Compensation report

Main features of the compensation system for the Managing Board

Decisions concerning the compensation system for the Managing Board as well as regular consultation on and reviews of the compensation system are the responsibility of the Supervisory Board. The Personnel Committee is charged with preparing proposals. The compensation system applicable for the members of the Managing Board of HUGO BOSS AG since fiscal year 2010 was approved with a clear majority by the Annual Shareholders’ Meeting on May 10, 2011. Without in principle altering this system approved by the Annual Shareholders’ Meeting, agreements with all members of the Managing Board were adjusted effective January 1, 2013 such that the performance-related compensation component is solely oriented toward quantitative targets. Consequently, personal objectives are no longer included in the objectives agreed with members of the Managing Board.

In fiscal year 2015, the compensation system for members of the Managing Board was examined and further developed by the Supervisory Board in connection with the conclusion of new service contracts for Mark Langer and Christoph Auhagen, both members of the Managing Board. On the basis of discussions in the Supervisory Board and of the proposals made by the Personnel Committee, new service contracts were concluded in October 2015 with the Managing Board members Mark Langer and Christoph Auhagen with effect from January 1, 2016, which provide for a compensation system that is partly new in its conception. The service contact for Claus-Dietrich Lahrs, the chairman of the Managing Board, remains unchanged. It is planned to propose the system for the compensation of the Managing Board members, which applies to Mark Langer and Christoph Auhagen as of January 1, to the Annual Shareholders’ Meeting 2016 for approval in accordance with Sec. 120 (4) Sentence 1 AktG [“Aktiengesetz”: German Stock Corporation Act].

Unless otherwise stated, the following information relates to the compensation system applicable equally to all members of the Managing Board until the end of fiscal year 2015, which also remains applicable to the compensation of Claus-Dietrich Lahrs in fiscal year 2016. The main changes to the compensation system decided for Mark Langer and Christoph Auhagen with effect from January 1, 2016 are outlined in the penultimate section of this compensation report.

The total compensation of the Managing Board, under the existing and also the evolved compensation system, comprises a non-performance-related (fixed) compensation component and a performance-related (variable) compensation component. The compensation structure is partly geared toward the sustainable growth of the Company by factoring in compensation components with a multiple-year assessment basis. The total compensation of individual members of the Managing Board is specified by the Supervisory Board based on a performance assessment, taking into account any payments made by Group companies. Criteria for determining the appropriateness of the compensation are the responsibilities of the individual member of the Managing Board, their personal performance, the economic situation, the performance and outlook of the Company, as well as the level of compensation usually paid, taking into account peer companies and the compensation structure in place in other areas of the company. At its professional discretion, the Supervisory Board can make decisions as regards special payments for the outstanding achievements or success of a member of the Managing Board.

For fiscal year 2015, the amounts paid to members of the Managing Board will for the first time be disclosed individually, which until now was prohibited for a period of five years on the basis of a resolution of the Annual General Meeting of June 21, 2010. For that reason, the individual amounts paid to members of the Managing Board for the previous year are not disclosed.

Non-performance-related compensation

The fixed compensation components consist of a fixed basic compensation, fringe benefits and contributions to retirement benefits. The fixed basic compensation is paid as a monthly salary. All members of the Managing Board receive fringe benefits such as company cars, supplementary payments to health and nursing care insurance, conclusion of and contributions to an accident and directors and officers (D&O) liability insurance as well as other benefits in kind integral to the salary and other equipment and services needed to fulfill their duties as members of the Managing Board. In accordance with Sec. 93 (2) Sentence 3 German Stock Corporation Act, the deductible for the D&O insurance is 10% of the relevant loss but no more than one-and-a-half times the fixed annual compensation. Each member of the Managing Board is responsible for the taxation of the taxable benefit resulting from the private use of the company car.

Performance-related compensation

The performance-related compensation, comprising an annual bonus and a bonus assessed over a multiple-year period, relates only to quantitative targets. Until the end of fiscal year 2015, the arrangements for the annual bonus and a bonus assessed over a multiple-year period were governed on a standard basis in the service contracts of the members of the Managing Board.

Short-term variable incentives

The annual bonus is determined by reference to the development of a target indicator defined for each fiscal year. Trade net working capital (total of raw materials, finished goods and trade receivables less trade payables) was set as the assessment base for the annual bonus for all members of the Managing Board. At the beginning of each fiscal year, the Managing Board and the Supervisory Board agree on the target to be reached as well as the maximum and minimum thresholds for trade net working capital as a percentage of sales as a basis for determining the annual bonus. If the target is achieved in full, 100% of the amount contractually agreed with each member of the Managing Board is paid out. The maximum amount of 150% of the target annual bonus is paid out if a specified threshold set below the annual target is reached. No annual bonus is paid if a specified threshold set above the annual target is reached or exceeded. The annual bonus is payable within a week of the Supervisory Board approving the consolidated financial statements for the fiscal year in question.

If the target is achieved in full (100%) for the annual bonus 2015, a total amount of EUR 790 thousand will be paid out (Claus-Dietrich Lahrs EUR 440 thousand, Christoph Auhagen EUR 200 thousand, Mark Langer EUR 150 thousand).

Long-term variable incentives

The multiple-year bonus is assessed over a period extending over several years and is measured by reference to the development of quantitative targets over a three-year period. The quantitative targets are oriented towards increasing the enterprise value and are tied to the development of the indicators sales and EBITDA before special items over a period of three years. The amount of variable compensation for a fiscal year depends on the degree to which a predefined target sales and target EBITDA before special items are achieved over a period of several years. For the multiple-year period, targets as well as maximum and minimum thresholds are defined for both earnings indicators for each of the three fiscal years. The degree of target achievement is determined separately for each of the three fiscal years. The payout is determined based on the weighted average annual target achievement for the three fiscal years. If the target is achieved in full, 100% of the amount contractually agreed with each member of the Managing Board is paid out. The maximum amount of 150% of the target multiple-year bonus is paid out if a specified maximum threshold is reached or exceeded. No multiple-year bonus is paid out if the indicators reach or drop below a specified minimum threshold.

Installments for the expected target multiple-year bonus are paid within a week of the Supervisory Board approving the consolidated financial statements for the first fiscal year of the three-year period. The actual target realization for the multiple-year bonus is determined at the end of the third fiscal year. If the amount of the multiple-year bonus determined based on actual target realization exceeds the installment amounts, the member of the Managing Board in question receives the difference within a week of the consolidated financial statements for the third fiscal year being approved. If the installment amounts exceed the amount of the vested multiple-year bonus, the member of the Managing Board in question repays the difference to HUGO BOSS AG within a week of the consolidated financial statements for the third fiscal year being approved.

For the multiple-year bonus for 2015-2017, if the target is achieved in full (100%), a total amount of EUR 3,160 thousand will be paid out (Claus-Dietrich Lahrs EUR 1,760 thousand, Christoph Auhagen EUR 800 thousand, Mark Langer EUR 600 thousand).

Total compensation

Total compensation of the Managing Board in fiscal year 2015 came to EUR 4,918 thousand (2014: EUR 4,434 thousand). Of this amount, EUR 3,690 thousand was attributable to fixed salary components including fringe benefits (2014: EUR 3,682 thousand), which was paid in full in the 2015 reporting period.

An amount of EUR 644 thousand (2014: EUR 752 thousand) is accounted for by the annual bonus agreed for fiscal year 2015. A total of EUR 584 thousand (2014: EUR 0 thousand) is accounted for by the multiple-year bonus for the period 2013-2015. The annual bonus for 2015 and the multiple-year bonus for 2013-2015 will be paid out in fiscal year 2016 within a week of the Supervisory Board approving the consolidated financial statements for 2015.

In fiscal year 2015, the Managing Board received advance installments of the multiple-year bonus for fiscal year 2014 totaling EUR 2,844 thousand (2014: EUR 2,844 thousand advance installments of the multiple-year bonus 2013), which will ultimately be measured by the target realization for the multiple-year period 2014-2016. As of the reporting date, the advances towards the multiple-year bonuses for 2013-2015 and 2014-2016 total EUR 5,688 thousand (2014: EUR 2,844 thousand).

Compensation of members of the Managing Board for fiscal year 2015 under GAS 17

Pension provision and provision for surviving dependents

The Company has entered into defined benefit pension obligations for members of the Managing Board. The post-employment benefits are calculated in the basis of the duration of membership of the Managing Board as a percentage of the contractually agreed pensionable income. The basis for the pensionable income is defined as the basic salary under the service contract. For Claus-Dietrich Lahrs and Christoph Auhagen the level of the post-employment benefits is 50% of the pensionable income, and for Mark Langer 60% of that income.

Post-employment benefits are paid when the employment relationship ends at or after a fixed age limit of 60 or 65 years (Chairman of the Managing Board) or if the member of the Managing Board becomes permanently unable to work due to illness or accident and leaves the company before reaching the age limit. Furthermore, in the event of the death of a member of the Managing Board, a post-employment benefit is paid to the surviving dependents in the form of a widow’s or orphan’s pension.

If the member of the Managing Board leaves the company before becoming eligible for a pension, the period by which the benefits become vested is agreed in accordance with the legal regulations. However, there is no pro rata temporis reduction of the pension entitlement as provided for under legal provisions.

Ongoing pension payments are adjusted annually by at least 1%.

In addition, the HUGO BOSS Group offers the Managing Board and executives the option of acquiring additional pension benefits under deferred compensation agreements. This supplementary pension plan can take the form of retirement benefits or, alternatively, the form of occupational incapacity benefits and/or surviving dependents’ benefits and/or the form of a lump-sum death grant. The pension benefits take the form of monthly payments, while surviving dependents’ benefits can also be granted in the form of a lump-sum capital payment. The contributions from deferred compensation agreements are included in the disclosure of the total amounts paid. The provisions recognized correspond to the plan assets in each case.

Benefits in the event of termination of employment

In the event of early termination (excluding the existence of important grounds for the company to terminate a service agreement), the service agreements include provisions that comply with the recommendations of the German Corporate Governance Code point 4.2.3. under which a member of the Managing Board will receive a severance payment in the amount of the total amounts paid (including fringe benefits) for the duration of the original residual period, but at most for a period of one year and in the case of Claus-Dietrich Lahrs for a period of two years (calculated from the end of the service agreement) (severance pay cap). For these purposes, the total amounts are calculated on the basis of the total remuneration received for the last full fiscal year and, where appropriate, on the basis of the predicted total remuneration for the current fiscal year, The service agreements do not provide for any severance payment in the event of early termination for an important reason for which the member of the Managing Board in question is responsible. The service agreements do not stipulate any provisions in the event of regular termination, with the exception of the provisions governing pensions.

The service agreements with the members of the Managing Board contain a clause under which, in the event of a change of control (acquisition of more than 30% of the voting rights in HUGO BOSS AG), each member of the Managing Board is granted an extraordinary termination right and, if the service agreement is indeed terminated, a severance payment has to be made to the member of the Managing Board. This clause, which is applicable only to Claus-Dietrich Lahrs in the reporting period, became a component part of all Managing Board members’ service agreements on January 1, 2016. The Company has not entered into any other compensation arrangements with members of the Managing Board or employees in the event of a takeover bid.

Further development of the compensation system

As of January 1, 2016, in addition to non-performance-related compensation components, the compensation structure for the members of the Managing Board Mark Langer and Christoph Auhagen provides for core performance-related compensation components with modified content in the form of a short-term incentive program (STI) and a long-term incentive program (LTI).

The structure of the fixed compensation components, which still comprise a fixed basic compensation, certain fringe benefits already described above and a contribution to post-retirement benefits under the new compensation system, is essentially unchanged.

As a short-term performance-related compensation component, the short-term incentive program is tied to the development of certain quantitative targets in line with the previous annual bonus. The targets defined for the two members of the Managing Board, with different weightings, were EBITDA (consolidated earnings before interest, taxes, depreciation, amortization and special items), trade net working capital (sum of raw and finished goods and trade receivables less trade payables) and sales (the sales recognized in the consolidated financial statements using the exchange rates underlying the budget). For the annual bonus of a fiscal year, the targets to be achieved are defined in a target-setting agreement between the Managing Board and the Supervisory Board at the start of the fiscal year March 31 at the latest. All targets may be replaced by other corporate goals or weighted differently. If the Managing Board and Supervisory Board are unable to reach agreement, the Supervisory Board makes the decision at its professional discretion. If the agreed targets are achieved in full on average, 100% of the amount contractually agreed with the respective member of the Managing Board will be paid out. Target fulfillment that is above the maximum of 150% or below the minimum target of 75% agreed for the individual target will not be taken into account in calculating the average. If the average target fulfillment comes to 150% or more, a maximum amount (cap) of 150% is paid out. If the average degree of target achievement is below 75%, on the other hand, no annual bonus will be paid. Between the minimum target and maximum target, target fulfillment will be determined in each case by linear interpolation. As previously, the annual bonus is payable within a week of the Supervisory Board approving the consolidated financial statements for the fiscal year in question.

Under the new compensation system, a long-term incentive program (LTI) replaces the previous long-term variable compensation (multiple-year bonus). Under the LTI program, the members of the Managing Board receive a defined number (“initial grant”) of virtual shares (“tranches”) at the beginning of the plan. The initial grant is based on the amount (“LTI budget”) defined in the service agreement or by an additional agreement divided by the share price for the last three months preceding the initial grant. Each tranche has a three-year performance term. A one-year qualifying period follows the expiry of the performance term. Upon the expiry of the performance term and the qualifying period, the final number of virtual shares is calculated on the basis of the fulfillment of certain performance criteria and the trend in the Company’s share price. The criteria defined as performance components, in each case over the performance term and with different weightings, take into account not only value creation within the Company measured against the MSCI World Textiles, the Apparel & Luxury Goods Performance Index and the profitability indicator Return on Capital Employed (ROCE), but also employee satisfaction in the Company and sustainability. Specific target, minimum and maximum values are set for each performance component and these are used to calculation the entitlement to payment. The targets for a tranche in accordance with the LTI program are defined in a target agreement between the Managing Board and the Supervisory Board no later than March 31 of the first year of the tranche’s performance term. If the Managing Board and Supervisory Board are unable to reach agreement, the Supervisory Board makes the decision at its professional discretion. The variable remuneration under the LTI program is limited for each member of the Managing Board to 250% of the individual LTI budget (cap). Furthermore, subject to the terms of point 4.2.3 of the German Corporate Governance Code in the current version (or of a successor provision), the severance payment cap recommended there will also apply unless a deviation from this was declared in the relevant declaration of compliance. Under certain circumstances (in particular in the event of the termination of the service agreements for good cause), claims of members of the Managing Board under the LTI program may lapse.

The further development of the Managing Board’s compensation in fiscal year 2015 was supported by a compensation consultant whose independence was respected by the Supervisory Board and the company.

Compensation of the Supervisory Board

The compensation of the members of the Supervisory Board set by the Annual Shareholders’ Meeting is governed by Art. 12 of Articles of Association of HUGO BOSS AG. The compensation is based on the company size and the scope of work of Supervisory Board members. Compensation of Supervisory Board members is split into fixed and variable components. The variable component is measured based on the amount of earnings per share in the consolidated financial statements. The position of chairman of the Supervisory Board and that of the deputy chairman are taken into account in the calculation of the compensation. The fixed and variable compensation is paid out after the end of the Annual Shareholders’ Meeting that decides on the exoneration of the Supervisory Board for the fiscal year in question. Members of the Supervisory Board, who have been members of the Supervisory Board or a committee for part of the fiscal year are paid compensation proportionately to the duration of their office. Members of the Supervisory Board are reimbursed expenses incurred in connection with the performance of their duties. Any VAT is reimbursed by the Company if the members of the Supervisory Board have been authorized to provide the Company with a separate invoice for VAT, and exercise this right. The Supervisory Board received compensation for its activities in 2014 amounting to EUR 2,184 thousand. For fiscal year 2015, total compensation is expected to come to EUR 2,087 thousand. This figure includes a variable component of EUR 1,332 thousand (2014: EUR 1,454 thousand), which is calculated on the basis of the expected earnings per share in the consolidated financial statements.