Compensation report

The compensation report describes the main features of the compensation system for the Managing Board and Supervisory Board of HUGO BOSS AG. It also explains the structure, composition and amount of the compensation components. The report is based on the recommendations of the German Corporate Governance Code in the version of February 7, 2017 and contains disclosures based on the requirements of German Accounting Standard (GAS) 17, the HGB [“Handelsgesetzbuch”: German Commercial Code] and International Financial Reporting Standards (IFRS). The quantitative disclosures pursuant to IAS 24 are presented in the notes to the consolidated financial statements.

Compensation of the Managing Board

Decisions concerning the compensation of Managing Board members (including former Managing Board members and their surviving dependents) as well as regular deliberation on and the review of the compensation system are the responsibility of the full Supervisory Board. However, the Personnel Committee submits proposals in preparation for decisions on these matters. The personnel matters dealt with by the Supervisory Board and the Personnel Committee during the reporting year and compensation-related topics are explained in the Supervisory Board’s report. Report of the Supervisory Board

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 successes of a member of the Managing Board.

Main features of the compensation system for the Managing Board

The compensation system in place since January 1, 2016 aligns the Managing Board’s compensation more closely than previously to the Company’s sustainable growth by means of setting relevant objectives in the field of long-term variable compensation. At the same time, sales, EBITDA before special items and trade net working capital are the target components of short-term variable compensation. This is intended to ensure a better response to short-term developments. Also, during the design process, a great deal of importance was attached to the fact that above-average performance would be rewarded more comprehensively, but variable compensation would cease to be paid more quickly than before in the event of below-average performance.

Since January 1, 2016, in addition to non-performance-related (fixed) compensation components, the compensation structure has provided for core performance-related (variable) compensation components in the form of a short-term incentive program (STI) and a long-term incentive program (LTI). In this regard, the average share of the fixed compensation components in the total target compensation amounts to 35%, while the average share of compensation from the STI and from the LTI come to 26% and 39% respectively, whereby a target achievement of 100% each is assumed for the information for the STI and the LTI.

Non-performance-related (fixed) compensation components

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. The members of the Managing Board also receive fringe benefits to a small extent which they individually pay tax on as per the applicable tax regulations if they derive any financial advantage from private use of the same. The fringe benefits primarily include private use of the company car, supplementary payments to health and nursing care insurance, the conclusion of and contributions to accident and directors’ and officers’ (D&O) liability insurance as well as, to a small extent, other equipment and services needed to fulfill their duties as members of the Managing Board. In accordance with Sec. 93 (2) Clause 3 AktG [“Aktiengesetz”: 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.

Performance-related (variable) compensation components

Short-term variable compensation – short-term incentive program (STI)

As a short-term performance-related compensation component, the STI is tied to the development of certain quantitative targets. In accordance with the Group’s management system, the Supervisory Board has determined the following indicators as targets:

• Sales (the sales recognized in the consolidated financial statements using the exchange rates underlying the budget)
• EBITDA before special items (consolidated net income before interest, taxes, depreciation, amortization and special items)
• Trade net working capital (sum of raw and finished goods and trade receivables less trade payables) Group Management

The targets for sales and trade net working capital are weighted at 25% each. The EBITDA before special items is included in the STI’s target achievement with a weighting of 50%.

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 and by March 31 at the latest. All targets may be replaced by other corporate goals or weighted differently for the respective financial year in the context of the target-setting agreement. It is therefore possible to respond to short-term developments following the completion of one performance period and at the start of another. The Supervisory Board thus has the opportunity to regularly align the Managing Board’s compensation so that it is directly geared toward the Company’s strategy and its successful implementation. The Managing Board and the Supervisory Board should reach an agreement concerning the targets and their weighting in this regard. The Supervisory Board shall only make decisions at its professional discretion if this does not happen.

If the agreed targets are fully achieved on average, the respective member of the Managing Board shall be paid 100% of the contractually agreed amount. Target fulfillment that is above the maximum target of 150% or below the minimum target of 75% agreed for the individual target shall not be taken into account when calculating the average. If the average target achievement comes to 150% or more, a maximum amount (cap) of 150% is paid out. If, on the other hand, the average degree of target achievement is below 75%, no annual bonus will be paid. Between the minimum target and the maximum target, target achievement shall be determined in each case by linear interpolation. 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 were achieved in full (100%) for the 2017 STI, a total amount of EUR 1,502 thousand would be paid out (Mark Langer EUR 650 thousand, Bernd Hake EUR 400 thousand, Yves Müller EUR 33 thousand (on a pro rata basis) and Ingo Wilts EUR 419 thousand).

The degree of target achievement for the individual target components for fiscal year 2017 is summarized in the table below.

For fiscal year 2017, the average degree of target achievement is 111% and thus above the minimum target of 75%. The annual bonus is thus paid out in the amount of EUR 1.664 thousand (Mark Langer EUR 720 thousand, Bernd Hake EUR 443 thousand, Yves Müller EUR 37 thousand (on a pro rata basis) and Ingo Wilts EUR 464 thousand).

Long-term variable compensation – long-term incentive program (LTI)

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 or at the start of their activity. The initial grant is based on an amount (“LTI budget”) defined in the respective service agreement or by an additional agreement. The LTI budget should roughly correspond to the fixed annual salary. The initial grant is calculated by dividing the LTI budget 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 a tranche’s performance term. Following the expiry of the performance term, the final number of virtual shares (“final grant”) is calculated based on the achievement of certain target components. The final entitlement to payment is calculated by multiplying the final grant by the Company’s share price during the last three months of the qualifying period.

The Supervisory Board has defined the following as target components for the 2016 to 2018 tranche and the 2017 to 2019 tranche:

• Shareholder return for the HUGO BOSS share compared to the MSCI World Textiles, Apparel & Luxury Goods Performance Index (relative total shareholder return (RTSR))
• Return on capital employed (ROCE)
• Employee satisfaction
• The Company’s performance in the field of sustainability

The “relative total shareholder return” target component is measured based on the increase in enterprise value, comprising the share performance and hypothetically reinvested dividends, compared to the MSCI World Textiles, Apparel & Luxury Goods Performance Index. The return on capital employed is based on the development of the ROCE (return on capital employed) profitability indicator versus the budget. The degree of employee satisfaction is measured by an employee survey conducted annually by an independent institute, and the resulting “Employee Trust Index” is compared with the top 100 companies. The sustainability performance is determined by the Company’s improvement in the Dow Jones Sustainability Assessment, in which the sustainability performance of listed companies is assessed by an index provider. The composition of the Dow Jones Sustainability Index (DJSI) is defined based on this assessment. The targets for the RTSR and ROCE performance criteria each account for one third of the LTI program, while the targets for employee satisfaction and sustainability each account for one sixth.

Specific target, minimum and maximum values are defined for each target component and are used to calculate the entitlement to payment. The targets are defined on March 31 at the latest of the first year of the performance term in a target-setting agreement concluded between the Managing Board and the Supervisory Board. The Managing Board and the Supervisory Board should reach an agreement in this regard. The Supervisory Board shall only make decisions at its professional discretion if this does not happen.

A target achievement of only 50% minimum and 200% maximum is taken into account for each target component for the purposes of calculating the final grant. A one-year qualifying period follows the expiry of the performance term. The entitlement to payment is based on the Company’s share price during the last three months of the qualifying period and the amount is limited to 250% of the individual LTI budget for each member of the Managing Board (cap). Under certain circumstances (particularly when service agreements are terminated for due cause or when members of the Managing Board resign before a tranche’s term has expired), entitlements of members of the Managing Board may expire under the LTI program.

The individual LTI budget in relation to fiscal year 2016 is EUR 850 thousand for Mark Langer, EUR 458 thousand for Bernd Hake and EUR 206 thousand for Ingo Wilts. In the case of Mr. Hake and Mr. Wilts, the LTI budget is determined from the start of their Managing Board activities in 2016 on a pro rata basis.

The individual LTI budget in relation to fiscal year 2017 is EUR 900 thousand for Mark Langer, EUR 592 thousand for Bernd Hake, EUR 54 thousand for Yves Müller and EUR 564 thousand for Ingo Wilts. In the case of Yves Müller, the LTI budget is determined on a pro rata basis from the start of his Managing Board activities in 2017.

Multiple-year bonus

Moreover, for Mark Langer, the Chairman of the Managing Board, the multiple-year bonus for the fiscal year 2015 has not been paid yet. The multiple-year bonus 2015-2017 was the earlier long-term variable compensation under the compensation system applicable until the end of the fiscal year 2015. The multiple-year bonus was assessed over a period extending over several years and was measured based on the development of quantitative targets defined for a three-year period. The quantitative targets were geared toward increasing the enterprise value and were tied to the development of the two performance indicators – sales and EBITDA before special items – over a period of three years. The EBITDA before special items was weighted at 75%, while sales had a weighting of 25% in the determination of the multiple-year bonus. The amount of variable compensation for a fiscal year depended on the degree to which a predefined target sales and target EBITDA before special items were achieved over a period of three years. For the three-year period, targets as well as maximum and minimum thresholds were defined for both earnings indicators for each of the three fiscal years. The degree of target achievement was determined separately for each of the three fiscal years. The payout was 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 the specified maximum threshold was reached or exceeded. No multiple-year bonus is paid out if the indicators reach or drop below the specified minimum threshold.

Installments for the expected target multiple-year bonus were paid within a week of the consolidated financial statements for the first fiscal year of the three-year period being approved. The actual target achievement for the multiple-year bonus was 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 installments exceed the amount of the vested multiple-year bonus for the three-year period, the member of the Managing Board in question repays the difference to HUGO BOSS AG within one week of the consolidated financial statements for the third fiscal year being approved.

For the multiple-year bonus for fiscal year 2015, a degree of target achievement of 3.45% for EBITDA before special items and 4.18% for sales was recorded for the three-year period 2015 to 2017. This results in a payment of EUR 46 thousand, which is determined based on the cumulative target achievement of 7.63% and included in the total compensation for the fiscal year 2017.

Pension provision and provision for surviving dependents

All active members of the Managing Board have received pension commitments which are regulated in individual contracts and the amounts of which are measured as a percentage of the contractually agreed pensionable income depending on their duration of membership of the Managing Board. The basis for determining the pensionable income is defined as the basic salary under the service agreement.

For Mark Langer, the Chairman of the Managing Board, this is done in the form of a benefit-based commitment.

The members of the Managing Board appointed as from fiscal year 2016 were granted contribution-based pension commitments. This form of pension commitment also applies to any future appointments to the Managing Board.

The Supervisory Board received guidance from an independent compensation expert when designing the contribution-based pension scheme for the new members of the Managing Board.

Contribution-based pension commitments

As of fiscal year 2016, every year, for newly appointed members of the Managing Board, HUGO BOSS pays a pension contribution into an employer’s pension liability insurance scheme taken out on the life of the member of the Managing Board. The contribution corresponds to 40% of the pensionable income, which is determined based on the basic salary under the service agreement.

The amount of retirement benefit in this regard corresponds to the amount accumulated by means of the individual employer’s pension liability insurance. This results from the total unpaid pension contributions per year plus an annual interest rate depending on the insurance tariff in question. A member of the Managing Board shall be entitled to retirement benefit at or after a fixed age limit of 65 years or if they become permanently unable to work due to illness or accident and leave the Company before reaching the age limit. In the event of the death of the member of the Managing Board, their spouse or registered civil partner under the Civil Partnership Act and their surviving children shall be entitled to a survivor’s pension.

If the member of the Managing Board leaves the Company before becoming eligible for a pension, the benefits shall still become vested if their pensionable service was longer than three years. If the member of the Managing Board leaves the Company before reaching the fixed age limit, the entitlement amount corresponds to the benefits arising from the premium-free employer’s pension liability insurance at the time of departure.

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

Benefit-based pension commitments for Mark Langer, the Chairman of the Managing Board

A pension commitment exists for Mark Langer, the Chairman of the Managing Board, through the Company in the form of a benefit-based pension commitment. The amount of the subsequent post-employment benefit is limited to 60% of the pensionable income in this regard. Post-employment benefits are paid when the employment relationship ends at or after a fixed age limit of 60 years or if the Chairman 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 the Chairman of the Managing Board, a post-employment benefit shall be paid to the surviving dependents in the form of a widow’s or an orphan’s pension.

If the Chairman 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%.

Supplementary pension plan

In addition, the HUGO BOSS Group offers the members of the Managing Board 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 compensation. Provisions and plan assets are recognized at the same amount.

Benefits in the event of premature termination of employment

In the event of premature termination of the service agreement (without there being due cause for termination of the service agreement on the Company’s part), the member of the Managing Board in question shall receive severance pay amounting to their total compensation (including fringe benefits) for the duration of the original remaining term, but for no longer than 15 months, starting from the time the service agreement is terminated (severance payment cap). For these purposes, the total compensation is calculated on the basis of the total compensation received for the last full fiscal year and, where appropriate, on the basis of the predicted total compensation for the current fiscal year.

The service agreements do not provide for any severance payment in the event of premature termination of the service agreement for due cause 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 each contain a provision under which, in the event of a change of control (acquisition of more than 30% of the voting rights in HUGO BOSS AG), the member of the Managing Board in question is granted an extraordinary right to termination and, if the service agreement is indeed terminated, a severance payment must be made to said member of the Managing Board. In principle, the amount of severance pay corresponds to the severance payment to be made in the event of the service agreement being terminated prematurely and is therefore subject to the same severance payment cap. 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.

Total compensation of members of the Managing Board for the fiscal year 2017 under GAS 17

Benefits granted for fiscal year 2017 under GCGC

Benefits received for fiscal year 2017 under GCGC

Other compensation components

Advance payments of EUR 540 thousand made to Mark Langer, Chairman of the Managing Board are outstanding as at December 31, 2017. These will be offset against the bonus payments for fiscal year 2017 and definitively settled.

Total compensation of former members of the Managing Board

In fiscal year 2017, no members left the Managing Board, meaning that no bonus or severance payments were made to former members of the Managing Board.

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 the 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, that of the Deputy Chairman and membership of the Committees are taken into account when calculating 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 past fiscal year in question. Members of the Supervisory Board who have only 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 are entitled to provide the Company with a separate invoice for VAT and exercise this right. The Supervisory Board received total compensation amounting to EUR 1,561 thousand for its activities in 2016. For 2017, the total compensation is expected to come to EUR 1,493 thousand. This figure includes a variable component of EUR 738 thousand (2016: EUR 785 thousand), which is calculated on the basis of the expected earnings per share in the consolidated financial statements.