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

Share price-based compensation program

In 2017, BASF continued its share price-based compensation program known as the long-term incentive (LTI) program for the BASF Group, which has been in place since 1999. Approximately 1,200 people, in particular the Board of Executive Directors and senior executives, are currently eligible 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 volume-weighted average market price for BASF shares on the first business day after the Annual Shareholders’ Meeting, which was €87.84 on May 15, 2017.

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 is 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. If the cumulative percentage performance of BASF shares exceeds the percentage performance of the MSCI World Chemicals Index^SM (MSCI Chemicals), right B may be exercised (relative threshold). The value of right B is 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 of the LTI program 2017 were granted on July 1, 2017, and may be exercised following a two-year vesting period, between July 1, 2019, and June 30, 2025. 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 10 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 actual annual variable compensation. 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 2010 to 2016 programs were structured in a similar way to the LTI program 2017.

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.

The stated fair values and the valuation parameters relate to the LTI programs 2017 and 2016. 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 1,461,113 in 2017 (2016: 1,710,404).

As a result of a resolution by the Board of Executive Directors in 2002 to settle options in cash, options outstanding from the LTI programs 2010 to 2017 were valued with the fair value as of December 31, 2017. A proportionate provision is recorded for programs in the vesting period. The LTI provision decreased from €464 million as of December 31, 2016 to €347 million as of December 31, 2017 due to lower fair values of the outstanding option rights. The utilization of provisions amounted to €49 million in 2017 (2016: €25 million). Income arising from the reversal of provisions amounted to €68 million in 2017. The previous year had included an expense of €267 million.

The total intrinsic value of the exercisable options amounted to €145 million as of December 31, 2017 and €167 million as of December 31, 2016.

BASF incentive share program

The “plus” incentive share program was introduced in 1999 and is currently available to employees in Germany, other European countries and Mexico. Simultaneous participation in both the “plus” program and the LTI program is not allowed.

Employees who participate in the BASF incentive share program “plus” acquire shares in BASF from their variable compensation. For every 10 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 10 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:

The free shares to be provided by the Company are measured 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 €86.02 for the 2017 program, and €67.90 for the 2016 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 €28 million were recorded in 2017 for the BASF incentive share program “plus” (2016: €28 million).