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March 1, 2012
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28 – Stock price-based compensation program and BASF incentive share program

Stock price-based compensation program

In 2011, BASF continued its stock price-based compensation program (the long-term incentive, or LTI program) for senior executives of the BASF Group. This program has been in place since 1999. Approximately 1,100 senior executives, including the Board of Executive Directors, are currently entitled to participate in the LTI program. This program provides for the granting of virtual options, which are settled in cash when exercised.

Participation in the LTI program is voluntary. The condition for taking part in the program is the participant’s own investment: A participant must hold BASF shares in the amount of 10% to 30% of his or her individual variable compensation for a two-year period from the granting of the option (holding period). The number of shares to be held is determined by the amount of variable compensation and the weighted-average market price for BASF shares on the first business day after the Annual Shareholders’ Meeting, which was €65.98 on May 9, 2011.

The participant receives four option rights per invested share. Each option consists of two parts, right A and right B, which may be exercised if defined thresholds have been met: The threshold of right A is met if the price of the BASF share has increased by more than 30% in comparison to the base price (absolute threshold). The value of right A will be the difference between the market price of BASF shares on the exercise date and the base price; it is limited to 100% of the base price. Right B may be exercised if the cumulative percentage performance of BASF shares exceeds (relative threshold) the percentage performance of the MSCI World Chemicals IndexSM (MSCI Chemicals). The value of right B will be the base price of the option multiplied by twice the percentage outperformance of BASF shares compared to the MSCI Chemicals Index on the exercise date. It is limited to the closing price on the date of exercise minus the computed nominal value of BASF shares. The options were granted on July 1, 2011, and may be exercised following a two-year vesting period, between July 1, 2013, and June 30, 2019. During the exercise period, it is not possible to exercise options during certain periods (closed periods). Each option right can only be exercised in full, meaning that it may only be exercised if one of the performance targets is achieved and may only be exercised once, i.e., if only one performance target is met and that option is exercised, the other option right lapses. The maximum gain for a participant is limited to 10 times the original individual investment. Option rights are non-transferable and are forfeited if the option holders no longer work for BASF or have sold part of their individual investment before the expiry of the two-year vesting period. They remain valid in the case of retirement.

For the members of the Board of Executive Directors, the long-term direction of the program is significantly strengthened compared to the conditions applying to the other participants. The members of the Board of Executive Directors are required to participate in the LTI program with at least 10% of their gross bonus. In view of this binding own investment (in the form of BASF shares), an extended holding period of four years applies. Under the LTI program, members of the Board of Executive Directors may only exercise their options at least four years after they have been granted (vesting period).

The 2004 to 2010 programs were structured in a similar way to the LTI program 2011.

The benchmark index used to determine the value of right B for the 2004 program is the Dow Jones Chemicals Total Return Index (DJ Chemicals). This index was replaced by the MSCI Chemicals starting with the 2005 program. The MSCI Chemicals is a global industry index for the chemical industry that measures the performance of the companies contained within it in their respective local currencies, which significantly reduces currency effects.

The models used in the valuation of the option plans are based on the arbitrage-free valuation model according to Black- Scholes.

Due to the complexity of the programs, a numerical solution method was used (Monte Carlo simulation).

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Fair value of options and parameters used as of December 31, 20111

 

 

LTI program of the year

 

 

2011

2010

1

It is assumed that the options will be exercised based upon the potential gains.

Fair value

12.72

27.48

Dividend yield

%

4.08

4.08

Risk-free interest rate

%

1.49

1.26

Volatility BASF share

%

27.86

29.26

Volatility MSCI Chemicals

%

19.45

20.40

Correlation BASF share price: MSCI Chemicals

%

80.20

80.01

As of December 31, 2011, the fair values and the valuation parameters relate to the LTI programs 2011 and 2010. For the programs from preceding years, corresponding fair values were computed and valuation parameters were used.

The number of options granted amounted to 2,357,424 in 2011 (2010: 1,833,760).

Volatility was determined on the basis of the monthly closing prices over a historical period corresponding to the remaining term of the options.

As a result of a resolution by the Board of Executive Directors in 2002 to settle options in cash, options outstanding from the programs 2004 to 2011 were valued with the fair value as of the balance sheet date December 31, 2011. This amount is recognized proportionally as a provision over the respective vesting period. This provision decreased from €411 million as of December 31, 2010, to €269 million as of December 31, 2011, due to lower fair values of the options as well as to the lower number of outstanding options. The utilization of provisions amounted to €267 million in 2011 (2010: €263 million). Personnel expenses amounted to €125 million in 2011 and €418 million in 2010.

The total intrinsic value of exercisable options amounted to €167 million as of December 31, 2011, and €266 million as of December 31, 2010.

BASF incentive share program

All employees are entitled to participate in the “plus” incentive share program, with the exception of those senior executives entitled to participate in the LTI program. The “plus” program was introduced in 1999 and is currently offered in Germany, other European countries and Mexico. Each participant must make an individual investment in BASF shares from his or her variable compensation. For every ten BASF shares purchased in the program, a participant receives one BASF share at no cost after one, three, five, seven and ten years of holding the BASF shares. As a rule, the first and second block of ten shares entitles the participant to receive one BASF share at no extra cost in each of the next ten years.

The right to receive free BASF shares lapses one year after retirement if a participant sells the individual investment in BASF shares, or if the participant stops working for the Company. The number of free shares to be granted has developed as follows:

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Number of free shares to be granted

 

2011

2010

As of January 1

3,085,075

3,296,361

Newly acquired entitlements

512,745

485,080

Bonus shares issued

(511,338)

(557,001)

Lapsed entitlements

(101,329)

(139,365)

As of December 31

2,985,154

3,085,075

The free shares to be provided by the Company are valued at the fair value on the grant date. Fair value is determined on the basis of the stock price of BASF shares, taking into account the present value of dividends, which are not paid during the term of the program. The weighted-average fair value on the grant date amounted to €53.29 for the 2011 program, and €32.93 for the 2010 program.

The fair value of the free shares to be granted is booked through the income statement against capital surplus over the period until the shares are issued.

Provisions for the costs of the 2002 program continue to be accrued proportionally on the basis of the BASF closing stock price.

Personnel expenses of €17 million were recorded in 2011 for the BASF incentive share program (2010: €16 million).

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