The following compensation report is part of the combined management report.
Performance-based compensation system for the Executive Board
Since fiscal year 2014/2015 a revised compensation system has been in place for the Executive Board members of thyssenkrupp AG. 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 non-performance-related and performance-related 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 additional bonus granted in previous years based on the ratio funds from operations/total debt and the conversion of part of the performance bonus into thyssenkrupp AG (stock rights) virtual shares were discontinued as of fiscal year 2014/2015.
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 performance-related 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 did not exist for the 2014/2015 fiscal year; however they have been agreed with Dr. Heinrich Hiesinger, Guido Kerkhoff and Oliver Burkhard in connection with the renewal of their contracts for their second term of office resolved in this fiscal year. The full content of the change-of-control clause can be found under "Takeover-related disclosures" in the "Legal information" section of the combined management report.
Fixed compensation and fringe benefits
Non-performance-related basic compensation (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 performance-related 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 (FCF before divestments; from fiscal year 2015/2016 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)
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 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 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 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 2015, the Supervisory Board set the tkVA target at zero. This relates to the performance period 2014/2015 up to and including 2016/2017. In the case of the LTI, too, the Supervisory Board will regularly review and if necessary adjust the target and threshold values 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 performance-related compensation components, thyssenkrupp therefore caps overall compensation at €4 million per fiscal year for an ordinary Executive Board member, and €8 million per fiscal year for the Executive Board chairman.
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 current fixed salary (salary as of fiscal 2014/2015) – as a result their pension will no longer be pegged to the term of their appointment and progression of their fixed salary. Current pensions are adjusted annually in line with the consumer price index.
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% of his current fixed salary in fiscal year 2014/2015 and to fix the defined contribution at 40% of his current fixed salary in 2014/2015. 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 2014/2015
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).
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 €12.2 million. The corresponding prior-year value was €12.6 million. The requirement for appropriateness was also taken into account when determining the individual performance-related 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 2nd installment of the LTI fell due in the reporting year. On account of the stabilization of average tkVA achieved in the applicable performance period 2011/2012 – 2013/2014, this led to a payout – the first since 2008/2009 – amounting to just over 75% of the initial value for each beneficiary. As a result an amount of €750,053 was paid to Dr. Heinrich Hiesinger, and €375,016 to Guido Kerkhoff. Oliver Burkhard and Dr. Donatus Kaufmann did not receive payments from this installment because they were not yet members of the Executive Board in fiscal year 2011/2012. In January 2015 the Executive Board members were granted new stock rights under the 5th installment of the LTI. Under the 3rd to 5th installments of the LTI, active and former Executive Board members now have a total of 554,327 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: €17.7 million). For pension obligations benefiting former Executive Board members and their surviving dependants, an amount of €261.6 million (prior year: €267.7 million) was accrued in the financial statements under IFRS; an amount of €205.2 million (prior year: €196.9 million) was accrued 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 not only to the share price but also to tkVA, it promotes value-based management geared to achieving the corporate goals.
IIn the reporting year, the LTI program for further executives resulted in expense of altogether €29.5 million (prior year: €67.8 million).
In addition, selected executives receive a further share-based compensation component in such a way that 20% of their short-term variable compensation for each fiscal year is converted into thyssenkrupp AG stock rights tied to the thyssenkrupp share price. These stock rights are only paid out in cash after the expiration of three fiscal years; the payout amount is then based on the average thyssenkrupp share price in the 4th quarter of the third fiscal year.
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 €1.74 million (prior year: €1.76 million). This includes compensation paid to Supervisory Board members for supervisory board directorships at Group companies in the amount of €77,202 (prior year: €80,992).
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 mediatory 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 2014/2015, p. 23-30