Remuneration report

The full Supervisory Board decides on the remuneration system for the Board of Management, and reviews it regularly. The Personnel Committee of the Supervisory Board, comprising the Chairman of the Supervisory Board, one shareholder representative and one employee representative, prepared the resolutions for the full Supervisory Board in the year under review.

The previous remuneration system for the Board of Management was already geared to providing incentives for Munich Re’s long-term and sustainable success and to bringing the interests of the members of the Board of Management into line with those of our shareholders. It met the relevant company and supervisory law requirements, including those of the German Corporate Governance Code.

The remuneration system for the Board of Management comprised fixed and variable components as well as the occupational retirement scheme. Details can be found in the following table:

The fixed components of remuneration comprised basic remuneration plus remuneration in kind and fringe benefits such as company cars, insurance policies and healthcare. The payroll tax on the remuneration in kind and fringe benefits was borne by Munich Re.

The variable remuneration component was geared to the overall performance of the Group and defined divisional units, and to the personal performance of the individual members of the Board of Management.

The amount of variable remuneration depended on the extent to which the annually set objectives for annual and multi-year performance were met, and how the overall performance component was assessed.

In evaluating the overall performance of the Board of Management as a whole and of its individual members, performance criteria not included in the agreed objectives were also taken into consideration in particular, and could be assessed as either positive or negative. In addition, the Supervisory Board was able to address developments that were beyond the influence of Board members during the appraisal period.

Annual objectives, multi-year objectives, overall performance evaluation and investment in shares together formed a well-balanced and economic – i.e. strongly risk-based – incentive system, with great importance being attached to ensuring that the targets set for the members of the Board of Management did not have undesirable effects. During the one and three-year appraisal periods, no adjustments were made to the objectives and no guaranteed variable remuneration components were granted.

Details of the assessment bases for the annual and multiyear performance are provided in the following tables.

The financial and personal objectives set for the members of the Board of Management up to 2017 were very granular and formulated very clearly to ensure that they were objective, and could be measured and monitored. They included commercially sensitive information that was highly relevant for the market and the competition, and covered clients’ interests. That is why we did not publish specific targets on the basis of the previous remuneration system. To enhance the transparency of the remuneration report, the overall achievement of objectives for each remuneration component is now also published in the remuneration tables in accordance with the German Corporate Governance Code.

The remuneration system for the Board of Management was designed in such a way that, owing to the “overall performance” component, a negative contribution to profits led to a reduction in variable remuneration on an annual and multi-year basis. Moreover, the financial multiyear objectives were conceived such that the result of an adverse year caused the overall achievement of objectives to drop to zero. Hence, owing to the decline in the result for 2017, which was attributable to hurricane losses, no bonus for the Group objective for annual performance was paid and three multi-year bonus schemes were significantly impacted. On account of the flexible bonus policy, it was also possible for no variable remuneration to be paid at all. In addition, the malus principle also involved the obligation on members of the Board of Management to invest in Company shares, as a result of which part of the bonus paid was placed at risk again and thus linked to the interests of shareholders.

According to the contracts of employment for members of the Board of Management appointed for the first time as from 1 January 2017, all variable remuneration components not already paid out are forfeited in the event of termination of a Board member’s contract by the Company for good cause or in the event of relinquishment by a Board member of their appointment to the Board of Management without good cause.

In the case of temporary incapacity to work due to illness or for another cause beyond the Board member’s control, the remuneration is paid until the end of the contract of employment. The Company may terminate the contract prematurely if Board members are incapacitated for a period of longer than 12 months and it is probable that they will be permanently unable to fully perform the duties conferred on them (permanent incapacity to work). In this event, the Board member will receive a disability pension.

Stock option plans
No stock option plans or similar incentive schemes are in place for the Board of Management.

Remuneration for other board memberships
In the case of seats held on other boards, remuneration for board memberships must be paid over to the Company. Exempted from this is remuneration for memberships explicitly classified by the Supervisory Board as private.

Severance cap and change of control
Members of the Board of Management appointed before 1 January 2017 have no contractual right to severance payments. If the Board member’s activities are terminated prematurely by the Company without good cause, payments due may not exceed the equivalent of two years’ total remuneration (three years’ total remuneration in the event of acquisition of a controlling interest or change of control within the meaning of Section 29(2) of the Securities Acquisition and Takeover Act – WpÜG) and may not cover more than the remaining period of the employment contract if this is shorter. If the employment contract is terminated for good cause on grounds that are within the Board member’s control, no payments are made to the Board member. The calculation is based on overall remuneration for the past financial year and, where appropriate, on the probable overall remuneration for the current financial year.

Members of the Board of Management appointed for the first time after 1 January 2017 whose contracts are terminated by the Company without good cause have a contractual right to a severance payment. Such payments may not exceed the equivalent of two years’ total remuneration, and are limited to the remaining term of the Board member’s contract if this term is shorter. Total annual remuneration is calculated on the basis of basic annual remuneration and variable remuneration paid out for the prior full financial year before the contract was terminated; remuneration in kind, other fringe benefits and contributions to occupational retirement schemes are not taken into account. Payments received by a Board member during a period of notice and after termination of the appointment are offset against any severance payment. There will be no right to severance payments in the event of extraordinary termination of the Board member’s contract for good cause.

As a matter of principle, the Company ensures that severance payments are related to performance achieved over the whole period of activity.

Up to and including 2008, the members of the Board of Management were members of a defined benefit plan, providing for payment of a fixed pension amount.

As of 2009, newly appointed members of the Board have become members of a defined contribution plan. For this plan, the Company provides a pension contribution for each calendar year (contribution year) during the term of the employment contract. It uniformly amounts to 25.5% of the target overall direct remuneration (= basic remuneration + variable remuneration on the basis of 100% achievement of objectives). The amount of the pension contribution takes into consideration the peer group (including DAX 30 companies) and the pension contributions for the employee groups below the level of the Board of Management. The pension contributions for the members of the Board of Management are paid over to an external pension insurer. The insurance benefits that result from the contribution payments constitute the Company’s pension commitment to the Board member.

Board members appointed before 2009 were transferred to the new system. They kept their pension entitlement from the defined benefit plan (fixed amount in euros) existing at the date of transfer, which was maintained as a vested pension. For their service years as of 1 January 2009, they receive an incremental pension benefit based on the defined contribution plan.

The Supervisory Board determines the relevant target pension level for pension commitments from defined benefit plans and defined contribution plans – also considering length of service on the Board – and takes account of the resultant annual and long-term cost for the Company.

The members of the Board of Management are also members of the Munich Re pension scheme, which is a defined contribution plan.

Separate Remuneration Committee from 2018
The Supervisory Board set up a separate Remuneration Committee with effect from 1 January 2018, of which the Chairman of the Supervisory Board and one representative each of the shareholders and employees are members. Following the 2019 Supervisory Board election, the Committee is to be set up in such a way that the two shareholder representatives may not be members of the Supervisory Board for more than ten years. This enables us to comply with a key demand of our shareholders. As a result of the establishment of the Remuneration Committee, responsibility for all remuneration-related matters concerning members of the Board of Management has been transferred from the Personnel Committee to the Remuneration Committee. This has no effect on the remaining tasks of the Personnel Committee, such as the appointment and dismissal of Board members or the conclusion of contracts.

New remuneration system from 2018
The Supervisory Board agreed a new remuneration system effective from 1 January 2018, partly because the remuneration system for the members of the Board of Management was rejected at the 2017 Annual General Meeting. The new remuneration system complies with legal requirements as did the previous system, takes account of the major issues raised in the previous year and is much leaner, less complex and easier to comprehend. The major reduction in complexity, paired with externally accepted indicators, means that the Company will be able to disclose the assessment bases and evaluations for the Board of Management’s remuneration in a more transparent manner in future, and therefore better meet the requirements of shareholders and their representatives.

The new remuneration system for the Board of Management will be put to the vote at the Annual General Meeting on 25 April 2018.

The structure of the remuneration system for the members of the Board of Management with effect from 2018 is shown below. A particular focus is on the changes compared with the previous remuneration system, and reasons are given in each particular case.

Remuneration continues to comprise fixed (non-performance-related) and variable (performance-related) components and a company pension scheme. Details are included in the following table:

Updated overview of the structure of the remuneration system for the Board of Management from 2018
At its meeting on 14 March 2018, the Supervisory Board of Munich Reinsurance Company passed a resolution regarding the methodology for assessing the multi-year component “total shareholder return (TSR) of the Munich Re shares compared with a defined peer group” and determined the scaling to be applied.

The following overview of the structure of the remuneration system for the Board of Management from 2018 has been adapted accordingly and replaces the overview found on page 41 of the 2017 Group Annual Report.

Fixed remuneration
Fixed remuneration comprises basic remuneration plus the remuneration in kind and fringe benefits (including company cars and insurance policies) previously granted. The payroll tax on the remuneration in kind and fringe benefits will continue to be borne by Munich Re.

The share of basic remuneration in the target overall direct remuneration will be increased from 30% to 50%. The higher weighting of the basic remuneration ensures a greater balance in the composition of the overall remuneration, which is also a requirement under Solvency II. In accordance with Solvency II, fixed and variable remuneration components must be in balance, so that the fixed component represents a sufficiently high proportion of the total remuneration and enables the undertaking to apply a fully flexible bonus policy, including the possibility of paying no variable remuneration at all. The reduction in the variable component is designed to avoid providing Board members with the incentive to take excessive risk in order to achieve a higher bonus. Moreover, variable remuneration, which is geared solely to financial objectives and will in future only take qualitative aspects into consideration as part of the overall performance evaluation, will become significantly more volatile than was previously the case with qualitative objectives. Individual investors have also been increasingly requesting a strengthening of fixed remuneration. For these reasons, it seems appropriate to raise basic remuneration.

Variable remuneration
Assessment bases and link to corporate strategy
Variable remuneration has been completely revamped. It continues to comprise an annual and multi-year component, both of which are related to the future (as was previously the case). The assessment bases used, however, differ from those in the previous remuneration system. One of the main reasons for this is that disclosure of the financial objectives set for members of the Board of Management – which was requested by investors for the sake of greater transparency – was previously out of the question owing to its relevance for the competition and impact on clients’ interests. The assessment bases of the new remuneration system do not have these disadvantages.

Going forward, the exact target for the IFRS consolidated result used for the annual bonus, and the respective figures for a 0% and 200% achievement of objectives (linear scaling) will be communicated externally. The target cannot be adjusted retroactively. After the assessment period has ended, the IFRS consolidated result achieved and the corresponding achievement of this objective will also be disclosed. As regards the total shareholder return (TSR) of Munich Re’s shares used for the multi-year bonus, which is measured in relative terms in comparison with the peer group, the specific values for assessing the achievement will not be available until the end of the plan period. The values used for 0% and 200% of the linear scaling will be communicated externally prior to the 2018 Annual General Meeting. After assessing this achievement, this too will be communicated together with the comparable values for the peer group. This ensures comprehensive transparency regarding the financial objectives.

As only one financial indicator each is used in the annual and multi-year bonus, the variable remuneration component is easier to understand. The Company has deliberately decided in favour of this simpler method in order to reduce the complexity of the previous remuneration system. The IFRS consolidated result and TSR on Munich Re’s shares in comparison with the peer group are two ambitious and exacting indicators promoting long-term corporate strategy. Both indicators can be influenced by the Board of Management.

Munich Re’s business strategy is geared to profitable growth and successful positioning among our competitors. As an established result aggregate and relevant key figure for the capital market, the IFRS consolidated result takes account of high and stable earnings power in the annual variable remuneration component. The target for the IFRS consolidated result is based on annual planning figures, which in turn reflect Munich Re’s business strategy.

Based on its long-term strategic orientation and economic management of the Group, Munich Re is convinced of its ability to sustainably create value for its shareholders in the form of TSR. TSR takes account of dividend payments as well as share price performance. A multi-year component based on an increase in TSR in comparison with our peer group makes up the largest portion of the new variable remuneration for the Board of Management. From Munich Re’s point of view, the relative TSR is well suited for bringing in line the interests of shareholders and of the members of the Board of Management. As TSR is measured over a period of several years, it reflects Munich Re’s sustainable and long-term performance not only in absolute terms, but also in relative terms. After all, above-average TSR development in comparison with the peer group is not conceivable in the long term without simultaneously generating good results and creating value for our shareholders. Surpassing the performance of our peer group can be in the interests of shareholders – even in a weak market environment.

As soon as the information on the achievement of objectives is available, as part of the overall performance evaluation the Supervisory Board can take into consideration both in the annual and multi-year bonus the performance of the individual members of the Board of Management and the Board of Management as a whole, along with Munich Re’s financial situation, performance and future prospects. This is done by means of a loading or reduction of up to 20 percentage points on the relevant objective achieved.

In evaluating overall performance, in particular financial and non-financial criteria for the individual member’s performance and the performance of the respective divisional unit/division and the field of business need to be taken into consideration. Other aspects, such as those relating to periods prior to the appraisal period in question, may also be taken into account. For this purpose, the Supervisory Board has compiled a set of criteria with the following examples of bonus-malus aspects:

Transparency is provided with regard to whether and for what loadings or reductions were made and what they amounted to.

The evaluation of overall performance can also take into account factors that influence business development but are not reflected in the IFRS consolidated result and TSR. Therefore, in light of the aim of keeping the remuneration system simple and transparent, no further financial assessment bases are needed.

Targets for the annual bonus
The aim of the annual bonus is to achieve a high IFRS consolidated result. A target of €2,300m was set for 2018, with the following linear scaling for the 0–200% target corridor:

€1,600m = 0% achievement of objective
€2,300m = 100% achievement of objective
€3,000m = 200% achievement of objective

The target chosen for 2018 is a challenging objective for the members of the Board of management given the prevailing low-interest-rate policies and fierce competition in the reinsurance markets.

Targets for the multi-year bonus
The objective of the multi-year bonus is the sustainable performance of Munich Re’s shares in terms of TSR in comparison with the peer group. The companies in the peer group were selected based on comparable business activities and size. Furthermore, they must be listed on the stock exchange and subject to similar accounting standards as Munich Re, which is why the peer group only includes European primary insurance and reinsurance companies. The peer group comprises Allianz, Axa, Generali, Hannover Re, SCOR, Swiss Re and Zurich Insurance Group. It is the same peer group as for the analysts’ conference.

The multi-year bonus spans five calendar years. In the first calendar year, the initial TSR is established, and at the end of the scheme, the end TSR is computed and compared in order to determine achievement of the objective. The calculations are made on the basis of reporting date figures.

Deferral
The run time of the flexible and deferred multi-year bonus takes account of the nature and time horizon of the Company’s business activities. The TSR in the multi-year bonus fully reflects the sustainable and long-term performance of Munich Re’s shares, so that a further multi-year deferral period – which in turn is geared to share price performance – is neither expedient nor necessary. In the case of the annual bonus, a deferral period does not offer any significant added value either, as the annual bonus makes up only 15% of overall remuneration.

Limit to variable remuneration (malus) and clawback
Given that the Supervisory Board can take into account a loading or discount of up to 20 percentage points on both the annual bonus and the multi-year bonus in order to reflect the achievements of the individual members of the Board of Management and the Board of Management as a whole, it has the option of reducing variable remuneration in the case of negative result contributions.

According to the employment contracts for members of the Board of Management appointed for the first time after 1 January 2017, all unpaid variable remuneration components are forfeited in the event of termination of a Board member’s contract by the Company for good cause or in the event of relinquishment by a Board member of their appointment to the Board of Management without good cause.

In addition, all employment contracts of the members of the Board of Management provide for the right of the Company to implement any requirements by the supervisory authority to limit, cancel or not pay out variable remuneration in relation to the member of the Board of Management.

Contractual clawback provisions requiring reimbursement of variable remuneration components already paid out are triggered in the event of a serious breach of duty. With effect from 2018, all employment contracts of the members of the Board of Management include a provision according to which, in particular pursuant to Section 93 of the German Stock Corporation Act (AktG), a member of the Board of Management is required to reimburse the Company for any damage attributable to them as a result of a breach of duty. The contractual indemnity provision protects the Company; it is designed to safeguard the Company’s assets in the event of a serious breach of duty. In the Company’s view, an additional clawback provision for bonuses already paid is therefore not required.

Upper remuneration limits
The target corridor of 0–200% defines an upper limit for variable remuneration paid to members of the Board of Management. Any higher achievement of objectives is capped at 200%; in this case, there is therefore also no loading as a result of the overall performance evaluation. In addition, there are caps on the maximum amounts of total remuneration and its variable components in accordance with the German Corporate Governance Code.

Share ownership of the members of the Board of Management
Unlike previously, members of the Board of Management are no longer obliged to invest in Company shares under the new remuneration system. There are several reasons for this:

The TSR used in the multi-year bonus reflects the performance of Munich Re’s shares, which ensures that the interests of the Board of Management are in line with those of our shareholders. From the Company’s point of view, the steadily increasing requirements under insider trading law regarding the purchase and sale of shares as well as the rising number of investigations – also in connection with share-based remuneration components – are compelling arguments against remuneration based on an obligation to purchase shares. The reputational damage that may ensue for a company is huge (even if the legal proceedings are terminated) and may also have a negative effect on shareholders.

In addition, the members of the Board of Management appointed prior to 2017 already hold a large number of Company shares. Moreover, all members of the Board of Management are obliged under the 2017 annual performance plan and all or individual multi-year performance plans (2015–2017, 2016–2018 and 2017–2019) to continue to invest in Company shares over the next few years.

Pensions
There have been no changes to the pensions for members of the Board of Management compared with 2017.

Other
No guaranteed variable remuneration (sign-on bonuses/recruitment bonuses)
As a matter of principle, the Company does not pay guaranteed variable remuneration to members of the Board of Management. We only pay sign-on/recruitment bonuses in exceptional cases and on production of corresponding evidence if a new member of the Board of Management forfeits a bonus by a previous employer. Compensation for forfeiting variable remuneration components paid by a previous employer is in any case limited to the first year of employment. Payment is effected in several instalments, and is tied to prerequisites for disbursement.

Severance cap and change of control
Members of the Board of Management appointed before 1 January 2017 have no contractual right to severance payments. If the Board member’s activities on the Board are terminated prematurely by the Company without good cause, payments due may not exceed the equivalent of two years’ total remuneration (three years’ total remuneration in the event of acquisition of a controlling interest or change of control within the meaning of Section 29(2) of the Securities Acquisition and Takeover Act – WpÜG) and may not cover more than the remaining period of the employment contract if this is shorter. If the employment contract is terminated for good cause on grounds that are within the Board member’s control, no payments are made to the Board member. The calculation is based on overall remuneration for the past financial year and, if necessary, on the probable overall remuneration for the current financial year.

Members of the Board of Management appointed for the first time after 1 January 2017 whose contracts are terminated by the Company without good cause have a contractual right to a severance payment. Such payments may not exceed the equivalent of two years’ remuneration, and are restricted by the remaining term of the Board member’s contract if this term is shorter. Annual remuneration is calculated on the basis of annual basic remuneration and variable remuneration paid out for the prior full financial year before the contract was terminated; remuneration in kind, other fringe benefits and contributions to occupational retirement schemes are not taken into account. Payments received by a Board member during a period of notice after termination of the appointment are offset against any severance payment. There will be no right to severance payments in the event of extraordinary termination of the Board member’s contract by the Company for good cause.

As a matter of principle, the Company ensures that severance payments are related to performance achieved over the whole period of activity.

Amount of remuneration
As previously, the level of the target overall direct remuneration for the members of the Board of Management is set by the Supervisory Board, taking into account the responsibilities and performance of each member of the Board of Management, the performance of the full Board of Management and the financial situation, performance and future prospects of Munich Re. It takes into consideration whether the remuneration is standard practice and appropriate compared with other companies of the peer group (including DAX 30 companies). The target overall direct remuneration for the Chairman of the Board of Management is based on the median remuneration paid to the chairs of the boards of management of DAX 30 companies. In addition, the Supervisory Board takes into account the level of the salaries paid to the Board of Management in relation to the level of salaries paid to senior managers and to general staff members over time.

Pay ratios
In 2017, the ratio of the target overall direct remuneration of the Chairman of the Board of Management to the average target overall direct remuneration of all Company employees (excluding the Board of Management) was 37. The ratio of the average target overall direct remuneration of all members of the Board of Management to the average target overall direct remuneration of all employees (excluding the Board of Management) was 23.

External consultants
Munich Re did not use the services of external consultants to draft and implement the remuneration system of the Board of Management effective from 2018.

Concluding remarks of the Supervisory Board
In the Supervisory Board’s view, the remuneration system of the Board of Management applying with effect from 2018 is appropriate, sustainable and transparent. The remuneration paid is linked to the Company’s business strategy and results, and to the performance of Munich Re’s shares, taking into particular consideration the interests of both the Company and its shareholders. Besides this, the new remuneration system brings about the transparency requested by shareholders and their representatives with regard to the targets and achievement of objectives, and takes account of the criticism expressed about the previous remuneration system. The Supervisory Board therefore calls upon all shareholders to approve the new remuneration system.