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Remuneration of employees and managers

Structure and system

Performance management is embedded into the Performance Excellence process at Hannover Re. Departmental and individual goals are derived from the strategic corporate objectives. By linking Management-by-Objectives agreements and Performance Excellence criteria we ensure that the efforts of our staff contribute directly to the success of the business strategy. We are convinced that performance-based remuneration components foster individual initiative. Through the delegation of tasks, powers and responsibility as well as the agreement of exacting goals we create a culture of entrepreneurial thinking on all hierarchical levels – among the ranks of both management and staff alike. This principle is reflected as far as possible in performance-based remuneration components.

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Group of participants and total number of eligible participants in variable remuneration systems
Participants Management level   Variable remuneration system Number of eligible participants in the variable remuneration system
Managing Director E1MD Management level 2 Management by Objectives (MbOs), stock appreciation rights Hannover Re Group
140 managers worldwide out of altogether 141 participate in both the MbO process and the stock appreciation rights scheme
Director E2D Management level 3
General Manager E2GM
Chief Manager E3CM   Group Performance Bonus (GPB) Home Office Hannover
551 GPB-eligible staff out of altogether 1,001 staff below the management level
Senior Manager E3SM
Manager E4AU
Deputy Manager E4DA      
Assistant Manager E5
Staff undergoing job familiarisation E6
Group of participants and total number of eligible participants in variable remuneration systems
Participants Management level   Variable remuneration system Number of eligible participants in the variable remuneration system
Managing Director E1MD Management level 2 Management by Objectives (MbOs), stock appreciation rights Hannover Re Group
140 managers worldwide out of altogether 141 participate in both the MbO process and the stock appreciation rights scheme
Director E2D Management level 3
General Manager E2GM
Chief Manager E3CM   Group Performance Bonus (GPB) Home Office Hannover
551 GPB-eligible staff out of altogether 1,001 staff below the management level
Senior Manager E3SM
Manager E4AU
Deputy Manager E4DA      
Assistant Manager E5
Staff undergoing job familiarisation E6

A system of variable remuneration is in place for management ranks below the Executive Board on the levels of Managing Director, Director and General Manager. It consists, firstly, of a long-term remuneration component (stock appreciation rights) and, secondly, of short-term variable remuneration dependent upon accomplishment of the agreed goals for the year in question (Management by Objectives, MbO). Members of staff on the levels of Chief Manager, Senior Manager and Manager are able to participate in the Group Performance Bonus (GPB). The group of participants and the total number of eligible participants in the variable remuneration system of Hannover Re are set out in the table above.

For staff on the level of Manager or higher we introduced a remuneration model linked to the company’s success in 2004, namely the Group Performance Bonus (GPB). This tool is geared to the minimum return on equity of 750 basis points above the risk-free interest rate and the return on equity actually generated.
For those participating in the GPB 14.15 monthly salary payments are guaranteed; a maximum of 16.7 salary payments is attainable. Since its launch the maximum amount of the GPB was paid out in 2006, 2007, 2009 and 2010.

Remuneration of managers in the 2011 financial year

The present remuneration system for managers at Hannover Re consists of the following components: an annual fixed salary, a performance-based bonus and stock appreciation rights. The fixed salary and performance-based bonus upon attainment of the targets agreed for a particular year (Management by Objectives) produce the total cash compensation. The ratio of annual fixed salary to short-term variable MbO bonus varies at Hannover Home Office according to hierarchical level as follows:

  • 60/40 for Managing Directors
  • 65/35 for Directors
  • 70/30 for General Managers

Outside Germany this ratio is not as clear-cut as it is at Home Office, but the average figures for all Managing Directors are 62% fixed and 38% variable and for General Managers 74% fixed and 26% variable.

The targets agreed in the context of the MbO bonus are broken down into economic and individual targets, as shown in the following table.

MbO bonus
Participants Economic department targets Individual targets
Managing Directors of TDs/RDs 50% 50%
General Managers of TDs/RDs 25% 75%
Managing Directors and General Managers of Service Departments   100%

Economic department targets are agreed on the basis of the combined ratio and IVC in non-life reinsurance and the premium growth, technical result and IVC in life/health reinsurance. At the subsidiaries abroad agreements are reached on the basis of net income, EBIT, EPS contribution and IVC.

Since 2006 the degree of goal attainment has been indexed if goal attainment exceeds 80%. A good performance with attainment of all agreed targets corresponds to an average overall goal attainment of 80%. Only an above-average performance (“stellar performance”), in other words a performance in excess of 80%, triggers indexation of the degree of goal attainment.
A maximum goal attainment of 100% corresponds after indexation to a maximum degree of goal attainment of 125%.

While the MbO process takes into account the attainment of short-term targets, the long-term performance of the company is reflected in Hannover Re’s virtual stock option plan. At Home Office the cash value of the basic allocation of stock appreciation rights corresponds on average to 5.9% of the total cash compensation and is awarded to the entitled manager outside the total cash compensation. The cash value of the basic allocation of stock appreciation rights at the Local Offices abroad amounts on average to 10% of the total cash compensation.

Each participant in the virtual stock option plan of Hannover Re is first awarded an individual basic number of stock appreciation rights. Depending upon the extent to which the target level of the internal (EPS) and external (RBS Global Reinsurance Index) performance criterion is surpassed or undershot, this basic number increases or decreases to produce the final number of stock appreciation rights. The awarded stock appreciation rights may be exercised up to 10 years after the end of the respective allocation year, provided the vesting period has expired (for the first 60% after four years, with one further year for each additional 20%).

There are four exercise periods each year. In this respect, however, there is no entitlement to delivery of shares of Hannover Re, but merely to payment of a cash amount geared to the performance of the Hannover Re share. This is established from the difference between the market price of the Hannover Re share at the beginning of the allocation year (basic price) and the current market price at the time when the stock appreciation rights are exercised. Both figures are determined by averages.

Remuneration of managers from the 2012 financial year onwards

In order to fulfil the requirements of the Regulation on the Supervisory Law Requirements for Remuneration Schemes in the Insurance Sector (Versicherungs-Vergütungsverordnung – VersVergV), which entered into force on 13 October 2010, a uniform remuneration system is applicable worldwide to all managers of the Hannover Re Group with effect from 1 January 2012 which – in its basic principles and parameters – satisfies the special requirements of § 4 VersVergV and is appropriately realised according to the various management levels. As part of the reorientation of the remuneration system, the share-based remuneration of the Executive Board – the so-called share award programme – is also to be extended to include managers. At the same time, the stock appreciation rights plan for managers is terminated with effect from the 2012 allocation year. This ensures adherence to a consistent share-based remuneration component for the Executive Board and managers alike.

The measurement of the variable remuneration is based on three elements: Group net income, business group targets and individual targets. The weighting of the elements is dependent upon whether responsibility is carried in a treaty/regional department or in a service department. In the treaty/regional departments the Group net income is weighted at 20%, the business group targets at 40% and the individual targets also at 40%. In the service departments the Group net income carries a 40% weighting, while the individual targets account for 60%.

The Group net income is measured by the average return on equity (ROE) of the Hannover Re Group over the last three financial years. The maximum possible goal attainment is 200%. A lower limit is placed on goal attainment of –50% (penalty) for Management Level 2 (Managing Directors) and 0% for Management Level 3 (Directors and General Managers).

The measurement of the business group targets is geared to the actual value created. The Intrinsic Value Creation (IVC) of the business group encompassing the relevant area of responsibility is therefore used as a one-year measurement basis. Negative performance contributions are excluded here – the minimum possible goal attainment is 0%. The maximum possible goal attainment is limited to 150%.

Individual targets are agreed and measured for a period of one year. The degree of goal attainment is between 0% and 100%. Agreements on business group targets and individual targets as well as on their degree of goal attainment will continue to be arrived at as part of the MbO process.

The overall degree of goal attainment determines the amount of variable remuneration including share awards. On Management Level 2 (Managing Directors) 60% of the variable remuneration is paid out annually in cash and 40% is granted in the form of share awards. On Management Level 3 (Directors and General Managers) the variable remuneration is split into 65% cash payment and 35% granted as share awards.

The total number of share awards granted is determined according to the value per share of Hannover Re. This value is arrived at from the average of the closing prices of the shares in a period extending from 20 trading days before to 10 trading days after the meeting of the Supervisory Board at which the consolidated financial statement is approved. The number of share awards is established by dividing the specified portion of the total bonus (40% or 35%) by the value per share, rounded up to the next full share.

Following expiry of a vesting period of four years the value of one Hannover Re share calculated at the disbursement date is paid out for each share award. The value of the Hannover Re share is again determined from the average of the closing prices of the shares in a period from 20 trading days before to 10 trading days after the meeting of the Supervisory Board that approves the consolidated balance sheet. In addition, a sum in the amount of the dividend is paid out for each share award. The level of the dividend payment is the sum total of all dividends per share paid out during the period of the share awards multiplied by the number of share awards.

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