Compensation of the Board of Management

Objective

The compensation system for the Board of Management of Bayer AG applies in the version approved by a large majority at the Annual Stockholders’ Meeting on April 29, 2016.

The Bayer Group’s compensation system is aligned to the corporate strategy and geared toward performance-driven, sustainable Corporate governance comprises the long-term management and oversight of the company in accordance with the principles of responsibility and transparency. The German Corporate Governance Code sets out basic principles for the management and oversight of publicly listed companies. and an appropriate compensation structure and level. The nature and appropriateness of the compensation system for the members of the Board of Management are determined by the full Supervisory Board on the proposal of the Human Resources Committee of the Supervisory Board, regularly reviewed and adjusted as necessary. All of the assessment criteria recommended in Section 4.2.2 of the German Corporate Governance Code are taken into account. An independent compensation consultant has confirmed that the compensation is appropriate and on a customary level. The compensation structure in the Bayer Group is, in principle, the same for the Board of Management as for all other managerial employees.

Transparent compensation structure

The compensation paid to members of the Board of Management of Bayer AG comprises a non-performance-related component of about 30% and a performance-related variable component of about 70%. The compensation components under the system are as follows, assuming 100% target attainment by a member of the Board of Management.

Compensation Structure Based on 100% Target Attainment

Compensation Structure Based on 100% Target Attainment (pie chart)

1 Excluding fringe benefits and pension entitlements

The non-performance-related compensation component comprises the fixed annual compensation along with fringe benefits. The variable performance-related compensation components comprise a variable annual cash payment (STI = short-term incentive) based on target attainment, which is paid out in cash in the following year, and a long-term variable cash payment (LTI = long-term incentive). The system for the LTI program is based on stockholder return. The individual performance-related components are capped upon payment. There is also a cap on the total cash compensation. This amounts to 1.8 times the respective target compensation and is determined annually when the fixed compensation is set.

The members of the Board of Management also receive pension entitlements for themselves and their surviving dependents.

Non-performance-related components

Fixed annual compensation

The level of the non-performance-related, fixed annual compensation takes into account the functions and responsibilities assigned to the members of the Board of Management as well as market conditions. The fixed annual compensation is regularly reviewed by the Supervisory Board in light of the consumer price index and adjusted if necessary. It is paid out in twelve monthly installments.

Fringe benefits

This component mainly includes perquisites such as a company car with driver or the use of the company carpool, payments toward the cost of security equipment, and the reimbursement of the cost of annual health screening examinations. Fringe benefits are reported at cost or the amount of the pecuniary advantage gained.

Performance-related components

Short-term variable cash compensation

The short-term variable cash compensation (STI) depends on the company’s business success in the respective year. The level of the STI is determined by the target attainment for three subcomponents – the Group component, the divisional component and the individual performance component – each of which is given a one-third weighting in the performance evaluation. The performance evaluation takes into account both positive and negative developments.

  • The Group component is based on the core earnings per share of the Group and is capped at 200%.
  • The divisional component is incentivized based on the weighted average performance of the three divisions and is capped at 300%. For the members of the Board of Management with functional responsibility, this component is based on the average performance of the divisions, weighted as follows: Pharmaceuticals 50%, Consumer Health 20%, Crop Science (including Animal Health) 30%. For the Board members with divisional responsibility, however, this one-third of the STI is incentivized entirely on the basis of the respective division’s earnings. The assessment of divisional performance comprises a 70% component linked to the attainment of financial targets in relation to the EBITDA margin before special items and divisional sales growth, and a 30% component based on the attainment of qualitative goals in areas such as innovative progress, safety, compliance and sustainability.
  • The target attainment criteria for the individual performance component are based on the duties and resulting personal targets of the respective member of the Board of Management, as well as on his or her individual contribution to the attainment of the Group targets. The individual targets for the members of the Board of Management are determined annually by the Supervisory Board, which also assesses their attainment.

The entire amount of the STI is paid out in cash in the second quarter of the following year and is capped at 200%.

Short-Term Variable Cash Compensation Components (STI)

Short-Term Variable Cash Compensation (STI) (chart)

Long-term stock-based cash compensation (LTI)

Members of the Board of Management are eligible to participate in the annual tranches of the long-term stock-based compensation program “Aspire” on condition that they purchase a certain number of Bayer shares – determined for each individual according to specific guidelines – as a personal investment and hold them for as long as they continue in the service of the Bayer Group.

The target amounts for the Aspire 2.0 tranches issued since 2016 are generally based on a contractually agreed target percentage of the fixed annual compensation. The starting value is also partly determined by the individual STI payment factor for the Board member concerned for the year prior to the issuance of the respective tranche. The cash payment amounts are determined after four years based on the average share price calculated over the last 30 trading days of the fiscal year, the performance of Bayer stock relative to the EURO STOXX 50 and the dividends paid in the meantime (total stockholder return approach). As with the other management levels, the cap for Aspire 2.0 is 250%. For the Board of Management, however, an additional performance measure has been included in the LTI program in the form of the comparison with the EURO STOXX 50 mentioned above. This increases or decreases the payout by the percentage of overperformance or underperformance, respectively.

The payout / performance matrix according to the absolute and relative development of Bayer’s share price is explained at https://www.investor.bayer.com/en/stock/stock-programs/aspire/.

The payments made under the tranches of the Aspire program issued in the years up to 2015 continue to be based until their expiration on the Aspire Target Opportunity, which is a contractually agreed percentage of fixed annual compensation. Depending on the performance of Bayer stock, both in absolute terms and relative to the EURO STOXX 50 benchmark index, participants are granted an award of between 0% and a maximum 300% of their individual Aspire Target Opportunity at the end of the respective performance periods.

Tranches of the Aspire Program

Tranches of the Aspire Program (chart)

If a member of the Board of Management enters retirement during the year or steps down from the Board of Management during the year due to the nonextension of his or her service contract by mutual agreement or by the company’s decision, the Aspire tranche granted for that year is reduced on a prorated basis according to the duration of the member’s active service on the Board of Management during this first year of the tranche. In this case, tranches granted for previous years remain in effect without any changes.

Share ownership guidelines

As a condition for receiving payments under the LTI program, members of the Board of Management must meet certain requirements regarding their personal investment in Bayer stock. As of 2016, they have been required to build a position in Bayer shares to the value of 75% of their fixed annual compensation within four years and hold these shares until the end of their service on the Board of Management. The Board of Management members must provide documentary evidence of their compliance with this obligation, first at the end of the four-year position-building period and then yearly thereafter. In the event of significant changes in fixed annual compensation, the value to which shares must be held is adjusted accordingly.

Pension entitlements (retirement and surviving dependents’ pensions)

The annual pension entitlement for members of the Board of Management is based on contributions. Each year Bayer provides a hypothetical contribution amounting to 42% of the respective fixed annual compensation. This percentage is comprised of a basic contribution of 6% and a matching contribution of 36%, which is four times the member’s personal contribution of 9%. The total annual contribution is converted into a pension module according to the annuity table for the applicable tariff of the Rheinische Pensionskasse VVaG pension fund. The annual pension entitlement upon retirement is the total amount of the accumulated pension modules including an investment bonus. The investment bonus is determined annually based on the net return on the assets of the Rheinische Pensionskasse VVaG minus the minimum return on the contributions that is guaranteed under the tariff and approved by the German Financial Supervisory Authority (BaFin). Future pension payments are annually reviewed and adjusted to take into account the development of consumer prices.

In addition, special individual arrangements exist for the following members of the Board of Management:

  • Werner Baumann has been granted a vested entitlement to an annual pension of €200 thousand starting on his 60th birthday. This is subject to a prorated reduction in the event that his term of office ends prior to his 60th birthday under certain conditions.
  • Dr. Marijn Dekkers had the option to receive either a lifelong monthly annuity or a capital sum. After leaving the Bayer Group, he opted for the payment of a monthly annuity.
  • Kemal Malik has been granted a vested entitlement to an annual pension of €80 thousand starting on his 65th birthday. This is subject to a prorated reduction in the event that his term of office ends prior to his 65th birthday under certain conditions.
  • Erica Mann participates in pension plans in Germany (30%) and Switzerland (70%) on a prorated basis in view of her split service contract. As regards the payment of pension benefits from her two pension plans, Ms. Mann has the option to receive either a lifelong monthly annuity or a capital sum when her pension benefits fall due.

Certain assets are administered by Bayer Pension Trust e.V. under a contractual trust arrangement (CTA) to cover pension entitlements resulting from direct commitments in Germany. This provides substantial additional security – beyond the benefits from the Pension Insurance Association – for the respective pension entitlements of the members of the Board of Management in Germany.

Benefits upon termination of service on the Board of Management

Post-contractual noncompete agreements

Post-contractual noncompete agreements exist with the members of the Board of Management, providing for compensatory payments to be made by the company for the two-year duration of these agreements. The compensatory payment amounts to 100% of the average fixed compensation for the twelve months preceding their departure.

Change of control

Agreements exist with the members of the Board of Management providing for severance indemnity in certain circumstances in the event of a change in control. The amount of any possible severance indemnity in the case of early termination of service on the Board of Management as a result of a change in control is limited to the value of three years’ compensation in line with the recommendation in Section 4.2.3 of the German Corporate Governance Code. Such payments do not exceed the compensation payable for the remaining term of the service contract.

Unfitness for work

In the event of temporary unfitness for work, members of the Board of Management continue to receive the contractually agreed compensation. Bayer AG may early terminate the service contract if the Board member has been continuously unfit for work for at least 18 months and is likely to be permanently incapable of fully performing his or her duties (permanent incapacity to work). A disability pension is paid in the event of contract termination before the age of 60 due to permanent incapacity to work. For members of the Board of Management, the amount of the disability pension under the service contract corresponds to the entitlement accrued on the date of contract termination, taking into account a fictitious period of service between that date and the member’s 55th birthday, where applicable.

Compensation of the Board of Management in 2017

The aggregate compensation for the members of the Board of Management in 2017 totaled €24,324 thousand (2016: €28,445 thousand), comprising €6,414 thousand (2016: €7,049 thousand) in non-performance-related components and €17,910 thousand (2016: €21,396 thousand) in performance-related components. The pension service cost amounted to €2,546 thousand (2016: €2,887 thousand).

As of December 31, 2017, the Board of Management of Bayer AG consisted of seven members. There were no changes in the membership of the Board of Management in 2017.

Effective April 26, 2018, the Supervisory Board has appointed Wolfgang Nickl as member of the Board of Management of Bayer AG. He will succeed Johannes Dietsch as Chief Financial Officer of Bayer AG on June 1, 2018.

Effective March 1, 2018, the Supervisory has appointed Heiko Schipper as a member of the Board of Management of Bayer AG and, from April 1, 2018, head of the Consumer Health Division, succeeding Erica Mann.

The following table shows the aggregate compensation of the individual members of the Board of Management who served in 2016 and / or 2017 according to the German Commercial Code:

Board of Management Compensation (German Commercial Code)

 

 

Fixed annual compensation

 

Fringe benefits

 

Short-term variable cash compensation

 

Long-term stock-based cash compensation (Aspire)1

 

Aggregate compensation

 

Pension service cost2

 

 

2016

2017

 

2016

2017

 

2016

2017

 

2016

2017

 

2016

2017

 

2016

2017

 

 

€ thousand

€ thousand

 

€ thousand

€ thousand

 

€ thousand

€ thousand

 

€ thousand

€ thousand

 

€ thousand

€ thousand

 

€ thousand

€ thousand

1

Fair value at grant date; for Dr. Marijn Dekkers, 4/12 of the grant amount for Aspire 2.0 was shown in 2016.

2

Including company contributions to Bayer-Pensionskasse VVaG, Rheinische Pensionskasse VVaG and to a pension fund outside Germany

3

It has been agreed that Erica Mann will receive a severance payment of €1,978 thousand in view of her leaving the company effective March 31, 2018. This puts her in the same position as if she had held office until December 31, 2018, and had then retired.

4

Dr. Marijn Dekkers additionally received a severance payment of €4,341 thousand. This puts him in the same position as if he had held office regularly until December 31, 2016, and had then retired.

Serving members of the Board of Management as of December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Werner Baumann (Chairman)

 

1,285

1,487

 

47

49

 

2,329

1,335

 

1,983

3,530

 

5,644

6,401

 

764

809

Liam Condon

 

800

806

 

44

43

 

1,106

519

 

1,624

1,677

 

3,574

3,045

 

330

320

Johannes Dietsch

 

750

756

 

83

42

 

978

679

 

1,522

1,483

 

3,333

2,960

 

318

305

Dr. Hartmut Klusik

 

750

756

 

140

40

 

1,053

565

 

1,522

1,597

 

3,465

2,958

 

316

305

Kemal Malik

 

775

781

 

35

36

 

1,050

604

 

1,573

1,591

 

3,433

3,012

 

318

310

Erica Mann3

 

750

756

 

182

24

 

798

378

 

1,522

1,210

 

3,252

2,368

 

219

257

Dieter Weinand

 

800

806

 

34

32

 

1,274

810

 

1,623

1,932

 

3,731

3,580

 

240

240

Former member

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dr. Marijn Dekkers4

 

475

 

99

 

475

 

964

 

2,013

 

382

Total

 

6,385

6,148

 

664

266

 

9,063

4,890

 

12,333

13,020

 

28,445

24,324

 

2,887

2,546

Fixed annual compensation

The fixed annual compensation of the members of the Board of Management was adjusted in 2017. The total fixed annual compensation of all the members was €6,148 thousand (2016: €6,385 thousand).

Short-term variable cash compensation

The total short-term variable cash compensation for all the members of the Board of Management in 2017 totaled €4,890 thousand (2016: €9,063 thousand) after deduction of the solidarity contribution. Provisions of €4,890 thousand (2016: €8,588 thousand) were established for payment of this compensation component to the members of the Board of Management serving as of December 31, 2017. The solidarity contribution is made by all employees of the companies covered by the respective agreements with the employee representatives to help safeguard jobs at the German sites. For 2017 it amounted to 0.25% (2016: 0.27%) of each person’s STI award.

Long-term variable cash compensation based on virtual Bayer shares

This compensation component no longer exists following the adjustment of the compensation system for the Board of Management effective January 1, 2016. The conversion of 50% of the STI into virtual Bayer shares took place for the last time in 2015 and was based on an average price of €119.17. The aggregate compensation for 2017 according to the IFRS includes a change of €538 thousand (2016: minus €1,275 thousand) in the value of existing entitlements. Provisions of €6,841 thousand (2016: €7,777 thousand) existed as of December 31, 2017, for the future cash disbursements to currently serving members of the Board of Management based on the virtual Bayer shares granted in previous years. This amount also contains the dividend entitlements attributable to the respective prior years.

Long-term stock-based cash compensation (Aspire)

The long-term stock-based cash compensation under the Aspire program is included in the aggregate compensation according to the German Commercial Code at its fair value of €13,020 thousand (2016: €12,333 thousand) at the respective grant date.

The aggregate compensation according to the IFRS includes the fair value of the partial entitlement earned in the respective year. Grants of stock-based compensation with a four-year performance period are therefore expensed at their respective fair values over four years starting with the grant year. The stock-based compensation according to the IFRS also includes the change in the value of existing entitlements under ongoing Aspire tranches granted in prior years.

Board of Management Compensation – Aspire Program (IFRS)

 

 

 

 

Serving members of the Board of Management as of December 31, 2017

 

Former member

 

 

 

 

 

 

Werner Baumann (Chairman)

Liam Condon

Johannes Dietsch

Dr. Hartmut Klusik

Kemal Malik

Erica Mann

Dieter Weinand

 

Dr. Marijn Dekkers

 

Total

 

 

 

 

€ thou­sand

€ thou­sand

€ thou­sand

€ thou­sand

€ thou­sand

€ thou­sand

€ thou­sand

 

€ thou­sand

 

€ thou­sand

1

The newly earned entitlements are derived from the 2014 – 2017 (2016: 2013 – 2016) tranches of the Aspire program because this compensation was or is being earned over a four-year period. They are stated at their prorated fair values in 2016 and 2017, respectively. Johannes Dietsch and Erica Mann are earning their entitlements at an accelerated rate until they leave the company on May 31, 2018, and March 31, 2018, respectively. Accordingly, the proportion earned in 2017 is higher than in the prior year. The Aspire entitlements earned in 2016 and 2017 and the value changes for Liam Condon, Johannes Dietsch, Dr. Hartmut Klusik, Kemal Malik, Erica Mann and Dieter Weinand relate in part to Aspire tranches granted to them before they joined the Board of Management but not yet fully earned.

2

This line shows the change in the value of the entitlements already earned in 2014, 2015 and 2016 (2016: 2013, 2014 and 2015).

Stock-based compensation entitlements earned in the respective year1

 

2017

 

1,528

871

2,038

819

830

2,049

947

 

 

9,082

 

2016

 

715

506

413

414

431

848

369

 

1,521

 

5,217

Change in value of existing entitlements2

 

2017

 

(120)

(77)

(51)

(42)

(58)

(240)

(53)

 

 

(641)

 

2016

 

(120)

(83)

(57)

(47)

(98)

(165)

(69)

 

(284)

 

(923)

Total

 

2017

 

1,408

794

1,987

777

772

1,809

894

 

 

8,441

 

2016

 

595

423

356

367

333

683

300

 

1,237

 

4,294

Provisions of €11,747 thousand (2016: €7,288 thousand) were established for the Aspire entitlements of the members of the Board of Management serving as of December 31, 2017. Of this amount, €6,048 thousand relates to the tranches issued up to 2016 and €5,699 thousand to the 2017 tranche.

Pension entitlements

The pension service cost recognized for the members of the Board of Management in 2017 according to the German Commercial Code was €2,546 thousand (2016: €2,887 thousand), while the current service cost for pension entitlements recognized according to the IFRS was €3,907 thousand (2016: €3,902 thousand). The following table shows the service cost and the settlement or present value of the pension obligations attributable to the individual members of the Board of Management.

Pension Entitlements (German Commercial Code and IFRS)

 

 

German Commercial Code

 

IFRS

 

 

Pension service cost1

 

Settlement value of pension obligation as of December 312

 

Current service cost for pension entitlements

 

Present value of defined benefit pension obligation as of December 31

 

 

2016

2017

 

2016

2017

 

2016

2017

 

2016

2017

 

 

€ thou­sand

€ thou­sand

 

€ thou­sand

€ thou­sand

 

€ thou­sand

€ thou­sand

 

€ thou­sand

€ thou­sand

1

Including company contribution to Bayer-Pensionskasse VVaG, Rheinische Pensionskasse VVaG and a pension fund outside Germany

2

The pension obligations of foreign subsidiaries and foreign Bayer pension funds are included at present value according to IFRS.

3

Dr. Marijn Dekkers stepped down from the Board of Management as of midnight on April 30, 2016.

Serving members of the Board of Management as of December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

Werner Baumann (Chairman)

 

764

809

 

7,452

9,044

 

1,054

1,290

 

12,429

13,544

Liam Condon

 

330

320

 

2,151

2,345

 

487

563

 

3,860

4,038

Johannes Dietsch

 

318

305

 

2,854

3,951

 

431

483

 

4,882

5,919

Dr. Hartmut Klusik

 

316

305

 

4,533

5,302

 

399

435

 

6,782

7,285

Kemal Malik

 

318

310

 

1,990

2,186

 

438

493

 

2,507

2,697

Erica Mann

 

219

257

 

7,199

7,492

 

288

275

 

7,232

7,532

Dieter Weinand

 

240

240

 

468

700

 

322

368

 

735

988

Former member

 

 

 

 

 

 

 

 

 

 

 

 

Dr. Marijn Dekkers3

 

382

 

 

483

 

Total

 

2,887

2,546

 

26,647

31,020

 

3,902

3,907

 

38,427

42,003

The difference between the pension service cost according to the German Commercial Code and the service cost for pension entitlements according to the IFRS arises from the difference in the valuation principles used in calculating the settlement value according to the German Commercial Code and the present value of the defined benefit pension obligation according to the IFRS.

Benefits upon termination of service on the Board of Management

It was agreed with Erica Mann that she be granted a severance package worth €1,978 thousand in light of the mutually agreed early termination, effective March 31, 2018, of her service contract, which originally ran until December 31, 2018. This package primarily comprises severance payments for fixed compensation, short-term variable compensation components, Aspire and payments for pension entitlements, each for the period April 1, 2018, through December 31, 2018. Erica Mann’s entitlements under the company pension plan and the Aspire program were set at the levels they would have reached if she had been eligible to participate until December 31, 2018. The severance payment for her fixed compensation and the short-term variable compensation component, together amounting to €1,172 thousand, will be paid in April 2018. The payments from the Aspire tranches will be made upon expiration of each tranche based on the respective Aspire program parameters. In addition, a noncompete agreement ending on December 31, 2018, exists with Erica Mann.

It was agreed with Dr. Marijn Dekkers that he be granted benefits of €4,341 thousand according to the German Commercial Code and €4,542 thousand according to the IFRS in light of the mutually agreed early termination, effective April 30, 2016, of his service contract, which originally ran until December 31, 2016. These comprised the fixed compensation, the short-term variable compensation components, Aspire and the pension service cost, each for the period May 1, 2016, through December 31, 2016. Dr. Dekkers’ entitlements under the company pension plan and the Aspire program were set at the levels they would have reached if he had been eligible to participate until December 31, 2016. The fixed compensation and the short-term variable compensation component, together amounting to €1,900 thousand, were paid in May 2016. The payments from the Aspire tranches will be made upon expiration of each tranche based on the respective Aspire program parameters.

The aggregate Board of Management compensation according to the IFRS is shown in the following table.

Board of Management Compensation according to IFRS

 

 

2016

 

2017

 

 

€ thousand

 

€ thousand

Fixed annual compensation

 

6,385

 

6,148

Fringe benefits

 

664

 

266

Total short-term non-performance-related compensation

 

7,049

 

6,414

Short-term performance-related cash compensation

 

9,063

 

4,890

Total short-term compensation

 

16,112

 

11,304

Change in value of existing entitlements to stock-based compensation (virtual Bayer shares)

 

(1,275)

 

538

Stock-based compensation (Aspire) earned in the respective year

 

5,217

 

9,082

Change in value of existing entitlements to stock-based compensation (Aspire)

 

(923)

 

(641)

Total stock-based compensation (long-term incentive)

 

3,019

 

8,979

Service cost for pension entitlements earned in the respective year

 

3,902

 

3,907

Total long-term compensation

 

6,921

 

12,886

Severance indemnity in connection with the termination of a service contract

 

4,542

 

1,978

Aggregate compensation (IFRS)

 

27,575

 

26,168

Compare to Last Year