Compensation report

The report on compensation forms part of the Corporate Governance Report and summarizes the basic principles used to establish the compensation of the Executive and Supervisory Boards of KUKA Aktiengesellschaft and explains the structure and level of remuneration of the members of the Executive and Supervisory Boards. The Executive Compensation Report is also an integral part of the management report.

Compensation of the Executive Board

KUKA Aktiengesellschaft’s Executive Board compensation contains fixed and variable components. The latter consist of several variable compensation elements. The Executive Board compensation system thus conforms with section 87 of the German Stock Corporation Act and the requirements of the CGC regarding sustainable corporate performance. The variable components take into consideration both positive and negative business developments.

At its meeting on September 28, 2010, the Supervisory Board examined in detail the compensation of the Executive Board. It then modified the existing executive member contracts of Dr. Reuter and Mr. Schulak retroactively in accordance with the compensation model described in this section. This was partly due to the circumstances surrounding Dr. Reuter’s appointment. Initially he had been appointed as CEO in accordance with section 105 para. 2 of the German Stock Corporation Act and only appointed as CEO and member of the Executive Board until the end of 2013 when the Supervisory Board reached its decision on April 26, 2010.

Because the term of Dr. Bickel’s appointment from the start was for a short period and ended on December 31, 2010, Dr. Bickel’s compensation for his work on the Executive Board of KUKA Aktiengesellschaft was purely fixed.

The fixed compensation consists of a base salary and payments in kind. The base salary is paid in twelve equal monthly installments. The payments in kind of the Executive Board members consist mainly of the use of company vehicles.

One half of the variable component is based on achievement of personal targets and, if an annual net profit was generated, the other half is dependent on the growth of key business indicators; namely, KUKA Group’s EBIT and free cash flow. The associated details are established annually by mutual agreement. The variable compensation component is capped and achievement of the financial targets is coupled to business development over several years.

An additional variable compensation component for members of the Executive Board consists of annually recurring phantom share programs (hereinafter also referred to as programs) that aim to provide a long-term incentive. It was first established in 2006. Phantom shares are virtual shares that grant the holder the right to cash compensation at the level of the company’s current share price. In contrast to stock options, income from phantom shares reflects not just the increase in share value, but the full value of the share. In addition, a dividend equivalent that mirrors the actual dividend distributed on real KUKA shares will be paid annually during the life of the plan for each virtual share held. There are no voting rights associated with phantom shares.

The term of each phase of the program is three calendar years. It was rolled out for the first time for the period from 2006 to 2008. At the beginning of the three-year period, the Supervisory Board establishes the amount to be allocated. A preliminary number of phantom shares is derived by dividing this number by the applicable starting price of KUKA’s shares, which is determined by the average price of KUKA shares (opening price in XETRA trading on the Frankfurt Stock Exchange) between January 1 and the last trading day prior to the Supervisory Board’s financial statements meeting in the first year of the respective program. The Supervisory Board also establishes an EVA (economic value added) for continuing operations (before taxes) at the beginning of the three-year performance period based on the operative plan for the three program years, which is based on the budget for the first financial year of the three-year period and the plan for the two subsequent financial years.

To determine a success factor, the actual cumulative EVA of the three-year performance period is divided by the EVA of continuing operations as per the operational planning for the three program years covered. The success factor can vary between 0 and 2.0. The final number of phantom shares depends on the degree of achievement of the success factor, which is multiplied by the preliminary number of phantom shares. At the upper limit, the number of phantom shares is doubled (this occurs when the success factor 2.0 is achieved). Payment is based on the final number of phantom shares at the closing share price (average price of KUKA shares between January 1 of the year following the three reference years (following year) and the day prior to the financial statements meeting of the Supervisory Board in the following year).

Each Executive Board member participating is obligated to apply 25 percent of the gross amount paid out in April of the following year to the purchase of KUKA shares at the then current share price. This share purchase serves to build up a level of holdings established at 50 percent of annual compensation in the form of KUKA shares starting in April of the following year. The obligation ends with the participant’s departure from the KUKA Group. In the event of termination of an Executive Board member’s contract, initiated by either party, all phantom shares allocated to the member expire.

The phantom share program established as a variable compensation component in financial 2010 refers to the period 2010 – 2012. Executive Board members were allocated 30.436 preliminary phantom shares based on a starting value of € 11.50.

The Supervisory Board will decide each year whether or not to grant the Executive Board share-price-oriented compensation. The repeated granting of such compensation in the past does not constitute a right to being granted such or comparable compensation in the future.

The objective of the program is to ensure that every member of the Executive Board is also a KUKA shareholder. It promotes share ownership among members of KUKA’s Executive Board and thereby ties the interests of these corporate members more closely to the interests of the shareholders. Changing success targets or comparative parameters retroactively is prohibited.

No loans were granted to Executive Board members during the reporting period.

Compensation for 2010

Payments to members of the Executive Board during the 2010 business year totaled € 2,642,000. The following table outlines the compensation of the individual Executive Board members as well as the entire Executive Board.

in € thousand Fixed salary including payments in kind* Variable compensation for financial 2010 Phantom share program 2010 - 2012** Total
*
Payments in kind consist of the use of company cars, payment of hotel costs at the company's headquarters, payment of return flights home and accident insurance premiums, depending on the contractual agreement with the individual Executive Board members.
The premium for D&O insurance, unlike that for accident insurance, is not included in the payments in kind because it cannot be allocated on an individual basis since the company pays a flat premium for the protected group of persons, which extends beyond the members of the Executive Board.
**
Value as per accruals as of December 31, 2010
Dr. Till Reuter 420 400 283 1,103
Stephan Schulak 324 299 212 835
Dr. Walter Bickel 704 The employment contract did not include a variable component The employment contract did not include any phantom shares 704
Total 1,448 699 495 2,642

With a few exceptions, former Executive Board members were granted benefits from the company pension scheme, which include old-age, vocational and employment disability, widow’s and orphan’s pensions. The amount of accruals included for this group of persons in 2010 for current pensions and expected pension benefits totals € 10,095,000 (German Commercial Code), which compares with € 9,392,000 in 2009.

Compensation of the Supervisory Board

Compensation Structure

A resolution was passed at the Annual General Meeting of the company on June 1, 2006, which revised the Articles of Association to require fixed compensation for members of the Supervisory Board.

In addition to reimbursement of expenses, each member of the Supervisory Board will be paid a fixed amount of € 30,000, payable at the end of the business year.

The chair of the Supervisory Board will be paid four times that amount, and the deputy chair’s compensation will be double. For chairing the annual general meeting, provided it was not being chaired by the head of the Supervisory Board, and for membership in one or more committees that were not of an interim nature, Supervisory Board members are paid an additional sum of € 30,000 plus statutory value added tax. Committee chairs will be paid at most 1 1/2 times the annual remuneration, even if they chair several committees or are members of another committee; this does not apply to the committee as per section 27 para. 3 of the MitbestG (German Act on Co-determination).

In addition, for each Supervisory Board meeting, each Supervisory Board member will have a choice of either being reimbursed for expenses or receiving a lump sum expenditure of € 450 per sitting plus applicable value added tax. This option may only be declared once per year.

Compensation for the years 2009 and 2010

Note that for financial 2010, the Supervisory Board members volunteered to forego 10 percent of their compensation. Mr. Bernd Minning also voluntarily forfeited a further 50 percent of the special payments to which he was entitled as Chairman of the Supervisory Board.

The following table compares the compensation of the members of the Supervisory Board for the 2009 and 2010 business years.

  Payment in 2010 for 2009 in € thousands Payment in 2011 for 2010 in € thousands
Bernd Minning
Chairman of the Supervisory Board; Chairman of the Personnel Committee, Strategy Committee, Mediation Committee and Nomination Committee
50 113
Dr. Till Reuter (to Sept. 29, 2009)
Chairman of the Supervisory Board and Chairman of the Personnel Committee
25 0
Dr. Rolf Bartke
Chairman of the Supervisory Board and Chairman of the Personnel Committee (to Sept. 18, 2009)
106 0
Jürgen Kerner
Deputy Chairman of the Supervisory Board
81 81
Prof. Dr. Dirk Abel 15 54
Dr. Uwe F. Ganzer
Chairman of the Audit Committee
19 68
Walter Prues (to June 30, 2009) 27 0
Dr. Michael Proeller (from of April 29, 2010) 0 37
Dr. Reiner Beutel (to Sept. 18, 2009) 39 0
Prof. Dr. Uwe Loos
Chairman of the Technology and Production Committee
19 68
Dr. Herbert Meyer (to Sept. 18, 2009)
Chairman of the Audit Committee
48 0
Pepyn René Dinandt (to April 29, 2009) 9 0
Helmut Gierse (to April 29, 2009) 9 0
Carola Leitmeir 27 54
Dr.-Ing. Helmut Leube (to Sept. 18, 2009) 19 0
Fritz Seifert 45 54
Wilfried Eberhardt 27 27
Siegfried Greulich 45 54
Thomas Knabel 45 54
Guy Wyser-Pratte 15 54

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