Compensation of the Managing Board

Decisions concerning the compensation of Managing Board members (including former Managing Board members and their surviving dependents) as well as regular advice on and reviewing of the compensation system are the responsibility of the full Supervisory Board. However, the Personnel Committee submits relevant proposals in preparation for decisions on these matters. The personnel matters dealt with by the Supervisory Board and the Personnel Committee during the reporting year and compensation-related topics are explained in the Report of the Supervisory Board. Report of the Supervisory Board

The compensation structure is geared toward the sustainable growth of the Company by factoring in compensation components with a multi-year assessment period. The total compensation of individual members of the Managing Board is specified by the Supervisory Board based on a performance assessment, taking into account any payments made by Group companies. Criteria for determining the appropriateness of the compensation are the responsibilities of the individual member of the Managing Board, their personal performance, the economic situation, the performance and outlook of the Company, as well as the level of compensation usually paid, taking into account peer companies and the compensation structure in place in other areas of the Company. At its professional discretion, the Supervisory Board can decide on special payments for outstanding achievements or successes of a member of the Managing Board. Compensation information from comparable national and international listed companies operating in the fashion and lifestyle industry is used to assess the appropriateness of the total compensation. In compiling the set of competitors, the Supervisory Board takes into account not only industry affiliation, but also market position, as well as the size and global orientation of the companies.

Main features of the compensation system for the Managing Board

The compensation system for the Managing Board is designed to ensure the increase in enterprise value. Consequently, the long-term variable compensation and its respective objectives are designed to promote sustainable and long-term growth for the Company. At the same time, and in order to account for short-term developments, sales, operating profit (EBIT) and trade net working capital are the targets for short-term variable compensation. Also, during the design process, a great deal of importance was attached to the fact that above-average performance would be rewarded accordingly. At the same time, variable compensation would cease to be paid in the event of below-average performance.

In addition to non-performance-related (fixed) compensation components, the compensation system also includes core performance-related (variable) compensation components in the form of a short-term incentive program (STI) and a long-term incentive program (LTI). In this regard, the average share of the fixed compensation components in the total target compensation amounts to 36%, while the average share of compensation from the STI and from the LTI account for 25% and 39% respectively, assuming a target achievement of 100% each for both the STI and the LTI.

Non-performance-related (fixed) compensation components

The fixed compensation components consist of a fixed basic compensation, fringe benefits and contributions to retirement benefits. The fixed basic compensation is paid as a monthly salary. Members of the Managing Board also receive fringe benefits to a small extent which they pay tax on individually according to the applicable tax regulations if they derive any financial advantage from their private use. The fringe benefits primarily include private use of the company car, supplementary payments to health and nursing care insurance, the closing of and contributions to accident and directors’ and officers’ (D&O) liability insurance as well as, to a small extent, other equipment and services needed to fulfill their duties as members of the Managing Board. In accordance with Sec. 93 (2) Clause 3 AktG [“Aktiengesetz”: German Stock Corporation Act], the deductible for the D&O insurance is 10% of the relevant loss, but no more than 1.5 times the fixed annual compensation.

Against the backdrop of the COVID-19 pandemic, HUGO BOSS has implemented extensive measures aimed at safeguarding the financial stability and flexibility of the Company. The members of the Managing Board of HUGO BOSS AG also participated in the measures to secure cash flow and voluntarily waived 40% of their basic compensation for the months of April and May 2020.

Performance-related (variable) compensation components

Short-term variable compensation – short-term incentive program (STI)

As a short-term performance-related compensation component, the STI is tied to the development of certain quantitative targets within a fiscal year. In accordance with the Group’s management system and the goal of maximizing free cash flow in the long term, the Supervisory Board has determined the following key performance indicators as targets:

• Sales (the sales proceeds recognized in the consolidated financial statements using the exchange rates applied in the budget)
• EBIT (the Group’s net income before interest and taxes)
• Trade net working capital (the sum of raw and finished goods as well as trade receivables less trade payables) in proportion to sales Group Management

The targets for sales and trade net working capital are weighted at 30% each. The EBIT is included in the STI’s target achievement with a weighting of 40%.

The Supervisory Board is convinced that the target components promote the operating and strategic development of the Company. For this reason, the above target components also apply to fiscal year 2021.

For the annual bonus in any given fiscal year, the targets to be achieved are set in a target-setting agreement between the Managing Board and the Supervisory Board at the start of the fiscal year and by March 31 at the latest. All targets may be replaced by other Group targets or weighted differently for the respective fiscal year in the context of the target evaluation. This allows the company to respond to short-term developments even post the completion of a performance period and at the start of the next performance period. As a result, the Supervisory Board has the opportunity to regularly align the Managing Board’s compensation so that it is directly geared towards the Company’s strategy and its successful implementation. The Managing Board and the Supervisory Board should reach an agreement concerning the targets and their weighting in this regard. The Supervisory Board shall only make decisions at its professional discretion if this does not happen.

In the event that the agreed targets are fully achieved on average, the respective member of the Managing Board shall be paid 100% of the contractually agreed amount. Target achievement above the maximum target of 150% or below the minimum target of 75% agreed for the individual target shall not be taken into account when calculating the average. If the average target achievement comes to 150% or more, a maximum amount (cap) of 150% is paid out. If, on the other hand, the average degree of target achievement is below 75%, no annual bonus will be paid. Between the minimum target and the maximum target, target achievement shall be determined in each case by linear interpolation. The annual bonus is payable within a week of the Supervisory Board approving the consolidated financial statements for the fiscal year in question. If the targets were achieved in full (100%) for the 2020 STI, a total amount of EUR 1,330 thousand would be paid out (Yves Müller EUR 454 thousand, Dr. Heiko Schäfer EUR 396 thousand and Ingo Wilts EUR 480 thousand).

The target weighting, the target values, the actual values and the degree of target achievement for the individual target components for fiscal year 2020 are summarized in the table below.

For fiscal year 2020, the average target achievement was 91%. At its meeting on March 3, 2020, the Supervisory Board has determined the STI target values in a way that the final target values will consider the negative implications of the COVID-19 pandemic on the business of HUGO BOSS. Accordingly, the determination for fiscal year 2020 takes into consideration the financial implications of the pandemic on sales, EBIT and trade net working capital. This is intended to ensure that also the short-term variable compensation for fiscal year 2020 is solely geared towards the underlying business performance of the Company.

Long-term variable compensation – long-term incentive program (LTI)

Under the LTI program, the members of the Managing Board receive a defined number (“initial grant”) of virtual shares (“tranches”) at the beginning of the plan or at the start of their activity. The initial grant is based on an amount (“LTI budget”) defined in the respective service agreement or by an additional agreement. The initial grant is calculated by dividing the LTI budget by the share price for the last three months preceding the awarding of the initial grant. Each tranche has a three-year performance term. A one-year qualifying period follows the expiry of a tranche’s performance term. Following the expiry of the performance term, the final number of virtual shares (“final grant”) is calculated based on the achievement of certain target components. The final entitlement to payment is calculated by multiplying the final grant by the Company’s share price during the last three months of the qualifying period.

The Supervisory Board has defined the following target components for the tranches 2017 to 2019, 2018 to 2020, 2019 to 2021 and 2020 to 2022:

• Relative total shareholder return (RTSR) of the HUGO BOSS share
• Return on capital employed (ROCE)
• Employee satisfaction
• The Company’s performance in the field of sustainability

The Supervisory Board is convinced that these target components promote sustainable and long-term growth for the Company. For this reason, the above target components also apply to fiscal year 2021.

The RTSR target component is currently measured on the basis of the increase in the Company’s enterprise value, comprising the share price performance and hypothetically reinvested dividends, compared to the MSCI World Textiles, Apparel & Luxury Goods Performance Index. The return on capital employed is based on the development of ROCE (return on capital employed) versus the budget. The degree of employee satisfaction is measured on the “Employee Trust Index” by an employee survey conducted annually by an independent institute for the 2019 to 2021 and 2020 to 2022 tranches. Employee satisfaction is also compared with the top 100 companies in Germany for the 2017 to 2019 and 2018 to 2020 tranches, in addition to the “Employee Trust Index”. The sustainability performance is determined by the Company’s ranking in the Dow Jones Sustainability Indices (DJSI), in which the sustainability performance of listed companies is assessed by an independent index provider. While the targets for the RTSR and ROCE performance criteria each account for one third of the LTI program, the targets for employee satisfaction and sustainability each account for one sixth.

Specific target, minimum and maximum values are defined for each target component and are used to calculate the entitlement to payment. The targets are set on March 31 at the latest of the first year of the performance term in a target-setting agreement between the Managing Board and the Supervisory Board. The Managing Board and the Supervisory Board should reach an agreement in this regard. The Supervisory Board shall only make decisions at its professional discretion if this does not happen.

A target achievement of only 50% minimum and 200% maximum is taken into account for each target component for the purposes of calculating the final grant. A one-year qualifying period follows the expiry of the performance term. The entitlement to payment is based on the Company’s share price during the last three months of the qualifying period and the amount is limited to 250% of the individual LTI budget for each member of the Managing Board (cap). Under certain circumstances (particularly when service agreements are terminated for due cause or when members of the Managing Board resign before a tranche’s term has expired), entitlements of members of the Managing Board may expire under the LTI program.

The individual LTI budget in relation to fiscal year 2017 amounts to EUR 54 thousand for Yves Müller and EUR 569 thousand for Ingo Wilts. In the case of Yves Müller, the LTI budget is determined on a pro rata basis from the start of his Managing Board activities in 2017. The individual LTI budget in relation to fiscal year 2017 amounted to EUR 900 thousand for Mark Langer and EUR 592 thousand for Bernd Hake.

The individual LTI budget in relation to fiscal year 2018 amounts to EUR 654 thousand for Yves Müller and EUR 638 thousand for Ingo Wilts. The individual LTI budget in relation to fiscal year 2018 amounted to EUR 900 thousand for Mark Langer and EUR 683 thousand for Bernd Hake.

The individual LTI budget in relation to fiscal year 2019 amounts to EUR 700 thousand for Yves Müller and EUR 711 thousand for Ingo Wilts. The individual LTI budget in relation to fiscal year 2019 amounted to EUR 980 thousand for Mark Langer and EUR 716 thousand for Bernd Hake.

The individual LTI budget for fiscal year 2020 amounts to EUR 700 thousand for Yves Müller, EUR 675 thousand for Dr. Heiko Schäfer and EUR 730 thousand for Ingo Wilts. In the case of Dr. Heiko Schäfer, the LTI budget is determined on a pro rata basis from the start of his Managing Board activities in 2020. The individual LTI budget for fiscal year 2020 amounted to EUR 990 thousand for Mark Langer.

The target weighting, the target values, the actual values and the degree of target achievement for the individual target components for the LTI tranche for 2017 to 2019 are summarized in the table below.

The target weighting, the target values, the actual values and the degree of target achievement (on a preliminary basis) for the individual target components for the LTI tranche for 2018 to 2020 are summarized in the table below.

Performance-related special compensation for Yves Müller

Following Mark Langer’s departure in July 2020, Yves Müller, in addition to his position as Chief Financial Officer (CFO), assumed the position of Spokesperson of the Managing Board and thus responsibility for part of Mark Langer’s former duties (Corporate Strategy and Communication departments, as well as the Group’s own retail business and wholesale) until Daniel Grieder’s arrival as Chairman of the Managing Board (expected on June 1, 2021). Against this background, the Supervisory Board has decided to grant a performance-related bonus of up to EUR 600 thousand for the additional duties and responsibilities at the sole discretion of the Supervisory Board. An instalment of EUR 200 thousand has already been paid out together with the salary for the month of September 2020.

Pension provision and provision for surviving dependents

All members of the Managing Board have received pension commitments, as agreed in individual contracts.

All active members of the Managing Board have been granted contribution-based pension commitments. The basis for determining the pensionable income is defined as the basic salary under the service agreement. This form of pension commitment also applies to any future appointments to the Managing Board.

An independent compensation expert supported the Supervisory Board in designing the contribution-based pension scheme for the active members of the Managing Board.

For Mark Langer, the former Chairman of the Managing Board, this was in the form of a benefit-based commitment. The amount of the commitment depends on the duration of his appointment to the Managing Board.

Contribution-based pension commitments

For active members of the Managing Board, HUGO BOSS annually pays a pension contribution into an employer’s pension liability insurance scheme taken out on the life of the member of the Managing Board. The contribution corresponds to 40% of the pensionable income, which is determined based on the basic salary under the service agreement.

The amount of retirement benefit in this regard corresponds to the amount accumulated by means of the individual employer’s pension liability insurance. This results from the total unpaid pension contributions per year plus an annual interest rate depending on the insurance tariff in question. A member of the Managing Board shall be entitled to retirement benefits at or after a fixed age limit of 65 years or if they become permanently unable to work due to illness or accident and leave the Company before reaching the age limit. In the event of the death of the member of the Managing Board, their spouse or registered civil partner under the German Civil Partnership Act and their surviving children shall be entitled to a surviving dependent’s pension.

If the member of the Managing Board leaves the Company before becoming eligible for a pension, the benefits shall still become vested if their pensionable service was longer than three years. If the member of the Managing Board leaves the Company before reaching the fixed age limit, the entitlement amount corresponds to the benefits arising from the premium-free employer’s pension liability insurance at the time of departure.

Ongoing pension payments are adjusted annually by at least 1%.

Benefit-based pension commitments for Mark Langer, the former Chairman of the Managing Board

A pension commitment exists through the Company for Mark Langer, the former Chairman of the Managing Board, in the form of a benefit-based pension commitment. The amount of the subsequent post-employment benefit is thereby limited to 60% of the pensionable income. A post-employment benefit shall be paid to the surviving dependents in the form of a widow’s or an orphan’s pension.

In the event that Mark Langer leaves the Company before becoming eligible for a pension, the period by which the benefits become vested is agreed in accordance with the statutory regulations. However, there is no pro rata temporis reduction of the pension entitlement as provided for under legal provisions. For pension purposes, Mark Langer is placed in the position as if the employment had lasted until December 31, 2021 as originally planned.

Ongoing pension payments are adjusted annually by at least 1%.

Supplementary pension plan

In addition, HUGO BOSS offers all members of the Managing Board the option of acquiring additional pension benefits under deferred compensation agreements. This supplementary pension plan can take the form of retirement benefits or, alternatively, the form of occupational incapacity benefits and/or surviving dependents’ benefits and/or the form of a lump-sum death grant. The pension benefits take the form of monthly payments, while surviving dependents’ benefits can also be granted in the form of a lump-sum capital payment. The contributions from deferred compensation agreements are included in the disclosure about total compensation. Provisions and plan assets are recognized at the same amount.

Benefits in the event of early termination of employment

In the event of early termination of the service agreement (without there being due cause for termination of the service agreement on the Company’s part), the member of the Managing Board in question shall receive severance pay amounting to their total compensation (including fringe benefits) for the duration of the original remaining term, but for no longer than 15 months, starting from the time the service agreement is terminated (severance payment cap). For these purposes, the total compensation is calculated on the basis of the total compensation received for the last full fiscal year and, where appropriate, on the basis of the predicted total compensation for the current fiscal year.

The service agreements do not provide for any severance payment in the event of premature termination of the service agreement for due cause for which the member of the Managing Board in question is responsible. The service agreements do not stipulate any provisions in the event of regular termination, with the exception of the provisions governing pensions.

The service agreements with the members of the Managing Board each contain a provision under which, in the event of a change of control (acquisition of more than 30% of the voting rights in HUGO BOSS AG), the member of the Managing Board in question is granted an extraordinary right to termination and, if the service agreement is indeed terminated, a severance payment must be made to the respective member of the Managing Board. In principle, the amount of severance pay corresponds to the severance payment to be made in the event of the service agreement being terminated prematurely and is therefore subject to the same severance payment cap. The Company has not entered into any other compensation arrangements with members of the Managing Board or employees in the event of a takeover bid.

Total compensation of members of the Managing Board for the fiscal year 2020 under GAS 17

Benefits granted for fiscal year 2020 under GCGC

Benefits received for fiscal year 2020 under GCGC

Other compensation components

As of December 31, 2020, no advance payments were made to the Managing Board.

Total compensation of former members of the Managing Board

Bernd Hake left the Managing Board on July 2, 2019. His employment contract ended on February 29, 2020. Up to this point, Bernd Hake received his contractually agreed fixed compensation of EUR 433 thousand. A severance agreement dated September 2019 also provides for payments in the amount of EUR 3,080 thousand in accordance with the employment contract and the agreed severance pay cap, which were due as at February 29, 2020. These are comprised of a severance payment of EUR 846 thousand for the fixed salary for the period from March 2020 to May 2021 as well as a payment in the amount of EUR 1,192 thousand for the short-term incentive program (STI) for January 2019 to May 2021. In addition, the severance agreement includes payments in the amount of EUR 664 thousand for the vested pro-rata long-term incentive program (LTI) compensation for the 2018 to 2020, 2019 to 2021 and 2020 to 2022 tranches. It also includes severance pay for the period from March 2020 to May 2021, in the amount of EUR 338 thousand for pension contributions, and in the amount of EUR 40 thousand for the company car and other fringe benefits.

The entitlements from the LTI tranches for 2016 to 2018 were paid out in March 2020 and entitlements from the LTI tranches for 2017 to 2019 will be paid out in 2021, each at the end of the one-year qualifying period. The final payout entitlement arises from the final target achievement of the target components and the Company’s share price during the last three months of the qualifying period.

Mark Langer left the Managing Board on July 15, 2020. His employment contract ended on December 31, 2020. Up to this point, Mark Langer received his contractually agreed fixed compensation of EUR 935 thousand. A severance agreement dated April 2020 also provides for payments in the amount of EUR 978 thousand in accordance with the employment contract and the agreed severance pay cap, which were due as of December 31, 2020. These consist of a severance payment of EUR 950 thousand for the fixed salary for the period from January 2021 to December 2021 and a payment of EUR 28 thousand for the company car and other fringe benefits.

Mark Langer receives a payment based on the actual target achievement for the respective fiscal year for the settlement of the entitlements from the STI for 2020 and 2021. The payment for the STI for 2020 on basis of the actual target achievement of 91% amounts to EUR 656 thousand. The payment for the STI for 2021 is based on a target compensation of EUR 750 thousand, but will be determined based on the actual target achievement in 2021 and will in no case exceed EUR 750 thousand. The payments are made at the same time as the 2020 and 2021 STI payment of the other members of the Managing Board.

The claims from the LTI tranches for 2017 to 2019 and 2018 to 2020 will be paid out in March 2021 and 2022 at the end of the one-year qualifying period. The final entitlement to payment occurs dependent on the final target achievement of the target components. For the LTI tranche for 2017 to 2019, the entitlement amounts to EUR 255 thousand.

The entitlements from the LTI tranches for 2019 to 2021 and 2020 to 2022 are payable as soon as it has been determined that the target for 2021 has been achieved. The final payment claims are based on the average target achievement of the target components for 2019, 2020 and 2021, and for 2020 and 2021, respectively.