Compensation Report 2008
Remuneration Board of Management 2008
Board of Management compensation is decided upon by the Personnel Committee of the Supervisory Board of MTU Aero Engines Holding AG. The members of this committee in the financial year 2008 were the chairman of the Supervisory Board, Klaus Eberhardt, the deputy chairman of the Supervisory Board, Josef Hillreiner, plus Harald Flassbeck (until April 30, 2008), Michael Leppek (since April 30, 2008) and Jürgen M. Geißinger.
The compensation awarded to members of the Board of Management of MTU Aero Engines Holding AG takes into account the size of the company, the global reach of its activities, its business and financial situation, and the level and structure of management compensation paid out by comparable companies in Germany and abroad. It furthermore takes into account the duties of each member of the Board of Management and their respective contributions to the company’s overall performance, and the length of time for which they have served on the board. Compensation levels are calculated in such a way as to match the competitive standards of the international recruitment market for highly qualified business executives, and so as to represent an adequate incentive to achieve results.
The compensation received by members of the Board of Management is based on a performance-related remuneration scheme. In the financial year 2008, it was made up of the following four components:
(1) a fixed basic sum, paid on a monthly basis.
(2) a variable bonus, which is dependent on achieving specific business targets and is contractually limited to a sum ranging between 83% and 100% of the fixed portion of the compensation.
(3) share-based compensation under the Matching Stock Program (MSP) which was established for a wide section of the company’s executive management in the financial year 2005 to cover the period 2005 - 2009. Under this scheme, shares of phantom stock are allocated to subscribers in equal tranches each year for a period of five years. The allocation of these phantom stocks is subject to the condition that subscribers hold their own long-term investment in the company’s shares. At the end of the respective vesting period, which runs for two years after allocation of each tranche, and on condition that the minimum exercise thresholds have been exceeded, the share-based compensation can be redeemed in exchange for the exercise of the phantom stock rights.
(4) pension commitments under a defined benefit pension plan for members of the Board of Management.
The contractual agreements with members of the Board of Management make no provision for further payments after termination of contract. Solely in the event of premature termination of contract without serious cause, members of the Board of Management are entitled to receive a payment equivalent to the fixed basic compensation that would have otherwise been awarded for the remaining term of their contract. In accordance with the recommendations of the German Corporate Governance Code, two Board of Management contracts contain a clause limiting such severance payments to no more than the value of two years’ compensation (severance payment cap).
Board of Management contracts make no provision for any compensatory payments in the event that a board member’s term of office should be prematurely terminated as the result of a change of control.
In the financial year 2008, total cash benefits paid to members of the Board of Management amounted to € 5.4 million (2007: € 5.9 million). Of this sum, € 2.9 million (2007: € 3.4 million) concerned non-performance-related payments and € 2.5 million (2007: € 2.5 million) was performance-related. The cumulative expense came to a total of € 6.3 million (2007: € 6.8 million).
Defined benefit obligation of pension provisions accorded to members of the Board of Management
The defined benefit obligation (DBO) of all pension provisions accorded to members of the Board of Management at December 31, 2008 amounted to € 1.9 million in total (2007: € 1.6 million). The slight increase in the present value of defined benefit obligations is due to the application of a higher discount at the current market rate of 5.75 % for 2008, compared with a rate of 5.25 % for 2007.
Share based compensation
The table in the Annual Report 2008 on page 302-303 lists the number and cash-equivalent value of phantom stock granted and allocated to members of the Board of Management under the Matching Stock Program (MSP) as the share-based component of their compensation. The cash-equivalent value of this stock has been calculated using the Black-Scholes pricing model. The expense relating to phantom stock granted to members of the Board of Management under the MSP is reported in the balance sheet on the basis of the fair value estimated at the time of its allocation, making allowance for the specific conditions relating to the exercise of the phantom stock rights. It should be noted that the terms under which equity instruments are issued have been amended.
A total of 411,456 shares of phantom stock from the Matching Stock Program had been granted to the Board of Management as of December 31, 2008. Of these, a total of 332,808 phantom stocks (2007: 314,592) were not yet exercisable at the end of financial year 2008 and will remain so for the remaining term of the Matching Stock Program. The average weighted exercise price for the phantom stocks that were not yet exercisable at December 31, 2008 was € 34.98 per phantom stock (2007: € 30.17).
Further information about the Board of Management compensation can be found in the Annual report 2008 (page 300 - 304).