The remuneration report describes the principles underlying the system of remuneration for the members of the Management Board and the Supervisory Board of Deutsche Wohnen SE, and explains the composition and amount of the individual remuneration paid to each of the Board members.
Remuneration system for the Management Board
The remuneration system for the Management Board and the total remuneration of the individual members are determined by the Supervisory Board and are subject to regular review. The amount of remuneration to be paid is governed by the German Stock Corporation Act [Aktiengesetz – AktG], supplemented by the regulations of the German Corporate Governance Code [Deutscher Corporate Governance Kodex – DCGK].
Criteria for the appropriateness of the remuneration paid to members of the Management Board are the responsibilities of the individual member, his/her personal performance, the economic situation, the success and future prospects of the company, and the extent to which the amount of remuneration is customary among his/her peers and in light of the remuneration structures in place within the company. The remuneration system as a whole focuses on the sustainable development of the company.
The contracts of all of the members of the Management Board provide a compensation payment in the event that their board activity ends early for reasons other than termination for good cause. The amount of this payment is limited to a maximum of two years' remuneration (settlement cap) and will not constitute remuneration for more than the residual term of the employment contract. The contracts also provide a compensation payment in the event of an early termination of the board activity as a result of a change of control, in which case the amount of the payment will be limited, in line with Section 4.2.3 of the DCGK, to a maximum of three years' remuneration.
In addition to fixed remuneration, the members of the Management Board receive variable short-term and variable long-term remuneration. The variable short-term remuneration component is aligned with short-term company targets. The variable long-term remuneration component is intended to enable the members of the Management Board, who shape and implement the company's business strategy and are thus materially responsible for its performance, to partake of the financial risks and opportunities to which the company is exposed. The variable remuneration components may be withheld in the event of any non-attainment of targets or will be subject to an upper limit.
The members of the Management Board moreover receive benefits in kind in form of insurance premiums and personal use of means of communication and company vehicles. In case of extraordinary developments, the contracts of the Management Board additionally could provide extra payments/remuneration which are limited to the amount of the particular fixed annual salary. No pension arrangements are in place.
The variable long-term remuneration component will be revised in 2018.
Variable remuneration system until financial year 2017
The variable short-term remuneration component – short-term incentive (STI) – is set on an annual basis in a target agreement between the Management Board and the Supervisory Board. The level of target attainment is determined after the respective financial year has ended. All claims to remuneration will be forfeited if the level of target attainment is lower than 75%, with the upper limit in this regard being 125%.
Payment of the STI for the financial year 2017 was subject to the attainment of the following financial performance targets: FFO I (weighting: 20%), earnings from disposals (weighting: 20%), EPRA NAV per share (weighting: 10%) and LTV (weighting: 10%). In addition, various strategic targets were defined, primarily with regard to the further optimisation of the capital structure, the implementation of the investment programme, the further expansion of the value-added chain, the integration of the nursing home facilities acquired in the financial year 2016, and the further development of the sustainability strategy (weighting: 30%). The decision as to whether to pay a further 10% of the STI was placed at the discretion of the Supervisory Board. At its meeting held on 8 March 2018, the Supervisory Board resolved upon the application of a degree of target attainment for STI of 125% for the Management Board for the financial year 2017.
The variable long-term remuneration component – long-term incentive (LTI) – takes the form of a share option programme ("SOP 2014").
In order to safeguard the shareholders' interest in a sustainable enhancement of the value of the company, share options may only be exercised where defined performance targets are reached by the end of the four-year waiting 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 development (weighting: 20%). Each of the aforementioned performance targets in turn comprises a minimum target, which must be attained in order to render half of the share options allotted to this performance target exercisable. In addition, there is a maximum target, upon the attainment of which all of the share options allotted to this performance target will become exercisable. The minimum target will be attained upon target attainment of 75% and the maximum target will be attained upon target attainment of 150%, taken across all of the individual targets. The performance targets take account of both the development in absolute terms of the key industry-specific indicators EPRA NAV per share (adjusted for goodwill) and FFO I per share on the basis of the company's four-year projections prior to the issuance of any share options, and also the relative performance of the Deutsche Wohnen share as compared to a group of its publicly listed German competitors. This is intended to encourage the beneficiaries of the programme to act in furtherance of the goal of attaining positive sustainable performance on the part of the company.
In accordance with Section 193(2)(4) of the German Stock Corporation Act [AktG], the waiting period for a tranche of share options will in each case commence on the date of issue and end four years after that date. The period for the exercise of the options is three years. Share options that are not or cannot be exercised by the end of the relevant seven-year term will expire or be forfeited without reparation or compensation.
System of variable remuneration from financial year 2018 onwards
According to the recommendation of the Executive Committee the Supervisory Board resolved upon the implementation of adjustments to the system of remuneration for the members of the Management Board. The previous system of remuneration had been subjected to a review and process of enhancement with the assistance of an external remuneration consultant. The objectives for the enhancement of the system of remuneration for the members of the Management Board can be summarised as follows:
The revised system of remuneration for the Management Board, described in greater detail below, is in line with both the specifications of the AktG and the recommendations and suggestions put forward by the DCGK. The changes will apply in equal measure to all of the members of the Management Board from 1 January 2018 onwards.
Overview of the new variable system of remuneration
The new system of remuneration has been established on the basis of, performance-based parameters as well as on the relative share price performance aimed at securing the success of the company. The variable remuneration components will continue to be calculated primarily on a long-term basis. In the interests of reducing the complexity of the system of remuneration, the share option plan in place to date will be replaced with a performance cash plan. The introduction of Share Ownership Guidelines (SOGs) will effectively reinforce the company‘s capital markets orientation, while fostering synchronized interests between Deutsche Wohnen‘s shareholders and its Management Board.
Variable short-term remuneration component – short-term incentive (STI)
In the interests of improving the transparency and comprehensibility of the system of remuneration, the performance targets for the STI will be described in the annual report from the financial year 2018 onwards. In addition, the Supervisory Board will in the future waive its rights with regard to the discretionary payment of a portion of the STI.
The assessment basis for the STI will comprise both financial and non-financial performance targets, which will be in line with both the current business strategy and the short-term company targets. They will be agreed upon in the form of a target agreement between the Management Board and the Supervisory Board at the beginning of each financial year. The performance targets defined in the target agreement will be disclosed in advance in the remuneration report, with at least two financial and two non-financial performance targets being determined per financial year, whereby the financial performance targets will always account for a share of 80% of the overall degree of target attainment.
The following financial performance targets apply with regard to the financial year 2018: (i) the adjusted EBITDA excluding earnings from disposals (weighting: 50%), (ii) the cost ratio (the relationship of staff costs and general and administration expenses to in-place rents; weighting: 10%) and (iii) the sales proceeds (weighting: 20%). The target values for the attainment of the financial performance targets are stipulated by the Supervisory Board, having regard to the business plan (budget) for the year in question. A bonus will be paid out where the aggregated results for the three financial performance targets amounts to as much as 125% of the target value in question. No bonus will be paid out where the aggregated degree of target attainment is under 75%.
Strategic targets have been defined by way of non-financial targets in relation to the sustainability of the company‘s investment programme, having regard to the extent of the reduction of CO² emissions, the growth in the segment of nursing and assisted living, the expansion of the supply chain as well as the progress made in the „DW 4.0“ project, and assigned a weighting of 20% in total. DW 4.0 addresses the necessary means of enhancing Deutsche Wohnen‘s ability to tap into new and existing, but as yet unused, potential, which involve the adoption of a more customer-focussed approach, a target group-oriented portfolio strategy and intergenerational personnel development measures. As in the case of the financial performance targets, the degree of attainment of the strategic targets may range between 0% and 125%, with 100% target attainment being the target value. As in the case of the financial performance targets, the degree of attainment of the strategic targets and the individual performance targets may range between 0% and 125%, with 100% target attainment being the target value.
The degree of attainment of the financial and non-financial targets is determined upon the expiration of a given financial year, and is published in the remuneration report. The final amount of the annual bonus paid out may not exceed 125% of the target value in question.
Variable long-term remuneration component – long-term incentive (LTI)
In the future, the members of the Management Board will receive variable long-term remuneration in the form of a cash payment as part of a performance cash plan. The new system of remuneration continues to be based on transparent, performance-based parameters aimed at securing the sustainable success of the company. The performance cash plan provides for the limitation of the amount of the LTI to be paid out to a maximum of 250% of the target in question.
The members of the Management Board will receive a target amount in euros for each tranche of the performance cash plan. This target amount will be multiplied by the applicable degree of target attainment upon the expiration of a four-year performance period. The assessment basis for the determination of the overall degree of target attainment will comprise two equally-weighted performance targets, which are cumulatively combined. Having regard to the relative share price performance and the return on property (EPRA NAV growth and dividend return), the amount of variable long-term remuneration which will be paid out will depend on both an external comparison with the company's competitors and on an evaluation of Deutsche Wohnen's performance.
The performance target “relative share price performance” takes account of both general developments on the capital markets and the performance of the company‘s competitors. During the four-year performance period, the development of the total shareholder return (TSR) on the Deutsche Wohnen share is gauged on the basis of a comparison with the FTSE EPRA/NAREIT Germany index, with the extent of any outperformance being calculated as the difference between the development of the TSR on the Deutsche Wohnen share and that of the reference group. The arithmetical mean of the closing prices for the last 30 trading days prior to the commencement of the performance period is taken as the initial share price for the Deutsche Wohnen share and the FTSE EPRA/NAREIT Germany index, with the arithmetical mean of the closing prices for the last 30 trading days prior to the expiration of the performance period being taken as the final share price. Dividends paid out over the course of the years in question will be offset, on the assumption that the amounts will be reinvested, in the calculation of the relative share price performance. The scale which will apply to the performance target “relative share price performance” over the four-year performance period is as follows:
The performance target “return on property” serves as an incentive for the Management Board to increase Deutsche Wohnen‘s net asset value, and the amount of the dividends paid out to its shareholders, over the long term. In this context, the EPRA NAV per share (adjusted for goodwill) at the beginning of the performance period is compared to the corresponding value at the end of the performance period in percentage amounts. This value is added to the total annual dividend return, which reflects the ratio of the individual annual dividend to the EPRA NAV per share calculated for the previous year. The scale which will apply to the performance target “return on property” over the four-year performance period is as follows:
The degree of attainment of the two performance targets is determined upon the expiration of the four-year performance period and is published in the remuneration report. The final amount of paid out per tranche may not exceed 250% of the target value originally awarded.
Introduction of Share Ownership Guidelines (SOGs)
Share Ownership Guidelines (SOGs) will be introduced from the financial year 2018 with a view to reinforcing Deutsche Wohnen's capital markets orientation and equity culture. The members of the Management Board of Deutsche Wohnen have undertaken to invest 300% (Chief Executive Officer) or 150% (ordinary members of the Management Board) of their basic remuneration in Deutsche Wohnen shares over a period of four years and to hold these until the expiration of their term of office as Board members. To this end, each member of the Management Board of Deutsche Wohnen has undertaken to meet interim targets with regard to shareholdings over the course of an acquisition period ending on 31 December 2021. Accordingly, their total shareholdings (including already held shares) at the end of each financial year should be commensurate with at least 25% of the total amount of the STI remuneration (net salary) paid out after 1 January 2018.
Total remuneration paid to the members of the Management Board
The members of the Management Board have received the following remuneration in return for the performance of their responsibilities in this capacity:
The members of the Management Board as well as the internal positions held by the Supervisory Board members have received the following amounts in return for their work in this capacity:
Given that Mr Philip Grosse was appointed a member of the Management Board with effect as at 1 September 2016, he was only paid partial amounts of remuneration for his work in this capacity with respect to 2016.
No loans or advances were granted to members of the Management Board of Deutsche Wohnen SE in the financial year 2017.
The following share options on basis of the existing share options program [AOP] 2014 have been granted to date:
The number of exercisable share options per tranche will conclusively be determined upon the expiration of the waiting period and in accordance with the degree of the satisfaction of the above-mentioned criteria.
In addition to their respective share options, Mr Michael Zahn holds 26,389, Mr Lars Wittan 11,104 and Mr Philip Grosse 11,000 shares in the company¹,².
Illustrative overview of the number of the company's shares and share options held by the members of the Management Board (by way of example, on the basis of exercisability upon degrees of target attainment of 75% and 150%):
1 The exercise period is three years, the exercise price is EUR 1.00.
2 The total expenditure of the share-based remuneration described in the report period, is for Mr Michael Zahn EURk 768, for Mr Lars Wittan EURk 389 and Mr Philip Grosse EURk 208.
System of remuneration for members of the Supervisory Board
Each member of the Supervisory Board receives a fixed remuneration of EUR 75,000; the Chairman of the Supervisory Board receives three times that amount and the Deputy Chairman of the Supervisory Board receives one and a half times that amount as remuneration. Each member of the Supervisory Board receives lump-sum remuneration in the amount of EUR 15,000 per financial year for his/her membership of the Audit Committee, with the Chairman receiving double that amount. Remuneration for membership of any other Supervisory Board committees is paid in the amount of EUR 5,000 per member, committee and financial year, with the Chairman receiving double that amount in each case. Including the remuneration of the members of the Supervisory board and comparable supervisory committees of the Group, the total amount of any remuneration per member of the Supervisory board – regardless of the number of memberships in a committee or functions - must not exceed an amount of EUR 300,000 (excluding the turnover tax thereby incurred) per year.
The Supervisory Board remuneration for the financial year 2017 amounted to EUR 738,750 (previous year: EUR 543,000), net of value added tax. Mr Uwe E. Flach received EUR 270,000 net (previous year: EUR 148,000), Dr. Andreas Kretschmer received EUR 162,500 net (previous year: EUR 123,000), Mr Wolfgang Clement received EUR 37,500 (previous year: EUR 68,000; ceased to be a member of the Supervisory Board with effect as at 2 June 2017), Mr Jürgen Fenk received EUR 18,750 (member of the Supervisory Board since 1 October 2017), Mr Matthias Hünlein received EUR 80,000 net (previous year: EUR 65,000), Dr. Florian Stetter received EUR 95,000 net (previous year: EUR 75,000), and Mr Claus Wisser received EUR 82,500 net (previous year: EUR 65,000).
The company will reimburse the members of the Supervisory Board for any reasonable expenses incurred by them in the performance of their duties. The company will also reimburse the amount of any value added tax accruing on the remuneration paid to the members of the Supervisory Board, provided that the latter are entitled to invoice the company for the value added tax on a separate basis and avail themselves of this option.
Furthermore, the company has taken out liability insurance on behalf of the members of the Supervisory Board (so-called D&O insurance), with a retention amount of 10% of the value of the damage in question. This retention amount will be limited, for all events of damage occurring within an annual policy period, to one-and-a-half times the amount of the fixed annual remuneration for the member of the Supervisory Board in question.
No loans were granted by the company to members of the Supervisory Board.