Compensation system for the members of the Executive Board

Introduction

 

As an independent, publicly-listed company, Siemens Energy’s Executive Board compensation follows the requirements of the German Stock Corporation Act (AktG) and implements all relevant recommendations of the German Corporate Governance Code. 

The Supervisory Board approved the compensation system explained below with effect from October 1, 2020. It has been implemented in the employment contracts with the respective Executive Board members.

 

 

The Transposition Of The Second Shareholder Rights Directive (ARUG II) requires that the compensation system for the Executive Board be presented to shareholders for approval upon every substantial change, at a minimum every four years. The compensation system for members of the Executive Board was approved by the company’s Annual Shareholders’ Meeting on February 10, 2021 with 96.7% of the recorded votes (Say on Pay).

 

Design of the Executive Board’s compensation

 

Compensation for the Executive Board should be transparent, easy to understand and set clear incentives for sustainable value creation. Further, the compensation system should support Siemens Energy’s strategy, take account of industry-specific conditions, offer a clear link to both individual and collective performance, and align with compensation for executive management and other employees of the Company.

 

A strong focus on performance is established by linking the majority of Executive Board members’ compensation to challenging performance targets. In most cases, over 60% of Siemens Energy Executive Board members’ compensation is variable and therefore “at risk”, meaning that it is tied to the attainment of pre-defined targets and can fall to as little as zero. Of variable compensation, a majority is granted in the form of long-term equity-based variable compensation (Stock Awards), which each give the recipient the right to receive one share of Siemens Energy stock after a four-year vesting period, depending on the degree to which targets are attained. This ensures that Executive Board members are rewarded for driving the Company’s sustainable development.

 

The sections below describe each aspect of the Executive Board’s compensation system in greater detail and give an overview of how the system has been applied for fiscal year 2021. A full description of the compensation system according to the standards set by §87a AktG can be found in the Company’s Notice of Annual Shareholders' Meeting 2021. Disclosures on the compensation of members of the Executive Board in fiscal year 2020 can be found in the Compensation Report, which is part of the Combined Management Report for fiscal year 2020.

The Supervisory Board has set the following target and maximum compensation levels for fiscal year 2021:

The compensation system for the members of the Executive Board places the focus on variable and long-term rewards. Viewed through the lens of target direct compensation, base salary and short-term variable compensation (Bonus) each comprise a share of 30%; to ensure that a majority of variable compensation is tied to multi-year performance, long-term equity-based variable compensation (Stock Awards) comprises a share of 40%.

 

According to regulatory requirements, the relative share of compensation is to be defined in terms of total target compensation. In this view, compensation is defined within three categories: fixed compensation (base salary, retirement benefits and fringe benefits), short-term variable compensation (Bonus) and long-term equity-based variable compensation (Stock Awards). As a rule, fixed compensation amounts to 38% of total target compensation, short-term variable compensation equals 27% and long-term equity-based variable compensation equals 35%. These percentages can vary from year to year depending on the value of fringe benefits.

Each member of the Executive Board receives a fixed base salary that is normally paid out in 12 monthly installments. The responsibilities and experience of the respective member of the Executive Board serve as an orientation for the level of base salary. For members of the Executive Board whose place of employment is located outside of Germany, a differing number of installments can be agreed on.

A maximum value for fringe benefits, in relation to base salary, is defined for each member of the Executive Board prior to the respective fiscal year. This amount covers benefits granted to the member of the Executive Board, for example, contributions in kind granted by the Company or fringe benefits like the provision of a company car, subsidies for insurance policies and assumption of costs for preventative medical examinations. In particular in connection with a place of employment outside of Germany, the Supervisory Board can additionally increase the maximum amount determined by a defined Euro amount.

 

Application for fiscal year 2021

 

For fiscal year 2021, the Supervisory Board set the maximum value equal to 8% of base salary. For Maria Ferraro, the maximum value was increased to a total of €107,600 to account for benefits granted by Siemens AG that still apply in fiscal year 2021. For Tim Holt, the maximum value was increased to a total of €457,600 to account for the value of potential tax equalization benefits. The Supervisory Board will decide on whether and in which amount to grant this benefit after Tim Holt submits final tax returns and the additional tax burden due to taxation in multiple jurisdictions is calculated.

The members of the Executive Board can be included in the Siemens Defined Contribution Pension Plan (BSAV). As a part of the BSAV, members of the Executive Board receive contributions that are credited to their individual pension account. The Supervisory Board annually re-views the appropriateness of contributions and decides whether to grant a contribution, which takes the form of a fixed amount credited to the BSAV. In place of contributions to the BSAV, the Supervisory Board can grant a fixed, unrestricted amount in cash (“Pension Substitute”). The Supervisory Board also decides annually whether and in what amount to grant a Pension Substitute.

 

Application for fiscal year 2021

 

The Supervisory Board elected to grant a Pension Substitute to all members of the Executive Board for fiscal year 2021 (President and CEO: €500,000; other members of the Executive Board: €250,000). Since Tim Holt is eligible to receive matching contributions as part of local retirement plans in the United States, the value of any such contributions is deducted from his Pension Substitute. 

Short-term variable compensation rewards the contribution made during a fiscal year to executing the Company’s strategy. The focus is set on the goal of operating the business profitably and efficiently. The fixed financial performance criteria are adjusted EBITA margin, which represents a key performance indicator for Siemens Energy and reflects the Company’s profitability, and return on capital employed (ROCE), which is an ancillary performance indicator and incentivizes efficient use of the capital made available.

 

The financial performance criteria cash conversion rate (based on free cash flow pre-tax) and nominal revenue growth rate may be used in the “individual targets” component. For non-financial performance criteria, the performance of individual members of the Executive Board is assessed according to focus topics, which can include operational aspects of implementing the Company’s strategy. Examples are the execution of major projects, digitalization, optimization/efficiency gains and diversity.

Further, prior to the beginning of a fiscal year and in alignment with the Company’s strategy and guidance communicated to the capital markets, the Supervisory Board may select an alternative financial performance criteria to ROCE and/or adjusted EBITA margin, as long as the performance criterion/criteria are part of the Company’s external reporting. These include adjusted EBITA, free cash flow pretax (FCF pre-tax), cash conversion rate (based on FCF pre-tax) and nominal revenue growth rate.

 

Application for fiscal year 2021

For fiscal year 2021, targets for adjusted EBITA margin were defined before special items, in line with guidance communicated to the capital markets.

 

The Supervisory Board selected the following individual targets for members of the Executive Board:

Cash conversion rate, calculated as free cash flow divided by adjusted EBITA, is part of Siemens Energy’s financial framework and capital market guidance, and the Company has identified its improvement as a key value driver. In addition, the Supervisory Board has defined non-financial (qualitative) targets relevant for each member’s areas of responsibility. A detailed description of each individual target as well as target attainment for each member of the Executive Board in fiscal year 2021 will be disclosed ex-post in the Company’s compensation report.

A substantial portion of total target compensation is tied to the long-term development of the Company and the Siemens Energy share. Stock Awards are granted as long-term equity-based variable compensation. One Stock Award confers the right to receive one share after the end of a vesting period, conditional upon target attainment. At the beginning of a fiscal year, a target amount (100%) is determined in Euro for each member of the Executive Board. An approximately four-year vesting period begins with the granting of Stock Awards, at the end of which Siemens Energy shares are transferred. The number of Siemens Energy shares transferred after the end of the vesting period depends on the attainment of targets relating to total shareholder return (TSR) (40%), earnings per share (EPS) (40%) and environmental, social and governance (ESG) factors (20%).

Performance indicators selected for ESG targets are measurable (quantitatively)and auditable. Performance indicators are selected to address topics that are key for the Company’s long-term success. 

The monetary value of Stock Awards transferred at the end of the vesting is capped at 250% of the target amount.

 

Malus and clawback regulations allow the Supervisory Board to withhold or reclaim long-term equity-based variable compensation (Stock Awards) in certain situations.

 

Application for fiscal year 2021

 

For the 2021 tranche of Stock Awards, the Supervisory Board defined the following targets:

 

Total shareholder return (TSR):

 

The relevant comparison indices were defined as: STOXX Global 1800 Industrial Goods and Services (70%) and MVIS US-Listed Oil Services 25 (30%). If Siemens Energy AG’s TSR during the performance period:

 

  • Exceeds the respective comparison index by 20 percentage points or more, target attainment = 200%.
  • Equals that of the respective comparison index,  target attainment = 100%.
  • Is 20 percentage points or more below that of the respective comparison index, target attainment = 0%.

Performance between these values is determined via linear interpolation. Target attainment is first determined relative to each index; overall target attainment for the TSR component is then determined based on the weighting of each index noted above.

 

Earnings per share (EPS):

 

The Supervisory Board set a target for average earnings per share (continuing operations) over the four fiscal years during the vesting period.

 

Environmental, social and governance (ESG):

 

In line with externally communicated long-term goals, the Supervisory Board identified carbon emissions (“E”) and gender diversity in leadership (“G”) as key topics for the upcoming four-year performance period. Additionally, the Supervisory Board took consideration of Siemens Energy’s status as a new independent company, which underscores the importance of fostering a culture in which employees are engaged and identify with their employer (“S”). The Supervisory Board established targets to be achieved by the end of the last fiscal year of the vesting period (i.e. fiscal year 2024) for the following performance indicators:

 

  • Environmental: Decarbonization target based on direct greenhouse gas emissions that arise from sources in the Company’s ownership or under its control (Scope 1) and the consumption of purchased electrical energy and district heating (Scope 2).
  • Social: Employee engagement target measured as the employee net promoter score (eNPS), set based on the results of a global survey of Siemens Energy’s employees.
  • Governance: Target for share of women in leadership positions (defined according functional value) based on the Company’s long-term target of 25% by 2025.

Detailed information on target values, corridors and attainment will be disclosed for EPS and ESG following the end of the vesting period of the 2021 tranche.

The Share Ownership Guidelines obligate members of the Executive Board to permanently hold Siemens Energy shares of an amount equal to a multiple of their pre-tax base salary – 300% for the President & CEO and 200% for the other members of the Executive Board – during their term of office on the Executive Board. The basis for assessment is each member of the Executive Board’s base salary for the month of September prior the respective verification date, extrapolated to an annual basis.

 

In Euros, the following targets for Share Ownership Guidelines apply:

  • Dr. Christian Bruch: €4,320,000
  • All other members: €1,440,000

Fulfillment of this obligation must be verified for the first time after the approximately four-year build-up phase and annually thereafter. If fluctuations in Siemens Energy’s share price cause the value of the accumulated shareholding to fall below the respective amount to be verified, the Executive Board member will be obligated to purchase additional Siemens Energy shares to make up the difference.

 

To compensate for the forfeiture of unvested equity awards at his previous employer, Dr. Christian Bruch received a one-time cash payment of approximately €3.2 million upon joining Siemens Energy in May 2020. Dr. Christian Bruch was required to invest the net proceeds from this payment immediately following completion of the spin-off.  As disclosed by the Company on September 29, 2020, Dr. Bruch purchased Siemens Energy shares on September 28, 2020 with a total value of approximately €1.9 million. The other members of the Executive Board of Siemens Energy AG have also acquired shares in the Company, either by way of the spin-off or via subsequent purchases.

Acceptance of public office, seats on supervisory boards (including any committee memberships), boards of directors, advisory boards and comparable bodies, as well as appointments to business or scientific bodies, is subject to prior approval by the Supervisory Board’s Presiding Committee. This does not apply for mandates within the Group. As a rule, approval is not granted for more than two supervisory board positions or comparable functions at listed companies outside the Group, or for accepting the chairmanship of the supervisory board at such a company.

 

If positions outside the Group are accepted, the Supervisory Board will decide at its duty-bound discretion on a case-by-case basis whether and to what extent the compensation for such positions is to be deducted.

In the event of early termination of Executive Board employment by mutual agreement, the Executive Board contracts stipulate a severance payment, the amount of which is limited to a maximum of two years of annual compensation, and which covers no more than the remaining term of the employment contract (severance cap).

 

No severance payments or special BSAV contributions (including Pension Substitutes) will be made in the event of early termination at the request of the Executive Board member or termination for cause by the Company.

 

There are no special provisions for the event that a change of control event occurs, that is, neither special rights to terminate the contract nor severance payments.

Siemens Energy is committed to providing a high level of transparency on its compensation practices for members of the Executive Board. Shareholders should be able to understand how the compensation system supports the achievement of strategic targets and promotes sustainable, long-term value creation.

 

Shareholders will have access to clear disclosure on the targets set for Executive Board members and how the degree to which these targets were attained affects members’ pay outcomes. This information will be disclosed ex-post in the compensation report for the respective fiscal year (i.e. in the compensation report 2021 for fiscal year 2021). Amounts granted and paid under individual compensation components, the pay mix and overall compensation are also to be transparently reported.

 

Changes to compensation from year to year implemented within the parameters of the compensation system approved by the Annual Shareholders’ Meeting will be communicated transparently in the compensation report.