30 – Share-price-based compensation program and BASF incentive share program

Share-price-based compensation program

In 2014, BASF continued its share-price-based compensation program known as the long-term incentive (LTI) program for senior executives of the BASF Group. This program has been in place since 1999. Approximately 1,200 senior executives, including the Board of Executive Directors, are currently entitled to participate in this program. This program provides for the granting of virtual options, which are settled in cash when exercised.

Participation in the LTI program is voluntary. In order to take part in the program, a participant must make a personal investment: A participant must hold BASF shares amounting to 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 €80.96 on May 5, 2014.

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 with 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 with 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. Beginning with the 2013 (LTI) program, right B is only valuable if the price of BASF shares at least corresponds with the base price. The options were granted on July 1, 2014, and may be exercised following a two-year vesting period, between July 1, 2016, and June 30, 2022. During the exercise period, there are certain times (closed periods) during which the options may not be exercised. Each option can only be exercised in full. This means that one of the performance targets must be surpassed. If the other performance target is not surpassed and the option is exercised, the other option right lapses. A participant’s maximum gain from exercising an option is limited to five times the original individual investment starting with the 2013 LTI program. The maximum gain from exercising an option is limited to ten times the original individual investment for programs from previous years. Option rights are nontransferable 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 orientation of the program is significantly strengthened compared with 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 personal investment (in the form of BASF shares), an extended holding period of four years applies. Members of the Board of Executive Directors may only exercise their options at least four years after they have been granted (vesting period).

The 2007 to 2013 programs were structured in a similar way to the LTI program 2014.

The models used in the valuation of the option plans are based on the arbitrage-free valuation model according to Black-Scholes. The fair values of the options are determined using the binomial model.

Fair value of options and parameters used as of December 31, 2014

 

 

 

LTI program of the year

 

 

 

2014

2013

Fair value

 

20.76

24.15

Dividend yield

 

%

3.86

3.86

Risk-free interest ra

 

%

0.30

0.18

Volatility BASF share

 

%

28.63

29.53

Volatility MSCI Chemicals

 

%

19.50

20.11

Correlation BASF share price: MSCI Chemicals

 

%

79.03

78.81

As of December 31, 2014, the fair values and the valuation parameters relate to the LTI programs 2014 and 2013. The fair value calculation was based on the assumption that options will be exercised in a manner dependent on their potential gains. For the programs from preceding years, corresponding fair values were computed and valuation parameters were used.

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

The number of options granted amounted to 1,870,440 in 2014 (2013: 2,081,900).

As a result of a resolution by the Board of Executive Directors in 2002 to settle options in cash, options outstanding from the programs 2007 to 2014 were valued with the fair value as of the balance sheet date December 31, 2014. A proportionate provision is recorded for programs in the vesting period. The LTI provision decreased from €367 million as of December 31, 2013 to €207 million as of December 31, 2014, due to lower fair values of the options on average. The utilization of provisions amounted to €106 million in 2014 (2013: €148 million). Income arising from the reversal of the provision amounted to €54 million in 2014. The previous year had included an expense of €104 million.

The total intrinsic value of exercisable options amounted to €41 million as of December 31, 2014, and €160 million as of December 31, 2013.

BASF incentive share program

All employees are entitled to participate in the “plus” incentive share program, with the exception of those entitled to participate in the LTI program. The “plus” incentive share 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 if a participant sells the individual investment in BASF shares, if the participant stops working for the Company or one year after retirement. The number of free shares to be granted has developed as follows:

Number of free shares to be granted

 

 

2014

2013

As of January 1

 

2,908,076

2,886,647

Newly acquired entitlements

 

589,220

621,575

Bonus shares issued

 

(515,143)

(509,807)

Lapsed entitlements

 

(77,105)

(90,339)

As of December 31

 

2,905,048

2,908,076

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 €64.73 for the 2014 program, and €54.39 for the 2013 program.

The fair value of the free shares to be granted is recognized as an expense with a corresponding increase in capital surplus over the term of the program.

Personnel expenses of €26 million were recorded in 2014 for the BASF incentive share program “plus” (2013: €21 million).