Message from Professor Hasso Plattner, Chairman, SAP Supervisory Board
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Message from Professor Hasso Plattner,
Chairman, SAP Supervisory Board
March 6, 2018
UPDATED: April 23, 2018
Dear Shareholders,
As we have published our Integrated Report 2017, we look back on another year of strong growth and groundbreaking innovation at
SAP. At the same time, we are looking ahead to helping our customers be successful as they become intelligent enterprises. This
success comes with responsibility. In 2017 we addressed feedback from investors regarding the governance of our company. I met
with institutional investors in our New York City office and Walldorf headquarters for in-depth discussions on SAP strategy and
governance – in particular Executive Board compensation. This dialog is important to me and we will continue this. Furthermore,
since it is not possible for me to conduct this dialog with all shareholders, it is important to me to share the actions that we took to
address the governance topics brought up by institutional investors.
We have implemented the following changes to our governance:
– We have included a deductible in the D&O insurance for our Supervisory Board.
– We have reduced the number of our deviations from the German Corporate Governance Code and fully comply with all
recommendations of the German Governance Code as of February 2018 (read document).
– We have published a comprehensive Profile of Skills and Expertise as well as the meeting attendance of our Supervisory Board
members (read documents).
– Regarding executive board compensation, we have:
▪ No longer included a discretionary component for the STI from 2018 onwards.
▪ Reduced the maximum target achievement from 181.3% to 140% for the STI from 2018 onwards.
▪ Set severance caps in compliance with the German Corporate Governance Code.
▪ Added a contractual clawback clause.
Further, we have taken many actions to increase transparency around compensation as well as simplify the Compensation Report
(read document):
– Restructured and rewrote the Compensation Report to make the compensation system more understandable
– Explicitly stated caps and explanation of mechanisms
– Disclosed the vertical pay ratio
– Published historic target achievements
– Published 2017 target achievement for each Executive Board compensation component (short-term incentive, long-term
incentive)
The Supervisory Board is committed to the success of SAP for the shared benefit of all stakeholders. We believe we have the right
structures in place to ensure SAP’s sustainable success, considering the unique position of our company – a European company
listed on the German DAX, as well as a software company with most competitors based in the United States. A key takeaway from
my dialog with investors is that it is crucial to explain our Executive Board compensation in a clear way. In addition, please find some
further questions and answers that also reflect those that arose in the discussions with institutional investors.
Finally, I fully understand the importance of an independent Supervisory Board with shareholder representatives who have the skills
and experiences to represent shareholder interests. We have a majority independent Board and have proposed four nominees to
this year’s Annual General Meeting of Shareholders (AGM) for election to the Supervisory Board. Changes on the Supervisory Board
highlight the importance of good succession planning to allow diverse opinions and backgrounds in our Board. With the candidates
proposed for election at the AGM 2018, I am convinced we have identified nominees with the ideal mix of company and sector
knowledge, strategic and governance experience as well as independence of mind and personal qualities in line with our published
Profile of Skills and Expertise:
1• Aicha Evans – Appointed by court last year, her industry and strategy insight has already been valuable to the Board.
• Dr Friederike Rotsch – As Prof Haarmann leaves the Supervisory Board, Dr Rotsch brings an outstanding background in
corporate compliance and law.
• Diane Greene – With SAP’s focus on the cloud business, Diane Greene brings significant industry and strategy expertise to
the Board.
• Gerhard Oswald – As a former Executive Board member of SAP, Gerhard Oswald brings deep knowledge of the internal
operations of the company as well as extensive customer knowledge.
Developing and maintaining a best-in-class governance system for SAP is a continuous process. I would like to take this opportunity
to thank all shareholders who have shared their opinions and analysis with us and I am looking forward to continued dialog with our
stakeholders.
For the Supervisory Board
Professor Hasso Plattner
(Chairman)
2SAP Executive Board Compensation
Frequently Asked Questions
How is compensation of the Executive against benchmarks to ensure that the compensation system is
within norms. The SAP Supervisory Board believes the
Board structured?
Executive Board compensation system is the right one to
The SAP Supervisory Board believes the Executive Board support the growth of value for the Company over the long term.
compensation system is the right one to support the growth of
value for the Company over the long term. It consists of non- Why are there two very different amounts
performance-related pay, as well as performance-related pay.
given for the Executive Board’s
The performance-related pay is variable and makes up a
significantly larger part of the target compensation to compensation?
appropriately motivate and reward the Executive Board for We report compensation as recommended by the German
ensuring SAP’s sustained success. Corporate Governance Code, which requires two different views:
Non-performance-related pay consists of: – Benefits Granted reflects the amount of compensation
awarded for one year in 2017. This compensation is
– Fixed salary listed at fair market value and is subject to conditions
– Fringe benefits of the specific compensation plans. For example, Bill
McDermott was granted €7.7 million for the LTI 2016
Performance-related pay consists of:
plan. This would not be paid out until four years from
– Short-term incentive (one year in length): For 2017, now, subject to the conditions of the plan, which are
this plan consisted of 75% financial targets and 25% explained in detail in the Compensation Report.
discretionary component. The discretionary – Benefits Received reflects the amount of compensation
component was based on a number of factors, disbursed for the year under review. This includes
including performance of certain strategic projects and payments of long-term compensation awarded in
non-financial indicators. Potential total payout ranged previous years but paid out in 2017. The outstanding
from 0% – 181.3%. amounts of long-term incentives awarded to Executive
For 2018, this plan consists of three financial targets Board members is made transparent in the
only, with total payout ranging from 0% –140%. Compensation Report.
– Long-term incentive: This plan grants share units
based on prior-year operating profit. After 4 years, the Why has Bill McDermott’s paid
share units vest. The share units are based on the SAP compensation jumped to €22 million?
share price. 40% of the share units (RSUs) are based
Bill McDermott’s “benefits received” increased to €21.79 million
on a board member’s remaining with the company and
in 2017. The increase in disbursement results from exercising of
are paid out after the period. 60% of the share units
restricted share units from the RSU Milestone Plan 2015 and
(PSUs) are based on performance of the share against
virtual share options from the SAP SOP 2010. The programs
a peer group. For the performance-based share units
intend to reward long-term growth of the company and its share
(PSUs), there is no payout if the performance
price. As SAP has seen great success over the past years, the
difference between the Peer Group Index and the SAP
value of these awards has increased. The virtual share options
share is under 50%. Total payout is capped at 150%
awarded in 2010 were granted at €40.80 and 2011 at €48.33
You can find a detailed explanation in the SAP Compensation and all were exercised at €85.23. This increase in share price
Report. reflects the growth of market capitalization from €40.5 billion at
the beginning of 2010 to €114.8 billion in 2017.
Why is the compensation so complex?
Bill McDermott’s compensation (benefits
The compensation structure takes into consideration both the
typical structure of German executive compensation systems as granted) is lower than last year, why?
well as those more typical of companies in the software industry, SAP has very ambitious goals and sets internal goals to motivate
which are based mostly in the United States. The SAP and reward management for achieving or beating these goals.
Supervisory Board has evaluated the compensation system While it is important that we issue challenging yet prudent
3guidance to the market, we feel it is just as important to comparing Executive Board pay with the pay of executives and
challenge our management with even higher targets. Further the employees. The performance-based elements each correspond
variable components of the CEO pay are proportionally more to target achievements of 100% of all KPIs. The SAP
than the Board Average, meaning the CEO salary is impacted Supervisory Board reviews, assesses, and if appropriate, revises
greater by changes in variable compensation. The these compensation targets in its first meeting of each fiscal
compensation is lower due to the following effects: exchange year. The SAP Supervisory Board believes this approach
rate fluctuation, target achievement for the STI and LTI grant for ensures the compensation system is appropriate.
the 2017 tranche.
What was target achievement in 2017?
Why is the maximum payout for the CEO STI target achievement was: 88.2%
€37 million?
LTI simulated payout of the 2017 tranche based on SAP share
When considering the maximum payout for 2017, which at first
price on December 31, 2017: 107.76%
glance may look like a high number, one must also consider
what conditions would have to be met for this amount to actually How was the discretionary achievement
be paid out.
component of the STI decided?
STI: The SAP Supervisory Board determined the discretionary
– Target achievement of all financial KPIs is 175% element of the 2017 STI mainly based on market data, the
– Target achievement of discretionary KPI is 200% results of an annual employee survey, and customer satisfaction
surveys, and compares it with the corresponding prior-year
LTI: values. The target achievement of the discretionary component
– Grant amount of LTI tranche set at maximum 120% of the STI was 88% in 2017.
– SAP’s share price outperforms the Peer Group Index
The 2018 STI no longer includes discretionary component.
by at least 25 percentage points
– SAP share price has at least tripled compared to grant
Which non-financial KPIs are included in
price
the STI in 2018?
For these conditions to be met, SAP’s market capitalization In 2017, the discretionary component of the STI was based on
would have to increase by at least €200 billion from 2017 to several factors, some of which were non-financial such as
2021. In the event this were to happen, shareholders would also customer loyalty and employee engagement. As the
participate in the strong positive performance. discretionary component is not included in the STI in 2018, non-
financial indicators are not directly included.
Why doesn’t SAP have a maximum
compensation amount as other companies SAP reports holistically on both non-financial and financial
indicators. We have also shown the impact that some non-
have? financial indicators have on our operating profit. Therefore, we
The compensation does have a maximum cap. The conditions are convinced that performance of the non-financial indicators
for the caps are found in the STI and LTI plans, which each have directly impacts the financial performance on which the Board is
their own individual caps. The STI is capped at 181.3% for 2017 measured in the STI.
and at 140% for 2018. The maximum possible payout amount
for the LTI tranche is capped at 468% of the contractual target Further, non-financial indicators are regularly included in the
amount. For a description of the conditions that would trigger reports to and discussed with the SAP Supervisory Board.
the cap, please refer to previous question.
Why don’t you publish the target
How are target amounts set? achievement curve?
The Supervisory Board sets the individual total target SAP is committed to transparency. We have increased the level
compensation for each Executive Board member, comprised of of transparency in the Compensation Report compared to last
the fixed compensation element and the two performance- year. At the same time, disclosing certain metrics could put us
based elements. The target compensation is benchmarked at a competitive disadvantage. In these cases, we do not
based on SAP’s global strategy, market position, business disclose the information. Nonetheless, we feel we now provide a
performance and prospects of the economy, and the clear insight into the compensation structure, awards, and
compensation paid at comparable companies, both in Germany reasoning behind it.
and globally. The SAP Supervisory Board also considers the
compensation systems applicable for the rest of the Company,
4What is the Peer Group Index? However, in all cases where the SVB has discretion there are
clear criteria defined that guide its exercise.
As part of the long-term incentive, the SAP’s share price
performance is measured by comparing the grant price of the In 2017, 5 key factors were considered when setting the
PSUs against the payout price. We calculate the difference discretionary element of the STI plan. This helped ensure the
between SAP’s share price performance and the Peer Group SAP Supervisory Board its evaluation was appropriate. In 2017,
Index performance. the discretionary element of the STI plan corresponds to only 5-
8% of total compensation, depending on payout. The STI no
The Peer Group Index currently includes the following major
longer includes a discretionary component in 2018.
international competitors of SAP: Microsoft, Oracle, IBM,
Salesforce, Adobe, VMWare, Symantec, Workday, ServiceNow, The award of PSUs and RSUs is made by the SAP Supervisory
and Tableau. When measuring performance, we feel it is Board, using operating profit target achievement of prior year as
important to compare SAP with its competitors. The SVB has a guide for the decision. Here, the guide helps ensure that the
defined this group based on internal and external decision regarding the award is appropriate.
recommendations and if necessary adjusted the group, for
example in case of a competitor’s delisting. Why are the fringe benefits for Bill
The Peer Group Index is calculated as a price index based on McDermott so high?
weighted market capitalization which is capped at 15%. The fringe benefits of Bill McDermott mainly consist of tax gross
Consequently, the weight of smaller more volatile competitors is ups according to local conditions, discrete payments arising
increased resulting in a highly ambitious index. The index is through application of the fixed currency exchange-rate clause
calculated daily by Deutsche Börse Group and can be tracked for 2015 and expenses for maintenance of two households.
under ISIN DE000A2BLEB9. Fringe benefits for the Executive Board in general mainly
comprise additional benefits such as insurance contributions,
Why is the LTI paid out when the Peer benefits in kind, expenses for maintenance of two households,
Group Index outperforms the SAP share use of aircraft, tax gross-ups according to local conditions, and
discrete payments arising through application of the fixed
price?
currency exchange-rate clause due to payments in previous
The Peer Group Index is a highly ambitious index. The LTI is years.
structured that the Executive Board is strongly motivated to
produce long-term increase in share price above the Peer Group What does the Vertical Pay Ratio tell me?
Index. Given the ambitious nature of the Peer Group Index, the
Isn’t the ratio high?
Executive Board does receive a reduced payout if share price
The vertical pay ratio compares the total benefits granted to
performance is positive but performance against the index is
Executive Board members, total benefits granted to the
between (50% and 100%).
Executives as well as all employees collectively who were
Why are there no shareholding employed on December 31, 2017. In order to ensure
comparability for total benefits granted, only fixed
requirements?
compensation, one-year and multiyear variable compensation
There are shareholding requirements. As part of the STI, are considered. The Executives comprise the first and second
Executive Board members must invest 5% of their payment in management levels below the Executive Board. The vertical pay
SAP shares and hold these shares for 3 years. Further the RSUs ration for SAP lies just above the median in Germany.
and PSUs, which are directly related to the SAP share price,
must be held for a 4-year vesting period, motivating the
Executive Board members to have a long-term focus.
Why are there so many opportunities for
the SVB to exercise discretion?
Per German law, the SAP Supervisory Board is entitled to
retroactively adjust the STI payout and the LTI Plan grant
amount following extraordinary and unforeseeable events, at its
discretion and in the interest of the company. The SAP
Supervisory Board feels that appropriate compensation is
important in light of extraordinary events, and therefore
reserves the right to exercise this legal option when appropriate.
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