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Compensation of the Board of Management

The structure of the compensation system and the level of compensation for the members of the Board of Management are determined by the Supervisory Board. The appropriateness of the compensation is regularly reviewed. The criteria for determining the appropriateness of the compensation for an individual Board of Management member include, in particular, his duties, his personal performance, and the economic situation and sustainable growth of the LANXESS Group. Consideration is also given to the company’s overall compensation structure and to compensation at comparable companies. The compensation structure is also designed to be competitive in the international market for highly qualified executives and provide the motivation to successfully work toward sustainable corporate development.

Effective January 1, 2010, the contracts of the members of the Board of Management were amended to implement the legislative changes entailed by the German Law on the Appropriateness of Management Board Compensation and the provisions of the German Corporate Governance Code. The 2010 Annual Stockholders’ Meeting of LANXESS AG resolved to approve the compensation system that was introduced with these new contracts. This compensation system was applied when concluding the service contracts with all Board of Management members.

The components of the compensation for members of the Board of Management are the annual base salary; the variable components, which are the Annual Performance Payment, the Long-Term Incentive Plan/Long-Term Stock Performance Plan and the Long-Term Performance Bonus; and a retirement pension. The three variable components are linked to LANXESS’s annual performance and, particularly, to its corporate success over a number of years. A cap has been defined for each of them. The compensation mix of 31% annual base salary and 69% variable compensation components is strongly aligned with the company’s performance and long-term value creation.

Compensation Mix for Members of the Board of Management
   
%  
Annual base salary 31
Annual Performance Payment 36
Long-Term Incentive Plan/Long-Term Stock Performance Plan 19
Long-Term Performance Bonus 14
  100
 

Annual base salary

The fixed compensation comprises the annual base salary and remuneration in kind, the latter consisting mainly of the tax value of perquisites such as the use of a company car. The annual base salary of the members of the Board of Management is market-oriented and in line with that paid at other comparable companies. The aggregate amount of the fixed compensation came to €2,678 thousand in fiscal 2012.

Variable compensation

The annual performance-based component of the variable compensation, known as the Annual Performance Payment (APP), is based on corporate business targets and other conditions, such as the attainment of certain Group EBITDA targets, which are defined by the Supervisory Board before the beginning of the respective fiscal year. The APP is equivalent to 115% of the annual base salary in the case of 100% target attainment, with the maximum payment limited to 200% of this variable compensation component. Compensation from the performance-based APP in 2012 totaled €4,713 thousand. Actual payments in 2013 may differ from this amount, which was calculated in advance.

In March 2012, on account of the company’s exceptional performance in fiscal 2011, the Supervisory Board approved the payment of a special bonus to the members of the Board of Management totaling €830 thousand. This bonus amounted to €320 thousand for Dr. Heitmann, €110 thousand for Dr. Düttmann, and €200 thousand each for Dr. Breuers and Dr. van Roessel.

The Long-Term Incentive Plan (LTIP) is another element of variable compensation. This compensation component is based on the performance of LANXESS stock against a reference index, the Dow Jones STOXX 600 ChemicalsSM. The LTIP responds to the call by legislators for a stronger focus on long-term company performance. The LTIP is divided into three three-year tranches, with the first tranche having begun in 2008. Participation required a prior personal investment each year in LANXESS shares to a value of 13% of the annual base salary. The shares are subject to a five-year lock-up period. First payments from the LTIP are made three years after the start of a tranche, provided defined conditions are satisfied. 100% target attainment brings a payment per tranche of 50% of the individual target income, which is the annual base salary plus the APP assuming 100% target attainment.

The LTIP was succeeded effective fiscal 2010 by two other long-term variable compensation components: the Long-Term Stock Performance Plan (LTSP) and the Long-Term Performance Bonus (LTPB).

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Compensation of the Board of Management
                     
€ ’000   Fixed compensation Variable compensation   Payments from LTSP rights  
                     
  Year Annual base salery Remuneration in kind Performance bonus1) Payment for previous years2) LTPB(multi-year)3) Total cash compensation Number of rights Fair values Total compensation
                     
Dr. Axel C. Heitmann 2012 900 119 1,798 320 703 3,840 564,375 282 4,122
2011 825 118 1,423 190 556 3,112 532,125 266 3,378
Dr. Werner Breuers 2012 500 54 972 200 380 2,106 322,500 161 2,267
2011 494 53 862 109 336 1,854 306,375 153 2,007
Dr. Bernhard Düttmann
(effective April 1, 2011)
2012 500 61 972 110 380 2,023 322,500 161 2,184
2011 375 194 646 0 126 1,341 322,500 161 1,502
Dr. Rainier van Roessel 2012 500 44 972 200 380 2,096 322,500 161 2,257
2011 494 44 862 109 336 1,845 306,375 153 1,998
Matthias Zachert
(until March 31, 2011)
2012 0 0 0 0 0 0 0 0 0
2011 137 13 158 0 0 308 354,750 177 485
Total 2012 2,400 278 4,713 830 1,844 10,065 1,531,875 765 10,830
2011 2,325 422 3,951 408 1,354 8,460 1,822,125 910 9,370
1) Payment in 2012 and 2013, respectively
2) Payment in 2011 and 2012, respectively
3) Payment of 50% each in 2013 and 2014

The LTSP is divided into four four-year tranches and is also based on the performance of LANXESS stock against the Dow Jones STOXX  600 ChemicalsSM reference index. Compared to the previous LTIP, the possible payment per tranche under the new plan has been reduced from 50% to 30% of the individual target income, assuming 100% target attainment. The condition for participation in the LTSP is a prior personal investment each year in LANXESS shares to a value of 5% of the annual base salary. The shares are subject to an average five-year lock-up period.

For more information, particularly regarding the valuation parameters applied, please see Note [14] to the consolidated financial statements.

The personnel expenses incurred in fiscal 2012 for the LTIP and LTSP entitlements granted amount to €1,726 thousand for Dr. Heitmann, €118 thousand for Dr. Düttmann and €991 thousand each for Dr. Breuers and Dr. van Roessel. These personnel expenses are theoretical amounts and are not to be equated with the actual gains realized when the entitlements are exercised in the future.

The LTPB, which is the third variable compensation component, is likewise aligned to long-term corporate performance. It rewards target attainment only after two successive fiscal years. The basis for calculating the LTPB is the individual APP target attainment for the fiscal years in question. The exact amount of the LTPB results from the average individual APP target attainment for the two fiscal years. Assuming an average APP target attainment of 100%, the LTPB amounts to 45% of the annual base salary. Rights worth €1,844 thousand were earned under the performance-based LTPB in fiscal 2011 and 2012. Actual payments in 2013 and 2014 may differ from this amount, which was calculated in advance.

Retirement pensions

On termination of their service contracts, the members of the Board of Management receive benefits under the company pension plan. These benefits are paid when the beneficiary reaches age 60 or if the beneficiary is permanently unable to work. They are paid to surviving dependents in the event of the beneficiary’s death.

The pension plan for the members of the Board of Management is a defined contribution plan stipulating a basic contribution to be made by the company equal to 25% of the annual base salary and APP. Moreover, the members of the Board of Management must themselves pay an amount from deferred compensation amounting to 12.5% of the APP. The members of the Board of Management may increase their personal contribution to up to 25% of the APP. From the date of entitlement, up to 30% of the accumulated capital – including the interest thereon – may be converted to a pension benefit. There are claims arising from provisions in place before 2006 that are granted as vested rights. If the service contract ends before the beneficiary reaches the age of 60, the company pays certain additional benefits up to a defined ceiling.

LANXESS has established provisions for the future claims of Board of Management members. The total service cost recognized under IFRS accounting rules in the 2012 consolidated financial statements for this purpose was €815 thousand. The present value of the obligations for the members of the Board of Management serving as of December 31, 2012 was €18,248 thousand. Under IFRS accounting principles, the service cost for pension entitlements earned in 2012 and the present value of the obligations, including acquired rights, as of December 31, 2012 amounted, respectively, to €257 thousand and €10,924 thousand for Dr. Heitmann, €271 thousand and €2,173 thousand for Dr. Breuers, €204 thousand and €944 thousand for Dr. Düttmann, and €83 thousand and €4,207 thousand for Dr. van Roessel.

The total service cost recognized under HGB accounting rules in the 2012 annual financial statements for this purpose was €1,987 thousand. The present value of the obligations for the members of the Board of Management serving as of December 31, 2012 was €14,882 thousand. Under HGB accounting principles, the present value of the obligations, including vested rights, for the members of the Board of Management serving as of December 31, 2012 amounted, respectively, to €8,732 thousand for Dr. Heitmann, €1,850 thousand for Dr. Breuers, €768 thousand for Dr. Düttmann, and €3,532 thousand for Dr. van Roessel.

As of December 31, 2012, obligations to former members of the Board of Management totaled €11,411 thousand under IFRS accounting rules and €8,946 thousand under HGB accounting rules.

Payments of €479 thousand were made to former members of the Board of Management.

In fiscal 2012, the members of the Board of Management had indemnification rights should their service contracts be terminated for defined reasons at the instigation of the company or in the event of a material change of control over the company. The terms depended on the respective circumstances and, regardless of the remaining term of the service contract, included severance payments amounting to up to two times the annual base salary or, in the event of a change of control, three times the annual base salary, plus the APP and LTPB assuming 100% target achievement.

No additional benefits have been pledged to any member of the Board of Management in the event of termination of their service. In 2012, no member of the Board of Management received benefits or assurances of benefits from third parties in respect of their duties as members of the Board of Management.

No loans were granted to members of the Board of Management in fiscal 2012.

Service

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