Compensation of members of the Executive Board of Merck KGaA Audited

The compensation report is part of the audited Notes to the Group accounts.

Compensation of members of the Executive Board of Merck KGaA

Contrary to management board members of German stock corporations, the members of the Executive Board of Merck KGaA are not employed officers of the company. Rather, they are personally liable general partners of both Merck KGaA and the general partner E. Merck KG, and in this capacity they receive profit-based compensation from E. Merck KG. Therefore, the obligation to individually publish the compensation of management board members of publicly listed German stock corporations does not apply to the Executive Board of Merck KGaA. The following presentation of individual compensation is therefore being made on a voluntary basis.

Contrary to publicly listed German stock corporations, at Merck KGaA it is not the Supervisory Board, but the Board of Partners of E. Merck KG that decides on the amount and composition of compensation. E. Merck KG has transferred the execution of this right to its Personnel Committee. Among other things, the Personnel Committee is responsible for the following decisions: contents of contracts with Executive Board members, granting of loans and advance salary payments, approval for taking on honorary offices, board positions and other sideline activities, as well as the division of responsibilities within the Executive Board of Merck KGaA. The compensation system defined by the Personnel Committee for Executive Board members takes into account various compensation-relevant aspects, including the responsibility of the individual Executive Board members, their individual performance, the performance of the company, as well as the amount of compensation paid to executive board and management board members of comparable companies. The Personnel Committee regularly commissions an independent compensation consultant to review the appropriateness of compensation.

Features of the compensation system

The compensation paid to the Executive Board members of Merck KGaA in fiscal 2012 comprises fixed components, variable compensation components and additions to pension provisions. Benefits in kind and other benefits are additionally granted.

Fixed compensation

Fixed compensation is paid in the form of 12 equivalent monthly installments. The table below provides an overview of the amount of the fixed compensation paid in 2011 and 2012.

Variable compensation

Variable compensation is based on the three-year rolling average of profit after tax of the E. Merck Group. Exceptional factors that amount to more than 10% of the Group profit and for which the Executive Board member is not responsible are eliminated. The members of the Executive Board receive an individually fixed per mille rate of the Group profit calculated in this manner.

Additionally, in exceptional cases the Personnel Committee of E. Merck, which is responsible for the compensation of the Executive Board, may grant one-time payments voluntarily and at its own discretion. In such cases, the Personnel Committee ensures that the one-time payments do not exceed the respectie total compensation of the individual Executive Board member composed of fixed and variable compensation (excluding the one-time payment).

Additional variable compensation (Merck Long-Term Incentive Plan)

In 2012, a long-term variable compensation component known as the Merck Long-Term Incentive Plan was added to the variable compensation of the members of the Executive Board. It aims to enhance the sustainability of the compensation system and to align it not only with target achievement based on key performance indicators, but above all with a sustainable performance of Merck shares.

Subject to the resolution of the Personnel Committee each year, under the Merck Long-Term Incentive Plan the members of the Executive Board could be eligible to receive a certain number of virtual shares – Merck Share Units (MSUs) – at the end of a three-year performance cycle. The number of MSUs that could be received depends on the total value defined for the respective person and the average closing price of Merck shares in Xetra trading during the last 60 trading days prior to January 1 of the respective fiscal year (reference price). In order to participate in the Plan, members of the Executive Board must personally own an investment in Merck shares equivalent to 10% of their respective fixed annual compensation, taking into account the equity interest held in E. Merck KG as a personally liable general partner. It is not permitted to sell these shares during the performance cycle. After termination of the three-year performance cycle, the number of MSUs to be granted then is determined based on the development of two key performance indicators (KPIs). These are:

a) the performance of the Merck share price compared to the DAX® with a weighting of 70%, and

b) the development of the EBITDA pre margin, during the performance cycle as a proportion of a defined target value with a weighting of 30%.

Depending on the development of the KPIs, at the end of the respective performance cycle the members of the Executive Board are granted between 0% and 150% of the MSUs they could be eligible to receive. Based on the number of MSUs granted, the members of the Executive Board receive a cash payment at a defined point in time in the year following the expiration of the three-year performance cycle. The value of an MSU corresponds to the average closing price of Merck shares in Xetra trading during the last 60 trading days prior to January 1 after the performance cycle. The payment amount is limited to three times the reference price. The net amount after taking tax into account is invested in Merck shares by the members of the Executive Board. One third of these shares may be sold at the earliest one year after termination of the performance cycle, another third after two years, and another third after three years.

In fiscal 2012, the following total values were specified for members of the Executive Board, which resulted in the respective number of MSUs they were eligible to receive based upon the definitive reference price of Merck shares (60 trading days preceding January 1, 2012) of € 69.57: Karl-Ludwig Kley € 1.5 million (21,562 MSUs), Kai Beckmann € 1.0 million (14,375 MSUs), Stefan Oschmann € 1.0 million (14,375 MSUs), Bernd Reckmann € 1.0 million (14,375 MSUs), and Matthias Zachert € 1.0 million (14,375 MSUs).

For fiscal 2013, the Personnel Committee authorized the Chairman of the Personnel Committee to assign potential numbers of MSUs to the Executive Board members for a performance cycle from January 1, 2013 to December 31, 2015. The following total values were defined as the initial basis: Karl-Ludwig Kley € 1.5 million, Kai Beckmann € 1.0 milion, Stefan Oschmann € 1.0 milion, Bernd Reckmann € 1.0 million and Matthias Zachert € 1.0 million.

Additional benefits

The members of the Executive Board also receive certain additional benefits, mainly contributions to insurance policies as well as a company car, which they are entitled to use privately. The members of the Executive Board must declare these benefits in their tax returns. Overall, the value of other additional benefits totaled € 122 thousand in 2012 (2011: € 121 thousand). Of this amount, in 2012 € 28 thousand was attributable to Karl-Ludwig Kley (2011: € 28 thousand), € 23 thousand to Kai Beckmann (2011: € 14 thousand), € 21 thousand to Stefan Oschmann (2011: € 15 thousand), € 26 thousand to Bernd Reckmann (2011: € 25 thousand) and € 24 thousand to Matthias Zachert (2011: € 14 thousand).

Total compensation

Accordingly, the following total compensation results for the members of the Executive Board of Merck KGaA broken down by performance-independent and performance-related components:

Pension provisions

The individual contractual pension obligations grant the members of the Executive Board entitlement to a lifelong old-age pension or surviving dependents’ pension in the event of reaching the individual contractually agreed age limit, permanent disability, or death.

The amount of the old-age pension is determined by a percentage share of pensionable compensation defined by the Personnel Committee.

The individual values are presented in the following table:

The following amounts were added to pension provisions in 2012:

The surviving dependents’ pension grants the spouse a lifelong surviving dependents’ pension amounting to 60% of the pension entitlement, dependent children either a half-orphan’s or an orphan’s pension maximally until the age of 25.

As an alternative to an old-age pension, upon reaching the age limit specified in their individual contracts, the members of the Executive Board have the possibility to receive their pension entitlement in the form of a one-time lump-sum payment calculated in accordance with actuarial principles.

Benefits in the event of termination of the duties as an Executive Board member

The employment contracts of Karl-Ludwig Kley, Kai Beckmann, Stefan Oschmann and Bernd Reckmann each contain a post-contractual non-competition clause. An amount equal to 50% of the average contractual benefits paid to the respective Executive Board Member within the past 12 months prior to leaving the company shall be provided as compensation for each year of the two-year non-competition period. During the period of the non-competition clause, other employment income as well as pension payments will be credited toward this compensation. Within certain time limits, E. Merck KG has the possibility to dispense with adherence to the non-competition clause with the consequence that the obligation to make the compensation payments shall cease to apply.

Above and beyond existing pension obligations, no further obligations additionally exist in the event of the termination of the contractual relationships of the Executive Board members.

Miscellaneous

The members of the Executive Board do not receive additional compensation for serving on the boards of Group companies.

Should members of the Executive Board be held liable for financial losses while executing their duties, under certain circumstances this liability risk is covered by a D&O insurance policy from Merck KGaA. The D&O insurance policy has a deductible in accordance with the legal requirements and the recommendations of the German Corporate Governance Code.

Payments to former Executive Board members and their surviving dependents

Pension payments to former members of the Executive Board or their surviving dependents amounted to € 10,478 thousand in 2012 (2011: € 9,734 thousand). Pension provisions totaling € 108,473 thousand exist for pension entitlements of this group of persons (2011: € 89,204 thousand).