BASF : Compensation Report 2022

Compensation Report

Compensation Report

Pursuant to section 162 of the German Stock Corporation Act (AktG), the management and supervisory boards of a publicly listed company prepare a clear and understandable compensation report every year. This report outlines the main principles of compensation for the members of the Board of Executive Directors and the Supervisory Board and provides specific information on compensation granted and owed to current and former members of the Board of Executive Directors and Supervisory Board in the 2022 business year.

This report meets the disclosure requirements of section 162 AktG and the applicable accounting rules (HGB, IFRS). Furthermore, the recommendations of the German Corporate Governance Code (GCGC) in the version dated April 28, 2022, have been observed.

The Compensation Report for 2021, which was prepared for the first time in accordance with the new provisions of Section 162 AktG, was approved by the Annual Shareholders’ Meeting with a majority of 94.42% on April 29, 2022. We understand the high approval rate as confirmation of the acceptance of both the current compensation system and the Compensation Report 2021.

Compensation of the Board of Executive Directors

Principles

The compensation of the Board of Executive Directors is determined by the company’s size, complexity and financial position, as well as the performance of the Board of Executive Directors as a whole (Ge- samtvorstand). It is designed to contribute to sustainable corporate development and the achievement of strategic corporate goals. The long-term strategic goals communicated as part of BASF’s strategy form the key performance indicators for the short-term and long-term variable compensation and thus foster the sustainable and long-term development of the company within the meaning of section 87(1) sentence 2 AktG.

• The strategic target “yield” refers to an annual return on capital employed (ROCE) above the cost of capital percentage. The ROCE serves as the key performance indicator for determining the perfor- mance bonus (short-termincentive, STI).
• The strategic targets “growth,” “profitability” and “sustainability” are represented in the long-termincentive (LTI) program.

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By taking into account the total shareholder return (development of the share price and dividend), the LTI enables members of the Board of Executive Directors as well as shareholders to participate in the sustainable and long-term development of the company.

The compensation of the Board of Executive Directors is marked by a pronounced variability in relation to the performance of the Board of Executive Directors as a whole and the BASF Group’s success. The external and internal appropriateness of the Board’s compensation is reviewed by an independent external auditor on a regular basis. DAX listed companies in Germany and globally operating companies in Europea serve as an external reference.

For internal comparison, the compensation of senior executives and employees of BASF SE is considered in total as well as over time.

Based on a proposal by the Personnel Committee, the Supervisory Board determines the structure and amount of compensation of members of the Board of Executive Directors. In the event of significant amendments, but at least every four years, the compensation system resolved by the Supervisory Board is presented to the Annual Shareholders’ Meeting for approval.

In very exceptional and unforeseen cases (such as a severe economic crisis), the Supervisory Board can temporarily deviate from the components of the compensation system (procedures and rules on the compensation structure and amount as well as relating to the individual compensation components) for the Board of Executive Direc- tors, if this is in the interest of the company’s long-termwell-being.

Since January 1, 2020, the compensation system for the Board of Executive Directors contains the components listed in the table below with the annual target amounts (including relative portions) valid for the 2022 business year.

Components of the compensation system also include a withholding and clawback clause for variable compensation components as well as a Share Ownership Guideline, which obliges members of the Board of Executive Directors to hold a defined number of shares for the length of their Board mandate and beyond.

Compensation Report

4. Short-term incentive (STI)

Short-term incentive (STI)

• One-yearperformance period
• The actual amount of the STI is based on the achievement of set operational and strategic targets as well as on the BASF Group’s ROCE.
• The payout is limited to 200% of the target amount (cap).
• The payment occurs in May of the following year.

For each business year, an STI with a one-year performance period is granted. The STI is based on the achievement of operational and strategic goals as well as the return on capital employed (ROCE), which is relevant for the compensation of all employees. The actual STI amount is paid in May of the following year.

ROCE as key performance indicator for one-year variable compensation

With the ROCE as the key performance indicator for the variable compensation, the short-term variable compensation is directly linked to the company’s operating success and aligned with the BASF Group’s financial goal of earning a premium on the cost of capital. The ROCE of the particular business year serves as the key performance indicator for the success of the company when determining the STI. ROCE is the ratio of income from operations (EBIT) of the segments in relation to the average operating assets of the segments, plus the customer and supplier financing not included there.

  For more information on the determination of ROCE and the cost of capital basis, see Our Steering Concept on page 41 of the BASF Report 2022

The target ROCE for the variable compensation is one percentage point above the cost of capital percentage for the business year, which is determined using the weighted average cost of capital (WACC) approach in accordance with the capital asset pricing model. A ROCE factor is assigned to each relevant ROCE value. If the ROCE is two percentage points or more below the target ROCE, the ROCE factor will decline at a faster rate. The ROCE factor will increase at a slower rate if the ROCE is two percentage points or more above the target ROCE.

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The ROCE factor is 1.0 if the ROCE achieved in the business year is one percentage point above the weighted cost of capital percentage (based on the WACC in accordance with the capital asset pricing model) for that year, meaning an appropriate premium on the cost of capital was earned.

In calculating ROCE, adjustments are made for negative and positive special items resulting from acquisitions and divestitures (for example, integration costs in connection with acquisitions and gains or losses from the divestiture of businesses) when these exceed a range of plus or minus 1% of the average cost of capital basis. An adjustment of the ROCE (in the first 12 months after closing) therefore only occurs in cases of exceptionally high special items resulting from acquisitions and divestitures.

For the business year 2022, the target ROCE was 10% with a cost of capital percentage of 9%. This figure is reviewed and communicated annually.

  For more information on the determination of ROCE and the cost of capital basis, see Our Steering Concept on page 41 of the BASF Report 2022

Target agreement and performance assessment

In order to assess the performance of the Board of Executive Direc- tors, each year the Supervisory Board sets a target agreement with the Board of Executive Directors as a whole. The target agreement contains:

• One-yearoperational targets, for example, earnings and financial targets. This includes, for example, EBIT before special items.
• One-yearstrategic targets relating to the further development of the BASF Group, for example, targets for growth, investment and R&D strategy, and sustainability.

The achievement of operational and strategic targets comprises the performance factor, each with a weight of 50%. These targets are in line with the outlook published in the forecast in the BASF Report. A performance factor with a value between 0 and 1.5 is determined on the basis of the target achievement ascertained by the Supervisory Board. A target achievement rate of 100% equates to a value of 1.0 for the performance factor.

Target achievement and performance factor

ROCE factor

ROCE factor

1.5

Values between these figures are interpolated.

If the actual ROCE is more than 6 percentage points above the target ROCE, the ROCE

The payout amount of the STI is determined as follows:

Compensation Report

5. Long-term incentive (LTI)

The LTI program incentivizes the achievement of the BASF Group’s strategic targets and takes into consideration the development of the BASF share price and dividend (total shareholder return) over a period of four years. The LTI is also offered with slight variations to senior executives of the BASF Group.

Long-term incentive (LTI)

• Four-yearperformance period
• The payout amount is determined by the achievement of three agreed strategic targets (growth, profitability, sustainability) and the performance of the BASF share plus the dividends paid (total shareholder return).
• The payout is limited to 200% of the target amount (cap).
• The payment occurs in May following the four-year performance period.

Allocation: An LTI plan with a four-year performance period will be allocated for each business year. The target amount will be converted into a preliminary number of virtual performance share units (PSUs). To undertake this conversion, the target amount is divided by the average price of the BASF share in the fourth quarter of the year prior to the beginning of the respective plan.

Targets and target achievement: At the beginning of the four-year performance period, the Supervisory Board defines three strategic targets. Depending on the achievement of these strategic targets over the four-year performance period, the number of PSUs can

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increase or decrease. To determine this, the number of provisional PSUs at the end of the four years is multiplied by the weighted target achievement rate for the three strategic targets.

Payout: The final number of PSUs determined in this way is multiplied by the average share price of the BASF share in the fourth quarter of the last year of the four-year performance period plus the cumulative dividend payments in the four business years of the performance period. The payout amount of the LTI therefore reflects not only the achievement of the strategic targets but also the development of the total shareholder return. The LTI plan is vested at the end of the respective four-year performance period and the actual amount is paid out in the following year. The payout is limited to 200% of the target amount (cap).

Determination of target achievement: The Supervisory Board defines a target value for each of the three strategic targets at the beginning of the four-yearperformance period, corresponding to a target achievement of 100%, as well as a minimal value, a maximum value and a target achievement curve.

The target achievement rate for each strategic target is determined on an annual basis. At the end of the four-year performance period, the arithmetic mean of the four annual target achievement rates is calculated. The resulting average target achievement rates for the individual strategic targets are combined according to the defined weighting to reach a weighted target achievement. The preliminary number of PSUs is multiplied by the weighted target achievement in order to determine the final number of PSUs.

Allocation

(year 1)

LTI target amount

Share price at allocation date

Preliminary number of

(virtual) performance share units (PSUs)

Achievement of strategic targets over a four-year performance period

Strategic target 1: growth

Strategic target 2: profitability

Strategic target 3: sustainability

Payout (after year 4)

Final number of (virtual) PSUs

Share price at end date + ∑ dividends

LTI payout (gross);

cap at 200% of target amount