Compensation report

The “Compensation report” details the compensation system underlying Board of Management compensation as well as the specific remuneration received by the individual members of the Board of Management. It takes into consideration the requirements of the German Commercial Code taking account of the provisions of German Accounting Standard No. 17 (GAS 17), the recommendations of the German Corporate Governance Code (GCGC) as amended on February 7, 2017, and the International Financial Reporting Standards (IFRS).

Changes in the composition of the Board of Management and contract extensions. Dr. Thomas Kremer’s term of office ended as scheduled on March 31, 2020. The Board of Management department for Data Privacy, Legal Affairs and Compliance headed by Dr. Kremer was dissolved effective January 1, 2020 and its constituent units were assigned to the Finance; Human Resources and Legal Affairs; and Technology and Innovation Board of Management departments. Until his departure, Dr. Kremer supported the transition to the new structures as part of a designated mandate. Dr. Dirk Wössner informed the Supervisory Board that he did not intend to extend his service contract beyond its scheduled expiration date at the end of 2020. Dr. Wössner resigned from his position on the Board of Management with effect from October 31, 2020. The Supervisory Board appointed Srini Gopalan to succeed Dr. Wössner as the Board of Management member for Germany. Srini Gopalan moved from the Europe Board of Management department to the Germany Board department effective November 1, 2020. Dominique Leroy, Srini Gopalan’s successor as the Board of Management member responsible for Europe, was appointed by the Supervisory Board also effective November 1, 2020. By resolution of the Supervisory Board of Deutsche Telekom AG of December 16, 2020, Claudia Nemat was reappointed as the Board of Management member for Technology and Innovation for the period from October 1, 2021 to September 30, 2026.

Compensation of the Board of Management

Basis of Board of Management compensation. The current Board of Management compensation system was adopted by the Supervisory Board on February 24, 2010. The shareholders’ meeting of Deutsche Telekom AG on May 3, 2010 approved this system. The compensation of Board of Management members comprises various components. Under the terms of their service contracts, members of the Board of Management are entitled to an annual fixed remuneration and annual variable performance-based remuneration (Variable I), a long-term variable remuneration component (Variable II), as well as fringe benefits and deferred benefits based on a company pension entitlement. The Supervisory Board defines the structure of the compensation system for the Board of Management and reviews this structure and the appropriateness of compensation at regular intervals. It is ensured that Board of Management compensation is oriented toward the sustained development of the Company and that there is a multi-year measurement base for the variable components. Sideline employment generally requires prior approval. Generally, no additional compensation is paid for being a member of the management or supervisory board of other Group entities.

On December 16, 2020, the Supervisory Board resolved on the key features of a new compensation system which takes into account the updates to the 2020 German Corporate Governance Code and the amendments to the German Stock Corporation Act (ARUG II, the Act Implementing the Second Shareholder Rights Directive). This compensation system will be submitted for vote at the shareholders’ meeting of Deutsche Telekom AG on April 1, 2021 and presented in detail in the invitation to the 2021 shareholders’ meeting. The rules of the current compensation system are described further on in this “Compensation report.” As each of the compensation components are presented below, the annotation “Planned change in 2021:” signifies elements that will differ under the new compensation system, which is still to be voted on, from the current system described here. Readers of this “Compensation report” should therefore be able to see at a glance which changes are planned.

Compensation of the Board of Management

Non-performance-based compensation components

Basic remuneration

The fixed annual remuneration is determined for all Board of Management members based on market conditions in accordance with the requirements of stock corporation law and is paid on a monthly basis. In the event of temporary incapacity for work caused by illness, accident, or any other reason for which the respective Board of Management member is not responsible, the fixed basic remuneration continues to be paid. The continued payment of remuneration ends at the latest after an uninterrupted period of absence of six months, or for a maximum of three months following the end of the month in which the Board of Management member’s permanent incapacity for work is established.

Fringe benefits

In accordance with market-oriented and corporate standards, the Company grants all members of the Board of Management additional benefits under the terms of their service contracts, some of which are viewed as non-cash benefits and taxed accordingly. This mainly includes being furnished with a company car and accident and liability insurance, and reimbursements in connection with maintaining a second household.

Pension commitments

New pension commitment. Since 2009, all Board members have been granted a company pension in the form of a defined contribution plan. Under this arrangement, the Board member receives a one-time lump sum payout upon entering retirement. A contribution is paid into the Board member’s pension account for each year of service at an interest rate corresponding to market levels. Annual additions to the pension account have no effect on cash or cash equivalents. The cash outflow is only effective upon the Board member’s retirement. As a rule, the date of retirement is the beneficiary’s 62nd birthday. The amount to be provided annually is individualized and decoupled from other compensation components. The exact definition of the contribution is based on a comparison with peer companies that are suitable for benchmarking and also offer defined contribution plans. The contributions for Birgit Bohle, Srini Gopalan, Dr. Christian P. Illek, Dr. Thomas Kremer, Thorsten Langheim, Claudia Nemat, and Dr. Dirk Wössner amount to EUR 250,000 each for each year of service rendered.

Legacy pension commitment. As the longest-serving Board member, CEO Timotheus Höttges is the only current Board member to still benefit from a legacy pension commitment under the company pension plan. Benefits from the company pension plan are in direct relation to the beneficiary’s annual salary. The Board of Management members receive company pension benefits based on a fixed percentage of their last fixed annual salary for each year of service rendered prior to their date of retirement. The pension payments may be in the form of a life-long retirement pension upon reaching the age of 62 or in the form of an early retirement pension upon reaching the age of 60. Opting for the early retirement pension scheme is connected with actuarial deductions. The company pension is calculated by multiplying a basic percentage rate of 5 % by the number of years of service as a member of the Board of Management. After ten years of service, the maximum pension level of 50 % of the last fixed annual remuneration is attained. Following Timotheus Höttges’ reappointment to the Board of Management and the adjustment to his basic remuneration, the Supervisory Board decided to dynamically increase his pension entitlements accrued up to December 31, 2018 by 2.4 % per year using the basic remuneration valid up to December 31, 2018 as the measurement base. Future increases in his compensation will thus not lead to higher pension payments.

The pension payments to be made upon retirement increase dynamically, at a rate of 1 % per year. In addition, the pension agreements include arrangements for pensions for surviving dependents in the form of entitlements for widows/widowers and orphans. In specifically provided exceptional cases, entitlement to a widow’s/widower’s pension is excluded. The standard criteria for eligibility in the pension arrangements are in line with market conditions. In the event of a permanent incapacity for work (invalidity), the beneficiary is also entitled to the pension credit accrued.

Pension substitute. A “pension substitute” was agreed with Adel Al-Saleh in lieu of a pension commitment due to his U.S. citizenship. The same applies to the new Board of Management member, Dominique Leroy. The arrangement provides for an annual payment of EUR 250,000 for each full year of service rendered and is reported in the tables under fringe benefits. In determining the amount, the Supervisory Board oriented itself to the level of the contributions for those Board members who have received a contribution-based benefit promise (new pension commitment).

Planned change in 2021: Under the new compensation system, new members appointed to the Board of Management after its introduction will no longer receive pension commitments.

Service cost and defined benefit obligations for each member of the Board of Management with a pension commitment are shown in the following table:

Performance-based compensation components

The variable remuneration of the members of the Board of Management is mainly divided into Variables I and II. Variable I contains both short-term and long-term components consisting of the realization of budget figures for specific performance indicators, strategic/functional targets, and adherence to the Group’s Guiding Principles. The payment amount of Variable I is tied to an obligation to invest in shares of Deutsche Telekom AG, which results in a further inflow of shares after four years under the current Share Matching Plan. Variable II is oriented solely toward the long term. This ensures that the variable remuneration is oriented toward the sustained development of the Company and that there is a predominantly long-term incentive effect. The variable compensation elements include clear upper limits, while the amount of compensation is capped overall. The final component of performance-based compensation comprises an option for the Supervisory Board to award a bonus for extraordinary performance. In the event of temporary incapacity for work caused by illness, accident, or any other reason for which the respective Board of Management member is not responsible, claims to variable remuneration are reduced pro rata in line with the uninterrupted period of absence; the uninterrupted period of absence must be more than one month in duration.

Variable I

The annual variable remuneration of Board of Management members is based on the achievement of targets set by the Supervisory Board of Deutsche Telekom AG for each member of the Board of Management at the beginning of the financial year. The set of targets is composed of corporate targets (50 %) related to the unadjusted values – adapted for target-relevant factors – for revenue, EBITDA after leases, and free cash flow after leases, as well as personal targets for the individual members of the Board of Management. The three Group targets are weighted in relation to each other at 40/40/20. The personal targets consist of targets oriented toward the sustained success of the Company concerning the implementation of the strategy in the member’s respective department (30 %) and value adherence (adherence to Guiding Principles), which is an indicator of compliance with value orientation and accounts for 20 %. The agreement on targets and the level of target achievement for the respective financial year are determined by the plenary session of the Supervisory Board. Levels of target achievement exceeding 100 % are capped at 150 % of the award amount. Any higher levels of target achievement will not be taken into consideration. To ensure the long-term incentive effect and orientation toward the sustained development of the Company, a third of the variable remuneration set by the plenary session of the Supervisory Board must be invested in shares of Deutsche Telekom AG; these shares must be held by the respective Board member for a period of at least four years.

Planned change in 2021: The new compensation system will also incorporate an existing ESG target into short-term variable remuneration. Additionally, the individual target parameters for strategy implementation and value adherence will be taken into account in the form of a performance factor that can be expressed as a value between 0.8 and 1.2. The performance factor is applied after the level of target achievement for Group and ESG targets has been determined. With the application of the performance factor, a target achievement level of between 0 % and 180 % is possible.

Share Matching Plan

Share deferral and the Share Matching Plan

In the 2020 financial year, the Board of Management members, as described above, were contractually obliged to invest a third of Variable I in shares of Deutsche Telekom AG. The Supervisory Board made an offer to the Board members to increase the obligatory personal investment in 2020 to up to 50 % of the Variable I payout. Deutsche Telekom AG will grant one additional share for every share acquired as part of the Board of Management member’s aforementioned personal investment (Share Matching Plan) on expiration of the four-year lock-up period, provided they are still a member of the Board of Management.

Disclosures are required not only of the total expense related to share-based remuneration from matching shares in the 2020 financial year and the fair value of the matched shares at their grant date, but also of the number of entitlements to matching shares and their development in the current financial year.

The fair value of the matching shares at grant date shown in the following table does not represent a component of remuneration for the Board of Management members in 2020. It is an imputed value of the entitlements to matching shares determined on the basis of relevant accounting policies. Here, the fair value equates to the share price at grant date less an expected dividend markdown. The following table is based on expected target achievement for the 2020 financial year and thus on the estimated amount of the personal investment to be made by the respective Board of Management member to establish his or her entitlements to matching shares. The final number of entitlements to matching shares identified for the 2020 financial year may be higher or lower than the amounts estimated here.

The total share-based remuneration expense for entitlements to matching shares from 2015 to 2020 to be recognized for the financial years 2019 and 2020 pursuant to IFRS 2 is included in the two last columns of the table.

By December 31, 2020, Deutsche Telekom AG had acquired 565,596 shares for the purpose of awarding matching shares to Board of Management members as part of the Share Matching Plan. In 2020, shares were once again transferred from the Share Matching Plan for Board of Management members to individual members of the Board of Management. In total, 122,760 shares (2019: 55,146) were transferred to Board of Management members in 2020; of this total, 54,550 shares were transferred to Board of Management members who were no longer serving on the Board at the transfer date.

Variable II

Variable II

The exclusively long-term-oriented Variable II is measured based on the fulfillment of four equally weighted performance parameters (return on capital employed (ROCE), earnings per share (EPS), customer satisfaction, and employee satisfaction). All four parameters are collected on a Group-wide basis. Each parameter determines a quarter of the award amount. Levels of target achievement exceeding 100 % are capped at 150 % of the award amount. The measurement period is four years, with the measurement being based on average target achievement across the four years planned at the time the tranche was determined. The award amount is decoupled from other remuneration components and is set for each member of the Board of Management individually.

Planned change in 2021: Variable II will remain as described here. However, Variable II will be supplemented by a share-based component. The individual amount granted to each Board of Management member will be translated into phantom shares and thus additionally linked to the development of the share price. The payment is then made by translating the phantom shares into a cash amount. Total payments are capped at 200 % of the target amount.

Bonus for extraordinary performance

At its discretion and after due consideration, the Supervisory Board may also reward extraordinary performance by individual or all Board of Management members in the form of a special bonus.

Arrangements in the event of termination of a position on the Board of Management. Service contracts for members of the Board of Management concluded since the 2009 financial year include a severance cap in case of premature termination without good cause allowing a compensation payment that is limited to a maximum of two years’ remuneration (severance cap) and may not exceed the remuneration due for the remaining term of the service contract.

Planned change in 2021: In the future, compensation paid in connection with a post-contractual prohibition of competition will be deducted from the severance payment.

The service contracts for members of the Board of Management at Deutsche Telekom AG do not include any benefits in the event of the termination of a position on the Board of Management as a result of a change of control.

Board of Management member service contracts generally stipulate a post-contractual prohibition of competition. Pursuant to these provisions, members of the Board of Management are prohibited from rendering services to or on behalf of a competitor for the duration of one year following their departure. As compensation for this restricted period, they receive either a payment of 50 % of the last fixed annual remuneration and 50 % of the most recent Variable I on the basis of 100 % target achievement, or 100 % of the last fixed annual remuneration.

Service contracts for members of the Board of Management concluded since the 2020 financial year contain extensive clawback provisions entitling Deutsche Telekom to reclaim Variable I and Variable II payments if, within three years of determining the variable remuneration, either part or all of the payment is deemed to have been made wrongly.

Board of Management compensation for the 2020 financial year. In reliance on legal requirements and other guidelines, a total of EUR 24.1 million (2019: EUR 23.3 million) is reported in the following table as total compensation for the 2020 financial year for the members of the Board of Management. The Board of Management compensation comprises the fixed annual remuneration as well as other fringe benefits, non-cash benefits and remuneration in kind, short-term variable remuneration (Variable I), fully earned tranches of long-term variable remuneration (Variable II), a bonus for extraordinary performance, and the fair value of the matching shares. This was calculated on the basis of the estimated amount of Variable I at the grant date and the resulting number of entitlements to matching shares. Compensation also includes the bonus for extraordinary performance described in the “Compensation report” and the sign-on bonus for a new Board of Management member.

Total compensation. The compensation of the Board of Management is shown in detail in the following table:

The amounts shown in the “Long-term variable performance-based remuneration (Variable II)” column had been pledged to the eligible Board of Management members in the 2017 financial year.

No member of the Board of Management received benefits or corresponding commitments from a third party for his or her activity as a Board of Management member during the past financial year.

Former members of the Board of Management. A total of EUR 8.5 million (2019: EUR 8.8 million) was included for payments to and entitlements for former members of the Board of Management as well as any surviving dependents.

Provisions (measured in accordance with IAS 19) totaling EUR 223.9 million (December 31, 2019: EUR 213.4 million) were recognized for current pensions and vested rights to pensions for this group of persons and their surviving dependents.

Other. The Company has not granted any advances or loans to current or former Board of Management members, nor were any other financial obligations to the benefit of this group of people entered into.

Table view in accordance with the requirements of the German Corporate Governance Code

The following tables are based on model tables 1 and 2 recommended by the German Corporate Governance Code (GCGC) as amended on February 7, 2017, which present the total compensation granted for the reporting year and the remuneration components allocated.

Benefits granted for the reporting year

Benefits allocated for the reporting year

The following table does not contain the target values, but the actual benefits allocated for 2020 for one- and multi-year variable remuneration components. There is another difference between the following table and the table of benefits granted with regard to the presentation of the Share Matching Plan: The figures for the Share Matching Plan disclosed in the following table show the value of the benefits allocated applicable under German tax law at the time of transfer of the matching shares, whereas the above table of benefits granted shows the fair values of remuneration at the grant date.

New compensation system from 2021

A detailed presentation of the new compensation system, the key features of which were adopted by the Supervisory Board of Deutsche Telekom AG on December 16, 2020 and which will be submitted for vote at the shareholders’ meeting on April 1, 2021, is included with the invitation to the 2021 shareholders’ meeting. The planned changes to the compensation system highlighted in this “Compensation report” do not constitute comprehensive information and merely serve to illustrate the areas in which the Supervisory Board has modified the current compensation system.

Compensation of the Supervisory Board

The compensation received by the members of the Supervisory Board is specified under § 13 of the Articles of Incorporation of Deutsche Telekom AG. Under the compensation system applicable for the 2020 financial year, members of the Supervisory Board receive fixed annual compensation of EUR 70,000.00.

The Chairman of the Supervisory Board receives a further EUR 70,000.00 and the Deputy Chairman EUR 35,000.00. Members of the Supervisory Board also receive compensation as follows for activities on Supervisory Board committees:

1. The Chairperson of the Audit Committee receives EUR 80,000.00, ordinary members of the Audit Committee EUR 40,000.00.
2. The Chairperson of the General Committee receives EUR 70,000.00, ordinary members of the General Committee EUR 30,000.00.
3. The Chairperson of the Nomination Committee receives EUR 25,000.00, ordinary members of the Nomination Committee EUR 12,500.00.
4. The Chairperson of any other committee receives EUR 40,000.00, ordinary members of any other committee EUR 25,000.00.

Chairpersonship and membership of the Mediation Committee are not remunerated.

Members of the Supervisory Board receive an attendance fee amounting to EUR 1,000.00 for each meeting of the Supervisory Board or its committees that they have attended. The Company reimburses value-added tax payable on remuneration and expenses.

The total compensation of the members of the Supervisory Board in 2020 amounted to EUR 3,043,250.00 (plus VAT).

The Company has not granted any advances or loans to current or former Supervisory Board members, nor were any other financial obligations to the benefit of this group of people entered into.

The compensation of the individual members of the Supervisory Board for 2020 is as follows:

Share ownership by members of the Board of Management and the Supervisory Board

Members of the Board of Management and Supervisory Board of Deutsche Telekom AG were reported to have purchased and transferred 353,569 shares (2019: 278,574) and sold 90,215 shares (2019: 68.930) under the Share Matching Plan in the course of 2020. Total direct or indirect holdings in the Company or associated financial instruments by members of the Board of Management and the Supervisory Board do not exceed 1 % of the shares issued by the Company.