43 Remuneration based on performance shares and phantom shares (share-based payment)
At the beginning of 2017, the Supervisory Board of Volkswagen AG resolved to adjust the remuneration system of the Board of Management with effect from January 1, 2017. The remuneration system of the Board of Management comprises non-performance-related and performance-related components. The performance-related remuneration consists of a performance-related annual bonus with a one-year assessment period and a long-term incentive (LTI) in the form of a performance share plan with a forward-looking three-year term (share-based payment). In addition, a bonus was converted into phantom preferred shares (phantom shares) in 2016.
The group of beneficiaries of the performance share plan was expanded at the end of 2018 by including members of top management. At the beginning of 2019, they will be granted performance shares for the first time for the 2019-2021 performance period. The way the performance shares allocated to them work is essentially the same as the performance shares allocated to members of the Board of Management.
Each performance period of the performance share plan has a term of three years. At the time the LTI is granted, the annual target amount under the LTI is converted, on the basis of the initial reference price of Volkswagen’s preferred shares, into performance shares of Volkswagen AG, which are allocated to the respective beneficiary as a pure calculation position. After the end of the three-year term of the performance share plan, a cash settlement shall take place. The payment amount corresponds to the number of determined performance shares, multiplied by the closing reference price at the end of the three-year period plus a dividend equivalent for the relevant term. The payment amount under the performance share plan is limited to 200% of the target amount. If 100% of the targets agreed in each case are achieved, the target amount is €1.8 million for each member of the Board of Management and €3.8 million for the Chairman of the Board of Management. A total of 276,382 performance shares were allocated to the members of the Board of Management.
The total target amounts of the members of the top management tier for the 2019-2021 performance period came to €95.2 million on aggregate.
The fair value of the obligation arising from the performance shares amounted to €48.4 million as of December 31, 2018 (previous year: €43.8 million). The compensation cost of €18.2 million (previous year: €43.8 million) was recognized under personnel costs. If the beneficiaries of the performance share plan had left the Company as of December 31, 2018, the obligation (intrinsic value) would have amounted to a total of €33.7 million (previous year: €20.3 million).
At its meeting on April 22, 2016, Volkswagen AG’s Supervisory Board accepted the offer made by the members of the Board of Management to withhold 30% of the variable remuneration for fiscal year 2015 for the Board of Management members active on the date of the resolution and to make its disposal subject to future share price performance by means of phantom shares. The amount withheld led to the creation of 50,703 phantom preferred shares. The fair value of the obligation to current and former members of the Board of Management amounted to €5.0 million as of December 31, 2018 (previous year: €7.0 million). In 2018, Mr. Stadler received a cash payment of the value of 8,633 shares in an amount of €1.0 million as part of the termination of his contract of service. The decrease in the fair value of all phantom shares by €1.0 million (previous year: increase in fair value by €2.0 million) was recognized as income (previous year: expense). If the other members of the Board of Management had also left the Company as of December 31, 2018, the obligation (intrinsic value) would have amounted to a total of €5.3 million (previous year: €7.3 million). For further details on performance shares and phantom shares, please refer to our disclosures in the remuneration report, which is part of the Group management report.