28. Share Price-Based Compensation Program and BASF Incentive Share Program

Share price-based compensation programs

The BASF Group’s share price-based compensation programs, or long-term incentive (LTI) programs, are cash-settled programs. If vested, the cash-settlement obligation is measured at fair value on every balance sheet date and recognized as a provision.

In 2023, the BASF Group continued offering its share price-based compensation program (LTI program), known as Strive!, which was launched in 2020. The share price-based compensation program known as “BOP” (BASF Option Program), which had existed since 1999, was offered for the last time in 2020. All option rights granted during the BOP program years remain valid until the end of their respective exercise periods.

Generally, members of the Board of Executive Directors and all senior executives are entitled to participate in the LTI programs.

Strive!

Strive! is based on a performance share plan and takes into account the achievement of strategic goals and the development of the BASF share and dividend (total shareholder return) over a period of four years.

Participation in Strive! is voluntary for senior executives and is linked to a share ownership obligation. Strive! offers rolling eligibility, without a deadline for participation. In 2023, 684 people were eligible to participate in Strive!. About 93% of eligible senior executives and Members of the Board of Executive Directors participated. Unlike for senior executives, participation is not voluntary for the members of the Board of Executive Directors and is outlined in their service contracts. The same plan conditions generally apply to members of the Board of Executive Directors.

A Strive! plan includes a four-year performance period with a fixed disbursement date. A target amount is determined at the beginning of each 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 periods 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 the respective Strive! plan 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.

A personal investment in BASF shares is the 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 the 2023 Strive! program ends on December 31, 2026. The 2023 Strive! program has the same fundamental structure as the Strive! programs in previous years.

PSUs vested by the deadline were measured at fair value. Fair value is determined based on the BASF share price of €48.78 on the balance sheet date plus expected dividend payments during the term of the program and taking into account the weighted target achievement rate of the respective Strive! plan. A fluctuation rate of 4% is assumed for the fair value of senior executives’ PSUs.

The LTI provision for Strive! rose from €71 million as of December 31, 2022, to €118 million as of December 31, 2023, due to the increased number of vested PSUs. The expense from the addition of provisions totaled €47 million in 2023 and €23 million in 2022. On the basis of preliminary degrees of target achievement, a payment amount of €43 million was recognized in current provisions for the fully vested 2020 program year.

BASF Option Program (BOP)

The “BOP” LTI program last offered in 2020, grants virtual option rights. When exercised, the option rights are settled in cash.

Participation in BOP was voluntary. In order to take part in the program, a participant had to make a personal investment: Participants were 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 was determined by the amount of variable compensation and the volume-weighted average share price on the first trading day after the Annual Shareholders’ Meeting.

Participants received 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. Right B may be exercised (relative threshold) if the cumulative percentage performance of BASF shares exceeds the percentage performance of the MSCI World Chemicals IndexSM (MSCI Chemicals). 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. Right B may only be exercised if the price of the BASF share equals at least the base price. When a two-year vesting period is over, options granted can be exercised until the end of the respective exercise period. When a two-year vesting period is over, options granted can be exercised until the end of the respective exercise 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, and one of the thresholds must be exceeded. If the other threshold is not exceeded, the other option right lapses. A participant’s maximum gain from exercising an option is limited to five times the original individual investment. 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 has been strengthened significantly compared with the conditions applying to the other participants. Members of the Board of Executive Directors were 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).

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 2016 to 2020 programs were valued at fair value as of December 31, 2023. A proportionate provision was recognized for programs in the vesting period.

The number of outstanding options declined from 9,328,238 in 2022 to 7,731,844 in 2023, due mainly to the expiration of options from the 2015 BOP program.

The exercisable options had no intrinsic value as of December 31, 2023, or December 31, 2022.

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

The LTI provision for BOP decreased from €64 million as of December 31, 2022, to €50 million as of December 31, 2023, due to lower fair values and a lower number of outstanding option rights. In 2022, the amount of €1 million was utilized due to senior executives leaving the company, whereas in 2023, less than €1 million was utilized due to senior executives leaving the company. Income from the reduction in provisions totaled €13 million in 2023 and €46 million in 2022.

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 €45.88 for the 2023 program, and €47.74 for the 2022 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 €26 million in 2023 and €20 million in 2022.