The remuneration report describes the remuneration system for the members of the Management Board and Supervisory Board of Deutsche Wohnen SE for the ﬁnancial year 2020, and explains the structure and amount of individual components of remuneration for each individual board member in detail. Remuneration is governed by the German Stock Corporation Act [Aktiengesetz – AktG] and the provisions of the German Corporate Governance Code as amended on 16 December 2019 and is in line with the requirements of the German Commercial Code [Handelsgesetzbuch – HGB] and the International Financial Reporting Standards (IFRS).
Remuneration system for the Management Board
The system of remuneration for the Management Board and speciﬁc target total remuneration for individual Management Board members is deﬁned by the Supervisory Board and reviewed at regular intervals. In accordance with article 87a of the German Stock Corporation Act [Aktiengesetz – AktG], the Supervisory Board shall adopt a new remuneration system that shall apply from the ﬁnancial year 2021. The new remuneration system is presented to the Annual General Meeting 2021 for resolution.
The criteria for appropriate Management Board remuneration include the responsibilities of the individual Management Board members, their personal performance, the economic situation, the company’s performance and outlook. Remuneration is also measured against standards for the peer group and the company’s internal remuneration structures. Remuneration data from MDAX companies was used to assess the total remuneration in ﬁnancial year 2020 in relation to the standard market rate, as Deutsche Wohnen SE was listed on the MDAX when the current remuneration system was established by the Supervisory Board and until mid-2020. In this horizontal market comparison, the Supervisory Board took into account the relative size of Deutsche Wohnen on the relevant market and used the equally weighted size indicators of revenue, employees and market capitalisation to appraise the total remuneration in relation to the standard market rate. Overall, the remuneration system is aligned with the company’s sustainable development.
As well as a non-performance-based basic annual salary, the Management Board members receive performance-based variable remuneration. This consists of variable short-term remuneration (short-term incentive) and variable long-term remuneration (long-term incentive). 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 subject to a cap.
The Supervisory Board optionally uses virtual shares in Deutsche Wohnen (so-called Restricted Share Units) as an additional remuneration component for Management Board members who have assumed ofﬁce with the company for the ﬁrst time.
Share ownership guidelines (SOGs) are another important part of the remuneration system. They oblige the Management Board members to accumulate as ﬁxed multiple of the annual basic salary in Deutsche Wohnen shares up to a date speciﬁed in the service contracts and hold them throughout their time working on the Management Board.
Retirement beneﬁts (pensions, retirement annuities, pension commitments) are not granted to the members of the Management Board. In the event of occupational disability, there are entitlements to short-term temporary salary continuation.
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. The contracts only provide for a compensation payment in the event of premature termination of activity due to a change of control, which is limited to a maximum of three years’ remuneration. There are no other claims for compensation in the event of the resignation of a member of the Management Board.
Variable remuneration components
The remuneration system is based on parameters reﬂecting personal and company performance and the relative performance of the company share. Variable performance-based remuneration is largely calculated on a long-term assessment base. Share ownership guidelines 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 German Corporate Governance Code.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 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. For the achievement of the strategic non-ﬁnancial targets, 100% performance represents the goal. Payments are capped at a maximum of 125% of the target, aggregated across the three ﬁnancial and non-ﬁnancial targets. No payment is made if the aggregate performance is below 75% of the target.
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 2020 the ﬁnancial performance targets were (i) FFO I per share (40% weighting), (ii) cost ratio (staff, general and administration expenses divided by contracted rental income; 10% weighting) and (iii) institutional sales net margin (30% weighting). In the context of non-ﬁnancial performance targets, strategic targets were set with a total weighting of 20%, covering developing the equity story, customer and employee satisfaction and implementing the strategic sustainability programme.
At its meeting on 15 March 2021, the Supervisory Board set a target performance for the Management Board of 125% for the ﬁnancial and non-ﬁnancial performance for the ﬁnancial year 2020. The FFO I came to EUR 1.56 per share and was able to exceed the planned ﬁgures by the Supervisory Board of about 4%. The net margin for institutional disposal was 20% and nearly doubled in comparison to the forecast. The cost ratio was at 12.2% and thereby about 7% below the corresponding forecast.
In the ﬁnancial year of 2020 the economic environment of Deutsche Wohnen SE has changed due to the circumstances of the coronavirus pandemic. In addition to the increased economic uncertainty, the regulatory interventions in the berlin residential real estate market have an impact on the company’s business. The Management Board members of Deutsche Wohnen have agreed to waive the part of the STI remuneration exceeding 100%. The Supervisory Board has therefore decided to pay out 100% of the STI remuneration for the ﬁnancial year 2020.
For the ﬁnancial year 2021, the ﬁnancial performance targets were (i) FFO I per share (40% weighting), (ii) general and administration expenses ratio (10% weighting) and (iii) block sales net margin (30% weighting). In the context of non-ﬁnancial performance targets, strategic targets were set with a total weighting of 20%, covering customer and employee satisfaction, improving energy efﬁciency of housing stock, formulating the ESG strategy and further developing the sustainability rating.
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 1. 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:
Using the property yield as a performance target incentivises the Management Board members to sustainably increase the NAV of Deutsche Wohnen as well as dividend payments to 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 property yield 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 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 the (i) adjusted NAV per share (40% weighting), (ii) FFO I (excluding 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.
At its meeting on 27 April 2020 the Supervisory Board approved agreements (known hereafter as “compensation agreements”) between the company and the Management Board members Michael Zahn, Philip Grosse and Lars Urbansky, as well as the former Management Board member Lars Wittan, to offset the adverse effects on remuneration of the legislation announced by the Berlin Senate on 5 June 2019 to cap and reduce residential rental rates in Berlin [MietenWoG Berlin, the “Berlin rent cap”]. Before adopting the resolution on 7 April 2020 the Supervisory Board had determined that the announced Berlin rent cap had a signiﬁcantly negative impact on the company’s share price, although the relevant performance of the shares in peer group companies, which is used to determine the LTI, was not adversely affected, or to a much lesser extent, by the Berlin Senate’s announcement. At the meeting, the Supervisory Board determined that it is highly probable that the company’s share price will recover much of its value if the Federal Constitutional Court holds that the Berlin rent cap is not consistent with the German Constitution. In the assessment of the Supervisory Board the long-term remuneration from share options granted under the share option programme 2014 for 2016 and 2017 would also have been considerably higher without the rent cap, since without the Berlin rent cap the hurdle rate for one of the performance targets (relative share performance compared with the adjusted EPRA/NAREIT Germany index; 20% weighting) would not have been missed. The Supervisory Board believes that the Berlin rent cap would jeopardise the sustainability and rigour of the long-term remuneration if these one-off effects were not taken into account separately.
Under these circumstances the Supervisory Board considered it reasonable to make an extraordinary one-off adjustment to the LTI performance periods of the Management Board members Michael Zahn, Philip Grosse and Lars Urbansky and the former Management Board member Lars Wittan to ensure that the announcement of the rent cap and the ruling on it by the Federal Constitutional Court always fall in the same LTI performance period, so that both of these extraordinary price-relevant events are contained within a single period. The effect of the compensation agreements in this regard is to adjust the LTI performance periods for measuring the relative share performance that is used to determine the LTI. The adjustment of the LTI performance period is determined in accordance with a compensation date deﬁned in the compensation agreements. The compensation date is the last day of the third month following the month in which the Federal Constitutional Court has ruled on whether the Berlin rent cap is unconstitutional. If, for example, the Federal Constitutional Court rules in June 2021, a performance period of 1 January 2019 to 31 December 2023 would apply to the LTI remuneration granted in 2020 and a performance period of 1 January 2019 to 31 December 2024 would apply to the LTI remuneration granted in 2021.
The compensation agreements also stipulate that the Management Board members Michael Zahn and Philip Grosse and the former Management Board member Lars Wittan are granted, subject to speciﬁc conditions, subscription rights to share units (SU) that correspond to a minimum achievement of the performance target in the share option programme 2014 (relative share performance compared with the EPRA/NAREIT Germany index; 20% weighting). The agreed value of each SU corresponds to the reference price of the Deutsche Wohnen SE share as of the relevant compensation date, plus a notional dividend. The subscription requirements are deemed to be in place if the Federal Constitutional Court determines that the Berlin rent cap is unconstitutional and the closing price of the company share reaches or exceeds the amount of EUR 35.56 on at least one trading day in XETRA by Deutsche Börse AG between the date of the ruling of the Federal Constitutional Court and the compensation date, or if the Federal Constitutional Court rules that the Berlin rent cap is constitutional and the change in the value of the company share between 1 January 2019 and the compensation date corresponds at a minimum to the change in value of the EPRA/NAREIT Germany index in this period.
The settlement of the SU is equivalent to 60% of the total number of SU in shares of the company. The difference between the value of the shares transferred and the SU value in total is paid as a cash payment, including the notional dividend. For the active members of the Management Board, the information is contained in the compensation tables. The amount of Lars Wittan from EUR 67 Tsd. corresponds to the present value of 4,550 SU.
When structuring the compensation agreements the Supervisory Board ensured that the impact on the Management Board is only positive to the extent that it is backed up by a corresponding share performance that also beneﬁts shareholders, and that the Management Board members concerned do not proﬁt from extraordinary share price increases in view of a ruling by the Federal Constitutional Court, but at the same time should not be unreasonably penalised.
Restricted Share Units
Management Board members Henrik Thomsen and Lars Urbansky also receive virtual shares known as “Restricted Share Units” (RSU). The RSU are allocated in tranches over four years on 1 April of each ﬁnancial year. The number of RSU to be allocated in each ﬁnancial year is deﬁned in advance in the service contracts for Management Board members. The agreed value of each RSU corresponds to the reference price of the Deutsche Wohnen SE share on the allocation date, plus a notional dividend. The amount of the corresponding annual gross com- pany dividend per share must be added to each RSU in the year of its allocation and every year thereafter. Allocations end if the Management Board member entitled to allocations leaves the company for whatever reason.
RSU are settled in cash or, in the event of an extension of the service contract of the Management Board member entitled to allocations, in the year of allocation of the ﬁnal tranche, usually on the day on which the variable short-term remuneration component (STI) for the year concerned is paid out. On this date the company transfers to the Management Board member entitled to allocations the number of company shares corresponding to 60% of the number of RSU acquired by the Management Board member (RSU convertible shares). The Management Board member receives the difference between the value of the RSU convertible shares and the value of the RSU including the notional dividend as a cash payment on the aforementioned date.
In all other cases the virtual shares are settled on 15 April of the ﬁrst year after the last tranche has been allocated, on condition that the Management Board member entitled to allocation has not declined an offer to renew their service contract on the same terms, or has terminated their service contract without a good reason or their contract has been terminated for a good reason.
The RSU convertible shares may be sold no sooner than four years after the time of allocation of the relevant tranche
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, the Management Board members undertake to build up annual interim holdings of company shares. This means that at the end of each ﬁnancial year the total shareholding (including shares already held) of Management Board members Michael Zahn and Philip Grosse must be at least 25% of the total STI payments (net) made after 1 January 2018. The accumulation period for the Management Board members Michael Zahn and Philip Grosse ends on 31 December 2021. In an accumulation period from 1 April 2019 to 31 March 2023, the total shareholding (including shares already held) of Management Board member Lars Urbansky at the end of each ﬁnancial year must be at least 25% of the total STI payments (net) made after 1 January 2020. In an accumulation period from 1 January 2020 to 31 December 2023, the total shareholding (including shares already held) of Management Board member Henrik Thomsen at the end of each ﬁnancial year must be at least 25% of the total STI payments (net) made after 1 January 2020.
Total Management Board remuneration
Management Board members were entitled to the following remuneration for their Management Board work:
No loans or advance payments were made to members of the Management Board of Deutsche Wohnen SE in ﬁnancial year 2020.
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 the Supervisory Board had determined the level of performance, the third tranche (2016) of the share option programme 2014 became eligible for exercise in ﬁnancial year 2020 as shown in the table. Michael Zahn, Philip Grosse and Lars Wittan exercised their subscription options in full in ﬁnancial year 2020 and received shares from the contingent capital 2014/III.
The result recognised for share-based remuneration in the reporting period is composed of EUR 173,332.69 in income for tranche 3 and EUR 44,776.69 in expenses for tranche 4. The reported year 2020 resulted in balanced income of EUR 128,556.00, namely EUR 96,003.26 for Michael Zahn, EUR 28,729.36 for Lars Wittan, EUR 3,823.38 for Philip Grosse, EUR 0.00 for and Henrik Thomsen and EUR 0.00 for Lars Urbansky.
As well as outstanding share options, as of 31 December 2020, Michael Zahn held 111,565 shares, Philip Grosse held 26,007 shares, Henrik Thomsen held 4,273 shares and Lars Urbansky held 3,665 shares in the company.
Remuneration system for the Supervisory Board
Each member of the Supervisory Board receives ﬁxed annual remuneration of EUR 75 thousand, the Chair of the Supervisory Board receives three times this amount and the Deputy Chair one-and-a-half times this amount. For membership of the Audit Committee, a member of the Supervisory Board receives an additional EUR 15 thousand per ﬁnancial year and the Chair of the Audit Committee receives twice this amount. A fee of EUR 5 thousand per member and committee is paid for each ﬁnancial year for membership of other Supervisory Board committees; the committee chair 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 thousand per member of the Supervisory Board – regardless of the number of committee memberships and functions – per calendar year (not including any VAT payable).
The remuneration paid to members of the Supervisory Board in the ﬁnancial year 2020 amounted to a total of EUR 749,375 (previous year: EUR 744,167) net of value added tax. Matthias Hünlein received EUR 247,500 net (previous year: EUR 255,000), Dr Andreas Kretschmer received EUR 63,750 net (previous year: EUR 127,500; left the Supervisory Board as of June 2020), Jürgen Fenk received EUR 116,875 net (previous year: EUR 95,000), Arwed Fischer received EUR 80,833 net (previous year: EUR 43,750), Kerstin Günther received EUR 52,500 net (member of the Supervisory Board since June 2020), Tina Kleingarn received EUR 82,917 net (previous year: EUR 77,917), Dr Florian Stetter received EUR 105,000 net (previous year: EUR 105,000).
The company reimburses the members of the Supervisory Board for their out-of-pocket expenses. The VAT payable on the remuneration is reimbursed by the company to the extent that the members of the Supervisory Board are entitled to invoice the company for separate VAT and they exercise this right.
Furthermore, the members of the Supervisory Board are included in the D&O insurance of Deutsche Wohnen SE.
No loans were granted by the company to members of the Supervisory Board.