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Remuneration Report

 

In accordance with the German Stock Corporation Act (Aktiengesetz – AktG), the specification of remuneration for the Executive Board is reserved for the plenary session of the Supervisory Board. In the fall of 2009, the Supervisory Board thoroughly reviewed and completely reorganized the remuneration structure of the Executive Board with the assistance of an independent advisor.

Executive Board remuneration system
Remuneration for Executive Board members consists of the following elements:

Each Executive Board member receives a fixed annual remuneration, which is paid in 12 monthly installments.

The Executive Board members also receive a variable remuneration which is tied to the achievement of certain targets relating to the year-on-year change in the Continental Value Contribution (CVC) and the Return on Capital Employed (ROCE). In addition, the Supervisory Board can establish a strategic target at the beginning of every fiscal year. An absence of variable remuneration is possible if certain minimum values are not achieved. To take account of extraordinary developments that have influenced the degree of target achievement, the Supervisory Board may revise the achievement of the targets that form the basis for calculation of the variable remuneration retroactively by 20% upward or downward at its reasonable discretion. In each case, this variable remuneration component is capped at 150% of the fixed target bonus. 40% of the variable remuneration achieved in one fiscal year is paid out in the form of a lump sum as an annual bonus. The remaining 60% is converted into virtual shares of Continental AG. Following the expiration of a three-year holding period after the end of the fiscal year for which the variable remuneration is determined, the value of these virtual shares is paid out including the value of the dividends paid out during the holding period. Conversion of the variable remuneration into virtual shares and payment of the value after expiration of the holding period are carried out based on the average share price for the three month period leading up to the Annual Shareholders' Meeting in the year of the conversion or in the year of the payment. However, the amount paid out after expiration of the holding period may not fall below 50% of the value upon conversion nor exceed it by more than threefold. In addition, the Supervisory Board may revise the amount calculated in such a way by 20% upward or downward retroactively to balance out extraordinary developments, for example a noticeable change in the share price that is wholly or mainly due to external influences. Furthermore, a special bonus may be agreed for particular projects in individual cases, and a recognition bonus may be granted.

The employment contracts of Executive Board members Dr. Hans-Joachim Nikolin and Heinz-Gerhard Wente, who are still in office and were appointed before 2009, have also been adjusted to the new structure with effect from January 1, 2010. In the employment contracts for the Executive Board entered into before the enactment of the German Act on the Appropriateness of Management Board Remuneration (Gesetz zur Angemessenheit der Vorstandsvergütung – VorstAG), the variable remuneration depended in part on the distributed dividends. Should the dividend amount increase significantly, the Chairman's Committee could alter the method of calculation. The bonus was also dependent on the achievement of certain individually agreed targets that related to key performance indicators of the respective Executive Board member's scope of duties. This variable remuneration component was limited to a maximum amount that was contingent upon the fixed annual remuneration.

Executive Board members also receive additional benefits, primarily the reimbursement of expenses, including payments – generally for a limited time – for a job-related second household or activities abroad on behalf of the company, the provision of a company car, and premiums for group accident and directors' and officers' (D&O) liability insurance. The D&O insurance policy provides for an appropriate deductible that was adjusted on July 1, 2010 to the requirements of Section 93 (2) Sentence 3 of the Aktiengesetz in the version of the VorstAG. Members of the Executive Board must pay taxes on these additional benefits.

Continued remuneration payments have also been agreed for a certain period in the event of employment disability through no fault of the Executive Board member concerned.

All members of the Executive Board have been granted post-employment benefits that are paid starting at the age of 63 (but not before they leave the service of the company) or in the case of disability. Dr. Hans-Joachim Nikolin is entitled to post-employment benefits before the age of 63 if his employment agreement is prematurely terminated by mutual agreement before December 31, 2011. In each case, the maximum post-employment benefit amounts to 50% of the most recent fixed remuneration payment and 12% of the average variable remuneration achieved in the last five fiscal years. There is a basic rate for the post-employment benefits that is determined individually. For each year of service, a member of the Executive Board attains a benefit entitlement amounting to 10% of the difference between the basic rate and his or her maximum post-employment benefit, until the full entitlement has been achieved after 10 years. An adjustment of the post-employment benefit after commencement of such benefit payments is carried out in accordance with Section 16 of the German Occupational Pension Improvement Act (Betriebsrentengesetz – BetrAVG). Any other income is offset from the post-employment benefit.

In the employment contracts it is agreed that, in the case of premature termination of Executive Board activity without justifiable grounds, payments to the Executive Board member to be agreed, including the additional benefits, shall not exceed the value of two annual salaries nor the value of remuneration for the remaining term of the employment contract for the Executive Board member. No compensation agreements exist with members of the Executive Board in the event of a takeover bid or a change of control in the company. In fiscal year 2010, they neither received nor were promised payments by a third party with respect to their activities on the Executive Board.

Individual remuneration
The total remuneration of each individual member of the Executive Board for the year under review and the previous fiscal year, broken down into fixed and variable components, and the individual pension expense, as well as the value recorded in the consolidated annual financial statements pertaining to the stock options granted under stock option plans in previous fiscal years and redeemed in the past year, is disclosed in the following tables. José A. Avila was assured that the short-term components of his variable remuneration for 2010 would be at least €360 thousand. In addition, the Supervisory Board awarded him a recognition bonus of €225 thousand for fiscal year 2010. Payment of this bonus will be made in the same manner as the long-term component of his variable remuneration. Former Executive Board member Gerhard Lerch received compensation for the period of a restrictive covenant lasting until September 29, 2010. In calendar year 2010, he was paid €509 thousand (PY: €687 thousand) in this context. Further details of the stock option plans are given in Note 24 to the consolidated financial statements.

Remuneration of the Executive Board in 2010
in € thousands Remuneration components
  Fixed1 Variable,
short-term		 Variable,
long-term2		 Total Share-based
payment4
Dr. E. Degenhart 1,233 594 891 2,718 9802
J. A. Avila 690 360 551 1,601 5512
Dr. R. Cramer 636 480 721 1,837 7822
H. Matschi 630 270 405 1,305 4662
Dr. H.-J. Nikolin 633 320 479 1,432 8342,3
W. Schäfer 1,036 457 686 2,179 6862
N. Setzer 636 540 810 1,986 8712
H.-G. Wente 788 508 762 2,058 1,0362,3
Total 6,282 3,529 5,305 15,116 6,206
1) In addition to cash components, the fixed remuneration includes non-cash elements, such as company cars, insurance, and moving costs.
2) Long-term term component of the variable remuneration which is converted into virtual shares of Continental AG in line with the new remuneration structure geared towards sustainable development of the company, including recognition bonuses.
3) The amount of personnel expenses carried in the consolidated financial statements (compensation cost) in 2010 for stock options granted and redeemed in previous fiscal years under the 2004 and 2008 stock option plans.
4) Includes changes in the value of the virtual shares granted in previous years.
Remuneration of the Executive Board in 2009
in € thousands Remuneration components
  Fixed1 Variable,
short-term		 Variable,
long-term2		 Total Share-based
payment
Dr. E. Degenhart (since August 12, 2009) 472 202 304 978 3042
Dr. K.-T. Neumann (until August 12, 2009)2 453 – – 453 3633
Dr. R. Cramer (since August 12, 2009) 233 140 210 583 2102
Dr. A. Hippe (until February 28, 2009) 112 36 – 148 963
H. Matschi (since August 12, 2009) 239 140 210 589 2102
Dr. H.-J. Nikolin 460 – – 460 5423
N. Setzer (since August 12, 2009) 238 140 210 588 2102
H.-G. Wente 459 119 – 578 3133
Total 2,666 777 934 4,377 2,248
1) In addition to cash components, the fixed remuneration includes non-cash elements, such as company cars, insurance, and moving costs.
2) Long-term term component of the variable remuneration which is converted into virtual shares of Continental AG in line with the new remuneration structure geared towards sustainable development of the company.
3) The amount of personnel expenses carried in the consolidated financial statements (compensation cost) in 2009 for stock options granted and redeemed in previous fiscal years under the 2004 and 2008 stock option plans.

Long-term component of share-based payment
The amounts of variable remuneration converted into virtual shares of Continental AG changed as follows in the year under review:

in € thousands Outstanding at Jan. 1, 2010 Weighted fair value Additions Weighted fair value Disposals Amount paid out Outstanding at Dec. 31, 2010 Weighted fair value
Dr. E. Degenhart – – 304 392 – – 304 392
J. A. Avila – – – – – – – –
Dr. R. Cramer – – 210 271 – – 210 271
H. Matschi – – 210 271 – – 210 271
Dr. H.-J. Nikolin – – – – – – – –
W. Schäfer – – – – – – – –
N. Setzer – – 210 271 – – 210 271
H.-G. Wente – – – – – – – –
Total – – 934 1,205 – – 934 1,205

Post-employment obligations and service costs
The defined benefit obligation (DBO) for all pension commitments for the active members of the Executive Board, as well as the service cost calculated for the respective fiscal year in accordance with international accounting standards, are presented below:

  Defined benefit obligation Service cost
in € thousands Dec. 31, 2010 Dec. 31, 2009 2010 2009
Dr. E. Degenhart (since August 12, 2009) 1,111 292 681 265
J. A. Avila (since January 1, 2010) 545 – 541 –
Dr. R. Cramer (since August 12, 2009) 285 88 207 81
H. Matschi (since August 12, 2009) 374 103 240 94
Dr. H.-J. Nikolin 4,315 2,865 146 130
W. Schäfer (since January 1, 2010) 696 – 703 –
N. Setzer (since August 12, 2009) 248 65 153 59
H.-G. Wente 4,023 2,279 67 56
Dr. K.-T. Neumann (until August 12, 2009)1 n/a n/a – 178
Dr. A. Hippe (until February 28, 2009)1 n/a n/a – 25
Total 11,597 5,692 2,738 888
1) The defined benefit obligation was omitted for Executive Board members who left the company in the previous year. We refer to Note 39 for details of pension obligations for former members of the Executive Board.
2004 and 2008 stock option plans
  Number of subscription rights Payments1 (in € thousands)
  Dec. 31, 2010 Dec. 31, 2009 2009 2010 2011
Dr. K.-T. Neumann (until August 12, 2009) – – 59 – –
Dr. A. Hippe (until February 28, 2009) – – 100 – –
Dr. H.-J. Nikolin – – 106 38 96
H.-G. Wente – – 76 12 96
Total – – 341 50 192
1) Subscription rights under the 2004 and 2008 stock option plans were converted into cash payment.

Remuneration of the Supervisory Board
Article 16 of the Articles of Incorporation regulates the remuneration paid to members of the Supervisory Board. This remuneration also has fixed and variable components. The variable part depends on the consolidated net income per share for the past fiscal year. The chairman and vice chairman of the Supervisory Board and the chairs and members of committees qualify for higher remuneration. In addition, the members of the Supervisory Board are paid meetingattendance fees and their expenses are reimbursed. The D&O insurance policy also covers members of the Supervisory Board. As recommended by the German Corporate Governance Code, the deductible has also been in line with the requirements of the VorstAG since July 1, 2010.

In the past year there were no consultant agreements or other agreements for the provision of services or work between the company and members of the Supervisory Board or related parties.

Remuneration of individual Supervisory Board members in 2010 as provided for under these arrangements is presented in the following table.

Remuneration of the Supervisory Board
in € thousands Remuneration components
  2010 2009
  Fixed1 Variable Fixed1 Variable
Prof. Dr.-Ing. Wolfgang Reitzle (since September 28, 2009) 84 22 19 –
Dr. Hubertus von Grünberg (until March 6, 2009) – – 17 –
Rolf Koerfer (from Feb. 5, 2009 to Nov. 29, 2010) 58 15 73 –
Werner Bischoff 68 17 72 –
Dr. h.c. Manfred Bodin (until April 23, 2009) – – 14 –
Dr. Diethart Breipohl (until April 23, 2009) – – 21 –
Michael Deister 68 17 73 –
Dr. Gunter Dunkel (since April 23, 2009) 42 11 31 –
Hans Fischl (since April 23, 2009) 68 17 48 –
Dr. Michael Frenzel (until September 15, 2009) – – 31 –
Dr. Jürgen Geißinger (since February 5, 2009) 42 11 40 –
Prof. Dr.-Ing. E.h. Hans-Olaf Henkel 42 11 57 –
Michael Iglhaut 46 11 55 –
Jörg Köhlinger (since April 23, 2009) 46 11 32 –
Prof. Dr. Klaus Mangold (since April 23, 2009) 42 11 31 –
Hartmut Meine 52 12 48 –
Dirk Nordmann 46 11 48 –
Jan P. Oosterveld (until January 26, 2009) – – 4 –
Artur Otto (since May 1, 2010) 29 7 – –
Dr. Thorsten Reese (until April 30, 2010) 24 5 73 –
Klaus Rosenfeld (since April 23, 2009) 64 17 44 –
Georg F. W. Schaeffler (since February 5, 2009) 43 11 40 –
Maria-Elisabeth Schaeffler (since February 5, 2009) 42 11 55 –
Jörg Schönfelder 46 11 48 –
Jörg Schustereit (until April 23, 2009) – – 17 –
Fred G. Steingraber (until January 26, 2009) – – 5 –
Prof. Dipl.-Ing. Jürgen Stockmar (until January 25, 2009) – – 4 –
Christian Streiff (until February 3, 2009) – – 4 –
Dr. Bernd W. Voss 84 22 89 –
Dieter Weniger (until April 23, 2009) – – 16 –
Prof. KR Ing. Siegfried Wolf (since December 6, 2010) 3 1 – –
Erwin Wörle 46 11 48 –
Total 1,085 273 1,157 –
1) Including meeting-attendance fees.

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Continental Value Contribution (CVC). The CVC represents the absolute amount of additional value created, and the Delta CVC represents the change in absolute value creation over the prior year. This change in the absolute contribution measured by Delta CVC allows us to monitor the extent to which management units generate value-creating growth or resources must be employed more efficiently. The CVC is measured by subtracting the weighted average cost of capital (WACC) from the ROCE and multiplying this by the average operating assets for the fiscal year. The weighted average cost of capital calculated for the Continental Corporation corresponds to the required minimum return. The cost of capital is calculated as the weighted average ratio of the cost of equity and borrowing costs.

Currency swap. Swap of principal payable or receivable in one currency into similar terms in another currency. Often used when issuing loans denominated in a currency other than that of the lender.

Defined Benefit Obligation (DBO). DBO is defined as the present value of all vested and non-vested benefits calculated on the basis of estimated salary levels at retirement. The only actuarial method that may be used to calculate the DBO is the projected unit credit method. DBO corresponds to PBO (projected benefit obligation).

Derivative financial instruments. Transactions used to manage interest rate and/or currency risks.

Dividend payout ratio. The dividend payout ratio is the ratio between the dividend for the fiscal year and the earnings per share.

EBIT. Earnings Before Interest and Taxes. EBIT represents the results of operations. Since 2002, when the amortization of goodwill was discontinued, EBITDA has been equal to EBIT.

EBITA. EBIT before scheduled goodwill amortization.

EBITDA. Earnings before interest, taxes, depreciation and amortization.

Finance lease. Under a finance lease, the lessor transfers the investment risk to the lessee. This means that the lessor bears only the credit risk and any agreed services. The lessee is the beneficial owner of the leased asset. Finance leases are characterized by a fixed basic term during which the lease may not be terminated by the lessee.

Gearing ratio. The gearing ratio represents the net indebtedness divided by total equity, expressed as a percentage.

Hedging. Securing a transaction against risks, such as fluctuations in exchange rates, by entering into an offsetting hedge transaction, typically in the form of a forward contract.

IAS. International Accounting Standards.

IASB. International Accounting Standards Board. The authority that defines the International Financial Reporting Standards.

IFRIC. International Financial Reporting Interpretations Committee. Committee that reviews and determines appropriate treatment of accounting issues within the context of IFRS and IAS.

IFRS. International Financial Reporting Standards. The accounting standards issued by the IASB.

Interest rate cap. An interest rate cap sets an upper limit for a variable interest rate in relation to a notional debt amount. To the extent that the variable interest due on the underlying debt exceeds the cap amount, the holder of the cap receives income as compensation in the amount of the difference to the cap. An up-front premium is paid as consideration for the cap.

Interest rate swap. An interest rate swap is the exchange of interest payments between two parties. For example, this allows variable interest to be exchanged for fixed interest, or vice versa.

Net indebtedness. The net amount of interest-bearing liabilities as recognized in the balance sheet, cash and cash equivalents, the positive fair values of the derivative financial instruments as well as other interest-bearing investments.

Operating assets. Operating assets are the assets less liabilities as reported in the balance sheet, without recognizing the net indebtedness, discounted trade bills, deferred tax assets, income tax receivable and payable, as well as other financial assets and debts.

Operating lease. A form of lease that is largely similar to rental. Leased assets are recognized in the lessor's balance sheet and capitalized.

PPA. Purchase Price Allocation. PPA is the process of breaking down the purchase price and assigning the values to the identified assets, liabilities, and contingent liabilities following a business combination. Subsequent adjustments to the opening balance sheet – resulting from differences between the preliminary and final fair values at the date of initial consolidation – are recognized as "PPA adjustments".

Rating. Standardized indicator for the international finance markets that assesses and classifies the creditworthiness of a debtor. The classification is the result of an economic analysis of the debtor by specialist rating companies.

ROCE. Return On Capital Employed. We define ROCE as the ratio of EBIT to average operating assets for the fiscal year.

SIC. Standing Interpretations Committee (predecessor to the IFRIC).

US GAAP. United States Generally Accepted Accounting Principles. These principles are subdivided into binding and guiding principles.

Weighted Average Cost of Capital (WACC). The WACC represents the weighted average cost of the required return on equity and net interest-bearing liabilities.