Executive Board remuneration

Remuneration system

At its meeting held on 25 April 2013, the Supervisory Board of the former KION Holding 1 GmbH adopted a resolution as part of the conversion of the Company into a public limited company to approve the remuneration system for the future Executive Board of KION GROUP AG and fix the remuneration to be paid to the individual members of the Executive Board. This resolution was in line with the Human Resources Committee’s recommendation. The Supervisory Board took care not only to ensure compliance with the requirements of the German Stock Corporation Act (AktG) and the DCGK, but also to ensure that the remuneration to be paid to the individual members of the Executive Board was harmonised. Although the Executive Board service contracts were to come into force on the effective date of the change in legal form, i.e. on 4 June 2013, the new remuneration system was conditional upon KION GROUP AG’s successful IPO and therefore only came into force on the day after the first day of trading on the Frankfurt Stock Exchange on 28 June 2013. Up to that point, KION GROUP AG continued to use the remuneration arrangements applicable to the board members of the former KION Holding 1 GmbH and arising from their respective service contracts with the various subsidiaries. The following information therefore provides a brief description of the Executive Board remuneration arrangements initially in force in the period from 4 June to 28 June 2013 and then gives a detailed description of the Executive Board remuneration system applicable since 29 June 2013.

Essential features of the Executive Board remuneration system in the period 4 June 2013 to 28 June 2013

In the period between the effective date of the change in the legal form of the Company to a public limited company and the first day of trading in the Company’s shares on the Frankfurt Stock Exchange on 28 June 2013, the arrangements applied for the remuneration of the members of the Executive Board remained the same as the arrangements that had applied prior to 4 June 2013 under the service contracts with the various subsidiaries relevant to the persons concerned. The total remuneration paid to the members of the Executive Board in this period comprised a non-performance-related salary and non-performance-related non-cash benefits, performance-related (variable) remuneration and pension entitlements.

Non-performance-related remuneration consisted of a fixed annual salary (basic remuneration) and additional benefits. The fixed annual salary was paid at the end of each month in twelve equal instalments, the last payment being made for the full month in which the Executive Board service contract ended. The additional benefits essentially included use of a company car and the payment of premiums for accident insurance with benefits at a typical market level.

The performance-related remuneration was a variable remuneration component based on performance measured over one year. It was structured differently for each individual Executive Board member. In the case of Mr Riske and Dr Toepfer, who were employed by KION GROUP GmbH (now KION Material Handling GmbH) prior to the change in legal form of KION Holding 1 GmbH, there was a combined performance and target-based bonus system based on two performance targets: adjusted earnings before interest, taxes and amortisation (EBITA) and unlevered free cash flow (UFCF). For Mr Knoef, Mr Maurer and Mr Quek, the relevant bonus system was that used by the Group companies in which they were a member of the management board up to their appointment to the Executive Board of the Company and that was based on annual financial performance targets of a varying nature weighted according to brand and Group criteria. Achievement of the targets for EBIT (40 per cent weighting), UFCF (also 40 per cent weighting) and revenue (20 per cent weighting) was measured in 2013.

In all bonus systems, the possible range for target achievement was 0 per cent to 200 per cent. If the targets derived from the annual budget were achieved in full, target achievement was 100 per cent. The target achievement levels for each weighted Company target were added together to give the total target achievement.

The pension entitlements consisted of contributions for retirement, invalidity and surviving dependants’ benefits. Specifically:

Mr Riske and Mr Knoef participated in a defined benefit scheme funded entirely by the Company. This scheme was a final salary scheme guaranteeing Mr Riske a retirement pension of up to 50 per cent of his final basic salary and Mr Knoef a retirement pension of up to 60 per cent of his final basic salary. Dr Toepfer and Mr Maurer also belonged to defined benefit schemes comprising two components fully funded by KION: a fixed basic pension to a maximum amount of €36,000 p.a. for Dr Toepfer and to a maximum amount of €30,000 p.a. for Mr Maurer (the final amount in each case being dependent on the duration of the service contract) and a variable top-up pension based on 12 per cent of basic salary for Dr Toepfer and 9 per cent of basic salary for Mr Maurer, from which a fixed pension component could be calculated by multiplying the amounts concerned by an age-related annuitisation factor each year. Subject to participation in the deferred compensation model offered by the KION Group (KION pension plan), both Dr Toepfer and Mr Maurer also receive a third component (referred to as the matching employer contribution): they were granted an additional Company contribution to be invested in the KION pension plan (up to a maximum of 6 per cent of basic salary for Dr Toepfer and up to a maximum of 5 per cent of basic salary for Mr Maurer, depending on the amount of deferred compensation); the amount concerned was converted into guaranteed pension capital by multiplying it by an age-dependent annuitisation factor each year. Mr Quek was not entitled to a company pension.

Essential features of the Executive Board remuneration system since 29 June 2013

Since the IPO, the remuneration of the Executive Board of KION GROUP AG has been determined in accordance with the requirements of the AktG and the DCGK. It reflects the size and complexity of the KION Group, its business and financial situation, its performance and future prospects, the normal amount and structure of executive board remuneration in comparable companies and the internal salary structure. The Supervisory Board also took into account the relationship between the Executive Board remuneration and the remuneration paid to senior managers and the workforce of the Company as a whole, including increases over the course of time. Other criteria used to determine remuneration included the remit and work to be carried out by the individual members of the Executive Board. The remuneration system was converted with support from external consultants working independently of the Executive Board and the Company.

The total remuneration now paid to the Executive Board also comprises a non-performance-related salary and non-performance-related non-cash benefits, performance-related (variable) remuneration and pension entitlements. When the variable remuneration structure was defined, the emphasis was on creating a measurement basis covering a number of years, thus providing the members of the Executive Board with an incentive to contribute to the sustained and long-term growth of the Company. The structure also takes into account both positive and negative performance.

In addition, the remuneration for all members of the Executive Board is subject to upper limits on the amounts payable, both overall and also in terms of the variable components.

The pension entitlements consist of entitlements in respect of retirement, invalidity and surviving dependants’ benefits. The Supervisory Board regularly reviews the structure and appropriateness of Executive Board remuneration.

Non-performance-related remuneration

The Executive Board members of KION GROUP AG receive non-performance-related remuneration in the form of a fixed annual salary (basic remuneration) and additional benefits. The fixed annual salary is paid at the end of each month in twelve equal instalments, the last payment being made for the full month in which the Executive Board service contract ends. The additional benefits essentially comprised use of a company car and the payment of premiums for accident insurance with benefits at a typical market level.

Additional special benefits have been agreed for Mr Quek because he has been sent from Singapore to China on foreign assignment.

Mr Quek’s remuneration is therefore structured as if he were liable for taxes and social security contributions in Singapore. KION GROUP AG pays the additional taxes and social security contributions that Mr Quek incurs in China and Germany. In 2013, this amount was €227,077. The additional benefits agreed with Mr Quek include the cost of trips home to Singapore for Mr Quek and his family, a company car, rental payments in Xiamen and private health insurance. In 2013, the special additional benefits for Mr Quek amounted to a total of €117,161. These special benefits will be granted for as long as Mr Quek’s designated place of work is Xiamen or until his service contract with KION GROUP AG ends.

Performance-related remuneration

The performance-related remuneration components consist of a variable remuneration component measued over one year and a variable remuneration component measured over several years in the form of a rolling performance share plan with a three-year term.

One-year variable remuneration

The one-year variable remuneration is a remuneration component linked to the business profitability and productivity of the KION Group in the relevant financial year. Its amount is determined by the attainment of targets based on the following KPIs: earnings before interest, taxes and amortisation (EBITA), return on capital employed (ROCE), revenue and net debt. They are weighted as follows: 30 per cent for EBITA, 30 per cent for ROCE, 20 per cent for revenue and 20 per cent for net debt. The target values for the financial components are derived from the annual budget and specified by the Supervisory Board.

The possible range for target achievement is 0 per cent to 200 per cent. If the targets derived from the annual budget are achieved in full, target achievement is 100 per cent. The target achievement levels for the weighted Company targets (EBITA, ROCE, revenue and net debt) are added together to give the total target achievement.

The individual performance of the Executive Board members is rated using a discretionary performance multiple with a factor of between 0.8 and 1.2. The factor is determined by the Supervisory Board with reference to attainment of the individual targets defined by the Supervisory Board in a target agreement form at the start of the year. The factor is applied to total target achievement for the budget targets and results in payment of the individual target bonus if the overall target attainment is 100 per cent. The amount paid as one-year variable remuneration is capped at 200 per cent of the target bonus.

In the event that an Executive Board member is not entitled to remuneration for the entire year on which the calculation is based, the remuneration is reduced pro rata temporis.

Multiple-year variable remuneration

The multiple-year variable remuneration component is structured in the form of a performance share plan. At the start of the three-year performance period, a conditional entitlement to a certain target number of performance shares is granted. This number is calculated by dividing the allocation value (in euros) for the particular Executive Board member by the fair value of one performance share at the time of grant. The number of preliminary performance shares defined in this way is adjusted depending on achievement of the two target values – total shareholder return (TSR) for KION shares compared with the STOXX^® Europe Total Market Index (TMI) Industrial Engineering index and return on capital employed (ROCE) – over the performance period. Each target has a 50 per cent weighting.

The possible range for target achievement for both elements is 0 per cent to 150 per cent. If KION shares outperform the STOXX® Europe TMI Industrial Engineering index by 10 per cent and the ROCE targets defined each year on the basis of the budget are achieved, total target achievement will be 100 per cent.

The amount paid for each tranche is determined by the final number of performance shares multiplied by the price of the Company’s shares (average price over the preceding 60 trading days) at the end of the performance period. Depending on achievement of the individual targets defined by the Supervisory Board at the start of the performance period (three-year target agreement form), the Supervisory Board can use a discretionary factor to make a final adjustment to the calculation of the amount to be paid out at the end of the performance period by plus or minus 20 per cent, although the maximum payment may not exceed 200 per cent of the allocation value.

The plan is a cash-settled long-term incentive plan that does not include the right to receive any actual shares. The first payment under the plan will be made in 2016.

Under the requirements of German accounting standard (GAS) 17 and IFRS 2, the total expense arising from share-based payments and the fair value of the performance share plan on the date of granting must be disclosed. As the conditional entitlements under the performance share plan were only granted for the first time in 2013, there are no comparative prior-year figures to disclose >> Table 007

Prior to the planned IPO, Executive Board member Dr Thomas Toepfer was granted a special bonus (to be payable in two tranches) dependent on a successful IPO and subject to the condition that Dr Toepfer remained employed by KION GROUP AG after the IPO for a period of twelve months (for tranche 1) and 18 months (for tranche 2). The amount of the bonus depends on the weighted average price of KION shares in the four weeks immediately preceding the payment of each tranche. On the basis of the share price of €30.73 as at 31 December 2013, the fair value of the bonus as at the reporting date was approximately €1.5 million. The pro-rata expense for 2013 ist €0.6 million. If, prior to the due dates for the payment of tranche 1 or tranche 2, Dr Toepfer dies, suffers permanent incapacity or is forced to leave the Company without good cause of his own making, he will remain entitled to payment of this bonus. In connection with the provision of this special bonus entitlement, Dr Toepfer paid a one-off capital contribution of €200,000 into the Company, which the Company has deducted from the net amount of a bonus for 2012 due to be paid to Dr Toepfer in 2013.

Pension entitlements

KION GROUP AG grants its Executive Board members direct entitlement to a company pension plan consisting of retirement, invalidity and surviving dependants’ benefits. The defined benefit entitlement for Gordon Riske, the Company’s Chief Executive Officer, which had been granted in his original service contract, was transferred to his Executive Board service contract. The benefit amounted to a maximum of 50 per cent of the most recent fixed annual salary after the end of the tenth year of service based on his original service contract. For the other members of the Executive Board, the present value of the previous defined benefit plan was transferred as a starting contribution for new pension arrangements in the form of a defined contribution plan. The new defined contribution plan is structured as a cash balance plan.

For each of the ordinary members of the Executive Board, a fixed annual contribution of €150,000 (€124,500 for Mr Quek) will be paid into their pension accounts for the duration of the member’s period of service on the Executive Board. Interest is paid on the pension account at the prevailing statutory guaranteed return rate for the life insurance industry (applicable maximum interest rate for the calculation of the actuarial reserves of life insurers pursuant to section 2 (1) German Regulation on the Principles Underlying the Calculation of the Premium Reserve (DeckRV)) until an insured event occurs. If higher interest is generated by investing the pension account, it will be credited to the pension account when an insured event occurs (surplus). The standard retirement age for the statutory pension applies. Once Executive Board members have reached their 62nd birthday, they are entitled to early payment of the pension. In the event of invalidity or death, the contributions that would have been made until the age of 60 are added to the pension account, although only a maximum of ten contributions will be added. When an insured event occurs, the pension is paid as a lump sum or, following a written request, in ten annual instalments.

Termination benefits

In line with the DCGK, all Executive Board service contracts provide for a severance payment equivalent to no more than two years’ annual remuneration payable in the event of the contract being terminated prematurely without good cause. The amount of annual remuneration is defined as fixed salary plus the variable remuneration elements, assuming 100 per cent target achievement and excluding non-cash benefits and other additional benefits, for the last full financial year before the end of the Executive Board service contract. If the Executive Board service contract was due to end within two years, the severance payment is calculated pro rata temporis. If a service contract is terminated for good cause for which the Executive Board member concerned is responsible, no payments are made to the Executive Board member in question. The Company does not have any commitments for the payment of benefits in the event of a premature termination of Executive Board contracts following a change of control.

Executive Board members are subject to a post-contractual non-compete agreement of one year. In return, the Company pays the Executive Board member compensation for the duration of the non-compete agreement amounting to 100 per cent of his final fixed salary. Other income of the Executive Board member is offset against the compensation.

In the event that Mr Riske’s appointment is not extended for reasons for which he is not responsible and he has not reached the standard retirement age for the statutory pension or in the event that Mr Riske resigns for good cause before the end of his appointment or suffers permanent incapacity after his period of service as a result of sickness, he will receive transitional benefits of €252,000 per annum on the basis of previous contracts. During his current term of office, the amount of the transitional benefits will rise by €12,000 each year up to a maximum amount of €300,000 per annum. Severance payments in the event of early termination of his appointment without good cause, compensation for the post-contractual non-compete agreement, pension benefits that Mr Riske receives due to his previous work for other employers and income from other use of his working capacity (with the exception of remuneration for work as a member of a supervisory or advisory board or a board of directors) will be offset against these transitional benefits.

If an Executive Board member suffers temporary incapacity, he will receive for a period of six months a full fixed salary plus the one-year variable remuneration. In the event of temporary incapacity for a further six months, the Executive Board member will receive 80 per cent of his fixed salary, but only up to a point at which the service contract is terminated.

If an Executive Board member ceases to be employed by the Company as a result of death, he or his family members will be entitled to the fixed monthly remuneration for the month in which the service contract ends and for the three subsequent months, but only up to the point at which the service contract would otherwise have come to an end.

Remuneration paid to members of the Executive Board in 2013

The total remuneration granted to Executive Board members for 2013, including the remuneration paid for the period when they were members of the Executive Board of KION Holding 1 GmbH was €11,114,473. Of this amount, €2,534,753 was attributable to fixed non-performance-related remuneration components, €8,357,976 to variable one-year and multiple-year performance-related remuneration components and €221,744 to other non-performance-related benefits. The figure shown for one-year variable remuneration is based on a preliminary total target achievement rate calculated using preliminary earnings figures at the beginning of 2014. This preliminary variable remuneration for each Executive Board member is also subject to adjustment by the Supervisory Board in line with the individual performance of the Executive Board member. This adjustment may vary by +/–20 per cent of the variable remuneration. For multiple-year variable remuneration, the fair value at the date of grant is shown as a preliminary notional variable. The first payment will be made in 2016, provided the Company’s long-term targets are achieved.

Excluding the period in which they were members of the Executive Board of KION Holding 1 GmbH, i.e. for the period since the IPO on 28 June 2013 only, the total remuneration granted to Executive Board members for 2013 was €8,671,538. Of this amount, €1,412,752 was attributable to fixed non-performance-related remuneration components, €7,143,197 to variable one-year and multiple-year performance-related remuneration components and €115,589 to other non-performance-related benefits.

The additional benefits were measured at the value calculated for tax purposes. >> Table 008

There were also termination benefits of €6,001,370 and share-based remuneration of €39,050 for members of the Executive Board in 2012, which were not included in the table above.

The table below shows the contributions (additions to the plan) attributable to each individual Executive Board member and the corresponding present values. >> Table 009

The total remuneration paid to former members of the Executive Board in 2013 amounted to €207,561 (2012: €165,396). Provisions for defined benefit obligations to former members of the Executive Board or their surviving dependants amounting to €5,171,114 (2012: €3,635,970) were recognised in accordance with IAS 19.

In the year under review, no advances were made to members of the Executive Board, and no loans were granted.