Value-based management

“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 cost of stockholders’ equity and borrowing costs. This is why we strive to earn a premium on our cost of capital of at least €2 billion on average each year. To ensure BASF’s long-term success, we encourage all employees to think and act entrepreneurially along the lines of our value-based management concept. Our goal: to create awareness as to how each and every employee can find value-oriented solutions in the company’s day-to-day operations and implement these in an effective and efficient manner.

EBIT after cost of capital

EBIT after cost of capital1 (million €)
Five-year summary
EBIT after cost of capital (bar chart)Enlarge image

1 The figures for 2009 to 2011 were not restated according to IFRS 10 and 11 (see Data). The figures for 2012 are shown before and after the restatement.

Earnings before interest and taxes (EBIT) after cost of capital is a key performance and management indicator for the BASF Group and its operating divisions and business units. This figure combines the company’s economic situation as summarized in EBIT with the costs for the capital made available to us by shareholders and creditors. When we earn a premium on our cost of capital, we exceed the return expected by our shareholders.

Calculation of the cost of capital percentage

The cost of capital percentage (weighted average cost of capital, WACC) is determined using the weighted cost of equity and borrowing costs. The cost of equity is ascertained using the Capital Asset Pricing Model. Borrowing costs are determined based on the financing costs of the BASF Group.

EBIT after cost of capital, which we use as a steering parameter, is a pretax figure. Therefore, we use the current average tax rate to derive the pretax cost of capital percentage from the WACC. In 2013, this cost of capital percentage was 11%; it will be at the same level in 2014. Based on this, an EBIT threshold is determined which must then be reached by all the BASF Group’s operating units put together in order to earn the cost of capital.

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Calculation of EBIT after cost of capital (million €)

 

2013

2012

2

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

3

In 2012 and 2013, the cost of capital percentage was 11%.

EBIT BASF Group

7,273

6,742

– Less EBIT for activities not assigned to the segments2

(664)

(215)

– Less cost of capital3

6,065

5,793

EBIT after cost of capital

1,872

1,164

Value-based management throughout the company

For us, value-based management means the daily focus placed on value by all of our employees. To this end, we have identified value drivers that show how each and every unit in the company can create value. We develop performance indicators 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, the most important performance indicators are the achievement of a positive EBIT after cost of capital and a competitive return. By contrast, the value contribution of the functional units is evaluated on the basis of effectiveness and efficiency.

All this forms a comprehensive system of value drivers and key indicators for the individual levels and functions at BASF. In addition to EBIT after cost of capital, EBIT and EBIT before special items are the most significant performance indicators for measuring economic success as well as for steering the BASF Group and its operating units.

We primarily comment on EBIT before special items on a segment and division level in our financial reporting because this figure is adjusted for influences not associated with typical business operations. This makes it particularly suitable for describing economic development over time. In addition to EBIT before special items, we also report on sales as another main driver for EBIT after cost of capital. BASF’s nonfinancial targets are focused more on the long term, and are not used for short-term steering.

According to our value-based management concept, all employees can make a contribution in their areas of business to help ensure that we earn the targeted premium on our cost of capital. We pass this value-based management concept on to our team around the world through seminars and training events, thereby promoting entrepreneurial thinking at all levels within BASF. Information relevant to the principles of the Global Compact