Since January 1, 2020
The current remuneration system for members of the Executive Board of Deutsche Lufthansa AG has been in place since January 1, 2020 and was approved by a majority of 88.2% at the Annual General Meeting on May 5, 2020.
The following statements provide an overview of the structure and main components of the remuneration system for the members of the Executive Board of Deutsche Lufthansa AG and on the application of the system in the financial year 2022. A full description of the system can be found in the notice convening the Annual General Meeting 2020 in section VII from page 36 onwards.
The framework agreement of 29 June 2020 concluded between Deutsche Lufthansa AG and the Economic Stabilization Fund (WSF) provides for significant restrictions on Executive Board remuneration. Subject to contractual claims against the Company already established before 21 June 2020, no bonuses, other variable or comparable remuneration components may be paid to Executive Board members for the duration of the stabilization measures. The same applies to special payments in the form of share packages, bonuses or other separate compensation in addition to the fixed salary, other discretionary compensation components and severance payments not required by law.
At the same time, no Executive Board member was allowed to receive a basic salary (including any payments for work on executive or supervisory boards of Group companies) which was higher than their basic salary as of 31 December 2019 until at least 75% of the total of Silent Participations I and II (including interest and any additional payment) and the equity interest had been satisfied, repaid or redeemed, sold or otherwise settled by means of a capital contribution or otherwise. Analogously, the upper limit for new Executive Board members was set by the lowest fixed salary of an Executive Board member with an equivalent position as of 31 December 2019.
These restrictions on basic salary no longer apply now that the stabilisation measures have been repaid in full in the fiscal year 2021. However, the restrictions in the ESF framework agreement on the payment of bonuses continue to apply until the ESF has sold its equity investment in Deutsche Lufthansa AG in full.
In view of the requirements of the aforementioned framework agreement with the ESF, the Supervisory Board has suspended variable remuneration components for the Executive Board members again for financial year 2022. This means that, as in the financial year 2021, the members of the Executive Board do not receive any variable remuneration components – representing around two thirds of the target remuneration provided for in the remuneration system.
This again represents a deviation from the remuneration structure for 2022, so that it consists solely of non-performance-related remuneration components. In view of the government stabilisation measures, this is in the interests of the Company’s long-term prosperity.
Although the Supervisory Board suspended variable remuneration elements for Executive Board members for 2022, it nevertheless set specific targets for the Executive Board members in the sense of corporate management – as already done for fiscal year 2021. On the basis of the existing remuneration system, the Supervisory Board set short-term annual targets, including individual targets, with each Executive Board member, as well as targets for the four-year period 2022 to 2025.
Each member of the Executive Board receives a fixed basic remuneration. This is paid in twelve monthly installments.
Each Executive Board member receives fringe benefits within the framework of the defined maximum compensation. These include in particular the provision of a company car with driver for business and private use, insurance allowances, and flight concessions customary in the industry for private air travel.
The members of the Executive Board receive a retirement benefit commitments based on a defined contribution system. During the term of their employment, Executive Board members are credited annually with a fixed amount in a personal pension account set up for this purpose. The investment rules for the pension account are based on the investment concept for the Lufthansa Pension Trust, which also applies to employees of Deutsche Lufthansa AG.
42.5% of the annual bonus is based on the financial targets of adjusted EBIT margin and adjusted ROCE, and 15% on non-financial overall and individual business and sustainability targets ("business and sustainability targets").
The range of target achievement for both the financial and non-financial performance criteria is between 0% and 200%.
In addition, the Supervisory Board has the option of applying an individual performance factor of 0.8 to 1.2 to the annual bonus in recognition of the individual performance of each Executive Board member. This is based on the individual performance targets agreed annually between the Supervisory Board and the individual Executive Board members .Depending on the performance of each individual Executive Board member, the amount of the annual bonus can thus be adjusted upwards or downwards in the form of a bonus or malus. The performance criteria for those targets are derived in particular from the individual areas of responsibility of the individual Executive Board members and, derived from the corporate strategy, should cover relevant aspects relating to all stakeholder groups. Specific measurable targets and/or expectations of the individual Executive Board members are then derived from the defined performance criteria.
For the business and sustainability targets, the Supervisory Board defines focus areas on an annual basis. Through these, both the overall responsibility of the Executive Board and specific challenges for individual Executive Board departments can be taken into account. In determining the specific performance criteria, the Supervisory Board is guided by aspects relating to the operational implementation of the corporate strategy as well as sustainability aspects, particularly in relation to the environment, social responsibility and governance (so-called ESG issues).
If exceptional circumstances arise which have a significant influence on the financial targets and whose occurrence could not be foreseen at the time the Supervisory Board set the target values, the Supervisory Board may adjust the one-year variable compensation accordingly. Exceptional circumstances may include, for example, significant acquisitions, the sale of significant parts of the company, a change or changes in the underlying accounting standards and/or comparable circumstances. If an adjustment is required for a fiscal year due to exceptional circumstances, this will be presented in detail and transparently in the relevant compensation report.
The Supervisory Board has the option of withholding or reclaiming the one-year variable compensation in cases of intentional or grossly negligent breach of statutory duties or violation of internal company guidelines (compliance malus and clawback) or in cases where variable compensation components linked to the achievement of specific targets were wrongly paid out on the basis of incorrect data (performance clawback).
The multi-year variable remuneration is based 85% on financial and 15% on non-financial performance criteria. On the one hand, the positioning of the relative total shareholder return (TSR), i.e. the return on shares taking into account notionally reinvested dividends, of Deutsche Lufthansa AG compared with DAX companies is measured with a weighting of 42.5 %. Secondly, the average return on capital in the form of Adjusted ROCE during the 4-year performance period is included in comparison with a strategic target set by the Supervisory Board prior to the commitment. For the non-financial strategic and sustainability targets, the Supervisory Board defines focus areas for the respective performance period.
The range of target achievement for both the financial and non-financial performance criteria is between 0% and 200%.
Since the 2020 financial year, the members of the Executive Board have received a number of virtual shares at the beginning of the performance period equal to the contractually agreed target amount.
At the end of the performance period, the number of conditionally granted shares is multiplied by the total target achievement resulting from the target achievement of the financial and non-financial performance criteria. The resulting final number of shares is multiplied by the average share price of the Lufthansa share over 60 stock market trading days prior to the end of the performance period plus any dividends paid during the performance period, and is generally paid out in cash after adoption of the consolidated financial statements for the final year of the respective performance period.
The Supervisory Board has the option of withholding or reclaiming the multi-year variable compensation in cases of intentional or grossly negligent breach of statutory duties or violation of internal company guidelines (compliance malus and clawback) or in cases where variable compensation components linked to the achievement of specific targets were wrongly paid out on the basis of incorrect data (performance clawback).
To determine the relative total shareholder return, at the end of the 4-year performance period the average share price over the last 60 trading days prior to the start of the performance period is compared with the average share price over the last 60 trading days prior to the end of the performance period. Fictitious reinvested dividends are taken into account. The DAX companies that are represented in the index both at the beginning and at the end of the performance period are used as the peer group for the relative TSR. The TSR performance of all companies is ranked and the relative positioning of Deutsche Lufthansa AG is determined on the basis of the percentile achieved.
For the determination of target achievement applies:
The Supervisory Board has set uniform maximum amounts for the performance-related compensation components for all members of the Executive Board. These are uniformly set at 200% of the target amount for both the one-year and the multi-year variable compensation for all members of the Executive Board.
In addition, the Supervisory Board has set a maximum compensation for the respective members of the Executive Board pursuant to Section 87a (1) No. 1 AktG for the total of all compensation amounts spent for a fiscal year (including fringe benefits and pension commitment). This is EUR 9.5 million for the Chairman of the Executive Board and EUR 5.0 million for an ordinary member of the Executive Board.
If the compensation for a fiscal year exceeds this maximum limit, the variable compensation will be reduced accordingly.
The Share Ownership Guidelines (SOG) oblige the Chairman of the Executive Board to acquire Lufthansa shares in the amount of two times and ordinary Executive Board members in the amount of one times their respective basic remuneration and to hold these shares for the duration of their service and beyond. The minimum number of Lufthansa shares to be acquired by Executive Board members is determined at the start of their Executive Board service on the basis of the average share price over the 125 stock market trading days prior to the start of the employment contract. If the basic remuneration is increased, the number of shares to be acquired also increases.
As a rule, a four-year build-up phase applies to the share portfolio. Existing shareholdings are taken into account. Compliance with this obligation must be demonstrated annually by the members of the Executive Board.
The shares held under the SOG are to be held until termination of the Executive Board member's employment contract. Upon leaving the Executive Board, the Executive Board member may then sell 25% of the shares held by him under the SOG each year.
In connection with the restrictions on Executive Board compensation during the WSF stabilization measures, the Supervisory Board resolved to suspend the four-year build-up period for the period of the stabilization measures. It will come into effect again as soon as variable compensation is granted again.
The assumption of sideline activities by Executive Board members outside the Lufthansa Group requires the prior approval of the Presiding Committee of the Supervisory Board in each case.
If members of the Executive Board hold mandates or similar offices in companies in which Deutsche Lufthansa AG holds a direct or indirect interest, these are deemed to be compensated for with the Executive Board remuneration and are not remunerated separately. Any remuneration from such mandates is offset against the Executive Board remuneration.
In the event of premature termination of the contract without good cause, the Company will, in accordance with the recommendation of the German Corporate Governance Code, compensate no more than the value of the entitlements for the remaining term of the contract, whereby payments may not exceed two years' compensation (severance payment cap). The maximum severance payment is calculated on the basis of the amount of the annual compensation, which comprises the basic compensation and the target values for the one-year and multi-year variable compensation; non-cash compensation and fringe benefits are not taken into account.
In the event of termination by regular expiry of the contract, premature termination at the request of the Executive Board member without good cause or good cause for termination by the Company, there is no entitlement to a severance payment or other payments from the one-year or multi-year variable compensation.
In the event of a change of control, the Executive Board member and the Company each have the right to terminate the Executive Board employment contract within a period of six months from the change of control. In this case, the Executive Board member is entitled to a severance payment in the amount of his compensation entitlements for the remaining term of the contract. The amount of the severance payment may not exceed the contractually agreed maximum severance payment described above. For all employment contracts concluded before January 1, 2020, the severance payment amount is still 150% of the maximum severance payment.
Executive Board members are subject to a one-year non-competition clause after leaving the Executive Board. For the duration of the post-contractual non-competition clause, the Company pays the Executive Board member compensation (severance payment) amounting to half of the basic compensation. The offsetting of a severance payment against the waiting allowance has so far only been provided for in Executive Board employment contracts concluded after the entry into force of the German Corporate Governance Code as amended on December 16, 2019, and for future new appointments and reappointments.
Corporate responsibility, that is to say sustainable and responsible entrepreneurial practice, is an integral part of our corporate strategy. It means that we are committed to creating added value for our customers, employees and investors and to meeting our responsibilities toward the environment and society.