Compensation of the Executive Board Members

For adidas, transparent and comprehensible reporting on the compensation of the Executive Board and Supervisory Board is an essential element of good corporate governance. The Compensation Report is a component of the combined Management Report and outlines the principles of the compensation system for the members of the Executive Board and Supervisory Board as well as the level and structure of the compensation in accordance with the legal requirements and the recommendations of the German Corporate Governance Code (‘Code’) as amended on February 7, 2017, which was published in the Federal Gazette on April 24, 2017 and May 19, 2017 (corrected version).

COMPENSATION OF THE EXECUTIVE BOARD MEMBERS

Following preparation by the Supervisory Board’s General Committee, the compensation system for the Executive Board and the total compensation of each member of the Executive Board is determined and regularly reviewed by the entire Supervisory Board. The compensation and personnel topics dealt with by the Supervisory Board and General Committee in the year under review are described in the Supervisory Board Report. see Supervisory Board Report

COMPENSATION SYSTEM

Principles of the compensation system

The compensation system is geared toward creating an incentive for successful, sustainable and long-term corporate management and development. The compensation is thus structured with an appropriate balance of non-performance-related and performance-related components. More than 50% of the performance-related target compensation components are based on mainly future-related, multi-year performance criteria. They are designed in such a way that both positive and negative developments are considered. Moreover, the incentive to achieve the long-term targets decisive for the multi-year performance-related compensation component is higher than the incentive to achieve the targets decisive for being granted the one-year performance-related compensation component. Execution of the corporate strategy is promoted by selecting suitable performance targets for the performance-related compensation. Therefore, at least 80% of the performance-related compensation is directly linked to the short- and long-term sales and profitability targets externally communicated, thus bringing the compensation of the Executive Board members directly in line with the interests of the shareholders. SEE SECTION ‘VARIABLE PERFORMANCE-RELATED COMPONENTS’

When designing the compensation system and determining the Executive Board compensation, the Supervisory Board takes into account the size and global orientation, the economic situation, the success and the outlook of the company. Furthermore, the Supervisory Board considers the common level of compensation in particular by taking into account the compensation level of the DAX 30 companies and the relation between the Executive Board compensation and that of senior management and employees overall, also in terms of its development over time. Compared with competitors, the compensation should be attractive, offering incentives to attract qualified members for the Executive Board and retain them long-term. In addition, when determining the compensation, the tasks of the respective Executive Board member and their contribution to the company’s success are taken into consideration. The performance-related compensation is measured based on the achievement of ambitious, pre-agreed targets; subsequent changes to performance targets or comparison parameters are not permitted. The compensation system aims to appropriately remunerate exceptional performance, while diminishing performance-related compensation when targets are not met. Thus, in the Supervisory Board’s opinion, an appropriate level of compensation, which is reviewed regularly by the Supervisory Board and adjusted if required, is ensured.

The compensation system which has been applicable for the members of the Executive Board since the 2018 financial year was adopted by the shareholders at the Annual General Meeting on May 9, 2018. In view of the Act on the Implementation of the Second Shareholders’ Rights Directive (Gesetz zur Umsetzung der zweiten Aktionärsrechterichtlinie – ‘ARUG II’) and the coming into force of the new version of the German Corporate Governance Code, structural changes to the compensation system for the Executive Board members will become necessary. Furthermore, in late 2020, adidas will present the new long-term strategic business plan applicable from the 2021 financial year and the associated targets. In this context, it is intended to present the revised compensation system to the Annual General Meeting for approval in 2021 in accordance with the provisions of ARUG II. In this way, the new short-term and long-term performance-related compensation components for the Executive Board members can be aligned with the company’s new long-term targets applicable from the 2021 financial year.

The total annual compensation of the Executive Board members is composed of a fixed compensation component, an annual cash bonus (‘Performance Bonus’), a long-term share-based bonus (Long-Term Incentive Plan – ‘LTIP Bonus’) as well as pension benefits and other benefits. In case of 100% target achievement, the target direct compensation (total annual compensation without pension benefits and other benefits) is composed of

• 35% fixed compensation,
• 25% Performance Bonus and
• 40% LTIP Bonus.

Compensation system for the Executive Board members

Overall, the Supervisory Board believes that the compensation system is clear and easy to understand and makes use of transparent performance criteria. Due to the fact that the target direct compensation consists predominantly of variable components which are directly linked to the short- and long-term objectives of the company and due to the share-based long-term compensation of the Executive Board members, the interests of the Executive Board are aligned with the interests of the shareholders.

Fixed non-performance-related components

Fixed compensation

The fixed compensation consists of an annual fixed salary. In principle, it is paid in twelve equal monthly installments and generally remains unchanged during the term of the service contract.

Other benefits

Other benefits for the Executive Board members primarily consist of paying for, or providing the monetary value of, non-cash benefits such as premiums or contributions to insurance schemes in line with market practice, the provision of a company car or the payment of a car allowance and, if Executive Board members are also subject to taxation abroad, the costs for the tax consultant selected by adidas. The total amount of other benefits is capped at 5% of the total amount of the fixed compensation and a (possible) Performance Bonus granted in the respective financial year (‘Benefit Cap’). Moreover, if an Executive Board member has to relocate upon initial appointment to the Executive Board, adidas pays reasonable expenses incurred for international relocations for the Executive Board member and their family; the expenses paid are capped on an individual basis.

Defined contribution pension plans

The current members of the Executive Board have defined contribution pension plans. Each year, as part of the pension commitments, the virtual pension account of each Executive Board member is credited with an amount which equals a percentage determined by the Supervisory Board and which is related to the Executive Board member’s individual annual fixed compensation. The appropriateness of the percentage is regularly assessed by the Supervisory Board. When making its decision, the Supervisory Board takes into account the targeted individual pension level – also based on the length of service on the Executive Board – and the resulting annual and long-term expenses for the company. The percentage most recently determined by the Supervisory Board amounts to 50%. The pension assets on the virtual pension account at the beginning of the respective calendar year yield a fixed interest rate of 3% p.a., however for no longer than until the pension benefits first become due. As a rule, interest is credited as at the close of December 31 in each calendar year, and on the due date in the year in which the pension benefits are first due. Entitlement to the pension benefits becomes vested immediately.¹

Entitlements to pension benefits comprise pensions to be received upon reaching the age of 65, or, on application, early retirement pensions to be received upon reaching the age of 62 or invalidity and survivors’ benefits.²

On occurrence of the pension-triggering event, the pension benefits generally correspond to the balance of the pension account including accumulated interest on that date. In case of invalidity or death prior to reaching the age of 62, for the minimum coverage, the Executive Board member’s virtual pension account will be credited with the outstanding pension contributions for the time until the Executive Board member would have reached the age of 62, but no longer than for 120 months (without interest accrual). The pension benefits due upon death of the Executive Board member are payable to the widow, the widower or the registered civil partner and the children entitled to pension benefits as joint creditors.

At the option of the Executive Board member or the surviving dependents, the payout of all pension benefits is made either as a one-time payment or in up to ten equal annual installments. If no choice is made by the Executive Board member or by the surviving dependents, the pension benefits are paid out in three equal annual installments. As a rule, in case of a payout in annual installments, the installments are due in January of the respective year.³

Variable performance-related components

Performance Bonus

As the annual variable performance-related component, the Performance Bonus serves as compensation for the Executive Board’s performance in the past financial year in line with the short-term development of the company. At the beginning of the financial year, the Supervisory Board establishes the respective weighted performance criteria. In case of 100% target achievement, the target amount of the Performance Bonus corresponds to 25% of the target direct compensation of the respective Executive Board member.

The amount of the Performance Bonus is determined based on the achievement of, generally, four weighted criteria. Two of these criteria are the same for all Executive Board members and are overall weighted at 60%. These criteria are directly linked to the annual guidance externally communicated and, at the same time, follow directly from the – also externally communicated – long-term growth targets of adidas. The other two criteria, which are also in line with the company’s short- and long-term targets and reflect priorities of the respective Executive Board function also taking into account non-financial aspects, are determined on an individual basis for the respective Executive Board member and are overall weighted at 40%. All criteria are designed in such a way that target achievement may also be zero. When targets are clearly not met, the Performance Bonus may consequently be forfeited entirely.

At the end of the financial year, the precise target achievement of each Executive Board member, which is, in principle, based on a comparison of the predefined target values with the values achieved in the year under review, is assessed by the Supervisory Board. The Supervisory Board determines the factor by which the Performance Bonus target amount is multiplied by adding up these degrees of target achievement (‘overall degree of target achievement’). The result is the individual amount of the Performance Bonus to be paid (‘Performance Bonus Amount’). When determining the degrees of target achievement and thus when determining the Performance Bonus Amount, the Supervisory Board may, at its equitable discretion, take into account extraordinary positive and negative developments which are not related to the performance of the Executive Board.

Even in case of an overall degree of target achievement of more than 150%, the Performance Bonus Amount is capped at a maximum of 150% of the individual Performance Bonus target amount. If the overall degree of target achievement lies at or below 50%, the Executive Board member is not entitled to the Performance Bonus.

If an Executive Board member takes or leaves office during a financial year, the Performance Bonus is generally calculated pro rata temporis based on the overall degree of target achievement determined at the end of the financial year. In certain cases defined in the terms and conditions of the Performance Bonus, entitlement to the payout of a Performance Bonus is generally forfeited.

The Performance Bonus Amount is payable following approval of the consolidated financial statements of the past financial year.

Long-Term Incentive Plan 2018/2020 (‘LTIP 2018/2020’)

The LTIP 2018/2020 aims to link the long-term performance-related compensation of the Executive Board to the company’s performance and thus to the interests of the shareholders. Therefore, the LTIP 2018/2020 is share-based. It consists of three annual tranches (2018, 2019 and 2020) and each tranche is assessed based on a period of approximately four and a half years. Each of the three annual LTIP tranches consists of a performance year and a subsequent lock-up period of slightly more than three years.

At the beginning of 2018, the Supervisory Board determined for each of the three performance years (2018, 2019 and 2020) the absolute increase in net income from continuing operations compared to the respective previous year as performance criterion. The target values for the annual LTIP tranches follow directly from the externally published long-term net income growth targets of the company. For instance, if net income from continuing operations increased by a total of € 630 million (100% target achievement) in the three-year period from 2018 to 2020, net income from continuing operations would amount to € 2,060 million in 2020. Compared to 2015 (basis of adidas’ corporate strategy), this would correspond to an average increase in net income of 23% per year, which would be within the target corridor of 22% to 24%, as defined by adidas in its current strategic business plan.

If the increase in net income from continuing operations is below € 210 million in the respective performance year, the target value for 100% target achievement is increased correspondingly for the following performance year, unless the Supervisory Board decides otherwise at its equitable discretion. For instance, if net income increased by only € 180 million in the past performance year, net income in the following performance year must be increased by € 240 million for 100% target achievement. However, if the increase in net income is higher than € 210 million in a performance year, the target for the following performance year remains unaffected. So despite a net income increase in 2019 of € 263 million (2018: € 279 million), reflecting a target achievement of 138% (2018: 149%), net income in the following performance year 2020 must still be increased by € 210 million for a target achievement of 100%.

In case of 100% target achievement, the LTIP target amount for each of the LTIP tranches corresponds to 40% of the target direct compensation of the respective Executive Board member.

The precise target achievement is determined on the basis of the approved consolidated financial statements for the respective performance year. In this respect, the Supervisory Board may, at its equitable discretion, take into account extraordinary positive and negative developments which are not related to the performance of the Executive Board. The degree of target achievement by which the annual LTIP target amount determined for the respective Executive Board member is multiplied is derived from the amount of the actual increase in net income from continuing operations for the respective performance year.

If the actual increase in net income from continuing operations compared to the previous year is between the predefined threshold values, the degree of target achievement is determined based on a sliding scale. If the annual increase in net income is below € 140 million, the degree of target achievement is zero. Consequently, the LTIP Bonus for the respective LTIP tranche is forfeited completely. Furthermore, the degree of target achievement is capped at 150%, even if the increase in net income exceeds € 280 million.

By multiplying the degree of target achievement thus calculated with the annual LTIP target amount determined for the respective Executive Board member based on 100% target achievement, the Grant Amount is determined, which is paid out to the Executive Board member for the respective annual LTIP tranche following the approval of the consolidated financial statements of adidas for the performance year. The Executive Board members have to invest the full Grant Amount which remains after deducting applicable taxes and social security contributions (‘LTIP Payout Amount’) into the acquisition of adidas AG shares (‘Share Ownership’). The shares purchased are subject to a lock-up period. The lock-up period ends in the third financial year after the acquisition of the shares upon expiry of the month in which the Annual General Meeting of adidas AG takes place. The Executive Board members may only dispose of the shares after expiry of the lock-up period.

LTIP 2018/2020: Annual LTIP tranches

Due to this mechanism, the compensation which the Executive Board members eventually receive from each of the LTIP tranches is directly dependent on the share price performance during the respective lock-up period of slightly more than three years and is thus dependent on the long-term performance of the company. The Executive Board members are entitled to any dividends distributed in connection with these shares during the lock-up period. If an Executive Board member takes or leaves office during a performance year, the Grant Amount for the respective annual LTIP tranche is generally calculated on a pro rata basis. The departed Executive Board member does not participate in the annual LTIP tranches for which the performance year begins after the respective Executive Board member’s departure. In certain cases defined in the terms and conditions of the LTIP 2018/2020, any claims in connection with the LTIP 2018/2020 are generally forfeited and adidas AG shares already purchased, for which the lock-up period has not yet expired, must be transferred to adidas without compensation payments.

Furthermore, to ensure sustainable management and development of the company, the terms and conditions of the LTIP 2018/2020 contain malus and clawback provisions; until expiry of the lock-up period (malus) and beyond (clawback), these provisions allow the Supervisory Board at its equitable discretion, under certain circumstances, to partially or completely reduce the compensation from the LTIP 2018/2020 already paid. Such circumstances are, for instance, material misstatements in the financial reports, serious compliance violations and violations of duty as well as breaches of the company-internal rules of conduct by the Executive Board member which, in any such case, would lead to an unjustified bonus payment in the context of the LTIP 2018/2020. Moreover, in the event of violations of duty by Executive Board members, the respective claims for damages under stock corporation law are applicable.

The compensation system for the Executive Board allows the Supervisory Board, at its equitable discretion and in exceptional cases, to grant a special bonus in case of extraordinary performance by an Executive Board member which is not related to performance criteria that were already decisive for granting the Performance Bonus or the LTIP Bonus. If such special bonus is granted, it is capped at a maximum of 100% of the annual fixed compensation of the financial year for which the special bonus is granted. If a special bonus is granted, the reasons for such granting will be disclosed in the Compensation Report on the financial year concerned.

Share ownership

40% of the target direct compensation of the Executive Board members is granted based on the long-term performance-related compensation component LTIP 2018/2020. To promote sustainable development of the company, the Executive Board members are obligated in the context of the LTIP 2018/2020 to invest the full Payout Amount into the acquisition of adidas AG shares. The shares purchased are subject to a lock-up period of slightly more than three years – as a result, the number of adidas AG shares directly held by the Executive Board members increases on an annual basis.

Commitments to Executive Board members upon termination of tenure

Unless otherwise agreed in the individual case, if the service contract ends upon the Executive Board member reaching the age of 65 or upon non-renewal of the service contract, the Executive Board member is entitled to receive annual fixed compensation on a pro rata basis up to the date on which they leave office as well as a potential prorated Performance Bonus and a potential prorated LTIP Bonus. Further, Executive Board members are subject to a post-contractual competition prohibition of two years. As consideration, for the duration of the competition prohibition, the Executive Board members generally receive a monthly compensation amount totaling 50% of the monthly fixed compensation last received, subject to offsetting (e.g. of income from other use of their work capacity). If the departed Executive Board member receives pension payments from the company, this compensation is offset against any pension benefits owed by the company during the period of the competition prohibition.

Under certain circumstances, the departing Executive Board member also receives a follow-up bonus. As regards the current members of the Executive Board, such a follow-up bonus is agreed with Roland Auschel in the amount of 75% of the Performance Bonus granted to him for the last full financial year. This follow-up bonus is payable in two tranches, twelve and 24 months following the end of the contract.

In case of premature termination of tenure in the absence of good cause, the Executive Board service contracts cap potential severance payments at a maximum of twice the total annual compensation, not exceeding payment claims for the remaining period of the service contract (‘Severance Payment Cap’). If the service contract is terminated due to a change of control, a possible severance payment is limited to 150% of the Severance Payment Cap. The Executive Board member does not receive a severance payment if they terminate tenure prematurely at their own request or if there is good cause for the company to terminate the employment relationship. The service contracts concluded with Executive Board members newly appointed with effect from January 1, 2020, generally stipulate that compensation for periods of competition prohibition possibly paid on a monthly basis to departing Executive Board members is offset against any severance payments potentially paid by adidas.

If an Executive Board member dies during their term of office, their spouse or partner receives or, alternatively, any dependent children receive, in addition to pension benefits, the pro rata annual fixed salary for the month of death and the following three months, but no longer than until the agreed end date of the service contract.

Sideline activities of Executive Board members

Executive Board members may only take on sideline activities with or without remuneration, in particular supervisory board mandates in group-external companies, with the prior approval of the Supervisory Board. Group-internal mandates are deemed covered by the contractually agreed Executive Board compensation. The Supervisory Board decides whether or not compensation for group-external mandates is credited to the Executive Board compensation. In accordance with a Supervisory Board resolution, the compensation received by Kasper Rorsted for his Board of Directors mandate at Nestlé S.A. is not credited to his Executive Board compensation. see Executive Board

EXECUTIVE BOARD COMPENSATION 2019

2019 Performance Bonus

For the 2019 financial year, the Supervisory Board determined

• currency-neutral sales growth,
• an increase in the operating margin and
• two criteria relating to the individual performance of the Executive Board members

as performance criteria.

The targets determined for the Performance Bonus are oriented toward the guidance communicated for the 2019 financial year, namely ‘currency-neutral sales increase between 5% and 8%’ and an ‘increase in the operating margin to a level between 11.3% and 11.5%’. When determining the degree of target achievement for the criterion ‘increase in the operating margin’, the positive effect of the accounting change pursuant to IFRS 16 in the amount of € 24 million was excluded.

In the 2019 financial year, the individual criteria relating to the individual Executive Board function focused on, for instance, execution of the corporate strategy, succession planning and performance management within the company, business success in the individual markets, product innovations, digitalization and operating efficiency. Based on the targets actually achieved, this results in an overall degree of target achievement between 75% and 107% (2018: 67%-118%) for the individual Executive Board members for the year under review. As in prior years, when determining the respective individual overall degrees of target achievement, the Supervisory Board did not take into account any extraordinary positive or negative developments which are not related to the performance of the Executive Board.

LTIP 2018/2020: Performance year 2019

In the 2018 financial year, the Supervisory Board determined as performance criterion for each of the three performance years (2018, 2019 and 2020) the absolute increase in net income from continuing operations compared to the respective previous year.

Based on the actual target achievement, this results in a degree of target achievement of 138% (2018: 149%) for each Executive Board member for the performance year 2019. When determining the degree of target achievement, the negative effect of the accounting change pursuant to IFRS 16 in the amount of € 54 million was excluded. Apart from this, as in prior years, the Supervisory Board did not take into account any extraordinary positive or negative developments which are not related to the performance of the Executive Board. The Executive Board members have to invest the full Grant Amount which remains after deducting applicable taxes and social security contributions (‘LTIP Payout Amount’) into the acquisition of adidas AG shares (‘Share Ownership’). The shares purchased will be subject to a lock-up period ending upon expiry of the month in which the Annual General Meeting of adidas AG takes place in the 2023 financial year. See section ‘Long-Term Incentive Plan 2018/2020 (LTIP 2018/2020)’

As at December 31, 2019, the total number of adidas AG shares which are held by Executive Board members active in the 2019 financial year and which are subject to a lock-up period amounts to 21,451 shares with a total value of € 6.217 million. The lock-up period for the adidas AG shares purchased in the 2018 LTIP tranche expires on May 31, 2022 and for the adidas AG shares purchased in the 2019 LTIP tranche on May 31, 2023. The number and performance of the adidas AG shares purchased so far by the Executive Board members in the context of the LTIP 2018/2020 are set out individually in the following.

The Executive Board was not granted a special bonus, as in prior years.

Pension commitments

The service costs for the pension commitments granted to the Executive Board members and the cash values of the vested rights in the 2019 financial year are set out individually in the following.

Overall compensation for 2019 in accordance with the code

Based on the Supervisory Board’s aforementioned determination, the overall compensation of the Executive Board for the 2019 financial year amounts to € 22.361 million. This represents a decrease of approximately 6% (2018: € 23.912 million). Of this overall compensation, € 3.574 million (2018: € 4.431 million) was attributable to the one-year and € 9.245 million (2018: € 10.186 million) to the multi-year performance-related compensation.

The recommendations of the Code to individually disclose the compensation components for each Executive Board member and to use the sample tables attached to the Code are implemented in the following.

Benefits granted in accordance with the code

In the following table, the individual compensation components in case of 100% target achievement of the performance-related compensation are disclosed for each Executive Board member individually, including other benefits and service costs, and also including the maximum and minimum achievable compensation.

Allocation in accordance with the code

Pursuant to the recommendations of the Code, the annual fixed compensation, other benefits, the Performance Bonus, the LTIP Bonus as well as the service costs are disclosed as an allocation for the financial year in which the compensation was granted, with the service costs not constituting an actual allocation to the Executive Board members.

Commitments to Executive Board members upon termination of tenure

Termination of Gil Steyaert’s tenure effective February 26, 2019

In connection with the termination of his Executive Board mandate, Gil Steyaert received a severance payment of € 3,422,316.⁴ Furthermore, it was contractually agreed to dispense with the obligation to invest the LTIP Bonus granted to Gil Steyaert for the 2018 financial year into adidas AG shares.

As regards the post-contractual competition prohibition, Gil Steyaert has received monthly compensation in the amount of € 28,634 since March 1, 2019, payable for a total period of 24 months. This corresponds to 50% of the last fixed monthly salary. If the compensation paid for the post-contractual competition prohibition and any potential income from other employment in total exceed the monthly fixed salary last received by Gil Steyaert before his departure, any income from other employment will be offset against the compensation paid for the post-contractual competition prohibition. The overall maximum compensation for the post-contractual competition prohibition payable to Gil Steyaert therefore amounts to € 687,225.

Termination of Eric Liedtke’s tenure effective December 31, 2019

In connection with the termination of his Executive Board mandate at the end of December 31, 2019, Eric Liedtke was granted a severance payment of € 5,428,572.

As regards the post-contractual competition prohibition, Eric Liedtke will receive monthly compensation in the amount of € 41,667 for a period of 24 months from January 1, 2020. This corresponds to 50% of the last fixed monthly salary. If the compensation paid for the post-contractual competition prohibition and any potential income from other employment in total exceed the monthly fixed salary last received by Eric Liedtke before his departure, any income from other employment will be offset against the compensation paid for the post-contractual competition prohibition. The overall maximum compensation for the post-contractual competition prohibition payable to Eric Liedtke therefore amounts to € 1,000,000.

Overall payments to former members of the Executive Board and their surviving dependents

In the 2019 financial year, overall payments to former members of the Executive Board and their surviving dependents amounted to € 14.567 million (2018: € 3.746 million). The increase in the overall payments compared to the previous year is attributable to the severance payments granted to Eric Liedtke and Gil Steyaert due to their departure from the Executive Board in the year under review.

Provisions were created for pension entitlements for former members of the Executive Board who resigned on or before December 31, 2005 and their surviving dependents, amounting to € 46.326 million (2018: € 43.904 million) in total as at December 31, 2019. There are pension commitments toward six former Executive Board members who resigned after December 31, 2005, which are covered by a pension fund or a pension fund in combination with a reinsured pension trust fund. From this, indirect obligations amounting to € 46.216 million (2018: € 40.969 million) arise for adidas AG, for which no provisions were created due to financing through the pension fund and pension trust fund.

Miscellaneous

The Executive Board members do not receive any additional compensation for mandates within adidas. The Executive Board members have not received any loans or advance payments from adidas AG. Furthermore, no Executive Board member received any payments or promises of payments from third parties with regard to their work at adidas.