Compensation Report 2013

Compensation Report 2013

This report describes the principles of the compensation system for members of the MTU Executive Board and Supervisory Board, including its components and the corresponding amount of benefits awarded. Executive Board compensation is linked to a style of corporate management that has a sustainable and long-term orientation. Supervisory Board compensation is established relative to the size of the company and the individual duties and responsibilities of the respective members.

Responsible Corporate Management

The management compensation report describes the principles applied when establishing the compensation to be awarded to members of the Executive Board and Supervisory Board of MTU Aero Engines AG, and states the amount and composition of that compensation. The management compensation report follows the provisions of Section 314(1), no. 6 of the German Commercial Code (HGB), German Accounting Standard DRS 17 "Reporting on the remuneration of members of governing bodies", and the recommendations of the German Corporate Governance Code.

At the proposal of its chair, the Supervisory Board decides on a system of compensation for the members of the Executive Board, including the main components of their contracts, and reviews this system at regular intervals.

The compensation system, which was developed with the support of external consultants and put in place in 2010, focuses on linking Executive Board of compensation to a style of corporate management and development that has a sustainable and long-term orientation. This entails not only an appropriate mix of fixed and variable compensation components but also the inclusion of long-term components in the variable compensation. Large parts of the variable compensation can now be deferred, or not paid out at all. The intention of these changes is to align the interests of the members of the Board of Management more closely with those of the company by increasing their participation in the company in the long term.

Members of the Executive Board did not receive any compensation for mandates on boards of MTU group companies, nor were they granted any loan facilities by the company.

Principles of the compensation system for members of the Executive Board

At the proposal of its chair, the Supervisory Board determines both the total compensation to be awarded to members of the Executive Board (so-called target direct compensation) and the composition of this compensation. The target direct compensation is made up of non-performance-related components (40 % of the total) and performance-related components (60 %). The latter comprise the Annual Performance Bonus (APB) and a share-based component, each of which makes up approximately 30 % of the target direct compensation.

NON-PERFORMANCE-RELATED COMPONENTS
The non-performance-related components consist of the basic salary and other benefits that are paid on a monthly basis. ‘Other benefits’ comprise taxable reimbursements of expenses and the non-cash benefit deriving from payments in kind such as insurance premiums or the use of a company car for business and private purposes, including any taxes on such benefits paid by the company.

PERFORMANCE-RELATED COMPONENTS
Performance-related components without long-term incentive effect

Half of the Annual Performance Bonus (APB) is granted as a short-term compensation component.

The actual amount depends on the results achieved in respect of two company performance targets and on the board member’s individual performance. The company performance targets are based on the key performance indicators at group level – ‘adjusted EBIT’ and ‘free cash flow’ – which are given equal weighting. The targets to be achieved to ensure payment of 100 % of the APB are set annually in advance by the Supervisory Board, taking the annual planning figures into account. In addition, an entry threshold is set for each performance target at a figure 30 % below the planned level; this corresponds to a goal achievement level of 50 %. Members of the Executive Board who do not reach this entry threshold are not entitled to a short-term compensation component. Similarly, the maximum goal achievement level of 180 % is fixed at a figure 15 % above the planned value for each of the two performance targets. Between the entry threshold, the 100-% goal achievement level, and the maximum value, the degree of goal achievement is interpolated using a straight-line method. The Supervisory Board takes the individual Executive Board member’s performance into account by decreasing or increasing the goal achievement figures by up to 20 % (termed the ‘discretionary factor’), depending on its assessment of the individual performance of that member.
The method used to adapt and disburse compensation components that have been withheld remains unchanged until final payment, even in cases where a member of the Board of Management leaves the company prior to the payment date.

Performance-related components with long-term incentive effect
Performance-related compensation with long-term incentive effect comprises the deferred APB and a share-based component.

Deferred Annual Performance Bonus (APB)
The remaining 50 % of the APB is deferred and paid out in two equal portions in the following two financial years.

The ultimate amount of the deferred APB depends on the goal achievement level attained in respect of the two key performance indicators at group level and on the discretionary factor applied in the financial years.
In Egon Behle's case, the outstanding deferred APBs of the pervious years will continue to be adjusted to the respective goal achievement level. His discretionary factor is set at one (1).

Shared-based component
The long-term compensation awarded to members of the MTU Executive Board also comprises a share-based component granted in annual tranches by the Supervisory Board. The share-based component consists of the Performance Share Plan (PSP), which is linked to the development of the MTU share relative to the MDAX index, and the Share Matching Plan (SMP), in which the members of the Board of Management can opt to invest their payment from the PSP at the end of the assessment period for each tranche.

Performance Share Plan (PSP)
On the dates fixed for these tranches, the provisional number of performance shares is calculated on the basis of the average price of the MTU Aero Engines AG share over the last 30 trading days prior to commencement of the assessment period in accordance with each Executive Board member’s long-term target compensation. At the end of the four-year assessment period, these performance shares entitle the recipients to a payment either in cash or in shares, as the Supervisory Board sees fit. Since 2011, the tranches of shares have been granted with effect from January 1 of each financial year. By way of exception, Michael Schreyögg was granted the fourth tranche of the PSP on July 1, 2013.

The actual number of performance shares is determined after expiry of the four-year assessment period for each tranche of granted shares. This amount reflects the performance of the MTU share compared with the other shares in the MDAX index, based on total shareholder return (TSR). The TSR is calculated as the total return on the stock including all changes in the share price and all dividends paid during the assessment period. The TSR ranking of the MTU share relative to that of all other MDAX-listed shares at the end of the assessment period is the main factor determining the number of shares allocated. Depending on this ranking, the level of goal achievement may be between 0 % and 150 %, with 100 % being the value for an average ranking.
The amount disbursed equals the actual number of performance shares multiplied by the average MTU Aero Engines AG share price over the last 30 trading days prior to the end of the assessment period. The maximum payment for each tranche of granted shares is limited to 300 % of the individual board member’s long-term target compensation. The Supervisory Board has the right to impose further limits if any extraordinary events should occur.

Share Matching Plan (SMP)
The members of the Executive Board are entitled to use the benefits payable under each tranche of the Performance Share Plan (PSP) to purchase MTU Aero Engines AG shares. At the end of the three-year vesting period, these shares are matched on the basis of the Share Matching Plan (SMP), with each Executive Board member being awarded one additional free share for every three MTU shares acquired in this way. The total value of the free shares allocated at the end of the vesting period is limited to three times the purchase price of the shares originally acquired through the PSP.

Individual compensation of the members of the Executive Board

The members of the Executive Board were awarded the following total compensation – as defined in Section 314(1) no. 6a of the German Commercial Code (HGB) – for their activities on the board in the financial years 2013 and 2012:

Table "Individual compensation of the members of the Executive Board", please see Annual Report 2013, page 22.

PERFORMANCE-RELATED COMPONENTS
Annual Performance Bonus (APB)

The performance targets are shown in the following table:

Table "Annual Performance Bonus", please see Annual Report 2013, page 22.

Deferred portions of the APB awarded in respect of 2011 and 2012 formed part of the performance- related compensation payable in 2013.

Performance Share Plan (PSP)

The following table shows the number of performance shares granted in each PSP tranche:

Table "Performance Share Plan 2013", please see Annual Report 2013, page 23.

Table "Performance Share Plan 2012", please see Annual Report 2013, page 24.

The fair value is calculated by an independent expert in accordance with the recommendations contained in IFRS 2. The fair value of each PSP tranche, taking into account a fluctuation rate of 4% per performance share, was as follows:

Table "Performance Share Plan", please see Annual Report 2013, page 24.

The methods used to calculate these figures are documented in the fairness opinions established at the respective grant dates.

The total carrying amount of the liabilities in connection with PSP compensation developed as follows:

Table "Development of total carrying amount", please see Annual Report 2013, page 25.

Share Matching Plan (SMP)The number of future matching shares depends on the cash amount paid out under the PSP. In order to determine the fair value of the SMP, a combined Monte Carlo simulation and Black-Scholes pricing model was used. The expected cash settlement was determined on the basis of the exact same assumptions used to measure the value of the PSP. The cash settlement serves as a basis for measuring the value of the Share Matching Plan in accordance with the Black-Scholes pricing model. The fair value of the forward options at the grant date was calculated on the basis of the following assumptions (an option period of 88 months, a vesting period of 52 months and a fluctuation rate of 4% for all tranches):

Table "Share Matching Plan", please see Annual Report 2013, page 25.

The following share-based SMP compensation agreements were in place during the current reporting period and earlier reporting periods:

Table "Share Matching Plan (SMP) 2013", please see Annual Report 2013, page 26.

Table "Share Matching Plan (SMP) 2012", please see Annual Report 2013, page 27.

Total expense incurred for share-based compensation
The total expense incurred for share-based compensation can be broken down as follows for the individual members of the Executive Board:

Table "Total expense incurred for share-based compensation", please see Annual Report 2013, page 27.

Rules when terminating the contracts of members of the Executive Board

The members of the Executive Board are insured under a defined-benefit plan in which the benefits promised are based on the contributions made. The benefits payable to members of the Board of Management under this plan correspond to those of their peers in comparable companies.

Retirement and survivors’ pensions
The members of the Executive Board earn company pension entitlements in accordance with the "MTU Pension Capital" plan, which constitutes the current post-employment benefits plan for members of the Executive Board of MTU Aero Engines AG. The goal of the plan is to provide a pension amounting to 60 % of each member’s basic salary after 15 years of service on the Executive Board When this plan was introduced on January 1, 2010, the vested benefits that each member of the Executive Board had earned up until December 31, 2009 under the pervious plan were transferred to the new plan in the form of initial units. This entitlement represents the benefit payable at age 60 under the old plan, adapted to reflect the ratio between the actual number of years of service with the company and the number of years from start of service with the company until age 60. The initial units transferred to the new plan correspond to the current cash value of the pension converted into a lump sum.

Once this amount had been determined, a pension account was opened for each member of the Executive Board to which further capital units are credited annually. The amount of the annual capital units is calculated on the basis of an individually defined contribution and an age-dependent factor, with the latter taking into account an interest rate of 6 % p.a. until age 60. The contribution period is capped at 15 years of service on the Board of Management, or at age 60, whichever comes sooner. As of the age of 61, the pension account earns interest at an annual rate of 4 % until such time as the pension is drawn (= bonus amount). The accrued capital units plus the units initially transferred to the account plus any bonus amounts credited to the account together make up the pension capital available to finance retirement benefits. If a member of the Executive Board dies before reaching age 60, 50 % of the benefits that he/she could still have earned until that age are added to the accrued balance on the pension account – taking into account the permissible contribution period.

The pension capital may be drawn either in a single lump sum, in installments or as a lifelong pension increased at an annual rate of 1 %. In any insured event, the pension account is topped up to the level of benefits the insured party would have reached under the previous plan (guaranteed capital). Pension benefits do not become payable until such time as an insured event occurs (i.e. on reaching pensionable age, or in the event of disability or death), even if the insured party leaves the Executive Board. The pension entitlement cannot be forfeited once the initial contribution has been paid.

Dr. Rainer Martens, Dr. Stefan Weingartner and Reiner Winkler had already been promised under the previous pension plan that their years of service with former group companies would count toward their pensions.

Details of the above-mentioned obligations and benefits are shown in the following table:

Table "Existing benefit entitlements", please see Annual Report 2013, page 29.

The differences in the annual contributions to the MTU pension accounts result from the remaining periods of service on the Executive Board until the end of the respective contribution period, from the respective age-dependent factors and from the different salary amounts eligible for pension contributions.

The following table shows the allocations made to pension provisions for the financial years 2013 and 2012 and the corresponding pension provisions for the members of the Executive Board of Management as of December 31, 2013:

Table "Allocations to pension provisions and total amounts recognized", please see Annual Report 2013, page 29.

As of December 31, 2013, the pension provisions in place for Executive Board members still in active service amounted to € 14,295,780 (December 31, 2012: € 10,422,096). The pension obligations toward former members of the Executive Board amounted to € 4,709,256 (December 31,2012: € 4,520,454).

Disability pensions
Under the new pension rules of January 1, 2010, if a member of the Executive Board is disabled before reaching the age of 60, 50 % of the benefits to which that person would normally have been entitled up to the maximum age limit are added to the balance on the pension account at the time of disablement. The amount credited is based on the contributions paid in the last year of employment. This arrangement also applies if the insured party dies before reaching the age of 60.

Severance payments on premature termination of contract for members of the Executive Board
The members of the Executive Board are entitled to receive severance payments if MTU prematurely terminates their appointment. In the case of ordinary termination, a severance package is payable that corresponds to the board member’s basic salary, 50 % of the APB and 50 % of the share-based performance-related compensation components for the time from the end of the notice period until the date on which the contract would normally have expired. The amount of the severance package may not exceed two full years of payments of these compensation components. If the employment contract is terminated for good cause, no severance package is payable.

Severance payments on premature termination of contract for members of the Executive Board in the event of a change of control or substantial changes in the ownership of MTU Aero Engines AG
If another company acquires a controlling interest in MTU as defined by the German Securities Acquisition and Takeover Act (WpÜG) or if the ownership structure of MTU changes substantially as a result of a merger or comparable transaction or amalgamation, the members of the Executive Board are entitled to receive severance payments. These severance payments are paid on the condition that the Supervisory Board relieves them of their duties within one year of such a change of control or if their employment contracts are not renewed as a result of the change of control. In these cases, the amount payable corresponds to the Board member’s basic salary for the period between leaving the Executive Board and the date on which their contract would otherwise have expired.

In addition, the Supervisory Board is entitled to commute the agreed APB for the year in which the change of control occurs, together with any deferred components of the APB from the two previous years, and to pay out a capital sum equivalent to at least 100 % of the target amount.

Further, the share-based performance-related compensation components (PSP/SMP) are automatically terminated. By way of compensation, the member of the Executive Board in question receives a pro rata payment that is calculated as if the component had been continued. The only difference is that the level of goal achievement is determined on the date of change of control and the final amount disbursed is multiplied by the average MTU share price (Xetra) over the last 30 trading days prior to the change of control.

The sum total of all severance payments made in connection with a change of control may not exceed three years’ total compensation in each case.


Further information about the Board of Management compensation can be found in the Annual Report 2013 (page 19-31).