Management Report
7.2 Compensation Report
Compensation of the Board of Management
In 2010 the compensation of the Board of Management basically comprised five components: a fixed annual salary, a short-term incentive award on a yearly basis in relation to a target amount, a long-term incentive award for a four-year period in relation to a target amount, a further long-term compensation component introduced in 2010 involving a grant of virtual Bayer shares subject to a three-year retention period, and a company pension plan conferring pension entitlements that increase with years of service. Compensation in kind and other benefits are also provided, such as the use of a company car for private purposes or reimbursement of the cost of health screening examinations.
The short-term incentive (STI) award for 2010 is calculated according to the Group’s EBITDA margin before special items and the weighted average target attainment of the HealthCare, CropScience and MaterialScience subgroups. The Supervisory Board can adjust this award according to individual performance. The target attainment of the subgroups is measured chiefly in terms of their EBITDA before special items. A qualitative appraisal in relation to the market and competitors is also taken into account. Serving members of the Board of Management as of the closing date receive 50% of the STI as direct compensation and 50% in the form of the new long-term compensation component.
The amount of Werner Wenning’s STI award for 2010 was set at the Supervisory Board’s discretion. In consideration of Mr. Wenning’s duties as Chairman of the Board of Management in 2010, and especially their successful transfer to Marijn Dekkers, the Supervisory Board specified a sum of €1,863 thousand, which was paid out in January 2011 as agreed. The STI award for Klaus Kühn was finalized upon his retirement from the Board of Management and paid out in May 2010.
The directly effected compensation for the service of the members of the Board of Management in 2010 totaled €10,019 thousand (2009: €8,830 thousand). Of this amount, fixed salaries accounted for €3,936 thousand (2009: €3,223 thousand), the part of the STI awards to be paid out in 2011 to the members of the Board of Management holding office on December 31, 2010 for €4,928 thousand (2009: €5,442 thousand), and compensation in kind and other benefits for €1,155 thousand (2009: €165 thousand), the latter item consisting mainly of amounts assigned to compensation in kind and other benefits in accordance with German taxation guidelines.
Since 2010 the long-term compensation of the members of the Board of Management holding office on December 31, 2010 has consisted of two components: a grant of virtual Bayer shares for which parts of the STI award – which was previously paid out in full – are used, and the long-term stock-based compensation program Aspire.
The 2010 Annual Stockholders’ Meeting approved the compensation system for the members of the Board of Management by way of a consultative resolution. This system remains in effect.
According to the changes resolved by the Supervisory Board in December 2009 and confirmed by the Annual Stockholders’ Meeting, 50% of the STI was granted in the form of virtual Bayer shares subject to a three-year retention period, thereby creating a new long-term compensation component. The value of these shares depends on the trend in the price of Bayer stock during the retention period. The basis for the conversion of this former part of the STI payment into virtual shares was the average official closing price of Bayer shares over the last 30 trading days of 2010 (November 18 – December 30, 2010) in the Xetra system of the Frankfurt Stock Exchange; this average price was €56.95. Wolfgang Plischke and Richard Pott receive one additional virtual Bayer share for every 20 virtual shares granted under the new system to compensate them for the conversion of part of the former STI into a long-term compensation component. The additional virtual shares are subject to the same retention period and value development.
In addition, the members of the Board of Management participate in the long-term stock-based compensation program Aspire I (annual tranches 2008 through 2010). Under this program, awards are paid out provided that the performance of Bayer stock (both in absolute terms and relative to the EURO STOXX 50 benchmark index) meets defined criteria over a period of three years (four years starting with the 2010 tranche). Further details of this program are provided in Note [26.6] to the consolidated financial statements. The fair value of the stock-based compensation newly granted in 2010 as of its grant date is included in the calculation of total compensation (see table below), although the award entitlement was only partially earned as of the closing date.
The following table shows the compensation components of the individual members of the Board of Management in 2010:
| Board of Management Compensation – Aggregate Compensation | [Table 3.28] |
|---|
| | | Serving members of the Board of Management | Former members | |
| | | Marijn
Dekkers (Chairman) | Werner
Baumann
| Wolfgang Plischke
| Richard
Pott
| Werner
Wenning
| Klaus
Kühn
| Total |
| | | € thousand | € thousand | € thousand | € thousand | € thousand | € thousand | € thousand |
Fixed salary
| 2010 | 900 | 633 | 633 | 633 | 873 | 264 | 3,936 |
| 2009 | - | - | 633 | 633 | 1,165 | 792 | 3,223 |
| Compensation in kind and other benefits | 2010 | 1,010* | 42 | 35 | 30 | 27 | 11 | 1,155 |
| 2009 | - | - | 49 | 39 | 36 | 41 | 165 |
| Total non-performance-related compensation | 2010 | 1,910 | 675 | 668 | 663 | 900 | 275 | 5,091 |
| 2009 | - | - | 682 | 672 | 1,201 | 833 | 3,388 |
| | | | | | | | | |
Short-term incentive
| 2010 | 903 | 554 | 554 | 554 | 1,863 | 500 | 4,928 |
| 2009 | - | - | 1,010 | 1,010 | 2,158 | 1,264 | 5,442 |
Total directly effected compensation
| 2010 | 2,813 | 1,229 | 1,222 | 1,217 | 2,763 | 775 | 10,019 |
| 2009 | - | - | 1,692 | 1,682 | 3,359 | 2,097 | 8,830 |
| | | | | | | | | |
Fair value of
stock-
price-indexed compensation based on the short-term incentive | 2010 | 903 | 554 | 582 | 582 | - | - | 2,621 |
| 2009 | - | - | - | - | - | - | - |
| Fair value of newly granted stock-based compensation as of grant date | 2010 | 261 | 206 | 291 | 291 | 184 | 33 | 1,266 |
| 2009 | - | - | 151 | 151 | 208 | 84 | 594 |
| Aggregate compensation (according to the German Commercial Code) | 2010 | 3,977 | 1,989 | 2,095 | 2,090 | 2,947 | 808 | 13,906 |
| 2009 | - | - | 1,843 | 1,833 | 3,567 | 2,181 | 9,424 |
| * including one-time relocation expenses |
The award entitlements earned in 2010 – both from the 2010 tranche and from previous years’ tranches on which the entitlements were only partially earned – are shown separately in the following table along with the changes in the value of entitlements from previous years’ tranches based mainly on the performance of Bayer stock in 2010. The evaluation of stock performance is based on the average official closing price of Bayer shares over the last 30 trading days of 2010 (November 18 – December 30, 2010) in the Xetra system of the Frankfurt Stock Exchange; this average price was €56.95. The fair value of the award entitlement already earned in 2010 from the 2010 tranche is included under “Stock-based compensation entitlements earned in the respective year.” Since certain components of the award entitlements are included in both tables, the figures in the following and the preceding table should not be added together.
| Board of Management Compensation – Stock-Based Compensation | [Table 3.29] |
|---|
| | | Serving members of the Board of Management | Former members | |
| | | Marijn
Dekkers (Chairman) | Werner
Baumann
| Wolfgang Plischke
| Richard
Pott
| Werner
Wenning
| Klaus
Kühn
| Total |
| | | € thousand | € thousand | € thousand | € thousand | € thousand | € thousand | € thousand |
Long-term incentive (stock-based
compensation entitlements earned in the respective year) | 2010 | 67 | 124 | 234 | 234 | 322 | 98 | 1,079 |
| 2009 | - | - | 319 | 319 | 587 | 398 | 1,623 |
Change in value of existing
entitlements | 2010 | - | (21) | (44) | (44) | (61) | (56) | (226) |
| 2009 | - | - | 212 | 212 | 390 | 265 | 1,079 |
The current members of the Board of Management are generally entitled to receive a pension upon leaving the Bayer Group, though not before the age of 60, in an annual amount equal to at least 30% of the last yearly fixed salary. This percentage increases depending on years of service as a member of the Board of Management and is capped at 60% except in the case of the member appointed prior to 2006, whose pension entitlement can rise to a maximum of 80% of his last yearly fixed salary. The respective surviving dependents’ benefit is set at 60% of this pension level.
The current service cost for the pension entitlements of the members of the Board of Management is shown in the following table. The current service cost for pension entitlements according to the German Commercial Code (HGB) also includes any past service cost resulting from new entitlements or variations in existing entitlements. The change in the present value of pension entitlements also reflects the interest cost for entitlements earned in prior years, along with actuarial gains and losses. Expenses for the pension entitlements of the members of the Board of Management who retired during the year are included up to the respective retirement dates. Since HGB and IFRS prescribe different methods for calculating pension provisions, the table contains both the amounts disclosed in the financial statements of Bayer AG prepared according to HGB and those published in the consolidated financial statements of the Bayer Group prepared according to IFRS. The figures in each case represent divergent disclosures of one and the same pension entitlement.
| Pension Entitlements | [Table 3.30] |
|---|
| | | Serving members of the Board of Management | Former members | |
| | | Marijn
Dekkers (Chairman) | Werner
Baumann
| Wolfgang Plischke
| Richard
Pott
| Werner
Wenning
| Klaus
Kühn
| Total |
| | | € thousand | € thousand | € thousand | € thousand | € thousand | € thousand | € thousand |
| Change in the present value of pension entitlements (IFRS) | 2010 | 2,612 | 621 | 1,017 | 1,074 | 823 | 426 | 6,573 |
| 2009 | - | - | 834 | 707 | 405 | 1,433 | 3,379 |
| Current service cost for pension entitlements earned in the respective year (IFRS) | 2010 | 2,175 | 111 | 203 | 217 | - | 141 | 2,847 |
| 2009 | - | - | 181 | 198 | - | 985 | 1,364 |
Present value of pension entitlements
at the closing date (IFRS)* | 2010 | 2,612 | 2,868 | 6,594 | 6,552 | - | - | 18,626 |
| 2009 | - | - | 5,577 | 5,478 | 14,675 | 6,335 | 32,065 |
| | | | | | | | | |
| Change in the present value of pension entitlements (German Commercial Code) | 2010 | 2,481 | 298 | 602 | 577 | 187 | 255 | 4,400 |
| 2009 | - | - | 482 | 279 | (452) | 1,048 | 1,357 |
| Current service cost for pension entitlements earned in the respective year (German Commercial Code) | 2010 | 2,292 | 117 | 209 | 225 | 3 | 148 | 2,994 |
| 2009 | - | - | 200 | 223 | 4 | 1,090 | 1,517 |
Present value of pension entitlements
at the closing date
(German Commercial Code) | 2010 | 2,481 | 2,690 | 6,392 | 6,301 | - | - | 17,864 |
| 2009 | - | - | 5,794 | 5,728 | 15,128 | 6,597 | 33,247 |
| * after deducting plan assets |
Unlike the aggregate compensation according to the German Commercial Code, the aggregate compensation according to IFRS does not include the fair value of newly granted stock-based compensation, but rather the stock-based compensation entitlements earned in the respective year plus the change in the value of stock-based compensation entitlements from previous years that have not yet been paid out. It also contains the current service cost for pension entitlements.
The components of the Board of Management’s compensation are summarized in the following table:
| Board of Management Compensation according to IFRS | [Table 3.31] |
|---|
| | 2009 | 2010 |
| | € thousand | € thousand |
| Directly effected compensation | 8,830 | 10,019 |
| Fair value of stock-price-indexed compensation based on the short-term incentive | - | 2,621 |
Long-term incentive
(stock-based compensation entitlements earned in the respective year) |
1,623 |
1,079 |
| Change in value of existing entitlements | 1,079 | (226) |
| Current service cost for pension entitlements earned in the respective year | 1,364 | 2,847 |
| Aggregate compensation (IFRS) | 12,896 | 16,340 |
For the only Board of Management member whose service contract was concluded prior to the entry into force of the amendments to the German Corporate Governance Code in June 2008, a general severance indemnity clause applies if the service contract is terminated at the company’s instigation prior to his 60th birthday. The basic principles according to this clause are as follows:
If a member of the Board of Management is not offered a new service contract upon expiration of his existing service contract because he is not reappointed to the Board of Management, or if the member is removed from the Board of Management prematurely during the term of his contract in the absence of grounds for termination without notice, he will receive a monthly bridging allowance amounting to 80% of his last monthly fixed salary for a maximum period of 60 months from the date of expiration of his service contract less the period for which he was released from his duties on full pay or otherwise compensated. (If he were removed during the term of his contract, he would also receive the payment due for the rest of the term, though this would be reduced to the amount of his annual fixed salary plus the target amount for the STI payment for at least twelve months.) His earnings from any new employment elsewhere would be offset against the bridging allowance. In the case of premature termination at the instigation of the company, further years of service might be credited under certain circumstances for the purpose of computing his Board of Management pension entitlement, though not beyond his 60th birthday.
The Supervisory Board has decided to follow the recommendation of the German Corporate Governance Code, as amended in June 2008, and limit severance payments under new service contracts. Under only one existing member’s contract could the clause still be invoked. In the case of the remaining contracts, it has been agreed that payment claims can only arise in the event of premature contract termination by the company without cause. Such claims, including ancillary benefits, are then limited to the value of two years’ compensation and may not compensate more than the remaining term of the contract. The severance payment cap is to be calculated on the basis of the total compensation (fixed salary plus the target value of the STI) for the previous year and, if appropriate, also the expected total compensation for the current year.
Post-contractual non-compete agreements have been concluded with the members of the Board of Management, providing for compensatory payments to be made by the company for the two-year duration of the post-contractual non-compete clause. For members appointed prior to 2010, this payment amounts to 50% of the average contractually agreed salary for the preceding three years. For the members newly appointed to the Board of Management as of January 1, 2010, the compensatory payment is 100% of the average fixed salary for the twelve months preceding their departure. It is offset against any severance payments.
Since his retirement from the Board of Management, Klaus Kühn has received regular payments as compensation for such a non-compete clause. The payments made to him in 2010 totaled €764,780.
Members of the Board of Management – in common with all employees – who joined the company prior to January 1, 1979, are entitled to six months’ pre-retirement leave. A payment may be made in lieu of this leave in certain circumstances. In 2010 this arrangement applied only to Werner Wenning, to whom a payment of €1,850 thousand was made in settlement of his claim to pre-retirement leave. This amount is included in the total of pensions paid to retired members of the Board of Management given below.
There were no loans to members of the Board of Management outstanding as of December 31, 2010, nor any repayments of such loans during the year.
We currently pay retired members of the Board of Management a monthly pension equal to 80% of the last monthly base salary received while in service. The pensions paid to former members of the Board of Management or their surviving dependents have been reassessed annually since January 1, 2009 and adjusted taking into account the development of consumer prices. These benefits are in addition to any amounts they receive under previous employee pension arrangements. The pensions paid to former members of the Board of Management and their surviving dependents amounted to €13,351 thousand (2009: €11,273 thousand). Pension provisions for former members of the Board of Management and their surviving dependents at the closing date amounted to €131,599 thousand (2009: €107,223 thousand) according to IFRS and €129,121 thousand (2009: €110,069 thousand) according to HGB.
Compensation of the Supervisory Board
The Supervisory Board is compensated according to the relevant provisions of the Articles of Incorporation, which provisions have not been altered since the resolution of the Annual Stockholders’ Meeting on April 29, 2005. This provides that, in addition to reimbursement of their expenses, each member of the Supervisory Board receives fixed annual compensation of €60,000 and a variable annual compensation component. The variable compensation component is based on corporate performance in terms of the gross cash flow reported in the consolidated financial statements of the Bayer Group for the respective fiscal year. The members of the Supervisory Board receive €2,000 for every €50 million or part thereof by which the gross cash flow exceeds €3.1 billion, but the variable component for each member may not exceed €30,000.
In accordance with the recommendations of the German Corporate Governance Code, additional compensation is paid to the Chairman and Vice Chairman of the Supervisory Board and for chairing and membership of committees. The Chairman of the Supervisory Board receives three times the basic compensation, while the Vice Chairman receives one-and-a-half times the basic compensation. Members of the Supervisory Board who are also members of a committee receive an additional one quarter of the amount, with those chairing a committee receiving a further quarter. However, no member of the Supervisory Board may receive total compensation exceeding three times the basic compensation. It has been agreed that no additional compensation shall be paid for membership of the Nominations Committee. If changes are made to the Supervisory Board and its committees during the fiscal year, members receive compensation on a pro-rated basis. No member of the Supervisory Board received compensation or any other benefits for personally performed services such as consultancy or agency services. The company has purchased insurance for the members of the Supervisory Board to cover their personal liability arising from their service on the Supervisory Board.
In addition to their compensation as members of the Supervisory Board, those employee representatives who are employees of Bayer Group companies receive compensation unrelated to their service on the Supervisory Board. The total amount of such compensation was €603 thousand (2009: €605 thousand).
There were no loans to members of the Supervisory Board outstanding as of December 31, 2010, nor any repayments of such loans during the year.
| Compensation of the Members of the Supervisory Board of Bayer AG in 2010 | [Table 3.32] |
|---|
| | Fixed
Compensation | Variable
Compensation | Total
|
| | € thousand | € thousand | € thousand |
| Dr. Paul Achleitner | 75 | 38 | 113 |
| André Aich | 60 | 30 | 90 |
| Willy Beumann | 64 | 32 | 96 |
| Dr. Clemens Börsig | 60 | 30 | 90 |
| Karl-Josef Ellrich 1 | 37 | 19 | 56 |
| Dr.-Ing. Thomas Fischer | 75 | 38 | 113 |
| Peter Hausmann | 75 | 38 | 113 |
| Prof. Dr.-Ing. e.h. Hans-Olaf Henkel | 75 | 38 | 113 |
| Reiner Hoffmann | 60 | 30 | 90 |
| Dr. rer. pol. Klaus Kleinfeld | 60 | 30 | 90 |
| Petra Kronen | 75 | 38 | 113 |
| Dr. rer. nat. Helmut Panke | 60 | 30 | 90 |
| Hubertus Schmoldt | 75 | 38 | 113 |
| Dr. Manfred Schneider (Chairman) | 180 | 90 | 270 |
| Dr.-Ing. Ekkehard D. Schulz | 60 | 30 | 90 |
| Roswitha Süsselbeck 2 | 30 | 15 | 45 |
| Dr. Klaus Sturany | 90 | 45 | 135 |
| Dipl.-Ing. Dr.-Ing. e.h. Jürgen Weber | 75 | 38 | 113 |
| Thomas de Win | 120 | 60 | 180 |
| Prof. Dr. Dr. h.c. Ernst-Ludwig Winnacker | 60 | 30 | 90 |
| Oliver Zühlke | 60 | 30 | 90 |
1 Member of the Supervisory Board until June 30, 2010 2 Member of the Supervisory Board effective July 1, 2010 |