System consists of several components

Board of Management compensation focused on value creation

The compensation system for Covestro’s Board of Management is focused on achieving a sustainable increase in the company’s enterprise value. It consists of several components and envisages performance-related compensation for the Board of Management members.

Covestro was established in fall 2015 as the legally and economically independent successor to Bayer’s MaterialScience subgroup. Therefore, the compensation shown for the Board of Management of Covestro AG covers the period from September 1 to December 31, 2015.

During this period, the four-member Board of Management received total compensation of around EUR 3.28 million. Of that amount, some EUR 1.28 million was accounted for by non-performance-related components and about EUR 2 million by performance-related components. Pension obligations totaled EUR 312,000.

Long-term alignment

Assuming 100-percent target attainment for the variable elements, the individual components of the compensation system are as follows: Around 30 percent of compensation comprises the fixed annual compensation (excluding benefits in kind and other benefits such as pension entitlements). A further share of around 30 percent is accounted for by short-term variable cash compensation and about 40 percent by long-term stock-based cash compensation.

Starting 2016, Covestro has introduced a new short-term variable cash compensation system for all entitled employees - including the members of the Board of Management. This is based solely on financial targets derived from the performance indicators used to steer the company: core volume growth, free operating cash flow and Return on Capital Employed. One-third of the payment will depend on the degree of attainment of these indicators. The new compensation system is thus based on clear and easily measurable financial targets.

The long-term stock-based cash compensation for the Board of Management members is to be made independent of the future development of Bayer’s share price. Members’ previously accrued entitlements will be based on the average closing prices for Bayer stock on the last 30 trading days of 2015 and frozen.

New program

Starting 2016, the members of the Board of Management are entitled to participate in a new long-term stock-based compensation program named Prisma. The target opportunity under this program is a certain percentage of a member’s annual fixed compensation. Payment is based on two criteria: the absolute development of the Covestro share price plus the dividends paid out over the four-year performance period (total shareholder return); the relative development of the Covestro share against the STOXX Europe 600 Chemicals index. The effect of this second criterion is to reduce the amount paid out if total shareholder return on the Covestro share is below the median for the benchmark index. In the case of substantial underperformance, there could be no payment at all.

Further information about the compensation of the Board of Management can be found in the Corporate Governance chapter in the Annual Report 2015.