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Last Update: 03/12/2009
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Part of the audited Consolidated Financial Statements and Management´s Analysis

25 -- Stock price-based compensation program and BASF incentive share program

Stock price-based compensation program


In 2008, BASF continued the BASF option program (BOP) for senior executives of the BASF Group. This program has existed since 1999. Approximately 1,000 senior executives, including the Board of Executive Directors, are currently entitled to participate in this program. The options are settled in cash when exercised.

To participate in the BASF option program, each participant must hold as a personal investment BASF shares in the amount of 10% to 30% of his or her individual variable compensation. The number of shares to be held is determined by the amount of variable compensation designated by the participant and the weighted-average market price for BASF shares on the first business day after the Annual Meeting, which was €45.21 on April 25, 2008 (base price after the stock split).

For each BASF share held as an individual investment, a participant receives four options. 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 to the base price (absolute threshold). The value of right A will be the difference between the market price of BASF shares at the exercise date and the base price; it is limited to 100% of the base price. Right B may be exercised if the cumulative percentage performance of BASF shares exceeds (relative threshold) the percentage performance of the MSCI World Chemicals Index SM (MSCI Chemicals). The value of right B will be the base price of the option multiplied by twice the percentage outperformance of BASF shares compared to the MSCI Chemicals index on the exercise date. It is limited to the closing price on the date of exercise minus computed nominal value of BASF shares. Shares of the individual investment must be held for at least two years following the

granting of the options. The options were granted on July 1, 2008, and may be exercised following a two-year vesting period, between July 1, 2010, and June 30, 2016. During the exercise period, it is not possible to exercise options during certain periods (closed periods). Each option right may only be exercised if the performance targets are achieved and may only be exercised once, meaning that if only one performance target is met and that option is exercised, the other option right lapses. The maximum gain for a participant from the BOP program is limited to 10 times the original individual investment. Option rights are forfeited if the option holders no longer work for BASF or have sold part of their individual investment before the two-year holding period. They remain valid in the case of retirement.

The option programs BOP 2001 to 2007 were structured in a similar way to BOP 2008.

The benchmark index used to determine the value of right B for BOP 2001 to 2004 is the Dow Jones Chemicals Total Return Index (DJ Chemicals). This index was replaced by the MSCI Chemicals starting with the option program 2005. The MSCI Chemicals is a global industry index for the chemical industry that measures the performance of the companies contained within it in their respective local currencies, which significantly reduces currency effects.

The model used in the valuation of the option plans is based on the arbitrage-free valuation model according to Black-Scholes.

Due to the complexity of the option programs, a numerical solution method was used (Monte Carlo simulation).

  Download (Download XLS xls, 17 kB)

Fair value and parameters used1

 

 

 

 

BASF option program of the year

 

 

2008

2007

1

It is assumed that the options will be exercised based upon the potential gains.

Fair value €

 

7.19

20.50

Dividend yield %

 

7.03

2.96

Risk-free interest rate %

 

2.92

4.33

Volatility BASF shares %

 

24.61

21.67

Volatility MSCI Chemicals %

 

18.91

15.44

Correlation BASF share price: MSCI Chemicals %

 

84.80

83.27

The fair values and the valuation parameters relate to the option programs 2008 and 2007. For the option programs from preceding years, corresponding fair values were computed and valuation parameters were used.

The number of options granted amounted to 2,859,472 in 2008 and 3,080,8081 in 2007.

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

As a result of a resolution by the Board of Executive Directors in 2002, to settle options in cash, options outstanding as of December 31, 2008, from the BOP 2001 to 2008 were valued with the fair value as of the balance sheet date as of December 31, 2008. This amount is accrued as a provision over the respective vesting period. This provision declined due to lower fair values from

€239 million as of December 31, 2007, to €80 million as of December 31, 2008. The reversal of the provision led to income of €112 million, which reduces personnel costs. The utilization of provisions amounted to €47 million. In 2007, personnel costs from the BASF option program amounted to €235 million.

The total intrinsic value of exercisable options amounted to €47 million as of December 31, 2008, and €141 million as of December 31, 2007.

1 The number of options were adjusted retroactively for the two-for-one stock split conducted in
    the second quarter of 2008.

BASF incentive share program

In 1999, BASF started an incentive share program called “Plus” for all eligible employees except the senior executives entitled to participate in the BOP. Currently, employees of German and of various European and Mexican subsidiaries are entitled to participate in the program. Each participant must make an individual investment in BASF shares from his or her variable compensation. For every ten BASF shares purchased in the program, a participant receives one BASF share at no cost after one, three, five, seven and ten years of holding the BASF shares. The first ten shares entitle the participant to receive one BASF share at no extra cost for each year for the next ten 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 the Company or one year after retirement.

The number of free shares to be granted developed as follows:

  Download (Download XLS xls, 17 kB)

Number of free shares to be granted

 

 

2008

20071

1

The number of free shares to be granted were adjusted retroactively for the two-for-one stock split conducted in the second quarter of 2008.

As of January 1

2,899.824

2,846.564

Newly acquired entitlements

681,770

607,300

Bonus shares issued

(429,284)

(403,960)

Lapsed entitlements

(98,206)

(150,080)

As of December 31

3,054.104

2,899.824

The free shares to be provided by the company are valued at the fair value on the grant date. Fair value is determined on the basis of the stock price of BASF shares, taking into account the present value of dividends, which are not paid during the term of the program. The weighted-average fair value at grant date amounted to €34.71 for the 2008 program and €36.57 for the 2007 program.

The fair value of the free shares to be granted is booked through the income statement against capital surplus over the period until the shares are issued.

Provisions for the costs for the 1999 to 2002 programs continue to be accrued proportionally on the basis of the BASF closing stock price.

Personnel costs of €9 million were recorded in 2008 for the employee stock program (2007: €19 million).

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