Rheinmetall AG’s pay system is geared towards sustainable corporate development. Using an assessment basis spanning several years, incentives are provided for a sustainable corporate management strategy, in particular as part of the long-term incentive program (LTI). The Supervisory Board of Rheinmetall AG resolves upon and regularly reviews the amount of Executive Board remuneration and any significant employment contract elements following preparation work carried out by the Personnel Committee. The Supervisory Board has performed an extensive review of the remuneration system of the Executive Board on the basis of all relevant information, and has looked in particular at whether the total remuneration of Executive Board members is proportionate to the scope of responsibilities of the Executive Board member in question, his personal performance and the economic situation and success of the Company in comparison with industry peers and ensuring that this remuneration does not exceed standard remuneration unless there are special reasons for this. Remuneration is calculated in such a way as to ensure that it is competitive on a national and international scale, thus offering an incentive for dedicated and successful work. The Supervisory Board most recently reviewed the suitability of Executive Board remuneration at its meeting on August 25, 2016 and adjusted it to standard market conditions at its meeting on December 8, 2016 with effect from January 1, 2017.
Total remuneration is performance-based and is made up of various components. These comprise fixed annual remuneration not linked to performance, performance-related variable remuneration comprising a short-term incentive program (STI) and a long-term incentive program (LTI) as well as fringe benefits and pension commitments. The fixed component makes up 60% and the STI 40% of the annual target salary.
The fixed component is paid out on a monthly basis in twelve equal portions. In addition, Executive Board members receive fringe benefits in the form of non-cash remuneration. This mainly consists of contributions to statutory social pension insurance (or any exempting life insurance in lieu) plus the use of a company car.
Performance-related variable remuneration
Performance-related variable remuneration comprises two elements, the STI and the LTI.
The target value (100%) for the STI is based on planning for the fiscal year. This is subject to the development of two key figures, EBT and return on capital employed (ROCE), which are each weighted at 50% and used as criteria for determining this figure. The amount paid from the STI ranges between 0% and 200% of the target amount. 200% of the target amount is paid if the planned value is exceeded by 10%. No payment is made from the STI if target achievement falls 30% below the planned value. In the case of intermediate target achievement values, a corresponding value within the range is paid out. The target parameters are also used, in combination with others, by managerial staff in order to ensure the uniformity and consistency of the target system in the Group as a whole in this respect.
In order to gear the Executive Board remuneration structure more strongly towards sustainable corporate development, an LTI is part of the Executive Board remuneration. The LTI provides for a distribution at the end of the fiscal year in question based on the calculation of the average adjusted EBT from the last three fiscal years. This distribution amount is divided into a cash portion and an equity portion. The number of shares granted is based on a reference share price which corresponds to the average price on the last five trading days in February of the subsequent fiscal year.
The shares granted are subject to a four-year lockup period, during which they are subject to all opportunities and risks inherent in capital market performance. As part of the LTI, the figure to be taken into account when calculating the distribution amount (average adjusted EBT from the last three fiscal years) is limited to a maximum of €300 million. This is therefore a cap that is intrinsic to the system. The cash portion is mainly used to pay the tax bill incurred upon receipt of the shares and the cash portion. At its meeting on December 11, 2012, the Supervisory Board resolved to waive observance of the four-year lockup period for members of the Executive Board who are retiring. Average adjusted EBT for fiscal 2015 totaled €146 million. Average adjusted EBT totaled €209 million for fiscal 2016.
The employment contracts make provision for the ability of the Supervisory Board to grant, in exceptional cases and at its own discretion, a special bonus exclusively in the following cases: (i) for special achievements or specific efforts, (ii) if and to the extent to which the Executive Board member has made a particular difference to the Company through his activities (e.g. restructuring success in a particularly difficult market environment). Executive Board members are not entitled to the granting of this special bonus. In fiscal 2016 no bonus was granted to the members of the Executive Board.
In addition to salaries, a group accident and invalidity insurance policy and a D&O insurance policy (Directors’ and Officers’ liability insurance) are also in place, whereby a deductible of 10% of the loss or one and a half times the annual fixed remuneration has been agreed. The contracts of Executive Board members provide for a compensation payment in the event that the position on the Executive Board is terminated prematurely without cause. This is limited to a maximum of two years’ salary including fringe benefits (compensation cap) and shall not provide any more payment than the remaining term of the employment contract. The members of the Executive Board did not receive any benefits or equivalent entitlements from third parties with regard to their activities as Executive Board members in fiscal 2016 or in the previous year.
On January 1, 2014, the defined benefit pension commitments in the form of pension amounts agreed on the basis of individual contracts were replaced by modular defined benefits including a transitional arrangement. A transitional arrangement also applies to Executive Board members who are currently in office. The amount of the defined benefits is determined on the basis of a proportion of the annual target salary, which is an average of 28%. The retirement age has been fixed at the age of 63. The Company has set up provisions for future claims.
Total remuneration of the execution board
Individual details of the remuneration of the Executive Board in fiscal 2016 and pension commitments attributable to individual members of the Executive Board can be found in the following table, in addition to the respective values for the previous year: