Volkswagen : Remuneration System for the Board of Management Members of Volkswagen Aktiengesellschaft

Remuneration system for the Board of Management members of

Volkswagen Aktiengesellschaft

1. KEY FEATURES OF THE REMUNERATION SYSTEM FOR THE BOARD OF MANAGEMENT MEMBERS OF VOLKSWAGEN AKTIENGESELLSCHAFT
   Volkswagen Aktiengesellschaft has set itself the goal of making the future of mobility even more sustainable and, in doing so, meeting the diverse needs of its customers and achieving sustainable growth. These strategic goals are also supported by a re- muneration system for the Board of Management members of Volkswagen Aktieng- esellschaft whose design pays particular attention to, among other things, the choice of the performance targets and remuneration structure.
   On 3 March 2023, the Supervisory Board of Volkswagen Aktiengesellschaft most re- cently resolved a remuneration system for the Board of Management members in ac- cordance with the provisions of section 87a Aktiengesetz (German Stock Corporation Act), which was approved by the General Meeting on 10 May 2023 with 98.82 % of the votes cast. The Supervisory Board regularly reviews the amount and composition of the Board of Management members' remuneration. In doing so, the Supervisory Board takes into account, in particular, how the remuneration of Peer Group companies and other DAX companies has changed as well as recommendations of investors. The Su- pervisory Board resolved to adjust the remuneration system with effect as of 1 Janu- ary 2024 in particular to satisfy the interests of the capital market in taking into ac- count the key financial indicator "net cash flow in the Automobile Division" when cal- culating the remuneration of the Board of Management members. For this purpose, in the annual bonus for the Board of Management members, the current financial perfor- mance target "Operating Profit of the Volkswagen Group including Chinese Joint Ven- tures (pro rata)" will be replaced by the financial performance target net cash flow in the Automobile Division. Net cash flow in the Automobile Division is a key performance indicator that serves as a criterion for, in particular, earning power and investment and dividend capability; it is therefore highly relevant for the capital market. Volkswagen Aktiengesellschaft states the net cash flow in the Automobile Division in the group management report. Furthermore, the Supervisory Board will likely suspend the ESG criterion of the mood index in the 2024 and 2025 financial years since the underlying measurement method is to be optimised and recalibrated.
   The new remuneration system includes the following adjustments in particular:

The annual bonus is based on the financial performance targets of the net cash flow in the Automobile Division of Volkswagen Aktiengesellschaft ("Net Cash Flow in the Automobile Division") and the operative return on sales of the Volkswagen Group (ROS) ("Operative Return on Sales") as well as the achievement of sustainability targets (en- vironment, social and governance, "ESG Targets"). The financial performance targets promote the strategic goal of competitive profitability. The integration of the sustainability targets also reflects the importance of the environment, social and governance factors. The selection of one or more targets per ESG dimension (as a rule, decarbonisation index, mood and diversity index as well as compliance and integrity factor) ensures that a wide range of sustainability components that are of great strategic relevance to Volkswagen Aktiengesellschaft are comprehensively covered.

In order to ensure that the remuneration of the Board of Management members is linked to the long-term development of the Volkswagen Group, the long-term variable remuneration constitutes a significant portion of the total remuneration. The long-term variable remuneration (long-term incentive, "LTI") is granted in the form of a performance share plan with a four-year performance period. The financial performance target is the audited, fully diluted earnings per Volkswagen preference share based on the continued and discontinued divisions of the Company (earnings per share, "EPS") during the performance period. In addition, the disbursement amount depends on the development of the price of the Volkswagen preference share and the dividends paid out during the performance period. Using the EPS financial performance target in conjunction with the development in the share price and the dividends paid out, measured over four years, ensures that the incentives have a long-term effect and promotes the strategic goal of competitive profitability. Since this is an important indicator for valuing shares, the interests of investors have also been taken into account.

The remuneration system for Board of Management members is clear and understand- able. It complies with the requirements of the Aktiengesetz and takes into account the recommendations of the German Corporate Governance Code (GCGC).

The new remuneration system applies as from 1 January 2024 to all Board of Management members with whom a new service agreement is concluded or whose service agreement is extended after the date on which the remuneration system is approved

by the General Meeting. To Board of Management members who had already been appointed prior to the approval of the remuneration system by the General Meeting, the new remuneration system likewise applies as from 1 January 2024. In order to implement the remuneration system, the Supervisory Board will, on behalf of Volkswagen Aktiengesellschaft, agree the corresponding amendment of their service agreements with the Board of Management members. To Board of Management members who had already been appointed prior to the Supervisory Board's first resolution on a remuneration system pursuant to section 87a Aktiengesetz on 14 December 2020 and whose service agreement had not yet been extended, the following exceptions continue to apply until an extension of the service agreement: The performance share plan of the Board of Management members who had already been appointed prior to 14 Decem- ber 2020 and whose service agreement has not yet been extended will continue to have a three-year performance period, but will in all other respects comply with the performance share plan described in this remuneration system. Penalty and clawback provisions are likewise only to apply to the Board of Management members who were already appointed prior to 14 December 2020 and whose service agreement has not yet been extended as from the time at which their agreements are extended.

1. DETAILS OF THE REMUNERATION SYSTEM

1. Remuneration components

1. Overview of the remuneration components and their relative percentages

The Board of Management members' remuneration consists of fixed and variable com- ponents. The base salary, fringe benefits and company pension are the fixed compo- nents of the Board of Management members' remuneration. The variable components are the annual bonus with a one-year assessment period and the performance share plan with a four-year assessment period.

- If applicable, benefits in connection with relocation

Based on the remuneration system, the Supervisory Board sets a specific target total remuneration for every Board of Management member that is commensurate with the duties and performance of the Board of Management member and the situation of the Company and does not exceed the usual remuneration without special reasons. The target total remuneration is made up of the sum of the remuneration components relevant for the total remuneration. The total remuneration includes the base salary, the annual bonus and the performance share plan as well as the fringe benefits and the company pension. As regards the annual bonus and LTI, the target amount is based on 100 % target achievement in each case. The relative percentages of the fixed and variable compensation components are shown below in relation to the target total remu- neration.

In the case of the Chairman of the Board of Management, the fixed remuneration (base salary, contribution to the company pension and fringe benefits) currently represents approximately 30 % of the target total remuneration and the variable remuneration approximately 70 % of the target total remuneration. The annual bonus (target amount) represents approximately 25 % of the target total remuneration and the LTI (target amount) approximately 45 % of the target total remuneration.

In the case of the Board of Management members, the fixed remuneration (base salary, contribution to the company pension and fringe benefits) currently represents approximately 35 % of the target total remuneration and the variable remuneration approximately 65 % of the target total remuneration. The annual bonus (target amount) represents approximately 25 % of the target total remuneration and the LTI (target amount) approximately 40 % of the target total remuneration.

The said percentages may differ in future financial years, for example due to the granting of benefits that are temporary or that have been agreed for the entire term of the service agreement to new Board of Management members pursuant to section 4 or

due to changes in the costs of the contractually promised fringe benefits and for any new appointments.

2. Fixed remuneration components

1. Base salary
   The Board of Management members receive a base salary in twelve equal instalments paid at the end of each month.
2. Company pension
   The Board of Management members have a contribution-based pension commitment
   - by way of a direct commitment - from Volkswagen Aktiengesellschaft in respect of old-age and surviving dependants' benefits and benefits based on a reduction in earn- ing capacity. The agreed old-age pension benefits are paid once the Board of Manage- ment member reaches the age of 65. In the case of Board of Management members who took office prior to 1 January 2020, the agreed old-age pension benefits are al- ready paid once the Board of Management member reaches the age of 63. The annual pension contribution amounts to up to 40 % of the contractually agreed base salary for ordinary Board of Management members and up to 50 % of the contractually agreed base salary for the Chairman of the Board of Management.
3. Fringe benefits
   Volkswagen Aktiengesellschaft grants the Board of Management members fringe ben- efits within the scope of a fringe benefit lump sum per financial year. The Board of Management members have the choice of certain benefits, such as company cars, a medical check-up per financial year, health and nursing insurance contribution allow- ances and accident insurance. Fringe benefits that are taken up are counted towards the fringe benefit lump sum insofar as they are subject to wage tax. If Board of Man- agement members do not make full use of the fringe benefit lump sum during a finan- cial year, the remaining amount of the fringe benefit lump sum will be paid out to them after the end of the financial year.
   If fringe benefits are granted abroad, the Supervisory Board is entitled to set forth de- viating provisions in order to take into account factual and legal differences. If, in the interest of the Company, a Board of Management member assumes a position abroad on a long-term basis, the Supervisory Board is entitled to grant the Board of Manage- ment member additional assignment-related fringe benefits.

3. Variable remuneration components

In the following, the variable remuneration components will be described in detail. It will be explained how the fulfilment of the performance criteria and the amounts dis- bursed as part of the variable remuneration are connected. It will also be explained in

what form and when Board of Management members will have the granted variable remuneration amounts at their disposal.

3.1 Annual bonus

The annual bonus is a performance-based bonus with a one-year assessment period. Target achievement is assessed based, on the one hand, on the development of the financial performance targets of the Net Cash Flow in the Automobile Division and Op- erative Return on Sales (together the "Financial Subtargets"). On the other hand, the annual bonus depends on changes in the ESG Targets that are taken into account through a multiplying factor ("ESG Factor").

3.1.1 Financial Subtargets

The Financial Subtargets of the Net Cash Flow in the Automobile Division and Opera- tive Return on Sales are each weighted at 50 %. The Supervisory Board is entitled to adjust the weighting of the Financial Subtargets for future financial years at its reason- able discretion.

The Supervisory Board shall determine the values for the Financial Subtargets for each financial year. In doing so, the Supervisory Board determines the following:

• For the Net Cash Flow in the Automobile Division:
• • a threshold value corresponding to a subtarget achievement level of 0 %,
  • a target value corresponding to a subtarget achievement level of 100 %,
  • a maximum value corresponding to a subtarget achievement level of 175 %.
• For the Operative Return on Sales:
• • a threshold value corresponding to a subtarget achievement level of 50 %,
  • a target value corresponding to a subtarget achievement level of 100 %,
  • a maximum value corresponding to a subtarget achievement level of 175 %.

Linear interpolation is used to determine values between the threshold value and target value and between the target value and maximum value.

The Supervisory Board may adjust the actually calculated subtarget achievement level of the subtarget Net Cash Flow in the Automobile Division in justified exceptions in order to ensure a performance-based assessment of the subtarget Net Cash Flow in the Automobile Division. Justified exceptions are acquisitions whose impact on the Net Cash Flow in the Automobile Division exceed EUR 1 billion.

The overall financial target achievement level is calculated by adding the weighted subtarget achievement levels together according to the following formula:

Overall financial target achievement level

3.1.2 ESG Factor

The relevant subtargets for calculating the ESG Factor are the environment subtarget, the social subtarget and the governance factor (together the "ESG Subtargets"). As a rule, the environment subtarget takes into account the criterion of the decarbonisation index, the social subtarget takes into account the criteria of the mood index and the diversity index, and the governance factor takes into account the criteria of compliance and integrity (together the "ESG Criteria"). The Supervisory Board is however entitled, at its reasonable discretion, to replace, suspend or add individual ESG Subtargets or the determined ESG Criteria if, in its view, other ESG Subtargets or ESG Criteria than those regulated in this section appear to be more suitable for reflecting developments in environment, social and governance issues and incentivising the Board of Manage- ment members accordingly.

The Supervisory Board determines the following for the environment and social sub- targets for each financial year:

• a minimum value corresponding to a subtarget achievement level of 0.7,
• a target value corresponding to a subtarget achievement level of 1.0,
• a maximum value corresponding to a subtarget achievement level of 1.3.

Linear interpolation is used to determine values between the minimum value and target value and between the target value and maximum value. The environment and social subtargets are each weighted at 50 %. Within the social subtarget, the ESG Criteria are, for their part, each weighted at 50 %. The Supervisory Board is entitled, at its reasonable discretion, to weight the ESG Subtargets and the ESG Criteria within an ESG Subtarget differently.

The Supervisory Board is likely to suspend the ESG criterion of the mood index in the 2024 and 2025 financial years as a new methodology for measuring the mood index and recalibrate the targets shall be laid down. The aim is to ensure that the mood index provides the Board of Management members with a better picture of employee satis- faction. Accordingly, the criterion of the diversity index is expected to be weighted at 100% within the social subtarget in the 2024 and 2025 financial years.

After the end of the financial year, the Supervisory Board determines a governance factor between 0.9 and 1.1. In this regard, the Supervisory Board evaluates the collective performance of the Board of Management as a whole and the individual performance of the respective Board of Management members with regard to integrity and compliance during the financial year.

The ESG Factor is calculated by multiplying the sum of the weighted target achievement of the environment subtarget and the social subtarget by the governance factor according to the following formula:

ESG Factor

• [achievement level of environment subtarget x 50 % + achievement level of so- cial subtarget x 50 %] x governance factor (0.9-1.1)

3.1.3 Calculation of the disbursement amount

The target achievement level is determined after the end of the financial year using the following formula:

Annual bonus

• individual target amount x overall financial target achievement level x ESG Fac- tor.

The Supervisory Board then assesses whether the disbursement amount is to be reduced due to conduct meeting penalty criteria (see 3.3). The disbursement amount calculated in this way is due for payment in the month after the Company's consolidated financial statement is approved for the relevant financial year. The amount disbursed in respect of the annual bonus is capped at 200 % of the target amount.

3.1.4 Board of Management members who join/leave the Company during a financial year; extraordinary events or developments

Should the service agreement start or end during the current financial year, the target amount will be reduced pro rata temporis in relation to the time of the beginning or end of the service agreement. The target amount will likewise be decreased pro rata tem- poris for periods during which the Board of Management member has no claim for re- muneration under the existing service agreement (e.g. if the service relationship is sus- pended or if he/she is unable to work but has no claim for continued payment of his/her remuneration).

Should any extraordinary events or developments occur, Volkswagen Aktiengesell- schaft will be entitled to adjust the terms of the annual bonus properly and at its reasonable discretion. Extraordinary events or developments can be, for example, an acquisition or sale of a company or parts thereof by an undertaking of the Volkswagen Group, material changes in the shareholder structure of Volkswagen Aktiengesell- schaft or high inflation.

3.2 Long-term incentive (LTI)

The LTI is granted in the form of a performance share plan with a four-year perfor- mance period. The relevant financial performance target is the EPS of Volkswagen Ak- tiengesellschaft as shown in the annual report as the audited, fully diluted earnings per Volkswagen preference share based on the continued and discontinued divisions.

At the beginning of each financial year, the Board of Management members are allocated a tranche of performance shares of Volkswagen Aktiengesellschaft for the financial year. The performance shares function purely as an operand. The tranche starts on 1 January of the first financial year of the performance period ("Grant Year") and ends on 31 December of the third financial year following the Grant Year. The number of performance shares to be conditionally allocated is calculated based on the relevant target amount agreed at the time of the allocation divided by the arithmetic mean of the closing prices of the Volkswagen preference share (securities identification num- ber: 766403) in the XETRA trading system of Deutsche Börse AG (or the trading system that replaces it) on the last 30 trading days prior to 1 January of the respective performance period.

One quarter of the allocated performance shares is determined at the end of each financial year during the performance period. The number of performance shares to be determined depends on the EPS of the Company. For this purpose, the Supervisory Board determines the following at the beginning of the performance period:

• an EPS minimum value that corresponds to a target achievement level of 50 %,
• an EPS target value that corresponds to a target achievement level of 100 % and
• an EPS maximum value that corresponds to a target achievement level of 175 %.