Compensation System for Members of the Board of Management
The base salary is paid on a monthly basis and is reviewed regularly to determine whether it is in line with market salaries and whether it is fair and reasonable. The base salary is paid on a monthly basis and is reviewed regularly to determine whether it is in line with market salaries and whether it is fair and reasonable.
The amount of the bonus is determined by the degree to which certain corporate and personal performance targets are achieved under a target-setting system, 70 percent of which is related to corporate performance targets and 30 percent to personal targets. The corporate performance targets reflect, in equal shares, operating performance (as measured by adjusted EBIT) and return on capital employed (“ROCE”). Board of Management members who fully achieve their performance target receive the target bonus agreed to in their contracts. The maximum bonus that can be achieved is 200 percent of the target bonus. Any compensation received for work done in the Company’s interest (other directorships at Group companies) is set off against the bonus or transferred to the Company.
The long-term variable compensation component that Board of Management members receive is stock-based compensation. This compensation is designed to reward Board of Management members (and other key executives) for their contributions to increasing the Company’s shareholder value and to promote E.ON’s long-term business performance. This variable pay component, which combines incentives for long-term growth with a risk component, effectively aligns management’s and shareholders’ interests.
Introduced in the 2006 financial year, the E.ON Share Performance Plan is a uniform groupwide stock-based compensation system. The amount of compensation from the E.ON Share Performance Plan depends on the performance of E.ON’s stock price, both in absolute terms and relative to an industry index.
Through the end of 2005, E.ON awarded annual stock appreciation rights (“SAR”) as part of its stock option program. SAR already granted may still be exercised in accordance with the program’s terms and conditions.
Both programs are described in Note 11 to the Consolidated Financial Statements of the 2007 Annual Report.
In line with the Code’s recommendations, the total compensation paid to Board of Management members therefore includes both fixed and variable components. Criteria applied to determine the amount of compensation include in particular a Board of Management member’s duties, his or her personal performance, the performance of the Board of Management as a whole, as well as the Company’s financial situation, its business performance, and its future prospects relative to a benchmark environment.
The variable compensation components contain an element of risk and consequently are not guaranteed compensation. The stock-based compensation program is based on demanding, relevant benchmark parameters. Under the program’s terms, performance targets or benchmark parameters cannot be changed at a later stage.
The Supervisory Board discussed the compensation system for the Board of Management at its meeting on December 17, 2007. The Supervisory Board’s Executive Committee, which is responsible for decisions on compensation, most recently reviewed the Board of Management’s compensation at its meeting on December 17, 2007.
In the event of a premature loss of a Board of Management position due to a change-in-control event, the service agreements of Board of Management members entitle them to severance and settlement payments.
The Company had change-of-control agreements with all Board of Management members in the 2007 financial year. The standard change-of control agreements with the Chairman of the Board of Management and with the members who joined the Board of Management in 2006 stipulate that a change of control exists in three cases: if a third party acquires at least 30 percent of the Company’s voting rights, thus triggering the automatic requirement to make an offer for the Company pursuant to Germany’s Stock Corporation Takeover Law; if the Company, as a dependent entity, concludes a corporate agreement; or if the Company is merged with another company. If, within 12 months of the change of control, the service agreement of a Board of Management member is terminated by mutual consent, expires, or is terminated by the Board of Management member because his or her position on the Board is materially altered by the change of control, he or she is entitled to severance pay equal to the capitalized amount of his or her total annual compensation (annual base salary, annual target bonus, and other compensation) for the remaining term of the service agreement or for at least three years. To reflect discounting and setting off payment for services rendered to other companies or organizations, payments will be reduced by 20 percent. If a Board of Management member is above the age of 53, this 20 percent reduction is diminished according to an age-related schedule.
The change-of-control agreements with the other members of the Board of Management reflect the hitherto standard terms for such agreements. Under these agreements, a change in control exists if a single shareholder acquires 25 percent or more of the Company’s voting rights; if a third party acquires a share of the Company’s voting rights that has led or would lead to this party having a share of the voting rights of at least half of the Company’s share capital with voting rights at an Annual Shareholders Meeting; if the Company, as a dependent entity, concludes a corporate agreement, becomes part of another company through subordination, takes on a different legal form, or is merged with another company. In the case of such a change-of-control event, a Board of Management member is entitled to severance and settlement payments. A Board of Management member will receive severance pay equal to the capitalized amount of his or her total annual compensation (annual base salary, annual target bonus, and other compensation) for the remaining term of the service agreement. If the remaining term of the service agreement exceeds three years, severance pay for the period beyond three years will be reduced by 25 percent to reflect discounting and setting off payment for services rendered to other companies or organizations. In addition, he or she will receive a settlement payment equal to at least three times his or her total annual compensation or, if he or she has been a Board of Management member for more than ten years, four times such compensation. Together, severance and settlement payments may not exceed five times a Board of Management member’s total annual compensation.
Following the end of their service for the Company, Board of Management members are entitled to receive pension payments in three cases: if they reach the standard retirement age (currently 60 years), if they are permanently incapacitated, or if their service agreement is terminated prematurely or not extended. Depending on the length of their service, Board of Management members are entitled to annual pension payments equal to between 50 percent and 75 percent of their last annual base salary. The annual pension of one member of the Board of Management is a fixed amount. If Board of Management members are entitled to pension payments stemming from earlier employment, these payments will be set off against their pension payments from the Company. If their service agreement is terminated prematurely or not extended, and if such termination or non-extension is not due to misconduct or rejection of an offer of extension that is at least on a par with the existing service agreement, Board of Management members who have been in a Top Management position in the E.ON Group for more than five years will receive a reduced pension as a bridge payment until they reach the age of 60. The amount of the bridge payment will be calculated based on the relation between the actual and potential length of service to the Company until the age of 60 is reached. The pension plans the Company granted to Board of Management members before the 2006 financial year do not include limitations on pension entitlements relating to premature termination or non-extension of service agreements.
