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Last Update:
March 1, 2012
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Value-based management

We add value as one company

“We add value as one company” is one of the four principles of our “We create chemistry” strategy. To create value in the long term, a company’s earnings must exceed the costs of equity and debt capital. This is why we strive to earn a premium on our cost of capital of at least €2.5 billion on average per year. To secure BASF’s long-term success, we encourage all employees to think and act entrepreneurially within the framework of our value-based management concept. Our goal: to create awareness about how every employee can find value-oriented solutions and implement these in an efficient and effective manner in day-to-day business.

EBIT after cost of capital

EBIT after cost of capital (million €)
Five-year summary¹

EBIT after cost of capital (bar chart) Enlarge image

¹ Since January 1, 2008, Group corporate costs are no longer allocated to the segments, but rather reported under Other. The previous years’ figures were not adjusted.

Earnings before interest and taxes (EBIT) after cost of capital is the key performance and management indicator for our operating divisions and business units. This figure takes into account that BASF’s shareholders and creditors expect a return on the capital they provide. The BASF Group creates added value only when EBIT covers at least the cost of capital.

Calculation of the cost of capital percentage

The cost of capital percentage depends primarily on three factors:

  • the capital structure of the BASF Group,
  • the level of interest rates on debt, and
  • the return expected by shareholders.

Borrowing costs comprise interest payments for bank loans and liabilities to the capital markets. The cost of equity corresponds to the returns expected by providers of equity. This is determined by the market value of BASF shares and with the help of the Capital Asset Pricing Model (CAPM).

An EBIT threshold is determined based on the cost of capital and income taxes. Together, the BASF Group’s operating units need to reach this threshold in order to earn the cost of capital. The cost of capital percentage is the relationship between this minimum EBIT level and the assets of the BASF Group’s operating units. In 2011, the cost of capital percentage was 11%; in 2012, it will be at the same level.

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Calculation of EBIT after cost of capital (million €)

 

 

 

2011

2010

1

The projected net expense is already provided for by an increase in the cost of capital percentage.

2

In 2010, the cost of capital percentage was 9%; in 2011, it was 11%.

EBIT BASF Group

8,586

7,761

less EBIT for activities not assigned to the segments1

178

(707)

less non-compensable foreign income taxes for oil production

439

983

less cost of capital2

5,418

3,985

EBIT after cost of capital

2,551

3,500

Value-based management throughout the company

Value-based management is only successful if it is firmly rooted in the company. For us, value-based management is the daily value-oriented performance of all our employees. We have identified value drivers that show how each individual business unit can create value. We develop key figures for the individual value drivers that help us to plan and pursue changes.

An important factor in ensuring the successful implementation of value-based management is linking the goals of BASF to the individual target agreements of employees. In the operating units, achievement of positive EBIT after cost of capital is the most important performance indicator. In contrast, the value contribution of the functional units is evaluated on the basis of effectiveness and efficiency.

According to our value-based management concept, all employees can make a contribution in their business to help ensure that we earn the targeted premium on our cost of capital. Around the world, we raise awareness of this topic among our team through numerous training programs, thereby promoting more entrepreneurial thinking at all levels within BASF. Information relevant to the principles of the Global Compact

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