installments of the MTI the Executive Board members also have a total of 231,908 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 €15.1 million (prior year: €15.5 million). In accordance with IFRS an amount of €157.8 million (prior year: €157.8 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 ThyssenKrupp 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 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. The MTI for this group of beneficiaries resulted in expense of €46.5 million in the reporting period (prior year: €30.2 million).
For fiscal year 2006/2007 the Executive Board of ThyssenKrupp AG again resolved to offer selected executive employees who are not beneficiaries of the MTI a compensation instrument in the form of the discount share purchase plan. On expiry of a specified 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%. The shares are purchased by participants on the stock market after expiry of the performance period. These shares are subject to a three-year blocking period.
With the discount share purchase plan, the variable compensation related to each company’s performance has been expanded to include a Group-related element which integrates the central performance indicator TKVA in the incentive system. The aim of the share- and value-based compensation component is to promote concentration on the Group's targets and strengthen executives' identity with the Group.
In the reporting period the discount share purchase plan resulted in expense of €12.6 million (prior year: €2.7 million). The Executive Board of ThyssenKrupp AG will take a new decision on whether to reissue the plan in fiscal 2007/2008.
Source: Annual Report 2006/2007, p. 28-32
New Supervisory Board compensation structure in the Articles of Association
The compensation of the Supervisory Board is determined by the Annual General Meeting and is regulated in Art. 14 of the Articles of Association. It is based on the duties and responsibilities of the Supervisory Board members and on the situation and performance of the Group. The current compensation arrangement was resolved in the Annual General Meeting on January 19, 2007 with effect for the reporting period.
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 dividend 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 €100,000,000 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 Supervisory Board or a committee meeting, his/her compensation is reduced proportionally. In view of the fact that the Nomination Committee was only formed in September 2007 and did not meet in the reporting period, by mutual agreement no compensation will be paid to the members of this committee.
On the basis of the proposed dividend, members of the Supervisory Board will receive total compensation, including meeting attendance fees, of €3.4 million (prior year: €2.7 million). The individual Supervisory Board members will receive the amounts listed in the following table. The corresponding amounts for the previous year are shown in brackets:
Members of the Supervisory Board of ThyssenKrupp AG will additionally receive fixed compensation of €150,075 (prior year: €152,691) for supervisory board directorships at Group subsidiaries in fiscal 2006/2007. The individual members of the Supervisory Board will receive the amounts shown in the following table:
Beyond this, with one exception, 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. The international law firm Clifford Chance, one of whose partners is Supervisory Board member Dr. v. Schenck, received a total of €333,556 (prior year: €32,676) for consultancy services for subsidiaries of ThyssenKrupp in the past fiscal year. As in the previous year, no loans or advance payments were granted to members of the Supervisory Board, nor were any guarantees or other commitments entered into in favor of Supervisory Board members.
Former Supervisory Board members who left the Supervisory Board prior to October 01, 2006, receive a proportion of the long-term compensation component in the total amount of €29,567 (prior year: €97,793) for the time they served on the Supervisory Board. The breakdown is shown in the following table:
Source: Annual Report 2006/2007, p. 32-34