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, the economic situation, and the success and sustainable growth of the LANXESS Group. Consideration is also given to compensation at comparable companies and the company’s overall compensation structure, including as well the ratio between the compensation of the Board of Management and that of LANXESS’s senior executives and the rest of the workforce, both overall and in terms of time. 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.

The compensation system that was introduced for members of the Board of Management in 2010 was approved by the Annual Stockholders’ Meeting of LANXESS AG on May 28, 2010. 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. The compensation mix of 31% annual base salary and 69% variable compensation components, assuming 100% target attainment, is strongly aligned with the company’s performance and long-term value creation. The present service contracts for members of the Board of Management set out the annual base salary and limits on the amounts for the variable compensation components. They do not provide for a separate limit on total compensation, even taking into account a possible discretionary bonus.

Compensation Mix for Members of the Board of Management
 
%  
Annual base salary 31
Annual Performance Payment 35
Long-Term Incentive Plan/Long-Term Stock Performance Plan 20
Long-Term Performance Bonus 14
  100
 

Annual base salary

The fixed compensation comprises the annual base salary and compensation 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 €3,124 thousand in fiscal 2013 (2012: €2,678 thousand).

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 2013 totaled €1,653 thousand. Actual payments in 2014 may differ from this amount, which was calculated in advance.

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. It 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).

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.

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Compensation of the Board of Management
 
€ ’000   Fixed compensation Variable compensation   Payments from LTSP rights  
 
  Year Annual base salery Compensation 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 2013 1,000 130 615 4) 34 323 2,102 596,625 328 2,430
2012 900 119 1,798 320 703 3,840 564,375 282 4,122
Dr. Werner Breuers 2013 613 51 346 5) 0 218 1,228 322,500 177 1,405
2012 500 54 972 200 380 2,106 322,500 161 2,267
Dr. Bernhard Düttmann 2013 613 57 346 5) 0 218 1,234 322,500 177 1,411
2012 500 61 972 110 380 2,023 322,500 161 2,184
Dr. Rainier van Roessel 2013 613 47 346 5) 0 218 1,224 322,500 177 1,401
2012 500 44 972 200 380 2,096 322,500 161 2,257
Total 2013 2,839 285 1,653 34 977 5,788 1,564,125 859 6,647
2012 2,400 278 4,714 830 1,843 10,065 1,531,875 765 10,830
1) Payment in 2013 and 2014, respectively
2) Payment in 2012 and 2013, respectively
3) Payment of 50% each in 2014 and 2015
4) The performance bonus was voluntarily reduced by 6% of the annual base salary.
5) The performance bonus was voluntarily reduced by 10% of the annual base salary.

The fair values of the LTSP entitlements that already existed at the start of 2013 declined significantly, which resulted in a net gain from share-based compensation in fiscal 2013 (2012: expense). Of this amount, €385 thousand (2012: €1,726 thousand) relate to the entitlements granted to Dr. Heitmann, €56 thousand (2012: €118 thousand) to Dr. Düttmann’s entitlements and €223 thousand (2012: €991 thousand) each to the entitlements for Dr. Breuers and Dr. van Roessel.

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 €977 thousand (2012: €1,843 thousand) were earned under the performance-based LTPB in fiscal 2012 and 2013 (2012: 2011 and 2012). Actual payments in 2014 and 2015 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. From fiscal 2013, the maximum amount that will be taken into account for calculating the APP contribution will be that due on 100% target attainment, irrespective of the actual target attainment. 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 to individual members of the Board of Management. 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 2013 consolidated financial statements for this purpose was €1,264 thousand (2012: €815 thousand). The present value of the obligations for the members of the Board of Management serving as of December  31, 2013 was €21,740 thousand (2012: €18,248 thousand). Under IFRS accounting principles, the service cost for pension entitlements earned in 2013 and the present value of the obligations, including acquired rights, as of December 31, 2013 amounted, respectively, to €376 thousand and €12,743 thousand (2012: €257 thousand and €10,924 thousand) for Dr. Heitmann, €376 thousand and €2,323 thousand (2012: €271 thousand and €2,173 thousand) for Dr. Breuers, €394 thousand and €1,584 thousand (2012: €204 thousand and €944 thousand) for Dr. Düttmann, and €118 thousand and €5,090 thousand (2012: €83 thousand and €4,207 thousand) for Dr. van Roessel.

The total service cost recognized under HGB accounting rules in the 2013 annual financial statements for this purpose was €3,470 thousand (2012: €2,199 thousand). The present value of the obligations for the members of the Board of Management serving as of December  31, 2013 was €18,565 thousand (2012: €15,095 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, 2013 amounted, respectively, to €10,712 thousand (2012: €8,882 thousand) for Dr. Heitmann, €2,028 thousand (2012: €1,850 thousand) for Dr. Breuers, €1,348 thousand (2012: €769 thousand) for Dr. Düttmann, and €4,477 thousand (2012: €3,594 thousand) for Dr. van Roessel.

As of December 31, 2013, obligations to former members of the Board of Management totaled €11,578 thousand (2012: €11,411 thousand) under IFRS accounting rules and €9,734 thousand (2012: €9,313 thousand) under HGB accounting rules.

Payments of €308 thousand (2012: €479 thousand) were made to former members of the Board of Management.

In fiscal 2013, 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 2013, 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 2013.