The Remuneration Report presents the principles, structure and amount of Management Board and Supervisory Board remuneration. The report complies with the legal provisions and gives consideration to the recommendations of the German Corporate Governance Code.
Management Board Remuneration
The Management Board’s remuneration system is intended to provide an incentive for performance-oriented and sustainable corporate management. Therefore, the aggregate remuneration of the Management Board members consists of different components: fixed components, an annual cash bonus based on the achievement of corporate targets (short-term incentive – STI), a variable compensation component with a long-term incentive (long-term incentive – LTI) and other remuneration components. Variable remuneration components with long-term incentive consist of performance share plans from the current and prior years, a convertible bond program from the year 2013, as well as a stock option plan from the current year. Management Board members also receive fringe benefits in the form of non-cash benefits, mainly the use of a company car and the payment of insurance premiums. All remuneration packages are reviewed annually for their scope and appropriateness by the Remuneration and Nomination Committee and are compared to the results of an annual Management Board remuneration analysis. The amount of compensation paid to Management Board members highly depends on their individual areas of responsibility, the Company’s economic situation and success and the Company’s business prospects versus its competition. All decisions concerning adjustments to remuneration packages are made by the entire Supervisory Board. The Management Board’s remuneration and index-linked pension scheme were last adjusted in July 2017. The remuneration of the new Management Board member Dr. Markus Enzelberger was adjusted as of November 1, 2017.
In the 2017 financial year, total benefits of € 6,453,649 (2016: € 4,383,658) were granted to the Management Board in accordance with the provisions of the German Corporate Governance Code. Of the total remuneration granted for the year 2017, € 3,387,433 was cash compensation and € 3,066,216, or 48 %, resulted from personnel expenses for share-based compensation (remuneration with long-term incentive: performance share plan, stock option plan and convertible bond plan). In 2017, share-based compensation included a one-time incentive granted to Dr. Malte Peters and Dr. Markus Enzelberger for joining the Management Board of MorphoSys AG, which consisted of shares of treasury stock. 82 Group Management Report Statement on Corporate Governance and Corporate Governance Report The total amount of benefits paid to the Management Board in the 2017 financial year amounted to € 10,593,126 (2016: € 5,070,618). In addition to cash compensation payments of € 2,963,485 (2016: € 2,672,333), this amount includes primarily the relevant value under German tax law of the transfer of treasury stock from a performance-based share plan (sharebased compensation), which amounted to € 1,986,671 (2016: € 2,398,285). This figure includes € 899,962 under German tax law for treasury shares granted to Dr. Malte Peters and Dr. Markus Enzelberger as a one-time incentive for joining the Management Board of MorphoSys AG. Because convertible bonds were exercised in 2017, the total amount for 2017 also included proceeds from the exercise of convertible bonds in the amount of € 4,743,008. As of April 3, 2017, a total of 36,729 treasury shares from the 2013 performance-based share plan for the Management Board vested because the vesting period for this LTI program had expired. The beneficiaries had the option to receive the shares at a time of their choosing within a six-month period ending on October 2, 2017. All transactions in MorphoSys shares executed by members of the Management Board were reported as required by law and published in the Corporate Governance Report as well as on the Company’s website.
Fixed Remunertation and Fringe Benefits
The non-performance-related remuneration of the Management Board consists of fixed remuneration and additional benefits, which primarily include the use of company cars, as well as subsidies for health, welfare and disability insurance. The Chief Financial Officer, Mr. Jens Holstein, receives an additional expense allowance for maintaining two households.
The Company also provides payments to Management Board members equal to a maximum of 10 % of the member’s fixed annual salary plus any taxes payable. This compensation is intended for the members’ individual retirement plans. Additionally, all Management Board members participate in a pension plan in the form of a provident fund, which was introduced in cooperation with Allianz Pensions-Management e.V. The pension obligations of the provident fund will be met by Allianz Pensions-Management e.V. These pension obligations are not pension benefit plans.
Performance-Based Compensation (Short-Term Incentive - STI)
Members of the Management Board each receive performance based compensation in the form of an annual bonus payment of up to 70 % of the gross base salary when 100 % of the member’s targets have been achieved. These bonus payments are dependent on the achievement of corporate targets specified by the Supervisory Board at the start of each financial year. Targets are typically based on, amongst other objectives, the Company’s performance and the progress of the partnered pipeline and the Company’s proprietary pipeline. At the start of the year, the Supervisory Board assesses the degree to which corporate goals were achieved in the prior year and uses this information to determine the bonus. The bonus may not exceed 125 % of the target amount (corresponding to 87.5 % of the gross base salary). Performance-based compensation can be reduced to zero if goals are not achieved. The bonus for the 2017 financial year will be paid in February 2018. Contrary to the usual bonus scheme for Management Board members, in the period from April 15 to October 31, 2017, Dr. Markus Enzelberger, as an interim Board member, agreed to an entitlement to a bonus payment of up to 52 % of his gross base salary with 100 % target achievement (maximum 65 % with 125 % target achievement). During this period, Dr. Marlies Sproll (on leave) was not entitled to a bonus payment.
Long-Term incentive Compensation (Long-Term Incentive - LTI)
In 2011, MorphoSys introduced a long-term incentive compensation plan (Performance Share Plan) for the Management Board and members of the Senior Management Group. The Performance Share Plan is based on the allocation of shares linked to the achievement of predefined performance targets over a four-year period.
Each year, the Supervisory Board determines the number of shares to be allocated to the Management Board. On April 1, 2017, the Management Board members (including Dr. Markus Enzelberger as an interim Management Board member from April 15 to October 31) were granted a total of 15,675 shares. Each Management Board member received an entitlement benefit for a specific number of shares. For more information, please refer to Item 7.3.5 in the Notes to the Consolidated Financial Statements and the explanation on stock repurchases in the Corporate Governance Report.
Long-term performance targets are set by the Supervisory Board at the time the shares are allocated for a specific year. The defined targets for the 2017 Performance Share Plan were the absolute performance of MorphoSys shares, as well as the relative performance of MorphoSys shares relative to a benchmark index comprising of equal parts of the NASDAQ Biotechnology Index and the TecDAX Index. The absolute and relative performance of the share price for each of the four assessment periods (one year each) is determined by comparing the average share price of the last 30 trading days prior to the beginning of the relevant assessment period (April 1) with the average share price of the last 30 trading days prior to the end of the evaluation period. The participants in the Performance Share Plan receive an annual share entitlement, which will be evaluated on the basis of the absolute and relative performance of the share price, that is, a comparison of the performance of MorphoSys shares versus the benchmark index. Depending on the absolute and relative performance of the share price over the course of an evaluation period, certain (absolute and relative) tiered target attainment levels between 10 % and 300 % can be achieved. Exceeding the target attainment level of 300 % does not grant entitlement to additional shares during the relevant assessment period (cap). At the end of the four-year term, a total level of target achievement based on the absolute and relative target attainment levels has to be established. The average absolute and relative attainment levels reached are weighted at 50 %. The overall target achievement is capped at 200 %.
The ultimate number of performance shares allocated to the Performance Share Plan participants is determined at the completion of the program, which spans four years. This calculation incorporates the number of shares initially granted (“grants”) multiplied with the total level of target achievement, as well as a “company factor” that is determined at the Supervisory Board’s discretion. This company factor is a number between zero and two that is set by the Supervisory Board based on the Company’s situation. The company factor’s predefined default value is one (1).
In 2017, MorphoSys also introduced a stock option plan (SOP) as another form of long-term incentive compensation based on the resolution of the Annual General Meeting on June 2, 2016 (Agenda Item 9). As of April 1, 2017, a total of 40,319 stock options were granted to the Management Board (including Dr. Markus Enzelberger as interim Management Board member from April 15 to October 31). Each member of the Management Board received a specific number of stock options that entitle them to purchase up to two MorphoSys shares each. Further details can be found in Item 7.1 in the Notes to the Consolidated Financial Statements and the explanations on stock repurchases in the Corporate Governance Report.
In accordance with the resolution of the Annual General Meeting on June 2, 2016 (Agenda Item 9), the SOP’s performance targets include the absolute price performance of MorphoSys shares and the relative price performance of MorphoSys shares compared to a benchmark index. The benchmark index consists of equal parts of the NASDAQ Biotechnology Index and the TecDAX Index. Each performance target has a 50 % weighting in the achievement of the overall target.
To determine the degree of target achievement for each performance target, the four-year vesting period (until the first stock options can be exercised) is subdivided into four equal periods of one year each. An arithmetic mean is calculated based on the degree of target achievement in each of the four years. This, in turn, determines the final percentage of target achievement for each performance target. The final percentage of target achievement for each of the two performance targets are then added together and divided by two, the result being the overall level of target achievement.
For the performance target of absolute price performance, a comparison is made between the stock market price of MorphoSys shares at the beginning of each year in the fouryear period with the price at the end of each respective period. If MorphoSys shares perform well, the degree of target achievement can reach up to 200 % on a straight-line basis for that particular year. Any further positive share price development of MorphoSys shares will not lead to any further increase in the performance target (cap).
For the performance target of relative price performance, the development of MorphoSys’s share price is compared with the development of the benchmark index during each annual period and set in relation to each other. In forming the benchmark index, the NASDAQ Biotech Index and the TecDAX Index are each weighted at 50 % in such a way that the percentage price movements of each index are added for the respective annual period and divided by two. If MorphoSys shares outperform the benchmark index, the degree of target achievement for the relevant period can reach up to 200 % on a straight-line basis. Any further positive share price development of MorphoSys shares versus the benchmark index will not lead to any further increase in the performance target (cap).
Stock options can only be exercised when the four-year (minimum) vesting period prescribed by law has expired, and the specified minimum value for the degree of target achievement of a performance target has been exceeded. The ultimate number of exercisable stock options is calculated by multiplying the number of initially granted stock options (“grants”) by the total level of target achievement and rounding up to the nearest whole number. The resulting ultimate number of stock options is limited to 200 % of the initially granted number of stock options. The stock options are settled in the form of Company shares, with each stock option entitling the holder to one share for the final number of stock options.
When the stock options are exercised, the exercise price must be paid for each underlying share. The exercise price corresponds to the average closing auction price of MorphoSys shares in the 30 trading days prior to the day on which the stock options were issued.
The terms of the stock option plan provide further details on the granting and settlement of stock options, the issue of Company shares from the Conditional Capital 2016-III and the administration of the SOP. For more information, please refer to the corresponding resolution of the Annual General Meeting on June 2, 2016 (Agenda Item 9).
None of the Management Board members were granted any loans or similar benefi ts in the reporting year nor have they received any benefi ts from third parties that were promised or granted based on their positions as members of the Management Board.
Termination of Management Board Empoyemnt Contracts / Change of Control
If a Management Board member’s employment contract terminates due to the member’s death, the member’s spouse or life partner is entitled to the fixed monthly salary for the month of death and the 12 months thereafter. In the event of a change of control, Management Board members are entitled to exercise their extraordinary right to terminate their employment contracts and receive any outstanding fixed salary for the remainder of the agreed contract period. Moreover, in such a case, all stock options and performance shares granted will become vested immediately and can be exercised after the expiration of the statutory vesting periods. A change of control has occurred when (i) MorphoSys transfers assets or a substantial portion of its assets to unaffiliated third parties, (ii) MorphoSys merges with an unaffiliated company or (iii) a shareholder or third party holds 30 % or more of MorphoSys’s voting rights.
CHANGE IN THE COMPOSITION OF THE MANAGEMENT BOARD
On January 5, 2017, MorphoSys announced that Dr. Malte Peters would succeed Dr. Arndt Schottelius as the Chief Development Officer and member of the Management Board of MorphoSys AG. Dr. Schottelius resigned from his position as Chief Development Officer effective February 28, 2017 to pursue new challenges. For the period leading up to the end of his employment contract on April 30, 2017, Dr. Schottelius and MorphoSys entered into an exemption agreement. According to the agreement, Dr. Schottelius was entitled to the remuneration agreed in his employment contract until April 30, 2017. The remuneration included a contractually agreed payment of a pro rata amount of his annual gross base salary of € 103,252.96 and a bonus of € 23,490.05. Dr. Schottelius also exercised the convertible bonds granted to him in 2013. In addition, he received shares that had vested after the four-year vesting period under the 2013 Performance Share Plan. Dr. Schottelius still has a pro rata entitlement based on the 2014, 2015 and 2016 Performance Share Plans, which can be exercised after a total of four years at the earliest. Dr. Schottelius did not participate in the 2017 Performance Share Plan. Effective March 1, 2017, Dr. Malte Peters was appointed Chief Development Officer of MorphoSys AG. His employment contract runs until June 30, 2019. As an additional incentive to join MorphoSys, Dr. Peters was granted a one-time compensation payment for the lost compensation from his former employment. This compensation was in the form of treasury shares held by MorphoSys valued at € 500,000. On October 30, 2017, MorphoSys announced that Dr. Markus Enzelberger would succeed Dr. Marlies Sproll as Chief Scientific Officer at MorphoSys AG. Dr. Sproll had been on a temporary leave of absence for family reasons since April 15, 2017 and eventually resigned from her post as Chief Scientific Officer effective October 31, 2017 due to ongoing family matters. She has been working as a Special Advisor to the CEO of MorphoSys, Simon Moroney, on a part-time basis since November 1, 2017. She received remuneration until October 31, 2017 in accordance with her Management Board employment contract. Dr. Sproll’s long-term compensation granted to her during her time as a member of the Management Board will be settled in accordance with the plans’ terms. Effective November 1, 2017, Dr. Enzelberger was appointed Chief Scientific Officer of MorphoSys AG after having served as the Interim Chief Scientific Officer since April 15, 2017. Dr. Enzelberger has held various management positions in research and development at MorphoSys since 2002. His Management Board employment contract runs until June 30, 2020. Upon joining the Management Board of MorphoSys AG, Dr. Enzelberger was granted a one-time incentive consisting of MorphoSys treasury shares to the value of € 400,000.
Supervisory Board Remuneration
The remuneration of Supervisory Board members is governed by the Company’s Articles of Association and a corresponding Annual General Meeting resolution on Supervisory Board remuneration. In the 2017 financial year, Supervisory Board members received fixed compensation, attendance fees and expense allowances for their participation in Supervisory Board and committee meetings. Each Supervisory Board member has received annual fixed compensation (€ 85,400 for Chairpersons, € 51,240 for Deputy Chairpersons and € 34,160 for all other members) for their membership of the Supervisory Board. The Chairperson receives € 4,000 for each Supervisory Board meeting chaired and the other members receive € 2,000 for each Supervisory Board meeting attended. For committee work, the committee Chairperson receives € 12,000 and other committee members each receive € 6,000. Committee members also receive € 1,200 for their participation in a committee meeting. Participation in a Supervisory Board or committee meeting by telephone or video conference results in a 50 % reduction in compensation for meeting participation. Supervisory Board members residing outside of Europe who personally take part in a Supervisory Board or committee meeting are entitled to a fixed expense allowance of € 2,000 (plus any sales tax due) for additional travel time in addition to attendance fees and reimbursed expenses. Supervisory Board members are also reimbursed for travel expenses and value-added taxes (VAT) on their compensation. In the 2017 financial year, Supervisory Board members received a total of € 523,015 (2016: € 529,680) excluding the reimbursement of travel expenses. This amount consists of fixed compensation and attendance fees for participating in Supervisory Board and committee meetings. No loans were granted to Supervisory Board members by the Company.