Report On Adidas Payment Bonus And Compensation Accounting Essay


In turn, the variable compensation system of Adidas includes a short-term Performance Bonus and a payment component which will be paid out according their fulfilment of the "Long-Term Incentive Plan 2009/2011". This LTIP 2009/2011 is measured over a period of three years which shall reflect a long-term incentive effect. By implementing this measurement the supervisory board complies with provision 4.2.3 (GCGC, 2010) where the board has to secure that the variable compensation elements are generally based on a multi-year assessment.

The Performance Bonus is related to the short-term corporate development. Thereby, at the beginning of each financial year the supervisory board determines the corporate-related as well as the individual performance criteria and also defines the explicit targets. At the end of the financial year each executive board member gets a concrete amount of bonus payments according to his respective target achievement. However, the LTIP Bonus is paid corresponding to the long-term performance of the management. In doing so, the following performance criteria set by the supervisory board are decisive: increase of the net income, reduction of net debt, growth in revenue and increase in share price. At the end of this tree-year period the degree of target achievement over this time range will be calculated and the corresponding payout of this bonus is made. This procedure fulfils the recommendation in terms of index-based compensation elements related to the company success (Article 4.2.3 GCGC, 2010).

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Additionally, Adidas states in his Compensation Report 2010 that they try to design the variable remuneration a way that the "incentives for the individual to achieve sustainable targets set under the LTIP significantly outweigh the incentives to concentrate just on short-term goals granting the Performance Bonus". This approach meets the requirement of the German Corporate Governance Code stating the compensation elements must not tempt the management to take unreasonable risks (article 4.2.3) and the compensation structure has to be related to a sustainable corporate development. However, Adidas does not apply a management share option plan which could also be an instrument to bring the management team in line with the long-term interests of the company owners and thus, support the sustainable value of the firm.

Finally, the remuneration components for each of the four executive board members are particularized in the Compensation Report. The total compensation is split in the non-performance related components, annual fixed salary and other benefits, and in the payments granted by the Performance Bonus program and by the LTIP Bonus 2009/2011. By this means Adidas complies with the required compensation disclosure declared in article 4.2.4 (GCGC, 2010).

The Compensation Report also makes statements about pension commitments and commitments to executive board members upon premature and regular end of tenure. In doing so, Adidas also meets the requirements of article 4.2.4 by disclosing due payments divided into a fixed and variable component for each member. Moreover, Adidas complies with the German Corporate Governance Code as they established the recommended severance payment caps in case of a premature end of tenure or if the service contract of the chairman is terminated due to a change of control (Article 4.2.3 GCGC, 2010).

As the German Corporate Governance requires the Annual General Meeting has the task to decide about the compensation of the supervisory board members of Adidas. According to its website Adidas complies with the broad guideline that the remuneration shall be in relation to size of the company and the responsibility and scope of activities the individual is entrusted with. According to these criteria the members receive a fixed remuneration. Moreover, the individuals who additionally are a chairman or a member of a committee get still an extra fixed payment. These approaches meet completely the provisions and recommendations stated in article 5.4.6 GCGC. In case a member is in several committees he only gets the payment of the committee which provides the highest compensation. A variable remuneration component is not implemented. However, the German Corporate Governance Code recommends besides the fixed payment a performance-related payment for the supervisory board members which should also be based on the long-term success of the company (Article 5.4.6). Additionally, the Compensation Report makes a statement about the other benefits granted to the supervisory board members which is recommended in article 5.4.6 GCGC.

Adidas maintains a loss and liability insurance for all its executive board and supervisory board members (D&O Insurance). This shall protect the individual in the event of a corporate loss occurred caused by his acts or omissions. However, the revised German Corporate Governance Code prescribes a deductible in such a case and since this release Adidas complies with this statutory provision. Article 3.8 GCGC requires a deductible which "accounts for 10% of the damage within one year up to a maximum of one and a half times the fixed annual payment".

Supervisory board

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The supervisory board of Adidas consists of twelve members. Six of these members are elected by the Annual General Meeting and the other half is elected by the employees. This approach and ratio of shareholder and employee representatives is in accordance with the German Co-Determination Act and in this way, Adidas also complies with the German Corporate Governance Code which prescribes that in companies having more than 2000 employees in Germany the supervisory board has to be composed half of employee representatives. According to the disclosures on the company´s website "the core functions of the Supervisory Board include the appointment and dismissal of Executive Board members, the supervision and consultancy of the Executive Board, the approval of the financial statements as well as the authorization of important operative planning and corporate decisions" which reflect the responsibilities described in article 5.1.1 GCGC.

Among the twelve members in the supervisory board there are two women of whom both are employee representative and at the same time one woman is still Deputy Chairwoman which is the second highest position in the supervisory board. Different nationalities within the board are another aspect arguing for diversity efforts. Currently, two members come from France of whom one is actually the Chairman of the supervisory board and one member has a Russian nationality. Regarding these facts you can see that Adidas tries to strengthen the diversity within the company as recommended by article 5.4.1 GCGC.

The company´s website also discloses the other mandates which the members carry out besides their membership in the supervisory board of Adidas. For instance, the Chairman of Adidas has three additional mandates: Member of the Supervisory Board, Allianz; Member of the Board of Directors, Sanofi-Aventis; Member of the Board of Directors, HSBC. All these three enterprises are important public listed corporations in Europe. But the other members do not have significant further mandates. However, you can raise the question whether the Chairman of the supervisory board has sufficient time to perform his mandate at Adidas besides his sideline activities in three other supervisory boards as article 5.4.5 GCGC prescribes.

The professional background of the members is very broad: it covers a former Chief Executive Officer of a big international pharmaceutical company, a current Chairman of a Russian company and two experts in finance and consulting. Therefore, you can state that Adidas meets article 5.4.1 GCGC prescribing that the group as a whole has the appropriate knowledge, ability and expert experience to carry out its task. Additionally, a former member of the executive board of Adidas is among the current twelve supervisory board members which complies with the recommendation in article 5.4.2 GCGC that not more than two former executives should belong to the supervisory board.

The supervisory board has established five permanent expert committees to be able to deal with complex issues more in depth and thus, to improve the efficiency of its work. By this means Adidas has met the provisions of the German Stock Corporation Act and the recommendations of the German Corporate Governance Code. According to them the supervisory board should form expert committees depending on the company´s circumstances and should also define their tasks and responsibilities (article 5.3.1 GCGC, 2010). The respective committee chairmen have to keep the supervisory board up-to-date about their activities within the committee. Moreover, a committee has also the possibility to pass a resolution on the premise that half of its members take part in the decision-making process.

According to its Corporate Governance Report 2010 Adidas has formed five permanent expert committees which are subordinate to the supervisory board and which are shortly described in the following:

Steering Committee: The Steering Committee which is composed of the three top-tier members of the supervisory board mainly debates major issues and develops resolutions on which the supervisory board shall vote. Moreover, in very urgent cases the committee has the competence to approve a resolution without involving the whole supervisory board team.

General Committee: The co-determined General Committee consisting of four members mainly prepares the supervisory board´s decision in respect to the appointment of executive board members (article 5.1.2 GCGC). Moreover, the committee is dealing with the compensation system for the executives and the determination of the total remuneration of the management team. Furthermore, they work out the details of the service contracts of the executive board members.

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Audit Committee: The co-determined Audit Committee is also composed of four members. A main requirement is that the Chairman of this committee is independent and is not a former member of Adidas´ executive board. Moreover, the recommendation in article 5.2 GCGC is fulfilled as the Chairman of the supervisory board of Adidas is not the Chairman of the Audit Committee. Additional, the Chairman of this committee has the know-how in the field of accounting and auditing. According to the Supervisory Board Report of Adidas the committee is concerned with all kinds of accounting issues, especially with the examination of the annual financial statements and the management reports. Another main task is the collaboration with the external auditors. In doing so, they review the auditors´ independence and based on these findings they make recommendations in terms of the appointment of the auditor in the Annual General Meeting and finally, because of its deep background knowledge the committee specifies the priorities on which the auditors have to concentrate during the next audit. Furthermore, the efficiency of the risk management, the internal control as well as the compliance systems is analyzed by this internal audit team. This described tasks and responsibilities cover completely the recommendations in article 5.3.2 GCGC.

Mediation Committee: The co-determined four members Mediation Committee has the task to work out a proposal for the supervisory board in terms of the appointment or dismissal of an executive board member in case the required two-third majority is not achieved in a preceded resolution.

Nomination Committee: The Nomination Committee consists of three members and this is the only committee which is exclusively comprised of shareholder representatives as recommended in article 5.3.3 GCGC. This approach is in compliance with the recommendations of the German Corporate Governance Code. In case of upcoming supervisory board elections the committee is responsible for proposing to the supervisory board suitable candidates for recommendation to the shareholders´ meeting for election. In doing so, the committee takes different aspects into account: an appropriate proportion of women, required expert and industry knowledge and experience with accounting principles and internal control systems. To strengthen the diversity effect the candidates should also have long-standing international working experiences.

Additionally, the published Supervisory Board Report 2010 which is a part of the Annual Report 2010 indicates that the supervisory board examined the efficiency of its activities in the past year including the collaboration with the executive board based on detailed questionnaires. Besides a self-assessment by the members of the supervisory board the external consultant who was called in did not find any concerns in terms of efficiency and conflicts of interest. In doing so, Adidas complies with article 5.6 GCGC which recommends a regular efficiency examination of the supervisory board activities. By this evaluation of an external consultant that there is no conflicts of interest the members of the supervisory board can be considered as independent according to article 5.4.2 GCGC.

The executive board of Adidas consists of four members of whom each executive is responsible for a major business unit within the company. In doing so, the responsibilities are clear distributed in the areas: Overall Leadership (CEO), Global Operations (COO), Finance (CFO) and Global Brands (CMO). Additional, there is a Business Allocation Plan for the Executive Board which rules the tasks of each member more in detail. In this way Adidas fulfills article 4.2.1 which says that the management team shall be comprised of several members and have a Chairman or Spokesman. Additionally, the article recommends by-laws allocating the duties among the individual members.

The composition of the management team promotes the cultural diversity and the international structure of the company as two out of four have foreign origins, namely America and New Zealand, and moreover, all of the members have an international occupational background. However, the executive board comprises just men.

The CEO of Adidas has three additional mandates. But he is member of the supervisory board of a football club and the biggest insurance company in Germany as well as the most important airline company in Germany so there should be no conflicts of interests in terms of these mandates. At the same the German Corporate Governance Code also recommends that executives of listed companies shall not take more than three additional supervisory board mandates besides their actual task

Moreover, the supervisory board passes the Rules of Procedure for the Executive Board which makes statements how the executives shall carry out the corporation´s business. These bylaws cover the conduct of business, the Chairman´s responsibilities and the procedure in terms of meetings and resolutions. By implementing the rules of procedure the company complies with article 4.2.1 GCGC which recommends established bylaws setting the required majority for management board resolutions. Moreover, there are paragraphs about conflicts of interest, reporting obligations, sideline activities and business transaction requiring the approval of the supervisory board. In general, these rules of procedure include suitable provisions to secure good corporate governance board in such a case. Another statement describes the requirement for all executives to disclose conflicts of interests to the supervisory board and to the other executive members without delay. This requirement exactly reflects the recommendation in article 4.3.4 GCGC discussing about the disclosure of conflicts of interest. Also general aspects are discussed such as the executive board shall ensure appropriate risk management and risk controlling which meet the requirements of article 4.1.4 GCGC or the CEO shall regularly consult with the Chairman of the supervisory board on strategy, business development and risk management

According to the Supervisory Board Report 2010 the executive board met its duty to inform the supervisory board comprehensively on a regular basis in terms of the business policy, all relevant aspects of business planning, the current course of the business, the financial position and the profitability of the company. Moreover, all major decisions and business transaction were discussed with the supervisory board.