Compensation Report 2009
Compensation Report 2009
The overall structure and level of Board of Management compensation is decided upon by the Supervisory Board of MTU Aero Engines Holding AG and reviewed at regular intervals.
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 2009, 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 (with subsequent amendments) 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 (a more detailed description of the MSP, including information on the amendments to the terms of issue introduced during the financial year 2007, is provided in Note 30.4 of the Annual Report 2009 (Capital reserves) to the consolidated financial statements.
(4) pension commitments under a defined benefit pension plan for members of the Board of Management. By a resolution of the Supervisory Board’s Personnel Committee dated March 10, 2009, new pension arrangements were concluded with the members of the Board of Management. The new pension plan contracts replaced the existing agreements with effect of June 1, 2009. Under the new pension plan, all pension commitments will be based on the same, uniform structure. In the past, differences between the various individual contracts meant that pension provisions had to be accounted for differently in each case. The conclusion of new pension plan contracts with the members of the MTU Board of Management creates a vested benefit obligation, which is recognized at the present value of the benefit obligation for service in prior periods. Pension provisions for defined benefit plans are dealt with in more detail under Note 31 of the Annual Report 2009 (Pension provisions) to the consolidated financial statements.
Pension commitments to members of the Board of Management principally comprise an entitlement to retirement and survivors’ pensions.
Retirement pension can be claimed when the beneficiary reaches the age of 60, or earlier in the event of permanent incapacity to work. The annual retirement pension amounts to 25 % of the last basic salary drawn by the beneficiary prior to the insured event. Retirement and survivors’ benefits are automatically increased by 1 % each year subsequent to the year in which they become payable.
Family members entitled to survivors’ benefits receive 75 % of the retirement pension in the case of a surviving spouse and 15 % for each dependent child (30 % if both parents are deceased), subject to the condition that the sum of the benefits does not exceed 100 % of the retirement pension.
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, such severance payments are limited 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 2009, the cumulative expense for Board of Management compensation came to a total of € 7.9 million (2008: € 6.3 million). Total cash benefits amounted to € 5.5 million (2008: € 5.4 million). Of this sum, € 2.9 million concerned non-performance-related payments (2008: € 2.9 million) and € 2.6 million was performance-related (2008: € 2.5 million).
Under the terms of an agreement between MTU and Dr. Rainer Martens’ former employer EADS, the retirement benefits accrued on the basis of both employer’s and employee’s contributions during his previous employment were transferred to MTU in accordance with Section 4, paragraph 2(2) of the German Company Pension Act (BetrAVG). When the new pension plan contracts were negotiated, it was agreed that Dr. Martens’ previous years of service with EADS dating back to September 1, 1991 (entry date at EADS), would be taken into account in the event of premature termination of his employment contract. As a result of this commitment, a total defined benefit obligation of € 0.9 million (2008: € 0.1 million) was allocated to pension provisions on his behalf in the financial year 2009. The increase in pension contributions on behalf of Egon Behle is largely attributable to the new pension plan contract.
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, 2009, amounted to € 4.5 million in total (2008: € 1.9 million), as stated in Note 31 of the Annual Report 2009 (Pension provisions) to the financial statements. The increase in the present value of defined benefit obligations is due, on the one hand, to the introduction of the new, uniform pension plan contracts and, on the other hand, to the application of a lower discount at the current market rate of 5.25 % for 2009, compared with a rate of 5.75 % for 2008.
Share based compensation
The table in the Annual Report 2009 on page 312-313 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 (for a more detailed explanation of the exercise conditions and the subsequent amendment as a result of the modification to the terms of issue that became effective in financial year 2007, please refer to Note 30.4 of the Annual Report 2009 (Capital reserves) to the consolidated financial statements).
At December 31, 2009 the number of shares of phantom stock from the Matching Stock Program granted to the Board of Management amounted to 411,456. In June 2009, 144,936 shares of phantom stock (2008: 144,936) were transferred to the Board of Management when the fifth and final tranche of the Matching Stock Program was allocated.
The total number of shares of phantom stock allocated to the Board of Management at December 31, 2009, thus amounted to 411,456 (2008: 266,520). Of these, 289,872 phantom stocks (2008: 332,808) were not yet exercisable at the end of financial year 2009 and will remain so for the remaining term of the Matching Stock Program. The average weighted exercise price for phantom stocks that were not yet exercisable at December 31, 2009, was € 25.52 per phantom stock (2008: € 34.98).
Further information about the Board of Management compensation can be found in the Annual Report 2009 (page 308 - 314).