Due to the strategic realignment of the Siemens Group under »Vision 2020+,« the draft version of the German Corporate Governance Code dated May 9, 2019, and the draft of the act transposing the second European Shareholder Rights Directive into German law (ARUG II), the compensation system for Managing Board members was thoroughly reviewed and further developed in fiscal year 2019.
The revised compensation system applies to all members of the Managing Board in office as of October 1, 2019 and to all new appointments and reappointments thereafter. On February 5, 2020, the Annual Shareholders’ Meeting endorsed the revised compensation system by a strong majority of 94.51 percent.
The following overview summarizes key changes to the compensation system for members of the Managing Board. A full description of the revised system can be found in the Notice of Annual Shareholders’ Meeting 2020 under Agenda Item 6 »To resolve on the approval of the system of compensation for the members of the Managing Board«.
The revised compensation system for the members of the Managing Board is thus as follows:
The overhauled compensation system enables the Supervisory Board to set total target compensation according to the function of each Managing Board member and thus to consider the different requirements for each function in setting both the absolute amount and the structure of compensation.
This possibility for differentiation has the consequence that the proportions of total target compensation represented by each of the individual compensation components in the compensation system are stated in percentage ranges. These were determined in such a way that, based on a target compensation without differentiation for fiscal year 2020 (»income basis«), any differentiation would not lead to a reduction in the proportion of long-term variable remuneration (Stock Awards).
Total target compensation of Managing Board members for fiscal year 2020 was adjusted in two respects: firstly, as part of the regular income review and secondly – for selected Managing Board members – on the basis of functional differentiation.
Specifically, the Supervisory Board made use of the option to differentiate the compensation of three members of the Managing Board for fiscal year 2020. As in previous years, Joe Kaeser’s compensation was differentiated based on his function as President & CEO. In addition, differentiation was made for Dr. Roland Busch and Prof. Dr. Ralf P. Thomas based on the special responsibility associated with the functions of Deputy CEO and Chief Financial Officer, respectively.
As part of the regular income review, the total target compensation was adjusted in favor of long-term variable compensation.
Target compensation for fiscal year 2020 was set by the Supervisory Board as follows:
In the future, the pension benefit contribution will be set as a fixed amount rather than as a percentage of base compensation plus the Bonus target amount. Instead of a pension benefit contribution, the Supervisory Board may grant newly appointed members of the Managing Board a fixed cash amount that can be used at the Managing Board member’s discretion.
Going forward, the short-term variable compensation will take account of the overall responsibility of the Managing Board, Managing Board members’ respective business responsibility and their individual challenges. Accordingly, the Bonus system is based on three equally weighted target dimensions: »Siemens Group«, »Managing Board portfolio« and »Individual targets.«
In both the »Siemens Group« and »Managing Board portfolio« dimensions, target attainment is measured based on one financial KPI. Individual targets can either be financial or non-financial targets.
In the »Individual targets« dimension, financial targets measuring liquidity or growth, as well as further non-financial targets, can be applied.
The Supervisory Board’s option to adjust the paid-out Bonus upwards or downwards by as much as 20% at its duty-bound discretion has been eliminated. As a result, the maximum Bonus payout amount has been reduced from 240% to 200% of the target amount.
Malus and clawback regulations allow the Supervisory Board to withhold or reclaim short-term variable compensation (Bonus) in certain situations.
Application for fiscal 2020
On September 18, 2019, the Supervisory Board of Siemens AG approved the following performance criteria for the short-term variable compensation component (Bonus) for fiscal 2020:
- For »Siemens Group,« the performance criterion »profit,« measured in terms of basic earnings per share (EPS);
- For »Managing Board portfolio,« the performance criterion »profitability/capital efficiency,« measured in terms of return on capital employed (ROCE) for Managing Board members with primarily functional responsibility, and in terms of the profit margin of the relevant business for Managing Board members with business responsibility.
Information on the »Individual targets« for the respective Management Board members – in particular on strategic initiatives, if these have already been completed – will be published following the close of the fiscal year in order to avoid disclosing sensitive information to third parties. Otherwise Siemens could risk putting itself at a competitive disadvantage.
Target bonus amounts were not adjusted versus last year’s levels.
Previously, the Stock Awards were subject to a single performance criterion: the performance of the Siemens share compared to the performance of the shares of relevant competitors. In the future, the number of shares to be transferred will depend on two performance criteria: 80% on the total shareholder return (»TSR«) and 20% on Siemens AG's internal performance in the area of environmental, social and governance (»ESG«).
Total Shareholder Return (TSR)
For long-term stock-based compensation (Stock Awards), the performance of Siemens AG on the capital market will be compared with a broad sector index (MSCI World Industrials) on the basis of total shareholder return (TSR). In view of the planned and announced changes in the business portfolio of Siemens AG, MSCI World Industrials offers a stable, strategically relevant metric over the term of a tranche. By taking account of share price performance and dividends paid, TSR reflects the overall performance of the Siemens share.
The range of target achievement for the TSR is between 0% and 200%. The following applies for the determination of target attainment:
- If the change in TSR of Siemens AG is at least 20 percentage points better than the change in TSR of the sector index, the target attainment is 200%.
- If the change in TSR of Siemens AG is equal to that of the sector index, the target attainment is 100%.
- If the change in TSR of Siemens AG is at least 20 percentage points worse than that of the sector index, the target attainment is 0%.
Environmental, Social & Governance (ESG)
To anchor environmental, social & governance (ESG) factors and sustainability in the Managing Board compensation system, a second performance criterion will be introduced for the Stock Awards in the form of a Siemens-internal ESG / Sustainability Index based on three equally weighted metrics. The ESG metrics will reflect relevant strategic and socio-political topics.
The current limit (cap) for stock awards of 300% of the target amount will be maintained.
Malus and clawback regulations allow the Supervisory Board to withhold or reclaim long-term variable compensation (Stock Awards) in certain situations.
Application for fiscal 2020
The Supervisory Board approved the following performance criteria for the 2020 Stock Awards tranche (vesting period: November 2019 to November 2023):
- »Long-term value creation,« measured in terms of total shareholder return (TSR) relative to the MSCI World Industrials index
- »Sustainability,« measured in terms of the Siemens ESG / Sustainability Index and taking into account the following three equally weighted key factors: CO2 emissions (environmental), learning hours per employee (social) and Net Promoter Score as a measure of customer satisfaction (governance).
Target amounts for Stock Awards were adjusted for all Managing Board members as part of the regular income review.
The maximum compensation for members of the Managing Board – in accordance with the draft of ARUG II – is equal to the sum of the maximum amounts that can be paid out to each Managing Board member for all compensation components for the given fiscal year. This amount limit is set annually by the Supervisory Board for each member of the Managing Board.
Maximum compensation is thus calculated as follows:
The Siemens Share Ownership Guidelines oblige the Managing Board members – after a four-year build-up phase – to continuously hold Siemens shares worth a multiple of their base salary.
The Share Ownership Guidelines are unchanged from the compensation system previously in effect. They remain at 300% of base salary for the President and CEO and 200% of base salary for all other Managing Board members.
If a Managing Board member holds a position in another Siemens company, also under the revised system no separate compensation is paid since holding such positions is considered to be covered by contractual Managing Board compensation.
With regard to compensation paid for external mandates, the Supervisory Board will decide on a case-by-case basis whether and to what extent the compensation for such positions is to be deducted.
For newly concluded Managing Board employment contracts (first-time appointment) or the extension of these contracts, there are no longer special rights to terminate the contract or severance payments in the event that a change of control occurs.
In the event of termination due to regular expiration of the term of office, no severance payments or special pension contributions are made. The same applies for early termination by mutual agreement at the request of the Managing Board member or if there is serious cause that entitles the Company to terminate the appointment.
In the event of early termination of Managing Board employment by mutual agreement and without serious cause, the Managing Board contracts stipulate a severance payment in line with regulatory requirements and common market practice.
With its revised compensation system for the Managing Board and in line with regulatory requirements and feedback from various stakeholders, Siemens has further enhanced its level of transparency and already implemented this in the Compensation Report for fiscal year 2019. Shareholders and other stakeholders should always be able to understand clearly how the system for compensating Managing Board members helps implement the Company’s strategy and fosters its sustainable development.
In the future, the Compensation Report will include the relevant performance criteria for the following fiscal year’s Bonus, together with the corresponding key figures. The key figures for the Siemens ESG / Sustainability Index that have been selected for the respective tranche of Stock Awards will also be published.
The target values, target ranges and target attainment for the Bonus-related key financial figures in a reporting year will be published retroactively in the Compensation Report. The target values, target ranges and extent of target attainment measured in terms of capital market performance and of the Siemens ESG / Sustainability Index will be published for the relevant Stock Awards tranches after the expiration of the vesting period.
Disclaimer: The information on this website describes the substantial changes to the compensation system for the Managing Board of Siemens AG and the manner in which the revised system has been applied in fiscal year 2020. A detailed and authoritative description of the revised system can be found in the Notice of Annual Shareholders’ Meeting 2020 under Agenda Item 6 »To resolve on the approval of the system of compensation for the members of the Managing Board«.