Remuneration

With respect to the recommendations of the German Corporate Governance Code as of December 16, 2019, published in the German Federal Gazette on March 20, 2020, and the Act Transposing the Second European Shareholder Rights (ARUG II), the remuneration system for the Executive Board was thoroughly reviewed and further developed.

The revised remuneration system applies to all members of the Executive Board in office as of January 2021 and to all new appointments and re-appointments thereafter.

Remuneration system for the Executive Board from 2021

With respect to the recommendations of the German Corporate Governance Code as of December 16, 2019, published in the German Federal Gazette on March 20, 2020, and the Act Transposing the Second European Shareholder Rights Directive (ARUG II), the remuneration system for the Supervisory Board which is mainly determined within the Company’s Articles of Association was thoroughly reviewed.

The Supervisory Board is responsible for advising and monitoring the Executive Board. By performing this task, the Supervisory Board contributes to the long-term development of the company and promotes the corporate strategy. The remuneration system accounts for this responsibility and the scope of activity of the Supervisory Board members, serving as the basis for the appropriate remuneration of Supervisory Board members. The attached overview summarizes the remuneration system for the Supervisory Board.

Remuneration system for the Supervisory Board

This report describes the principles of remuneration for Executive Board members of Vossloh AG and explains the amount and structure of the remuneration of the individual Executive Board members in the 2020 fiscal year. In addition, the report describes the principles and amount of Supervisory Board remuneration.

Purpose. The objective of the remuneration system for the Executive Board is to ensure that the Executive Board members are appropriately remunerated in accordance with their area of activity and responsibility, in line with the statutory requirements and taking into account the recommendations of the German Corporate Governance Code, in order to make a significant contribution to promoting and implementing the corporate strategy of Vossloh AG, namely strengthening the product business and further expanding the conventional and digital service business with the aim of sustainably increasing the value of the company. Criteria for the appropriate remuneration of Executive Board members are based on each member’s function and individual performance, Vossloh AG’s economic situation, success and sustainable future prospects in addition to customary remuneration polices in view of the Company’s comparative environment, remuneration structure and their development over time.

Executive Board remuneration system. In connection with the personnel changes and the expansion of the Executive Board from two to three members, the remuneration system for the Executive Board was revised in the fall of 2020 and, in particular, supplemented with a quantified maximum remuneration as well as malus and clawback provisions. The adjustments serve in particular to implement the new requirements of the Act Implementing the Second Shareholders’ Rights Directive (ARUG II) and take into account the new recommendations of the German Corporate Governance Code as amended on December 16, 2019. The Vossloh AG compensation system for Executive Board members as adopted by the Supervisory Board is available on the Company’s website and applies in principle from January 1, 2021. The new system has already been incorporated in the employment contracts with the Executive Board members appointed as of November 1, 2020, but contains certain opening clauses for the incumbent CEO’s old contract. The remuneration system is composed of fixed non-performance-related components and variable performance-related components, the sum of which constitutes the total compensation for Executive Board members.

Basic remuneration is a fixed annual sum, based on the responsibilities of each Executive Board member and is to be paid in twelve equal monthly installments. It also includes fringe benefits in the form of payments in kind which mainly consist of private use of a company car and allowances for health insurance and accident and baggage insurance. No separate remuneration was provided for services performed on behalf of subsidiaries. The adjusted remuneration system does not include a company pension plan. An exception in this respect still applies to the incumbent CEO, whose existing contract includes a commitment for pension payments upon reaching an age limit of 63.

The basic remuneration in each case amounts to around 40 percent (around 53 percent with the pension expense in the case of the incumbent CEO) of the target total remuneration, i.e., the total remuneration assuming 100 percent target achievement of the variable remuneration components.

The variable remuneration components include the annual bonus and the multiyear bonus. The predefined performance targets are based on financial performance indicators that can be measured objectively and are considered a relevant indicator of the Vossloh Group’s economic performance and strategy implementation, in addition to the performance of the Vossloh share. All performance targets are forward-looking and are (with the exception of the share price-based remuneration component) set by the Supervisory Board with target values before the beginning of each assessment period by means of target agreements with the members of the Executive Board. Targets for the share price-based variable remuneration component are derived directly from the relevant employment contracts. A subsequent change of the target values is generally excluded. If 100 percent of the targets are met, the variable remuneration components will contribute around 60 percent (around 47 percent in the case of the incumbent CEO including the pension expense) to the total target remuneration of the Executive Board members.

The components of the variable remuneration are regulated in detail as follows:

The annual bonus is determined on the basis of annual performance targets. If all of these targets are 100 percent achieved, the annual bonus amounts to slightly less than half of the total variable target remuneration. The performance targets for the annual bonus are Group EBIT, Group sales and the average capital employed of the Vossloh Group. The specific weighting of the performance targets and the associated target values are determined before the beginning of the assessment period. The Supervisory Board can reduce the bonus for 100 percent target achievement by up to 20 percent or increase it by up to 30 percent at its discretion in the event of extraordinary developments.

The multiyear bonus amounts to slightly more than 50 percent of total variable target remuneration if all multiyear performance targets are 100 percent achieved. ROCE (return on capital employed) accounts for 48 percent (for the CEO) and around 31 percent (for the other Executive Board members) of the performance targets for the multiyear bonus. The remainder is split evenly between the absolute and the relative performance of the Vossloh share. The relative performance of the Vossloh share is measured and assessed by comparing it to the average performance of the DAX, MDAX and SDAX. The multiyear bonus still had a two-year assessment period in the 2020 reporting year and has been measured over three years since January 1, 2021 in the adjusted remuneration system. The three-year assessment period is already included in the employment contracts of the Executive Board members newly appointed as of November 2020.

The achievement of targets for the annual bonus and the financial performance targets for the multiyear bonus are determined annually by the Supervisory Board on the basis of the audited consolidated financial statements. The component of the multiyear bonus related to the performance of the Vossloh share is assessed on the basis of volume-weighted XETRA average share prices or the average closing prices of the relevant indexes as published by Deutsche Börse AG. Both of these are taken from the 40 days immediately before or after the assessment period. The target bonus is granted if the target is fully realized. The bonus increases or decreases in relation to the target bonus depending on the achievement of the defined target values. The annual bonus and the multiyear bonus are limited to a maximum of 170 percent of the respective target bonus.

However, the Supervisory Board may use its discretion to set an extra bonus allocation for extraordinary performance in the period under review. In the adjusted compensation, the amount of these possible extra bonuses is limited to the target amount of the annual bonus.

Malus and clawback provisions. The new remuneration system also contains malus and clawback provisions which allow the Supervisory Board to withhold or reclaim variable compensation components in full or in part in justified cases.

Maximum remuneration. The remuneration of the individual Executive Board members is capped in accordance with the new remuneration system. The maximum remuneration set by the Supervisory Board is €2,923,000 gross p.a. for the CEO (including pension expense) and €1,812,800 gross p.a. for each of the other Executive Board members.

In the fall of 2020, the Supervisory Board conducted a review of the Executive Board remuneration based on the criteria of the German Corporate Governance Code as amended on December 16, 2019. Based on a horizontal comparison (with comparable companies in a peer group) and a vertical comparison (with the compensation of senior executives and the workforce as a whole), the Supervisory Board determined that the remuneration of the Executive Board was appropriate and in line with market practice. The peer group used for this purpose was already formed in 2017 with external support as part of the systematic review of the Executive Board’s remuneration at that time and was last confirmed by the Supervisory Board in November 2020. It mainly comprises manufacturing companies from the MDAX and SDAX. Compared to the peer group, the remuneration granted to the Executive Board members is consistently below the average and median, which is also due to the fact that Vossloh has slipped two places down the rankings within the peer group in terms of revenue and employees respectively since 2017 following the realignment and restructuring undertaken. In a vertical comparison with the remuneration of senior executives and also with the workforce as a whole, Executive Board remuneration has developed below average since 2017.

The remuneration system for the members of the Executive Board as adopted by the Supervisory Board and applicable since January 1, 2021 will be submitted to the 2021 Annual General Meeting for approval in accordance with Section 120a (1) German Stock Corporation Act (AktG).

In the following table, the remuneration of the Executive Board is listed by name and – as the provision of Section 162 AktG does not yet apply – prepared in accordance with the recommendations of the German Corporate Governance Code as amended in 2017. The benefits granted also include accrued amounts for variable remuneration components that will not be paid out until 2021 or 2022. The payments in kind include the private use of company cars in the amount of the taxable values and allowances for health insurance and accident and baggage insurance. Dr.-Ing. Karl Martin Runge left the Executive Board on October 31, 2020. This table includes his remuneration for the period in which he was still an Executive Board member. Benefits due to employment contracts coming to an end have been listed separately.

¹ All values for Dr.-Ing. Runge are based on the termination agreements concluded; the employment contracts expires on September 30, 2022.

* The annual variable remuneration includes extra bonus allocations for extraordinary performance. These amounted to €150,000 for Oliver Schuster in the reporting year and €120,000 for Oliver Schuster and €19,000 for Dr.-Ing. Karl Martin Runge in the previous year.

** The granting of multiyear variable remuneration is dependent on the achievement of performance targets for the period in question. Target fulfillment is measured after the expiry of the multiyear period as defined in the contract. The benefits were calculated on the basis of the most likely value and recognized as a provision, provided the contract was still valid.

Entitlements in accordance with provisions from the German Commercial Code are as follows:

¹ Employment contract expired on September 30, 2022.

Entitlements in accordance with provisions from the German Commercial Code are as follows:

Retirement benefits. In principle, the remuneration system does not provide a company pension plan for Executive Board members. An exception exists for the current CEO Oliver Schuster, whose existing contract includes a commitment for pension payments upon reaching an age limit of 63. Depending on the years of service on the Executive Board, annual pension benefits after a minimum three-year Executive Board membership amount to 1 percent, or in the case of a first-time contract renewal 2 percent, up to a maximum of 40 percent of the pensionable annual basic remuneration. The addition to the provision made in the 2020 fiscal year for members of the Executive Board in accordance with the requirements of German commercial law amounted to €370,147 (previous year: €517,265). Upon the death of an active or former member of the Executive Board, the pension entitlement or the most recent pension paid to the surviving spouse is reduced to 60 percent.

Commitments in the event of premature termination of duties. In the event of an agreed premature termination of the employment contract, the Executive Board contracts contain commitments to pay out their expected remuneration for the regular remaining term of the contract, unless the termination is based on a unilateral resignation by the Executive Board member without good cause or on a revocation of the appointment for a reason that also constitutes good cause for the termination of the employment relationship. However, the commitments are in any case limited to a maximum of two years’ remuneration (severance payment cap). Variable remuneration already earned is paid out under the adjusted remuneration system in accordance with the originally agreed targets and comparison parameters and according to the due dates specified in the contract. No payment obligations are made in the event of an early termination of Executive Board duties due to a change of control.

Benefits due to employment contracts coming to an end. The benefits in the following table have been pledged or made to the Executive Board members who left during the reporting year and in the previous year due to their employment contracts coming to an end. The fixed remuneration components were received in the year of departure. The variable remuneration of Dr.-Ing. Runge, who left the Company by mutual agreement on October 31, 2020, was paid in 2020.

¹ Employment contract expired on September 30, 2022

Loans to Executive Board members. No advances or loans were granted to any Executive Board members of Vossloh AG in the 2020 fiscal year.

Remuneration to former Executive Board members of Vossloh AG and their surviving dependents. Remuneration in the form of pension payments to former members of the Executive Board and management as well as their surviving dependents totaled €2,731,814 (previous year: €3,683,409). These were pension payments of €1,183,658, unchanged from the previous year, and benefits totaling €1,548,156 to the Executive Board members who left during the respective fiscal year (previous year: €2,499,751). Current pension payments are subject to adjustment in relation to the collective pay trend in the metal and electrical industries of North Rhine-Westphalia. Pension obligations to former members of the Executive Board and management, as well as their surviving dependents amounted to €23,389,389 (previous year: €22,809,518). Employer pension liability insurance policies totaling €10,155,725 (previous year: €10,297,220) are pledged in each beneficiary’s favor. The remaining amount of these pension obligations is covered by provisions.

Remuneration of the Supervisory Board. The remuneration of members of the Supervisory Board is to be determined by the Annual General Meeting and governed by Section 17 of the Company’s Articles of Incorporation. The remuneration system complies with the statutory provisions, takes into account the responsibilities and scope of activities of the Supervisory Board members and complies with recommendation G.18 of the German Corporate Governance Code as amended on December 16, 2019, in that the exclusively fixed remuneration ensures that the Supervisory Board performs its supervisory activities independently and effectively.

The Executive Board and Supervisory Board have prepared a remuneration system for the Supervisory Board members based on existing and unchanged provisions of the Articles of Incorporation, which is available on the Company’s website. The 2021 Annual General Meeting should pass a resolution on the confirmation of this remuneration system in accordance with Section 113 (3) AktG. In addition to reimbursement for their expenses, Supervisory Board members receive a fixed annual remuneration for duties performed of €40,000 (gross) to be paid after the conclusion of the fiscal year. The Supervisory Board Chairman receives three times and the vice-chairman one-and-a-half times the above fee. Membership in a committee is compensated by a premium of one quarter of the aforementioned remuneration amounts. The Audit Committee Chairman receives three times the additional Audit Committee membership fee. If the Supervisory Board Chairman is also a committee member, no additional fee is to be paid for his activities on the committee. Supervisory Board members who are members of the Supervisory Board or a committee for only part of the fiscal year receive pro rata remuneration.

For the 2020 fiscal year, Supervisory Board members received a net remuneration of €456,666 (previous year: €429,167).

The table below depicts the amounts paid to each Supervisory Board member:

Consulting agreements. No consulting agreements with Supervisory Board members existed in the 2020 fiscal year.

Loans to Supervisory Board members. In the 2020 fiscal year, no advances or loans were granted to any Supervisory Board members.

Please find the remuneration report 2021 - which will be presented to the Annual General Meeting on May 18, 2022 for approval - on Vossloh’s website for the Annual General Meeting.