7.2 Compensation Report

Compensation of the Board of Management

Until December 31, 2009, the compensation of the Board of Management basically comprised four 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 three-year period in relation to a target amount, 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 fixed salary consists of two parts: a base salary and a fixed supplement.

The short-term incentive award for 2009 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.

The directly effected compensation (non-performance-related compensation and short-term incentive) of the members of the Board of Management in 2009 amounted to €8,830 thousand (2008: €8,813 thousand), comprising €2,156 thousand (2008: €2,105 thousand) in base salaries, €1,067 thousand (2008: €1,042 thousand) in fixed supplements and €5,442 thousand (2008: €5,498 thousand) in short-term incentive awards to be paid out in 2010 as well as €165 thousand (2008: €168 thousand) in compensation in kind and other benefits, the latter item consisting mainly of amounts assigned to compensation in kind and other benefits in accordance with German taxation guidelines.

The members of the Board of Management participate in the long-term stock-based compensation program Aspire I (annual tranches 2007 through 2009). 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 three-year period. 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 2009 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 2009.

Board of Management Compensation – Aggregate Compensation					[Table 3.27]
		Werner Wenning	Klaus Kühn	Wolfgang Plischke	Richard Pott	Total
		€ thousand	€ thousand	€ thousand	€ thousand	€ thousand
Base salary	2009	812	448	448	448	2,156
Base salary	2008	794	437	437	437	2,105
Fixed supplement	2009	353	344	185	185	1,067
Fixed supplement	2008	344	336	181	181	1,042
Fixed salary	2009	1,165	792	633	633	3,223
Fixed salary	2008	1,138	773	618	618	3,147

Compensation in kind and other benefits	2009	36	41	49	39	165
Compensation in kind and other benefits	2008	61	36	38	33	168
Total non-performance-related compensation	2009	1,201	833	682	672	3,388
Total non-performance-related compensation	2008	1,199	809	656	651	3,315

Short-term incentive	2009	2,158	1,264	1,010	1,010	5,442
Short-term incentive	2008	2,105	1,305	1,044	1,044	5,498
Total directly effected compensation	2009	3,359	2,097	1,692	1,682	8,830
Total directly effected compensation	2008	3,304	2,114	1,700	1,695	8,813

Fair value of newly granted stock-based compensation as of grant date	2009	208	84	151	151	594
	2008	352	240	191	191	974
Aggregate compensation (according to the German Commercial Code)	2009	3,567	2,181	1,843	1,833	9,424
	2008	3,656	2,354	1,891	1,886	9,787

The award entitlements earned in 2009 – both from the 2009 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 on the performance of Bayer stock in 2009. The fair value of the award entitlement already earned in 2009 from the 2009 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 3.28]
		Werner Wenning	Klaus Kühn	Wolfgang Plischke	Richard Pott	Total
		€ thousand	€ thousand	€ thousand	€ thousand	€ thousand
Long-term incentive (stock-based compensation entitlements earned in the respective year)	2009	587	398	319	319	1,623
	2008	569	364	267	309	1,509
Change in value of existing entitlements	2009	390	265	212	212	1,079
Change in value of existing entitlements	2008	(195)	(135)	(97)	(106)	(533)

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 Board of Management member and is capped at 80% for members appointed prior to 2006 and 60% for those appointed since 2006. 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. Under the provisions of the German Accounting Law Modernization Act (BilMoG), which is being applied as of 2009, 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 previous year’s figures have been restated accordingly. 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 3.29]
		Werner Wenning	Klaus Kühn	Wolfgang Plischke	Richard Pott	Total
		€ thousand	€ thousand	€ thousand	€ thousand	€ thousand
Current service cost for pension entitlements earned in the respective year (IFRS)	2009	-	985	181	198	1,364
	2008	-	505	182	197	884
Present value of pension entitlements at the closing date (IFRS)*	2009	14,675	6,335	5,577	5,478	32,065
	2008	14,271	4,902	4,743	4,770	28,686

Current service cost for pension entitlements earned in the respective year (German Commercial Code) **	2009	4	1,090	200	223	1,517
	2008	2	575	626	223	1,426
Present value of pension entitlements at the closing date (German Commercial Code)**	2009	15,128	6,597	5,794	5,728	33,247
	2008	16,608	6,069	5,770	5,999	34,446
* after deducting plan assets ** 2008 figures restated pursuant to the German Accounting Law Modernization Act

The aggregate compensation of the Board of Management 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. The current service cost for pension entitlements must also be added.

The components of the Board of Management’s compensation are summarized in the following table:

Board of Management Compensation According to IFRS	[Table 3.30]
	2008	2009
	€ thousand	€ thousand
Directly effected compensation	8,813	8,830
Long-term incentive (stock-based compensation entitlements earned in the respective year)	1,509	1,623
Change in value of existing entitlements	(533)	1,079
Current service cost for pension entitlements earned in the respective year	884	1,364
Aggregate compensation (IFRS)	10,673	12,896

For active Board of Management members whose service contracts were concluded prior to the entry into force of the amendments to the German info

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 a member’s 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 short-term incentive 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.

This clause is now obsolescent and of only limited significance. 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, either the clause is no longer applicable because the member is leaving the company or has reached the age of 60, or 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 short-term incentive) 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 compensation payments to be made by the company during the two-year duration of the post-contractual non-compete clause. For members who held office in 2009, the amount of this compensation is 50% of the average contractually agreed salary for the preceding three years. For the members newly appointed to the Board of Management effective January 1, 2010, the compensation under the non-compete agreement is 50% of fixed salary. It is offset against any benefits payable by the company under the pension plan.

Members of the Board of Management who joined the company before January 1, 1979 – like all salaried employees hired prior to that date – are entitled to six months’ pre-retirement leave. A cash payment may be made in lieu of this leave under certain conditions. The only current member to whom this applies is Werner Wenning.

Special supplementary arrangements apply in the event of a change of control, see “Takeover-Relevant Information.”

There were no loans to members of the Board of Management outstanding as of December 31, 2009, nor any repayments of such loans during the year.

We currently pay former and 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 are reassessed annually as of 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. Pension payments to retired members of the Board of Management and their surviving dependents in 2009 amounted to €11,273 thousand (2008: €11,697 thousand). Pension provisions for former members of the Board of Management and their surviving dependents at the closing date amounted to €107,223 thousand (2008: €107,863 thousand) according to IFRS and €110,069 thousand (2008: €121,557 thousand) according to HGB.

Compensation System for the Board of Management effective 2010

The compensation system for the Board of Management already complied in the past with the recommendations of the German Corporate Governance Code and with many of the requirements of the new German Act on the Appropriateness of Management Board Compensation (VorstAG), which came into force in August 2009.

The short-term incentive is designed so that payments vary upward or downward depending on the company’s economic performance.
Caps on both short- and long-term incentive payments have been in place for many years.
Long-term incentive payments are governed by the long-term compensation program for members of the Board of Management and senior executives (Aspire I). Under the rules of this program, a personal investment must be made in Bayer shares. Performance is measured partly by the stock’s outperformance of a reference index (EURO STOXX 50) and partly in terms of average prices.
The consistency of compensation systems, from the Board of Management to junior managers, has been standard practice at Bayer for years, with identical compensation components, structures and performance parameters.

In December 2009, the Supervisory Board resolved on adjustments to ensure that the compensation of the Bayer AG Board of Management continues to comply fully with the requirements of the above Act and the recommendations of the German Corporate Governance Code. These adjustments are outlined below:

To further enhance the sustainability aspect and long-term focus of the compensation structure, the previous short-term incentive (STI) for the Board of Management is being split into two parts. 50% will continue to be paid out in the respective following year in the same way as the STI awards for all eligible employees in the Bayer Group. The remaining 50% takes the form of a new stock-based long-term incentive (LTI) component involving a grant of virtual Bayer shares, which are subject to a three-year retention period. The value of these shares then depends on the trend in the price of Bayer stock during the retention period. This strengthening of the long-term incentive means that the fixed salary and short-term incentive account for about 30% each and the long-term incentive for roughly 40% of total compensation.
The performance period (retention period) under the current Aspire programs (Aspire I and II) is being extended from three to four years. At the same time, the performance hurdles are being raised. The proven elements already mentioned, such as payment caps, outperformance and average share price, are being retained.

In addition, the Board of Management has voluntarily undertaken to comply with the new share ownership guidelines, under which the Chairman in future will hold shares to the value of 150% and the other members 100% (formerly 40% in both cases) of annual fixed salary.

The adjustments described apply effective January 1, 2010 to all the members of the Board of Management except those leaving during 2010.

It is intended to seek the stockholders´ approval for the compensation system for the members of the Board of Management by way of a consultative resolution at the 2010 Annual Stockholders’ Meeting.

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 provisions 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 €605 thousand (2008: €591 thousand).

There were no loans to members of the Supervisory Board outstanding as of December 31, 2009, nor any repayments of such loans during the year.

Compensation of the Members of the Supervisory Board of Bayer AG in 2009		[Table 3.31]
	Fixed Compensation	Variable Compensation	Total
	€ thousand	€ thousand	€ thousand
Dr. Paul Achleitner	75	38	113
André Aich	60	30	90
Willy Beumann	60	30	90
Dr. Clemens Börsig	60	30	90
Karl-Josef Ellrich	75	38	113
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
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