The remuneration system for members of the Management Board

Mr Koch, Mr Boone and Mr Hutmacher were appointed as members of the Management Board of METRO AG with effect from 2 March 2017 (Mr Koch was simultaneously appointed as Chairman of the Management Board) and Mr Baier with effect from 11 November 2016.

The service contracts of Mr Koch, Mr Boone and Mr Hutmacher came into force with effect from 13 July 2017, which is the day the demerger entered into force; Mr Baier’s service contract already came into force on 2 March 2017.

The agreed remuneration of the members of the Management Board is made up of

• a fixed salary,
• a short-term performance-based compensation,
• a performance-based remuneration with long-term incentive effect,
• a post-employment benefits plan as well as
• non-monetary and supplemental benefits.

The remuneration system for members of the Management Board¹

Total compensation and the individual compensation components are geared appropriately to the responsibilities of each individual member of the Management Board, his or her personal performance and the company’s economic situation and fulfil legal stipulations regarding customary remuneration. The performance-based variable remuneration serves as an incentive for the Management Board to increase the company’s value and is designed to generate sustainable, long-term corporate development.

According to the recommendation of the German Corporate Governance Code, the compensation for each member of the Management Board is limited in individual amounts; in each case with regard to the individual compensation components and also in total (total disbursement cap). The upper threshold of remuneration for the financial year amounts to €8,034,800 for Mr Koch, €4,048,600 for Mr Baier, €6,043,600 for Mr Boone and €6,123,600 for Mr Hutmacher.

Insofar as a member of the Management Board negligently or intentionally violates his duties and the company incurs damage as a result of it, the Supervisory Board has the right to withhold payment of the remuneration of this member of the Management Board in full or in part. A so-called clawback clause (repayment agreement), which in the event of a negative development provides for the recovery of payments made in the past from variable remuneration components, was not agreed with the members of the Management Board, since payments from the short-term performance-based remuneration and the performance-based remuneration with a long-term incentive effect only take place after fulfilment of the performance targets and termination of the performance period. Without prejudice to this, a reduction of future payments to be paid in the event of a deterioration of the company’s position according to § 87 Section 2 of the German Stock Corporation Act (AktG) remains.

Fixed salary

The fixed salary is contractually set and is paid in monthly instalments.

Short-term performance-based remuneration (short-term incentive/STI)

The short-term incentive remunerates the company’s operating performance on the basis of financial performance targets pertaining to that specific financial year.

A target value in euros is set for each member of the Management Board. The payout amount is calculated by multiplying the target value by the factor of overall goal achievement. This, in turn, is calculated by determining the goal achievement factors for each of the financial performance targets. The weighted arithmetic mean of the individual factors results in the overall goal achievement factor. The overall goal achievement is limited to a factor of 2.0.

Short-term incentive

The short-term incentive for financial year 2016/17 for the period from 13 July 2017 to 30 September 2017 for Mr Koch, Mr Baier, Mr Boone and Mr Hutmacher is based on the following parameters of the group:

• like-for-like sales development (sales growth in local currency on a comparable area or with respect to a comparable group of locations or merchandising concepts such as delivery and online business) at 50%,
• exchange rate – adjusted earnings before interest and taxes (EBIT) before special items at 50%,

in each case based on the target amount.

The thresholds for target achievement were determined by the Supervisory Board on the basis of quarterly targets and taking into account the budget planning of the group.

The short-term incentive for Mr Baier is based on the following parameters of METRO Cash & Carry (Wholesale) for financial year 2016/17 for the period from 2 March 2017 to 12 July 2017 (effective date of the demerger):

• like-for-like sales development (sales growth in local currency on a comparable area or with respect to a comparable group of locations or merchandising concepts such as delivery and online business) at 30%,
• exchange rate – adjusted earnings before interest and taxes (EBIT) before special items at 30%,
• Cash flow at 30%,
• Customer satisfaction (Customer Satisfaction Pulse) at 10%, in each case based on the target amount.

The thresholds for goal achievement were set by the Supervisory Board, taking into account the budget planning of the group for METRO Cash & Carry.

To determine whether a goal has been achieved, a lower threshold/barrier of entry and a target value of 100% goal achievement were defined for each performance target. A factor is allocated to the specific degree of goal achievement for each performance target:

• If the degree of goal achievement is 100%, the factor is 1.0.
• If the degree of goal achievement is lower or equal to the barrier of entry, then the factor is 0.0.
• In the case of intermediate values and values over 100%, the factor for goal achievement is calculated using linear interpolation and/or extrapolation.

To ensure the individual performance orientation of Management Board remuneration, the Supervisory Board of METRO AG reserves the general right to reduce or increase the weight of the individual short-term incentive by up to 30%. The basis for this are goals that were agreed individually with the respective members of the Management Board as well as overlapping strategic goals for all members of the Management Board, such as customer satisfaction, employee satisfaction and sustainability.

Short-term incentive – disbursement calculation

The payout amount of the short-term incentive is limited to a maximum of 200% of the individually determined target value (payout cap).

In addition, the Supervisory Board may grant special bonuses to members of the Management Board for exceptional performance. In the reporting year, no special bonuses were granted to the members of the Management Board.

The short-term incentive of the members of the Management Board is payable 4 months after the end of the financial year, but not before approval of the annual and consolidated financial statements for the incentivised financial year.

Performance-based remuneration with long-term incentive effect (long-term incentive, LTI)

The performance-based remuneration with long-term incentive effect incentivises the company’s long-term and sustainable corporate development, taking into account the internal and external value development as well as the concerns of the shareholders and the other stakeholders associated with the company.

Performance share plan (from financial year 2016/17)

The annual tranches of the so-called performance share plan and their associated performance targets generally have a multi-year assessment basis. The performance period is usually 3 years. The payout amount is limited to a maximum of 250% of the individually determined target value (payout cap). In case of employment termination, separate rules for the payout of the tranches have been agreed upon.

Each member of the Management Board is initially allocated conditional performance shares, the amount of which corresponds to the quotient of the individual target amount and the average of the share price of the company’s ordinary share upon allocation. The decisive factor here are the average Xetra closing prices of the company’s ordinary share over a period of 40 consecutive stock exchange trading days immediately after the Annual General Meeting of the company in the year of the allocation. An exception to this is the 2016/17 tranche of the performance share plan, which is based on the average Xetra closing prices of the company’s ordinary share over a period of 40 consecutive stock exchange trading days beginning on 13 July 2017, the initial listing date of the share.

The performance period ends after the 40th stock exchange trading day following the ordinary Annual General Meeting of the third financial year following the issuance of the tranche. After the performance period of a tranche, the final number of performance shares is determined, which depends on the achievement of 2 performance targets, which are weighted equally in the target amount of the performance share plan:

• reported earnings per share (EPS),
• total shareholder return (TSR).

Long-term Incentive

For the EPS component, the Supervisory Board generally decides at the beginning of the financial year in which the tranche of the performance share plan is allocated on a lower threshold/barrier of entry for goal achievement and an EPS target value for 100% target performance for the third financial year of the performance period. A factor is allocated to the specific degree of goal achievement:

• If the degree of goal achievement at the end of the performance period is 100%, the factor is 1.0.
• If the degree of goal achievement is lower or equal to the barrier of entry, then the factor is 0.0. The barrier of entry for the respective tranches is determined by the Supervisory Board. For the tranche granted in financial year 2016/17, the entry barrier amounts to 31% of the goal achievement.
• In the case of intermediate values and values over 100% up to a maximum of 300%, the factor for goal achievement is calculated using linear interpolation and/or extrapolation.

Determining the goal achievement of the EPS component

The goal achievement factor of the TSR component is measured by how the total shareholder return of the company’s ordinary share develops in the performance period relative to a defined benchmark index and to a defined comparison group. Indeed, it develops at half the rate compared to the development of the MDAX TSR over the same period and the development of the average TSR of a defined comparison group of direct competitors over the same period as the TSR of the company. The TSR value of the comparison group of the direct competitors is determined individually for the members of the comparison group and then the arithmetic average is established. The comparison group of direct competitors consists of the following companies: Bid Corp, Bizim Toptan, Marr, Eurocash Group, Performance Food Group, US Foods, Sysco and Sligro. Only companies that are listed for the entire performance period are included in this group. If TSR values are available for less than 6 companies in this comparison group, then the METRO TSR will be fully compared with the MDAX TSR and no comparison with the group of direct competitors will be made.

For the TSR component, the Supervisory Board also usually establishes a lower threshold/barrier of entry and a TSR target value for the 100% target achievement at the beginning of the financial year in which the tranche of the performance share plan is granted.

To determine the goal achievement, the Xetra closing prices of the company’s ordinary share are determined over a period of 40 consecutive stock exchange trading days immediately after the Annual General Meeting of the company in the year of the allocation of the tranche. This is used to establish the average, which is known as the starting share price. The performance period for the respective tranche will begin on the 41st trading day following the Annual General Meeting, or for the 2016/17 tranche on the 41st stock exchange trading day following the initial listing of the ordinary share of the company. 3 years after the starting share price has been determined and the tranche has been issued, the Xetra closing prices of the ordinary share of the company will be determined over a period of 40 consecutive stock exchange trading days immediately following the Annual General Meeting. This is used again to establish the average, which is known as the ending share price. The TSR percentage value will be determined on the basis of the change in the company’s ordinary share price and the total amount of hypothetically reinvested dividends throughout the performance period in relation to the starting share prices as a percentage.

The resulting TSR of the company is compared to the equally determined TSR of the 2 comparison groups in the performance period. A factor is allocated to the specific degree of goal achievement:

• If the degree of goal achievement at the end of the performance period is 100%, the factor is 1.0. This requires an outperformance of 5% points versus the comparison group.
• If the degree of goal achievement is lower or equal to the barrier of entry, then the factor is 0.0.
• In the case of intermediate values and values over 100% up to a maximum of 300%, the factor for goal achievement is calculated using linear interpolation and/or extrapolation.

The target achievement factors of the EPS and TSR components are used to form the arithmetic mean that establishes the overall target achievement factor. This is used to determine the target number of performance shares, which results in a cash payment in euros at the end of the performance period of the tranche:

• If the total goal achievement factor for both components is 1.0, then the target number of performance shares equals the number of conditionally allocated performance shares.
• If the total goal achievement factor is 0.0, then the number of performance shares decreases to zero.
• For all other goal achievements, the target number of performance shares is determined by means of linear interpolation or extrapolation.

The target number of performance shares is limited to a maximum of 300% of the conditionally allocated number of performance shares.

The payout amount is calculated per performance share as follows: again, 3 years after the starting share price has been determined and the tranche has been issued, the Xetra closing prices of the ordinary share of the company will be determined over a period of 40 consecutive stock exchange trading days immediately following the Annual General Meeting. This again is used to form the average and all the dividends paid during the performance period for the ordinary share of the company are added to it. This so-called share factor is multiplied by the number of calculated performance shares and establishes the gross payment amount.

The payout amount is limited to a maximum of 250% of the individually determined target value (payout cap).

The tranches of the performance share plan will be paid no later than 4 months after the Annual General Meeting that decides on the appropriation of the balance sheet profit of the last financial year of the performance period, but not before the approval of all annual and consolidated financial statements for the financial years of the performance period.

Share ownership guidelines

The performance share plan simultaneously introduces the so-called share ownership guidelines. As a prerequisite for the payment of performance shares in cash, the members of the Management Board are obligated for each tranche to develop a self-financed investment in ordinary shares of the company by the end of February in the third year of the performance period. The amount to be invested per tranche for the Chairman of the Management Board is two thirds of his gross annual fixed salary and for a full member of the Management Board 50% of his or her gross annual fixed salary. The plan aims to ensure that, after no more than 5 years of service, the Chairman of the Management Board has invested 200% and a full member of the Management Board 150% of his or her gross fixed salary in ordinary shares of the company, based on the notional purchase price for the respective shares. The purchase price and therefore the number of ordinary shares to be acquired is based on the average price of the Xetra closing prices of the company’s ordinary share over the 40 consecutive stock exchange trading days immediately after the balance sheet press conference, which takes place before February in the third year of the performance period. It corresponds to the quotient of the amount to be invested, which results from the gross annual fixed salary and the determined average price. If the self-financed investment in ordinary shares of the company is not, or not fully, met on the relevant closing date, the payout amount will initially be paid out in cash, but with the obligation to invest it in ordinary shares of the company until the share ownership guidelines are met.

Transfer of long-term incentives in connection with the demerger

Irrespective of the performance share plan, the members of the Management Board were granted 2 long-term incentive tranches in financial year 2016/17. Of the 2014/15 and 2015/16 tranches of the sustainable performance plan version 2014, which were granted by the former METRO AG (now: CECONOMY AG) prior to the demerger, the remaining target amounts for the period from the day after the demerger took effect were transferred to today’s METRO AG until the end of the performance period. The goal achievement of the former 2014/15 tranche was linked to the parameter return on capital employed before special items (RoCE) related to financial year 2016/17 and the target achievement of the former 2015/16 tranche in the earnings per share (EPS) parameter for financial year 2017/18. In order to determine the goal achievement, the Supervisory Board set thresholds for both tranches: a lower threshold/barrier of entry for each and a target value of 100% for target achievement. The goal achievement of the respective tranche is used to determine the factor which, multiplied by the individual target amount, results in a cash payment in euros at the end of the performance period of the tranche:

• If the degree of goal achievement at the end of the performance period is 100%, the factor is 1.0.
• If the degree of goal achievement is lower or equal to the barrier of entry, then the factor is 0.0.
• In the case of intermediate values and values over 100%, the factor for goal achievement is calculated using linear interpolation and/or extrapolation.

The payout amount is limited to a maximum of 250% of the individually determined target value (payout cap).

The performance period of the tranche linked to the RoCE performance target ends after the 40th stock exchange trading day after the Annual General Meeting of the company in 2018. The performance period of the tranche linked to the EPS performance target has been reduced from the original 4-year term to 3 years and ends after the 40th stock exchange trading day after the Annual General Meeting of the company in 2019.

Post-employment benefits plans

The members of the Management Board receive post-employment benefits plans in the form of employer’s commitments. The commitment of the former METRO AG (now: CECONOMY AG) to the post-employment benefits plans was transferred with all rights and obligations to today's METRO AG and continued unchanged. The financing is provided jointly by the Management Board and the company. This is based on an apportionment of “7 +14”. When a member of the Management Board makes a contribution of 7% of his or her defined basis for assessment, the company will contribute twice the amount. The assessment is based on the amount of the fixed salary and the target amount of the short-term incentive. When a member of the Management Board leaves the company before retirement age, the contributions retain the level they have reached. This component is congruently reinsured by Hamburger Pensionsrückdeckungskasse VVaG (HPR). The interest rate for the contributions is paid in accordance with the Articles of Association of the HPR with regard to profit participation, with a guarantee applying to the paid-in contribution.

Entitlement to pension plans exists

• if the employment ends with or after reaching the statutory retirement age in the German statutory pension insurance,
• if the employment ends after the age of 60 or after the age of 62 for pension commitments granted after 31 December 2011 and before reaching the regular retirement age,
• in the event of disability or death, provided that the relevant conditions of eligibility are met.

Payment can be made in the form of capital, instalments or a life-long pension. A minimum benefit is granted in the case of invalidity or death. In such instances, the total amount of contributions that would have been credited to the member of the Management Board for every calendar year up to a credit period of 10 years, but limited to the point when the individual turns 60, will be added to the benefits balance. This component is not reinsured, but will be provided directly by the company when the benefit case occurs.

Furthermore, members of the Management Board have been offered the option of converting future compensation components in the fixed salary as well as in the variable remuneration into post-employment benefits plans with Hamburger Pensionsrückdeckungskasse VVaG as part of a tax-privileged compensation conversion scheme.

The members of the Management Board have no further pension commitments beyond the described retirement benefits. In particular, no retirement payments will be granted.

Further benefits in case of an end to employment

Severance payments in cases of premature terminations of management roles with no urgent reason are limited to 2 annual remunerations (severance cap) and must not exceed the remuneration that would be paid for the remaining term of the employment contract. The recommendation by the German Corporate Governance Code is observed.

In the event of a change of control, the members of the Management Board may exercise their right to resign from their office, within 6 months after the change of control, for good cause at the end of each month by giving 3 months prior notice. They may also terminate their management contract with effect on the same date (extraordinary termination right).

The contractual provisions assume a change of control if either a single shareholder or a number of jointly acting shareholders have acquired a controlling interest in the meaning of § 29 of the German Securities Acquisition and Takeover Act (WpÜG) by way of holding at least 30% of the voting rights and the change of control significantly interferes with the responsibilities of a member of the Management Board.

If the extraordinary termination right is exercised, or if the service contract is terminated on the basis of an amicable agreement within 6 months from the change of control, the respective member of the Management Board shall be entitled to a lump sum compensation for his contractual entitlements during the remaining term of the member’s management contract. The recommendation by the German Corporate Governance Code is observed with the amount of the severance payment being limited to 150% of the severance payment cap. The entitlement to a severance payment lapses if the employment was terminated by the company for good cause pursuant to § 626 of the German Civil Code (BGB).

In addition, the service contracts of the members of the Management Board generally provide for a post-contractual non-compete clause. They are prohibited from providing services to or for a competitor for a period of 12 months after termination of the service contract. For this purpose, compensation for non-competition has been agreed which corresponds to the target salary consisting of the fixed salary, short-term incentive and long-term incentive for the duration of the post-contractual non-compete clause and is paid in monthly instalments. These payments will be credited with other compensation earned by the other use of the workforce. The company has the option of waiving the post-contractual non-compete clause prior to or upon termination of the service contract, while observing cancellation periods.

In the event of the death of a member of the Management Board during active service, his or her surviving dependants will be paid the fixed salary for the month in which the death occurred as well as for an additional 6 months.

Supplemental benefits

The supplemental benefits granted to members of the Management Board include non-cash benefits and expense allowances (for example, company cars).

Pursuant to the German Corporate Governance Code, the remuneration received by the Management Board is as follows, according to the tables “benefits granted” and “accruals”:

Long-term incentive (performance share plan) in financial year 2016/17

For the tranche of the performance share plan granted in financial year 2016/17, the target amount for Mr Koch is €1.6 million, for Mr Baier €0.81 million, for Mr Boone €0.96 million and for Mr Hutmacher €1.2 million.

The number of performance shares (initially vested) distributed amounts to 93,349 for Mr Koch, 47,258 for Mr Baier, 56,010 for Mr Boone and 70,012 for Mr Hutmacher.

The value of the tranche distributed in financial year 2016/17 as part of the performance share plan was calculated at the time of granting by external experts using recognised financial-mathematical methods.

In financial year 2016/17, the expenses for the company relating to the ongoing tranches of share- and performance-based payment programmes with a long-term incentive effect consisted of €0.27 million for Mr Koch, €0.14 million for Mr Baier, €0.16 million for Mr Boone and €0.2 million for Mr Hutmacher.

As of 30 September 2017, the provisions for the members of the Management Board totalled €0.77 million.

Post-employment benefits in financial year 2016/17 (including provisions for post-employment benefits plans)

In financial year 2016/17, a total of €0.28 million according to International Financial Reporting Standards (IFRS) and €0.29 million according to the German Commercial Code (HGB) was used for the remuneration of the active members of the Management Board of METRO AG for benefits to be provided after the end of their employment. Of this total, according to IFRS, approximately €0.07 million accounted for pension plans for Mr Koch, approximately €0.1 million for Mr Baier, approximately €0.06 million for Mr Boone and approximately €0.05 million for Mr Hutmacher.

For post-employment benefits plans according to the German Commercial Code (HGB), approximately €0.07 million was allocated to Mr Koch, approximately €0.1 million to Mr Baier, approximately €0.06 million to Mr Boone and approximately €0.05 million to Mr Hutmacher.

Provisions according to IFRS and the German Commercial Code (HGB) amount to approximately €0.007 million for Mr Koch, approximately €0.004 million for Mr Baier and approximately €0.091 million for Mr Boone according to IFRS and approximately €0.095 million according to HGB. There is no need to establish provisions for Mr Hutmacher. The present value of the commitment volume according to IFRS and the German Commercial Code (HGB) amount to approximately €2.8 million for Mr Koch, approximately €0.5 million for Mr Baier, approximately €0.7 million for Mr Boone and approximately €1.9 million for Mr Hutmacher. With the exception of the provisions listed in the last paragraph, the present value of the commitment volume is offset by assets.