Schaeffler AG’s Board of Managing Directors is directly responsible for managing the Schaeffler Group, setting objectives and the strategic direction, and managing the implementation of the growth strategy. The Supervisory Board of Schaeffler AG appoints, supervises, and advises the Board of Managing Directors.
In 2018, the Schaeffler Group’s management utilized a three-dimensional matrix organization consisting of three divisions, five functions, and four regions to manage the group’s business activities. The Schaeffler Group’s internal management system consists of the annual budget developed based on the strategic framework specified by the Board of Managing Directors, ongoing monitoring and management of financial performance indicators, regular meetings of the Board of Managing Directors and management, as well as reports provided to the Supervisory Board of Schaeffler AG. Ongoing monitoring and management is based on a comprehensive system of standardized reports on net assets, financial position, and earnings. Discussions at the meetings of the Board of Managing Directors and of management address the results of operations, including the achievement of targets and objectives, as well as the outlook for the year as a whole and any action that may be required.
The Schaeffler Group’s internal management system is designed to support implementation of the group strategy. Ensuring that the Schaeffler Group continues to meet its core business objective of growing profitably and creating long-term value necessitates a value-based approach to managing its business portfolio. One important principle underlying value-based management of companies is the necessity to reflect the interests and needs of investors.
Value-based management is an integral component of all planning, management, and control processes. The Schaeffler Group’s success-based management remuneration is directly linked to the economic development of the company as well.
Strategic financial performance indicators
In order to grow profitably and create long-term value, the company has to employ its available capital profitably. Having earnings sustainably exceed the cost of available debt and equity capital creates the fundamental basis for this. The Schaeffler Group’s internal management system consists of several levels. The Schaeffler Group’s key value-based performance indicator is Schaeffler Value Added (SVA) as well as return on capital employed (ROCE), which is closely linked to ROCE. Schaeffler Value Added represents a key performance criterion within the framework governing the variable short-term remuneration of the Board of Managing Directors and the remuneration at the next-lower levels of management. Both indicators are determined before special items.
See chapter performance indicators and special items for further details.
Schaeffler Value Added (SVA): The Schaeffler Group’s value added is measured using the amount of value added by the company, referred to as Schaeffler Value Added (SVA). Calculation of the SVA starts with the company’s EBIT (earnings before financial result and income taxes). EBIT has to be sufficient to cover the cost of capital. Positive SVA means that EBIT has exceeded the cost of capital for the period and, therefore, that the Schaeffler Group has added value in this amount. Cost of capital is calculated by applying the minimum return of 10% p.a. (before tax) set by the Board of Managing Directors and the Supervisory Board to the average capital employed during the year.
Average capital employed is calculated by adding up the following operating balance sheet items: property, plant and equipment, intangible assets, and working capital, which in turn comprises trade receivables and inventories net of trade payables. The annual average is determined as the mathematical average of the balance at the end of each of the four quarters.
Return on Capital Employed (ROCE): While Schaeffler Value Added is an absolute measure of the value added by the company, ROCE measures the relative return on capital employed in percent. The ROCE indicator measures the rate of return on capital and is defined as EBIT divided by average capital employed. The indicator shows how efficiently a company manages the use of its resources. Comparing ROCE to the cost of capital provides information about how much value was added. If ROCE exceeds the cost of capital, the company is adding value. Thus, ROCE serves as a tool for value-based management.
Key operating financial performance indicators
The two indicators SVA and ROCE serve as indicators of the amount of shareholder value added in 2018. However, their high level of aggregation makes using them as a basis for targeted operational management difficult. Therefore, these indicators are mainly used for reporting purposes.
Consequently, at group level, the objectives of profitable growth and adding long-term value are operationalized using key financial performance indicators. Thus, the Schaeffler Group focuses on continually monitoring and optimizing the following three key operating financial performance indicators:
- Revenue growth (at constant currency)
- EBIT margin (before special items)
- Free cash flow before cash in- and outflows for M&A activities
These three key operating financial performance indicators represent the basis for operating decisions and also form the basis for the outlook. Overall optimization of these indicators adds shareholder value for the long term by sustainably generating a premium over and above the cost of capital.
Revenue growth (at constant currency): Since the Schaeffler Group’s economic success is based on a long-term growth strategy, significant importance is attached to the performance indicator revenue growth. Revenue growth is a relative indicator and measures the change in revenue compared to the prior year. In order to make the evaluation of the company’s results of operations as transparent as possible and to increase the comparability over time, the Schaeffler Group reports revenue growth at constant currency.
EBIT margin (before special items): The EBIT margin is used as an indicator of the Schaeffler Group’s operating performance. The EBIT margin is a relative indicator calculated as the ratio of EBIT to revenue. This ratio measures the company’s profitability and indicates how successfully the company’s operating business is being managed. Thus, group management ensures that the Schaeffler Group is growing profitably while utilizing capital efficiently. The EBIT margin is calculated before special items in order to make the operating performance more comparable over time.
Free cash flow before cash in- and outflows for M&A activities: Traditionally, the Schaeffler Group’s growth has been financed from internal sources. The primary performance indicator of the group’s ability to generate internal financing is free cash flow, which is defined as the sum of cash flows from operating activities and cash flows from investing activities. Free cash flow measures the company’s ability to convert its operating performance to cash inflows in order to finance ongoing operations and any required capital expenditures from the company’s own operating activities. Along with profitability, the key factors affecting free cash flow are effective management of working capital as well as the level of capital expenditures. In order to make the evaluation of the company’s results of operations as transparent as possible and improve comparability over time, the Schaeffler Group reports free cash flow, one of its key operating financial performance indicators, before cash in- and outflows for M&A activities.
As a result of the application of IFRS 16, all principal repayments on lease liabilities will be presented as financing activities in the statement of cash flows. In order to continue to present a measure of the Schaeffler Group’s ability to convert operating performance to cash inflows, free cash flow before cash in- and outflows for M&A activities will be determined net of any principal repayments on lease liabilities starting in 2019.
More on trends in the indicators discussed above in chapter "Course of business"
Additional financial performance indicators
In addition to the three key operating financial performance indicators, the Board of Managing Directors also continually tracks additional financial performance indicators including, among others, the capex ratio, R&D ratio, net debt to EBITDA ratio, effective tax rate, and the dividend payout ratio.
The company further monitors a number of leading operating indicators in order to be able to identify trends in a multitude of factors affecting the Schaeffler Group’s business early on and take them into account in managing the company. For instance, the company analyzes forecasts of relevant market, economic, and sector data, such as gross domestic product, currency trends, as well as automobile and industrial production in order to gain important insight into the future of the business. Raw materials prices are monitored as well in order to estimate trends in significant costs.
In order to obtain a reliable indication of the likely level of capacity utilization and the probable revenue trend, Schaeffler also monitors certain leading operating indicators specific to each division.
- Automotive OEM: Multi-year master agreements won within one period are measured using the indicator “lifetime sales” on an ongoing basis and compared to current period revenue by calculating the “book-to-bill ratio” which provides an indication of the medium- to long-term utilization of the Automotive OEM division’s capacity. Orders received for short-term delivery under master agreements with customers validly cover a period of approximately two months. Changes in this measure of capacity utilization are monitored on a weekly basis.
- Automotive Aftermarket: For the Automotive Aftermarket, no comparable leading indicators can be derived from the volume of order intake or orders on hand. This division holds regular discussions with major customers and observes its markets to obtain leading indications of the short-term demand situation.
- Industrial: The Industrial division uses the change in orders on hand due within the following three months as a leading indicator. This figure is monitored on a monthly basis.
All financial indicators are calculated on a monthly basis using standardized reports on earnings, financial position, and net assets. These reports contain a comparison of budget vs. actual as well as a prior year comparison. The comparison of budget vs. actual is based on the annual budget flowing from the integrated operating budget embedded in a longer-range strategic corporate plan established by the Board of Managing Directors.
In addition to the financial performance indicators, management monitors additional key non-financial indicators. Such indicators are calculated using standardized reports during the year and include: quality, headcount, delivery performance, customer satisfaction, employee satisfaction, and rating. In order to facilitate a more precise evaluation of the company’s labor capacity, the number of employees will be determined in terms of full time equivalents (FTE) for internal management purposes starting in 2019.
See chapter "Sustainability management" for further detail.
Further non-financial measures were defined for sustainability management purposes. Thus, the company has defined a set of key figures for each field of action addressed in the sustainability strategy, used to manage the operation of the group’s sustainability measures. The company has a medium-term objective to define non-financial performance indicators and to incorporate these indicators in the value-based management of the company.
In managing the company, senior management considers it imperative that each individual Schaeffler Group employee act strictly within the relevant legal limits and comply with corporate governance standards.
See chapter "Corporate Governance" for further detail.
A company’s success depends to a considerable extent on the performance of its employees. In order to appropriately acknowledge this performance and to offer a motivating incentive, the company has developed a comprehensive remuneration system.
The Schaeffler Group aims to consistently align its brand identity, management model, and the four corporate values with one another and to focus the entire organization on common goals. A consistent performance-based remuneration system is key to achieving this aim. Harmonizing the indicators used to determine variable remuneration is one of the key objectives designed to standardize the Schaeffler Group remuneration models.
As a first step, the remuneration system for the Board of Managing Directors was adjusted and consistently oriented toward the Schaeffler Value Added/increasing shareholder value and free cash flow targets when Schaeffler AG’s common non-voting shares were listed in October 2015. A significant change introduced in this amendment was the addition of a long-term variable component, known as the long-term bonus, complementing the variable short-term component, known as the short-term bonus. The short-term bonus references a one-year period while the long-term bonus covers a four-year period, with the share price trend acting as one of its key performance criteria.
See chapter "Remuneration Report" for further detail.
The targets largely represent the strategic and key operating financial performance indicators, with the latter in turn representing the key performance indicators reflected in the annual outlook. As a result, operating targets are designed to be congruent with the measures comprising the outlook. Shareholders’ interests are reflected in the remuneration system by taking into account Schaeffler Value Added for variable short-term remuneration and the increase in the share price for the variable long-term remuneration.
In a subsequent step, the company adjusted the remuneration system for its top executives in 2016, applying the same considerations as those underlying the remuneration system for the Board of Managing Directors.
In 2017, the company then aligned the performance indicators relevant to variable remuneration across all remuneration models, both at the management level and for all levels of staff below management, for instance for the profit sharing arrangement in Germany.
The realignment is designed to create a modern, attractive and motivating remuneration system that is consistent with the values of a global family business and whose key performance measures reflect both the current year’s performance and the long-term and sustainable value added.