Principles of Board of Management remuneration

Goals. The remuneration system for the Board of Management aims to remunerate its members commensurately with their areas of activity and responsibility and in compliance with applicable law. The adequate combination of non-performance-related and performance-related components of remuneration is designed to create an incentive to secure the Group’s long-term success. The fixed component of remuneration is paid as a base salary; the variable components intended to reflect, clearly and directly, the joint and individual performance of the members of the Board of Management as well as the long-term performance of the Group. The interests of all stakeholders, in particular those of the shareholders as the owners of the Company and those of the employees, are harmonized through the focus on the Group’s long-term success.

Practical implementation. For each upcoming financial year, the Presidential Committee at first prepares a review by the Supervisory Board of the system and level of remuneration on the basis of a comparison with competitors. The main focus is on checking for appropriateness, based on a horizontal and vertical comparison. In the horizontal comparison, the following aspects are given particular attention in relation to a group of comparable companies in Germany:

  • the effects of the individual fixed and variable components, that is, the methods behind them and their reference parameters, and
  • the relative weighting of the components, that is, the relationship between the fixed base salary and the short-term and long-term variable components

and the target remuneration consisting of base salary, annual bonus and long-term variable remuneration, also with consideration of entitlement to a retirement pension and fringe benefits.

The vertical comparison focuses on the ratio of Board of Management remuneration to the remuneration of the senior executives and the entire workforce of Daimler AG in Germany, also with regard to development over time. For this purpose, the Supervisory Board has defined the group of senior executives with the use of the Company’s internal levels of hierarchy.

In carrying out this review, the Presidential Committee and the Supervisory Board consult independent external advisors, above all to facilitate a comparison with remuneration systems common in the market. If the review results in a need for changes to the remuneration system for the Board of Management, the Presidential Committee submits the relevant proposals to the entire Supervisory Board for its approval.

On the basis of the approved remuneration system, the Supervisory Board decides at the beginning of the year on the base and target remuneration for the individual members of the Board of Management and decides on the success parameters relevant for the annual bonus in the coming year. Furthermore, individual goals are decided upon for each member of the Board of Management for the respective areas of personal responsibility; those goals are then taken into consideration after the end of the financial year when the annual bonus is decided upon by the Supervisory Board.

For the long-term variable component of remuneration, the so-called Performance Phantom Share Plan (PPSP) the Supervisory Board sets an amount to be granted for the upcoming financial year in the form of an absolute amount in euros and sets the related performance targets.

In this way, the individual base and target remuneration and the relevant performance parameters are set by the beginning of each year.

After the end of each year, target achievement is measured and the actual remuneration is then calculated by the Presidential Committee and submitted to the Supervisory Board for its approval.

The system of Board of Management remuneration in 2014. The fixed base salary and the annual bonus continue to comprise approximately 29% of the target remuneration, while the variable component of remuneration with a long-term incentive effect (PPSP) makes up approximately 42% of the target remuneration. The base salary was increased by an average of 5%, for the first time since 2011. Changes were also made to the range of possible target achievement for the annual bonus and to the reference parameters of the PPSP. The reference parameters of the annual bonus and the range of possible target achievement for the PPSP remained unchanged.

As before, only 50% of the annual bonus is paid out in the March of the following year. The other 50% is paid out a year later with the application of a bonus-malus rule (so-called deferral), depending on the development of the Daimler share price compared with an automotive index (Dow Jones STOXX Auto Index) (see Our Road to Accident-free Driving) which Daimler AG uses as a benchmark for the relative share-price development. Both the delayed payout of the portion of the annual bonus (with the use of the bonus-malus rule) and the variable component of remuneration from the PPSP with its link to additional, ambitious comparative parameters and to the share price reflect the recommendations of the German Corporate Governance Code and give due consideration to both positive and negative developments.

The maximum amounts of remuneration of the members of the Board of Management are limited, both overall and with regard to the variable components, in accordance with the recommendation included in the German Corporate Governance Code in 2013. Effective January 1, 2014, the members of the Board of Management agreed to the inclusion of such limits in their current contracts of service.

The maximum amounts of remuneration of the members of the Board of Management were set as of financial year 2014 at 1.9 times the target remuneration for its members and 1.5 times the target remuneration for its Chairman. The target remuneration consists of the base salary, the target annual bonus and the grant value of the PPSP, excluding fringe benefits and retirement benefit commitments. With the inclusion of fringe benefits and retirement benefit commitments from the respective financial years, the maximum limit of total remuneration increases by these amounts. The possible cap on the amount exceeding the maximum limit takes place with the payment of the PPSP issued in the relevant financial year, i.e. for the year 2014, with payment of the PPSP in 2018.

The individual components of the remuneration system are as follows:

The base salary is fixed remuneration relating to the entire year, oriented towards the area of responsibility of each Board of Management member and paid out in twelve monthly installments.

The annual bonus is variable remuneration, the level of which is primarily linked to the operating profit of the Daimler Group (EBIT). For the past financial year, the annual bonus was also linked to the target for the respective financial year determined by the Supervisory Board (derived from the level of return targeted for the medium term and the growth targets), the actual result compared with the prior year, the individual performance of the Board of Management members and the achievement of compliance targets. In addition, qualitative targets are defined and included.

Primary reference parameters:

  • 50% relates to a comparison of actual EBIT in 2014 with EBIT targeted for 2014.
  • 50% relates to a comparison of actual EBIT in 2014 with actual EBIT in 2013.

Amount with 100% target achievement (target annual bonus):

In the year 2014, 100% of the base salary.

Range of possible target achievement:

0 to 200%, that is, the annual bonus due to EBIT achievement has an upper limit of double the base salary and may also be zero (see below). Both primary reference parameters, each of which relates to half of the annual bonus, can vary between 0% and 200%. For the primary reference parameter relating to half of the annual bonus “comparison of actual EBIT in the financial year with EBIT targeted for the financial year,” the limits of the unchanged possible range of 0% to 200% are defined as of 2014 by a deviation of +/-three percent of the prior-year revenue (previously two percent). For the other primary reference parameter, which also relates to half of the annual bonus, “comparison of actual EBIT in the financial year with actual EBIT in the prior year,” the limits of the unchanged possible range of 0% to 200% continue to be defined by a deviation of +/-two percent of the prior-year revenue.

The Supervisory Board has the possibility, with the degree of target achievement calculated from the primary reference parameters, to take account of the personal performance of the individual Board of Management members with an addition or deduction of up to 25% on the basis of the agreed individual targets. In addition, an amount of up to 10 percent can be added or deducted, depending on the key figures/assessment basis determined in advance. Since 2012, non-financial targets have been used as a basis for assessment. For the past financial year, those targets were employee satisfaction, diversity, customer satisfaction/product quality, and the further development and permanent establishment of the corporate value of integrity.

In 2014, further individual targets were agreed upon with the Board of Management with regard to the development and sustained function of the compliance management system. The complete or partial non-achievement of individual compliance targets can be reflected by a deduction of up to 25% from the individual target achievement. However, the compliance targets cannot result in any increase in individual target achievement, even in the case of full accomplishment.

The total amount to be paid out from the annual bonus is limited to 2.35 times the base salary of the respective financial year. In the agreements on the inclusion maximum amounts of remuneration in their current contracts of service effective as of January 1, 2014, the members of the Board of Management also agreed to the application of this percentage limit to the annual bonus payments for the years 2012 and 2013, which at that time had not yet been paid out.

The Performance Phantom Share Plan (PPSP) is a variable element of remuneration with long-term incentive effects. At the beginning of the plan, the Supervisory Board specifies an absolute amount in euros in the context of setting the individual annual target remuneration. This amount is divided by the relevant average price of Daimler shares calculated over a long period of time, which results in the preliminary number of phantom shares allocated. Also at the beginning of the plan, performance targets are set for a period of three years (performance period). Depending on the achievement of these performance targets with a possible range of 0% to 200%, after three years, the phantom shares allocated at the beginning of the plan are converted into the final number of phantom shares allocated. After another plan year has elapsed, the amount to be paid out is calculated from this final number of phantom shares and the applicable share price at that time. The share price relevant for the payout under this plan is also relevant for allocating the preliminary number of phantom shares for the plan newly issued in the respective year.

Reference parameters for Plan 2014:

  • 50 % relates to the Group’s return on sales in a three-year comparison with a newly defined group of competitors comprising all listed vehicle manufacturers with an automotive proportion of more than 70% by revenue and an investment-grade credit rating (BMW, Ford, Fuji Heavy, Honda, Hyundai, Isuzu, Mazda, Nissan, Paccar, Toyota, Volvo and Volkswagen). For the measurement of this success criterion, the competitors’ average return on sales is calculated over a period of three years. Target achievement of 100% only occurs when the average return on sales of the Daimler reaches 105% of the average return on sales of the group of competitors. Target achievement occurs to the extent to which Daimler’s return on sales deviates by a maximum of +/-2 percentage points from 105% of the calculated average of the competitors. So target achievement of 200% occurs if Daimler’s return on sales exceeds 105% of the average of the competitors by 2 percentage points or more. And target achievement of 0% occurs if Daimler’s return on sales is 2 percentage points or more lower than 105% of the calculated average of the competitors. In the deviation range of +/-2 percentage points, target achievement varies in proportional to the deviation.
  • 50% relates to the new “relative share performance,” i.e. the development of Daimler’s share price in a three-year comparison with the development of a share-price index for the defined group of competitors. If the development of Daimler’s share price (in percent) is the same as of the index (in percent), target achievement is deemed to be 100%. If the development of Daimler’s share price (in percent) is 50 percentage points or more below (above) the development of the index, target achievement is deemed to be 0% (200%). In the deviation range of +/-50 percentage points, target achievement varies in proportional to the deviation.

Value upon allocation:

Determined annually by the Supervisory Board; for 2014, approximately 1.3 to 1.6 times the base salary.

Range of possible target achievement:

0 to 200%, that is, the plan has an upper limit.
It may also be zero.

Value of the phantom shares on payout:

During the four-year period between the allocation of the preliminary phantom shares and the payout of the plan proceeds, the phantom shares earn a dividend equivalent in the amount of the actual dividend paid on ordinary Daimler shares.

The value of the phantom shares to be paid out depends on target achievement measured according to the criteria described above and on the share price relevant for the payout. This share price is limited to 2.5 times the share price at the beginning of the plan. In addition, the amount to be paid out is limited to 2.5 times the absolute euro amount specified at the beginning of the plan, which is relevant for the preliminary number of phantom shares allocated. This maximum amount includes the dividend equivalent paid out during the four-year plan period. In the agreements on the inclusion maximum amounts of remuneration in their current contracts of service effective as of January 1, 2014, the members of the Board of Management also agreed to the application of this limit to the dividend equivalents not yet due at that time from plans issued before January 1, 2014 and still running.

For all PPSP of 2015 and following years, an additional limit on target achievement was agreed upon for the reference parameter return on sales. In the case of target achievement between 195% and 200%, an additional comparison is made on the basis of the return on sales achieved in absolute terms. If the actual return on sales for the automotive business is below the strategic target (currently 9%) in the third year of the performance period, target achievement is limited to 195%.

Guidelines for share ownership. As a supplement to these three components of remuneration, “Stock Ownership Guidelines” exist for the Board of Management. These guidelines require the members of the Board of Management to invest a portion of their private assets in Daimler shares over several years and to hold those shares until the end of their Board of Management membership. The number of shares to be held was set in 2005 when the Performance Phantom Share Plan was introduced in relation to double the then annual base salary for each ordinary member of the Board of Management and triple the then annual base salary for the Chairman of the Board of Management. In fulfillment of the guidelines, up to 25% of the gross remuneration out of each Performance Phantom Share Plan is generally to be used to acquire ordinary shares in the Company, but the required shares can also be acquired in other ways.

Appropriateness of Board of Management remuneration. In accordance with Section 87 of the German Stock Corporation Act (AktG), the Supervisory Board of Daimler AG once again had an assessment of the system of Board of Management remuneration carried out by an external remuneration expert in 2014. The result was that the remuneration system as described above was confirmed as being in conformance with the requirements of applicable law. The remuneration system was approved as described by the Annual Shareholders’ Meeting in 2014 with an approval ratio of 96.8%.

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