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Stock price-based compensation program
In 2007, 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. As a matter of principle 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 €86.75 on April 27, 2007 (base price).
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 IndexSM (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.
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The options were granted on July 1, 2007 and may be exercised following a two-year vesting period, between July 1, 2009 and June 30, 2015. 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 – 2006 were structured in a similar way to BOP 2007.
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 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).
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Fair value and parameters used as of December 31, 20071
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BASF option program of the year |
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2007 |
2006 |
| Fair value |
41.00 € |
59.16 € |
| Dividend yield |
2.96% |
2.96% |
| Risk-free interest rate |
4.33% |
4.28% |
| Volatility BASF shares |
21.67% |
21.35% |
| Volatility MSCI Chemicals |
15.44% |
15.15% |
| Correlation BASF share price: MSCI Chemicals |
83.27% |
82.98% |
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