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

Share price-based compensation programs

The BASF Group offered its share price-based compensation program (the long-term incentive (LTI) program) known as BOP (BASF Option Program), which started in 1999, for the last time in 2020. Effective retroactively as of January 1, 2020, a new LTI program – known as Strive! – was also introduced in the form of a performance share plan. Generally, members of the Board of Executive Directors and all senior executives are entitled to participate in the LTI programs.

BASF Option Program (BOP)

This program grants virtual option rights. When exercised, the option rights are settled in cash.

In accordance with the program’s deadline requirement, approximately 1,100 people, in particular members of the Board of Executive Directors and senior executives, were eligible to participate in the BOP program as of April 1, 2020. Around 90% of those eligible participated.

Participation in BOP is voluntary. In order to take part in the program, a participant must make a personal investment: Participants are required to hold BASF shares representing between 10% and 30% of their respective 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 of BASF shares on the first trading day after the Annual Shareholders’ Meeting, which was €51.26 on June 19, 2020.

Participants receive 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 calculated nominal value of the BASF share. From the 2013 BOP program onward, right B may only be exercised if the price of the BASF share equals at least the base price. The options granted as of July 1, 2020 may be exercised between July 1, 2022, and June 30, 2028, following a two-year vesting period. 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 BOP program. 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. Members of the Board of Executive Directors are required to participate in the BOP 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 option rights four years after they have been granted at the earliest (vesting period).

The 2013 to 2019 programs are similar in structure to the 2020 BOP 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 2020 and 2019 BOP 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 1,693,748 in 2020 (2019: 2,099,028).

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 2013 to 2020 programs were valued at fair value as of December 31, 2020. A proportionate provision is recognized for programs in the vesting period. The LTI provision for BOP increased from €90 million as of December 31, 2019 to €115 million as of December 31, 2020, due to higher fair values of the outstanding option rights. No utilization of provisions was recognized in 2019 or 2020. The expense from the addition of provisions totaled €25 million in 2020 and €34 million in 2019. Of this amount, €1 million was attributable to the disposal group for the discontinued pigments business in 2020 and €1 million for the discontinued construction chemicals business in 2019.

The exercisable options had no intrinsic value as of December 31, 2020 or as of December 31, 2019.

Strive!

In 2020, a new LTI program – known as Strive! – was established in the form of a performance share plan for senior executives and members of the Board of Executive Directors. The new LTI plan is based on achievement of strategic targets and takes into account BASF’s share price and dividend performance (total shareholder return) over a four-year period. Participation in Strive! is voluntary and is linked to a share ownership obligation. Approximately 700 people were eligible to participate in Strive! in 2020. In contrast to the BOP program, Strive! offers rolling eligibility, without a deadline for participation. Members of the Board of Executive Directors as well as about 90% of eligible senior executives participated.

A Strive! plan includes a four-year performance period with a fixed disbursement date. A target amount is determined at the beginning of a new Strive! plan for every participant. This target amount is converted into a preliminary number of virtual performance share units (PSUs) by dividing it by the average BASF share price in the fourth quarter of the previous year. The number of PSUs that are ultimately paid out at the end of the performance period depends on the achievement of the three strategic targets: growth (volume growth compared with global chemical production), profitability (increase in EBITDA before special items) and sustainability (CO₂ emissions).

Achievement of each strategic target is calculated for each year of the four-year performance period. Upon conclusion of the performance period, the average degree of target achievement for each strategic goal is equal to the arithmetic mean of the degrees of target achievement for the four years. The total target achievement for Strive!2020 is determined by adding the target achievement degree for the three strategic targets after having multiplied each by the corresponding weighting factor. To calculate the final number of PSUs, this weighted target achievement is multiplied by the preliminary number of PSUs. The payment amount upon conclusion of the four-year performance period is calculated by multiplying the final number of PSUs by the average BASF share price for the fourth quarter of the last year of the performance period, plus the accumulated dividend payments in the four fiscal years. The payment occurs in May of the following year and is capped at 200% of the target amount. The payment amount therefore not only reflects achievement of the strategic targets, but performance of BASF’s dividend and share price as well (total shareholder return).

Like BOP, a personal investment in BASF shares is a prerequisite for participation in Strive!. Participants are required to own BASF shares amounting to a predetermined percentage of their base salary for the duration of the performance period. A set-up phase applies to first-time participants. During this period, they are required to hold a percentage of shares as their predetermined personal investment. The set-up phase for 2020 ends on December 31, 2023.

The number of PSUs granted amounted to 767,308 in 2020. PSUs vested by the deadline totaled 191,827 and were recognized at fair value in the amount of €55.04 in 2020. Fair value is determined using the BASF share price of €64.72 on the balance sheet date and the dividend payment of €3.30 in 2020, plus expected dividend payments during the term of the program. The weighted target achievement degree of 92.50% in 2020 is also taken into account. A fluctuation rate of 4% is assumed in the fair value calculation.

The resulting LTI provision for Strive! totaled €11 million as of December 31, 2020. As Strive! was offered for the first time in 2020, it represents an addition to provisions. No provisions were allocated to the disposal group.

The same plan conditions generally apply to members of the Board of Executive Directors. Unlike for senior executives, share ownership obligation is not voluntary for the Board of Executive Directors and is outlined in their service contracts.

BASF “Plus” 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 an LTI program is not permitted.

Employees who participate in BASF’s “plus” incentive share program and acquire shares in BASF as a personal investment 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 10 years of holding these shares. As a rule, the first and second block of 10 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 €45.30 for the 2020 program, and €68.21 for the 2019 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 for BASF’s “plus” incentive share program totaled €28 million in 2020 and €33 million in 2019.