Performance management system

In order to set and achieve our strategic goals more effectively, we pursue a Group-wide, value-oriented performance management approach. We use a specific set of performance indicators to reliably and transparently measure success. The following tables and information provide an overview of our key financial and non-financial performance indicators.

Profitability

We have incorporated sustainable growth in enterprise value into our medium-term aims and implemented it as a separate key performance indicator (KPI) for the entire Group. Return on capital employed (ROCE) is a key performance indicator at Group level. ROCE is the ratio of operating result after depreciation, amortization and impairment losses plus imputed taxes (net operating profit after taxes, NOPAT) to the average value of the assets tied up in the course of the year (net operating assets, NOA).

Our goal is to achieve or exceed the return targets imposed on us by providers of debt capital and equity on the basis of capital market requirements. We measure return targets using the weighted average cost of capital (WACC).

NOPAT is an earnings indicator derived from the income statement, taking an imputed tax expense into consideration. It does not include cost of capital.

NOA includes all assets that make a direct contribution to revenue generation. These include all elements on the asset side of the consolidated statement of financial position that are essential to the rendering of services. To this is added operating working capital, calculated from trade receivables, inventories, and trade and other payables. The figure for “other provisions” is deducted as no return target exists for this.

Revenue and earnings

Revenue corresponds to the value of our operating activities. Absolute revenue depends on how well we are able to sell our products and services on the market. The development of our revenue is an essential indicator for measuring the Company’s success. New products and services as well as additional sales activities are only successful if they increase revenue. Service revenue is the revenue that is generated by services (i.e., revenue from fixed-network and mobile voice calls – incoming and outgoing calls – as well as data services) plus roaming revenue, monthly basic charges and visitor revenue, as well as revenue generated from the ICT business. Service revenue is an important indicator for the successful implementation of the growth strategy of the Group and essentially comprises high-value – i.e., predictable and/or recurring – revenues from Deutsche Telekom’s core activities.

A reconciliation of net revenue disclosed in the consolidated financial statements, including its breakdown into revenue categories, to the “service revenue” financial performance indicator can be found in the following table:

We measure our operating earnings performance on the basis of adjusted EBITDA AL, i.e., EBITDA adjusted for depreciation of right-of-use assets, for interest expenses on recognized lease liabilities, and for special factors. And EBITDA is calculated as EBIT (profit/loss from operations) before depreciation, amortization and impairment losses on intangible assets, property, plant and equipment, and right-of-use assets. Both metrics indicate the short-term operational performance and the success of individual business areas. Special factors have an impact on the presentation of operations, making it more difficult to compare performance indicators with corresponding figures for prior periods. For this reason, we adjust our performance indicators to provide transparency. Without this adjustment, statements about the future development of earnings are only possible to a limited extent. The further inclusion of unadjusted EBIT/EBITDA AL as performance indicators means special factors are also taken into account. This promotes a holistic view of our expenses. In addition to these absolute indicators, we also use the EBIT and EBITDA AL margins to show how these indicators develop in relation to revenue. This makes it possible to compare the earnings performance of profit-oriented units of different sizes.

For the calculation of EBITDA AL, EBIT, and net profit/loss adjusted for special factors, please refer to the section “Development of business in the Group.”

Adjusted earnings per share is calculated as adjusted net profit divided by the time-weighted number of all ordinary shares outstanding, which is determined by deducting the weighted average number of treasury shares held by Deutsche Telekom AG.

Financial flexibility

Free cash flow AL (before dividend payments and spectrum investment) is calculated as net cash from operating activities less net cash outflows for investments in intangible assets (excluding goodwill) and property, plant and equipment, as well as the principal portion of repayment of lease liabilities – excluding finance leases at T‑Mobile US. Free cash flow AL is a key yardstick for providers of debt capital and equity. It measures the potential for further developing our Company, for generating organic growth, and for the ability to pay dividends and repay debt.

Cash capex (before spectrum investment) relates to cash outflows for investments in intangible assets (excluding goodwill) and property, plant and equipment, which are relevant for cash outflows as a component of free cash flow.

A rating is an assessment or classification of the creditworthiness of debt securities and their issuer according to uniform criteria. The assessment of creditworthiness by ratings agencies affects access to the capital markets and to the international finance markets, and refinancing costs. As part of our finance policy, we have defined a target range for our ratings. We believe that with a rating between A- and BBB (Standard & Poor’s, Fitch) or between A3 and Baa2 (Moody’s) we essentially have the necessary entry to the capital markets to generate the required financing.

We want our customers to be satisfied – or even delighted – as satisfied customers act as multipliers for our Company’s success. As a responsible, service-oriented company, the needs and opinions of our customers are of great importance to us, and we want them to stay with our Company in the long term. For this reason we measure customer retention/satisfaction in our companies using the globally recognized TRI*M method. The results of systematic surveys are expressed by an indicator known as the TRI*M index. To underscore the significance of customer retention/satisfaction for our operating business, the performance of Board of Management members and eligible managers is now also being tracked and incentivized by means of the long-term variable remuneration (Long-Term Incentive Plan). This KPI, as one of four target parameters, has been relevant for Variable II since 2010, as well as for the Long-Term Incentive Plan which was launched in 2015, and in which the Board of Management has participated since 2021. We take the TRI*M indexes calculated for the operating entities (excluding T‑Mobile US) as an approximation of the respective entities’ percentage of total revenue to create an aggregate TRI*M Group value. This allows Board members and eligible managers to benefit from the development of customer retention/satisfaction across the Group.

For further information on customer satisfaction, please refer to the section “Group strategy.”

Our employees want to contribute to the further development of the Company and identify with it. We want to pursue open dialog and productive exchange with our employees. New working models and state-of-the-art communication options, as well as regular employee surveys, help us to accomplish this. The most important feedback instruments across the Group (excluding T‑Mobile US) for assessing employee satisfaction include regular employee surveys and the pulse survey carried out twice a year. In our Company, we measure the employee satisfaction performance indicator using the engagement score – derived from the results of the last employee survey. The questionnaire and the measurement model were reviewed in the context of the 2021 employee survey and were updated based on feedback and the latest research findings. As part of this process, we changed the scale used for the engagement score (formerly the “commitment index”) to 1 to 100, instead of the 1 to 5 we had previously used. In view of the major significance of employee satisfaction for the success of the Company, the performance of Board of Management members and eligible managers is now also being tracked and incentivized by means of the long-term variable remuneration (Long-Term Incentive Plan). Employee feedback, as one of four target parameters, has been relevant for Variable II since 2010, as well as for the Long-Term Incentive Plan which was launched in 2015, and in which the Board of Management has participated since 2021. This allows Board of Management members and eligible managers to benefit from the development of employee satisfaction across the Group.

For further information about employee satisfaction, please refer to the section “Employees.”

Climate change and the destruction of the environment are existential threats to the world. Companies must therefore significantly increase their energy and resource efficiency and restrict their absolute energy consumption. This issue is ever more relevant for providers of information and communications technology (ICT). There is a general expectation on the ICT sector to continue building out the telecommunications network while, at the very least, keeping basic consumption stable in the medium term or even reducing it going forward. For over 20 years, Deutsche Telekom has recorded environmental, social, and governance (ESG) data and performance indicators, which are used first and foremost to calculate our Group-wide ESG KPIs, on the basis of which we measure and manage our CR performance. The non-financial performance indicator energy consumption is a record of the energy consumed in connection with the operation of our actual business model. We constantly monitor progress regarding our medium-term goal to keep energy consumption at least stable, and can make adjustments where necessary. To this end, we invest in measures and programs to conserve energy from all sources. At the same time, this goal plays into how we optimize and innovate for our future infrastructure, and calls for the use of innovative technology components. In living up to our responsibility to conserve resources and protect the climate, we also run various initiatives that aim to reduce the CO₂ emissions generated as part of our business activities. These initiatives include the sustained use of 100 % green electricity, optimizing power consumption in our buildings, and gradually transitioning our Group fleet vehicles from fossil fuels to zero- or low-emission power sources. We measure our progress in this regard on the basis of the CO₂ emissions (Scope 1 and 2) non-financial performance indicator. Given the major significance of these two ESG targets, since 2021 the performance of Board of Management members has also been tracked and incentivized by means of the annual variable remuneration.

For further information on these and other ESG KPIs, please refer to the section “Corporate responsibility and non-financial statement.”

As one of the leading providers of telecommunications and information technology worldwide, the development of our Group – and thus also our financial performance indicators – is closely linked to the development of customer figures. Acquiring and retaining customers are thus essential to the success of our Company. We have different ways of measuring the development of our customer figures according to the business activity in our operating segments: Depending on the activities of each segment, we measure the number of mobile customers and/or the number of broadband customers and fixed-network lines.

In our Systems Solutions operating segment, we use order entry as a non-financial performance indicator. We define and calculate order entry as the total of all amounts resulting from customer orders received in the financial year. Order entry in the form of long-term contracts is of great significance to the Group in order to estimate revenue potential. In other words, order entry is an indicator that provides a high degree of planning reliability.