Board of Management Remuneration

PRINCIPLES OF BOARD OF MANAGEMENT REMUNERATION

Matters involving the remuneration system and the total remuneration of each individual member of the Volkswagen AG Board of Management are decided on by the Supervisory Board on the basis of the Executive Committee’s recommendations.

At the beginning of 2017, the Supervisory Board of Volkswagen AG resolved to adjust the remuneration system of the Board of Management with effect from January 1, 2017. The system for remuneration of the Board of Management was approved by the Annual General Meeting on May 10, 2017 with 80.96% of the votes cast. The adjustment, in which the Supervisory Board was assisted by renowned, independent external remuneration and legal consultants, resulted in an alignment with the Group strategy. In addition to the statutory requirements of the Aktiengesetz (AktG – German Stock Corporation Act), the Supervisory Board took into account the recommendations of the German Corporate Governance Code (the Code) in the version dated February 7, 2017 in the existing remuneration system. In particular, the remuneration structure is focused on ensuring sustainable business development. The Supervisory Board revised the remuneration system for the members of the Board of Management in fiscal year 2020 and adopted the enhanced remuneration system on December 14, 2020 with effect from January 1, 2021. The enhanced remuneration system implements the requirements of the AktG as amended by the German Act on the Implementation of the Second Shareholders’ Rights Directive (ARUG II – Gesetz zur Umsetzung der zweiten Aktionärsrechterichtlinie) and takes into account the recommendations of the Code in the version dated December 19, 2019 (that took effect on March 20, 2020). The Supervisory Board will submit the revised remuneration system to the Annual General Meeting for approval in 2021 in line with the requirements of the AktG as amended by the ARUG II. For Board of Management members already appointed, substantial parts of the enhanced remuneration system will apply from January 1, 2021. The remainder of the enhanced remuneration system will apply from the time of reappointment and for first time appointees to the Board of Management. The enhanced remuneration system particularly implements environmental, social and governance targets (ESG targets), introduces penalty and clawback rules for variable remuneration components and extends the assessment period for performance share plans to four years.

The level of the Board of Management remuneration should be appropriate and attractive in the context of the Company’s national and international peer group. Criteria include the tasks of the individual Board of Management member, their personal performance, the economic situation, and the performance of and outlook for the Company, as well as how customary the remuneration is when measured against the peer group and the remuneration structure that applies to other areas of Volkswagen. In this context, comparative studies on remuneration are conducted on a regular basis.

COMPONENTS OF BOARD OF MANAGEMENT REMUNERATION

In this chapter, we provide an overview of the Board of Management’s remuneration system in the reporting year before going into the components of the remuneration for the reporting period.

Overview of the remuneration system

The remuneration system of the Board of Management comprises non-performance-related and performance-related components. The performance-related remuneration consists of an annual bonus with a one-year assessment period and a long-term incentive (LTI) in the form of a performance share plan with a forward-looking three-year term. The performance share plan is linked to business development in the next three years and is thus based on a multiyear, forward-looking assessment that reflects both positive and negative developments. The non-performance-related component creates an incentive for individual members of the Board of Management to perform their duties in the best interests of the Company and to fulfill their obligation to act with proper business prudence without needing to focus on merely short-term performance targets. The performance-related components, dependent among other criteria on the financial performance of the Company, serve to ensure the long-term impact of behavioral incentives.

If 100% of the targets agreed with each of the members of the Board of Management are achieved, the annual target remuneration for each member will amount to a total of €4,500,000 (corresponding to a fixed remuneration of €1,350,000, a target amount from the annual bonus of €1,350,000 and a target amount from the performance share plan of €1,800,000). The annual target remuneration for the Chairman of the Board of Management amounts to a total of €9,000,000 (fixed remuneration of €2,125,000, a target amount from the annual bonus of €3,045,000, and a target amount from the performance share plan of €3,830,000).

Board of Management members who also have duties as members of other corporate bodies within the Volkswagen Group generally do not receive separate remuneration for these.

Annual minimum remuneration of €3.5 million (sum of fixed remuneration, annual bonus, LTI and any special payments) was contractually agreed with Mr. Sommer. This applied pro rata for fiscal year 2020 due to his departure from the Board of Management.

Non-performance-related remuneration

The non-performance-related remuneration comprises fixed remuneration and fringe benefits. The fringe benefits result from noncash benefits and include in particular the use of operating assets such as company cars and the payment of insurance premiums. Taxes due on these noncash benefits are mainly borne by Volkswagen AG.

The fixed level of remuneration is reviewed regularly and adjusted if necessary.

Mr. Duesmann received compensation of entitlements lost due to his change of employer in the amount of €7.3 million.

Performance-related remuneration

The performance-related/variable remuneration consists of an annual performance-related bonus with a one-year assessment period and a long-term incentive (LTI) in the form of a performance share plan with a forward-looking three-year term (long-term incentive components). The components of performance-related/variable remuneration reflect both positive and negative developments.

Annual bonus

The annual bonus is based upon the result for the respective fiscal year. Operating profit achieved by the Volkswagen Group plus the proportionate operating profit of the Chinese joint ventures form half of the basis for the annual bonus, with operating return on sales achieved by the Volkswagen Group making up the second half. Each of the two components of the annual bonus are only payable if certain thresholds are reached or exceeded.

The calculated payment amount may be individually reduced by up to 20% (multiplier of 0.8) or increased by up to 20% (multiplier of 1.2) by the Supervisory Board, taking into account the degree of achievement of individual targets agreed between the Supervisory Board and the respective member of the Board of Management, as well as the success of the full Board of Management in transforming the Volkswagen Group by transferring employees to new areas of activity.

The payment amount for the annual bonus is capped at 180% of the target amount for the annual bonus. The cap arises from 150% of the maximum financial target achievement and a performance factor of a maximum of 1.2. For fiscal year 2020, the Supervisory Board has established the performance factor of 1.2 for existing Board of Management members. This was primarily due to the Board of Management members’ outstanding pandemic management and the fact that complete attainment of the transformation target would have been expected under non-pandemic-related conditions.

The annual bonus is payable following approval of the consolidated financial statements for the respective financial year. Deferral is generally not allowed.

CALCULATION OF THE PAYMENT AMOUNT FOR THE ANNUAL BONUS

Performance share plan – long-term incentive (LTI)

The LTI is granted to the Board of Management annually in the form of a performance share plan. Each performance period of the performance share plan has a term of three years. At the time the LTI is granted, the annual target amount under the LTI is converted on the basis of the initial reference price of Volkswagen’s preferred shares into performance shares of Volkswagen AG, which are allocated to the respective member of the Board of Management purely for calculation purposes. The conversion is performed based on the unweighted average of the closing prices of Volkswagen’s preferred shares for the last 30 trading days preceding January 1 of a given fiscal year. At the end of each year, the number of performance shares is determined definitively for one-third of the three-year performance period based on the degree of target achievement for the annual earnings per Volkswagen preferred share (EPS – earnings per share per preferred share in €). A prerequisite for this is that a threshold is reached.

EPS PERFORMANCE MEASUREMENT

After the end of the three-year term of the performance share plan, a cash settlement takes place. The payment amount corresponds to the final number of determined performance shares, multiplied by the closing reference price at the end of the three-year period plus a dividend equivalent for the relevant term. The closing reference price is the unweighted average of the closing prices for Volkswagen’s preferred shares for the 30 trading days preceding the last day of the three-year performance period. The dividend equivalent corresponds to the dividends distributed during the holding period on a genuine Volkswagen preferred share.

The performance share plan is focused exclusively on cash payment. Stock options are not part of the Volkswagen AG remuneration system. Consequently, there is no obligation to hold shares for members of the Board of Management.

The payment amount under the performance share plan is limited to 200% of the target amount. The payment amount is reduced by 20% if the average ratio of capex to sales revenue or the R&D ratio in the Automotive Division of the last three years is smaller than 5%. The Supervisory Board may cap the LTI in the event of extraordinary developments.

If the employment contract of a member of the Board of Management concludes prior to the end of the performance period due to extraordinary termination based on good cause, or if the member of the Board of Management starts working for a competitor (also referred to as “bad-leaver cases”), the non-vested performance shares will expire. For members of the Board of Management who held their seat as of December 31, 2016, this rule only applies in the event of a reappointment or new appointment.

In connection with the appointment of the Chairman of the Board of Management, the employment contract of Mr. Diess was terminated by mutual agreement in 2018 and a new employment contract was entered into, whereby the expiry rule described above applies from the 2018 to 2020 performance period onwards. In connection with the reappointment of Mr. Witter, the expiry rule applies from the 2020 to 2022 performance period onwards.

In the introductory phase of the performance share plan, the members of the Board of Management who were Board members as of December 31, 2016 generally received advances of 80% of their target amount for the 2017 to 2019 and 2018 to 2020 performance periods. Mr. Blume receives corresponding advances for the performance periods 2018 to 2020 (proportionate) and 2019 to 2021. The two advances will each be paid after the first year of the performance period. Final settlement is based on actual achievement of targets at the end of the relevant three-year performance period.

CALCULATION OF THE PAYMENT AMOUNT FROM THE PERFORMANCE SHARE PLAN

The number of performance shares equals the provisional performance shares allocated at the grant date of the performance share plan. The fair value as at the grant date was determined using a recognized valuation technique.

To determine the amount of the obligation, the provisional performance shares determined or allocated for the performance periods 2018 to 2020, 2019 to 2021 and 2020 to 2022 were taken into account. The intrinsic value of the obligation was calculated in accordance with IFRS 2 and corresponds to the amount that the members of the Board of Management would have received if they had stepped down on December 31, 2020. Only the nonforfeitable (vested) performance shares at the reporting date are included in the calculation. The intrinsic value was calculated based on the unweighted average share price for the last 30 trading days (Xetra closing prices of Volkswagen’s preferred shares) preceding December 31, 2020, taking the dividends paid per preferred share during the performance period into account. The net value of all amounts recognized in income for the performance shares in fiscal year 2020 is recorded in “Comprehensive income 2020 arising from performance shares” according to the IFRSs. Those members who left during the year were shown pro rata.

Phantom preferred shares

The phantom preferred shares for the remuneration withheld for 2015 formed part of the Board of Management remuneration until they were paid out in 2019. In fiscal year 2019, changes in the value of the phantom shares led to the recognition of expenses of €0.1 million.

Total remuneration cap

In addition to the cap on the individual variable components of the remuneration for the members of the Board of Management, the annual benefits received according to the Code in the version dated February 7, 2017, consisting of fixed remuneration and the variable remuneration components (i.e. annual bonus and performance share plan) for one fiscal year may not exceed an amount of €10,000,000 for the Chairman of the Board of Management and €5,500,000 for each member of the Board of Management. If the total remuneration cap is exceeded, the variable components will be reduced proportionately.

Regular review and adjustment

The Supervisory Board regularly reviews and, if necessary, adjusts the level of the total remuneration, the total remuneration cap and the individual targets. Among other things, the Supervisory Board performs a vertical comparison with the remuneration and employment terms of the Company’s employees and a horizontal comparison with the remuneration and employment terms of other companies’ management board members. The Supervisory Board uses an appropriate peer group of other companies to assess how customary the Board of Management members’ specific total remuneration is when measured against other businesses. This peer group is regularly reviewed and adjusted, most recently in February and December 2020. The peer group currently comprises the following companies: BMW, Daimler, Ford, General Motors, PSA Groupe, Nissan Motor Corporation, Toyota, BYD, Tesla (excluding CEO), hp, IBM, Uber, SAP, Samsung, General Electric, Siemens, Hitachi and Boeing.

Other agreements

Members of the Board of Management are entitled to payment of their normal remuneration for six months in the event of illness. In the event of disability, they are entitled to the retirement pension.

Surviving dependents receive a widow’s pension of 66 ⅔% and orphans’ benefits of 20% of the former member of the Board of Management’s pension. Contracts with members of the Board of Management whose first term of office began after April 1, 2015, provide for an entitlement – in line with the principles of the works agreement that also applies to employees of Volkswagen AG covered by collective agreements – to a widow’s pension of 60%, an orphan’s benefit of 10% for half-orphans and an orphan’s benefit of 20% for full orphans, based in each case on the former member of the Board of Management’s pension.

Members of the Board of Management and the Supervisory Board generally have the opportunity to obtain loans from Group companies.

REMUNERATION OF THE MEMBERS OF THE BOARD OF MANAGEMENT IN ACCORDANCE WITH THE GERMAN CORPORATE GOVERNANCE CODE

The amounts shown as “benefits received” in the Board of Management tables in accordance with the Code in the version dated February 7, 2017 correspond, in principle, to the amounts paid out for the fiscal year in question.

In 2020, Mr. Blume received an advance on the target amount for the 2019 to 2021 performance period. In accordance with the Code, this was reported in the tables in 2019 as benefits for the fiscal year.

The amounts shown as “Benefits granted” in the Board of Management remuneration tables in accordance with the Code in the version dated February 7, 2017 are based on 100% of the targets for the annual bonus and on the fair value at the grant date for the performance share plan. In the case of the performance share plan, the respective tranches are only payable to the Board of Management members at the end of the respective performance period (except for the advance described above). It is not until this time that the tranches are available to the Board of Management members. However, the tranches are shown as “Benefits granted” in the fiscal year in which they are allocated.

POST-EMPLOYMENT BENEFITS

In the event of regular termination of their service on the Board of Management, the members of the Board of Management are entitled to a pension, including a surviving dependents’ pension, as well as the use of company cars for the period in which they receive their pension. The agreed benefits are paid or made available when the Board of Management member reaches the age of 63, or in Mr. Duesmann’s case when he reaches the age of 65. From July 16, 2022, Mr. Renschler is entitled to a pension of 70% of his fixed level of remuneration in 2017.

For the members of the Board of Management of Volkswagen AG appointed before February 24, 2017 with a defined contribution pension scheme, a contribution rate of 50% of the fixed remuneration applies. For the members of the Board of Management of Volkswagen AG appointed after February 24, 2017 with a defined contribution pension scheme, a contribution rate of 40% of the fixed remuneration applies. The resulting amount will be credited to the pension account.

Ms. Werner, Mr. Blume, Mr. Diess, Mr. Duesmann, Mr. Kilian, Mr. Schot, Mr. Sommer and Mr. Witter received a defined contribution plan, which is based in principle on a works agreement that also applies to the employees of Volkswagen AG covered by collective agreements and includes retirement, invalidity and surviving dependents’ benefits. A pension contribution in the amount of 50% of the fixed level of remuneration for Ms. Werner, Mr. Diess and Mr. Witter and in the amount of 40% of the fixed level of remuneration for Mr. Blume, Mr. Duesmann, Mr. Kilian, Mr. Schot and Mr. Sommer is paid to Volkswagen Pension Trust e.V. at the end of the calendar year for each year they are appointed to the Board of Management. The annual pension contributions result in modules of what is, in principle, a lifelong pension in line with the arrangements that also apply to employees covered by collective agreements.

The individual pension modules vest immediately upon payment to Volkswagen Pension Trust e.V. Instead of a lifelong pension, benefits can optionally be paid out as a lump sum or in installments when the beneficiary reaches retirement age – currently 63 at the earliest. Volkswagen AG has assumed responsibility for pension entitlements due to Mr. Witter from the time before his service with the Company.

On December 31, 2020, the pension obligations for members of the Board of Management in accordance with IAS 19 amounted to €36.6 (60.5) million. €7.7 (13.7) million was added to the provision in the reporting period in accordance with IAS 19. Other benefits such as surviving dependents’ pensions and the use of company cars are also factored into the measurement of pension provisions. The pension obligations measured in accordance with German GAAP amounted to €26.6 (44.8) million. €6.4 (14.5) million was added to the provision in the reporting year in accordance with German GAAP.

Retired members of the Board of Management and their surviving dependents received €35.9 (14.5) million in the year now ended. Obligations for pensions for this group of persons measured in accordance with IAS 19 amounted to €396.3 (373.7) million, or €317.8 (300.5) million measured in accordance with German GAAP.

A one-year post-contractual restraint on competition has been agreed with Mr. Duesmann. For the duration of this post-contractual restraint, Mr. Duesmann will receive compensation. The compensation will count towards current benefits from the pension scheme.

EARLY TERMINATION BENEFITS

If the appointment to the Board of Management is terminated for cause through no fault of the Board of Management member, the claims are limited to a maximum of two years’ remuneration, in accordance with G.13 sentence 1 of the Code (severance payment cap).

No severance payment is made if the appointment to the Board of Management is terminated for good reason for which the Board of Management member is responsible. The members of the Board of Management are also entitled to a pension and to a surviving dependents’ pension as well as the use of company cars for the period in which they receive their pension in the event of early termination of their service on the Board of Management.

The post-contractual restraint on competition agreed with Mr. Duesmann will also generally apply in the event of early termination. The compensation will count towards any settlement.

Under the termination agreement with Mr. Schot, he will participate in the 2019 to 2021, 2020 to 2022 and 2021 to 2023 performance periods without any pro rata reductions. It has been agreed with Mr. Renschler that the tranche for the 2020 to 2022 performance period will be reduced on a pro rata basis in line with the date of his departure (July 15, 2020) and that no bad-leaver case will apply. It has been agreed with Mr. Sommer that the performance shares allocated to him for the 2018 to 2020, 2019 to 2021 and 2020 to 2022 performance periods will expire.

Please refer to notes 46 and 48 to the consolidated financial statements and the notes to the annual financial statements of Volkswagen AG for more detailed individual disclosures relating to members of the Board of Management who left the Company in fiscal year 2020.