30 – Share Price-Based Compensation Program and BASF Incentive Share Program

Share price-based compensation program

The BASF Group continued its share price-based compensation program (the long-term incentive (LTI) program) in 2018. The program has been in place since 1999 and approximately 1,200 people, in particular the Board of Executive Directors and senior executives, are currently eligible to participate. It 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 trading day after the Annual Shareholders’ Meeting, which was €85.45 on May 7, 2018.

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 on the option grant date (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 by which the BASF share outperforms the MSCI Chemicals Index on the exercise date. It is limited to the closing price on the date of exercise less the nominal value of the BASF share. From the 2013 LTI program onward, right B may only be exercised if the price of the BASF share equals at least the base price. The options of the 2018 LTI program were granted as of July 1, 2018, and may be exercised following a two-year vesting period, between July 1, 2020, and June 30, 2026. 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 thresholds must be exceeded. If the other threshold is not exceeded 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 the BASF Group 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 four years after they have been granted at the earliest (vesting period).

The 2011 to 2017 programs were structured in a similar way to the 2018 LTI program.

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 2018 and 2017 LTI programs. 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 and valuation parameters were determined/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 2,010,720 in 2018 (2017: 1,461,113).

As a result of a resolution by the Board of Executive Directors in 2002 to settle option rights in cash, all outstanding option rights under the 2011 to 2018 LTI programs were valued at fair value as of December 31, 2018. A proportionate provision is recognized for programs in the vesting period. The LTI provision decreased from €347 million as of December 31, 2017, to €56 million as of December 31, 2018, due to lower fair values of the outstanding option rights. The utilization of provisions amounted to €22 million in 2018 (2017: €49 million). Income arising from the release of provisions amounted to €268 million in 2018 (2017: €68 million). Of this amount, €6 million was attributable to the disposal group for the discontinued oil and gas business in 2018 (2017: €1 million).

The exercisable options had no intrinsic value as of December 31, 2018; their total intrinsic value as of December 31, 2017 was €145 million.

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 permitted.

Employees who participate in BASF’s “plus” incentive share program 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 these 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 a Group 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 BASF share price, 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 €85.45 for the 2018 program, and €86.02 for the 2017 program.

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

Personnel expenses of €32 million were recorded in 2018 for BASF’s “plus” incentive share program (2017: €28 million).