In light of the German Act implementing the Second Shareholder Rights Directive (Gesetz zur Umsetzung der zweiten Aktionärsrechterichtlinie - ARUG II) and the German Corporate Governance Code (Deutscher Coporate Governance Kodex - DCGK), the Supervisory Board resolved changes to the remuneration system for the Executive Board Members of Rheinmetall AG effective as of January 1, 2022 and submitted the remuneration system to the Annual General Meeting on May 11, 2021 for approval under agenda item 7. The Annual General Meeting approved the remuneration system for the Executive Board Members with a majority of 92.61%.
Overview of the compensation system
The compensation system at Rheinmetall consists of fixed (base compensation, fringe benefits and pension plan) as well as short-term and long-term variable compensation components (short-term incentive STI and long-term incen-tive LTI). The compensation system also governs other compensation-related legal transactions (e.g. contract terms and commitments at the end of the Executive Board activity).
In accordance with the act on the transposition of the Second Shareholder Rights Directive and the new recommendations of the German Corporate Governance Code, the Supervisory Board had reviewed the current remuneration system and approved a series of amendments effective from January 1, 2020.
The current remuneration system already applies for fiscal 2020 to Peter Sebastian Krause (Personnel) and Executive Board member Jörg Grotendorst. For the Chairman of the Executive Board, Armin Papperger, and CFO, Helmut P. Merch, the old remuneration system still applies due to the ongoing contracts.
Against the backdrop of the resolution on the approval of the remuneration system for Executive Board members at the 2020 Annual General Meeting, the Supervisory Board, with the advice of the Personnel Committee, undertook a comprehensive revision of the current remuneration system. The revised remuneration system is even more closely aligned with Rheinmetall's strategy and more comprehensively reflects the sustainable success of the Company by incorporating relevant performance indicators. In doing so, the Supervisory Board also took into account the feedback received from investors as part of Say-on-Pay 2020 and corresponding recommendations from the voting advisors. The Supervisory Board will submit the revised remuneration system, which is to apply to all Executive Board members from January 1, 2022, to the Annual General Meeting on May 11, 2021 for approval.
The remuneration for members of the Executive Board of Rheinmetall AG is geared towards sustainable and long-term corporate development. It thus makes a contribution to promoting the business strategy and to the long-term development of the company. The system offers incentives for the value-creating and long-term development of the company.
The remuneration system aims to ensure that the members of the Executive Board are properly remunerated according to their sphere of activity and responsibility, taking into reasonable account both the personal performance of each and every Executive Board member as well as the economic situation and success of the company. The remuneration system is designed to ensure that it is competitive on a national and international scale and thus offer an incentive for dedicated and successful work.
The remuneration system at Rheinmetall AG envisages basic remuneration not linked to performance with fringe benefits and pension benefits on the one hand and, on the other hand, performance-related variable remuneration comprising two components: the one-year short-term incentive (STI) and the long-term incentive (LTI).
This remuneration covers all activities for the company and for services performed with the company in accordance with sections 15 et seq. of the German Stock Corporation Act. If remuneration is agreed for mandates at affiliated companies, this is offset against the basic remuneration. For mandates at companies that are not affiliated companies or for functions in associations or similar groups to which the company or one of its affiliated companies belongs, the Supervisory Board decides on such setting-off.
Each Executive Board member receives a basic remuneration not linked to performance, which is paid every month in twelve equal parts. In addition to their basic remuneration, the Executive Board members receive fringe benefits. Fringe benefits include not only the reimbursement of reasonable expenses, but also subsidies for health and long-term care insurance and the provision of a company car that can also be used privately in accordance with current guidelines. Additional accident insurance is also taken out for each Executive Board member, which may also include a payment to heirs of the Executive Board member in the event of his/her death. The tax burden resulting from these fringe benefits is borne by the respective Executive Board member. Furthermore, the Executive Board members receive pension benefits.
The performance-related variable remuneration comprises two elements: the STI and the LTI.
The current remuneration system provides for a one-year STI the level of which depends on the individual target amount in euro agreed in the Executive Board member’s employment contract and previously defined financial and non-financial targets. The key figures of earnings before taxes (EBT) and return on capital employed (ROCE) are the financial targets – each of which has a weighting of 45%. The non-financial targets have a weighting of 10% and include topics such as the implementation of the corporate strategy and sustainability-related aspects. The weighted total of the target achievements across the financial and non-financial targets results in the overall target achievement. In the current remuneration that applies to Peter Sebastian Krause and Jörg Grotendorst, the STI provides for a modifier; in other words, a restricted margin of discretion that enables the Supervisory Board to adjust the values resulting from the achievement of targets upward or downward in the event of extraordinary developments. The margin by which the payment amount can be adjusted is limited to +/-20%. A single modifier is set for the two Executive Board members, covering as it does solely extraordinary developments.
For each financial target, a target figure is determined each year on the basis of operating planning, with a linear calculation made between the target achievement levels shown in the table below.
Target achievement is capped at 2.5 times the target value, with this figure being achieved in the current remuneration system with a +20% target overachievement (maximal target fulfillment). If the target achievement is -20% or lower (minimal target achievement), the STI for the fiscal year in question is €0.
|Degree of achievement of agreed annual targets||STI payment|
|≥||20%||under agreed targets||0%|
|10%||under agreed targets||50%|
|100%||of agreed targets||100%|
|10%||over agreed targets||150%|
|15%||over agreed targets||200%|
|≥||20%||over agreed targets||250%|
Following approval of the financial statements by the Supervisory Board, the resulting STI amount is transferred to the relevant Executive Board member with the next salary statement.
Due to the remuneration system that was previously in place, the STI is designed differently for Armin Papperger and Helmut P. Merch. There is no option for the Supervisory Board to subsequently adjust the payment amount by a modifier of +/- 20%. Moreover, the payment is capped at 200% of the target amount. In addition, the minimal/maximal target achievement is set to -30%/+10%.
To achieve an even stronger alignment of Executive Board remuneration to sustainable and long-term corporate development and factor in shareholder interests, the remuneration system envisages the Executive Board members taking part in the company’s LTI program.
In the current remuneration system, the LTI is based on two equal components with an equal weighting and is granted in yearly tranches. What is decisive for Component I is a contractually determined individual factor multiplied by the average adjusted EBT for the year for which remuneration is granted, as well as for the two years prior to this year, with the average adjusted EBT being capped at €750 million. The decisive factor for Component II is the average monthly total shareholder return (TSR) of the company’s grant year as a proportion of the average monthly TSR of the MDAX. For Component II, an individual target amount has been agreed in the Executive Board employment agreements, which corresponds to a target achievement of 100%.
After the grant year, a distribution amount is determined for each of these components, 50% of which is granted in company shares and 50% of which is paid in cash. The shares are subject to a lockup period of four years as of the point at which these shares are posted to the securities account of the Executive Board member. In addition, 20% of the share value is paid in cash. The payment of the cash remuneration and posting the shares to the securities accounts of the Executive Board members take place in the year following approval of the financial statements by the Supervisory Board.
Due to the remuneration system that was previously in place, the LTI is designed differently for Armin Papperger and Helmut P. Merch. Thus only Component I is used, with the average EBT over the decisive three years being capped at €300 million.
The EBT-oriented component of the LTI is based on the average adjusted EBT of the company in the year for which the remuneration is paid as well as for the two years previous to this year. The adjusted EBT is calculated annually on the basis of Rheinmetall’s consolidated financial statements by adding the adjusted EBIT published in the annual report and audited by the auditor and net interest income. The adjusted EBIT is shown on page 171. The average adjusted EBT in the year in question and the two previous years is calculated on this basis. This means that the distribution amount for the 2020 LTI is calculated on the basis of the average adjusted EBT of the Rheinmetall Group in the years 2018–2020.
For the respective contract term, a personal EBT factor is agreed upon with the Executive Board member. To determine the share of the LTI based on the average adjusted EBT, this factor is multiplied by the actual average adjusted EBT over the three relevant years. The average adjusted three-year EBT needed for calculating the distribution amount is capped at €750 million, which means that a higher remuneration cannot be granted even if the average adjusted three-year EBT exceeds this value. Deviating from this, for the Chairman of the Executive Board and the CFO, in calculating the distribution amount the decisive adjusted three-year EBIT is capped at €300 million. If the average adjusted three-year EBT is €0.00 or lower, this remuneration component ceases to apply.
The TSR-oriented component of the LTI is based on the monthly average TSR over the company’s past fiscal year. The decisive TSR figure is calculated as follows on the basis of thirteen month-end figures (December 31 of the previous year up to and including December 31 of the year in question):
Initially the total return (share performance including dividend) of the Rheinmetall share for each individual month of a fiscal year is determined. Intermediate dividends are reinvested on the day of the dividend markdown (ex-day) at the closing price. Decisive here is the final XETRA closing price on the Frankfurt Stock Exchange in each month. These monthly returns on shares are used to form an average value, which is compared with all the MDAX values determined by the same method. For better comparability, only the MDAX stocks listed in the index across the entire period under review are included in the calculation.
The average values of all companies – including Rheinmetall AG – are placed in order and assigned to percentiles. The percentiles, in turn, are assigned target achievement levels (as a percentage), with which a target LTI amount in euro is multiplied to generate a payment amount for Component II. The assignment is made through linear interpolation between the 75th percentile (= cap 150%), the 50th percentile (= 100%) and the 0 percentile (= 0%).
Both for the remuneration component based on EBT and TSR, 50% of the provisional payment amount is divided by an average Rheinmetall AG share price. Decisive here is the average price from XETRA closing prices on the Frankfurt Stock Exchange over the past five trading days in February on the year following the grant year. The figure is rounded up to the whole share, with the remaining, disregarded fraction converted to euro and added to the cash distribution amount. 20% of the share value is added to the cash distribution amount. Taxes and social security contributions incurred as a result of the granting of the shares and the cash distribution will be withheld from the cash distribution amount before payment. During conversion and additions, the figures are rounded to two decimal places.
The shares granted under the LTI are subject to a lockup period of four years as of the point at which these shares are posted to the securities account of the Executive Board member. This means that the Executive Board member can freely dispose of these shares only after this period has expired. During the lockup period, the shares granted are exposed to all the opportunities and risks that prevail on the capital market. The four-year lockup period ends automatically when the Executive Board member retires. This means that Executive Board members can sell the granted shares as soon as they retire. The lockup period also ends automatically in the event of the death of an Executive Board member, which means that the securities account holdings can be sold immediately by the heirs.
Itemized details of the remuneration of the Executive Board for fiscal 2020 can be found in the following table, in addition to the respective values for the previous year:
In fiscal 2020, Rheinmetall AG and its subsidiaries did not grant Executive Board members any advance payments or loans, nor were any contingent liabilities entered into in their favor.
For persons appointed to the Executive Board for the first time as of January 1, 2014, and who had not previously sat on the Executive Board of Rheinmetall Automotive AG (a transitional provision for the old system applied here), the current remuneration system provides pension benefits in the form of a modular capital plan. They receive an annual basic contribution in the amount of 16% of the respective basic remuneration and 100% of the target value of the STI. The basic contribution may also be supplemented by a performance-related additional contribution. The additional contribution is capped with an upper limit equal to 30% of the basic contribution.
The basic contribution and, if applicable, performance-related additional contribution are converted annually to a capital component with a capitalization factor linked to the benefits age. The sum of the capital components acquired in the past few calendar years yields the total pension capital. The total pension capital is converted to a lifelong pension when benefits become due. With the new remuneration system, the retirement age is 65.
There is a translational regulation for Executive Board members who acquired claims in the old system. The average defined benefit is 27.5% of the respective basic remuneration and the respective 100% target figure of the STI before retirement. The retirement age is 63. The expenses and present values of the pension obligations for Executive Board members active in fiscal 2020 are shown below: