Variable remuneration components

Variable Board of Management remuneration is to set the right incentives to achieve the operational and strategic targets of the Company, to link the interests of shareholders and members of the Board of Management, and also to support the sustainability drive of Deutsche Telekom in the long-term without inducing them to take inappropriate risks. The variable remuneration components reflect both the collective performance of the members of the Board of Management as well as the personal performance of individual members, and the economic development of Deutsche Telekom. When defining target-relevant performance parameters, the Supervisory Board ensured that they are in line with Deutsche Telekom’s strategy. The financial target parameters are derived from corporate planning and measure the fulfillment of budget values. The Supervisory Board of Deutsche Telekom AG will retrospectively disclose the concrete ambition level of the performance parameters used for a variable remuneration to be paid out in the remuneration report.

Short-Term Incentive (STI)

Main features

The STI is intended to reflect the short-term performance of the Board of Management members in the current financial year. It is comprised of three Group financial targets and three segment financial targets with a one-year assessment period, which are added together. The level of target achievement for the STI target is also influenced by an ESG & Strategy multiplier whose values may vary between 0.8 and 1.2. All values of the multiplier of less than 1.0 have the effect of a penalty (malus) and all values greater than 1.0 have the effect of an additional reward (bonus) for Board of Management members. The multiplier consists of two ESG targets and personal strategic targets for each Board of Management member, which also have an assessment period of one year. All financial and non-financial performance indicators are derived from Deutsche Telekom’s corporate strategy.

Combining Group- and segment-related targets in the STI aims to reinforce cross-department collaboration within the Board of Management team and also align a significant percentage of the annual variable remuneration of members of the Board of Management with responsibility for the operating business towards the development of the respective operating segment. In addition, the multiplier serves to ensure that the members of the Board of Management also align their actions with the Group’s non-financial targets.

Where the Supervisory Board determines that different target parameters than those set out in the STI, which are reported on as part of the financial and/or sustainability reporting and also contribute to the Company’s strategy, are more suitable for incentivizing the members of the Board of Management, these can be used alternatively or in addition to remunerate the Board of Management members; the same applies to the composition of the ESG & Strategy multiplier.

When defining the ambition level of the financial target parameters, the Supervisory Board uses the medium-term planning set up for Deutsche Telekom AG. Achieving the budgeted value of the planning leads to a target achievement level of 100 %. All STI target parameters can each have a target achievement level between 0 % and 166.67 %. Target achievement levels for individual components of the STI that exceed 166.67 % are not taken into account and cannot be used to offset any targets with a lower target achievement level. Maximum target achievement of the STI after the multiplier has been applied is 200 %.

When defining the target achievement levels of the Group financial targets and segment financial targets as well as the ESG targets, the Supervisory Board may within reasonable limits adjust the target parameters for significant and at the same time extraordinary effects that had not been taken into account at all or had been considered differently in the corporate planning.

Target parameters

Group financial targets

Service revenues

Service revenues are the revenues that are generated by customers from services (i.e., revenues from fixed and mobile network voice services – incoming and outgoing calls – as well as data services) plus roaming revenues, monthly basic charges and visitor revenues, as well as revenues generated from ICT business. The service revenues account for 30 % of the total target achievement of the Group financial targets. Incentivizing service revenues ensures a focus on valuable revenue components. This avoids giving the Board of Management the wrong incentive to maximize revenues in the short term through the low-margin terminal equipment business.

EBITDA AL

EBITDA AL (after leases), which also accounts for 30 % of the total target achievement, is the most important KPI for measuring the Company’s operational performance and reflects the result of the growth strategy as well as savings for promoting investment. EBITDA AL is calculated by adjusting EBITDA (earnings before interest, taxes, depreciation and amortization) for depreciation of the right-of-use assets and for interest expenses on recognized lease liabilities. EBITDA AL plays a particular role in capital market communication and, for this reason, is a key ratio when it comes to the annual capital market guidance (for improved comparability with other telecommunications companies, EBITDA AL is reported adjusted in this context).

Free cash flow AL

Free cash flow AL (FCF AL) is directly linked to the finance strategy of the Company (ability to pay a dividend and the ability to reduce liabilities) and has a weighting of 40 % of the total target achievement of the Group financial targets. When determining FCF AL, the free cash flow (cash generated from operations minus payments for investments) is adjusted for the repayment of lease liabilities. FCF AL also plays a particular role in capital market communication and, for this reason, is a key metric when it comes to the annual capital market guidance.

To improve comparability of the target parameters with EBITDA and free cash flow as reported in the financial statements of T‑Mobile US in accordance with U.S. GAAP, which continues to differentiate between operating and finance leases at the lessee, expenses and repayments for finance leases at T‑Mobile US are not taken into account when determining EBITDA AL and free cash flow AL.

Segment financial targets

Service revenues and EBITDA AL

The definitions described above apply to both target parameters. The members of the Board of Management in the Germany, Europe, and T‑Systems segments are given the KPIs broken down for the segments as defined in the corporate planning as their set of targets. In doing so, the Supervisory Board wishes to incentivize the operational responsibility for the respective segment by linking it to a significant percentage of the annual variable remuneration. The segment targets for the Chair of the Board of Management, the Chief Financial Officer, and the Board member responsible for Group Development & USA are the Group targets including the United States for both target parameters; the non-operational members of the Board of Management responsible for Human Resources & Legal Affairs and Technology & Innovation are assigned the respective Group targets excluding the United States. The service revenues and EBITDA AL each account for one-third of the segment financial targets.

OPEX ratio (adjusted)

The target parameter “OPEX ratio” will provide incentive to reduce the ratio of external indirect costs (excluding T‑Mobile US) to service revenues (excluding T‑Mobile US), as profitability can also be improved through a higher net margin. This will ensure a certain degree of flexibility with regard to operational decisions, allowing, for example, an increase in absolute costs with a higher-than-average increase in service revenues and thus in the result. Savings made in terms of external indirect costs and a higher net margin contribute to the improvement of the operating performance that is reflected in EBITDA AL and FCF AL and, consequently, have a positive impact on the valuation of the Company on the capital market. In terms of the external adjusted indirect costs AL, adjusted indirect costs are also calculated, in a similar manner to the determination of EBITDA AL, by adjusting for depreciation of right-of-use assets from lease arrangements and for interest expenses on recognized lease liabilities. The OPEX ratio accounts for a third of the segment financial targets.

ESG & Strategy multiplier

Customer retention/satisfaction (TRI*M)

A high level of customer retention/satisfaction is extremely important for Deutsche Telekom’s business success. At Deutsche Telekom, customer retention/satisfaction is determined for the Germany, Europe, and T‑Systems business units with the help of the globally recognized TRI*M method. The results of systematic surveys conducted by an external service provider are expressed by an indicator that combines questions on customer retention/satisfaction, the likelihood of recommendation to others, the further willingness of use, and the competitive advantage. The TRI*M indexes calculated for all the operational entities involved are aggregated as an approximation of the respective entities’ percentage of total revenue to create a TRI*M Group value. When preparing the ambition level, the Supervisory Board takes the specific competitive situation of the individual entity involved into consideration. Customer retention/satisfaction has a weighting of one-third in the ESG & Strategy multiplier.

Employee satisfaction

As the Board of Management relies heavily on the employees to implement Deutsche Telekom’s strategy, employee satisfaction is also incentivized as part of the Board of Management remuneration and has a weighting of one-third in the ESG & Strategy multiplier. The most important feedback instruments across the Group (excluding T‑Mobile US) for assessing employee satisfaction include the employee surveys carried out at least once a year. From the regularly used set of questions, the Supervisory Board selects some of the questions that it believes are of particular significance when it comes to evaluating employee satisfaction. For these questions, the Supervisory Board analyzes the development of the response behavior from the past and defines target levels that it believes should be achieved in future survey results. When setting the ambition level, the Supervisory Board calculates the average of the relevant questions, including all questions with the same weighting.

Personal strategic targets

Before the start of the financial year, personal strategic targets derived from the long-term corporate strategy are agreed with each Board of Management member. Deutsche Telekom’s strategic priorities for the next three years were most recently presented at the 2024 Capital Markets Day. The personal strategic targets have a weighting of one-third in the ESG & Strategy multiplier. By agreeing on personal strategic targets for the individual Board of Management members, the Supervisory Board aims to incentivize the strategic priorities of Board of Management members on an annual basis. After the end of the financial year, the performance of the Board of Management members with regard to the achievement of the personal strategic targets is evaluated and assessed by the Supervisory Board. On account of their strategic importance and relevance to competition, the specific personal strategic targets are published retrospectively.

Sample personal strategic targets may be structured as follows:

• Improvement of the network experience for customers through fiber optic and 5G build-out
• Growth through innovative products and services
• Increase in productivity and efficiency through automation and modernization of processes
• Development and operation of global platforms as well as products in the cloud
• Increase in the percentage of digital experts in the Group and use of AI
• Further development of the brand strategy and corporate culture

Share Matching Plan (SMP)

The Supervisory Board’s intention with the Share Matching Plan is to ensure that the Board of Management members work to increase Deutsche Telekom’s enterprise value also in the long term in the interest of the shareholders. To be entitled to participate in the Share Matching Plan, members of the Board of Management are obligated to invest a sum totaling at least one-third of the annual gross STI as determined by the Supervisory Board in Deutsche Telekom AG shares every year. Members of the Board of Management have the option of extending their personal investment to a maximum of 50 % of the gross STI. The shares are subject to a four-year lock-up period starting from the date of purchase. Deutsche Telekom AG will purchase the shares in a block. Starting in 2025, the block purchase will generally be made within one calendar week of publication of the financial results for the first quarter. Each Board of Management member must submit instructions for the purchase of shares on the working day following publication of the financial results for the first quarter. With regard to the share purchase instructions and when executing the block purchase, the Board of Management members and the Company have to observe any restrictions imposed by capital market law or the Company’s own regulations. Where obstacles exist, the instruction or the block purchase of the shares will be carried out immediately as soon as the obstacles cease to exist. Should such obstacles arise, the build-up period for share portfolios resulting from the Share Ownership Guidelines may be extended.

Depending on TSR development, additional Deutsche Telekom AG shares will be transferred free of charge to the Board member’s custody account at the administering bank after the four-year period. The unweighted averages of the closing prices of the Deutsche Telekom share in the XETRA trading system of Deutsche Börse during the last 30 trading days before the start or end of the four-year period and any dividend payouts during this period will be used to calculate the TSR.

If TSR development over the reference period is between 0 % and below 10 %, the Board of Management member will receive shares free of charge equivalent to the number of shares in the personal investment. If the TSR increases by 10 % or more in the reference period, the matching ratio will be 1:1.1. Each further increase in the TSR by 10 percentage points up to an increase in the TSR by at least 50 % in the reference period will increase the number of shares transferred free of charge by 10 % in each case. The maximum number of free shares is 1.5 times the number of shares in the personal investment. If TSR development is negative in the four-year reference period, the number of additional shares transferred free of charge will decrease. Up to a decrease in the TSR of below 10 %, the Board of Management members will receive shares free of charge in the amount of 90 % of the number of shares in the personal investment. A decrease in the TSR in the reference period of between 10 % and below 20 % will reduce the matching ratio to 80 % of the number of shares in the personal investment. In the event of a TSR decrease of 20 % or more in the four-year reference period, the members of the Board of Management will not receive any additional shares free of charge.

The transfer of the additional free shares results in a non-cash benefit for the member of the Board of Management and is taxed as income in the payroll run which follows the transfer of the shares. When the matching shares are transferred, the share price development in relation to the equivalent value is capped at 200 % of the relevant gross STI paid out for the year of the personal investment. This ensures that, when the matching shares are transferred, the equivalent value of these shares does not exceed 200 % of the relevant gross STI. In that case, the matching ratio would decrease to the detriment of the member of the Board of Management as a result of the cap.

Long-Term Incentive (LTI)

Main features

Potential payments from the LTI are significantly determined by the strategic performance parameters derived from the long-term corporate planning in order to ensure that members of the Board of Management act in the interests of the Company’s long-term successful development. Furthermore, payments from the LTI depend on Deutsche Telekom AG’s share price development over the four-year term of the plan. This ensures that the interests of the Board of Management are in line with the interests of the shareholders. As is the case with the Share Matching Plan, a further aim of the LTI is to help retain members of the Board of Management at the Company.

The LTI consists of two Group financial targets, which are added together, plus a further multiplier consisting of two ESG targets. Both the financial and the non-financial target parameters are derived from the corporate strategy. The ESG multiplier may have values between 0.8 and 1.2. All values of the multiplier of less than 1.0 have the effect of a penalty (malus) and all values greater than 1.0 have the effect of an additional reward (bonus) for Board of Management members.

Prior to the start of the plan, the financial performance parameters utilized are assigned an appropriate ambition level by the Supervisory Board for the entire four-year term of the plan. With regard to the non-financial target parameters, the Supervisory Board has the option of setting an ambition level for each individual year of the plan to account for any remaining planning uncertainties in this context. Nevertheless, the Supervisory Board also aims to define the non-financial performance parameters for the entire four-year term of the plan in the future, prior to the start of the plan.

Where the Supervisory Board determines that different target parameters than those set out in the LTI, which are reported on as part of the financial and/or sustainability reporting and also contribute to the Company’s strategy, are more suitable for incentivizing the members of the Board of Management, these can be used alternatively or in addition to remunerate the Board of Management members; the same applies to the composition of the ESG multiplier.

When defining the ambition level of the target parameters, the Supervisory Board makes use of the medium-term planning set up for Deutsche Telekom. Each performance parameter can have a target achievement level of between 0 % and 150 %. The impact of the share price development on the amount of the LTI has been capped by the Supervisory Board such that the maximum payout volume of the LTI cannot exceed 200 % of the grant value. The LTI is not paid out if the TSR decreases by 20 % or more in the four-year term of the plan.

When deriving the target achievement levels of the Group financial targets and ESG targets of the LTI, the Supervisory Board may within reasonable limits adjust the target parameters for significant and at the same time extraordinary effects that had not been taken into account at all or had been considered differently in the corporate planning.

The LTI that is oriented towards the achievement of long-term targets will be issued annually in tranches over a four-year term. The members of the Board of Management participate in the respective tranche to the amount of the grant value as stated in the contract, which is converted into phantom shares on the basis of a 100 % achievement level at the start of the term of the plan. When converting, the unweighted averages of the closing prices of the Deutsche Telekom share in the XETRA trading system of Deutsche Börse during the last 30 trading days before the start or end of the plan are used.

The number of phantom shares increases over the term of the LTI as a result of the dividends actually paid out by Deutsche Telekom AG during the term of the plan. Each dividend payout is converted into phantom shares on the day after the Shareholders’ Meeting and increases the number of phantom shares.

At the end of the term of the plan, the resulting final number of phantom shares is calculated following the final determination of the target achievement of the strategic performance parameters in the final plan year by the Supervisory Board. The conversion of the shares into a monetary amount is carried out in a similar way to the conversion at the start of the plan. Following the first Shareholders’ Meeting after the end of the term of the plan, the LTI is paid out together with the last dividend payout to the members of the Board of Management.

Target parameters

Group financial targets

Return on capital employed (ROCE)

A key financial performance indicator at the Deutsche Telekom Group is the return on capital employed (ROCE). ROCE is the ratio of operating result after depreciation, amortization and impairment losses plus imputed taxes (net operating profit after taxes) to the average value of the assets tied up in the course of the year (net operating assets). The goal of ROCE is to achieve or exceed the return targets imposed by providers of debt capital and equity on the basis of capital market requirements. Return targets are measured using the weighted average cost of capital (WACC). The indicator measures how efficiently revenue is generated with the capital employed. ROCE accounts for 50 % of the total target achievement of the Group financial targets in the LTI.

Earnings per share (EPS) (adjusted)

A further significant performance indicator at Deutsche Telekom is adjusted earnings per share (EPS (adjusted)), which also accounts for 50 % of the total target achievement of the Group financial targets for the LTI. Earnings per share is calculated as adjusted net profit divided by the adjusted, weighted average number of ordinary shares outstanding. As net profit takes all income and expenses as well as the minority non-controlling interests from the current period into consideration, earnings per share is a very good gauge to determine the dividend amount.

ESG multiplier

Energy consumption

Deutsche Telekom is also aiming to increasingly decouple its growth from the use of resources. Despite an extensive build-out of the telecommunications networks in the coming years, Deutsche Telekom is aiming to keep its absolute energy consumption stable (2027 compared with 2023, excluding T‑Mobile US). To achieve this, the energy efficiency must be significantly increased in light of a significant increase in data volume. These developments are mapped in the corporate planning from which the target parameters as well as the ambition level are derived. The aim of the energy consumption target is to incentivize the members of the Board of Management to behave in a way that will ensure that energy consumption, which is harmful to the environment, is kept at least stable. This target is supported by programs and investments in energy-saving measures for all energy sources, optimization of infrastructure, and the use of innovative technology components. The “energy consumption” target has a 50 % share in the ESG multiplier. The ambition level and target achievement are calculated excluding T‑Mobile US. This is due mainly to the fact that the intensive build-out of the 5G network in the United States, particularly in rural areas, leads to increased power consumption. To be able to account for the country-specific situation in this key market, the decision was made not to include T‑Mobile US in the setting of the ambition level for the time being. This step aims to ensure that the right incentives are set for the Board of Management toward the sustainable development of the business, while at the same time safeguarding the stability of network operations.

CO₂ emissions

The CO₂ reduction (Scope 1 and 2) has a 50 % weighting in the ESG multiplier. The target parameter is to ensure sustained use of 100 % green electricity as well as, in particular, optimized power consumption in our buildings, and the gradually transitioning of the Group fleet vehicles from fossil fuels to zero- or low-emission engine types. As in the case of the “energy consumption” target, the target parameters and the ambition level are derived from the corporate planning. The Supervisory Board decided to also set the ambition level and the target achievement for the “CO₂ emissions” target excluding T‑Mobile US because the Scope 1 emissions of T‑Mobile US are subject to fluctuations due to unforeseeable natural disasters and the resulting temporary use of diesel generators, among other things, to restore and guarantee damaged network infrastructure.