The Act on the Adequacy of Management Board Remuneration stipulates that the full Supervisory Board shall determine the amount of remuneration of the Executive Board of Hannover Re. In the previous year the Supervisory Board had therefore already amended the Rules of Procedure of the Standing Committee with immediate effect. Pursuant to Item 3.2 of the Rules of Procedure, the committee shall decide in lieu of the Supervisory Board on the content, formation, modification and termination of employment contracts with the members of the Executive Board with the exception of remuneration-related content. The latter shall be decided upon at a full meeting of the Supervisory Board.

The purpose of the remuneration system for the Executive Board is to recompense the members of the Executive Board according to their scope of activity and responsibility and in proportion to their tasks and performances as well as the position of the company. In this context, an appropriate variable portion of the total remuneration directly recognises the joint and individual performance of the Executive Board as well as the performance of the company. The variable remuneration components have a multi-year assessment basis and thereby support the sustainable development of the company.

With this objective in mind, the remuneration system consists of three components: fixed emoluments, a variable bonus as well as a share-based remuneration component based on a virtual stock option plan with a longer-term incentive effect and risk element.

The fixed emoluments, paid in twelve monthly instalments, are guided by the professional experience and area of responsibility of the Board member in question.

The variable bonus is cash compensation geared to the result of the financial year; half is based on the individual Board member’s specific profit contribution (performance bonus) and half on the net income generated by the Group as a whole (profit bonus). With respect to the determination of the profit bonus for the 2010 financial year, the Supervisory Board approved inter alia the calculation of the earnings per share (EPS) on a rolling three-year average, the capping of the profit bonus to a maximum 1.5 times the average target EPS of the last three financial years and the elimination of the guaranteed portion of the profit bonus.

The members of the Executive Board are also entitled to receive stock appreciation rights under the virtual stock option plan implemented in 2000 for certain members of the Group’s management.

The content of the stock option plan is based solely on the Conditions for the Granting of Stock Appreciation Rights. Under these conditions, stock appreciation rights are awarded separately for each financial year provided the internal and external performance criteria defined in advance by the Supervisory Board are met.

The internal performance criterion is satisfied upon achievement of the target diluted earnings per share (EPS) calculated in accordance with IAS 33 “Earnings per Share”. The external performance criterion is the relative increase in the value of the Hannover Re share. The benchmark used to measure this increase in value is the weighted RBS Global Reinsurance Index. The benchmarks cannot be retrospectively altered.

Exercise of the stock appreciation rights does not give rise to any entitlement to the delivery of Hannover Re stock, but merely to payment of a cash amount linked to the performance of the Hannover Re share. The amount paid out is limited to a maximum calculated as a quotient of the total volume of compensation to be granted in the allocation year and the total number of stock appreciation rights awarded in the year in question. With the aim of making greater allowance for the long-term effect in the remuneration structure, the Supervisory Board decided to extend the waiting period from two to four years for the Executive Board with respect to stock appreciation rights granted from the 2010 allocation year onwards.

Upon expiry of this waiting period a maximum 60 percent of the stock appreciation rights awarded for an allocation year may be exercised. The waiting period for each additional 20 percent of the stock appreciation rights awarded for this allocation year is one year. Stock appreciation rights lapse if they are not exercised within ten years of the date when they were awarded.

The previous conditions apply to stock appreciation rights granted in the financial year for the 2009 allocation year.

For further details of the virtual stock option plan please see the explanatory remarks in the notes to this Group Annual Report, Section 7.3 “Share-based payment”.

The following table summarises the structure of Executive Board remuneration applicable from 1 January 2010 onwards.

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At its meeting on 8 November 2010 the Supervisory Board – at the recommendation of the Standing Committee – approved revisions to the system of Executive Board remuneration effective 1 January 2011 in order to respond to the amended legal framework as well as to bring the split into fixed and variable remuneration more closely into line with market standards and make it more competitive. This future system of Executive Board remuneration is summarised under the heading “Structure and system of Executive Board remuneration from 2011 onwards”.

The total remuneration received by the Executive Board of Hannover Re on the basis of its work for Hannover Re and its affiliated companies is calculated from the sum of all components that resulted in a charge in the financial year concerned, irrespective of whether they accrued to the relevant Board member. Pecuniary advantages from non-cash compensation are also included. The stock appreciation rights awarded for the financial year in question have also been included in the total remuneration at their fair value on the date when they were awarded.

In the 2010 financial year 234,905 stock appreciation rights with a value of EUR 1.5 million were granted to active members of the Executive Board for the 2009 allocation year; in the previous year no stock appreciation rights were granted for the 2008 financial year because the internal performance criterion was not satisfied. Of the stock appreciation rights granted in previous years to active and former members of the Executive Board, an amount of EUR 0.14 million (EUR 0.15 million) was exercised.

As at 31 December 2010 the members of the Executive Board had at their disposal a total of 547,901 (318,170) granted, but not yet exercised stock appreciation rights with a fair value of EUR 4.7 million (EUR 2.1 million).

The remuneration (excluding pension payments) received by former members of the Executive Board totalled EUR 0.9 million (EUR 0.7 million).

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The Annual General Meeting of Hannover Re held on 12 May 2006 resolved by a voting majority of 85.5% to avail itself until 31 December 2010 of the option contained in the Act on the Disclosure of Management Remuneration (VorstOG) not to specify the remuneration of the Executive Board on an individualised basis by name.

The pension agreements between members of the Executive Board and Hannover Re with a contract date prior to 2009 contain commitments to an annual retirement pension calculated as a percentage of the fixed annual remuneration (defined benefit). Depending upon the contract date, the target pension is at most 50% or 65% of the monthly fixed salary payable on reaching the age of 65. For contracts from 2009 onwards commitments exist on the basis of a defined contribution scheme. The annual funding contribution for these contracts is paid by the company in an amount of 25% of the pensionable income (fixed annual emoluments as at 1 July of each year). Under both contract variants (defined benefit and defined contribution) income received from other sources while the pension is being drawn is taken into account pro rata or in full in certain circumstances (e.g. in the event of incapacity for work or termination of the contract of employment prior to age 65, receipt of disability benefits or previously earned pension payments).

There were eight (five) individual commitments to active Board members in the year under review. An amount of EUR 2.9 million (EUR 1.5 million) was allocated to the provision for pensions in the year under review. The provision stood at EUR 11.3 million (EUR 8.4 million) as at 31 December 2010. In addition, contributions to a pension fund in an amount of EUR 0.06 million (EUR 0.05 million) were paid.

The pension payments to former members of the Executive Board and their surviving dependants, for whom thirteen (thirteen) pension commitments existed, totalled EUR 1.3 million (EUR 1.3 million) in the year under review. Altogether, an amount of EUR 15.5 million (EUR 13.8 million) has been set aside for these commitments.

The members of the Executive Board require the approval of the Supervisory Board to take on sideline activities. This ensures that neither the remuneration granted nor the time required for this activity can create a conflict with their responsibilities on the Executive Board. If the sideline activities involve seats on supervisory boards or comparable control boards, these are listed and published in the Annual Report of Hannover Re. The remuneration received for such seats at Group companies is deducted when calculating the variable bonus and shown separately in the table.

Structure and system of Executive Board remuneration from 2011 onwards

The remuneration model for the Executive Board of Hannover Re was subject to further revision as a consequence of regulatory developments. These amendments, which were undertaken with the assistance of an independent firm of consultants specialising in the field of remuneration systems, ensure that the total remuneration and the split into fixed and variable components conform to regulatory requirements – especially the provisions of the Act on the Adequacy of Management Board Remuneration (VorstAG) and the Regulation on the Supervisory Law Requirements for Remuneration Schemes in the Insurance Sector (VersVergV) – and are both competitive and in line with market standards.

The revised remuneration model for the Executive Board comes into effect on 1 January 2011 and contains the following new features worthy of special note:

• measurement of the profit bonus according to the return on equity generated by Hannover Re (instead of the previous measurement based on EBIT and EPS), giving due consideration to the cost of capital,
• explicit allowance for the business group development in the performance bonus in the form of the business group IVCs (Intrinsic Value Creation being a tool of value-based management used to measure the accomplishment of longterm objectives),
• integration of a bonus bank for the partial deferment of payment over three years
• issue of virtual Hannover Re Share Awards as a participation component with a deferment in payment of four years (instead of the previously used virtual stock option plan).

The following tables provide an overview of the structure of the Executive Board’s remuneration applicable from 1 January 2011 onwards, as approved by the Supervisory Board at its meeting on 8 November 2010 on the recommendation of the Standing Committee.

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The following chart summarises the revised make-up of the variable remuneration components. For details of measurement and payment procedures please see the two tables following the chart.

Revised remuneration model (variable components)

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A non-pensionable fixed remuneration component is to be introduced for members of the Executive Board with a defined benefit commitment.