SAP – Executive Compensation Plan

SRM Assignment

Group 7
Anish Ranjan (2020PGPH005)
Hitesh Naik (2020PGPH009)
Uddesh Meshram (2020PGPH031)
Rizal Jaleel (2020PGPH042)
Company overview

SAP is a leading company in enterprise application software, ERP, a cloud-based software which
helps businesses of all sizes run effectively. It provides end-to-end tailored suite of applications
which help the companies operate their functions including profitability, adaptability, etc.

SAP promises to help their customers to run at their best possible capabilities through engineering
readymade solutions and innovation. This has also been reflected through their compensation
strategies.

Executive compensation at SAP

The executive compensation at SAP is determined by the Supervisory Board which is supported by
General and Compensation Committee. SAP consists of performance based as well as non-
performance-based compensation. SAP strives to maintain and promote internal as well as external
fairness and has aligned its compensation to its corporate strategy.

The compensation of the executives is determined by considering the financial and non-financial
performance of the organisation as a whole which is considered using following factors:

A. Financial factors
a. Current cloud backlog
b. Cloud and software revenue growth
c. Operating margin increase
d. Earnings per share
e. Effective tax rate
f. Cash flows – operating, investing, financing and free cash flow

B. Non-financial factors
a. Customer net promoter score – Started in 2012, this method includes a rating from
the customer on a scale of 0-10 wherein promoters of SAP (who gave 9-10 score) are
subtracted from percentage of detractors (those giving 0-6 score).
b. Employee engagement index – Measure of how strongly employees identify with
SAP.
c. Leadership trust score – To measure the amount of engagement shown and trust
exhibited by the employees on the leaders
d. Carbon emissions – meeting the short-term and long-term carbon reduction targets

Basically, executive compensation at SAP consists of:

1. Non-performance based compensation

a. Fixed compensation
b. Fringe benefits
c. Retirement pension

2. Performance based compensation

a. Short term incentives
b. Long term incentives
Compensation:

Non-Performance based

a. Fixed Compensation
Monthly payments are made as fixed compensation in 12 equal instalments in the home
currency of the executive. This comprises in the range of 10-20% of the total compensation.

b. Fringe benefits

These benefits are guaranteed to the executives through contract and include: insurance
contributions, expenses coverage of two households, use of aeroplanes, tax gross-ups and
other benefits in kind. These are limited to the extent of 10% and 20% of fixed compensation
for executives and CEO respectively.

Other provisions include – relocation package of 15% of total fixed compensation to

executives and up-to 30% for CEO and a sign-on bonus of up-to 200% of the fixed
compensation.

c. Retirement pension

It is based on defined contributions from the executives. SAP specifies a retirement pension
plan that stands relevant to the place of permanent residence of the executive (if SAP has its
existence there). It may not exceed 30% of the total fixed compensation.

Performance based

The supervisory board of SAP predefines the target values or Key Performance Indicators which are
subject to hurdles and upper and lower caps. Also, performance-based incentives correspond to
100% target achievement of the specified KPI’s. The supervisory board can adjust this compensation
part upwards as well as downwards in the interest of SAP, however, there is a limit of 20% change
for Short term incentives and 10% for Long term incentives.

a. Short term incentives (STI) – pay-out within one year

Short term incentives are measured on the basis of achievement of two types of KPI’s i.e.
Financial KPI’s and Sustainability KPI’s. However, if the weighted achievement is below 75%
hurdle then the target achievement is deemed to be zero.

i. Financial KPI’s – These carry a weightage of 80% of the total STI’s achievement.
Its composition is as follows:
Current cloud backlog – 30%
Cloud and software revenue growth – 25%
Operating margin increase – 25%

ii. Sustainability KPI’s – These carry a weightage of 20% of the total STI’s achievement.
Its composition is as follows:

Customer net promoter score – 6.67%

Employee engagement index – 6.67%
Carbon impact – 6.67%
b. Long term incentives (LTI’s) – pay-out after four years

The total grant amount for LTI’s has been converted into three share units as follows:

i. Market Performance (MSUs) – 1/3 of the LTI grant

It is determined by the performance of SAP in terms of Total Stockholder Return

relative to the Index. This performance factor is considered >100% only when SAP’s
total stockholder return is ranked better than median of the index companies.

MPU = originally granted number * market performance factor %

ii. Financial Performance (FSUs) – 1/3 of the LTI grant

Determined through the Financial KPI targets over the three-year span. An upper
cap of 120% and 110% has been put for cloud revenue and operating income
respectively. Cloud revenue, total revenue and operating income form 1/3 rd part
each of the total FSU grant.

iii. Retention share units (RSUs) – 1/3 of the LTI grant

References:

https://www.sap.com/investors/en/reports.html?tab=1&sort=latest_desc

https://www.sap.com/india/about/company.html