Merck 2014 Annual Report Download - page 152

147CORPORATE GOVERNANCE → Statement on Corporate Governance
COMPENSATION REPORT
(The Compensation Report is part of the audited Notes to the
Group accounts).
Compensation of members of the Executive Board of
Merck KGaA, Darmstadt, Germany
Contrary to management board members of German stock corpo-
rations, the members of the Executive Board of Merck KGaA,
Darmstadt, Germany, are not employed officers of the company.
Rather, they are personally liable general partners of both Merck
KGaA, Darmstadt, Germany, and the general partner E. Merck KG,
Darmstadt, Germany, and in this capacity they receive profit-based
compensation from E. Merck KG, Darmstadt, Germany. Given this
context, the stipulations of the German Corporate Governance
Code concerning the compensation of management board mem-
bers of publicly listed German stock corporations as well as the
individual disclosure thereof do not apply to the Executive
Board
members of Merck KGaA, Darmstadt, Germany. Nevertheless,
Merck
KGaA, Darmstadt, Germany, has decided to disclose the individual
compensation of each Executive Board member in the following
report.
Contrary to publicly listed German stock corporations, at
Merck KGaA, Darmstadt, Germany, it is not the Supervisory Board,
but the Board of Partners of E. Merck KG, Darmstadt, Germany,
that decides on the amount and composition of compensation.
E.Merck KG, Darmstadt, Germany, 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 hon-
orary offices, board positions and other sideline activities, as
well as the division of responsibilities within the Executive Board
of Merck KGaA, Darmstadt, Germany. The compensation system
defined by the Personnel Committee for Executive Board members
takes into account various aspects relevant to compensation, in-
cluding the responsibilities and duties of the individual Executive
Board members and their status as personally liable partners, their
individual performance, the economic situation, performance and
prospects of the company, normal compensation levels (by way of
peer comparison) and the rewards structure otherwise in place in
the company. The relationship between Executive Board compen-
sation and the compensation of top management and the workforce
as a whole is also taken into account, also in a multi-year assess-
ment. The Personnel Committee regularly commissions an inde-
pendent compensation consultant to review the appropriateness
of compensation.
Features of the compensation system
The compensation paid to the Executive Board members of
Merck KGaA, Darmstadt, Germany, in fiscal 2014 comprises fixed
components, variable compensation components and additions to
pension provisions. Benefits in kind and other benefits are addi-
tionally granted.
Fixed compensation
Fixed compensation is paid in the form of 12 equivalent monthly
installments. The table on page 149 provides an overview of the
amount of the fixed compensation paid in 2013 and 2014.
Variable compensation
Variable compensation is based on the three-year rolling average
of profit after tax of the Group formed by E.MerckKG, Darmstadt,
Germany. The Personnel Committee of E. MerckKG, Darmstadt,
Germany, decides at its own and equitable discretion on consider-
ation of exceptional factors of certain importance. From the net
income determined in this manner, the members of the Executive
Board receive individually fixed per mille rates based on the net
income of the Group formed by E. Merck KG, Darmstadt, Germany.
Additionally, in exceptional cases the Personnel Committee of
E. Merck KG, Darmstadt, Germany, which is responsible for the
compensation of the Executive Board, may grant one-time pay-
ments voluntarily and at its own discretion.
Additional variable compensation (Long-Term Incentive
Plan of Merck KGaA, Darmstadt, Germany)
In 2012, a long-term variable compensation component known as
the Long-Term Incentive Plan of Merck KGaA Darmstadt, Germany,
was added to the variable compensation of the members of the
Executive Board. It aims to enhance the sustainability of the com-
pensation system and to align it not only with target achievement
based on key performance indicators, but above all with a sus-
tainable performance of the shares of Merck KGaA, Darmstadt,
Germany.
Subject to the resolution of the Personnel Committee each
year, under the Long-Term Incentive Plan of Merck KGaA Darm-
stadt, Germany, the members of the Executive Board could be
eligible to receive a certain number of virtual shares – Share Units
of Merck KGaA, Darmstadt, Germany (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 the shares of Merck KGaA,
Darmstadt, Germany, 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 Execu-
tive Board must personally own an investment in the shares of
Merck KGaA, Darmstadt, Germany, equivalent to 10 % of their
respective fixed annual compensation, taking into account the
equity interest held in E. Merck KG, Darmstadt, Germany, 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 perfor-
mance indicators (KPIs). These are: