Compensation Report
Performance-based compensation for the Executive Board
According to the Act on the Appropriateness of Management Board Remuneration (VorstAG) 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 compensation system was approved by the Annual General Meeting on January 21, 2011 with a majority of 94.91% of the capital represented.
The compensation for the 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 performance bonus and the LTI as a component with a long-term incentive effect. On top of this there is an additional bonus representing a cash flow-based management incentive, on the award of which the Supervisory Board makes a new decision each year.
Criteria for the appropriateness of Executive Board compensation include the duties of the individual Executive Board members, their 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 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 fiscal year 2008/2009 provide for a severance payment in the event of early termination without cause. The severance payment is limited to a maximum of two years' compensation including benefits (severance payment cap) and compensates no more than the remaining term of the employment agreement. A promise of payments in the event of early termination due to a change of control does not exist.
Fixed compensation
Since the last review at October 01, 2010, the fixed compensation for an ordinary Executive Board member has been €670,000 per year, paid out as non-performance-related basic compensation in monthly installments as a salary. The Executive Board members also receive benefits, mainly comprising the use of a company car, telephone as well as insurance premiums. Individual Executive Board members have to pay tax on these benefits as compensation components. The benefits apply in principle to all Executive Board members; the amount varies according to personal situation. The fixed compensation is generally reviewed every two years.
Performance bonus
The first element of the performance-related compensation is the performance bonus. In accordance with the performance bonus rules resolved by the Supervisory Board, the amount of the performance bonus is dependent on the Group's EBT (earnings before taxes) and ROCE (return on capital employed), each of which is considered equally as a criterion. The performance bonus is therefore aligned with the performance indicators used in the Group. For example, if EBT is €2 billion and ROCE is 14.5%, the performance bonus is €1 million. A €100 million change in EBT or a change in ROCE by 0.5% points leads to a corresponding €25,000 change in the performance bonus. Individual performance can be recognized up to 20%. Extraordinary events are ignored in determining the performance bonus. The performance bonus is paid out to the individual Executive Board members two weeks after its establishment by the Supervisory Board. With a view to the Act on the Appropriateness of Management Board Compensation (VorstAG) the Supervisory Board determined that from fiscal year 2009/2010 a quarter of the performance bonus must be converted into ThyssenKrupp stock rights to be paid out after a three-year lock-up period. In view of the fact that EBIT is now used as a performance indicator in place of EBT, the Supervisory Board has decided to use EBIT instead of EBT alongside ROCE in an otherwise unchanged performance bonus system from fiscal year 2011/12.
LTI
From fiscal year 2010/2011 a further compensation component is the LTI, a variable compensation component with a long-term incentive effect. In accordance with a resolution by the Supervisory Board, the MTI plan still applying for fiscal year 2009/2010 was modified and is being continued under the name Long Term Incentive plan – LTI. The LTI system is as follows:
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. The number of stock rights issued under the LTI plan is then adjusted at the end of the respective three-year performance period. The basis for this is a comparison of average 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 previous three fiscal years. This compensation component therefore covers in total a period of six years. An increase in TKVA by €200 million results in a 5% increase in stock rights; if average TKVA decreases by €200 million, the number of stock rights decreases by 10%. More information on TKVA is provided in the section "Value-based management". At the end of the performance period the granted stock rights are paid out on the basis of ThyssenKrupp's average share price in the first three months after the end of the performance period. Payments under the LTI plan are limited to €1.5 million for an ordinary Executive Board member.
Additional bonus
This system of performance bonus and LTI is appropriate but requires supplementation under certain constellations. For example, due to the high negative TKVA in fiscal year 2008/2009 and despite substantial increases in the 2009/2010 and 2010/2011 fiscal years there will be no payments under the previous MTI plan for the reporting period – just as there were none for the last two fiscal years – owing to the plan's long-term focus. In difficult economic years, which demand particular efforts of the Executive Board, the work of the Executive Board should not be rewarded only with the fixed compensation, as was the case in 2008/2009. In view of the tasks facing the Executive Board and its particular responsibility this would impair the competitiveness of our executive remuneration. It must also be considered that high financial discipline is essential in critical times. For this reason a performance-based compensation element based on a cash flow-related indicator has been established for a certain period. This indicator is the ratio of funds from operations to total debt (FFO/TD), which makes it possible to balance out fluctuations in EBT, net working capital and capital expenditures. The achievement of set targets by the Executive Board is to be rewarded with an additional bonus. The additional bonus is based 50% on the year-end values and 50% on the annual average values of FFO/TD; with a year-end value of 18.2% and an annual average value of 17.2% the additional bonus amounts to €350,000; it changes by €50,000 for each 1.1% change in the year-end value and 0.8% change in the annual average value. To ensure the sustainability and multi-year assessment basis required by the VorstAG particularly in the ratio between short-term and long-term compensation, 55% of the additional bonus is converted into ThyssenKrupp stock rights and paid out after a three-year lock-up period (as with the performance bonus). Whether this additional bonus is granted again, and if so at what level, will be decided each year.
Pensions
Pensions are paid to former Executive Board members who have either reached pension age or become permanently incapacitated for work. Under the amended contract provisions now applied, pensions ("transitional allowances") are no longer paid upon premature termination or non-renewal of employment contracts.
The pension of an Executive Board member already in office is a percentage of the final fixed salary they received before their employment contract ended. This percentage increases with the duration of the Executive Board member's appointment. In general it is 30% at the start of the first five-year period of appointment, 50% at the start of the second and 60% at the start of the third. Dr. Heinrich Hiesinger's pension is 50%. Current pensions are adjusted annually in line with the consumer price index. For new Executive Board members to be appointed in the future, this final-salary pension plan has been switched to a defined-contribution pension plan, with the annual pension benefit ("module") amounting to 40% of the annual fixed salary.
Under the surviving dependants' benefits plan, a widow receives 60% of the pension 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 Executive Board compensation granted in 2010/2011
The following table shows details of compensation and pensions for individual Executive Board members in fiscal year 2010/2011. The prior-year figures are shown in square brackets:
Total compensation paid to active members of the Executive Board for their work in fiscal year 2010/2011 amounted to €13.8 million (prior year: €12.3 million). The performance bonus is based on continuing operations. The impairment losses in the Steel Americas business area were not taken into consideration.
Based on a contractual commitment that no longer applies to subsequently appointed Executive Board members, Prof. Dr.-Ing. Schulz will continue to receive a chauffeur-driven car and specific insurance benefits for a period of five years after entering into retirement on account of his having served on the Executive Board for over ten years; he is also entitled to an office with secretary for five years on account of his efforts for the Company; the present value of this is €935,000. The Company has recognized pension provisions for the future pension entitlements on the basis of IFRS.
No further benefits 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 benefits 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 6th installment of the MTI, which became due in the past fiscal year, resulted in no payment due to the sharp drop in TKVA in 2009/2010. In January 2011 the Executive Board members were granted new stock rights under the 1st installment of the LTI. Under the 7th to 8th installments of the MTI and the 1st installment of the LTI the Executive Board members have a total of 245,331 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 €14.6 million (prior year: €14.5 million). In accordance with IFRS an amount of €192.7 million (prior year: €190.6 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.
The aim of the MTI is to encourage and reward value-oriented executive behavior based on the Group's goals, and also to help strengthen ties with the Group. Beginning with the 2nd installment of the MTI, 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 then segment holding companies and other selected executives. Today the participants in the plan include the members of the business area management boards as well as management board members and selected executives of large Group companies. The MTI for this group of persons resulted in expense of €3.0 million in the reporting year (prior year: expense of €4.0 million).
In addition, the 2009/10 discount share purchase plan for selected executives of the Group in Germany who are not beneficiaries of the MTI ended in the 2nd quarter of the reporting year. On expiration of the performance period, beneficiaries were offered the opportunity to purchase ThyssenKrupp shares up to a fixed euro amount at a discount, which was paid by the employer. The remaining amount was paid by the participants as their contribution. The discount amount depended on the (Group) TKVA over the performance period and came to 76%. The shares purchased under the program have a three-year lock-up period. The program resulted in an expense of €8.6 million (prior year: €0.9 million).
The discount share purchase and MTI programs described will be replaced by the LTI in the future. The LTI employs a system comparable with the MTI. Under the LTI, too, stock rights are issued and their performance measured over a three-year period on the basis of TKVA; on expiration of the plan participants receive a cash payout equivalent to the value of the stock rights. The plan differs from the MTI in that the key data have been changed and the group of participants significantly expanded. In fiscal year 2010/2011 the LTI was awarded to only a few selected executives, the program has not yet been fully implemented. The resultant expenses amounted to €6.0 million.
In addition it was decided to modify the structure of the variable compensation component for further selected executives in such a way that 20% of the bonus awarded for each fiscal year must now be converted into ThyssenKrupp AG stock rights and is only paid out in cash after the expiration of three fiscal years on the basis of the average ThyssenKrupp share price in the 4th quarter of the 3rd fiscal year. This will be implemented for the first time for the 2010/2011 fiscal year.
Appropriate Supervisory Board compensation
The compensation of the Supervisory Board, which is based on the duties and responsibility of the Supervisory Board members and on the business situation and performance of the Group, is regulated in §14 of the Articles of Association of ThyssenKrupp AG.
In addition to reimbursement of their expenses and a meeting attendance fee of €500, Supervisory Board members receive compensation comprising three elements: fixed compensation of €50,000 and two performance-related elements. The first is a performance bonus of €300 for each €0.01 by which the dividend paid out to shareholders for the past fiscal year exceeds €0.10 per share. On top of this there is a component based on the long-term performance of the Company in the form of an annual compensation of €2,000 for each €100 million by which average earnings before taxes (EBT) in the last three fiscal years exceed €1 billion.
The Chairman receives three times the above fixed compensation, performance 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, for the reporting year of €1.8 million (prior year: €1.8 million). The individual members will receive the amounts listed in the following table. As the average EBT of the last three fiscal years is below the threshold of €1 billion – as in the previous year – no payment will be made from the long-term compensation component for fiscal year 2010/2011.
Members of the Supervisory Board of ThyssenKrupp AG will additionally receive compensation of €89,750 (prior year: €79,543) for supervisory board directorships at Group companies in fiscal year 2010/2011. The individual members of the Supervisory Board will receive the amounts shown in the following table:
As in the previous year Supervisory Board members received no further compensation or benefits for personal services rendered, in particular advisory and mediatory services, with one exception. The law firm Clifford Chance, for which Supervisory Board member Dr. v. Schenck works as an of counsel, received a total of €82,364 (prior year: €70,702) from ThyssenKrupp companies for its consulting services. 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.
Related to the reporting year, former Supervisory Board members who left the Supervisory Board before October 01, 2010 will not receive any compensation from the long-term compensation component for the time they served on the Supervisory Board because – as in the prior year – average EBT in the last three fiscal years is below the threshold of €1 billion.
Source: Annual Report 2010/2011, p. 33-40
