Goals. The remuneration system for the Board of Management aims to remunerate its members commensurately with their areas of activity and responsibility and in compliance with applicable law, so that Daimler is an attractive employer also for first-class executives. By means of adequate variability, the system should also clearly and directly reflect the joint and individual performance of the Board of Management members and the sustained performance of the Group.
Practical implementation. For each upcoming financial year, the Presidential Committee at first prepares a review by the Supervisory Board of the system and level of remuneration on the basis of a comparison with competitors. The main focus is on checking for appropriateness, based on a horizontal and vertical comparison. In this context, the following aspects are given particular attention in relation to a group of comparable companies in Germany:
- the effects of the individual fixed and variable components, that is, the methods behind them and their reference parameters,
- the relative weighting of the components, that is, the relationship between the fixed base salary and the short-term and long-term variable components,
- the ratio of an average employee’s income to that of a member of the Board of Management
and the resulting target remuneration consisting of base salary, annual bonus and long-term remuneration, also with consideration of entitlement to a retirement pension and fringe benefits.
In carrying out this review, the Presidential Committee and the Supervisory Board consult independent external advisors, above all to facilitate a comparison with remuneration systems common in the market. If the review results in a need for changes to the remuneration system for the Board of Management, the Presidential Committee submits proposals for such changes to the entire Supervisory Board for its approval.
On the basis of the approved remuneration system, the Supervisory Board decides at the beginning of the year on the base and target remuneration for the individual members of the Board of Management and decides on the success parameters relevant for the variable components of remuneration in the coming year. Furthermore, once a year, individual goals are agreed for the respective areas of responsibility for the coming year between the Chairman of the Supervisory Board, the Chairman of the Board of Management and each member of the Board of Management; those goals are then taken into consideration after the end of the financial year when the annual bonus is decided upon by the Supervisory Board.
In this way, the individual base and target remuneration and the relevant performance parameters are set by the beginning of each year. These details require the approval of the Supervisory Board.
On this basis, after the end of each year, target achievement is measured and the actual remuneration is calculated by the Presidential Committee and submitted to the Supervisory Board for its approval.
The system of Board of Management remuneration in 2012. The remuneration system comprises a fixed base salary (approximately 29% of the target remuneration), an annual bonus (approximately 29% of the target remuneration), and a variable component of remuneration with a long-term incentive effect (approximately 42% of the target remuneration). The spectrum of target achievement and the reference parameters remained unchanged. Only 50% of the annual bonus is paid out in the March of the following year. The other 50% is paid out a year later with the application of a bonus-malus rule, depending on the development of the Daimler share price compared with an automotive index (Dow Jones STOXX Auto Index (See Daimler Shares), which Daimler AG uses as a benchmark for the relative share-price development. Both the delayed payout of the annual bonus (with the use of the bonus-malus rule) and the variable component of remuneration with a long-term incentive effect with its link to additional, ambitious comparative parameters and the share price reflect the recommendations of the German Corporate Governance Code and give due consideration to both positive and negative developments. The details of the system are as follows:
The base salary is fixed remuneration relating to the entire year, oriented towards the area of responsibility of each Board of Management member and paid out in twelve monthly installments.
The annual bonus is variable remuneration, the level of which is primarily linked to the operating profit of the Daimler Group (EBIT). For the past financial year, the annual bonus was also linked to the target for the respective financial year determined by the Supervisory Board (derived from the level of return targeted for the medium term and the growth targets), the actual result compared with the prior year, the individual performance of the Board of Management members and the achievement of compliance targets. Optionally, additional key figures/assessment bases can be included; for 2012, these were key non-financial metrics and indicators oriented towards the UN Global Compact and its ten principles.
Primary reference parameters:
- 50% relates to a comparison of actual EBIT in 2012 with EBIT targeted for 2012.
- 50% relates to a comparison of actual EBIT in 2012 with actual EBIT in 2011.
Amount with 100% target achievement:
In the year 2012, 100% of the base salary.
Range of target achievement:
0 to 200%, that is, the annual bonus due to EBIT achievement has an upper limit of double the base salary and may also be zero (see below). Both primary reference parameters, each of which relates to half of the bonus, can vary between 0% and 200%. The limits of this bandwidth are defined by a deviation of plus or minus two percent of the prior-year revenue.
On the basis of the resulting degree of target achievement, an amount of up to 10% can be added or deducted, depending on the aforementioned predefined key figures/assessment basis. Since 2012, non-financial targets have been used as a basis for assessment; for the past financial year, those targets were the deepened establishment in the Daimler Group of the principles of the UN Global Compact. Furthermore, the Supervisory Board has the possibility, based for example on the aforementioned agreed targets, to take account of the personal performance of the individual Board of Management members with an addition or deduction of up to 25%.
Once again in 2012, additional individual targets were agreed upon with the Board of Management with regard to the development and sustained function of a compliance system. The complete or partial non-achievement of individual compliance targets can be reflected by a deduction of up to 25% from the individual target achievement. However, the compliance targets cannot result in any increase in individual target achievement, even in the case of full accomplishment.
The Performance Phantom Share Plan (PPSP) is an element of remuneration with long-term incentive effects. At the beginning of the plan, a number of phantom shares are granted and medium-term performance targets are set for a period of three years. On the basis of the degree of target achievement determined at the end of the three-year period, the final number of phantom shares is determined that are then paid out at the end of the fourth plan year. This final number can be between 0% and 200% of the phantom shares granted at the beginning of the plan. Payouts under the 2012 plan occur after four years at the price of Daimler shares that is then valid. Due to the granting of phantom shares and their payout at the end of the plan on the basis of the share price then valid, an opportunity and risk potential exists relating to the development of the share price. Half of the net amount paid out must be used to buy ordinary Daimler shares, which must then be held until the applicable guidelines for share ownership are fulfilled. (See Risk Report)
For the granting of phantom shares, the Supervisory Board specifies an absolute amount in euros in the context of setting the annual target remuneration. The number of phantom shares granted is calculated by dividing that amount by the relevant average share price over a period of several weeks. This average price is definitive not only for granting phantom shares under the new plan, but also for payment under the plan granted four years previously.
Reference parameters for Plan 2012:
- 50% relates to the Group’s return on sales compared with a group of competitors (BMW, Fiat, Ford, Honda, Paccar, Renault, Toyota, Volvo and Volkswagen). For the measurement of this success criterion, the competitors’ average return on sales is calculated over a period of three years, whereby the best and worst values are not taken into consideration. The extent that Daimler’s return on sales deviates by up to plus or minus two percentage points from the average thus calculated is deemed to be the range of target achievement. This means that target achievement is 200% if Daimler’s return on sales is two percentage points or more above the calculated average. Target achievement is 0% if Daimler’s return on sales is two percentage points or more below the calculated average.
- 50% relates to the Group’s return on net assets in relation to the cost of capital. This criterion stands for the value created by the Group. The extent that Daimler’s return on net assets deviates over a period of three years by plus or minus two percentage points from a target of 8% is deemed to be the range of target achievement. This means that target achievement is 200% if Daimler’s return on net assets is 10% or more. Target achievement is 0% if Daimler’s return on net assets is 6% or less.
As of PPSP 2013, the Supervisory Board has decided that target achievement of 200% will only be achieved with a return on net assets of 16% or more.
Value upon allocation:
Determined annually in relation to a market comparison; for 2012, approximately 1.3 to 1.6 times the base salary.
Range of target achievement:
0 to 200%, that is, the plan has an upper limit. It may also be zero.
Value of the phantom shares on payout:
In line with the calculated share price and the number of shares achieved according to the aforementioned criteria. The share price used as a basis for payout is limited to 2.5 times the share price at the beginning of the plan and the amount paid out is limited to 2.5 times the grant value used to calculate the preliminary number of phantom shares.
During the four-year period, the allocated phantom shares earn a dividend equivalent whose amount is related to the dividend paid on real Daimler shares in the respective year. With regard to share-based remuneration, any subsequent change in the defined performance targets or reference parameters is ruled out.
Guidelines for share ownership. As a supplement to these three components of remuneration, Stock Ownership Guidelines have been approved for the Board of Management. These guidelines require the members of the Board of Management to invest a portion of their private assets in Daimler shares over several years and to hold those shares until the end of their Board of Management membership. The number of shares to be held was set when the Performance Phantom Share Plan was introduced in relation to double the then annual base salary for each ordinary member of the Board of Management and triple the then annual base salary for the Chairman of the Board of Management. In fulfillment of the guidelines, half of the net payment made out of a Performance Phantom Share Plan is generally to be used to acquire ordinary shares in the Company, but the required shares can also be acquired in other ways.
Appropriateness of Board of Management remuneration. In accordance with Section 87 of the German Stock Corporation Act (AktG), the Supervisory Board of Daimler AG once again had an assessment of the system of Board of Management remuneration confirmed by external auditors in 2012. The remuneration system was unchanged in 2012 compared with 2011 and had already been approved by the Annual Shareholders’ Meeting in 2011.