The remuneration report describes the principles of the remuneration system for the members of the Management Board and Supervisory Board of Deutsche Wohnen SE and explains the structure and amount of individual remuneration for the Board members.
1.1. Remuneration system for the Management Board
The system of remuneration for the Management Board and total remuneration for individual Management Board members is defined by the Supervisory Board and reviewed at regular intervals. Remuneration is governed by the German Stock Corporation Act (Aktiengesetz – AktG) and the provisions of the German Corporate Governance Code (Deutscher Corporate Governance Kodex – DCGK).
The criteria for appropriate Management Board remuneration include the responsibilities of the individual Management Board members, their personal performance, the economic situation, and the company’s performance and outlook. Remuneration is also measured against standards for the peer group and the company’s internal remuneration structures. Overall, the remuneration system is aligned with the company’s sustainable development.
All contracts of the Management Board provide for a compensation payment in the event that the board activity ends early for reasons other than termination for good cause. It is capped at a maximum of two annual salaries (settlement cap), but covers no more than the remaining term of the employment contract. Contracts also provide for a compensation payment in the event of a change of control, capped at a maximum of three annual salaries in accordance with 4.2.3 of the DCGK.
In addition to their fixed remuneration, Management Board members also receive variable short-term and a variable long-term remuneration. The variable short-term remuneration component is based on short-term corporate goals. The variable long-term remuneration component is intended to associate the Management Board members, who shape and implement the company strategy and so are largely responsible for its financial performance, with the economic risks and opportunities of the company. Variable remuneration can expire if targets are not met and is otherwise subject to a cap.
Furthermore, Management Board members receive in-kind benefits in the form of insurance premiums, the private use of communication devices and company cars. In the event of extraordinary developments the contracts also allow the Supervisory Board to approve a special bonus, which is capped at the amount of that year’s fixed salary. No retirement benefits have been agreed.
Variable remuneration system
The remuneration system is based on parameters reflecting personal and company performance and the relative performance of the company share. Variable remuneration is largely calculated on a long-term assessment base. Share ownership guidelines (SOG) further strengthen the focus on the capital market and the alignment of shareholders’ interests with those of the Management Board of Deutsche Wohnen. The variable remuneration system for the Management Board as described below corresponds to the provisions of the German Stock Corporation Act (Aktiengesetz – AktG) and follows the recommendations and suggestions of the DCGK.Variable short-term remuneration component – short-term incentive (STI)
The STI is based on both financial and non-financial performance targets. These are aligned with the current company strategy and short-term company goals, and are agreed between the Management Board and the Supervisory Board at the beginning of every financial year. At least two financial and two non-financial performance targets are set for each financial year, whereby the financial performance targets always account for 80% of the total target performance. The Supervisory Board defines the financial performance targets in consideration of the budget for the respective year. Payments are capped at a maximum of 125% of the target, aggregated across the financial targets. No payment is made if the aggregate performance is below 75% of the target. As with the financial targets, performance against strategic, non-financial targets can be between 0% and 125%, whereby 100% performance is the goal.
Performance against the financial and non-financial targets is measured after the close of each financial year. The amount of the final annual bonus payment is capped at 125% of the target.
For the financial year 2018 the financial performance targets were (i) adjusted EBITDA without disposals (50% weighting), (ii) cost ratio (staff, general and administration expenses divided by contracted rental income; 10% weighting) and (iii) sales proceeds (20% weighting). Strategic, non-financial targets with a total weighting of 20% were defined, relating to the percentage of completion of the investment programme, particularly including CO2 reductions, growth in the segment Nursing and Assisted Living, expanding the value chain and the percentage of completion of the “DW 4.0” project. “DW 4.0” focuses on the developments necessary at Deutsche Wohnen to exploit new and existing, but as yet unused, potential. They include a stronger focus on clients, a portfolio strategy directed towards target groups, and activities to support and network employees from different generations.
As its meeting on 18 March 2019, the Supervisory Board resolved on a target for the Management Board of 121.7% for the achievement of financial performance targets and 100% for the achievement of non-financial performance targets for the financial year 2018.
For the financial year 2019 the financial performance targets were (i) adjusted EBITDA without disposals (40% weighting), (ii) cost ratio (staff, general and administration expenses divided by contracted rental income; 10% weighting) and (iii) sales proceeds (30% weighting). Strategic, non-financial targets with a total weighting of 20% were defined, relating to integration of the acquired facilities and derivation of a platform and portfolio strategy for the segment Nursing and Assisted Living, the implementation of the strategic sustainability programme as well as the strengthening of the dialogue with tenants and politics.
Variable long-term remuneration component – long-term incentive (LTI)
Management Board members receive a cash payment as part of a performance cash plan. The remuneration system is based on parameters that are transparent, performance-related and based on the company’s sustainable development. The performance cash plan provides for LTI payments to be capped at 250% of the target value.
Management Board members receive a target amount in euros for each tranche of the performance cash plan. This target amount is multiplied by the total target performance after a four-year performance period. Total target performance is made up of two equally weighted performance targets, which are added together. Using the relative share performance and the property yield (EPRA NAV growth plus dividend yield) mean the amount of the variable long-term incentive payment depends on both an external comparison with competitors and on the performance of Deutsche Wohnen.
The relative share performance target reflects both the general capital market performance and the performance of competitors. During the four-year performance period the total shareholder return (TSR) of the Deutsche Wohnen share is compared with the FTSE EPRA/NAREIT Germany Index. Outperformance is defined as the difference between the TSR of the Deutsche Wohnen share and that of the peer group. The starting price for the Deutsche Wohnen share and the FTSE EPRA/NAREIT Germany Index is the arithmetic mean of the closing prices on the 30 trading days immediately preceding the start of the performance period. The final price is calculated in the same way, as the arithmetic mean of the closing prices on the 30 trading days immediately preceding the end of the performance period. When calculating the relative share performance, dividends paid during the respective years are assumed to have been reinvested. The relative share performance over the four-year performance period is measured on the following scale:
The performance target “return on property” serves as an incentive for the Management Board members to increase the NAV of Deutsche Wohnen as well as the amount of dividends paid to the shareholders. This entails a percentage comparison of EPRA NAV per share (adjusted for goodwill) at the beginning of the performance period with the corresponding figure at the end of the performance period. Total annual dividend yields, which express the ratio of the respective annual dividend to EPRA NAV per share for the previous year, are added to this figure. The performance of the “return on property” over the four-year performance period is measured on the following scale:
Performance against the two targets is measured at the end of the four-year performance period and is published in the remuneration report. The payment of any tranche is capped at 250% of the target originally agreed.
Before financial year 2018 the LTI was structured as a share option programme (“SOP 2014”). To reflect the interests of shareholders in a sustainable increase in enterprise value, the share options can only be exercised if the defined performance targets are achieved at the end of the four-year vesting period, specifically: Increase in (i) adjusted NAV per share (40% weighting), (ii) FFO I (without disposals) per share (40% weighting) and (iii) share performance (20% weighting). Within each of the targets mentioned there is a minimum target that must be achieved before half the share options attributable to this target can be exercised. There is also a maximum target at which all the share options attributable to this target can be exercised. The minimum is set at a performance of 75% and the maximum at 150% across all individual targets. The performance targets include both the absolute change in the sector-specific indicators EPRA NAV per share (adjusted for goodwill) and FFO I per share on the basis of the company’s four-year planning before share options are issued, as well as the relative performance of the Deutsche Wohnen share compared with a peer group of publicly listed competitors in Germany. The vesting period for a tranche of share options starts on the issue date and ends at the close of the fourth anniversary of the issue date. The options may be exercised over a period of three years. Share options that are not exercised by the end of the total seven-year period are forfeited or expire without substitute or compensation.
Share ownership guidelines
In 2018 share ownership guidelines (SOG) were introduced at Deutsche Wohnen in order to strengthen the focus on capital markets and a shareholding culture. The Management Board members of Deutsche Wohnen undertake to invest 300% of their basic salary (Chief Executive Officer) or 150% of basic salary (ordinary Management Board members) in Deutsche Wohnen shares over a period of four years and to hold them until they cease to be a member of the Management Board. During an accumulation period up to 31 December 2021 the Management Board members undertake to build up interim holdings of company shares. This means that at the end of each financial year the total shareholding (including shares already held) should be at least 25% of the total STI payments (net) made after 1 January 2018.
1.2. Total remuneration paid to the members of the Management Board
The members of the Management Board received the following remuneration for the performance of their responsibilities in this capacity:
The members of the Management Board received the following remuneration for their work on the Management Board and Supervisory Boards of Group companies:
No loans or advance payments were granted to members of the Management Board of Deutsche Wohnen SE in financial year 2018.
The following share options have been granted on the basis of the previous share option programme 2014:
The final number of share options that can be exercised per tranche is determined at the end of the four-year vesting period, depending on performance against the criteria mentioned above. The exercise period is three years and the exercise price is EUR 1.00.
After determining the achievement of the targets by the Supervisory Board, the first tranche of the AOP 2014 was exercisable in November 2018. Mr Michael Zahn and Mr Lars Wittan each exercised all stock options for this tranche in financial year 2018 and received shares from Conditional Capital 2014/III.
Total expenses recognised for share-based remuneration in the reporting period were EUR 189 thousand for Mr Michael Zahn, EUR 82 thousand for Mr Lars Wittan and EUR 45n thousand for Mr Philip Grosse.
In addition to the outstanding share options, Mr Michael Zahn holds 50,000 shares, Mr Lars Wittan holds 20,000 shares and Mr Philip Grosse holds 15,721 shares in the company.
1.3. System of remuneration for the members of the Supervisory Board
Each Supervisory Board member receives a fixed annual remuneration of EUR 75,000, the Chairman of the Supervisory Board receives three times this amount and the Deputy Chairman of the Supervisory Board one-and-a-half times this amount. For membership of the Audit Committee a Supervisory Board member receives an additional EUR 15,000 per financial year and the Chairman of the Audit Committee receives twice this amount. Membership of other Supervisory Board committees is remunerated at an annual rate of EUR 5,000 per member and committee, whereby the Chairman of the committee receives twice this amount. Total remuneration, including remuneration for membership of Supervisory Board committees and comparable Supervisory Boards of Group companies may not exceed EUR 300,000 per Supervisory Board member (not including any VAT payable) per calendar year, regardless of the number of committee memberships and functions.
For financial year 2018 Supervisory Board remuneration amounts to EUR 772,083 (previous year: EUR 738,750) net of VAT. Matthias Hünlein received a net amount of EUR 182,083 (previous year: EUR 80,000), Uwe E. Flach receives a net amount of EUR 135,000 (previous year: EUR 270,000; left the Supervisory Board as of 15 June 2018), Dr Andreas Kretschmer receives a net amount of EUR 140,833 (previous year: EUR 152,500), Tina Kleingarn receives EUR 43,750 (Supervisory Board member since 15 June 2018), Jürgen Fenk receives a net amount of EUR 86,667 (previous year: EUR 18,750; joined the Supervisory Board as of 1 October 2017), Dr Florian Stetter receives a net amount of EUR 101,250 (previous year: EUR 95,000) and Claus Wisser receives a net amount of EUR 82,500 (previous year: EUR 82,500).
The company reimburses the Supervisory Board members for their out-of-pocket expenses. The VAT payable on the remuneration is reimbursed by the company to the extent that the Supervisory Board members are entitled to invoice the company for separate VAT and they exercise this right.
In addition, the company has taken out D&O insurance for the Supervisory Board members, with an excess of 10% of the loss in each case. The excess is capped at one-and-a-half times the fixed annual remuneration for the respective Supervisory Board member for all losses occurring in a given insurance year.
No loans were granted by the company to members of the Supervisory Board.