• 04.1
  Critical Accounting Policies
• 04.2
  Financial Condition and Results of Operations
• 04.3
  Results of Operations
• 04.4
  Liquidity and Capital Resources
• 04.5
  Recently Issued Accounting Standards
• 04.6
  Quantitative and Qualitative Disclosures about Market Risk
• 04.7
  Compensation of Management Board and Supervisory Board

04.7

Compensation of Management Board and Supervisory Board

REPORT OF THE MANAGEMENT BOARD OF FRESENIUS MEDICAL CARE MANAGEMENT AG, OUR GENERAL PARTNER

The compensation report of Fresenius Medical Care AG & Co. KGaA summarizes the principles applied for the determination of the compensation of the management board members of Fresenius Medical Care Management AG as general partner of Fresenius Medical Care AG & Co. KGaA and explains the amounts and structure of the management board compensation.

The compensation report is based on the recommendations of the German Corporate Governance Code and also includes the disclosures in accordance with the Commercial Code extended by the Act on the Disclosure of Management Board Compensation.

I. COMPENSATION OF THE MANAGEMENT BOARD

Determination of the compensation of the management board is made by the full supervisory board of Fresenius Medical Care Management ag. In the fiscal year 2008, the supervisory board was, for the first time, supported in this manner by a personnel committee, the “Human Resources Committee”. In the year under report, the Human Resources Committee consisted of Dr. Ulf M. Schneider, Dr. Gerd Krick, Dr. William P. Johnston and Dr. Walter Weisman. The objective of the compensation system is to enable the members of the management board to participate in the development of the business relative to their duties and performance and the successes in managing the economic and financial position of the Company taking into account its comparable environment.

The compensation of the management board is, as a whole, performance oriented and consists of three elements in fiscal year 2008:

• non-performance related compensation (basic salary)
• performance related compensation (variable bonus)
• components with long-term incentive effect (share options, share-based compensation with cash settlement)

Furthermore, three members of the management board had pension commitments in the reporting period. The design of the individual components is based on the following criteria:

The non-performance-related compensation was paid in twelve monthly installments as basic salary in fiscal year 2008. In addition, the members of the management board received additional benefits consisting mainly of insurance premiums, the private use of company cars, special payments such as foreign supplements, rent supplements and reimbursement of certain other charges and additional contributions to pension and health insurance.

The performance-related compensation will also be granted for fiscal year 2008 as a variable bonus. The amount of the bonus in each case depends on the achievement of individual and common targets. For the total performance-related compensation, the maximum achievable bonus is fixed. The targets are measured on revenue growth, consolidated net income and operating income (EBIT) as well as the development of cash flow, are in part subject to a comparison with the previous year's figures and can for another part be derived from the comparison of budgeted and actually achieved figures. Furthermore, targets are divided into group level targets and those to be achieved in individual regions. The regional targets also include in some cases special components which are for a three-year period, and therefore only for the fiscal years 2006, 2007 and 2008, linked to a special bonus component to the achievement of extraordinary financial targets connected to special integration measures, e.g. in connection with the acquisition of Renal Care Group in the U.S. The special components require an extraordinary increase in earnings. These special bonus components thereby consist in equal parts of cash payments and a share-based compensation based on the development of the stock exchange price of the Company's ordinary shares. Once the annual targets are achieved, the cash was or will be paid after the end of the respective fiscal year. The share-based compensation also to be granted yearly in these cases is subject to a three-year vesting period. The amount of cash payment of this share-based compensation corresponds to the share price of Fresenius Medical Care AG & Co. KGaA ordinary shares on exercise, and is, for that reason, attributed to the long-term incentive compensation components.

For fiscal years 2008 and 2007 the amount of the cash payment of the management board of Fresenius Medical Care Management AG consisted of the following:

Download table

In fiscal year 2008 stock options based on the Stock Option Plan 2006 were granted as components with long-term incentive effect. The principles of the Stock Option Plan 2006 are described in more detail in Note 15 „Stock Options”. As of January 1, 2008, the Company had three additional Employee Participation Programs secured by conditional capital which entitled their participants to convertible bonds or stock options and under which however, no further options could be issued.

In connection with these successful employee participation programs of the past fiscal years, Fresenius Medical Care AG & Co. KGaA implemented Stock Option Plan 2006 approved by resolution of the general meeting on May 9, 2006 and amended by resolution of the general meeting of May 15, 2007 (share split 1:3). A total of 2,499,021 stock options were granted under the Stock Option Plan 2006 on July 28, 2008, of which 398,400 options were granted to the members of the management board.

For fiscal years 2008 and 2007 the number and value of stock options issued and also the value of the share-based compensation is shown in the following table.

Download table

The stated values of the stock options granted to members of the management board in fiscal year 2008 correspond to their fair value at the time of grant, namely a value of $15.43 (€9.80) (2007: $13.23 / €9.71) per stock option. The exercise price for the stock options granted is $55.88 (€35.49) (2007: $46.22/€33.91).

At the end of fiscal year 2008, the members of the management board held a total of 2,159,720 stock options (December 31, 2007: 1,922,628 stock options).

The development and the status of the stock options of the members of the management board during 2008 are shown in more detail in the following table:

Download table

On the basis of the financial targets achieved in fiscal year 2008, additional rights for share-based compensation with cash settlement amounting to $2,189,419 (2007: $4,595,000) were earned. Since the actual distribution will only take place in March 2009, the number of shares will, on the basis of the then current share price, be determined only then by the supervisory board and serve as the basis for the calculation of the payment after the three year waiting period.

The amount of the total compensation of the management board of Fresenius Medical Care Management AG for fiscal years 2008 and 2007 consisted of:

Download table

The components with long-term incentive effect can be exercised only after the expiry of the specified vesting period. Their value is recognized over the vesting period as expense in the respective fiscal year. The expenses attributable to fiscal years 2008 and 2007 are stated in the following table.

Download table

The non-performance related compensation components and the basic structures of the performance-related compensation components are agreed in the service agreements with the individual management board members. The stock options are granted on an annual basis by the supervisory board to members of the management board.

II. COMMITMENTS TO MEMBERS OF THE MANAGEMENT BOARD FOR THE EVENT OF THE TERMINATION OF THEIR APPOINTMENT

There are individual contractual pension commitments for the management board members Roberto Fusté, Dr. Emanuele Gatti and Lawrence A. Rosen. With regard to these pension commitments, the Company as of December 31, 2008 has pension obligations of $3,354,178 (at December 31, 2007: $3,192,997). The additions to pension obligations in fiscal year 2008 amounted to $422,394 (2007: $1,530,166). Each of the pension commitments provides a pension and survivor benefit, depending on the amount of the most recent basic salary, from the 65th year of life, or, in the case of termination because of professional or occupational incapacity, from the time of ending active work. The starting percentage of 30 % increases with every year of service by 1.5 percentage points, 45 % being the attainable maximum. 30 % of the gross amount of any later income from an occupation of the management board member is setoff against the pension.

With the chairman of the management board, Dr. Ben Lipps, there is an individual agreement, instead of a pension provision, to the effect that, taking account of a competitive restriction after the ending of the employment contract / service agreement between him and Fresenius Medical Care Management ag, he can, for a period of ten years, act in a consultative capacity for the company. The consideration to be granted annually by Fresenius Medical Care Management AG in return would amount to approximately 33 % of the non-performance related compensation components paid to him in the fiscal year 2008.

The management board members Dr. Emanuele Gatti, Rice Powell and Mats Wahlstrom have been granted benefits (severance, calculated on the basis of guaranteed simple annual income, based on the relevant basic salary) by individual agreements for the event that their employment with Fresenius Medical Care Management AG should end. One half of any additional compensation payments which the said management board members would be entitled to in connection with existing post-contractual prohibitions of competitive activity would be set-off against these severance payments. The employment contracts of management board members contain no express provisions for the case of a change of control.

III. MISCELLANEOUS

In fiscal year 2008, no loans or advance payments of future compensation components were made to members of the management board of Fresenius Medical Care Management AG.

As far as legally permitted, Fresenius Medical Care Management AG undertook to indemnify the members of the management board against claims against them arising out of their work for the company and its affiliates, if such claims exceed their responsibilities under German law. To secure such obligations, the company concluded a Directors & Officers insurance with an appropriate excess. The indemnity applies for the time in which each member of the management board is in office and for claims in this connection after the ending of the membership of the management board in each case.

Former members of the management board did not receive any compensation in fiscal year 2008.

COMPENSATION OF THE SUPERVISORY BOARD

The compensation of the Supervisory Board of FMC - AG & Co. KGaA is regulated in § 13 of its statute.

Corresponding to this regulation the Company reimburses the Supervisory Board members for expenses incurred from their duties as Supervisory Board members, including value added tax.

Each member of the supervisory board shall receive a fixed fee of $80,000 per annum for each full fiscal year, payable in four equal installments at the end of each calendar quarter. In the event that the general meeting, taking into consideration the annual results, resolves a higher remuneration by a three fourths majority of the votes cast, such higher remuneration shall be payable.

The chairman of the supervisory board shall receive additional remuneration in the amount of $80,000 and his deputy additional remuneration in the amount of $40,000. As a member of a committee, a supervisory board member shall receive, in addition, $30,000 per year. As chairman of a committee a supervisory board member shall receive additional remuneration of $20,000 per year, payable in each case in four equal installments at the end of each calendar quarter.

To the extent that a member of the supervisory board is at the same time member of the supervisory board of the General Partner Management AG and receives remuneration for his services as member of the supervisory board of the Management ag, the remuneration will be reduced to half of it. The same shall apply in relation to additional remuneration of the Chairman and his deputy if such person is, at the same time, the chairman or his deputy, respectively, of the supervisory board of the Management ag. If the deputy of the chairman of the supervisory board of the Company is at the same time chairman of the supervisory board of the Management AG he shall not receive additional remuneration for his services as deputy of the chairman of the Company.

As regulated in § 7 of the Company’s statute the aggregate compensation fees to the members of the Supervisory Board of the General Partner Management AG and to its committees were charged to FMC - AG & Co. KGaA.

For the years 2008 and 2007 the compensation for the members of the supervisory boards were as follows:

Download table