Compensation Report 2014
Compensation Report 2014
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 the Personnel Committee, 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 present compensation system was developed with the support of external consultants and put in place in 2010. It focuses on linking Executive Board compensation to a style of corporate management and development that has a sustainable and long-term orientation. That 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 be deferred, or not paid out at all. The intention is to align the interests of the members of the Executive Board 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 the Personnel Committee, the Supervisory Board determines both the total compensation to be awarded to members of the Executive Board (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.
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 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. A slightly modified rule was applied in 2014 with regard to the „free cash flow“ performance target. Exceptionally, the corridor between the minimum and maximum goal achievement levels was defined in absolute terms. The entry threshold was set at a figure € 30 million below the planned
target and the maximum limit was fixed at a figure € 15 million above the planned target. The Supervisory Board takes each Executive Board member’s individual performance into account by decreasing or increasing the goal achievement figures by up to 20 % (termed the “discretionary factor”).
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).
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 (Xetra) 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 2010, 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 (Xetra) 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 post-tax benefits payable under each tranche of the Performance Share Plan (PSP) to purchase MTU Aero Engines AG shares, provided the Supervisory Board resolves to offer the Share Matching Plan in the year in question. 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.
Alternatively, the Supervisory Board may decide to offer a cash payment equivalent to the value of the matching shares.
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 2014 and 2013:
Table "Individual compensation of the members of the Executive Board", please see Annual Report 2014, page 36-37.
New Recommendations of the German corporate Governance Code (GCGC)
The GCGC determines which compensation components are to be disclosed individually for each Executive Board member and recommends the use of the model tables appended to the Code for this purpose. The following table shows the benefits granted for the financial years 2014 and 2013 as well as the minimum and maximum amounts applicable for the financial year 2014.
Table "Benefits granted", please see Annual Report 2014, page 38-39
The table below shows the allocation of fixed and variable compensation for the financial years 2014 and 2013 as well as the service cost (benefit expense) for the pension plan:
Table "Allocation of compensation and service cost" please see Annual Report 2014 page 40-41
Annual Performance Bonus (APB)
The performance targets set by the Supervisory Board for the 2014 Annual Performance Bonus (APB) were as follows:
- Adjusted EBIT € 370.0 million (actual adjusted EBIT in 2014: € 382.7 million)
- Free cash flow € 0.0 million (actual free cash flow in 2014: € 42.5 million).
Deferred portions of the APB awarded in respect of 2012 and 2013 formed part of the performance-related compensation payable in 2014.
Performance Share Plan (PSP)
The following table shows the number of performance shares granted in each PSP tranche:
Table "Performance Share Plan 2014", please see Annual Report 2014, page 43.
Table "Performance Share Plan 2013", please see Annual Report 2014, page 44.
The fair value is calculated by an independent expert in accordance with the recommendations contained in IFRS 2. A fluctuation rate of 4% per performance share is taken into account.
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 2014, page 45.
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 amount of the cash settlement serves as a basis for measuring the value of the forward options granted under the terms of the SMP. The fair value of the forward options at the grant date was calculated on the basis of the following assumptions (an option period of 52 months, a vesting period of 88 months and a fluctuation rate of 4 % were assumed for all tranches):
Table "Share Matching Plan", please see Annual Report 2014, page 45.
The following share-based SMP compensation agreements were in place during the current reporting period and earlier reporting periods:
Table "Share Matching Plan (SMP) 2014", please see Annual Report 2014, page 46.
Table "Share Matching Plan (SMP) 2013", please see Annual Report 2014, page 47.
In the financial year 2014, the members of the Executive Board were for the first time entitled to purchase MTU shares under the terms of the Share Matching Plan. This resulted in the following matching share entitlements:
Table " matching share entitlements", please see Annual Report 2014, page 48
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 2014, page 48.
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 annual capital units are calculated on the basis of an individual contribution and an age-dependent factor, with the latter taking into account an interest rate of 6 % per annum up to the age of 60. The contribution period
is capped at 15 years of service on the Executive Board, or at age 60, whichever comes first. 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 post-employment benefits. If a member of the Executive Board dies before reaching age 60, 50 % of the benefits that he/she would otherwise have earned up to that age are added to the accrued balance on the pension account – taking into account the permissible contribution period.
As a general rule, the pension capital is paid as a single lump sum. However, at the request of the Executive Board member and with the approval of the company, the pension capital may be drawn either in ten installments (with the amassed pension capital being increased by 4 % before payment
of the installments) or as a lifelong pension with annual increments 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.
Reiner Winkler, Dr. Rainer Martens and Dr. Stefan Weingartner 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 2014, page 50.
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 service cost for the financial years 2014 and 2013, and the corresponding carrying amounts of pension provisions recognized for members of the Executive Board in accordance with both IFRS and the German Commercial Code (HGB):
Table "Allocations to pension provisions and total amounts recognized", please see Annual Report 2014, page 50.
The pension obligations toward former members of the Executive Board in accordance with IAS 19 amounted to € 7,470,324 (2013: € 5,946,295) and included the pension obligation toward Egon Behle in the amount of € 3,235,873 (2013: € 3,079,256).
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 2014 (page 33-53).