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] applicable in financial year 2019 as amended on 7 February 2017.
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. Overall, the remuneration system is aligned with the company’s sustainable development.
All Management Board contracts provide for a compensation payment if the contract is terminated early without an important reason. 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 2017.
In addition to their fixed remuneration, Management Board members also receive variable short-term and 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 otherwise is 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. No retirement benefits have been agreed.
Variable remuneration components
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 2017.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. 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 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). The non-financial performance targets are strategic targets with a total 20% weighting, which cover the integration of homes acquired, the definition of a platform and portfolio strategy for the Nursing and Assisted Living business field, the implementation of the strategic sustainability programme and a more intensive dialogue with tenants and policymakers.
At its meeting held on 13 March 2020 the Supervisory Board approved a performance by the Management Board of 125% for the achievement of financial performance targets for financial year 2019. Adjusted EBITDA without disposals was EUR 718.6 and earnings from Disposals amounted to EUR 186.1, and thereby exceeded the planned figures adopted by the Supervisory Board by around 4.5% or around 540%. Cost ratio of 12.1% including disposal-related staff and general expenses was around 3.5% below the forecast for the financial year. For the non-financial targets for the financial year 2019, the Supervisory Board decided on a target performance of 110%.
For financial year 2020 the financial performance targets are (i) FFO I per share (40% weighting), (ii) cost ratio (staff, general and administration expenses divided by rental income; 10% weighting) and (iii) institutional sales proceeds (30% weighting). The non-financial performance targets are strategic targets with a total 20% weighting, including the development of the Equity Story, customer and employee satisfaction as well as the implementation of the strategic sustainability programme.
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:
Using the ‘return on property’ as a performance target incentivises the Management Board members to 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”). In line with the shareholders’ interest 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 (weighting: 40%), (ii) FFO I (without disposals) per share (weighting: 40%) and (iii) the share price performance (weighting: 20%). 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.
In addition, Management Board members Henrik Thomsen and Lars Urbansky receive virtual shares known as “Restricted Share Units” (RSU). The allocation of the RSU’s is made in tranches over four years on April 1 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 at each allocation date, plus a notional dividend. This corresponds to the amount of the company’s annual gross dividend per share, which is added in the year of allocation and every year thereafter. Allocations end if the qualified Management Board member leaves the company for whatever reason.
The RSU are settled in cash. If the service contract is renewed for a qualified Management Board member the RSU are settled in the year the last tranche is allocated, generally on the date on which the variable short-term remuneration component (STI) is paid for the respective year. On this date the company transfers to the qualified Management Board member 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 qualified Management Board member 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 not be sold earlier than four years after the date on which the respective tranche was allocated.
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 interim holdings of company shares. This means that at the end of each financial year the total shareholding (including shares already held) of the Management Board members Michael Zahn and Philip Grosse should 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. Management Board member Lars Wittan's obligation to invest in and hold shares in Deutsche Wohnen ended when his employment contract on 30 September 2019. At the end of each fiscal year, the total shareholding (including shares already held) of Management Board member Lars Urbansky should be at least 25% of the total of the STI payments (net) paid after 1 January 2020, while being in a build-up phase from 1 April 2019 until 31 March 2023. At the end of each fiscal year, the total shareholding (including shares already held) of Management Board member Henrik Thomsen should be at least 25% of the total of the STI payments (net) paid after 1 January 2020, while being in a build-up phase from 1 January 2020 until 31 December 2023.
1.2. Total Management Board remuneration
The members of the Management Board have received the following remuneration in return for the performance of their responsibilities in this capacity:
No loans or advance payments were made to members of the Management Board of Deutsche Wohnen SE in financial year 2019.
The following share options have been granted on the basis of the previous share option programme (SOP 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.
The second tranche (2015) of the SOP 2014 became eligible for exercise in March 2019 after the Supervisory Board had determined the level of performance. Michael Zahn and Lars Wittan each exercised all of their share options in this tranche in financial year 2019 and received shares from Contingent Capital 2014/III.
Total expenses recognised for share-based remuneration in the reporting period were EUR 11,000 for Michael Zahn, EUR 3,000 for Lars Wittan, EUR 1,000 for Philip Grosse, EUR 0 for Henrik Thomsen and EUR 0 for Lars Urbansky.
In addition to their outstanding share options, Michael Zahn held 81,565 company shares, Philip Grosse 21,184 company shares, Henrik Thomsen 1,565 company shares and Lars Urbansky 1,215 company shares as of 31 December 2019.
1.3. Remuneration system for the Supervisory Board
Each Supervisory Board member receives fixed annual remuneration of EUR 75 thousand, the Chairman of the Supervisory Board three times this amount and the Deputy Chairman one-and-a-half times this amount. For membership of the Audit Committee a Supervisory Board member receives an additional EUR 15 thousand per financial year and the Chairman 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 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 thousand per Supervisory Board member (not including any VAT payable) per calendar year, regardless of the number of committee memberships and functions.
The remuneration paid to Supervisory Board members in the financial year 2019 amounted to EUR 744,167 (previous year: EUR 772,083) net of value added tax. Matthias Hünlein received EUR 255,000 net (previous year: EUR 182,083), Dr Andreas Kretschmer received EUR 127,500 net (previous year: EUR 140,833), Jürgen Fenk received EUR 95,000 net (previous year: EUR 86,667), Arwed Fischer received EUR 43,750 net (Supervisory Board member since 18 June 2019), Tina Kleingarn received EUR 77,917 net (previous year: EUR 43,750), Dr Florian Stetter received EUR 105,000 net (previous year: EUR 101,250) and Claus Wisser received EUR 40,000 net (previous year: EUR 82,500, left the Supervisory Board as of 18 June 2019).
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.
Furthermore, the company has taken out general liability insurance on behalf of the members of the Supervisory Board (so-called D&O insurance), with retention of 10% of the value of the damage in question. 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.