The following compensation report is part of the combined management report.
Performance-based compensation system for the Executive Board
The current compensation system for the Executive Board members of thyssenkrupp AG has been in place since fiscal year 2014 / 2015. It was approved by the Annual General Meeting on January 30, 2015 with a majority of 98.79% of the capital represented.
Based on this, compensation for the Executive Board members comprises fixed and variable components. The former are the fixed compensation, fringe benefits and pension plans, while the latter are the performance bonus (Short Term Incentive Plan – STI) and the Long Term Incentive Plan (LTI). These components are described in more detail in the following passages.
The Supervisory Board – based on preparation by the Personnel Committee – is responsible for determining individual Executive Board member compensation. Criteria for the appropriateness of the 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 variable components are mainly based on performance over several years. They therefore set long-term incentives and focus the compensation structure on the sustainable development of the Company. In the case of exceptional performance or achievements, the Supervisory Board can award an additional discretionary bonus.
All Executive Board member contracts 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 fringe benefits (severance payment cap) and compensates no more than the remaining term of the employment agreement. Promises of payments in the event of early termination due to a change of control were agreed with Dr. Heinrich Hiesinger, Guido Kerkhoff and Oliver Burkhard in their contracts for their second term of office (from fiscal year 2015 / 2016). A corresponding clause was also agreed with Dr. Donatus Kaufmann in connection with the renewal of his contract from fiscal year 2016 / 2017 resolved in this fiscal year. The same benefits are granted as in the event of early termination without cause.
Fixed compensation and fringe benefits
Fixed compensation is paid in monthly installments as a salary. Since the last review at October 1, 2014 it has been €700,000 per year for an ordinary Executive Board member, and €1,340,000 per year for the Executive Board chairman. The Executive Board members also receive fringe benefits, mainly comprising a company car, security services, and insurance premiums. The benefits apply in principle to all Executive Board members; the amount varies according to personal situation.
The first component of variable compensation is the performance bonus. The amount of the performance bonus is dependent on three of the Group’s key performance indicators: Earnings before interest and taxes (EBIT) and free cash flow before M&A (FCF before M&A) each have a weighting of 40%, ROCE (return on capital employed) accounts for the remaining 20%.
The target figures for these indicators are taken from the corporate planning (budget); in addition threshold values are defined for each indicator, above or below which a further improvement or deterioration of the result has no effect on the level of target achievement. The Supervisory Board reviews and if necessary adjusts the target and threshold amounts annually in order to maintain challenging targets. In addition to the three weighted performance indicators, a multiplicative correction factor is used in the calculation. This permits the Supervisory Board to adapt and individually differentiate the overall target achievement level within a +/−20% range. The correction factor is made up equally of a sustainability multiplier and a discretionary factor. The sustainability multiplier is based on indirect financial targets from the areas employees, innovations, environment, and suppliers. The discretionary factor is set by the Supervisory Board to evaluate overall performance. The payout amount is limited to a maximum of 200% of the target level; there is no minimum bonus.
Long Term Incentive Plan (LTI)
The second component of variable compensation is the LTI, which has a long-term incentive effect. Decisive factors here are value generation, measured on the basis of thyssenkrupp Value Added (tkVA), and the performance of the Company's stock.
For an initial value (in euros) specified in the individual awards, the Executive Board members are granted so-called stock rights (virtual shares). The number of stock rights issued is calculated from the specified initial value divided by the average stock price in the 1st quarter of the three-year tkVA performance period, beginning on October 1 of the fiscal year in which the stock rights were granted. The number of stock rights issued is adjusted at the end of the tkVA performance period – depending on the performance of average tkVA in these three years compared with a target set by the Supervisory Board: The number of stock rights increases by 1% for every €20 million of average tkVA above the target value and decreases by 1% for every €10 million below the target. The payout amount is then based on this adjusted number and the average thyssenkrupp share price in the 1st quarter of the fiscal year immediately after the tkVA performance period. If tkVA and the share price perform positively, the maximum payout amount is 250% of the initial value; in the event of a very negative performance, the number of stock rights can decrease to zero, in which case no payout is made.
For the LTI installment granted to the Executive Board members in January 2016, the Supervisory Board set the target average tkVA at zero. This relates to the tkVA performance period 2015 / 2016 up to and including 2017 / 2018. In the case of the LTI, too, the Supervisory Board reviews and if necessary adjusts the target and threshold values for each new annual installment in order to maintain challenging targets.
Under the recommendation of the German Corporate Governance Code (section 4.2.3 (2), sentence 6), the compensation of Executive Board members must be capped both in total and with regard to its variable components. In addition to the maximum thresholds applying for variable compensation components, thyssenkrupp has therefore also established caps for overall compensation. These were increased to €4.5 million per fiscal year for Guido Kerkhoff and Oliver Burkhard, and €9 million per fiscal year for Dr. Heinrich Hiesinger for their second term of office starting in fiscal year 2015 / 2016; for Dr. Donatus Kaufmann the cap will be increased from currently €4 million to €4.5 million from the start of his second term of office in fiscal year 2016 / 2017.
Pensions are paid to former Executive Board members who have either reached pension age or become permanently incapacitated for work. thyssenkrupp does not pay transitional allowances upon premature termination or non-renewal of service contracts.
The pension of Executive Board members appointed before September 30, 2012 (Dr. Heinrich Hiesinger and Guido Kerkhoff) was originally a percentage of the final fixed salary they received before their employment contract ended. This percentage increased with the duration of the Executive Board member’s appointment and was generally 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; in the case of Dr. Heinrich Hiesinger, a pension entitlement of 50% of his final fixed salary before his employment contract ended was agreed right at the start of his first appointment period. When the Supervisory Board resolved to reappoint the two in fiscal year 2014 / 2015, it was agreed with them that from the start of the new period of appointment their pension entitlement would be fixed at 50% of their 2014 / 2015 fixed salary – as a result their pension is no longer pegged to the term of their appointment and progression of their fixed salary.
For Executive Board members appointed after September 30, 2012 (Oliver Burkhard and Dr. Donatus Kaufmann) the final-salary pension plan was switched to a defined-contribution pension plan, with the annual pension contribution (“module”) currently amounting to 40% of the annual fixed salary. In connection with the resolution on the reappointment of Oliver Burkhard in fiscal 2014 / 2015, with effect from the start of his new appointment period it was additionally agreed with him to cap his pension entitlement at 50% and the defined contribution at 40% of his fixed salary in 2014 / 2015.
The pension normally becomes payable on expiry of the Executive Board contract on or after the member’s 60th birthday. Current pensions are adjusted annually in line with the consumer price index in the case of Dr. Heinrich Hiesinger and Guido Kerkhoff, and at a rate of 1% per year in the case of Oliver Burkhard. Dr. Donatus Kaufmann’s pension will be paid in principle as a lump sum.
Under the surviving dependants’ benefits plan, a surviving partner receives 60% of the pension and each dependent child 20%, up to a maximum of 100% of the pension amount. In the case of Dr. Donatus Kaufmann, surviving dependants will receive the amount of the pension contributions plus interest at the time the pension becomes payable.
Total Executive Board compensation 2015 / 2016
Since fiscal year 2013 / 2014 we have disclosed compensation for individual Executive Board members on the basis of the standardized model tables recommended in the German Corporate Governance Code (as amended). A key feature of these model tables is the separate statement of the benefits granted (Table 1) and the actual allocations (Table 2). For the benefits granted, the target values (payable on 100% target achievement) and the minimum and maximum values that can be achieved are also stated. In addition, stock-based compensation is stated separately (Table 3).
- Executive Board Compensation 2015/2016 (Benefits granted)
- Executive Board Compensation 2015/2016 (Allocations)
- Stock-Based Executive Board Compensation
Total compensation for Executive Board members active in the respective fiscal year calculated in accordance with German GAAP (HGB) for work in the reporting year amounted to €10.6 million. The corresponding prior-year value was €12.2 million. The requirement for appropriateness was also taken into account when determining the individual variable compensation. No further benefits have been promised to any Executive Board members in the event that they leave their post. thyssenkrupp has no knowledge of benefits or corresponding promises given to members of the Executive Board by 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 3rd installment of the LTI fell due in the reporting year. On account of the performance of tkVA and the share price over the applicable performance period 2012 / 2013 to 2015 / 2016, this led to a payout amounting to over 166% of the initial value for each beneficiary. As a result an amount of €1,662,394 was paid to Dr. Heinrich Hiesinger and €831,197 to Guido Kerkhoff. Oliver Burkhard received a prorated payment of €554,137 based on his contract start date February 1, 2013. Dr. Donatus Kaufmann did not receive any payment from this installment because he was not yet a member of the Executive Board in fiscal year 2012 / 2013. In January 2016 the Executive Board members were granted new stock rights under the 6th installment of the LTI. Under the 4th to 6th installments of the LTI, the Executive Board members now have a total of 629,874 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 €17.4 million (prior year: €17.4 million). For pension obligations benefiting former Executive Board members and their surviving dependants, €304.1 million (prior year: €261.6 million) was accrued in the financial statements under IFRS and €207.3 million (prior year: €205.2 million) in the financial statements under German GAAP (HGB).
Stock-based compensation for further executives
Alongside the Executive Board, further selected executives of the Group worldwide receive part of their remuneration in the form of stock-based compensation (LTI). Since fiscal year 2014 / 2015 this is comparable with the LTI described above for the Executive Board, with the initial values adjusted accordingly.
thyssenkrupp uses this long-term compensation instrument to strengthen executives’ identification with thyssenkrupp and loyalty to the Company. As the LTI amount is linked to both the share price and tkVA, it promotes value-based management geared to achieving the corporate goals.
In the reporting year, the LTI program for further executives resulted in expense of altogether €76.2 million (prior year: €29.5 million).
Supervisory Board compensation
The compensation of the Supervisory Board is subject to § 14 of the Articles of Association. In addition to reimbursement of their expenses and a meeting attendance fee of €500, Supervisory Board members receive annual base compensation of €50,000.
The annual compensation for the Supervisory Board Chairman is €200,000 and for the Vice Chairman/Chairwoman €150,000. This also covers membership and chairs of committees. The other Supervisory Board members receive premiums for the chairs/membership of specified committees which are also defined in § 14 of the Articles of Association. Supervisory Board members who serve on the Supervisory Board or a committee for only part of the fiscal year receive prorated compensation.
The members of the Supervisory Board will receive total compensation, including meeting attendance fees, for the reporting year of €1.69 million (prior year: €1.74 million). This includes compensation paid to Supervisory Board members for directorships at Group companies in the amount of €69,302 (prior year: €77,202).
The individual members will receive the amounts listed in the following table:
In the reporting year Supervisory Board members received no further compensation or benefits for personal services rendered, in particular advisory and agency 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.
Source: Annual Report 2015/2016, p. 24-31