Long-Term Incentive Plan (LTIP)

Long-Term Incentive tranche for fiscal 2023

The Long-Term Incentive Plan is designed as a virtual performance share plan. It is based on a four-year future-oriented performance cycle that is composed of a three-year target achievement cycle and, since the 2021 tranche, a subsequent one-year holding period. In addition to three financial performance indicators, the LTIP has taken sustainability targets into account since fiscal 2022. These targets are linked to a sustainability factor. The sustainability factor has a range of 0.8 to 1.2 and can increase or reduce the target achievement resulting from the financial key performance indicators by up to 20%. The following graphic illustrates the calculation of the Share Units of Merck KGaA, Darmstadt, Germany (MSUs) as well as the functionality of the sustainability factor.

Calculation of the MSUs

As part of the LTIP, members of the Executive Board are provisionally granted a certain number of virtual shares, so-called share units of Merck KGaA, Darmstadt, Germany (“MSUs”). The number of MSUs is calculated as follows: An individual grant in Euros is set for each Executive Board member. Every year, this grant is divided by the definitive reference share price at the beginning of the performance cycle, resulting in the number of MSUs that the respective member is provisionally entitled to receive.

In fiscal 2023, the allocation of the LTIP tranche 2023 was made on the basis of the following parameters:

The number of MSUs actually allocated to the Executive Board members after the end of the target achievement cycle depends on the development of the financial performance indicators and the sustainability factor during the three-year target achievement cycle.

Based on the three financial performance indicators, the number of MSUs allocated may be between 0% and 150% of the provisionally granted MSUs. The resulting number of MSUs is then multiplied by the sustainability factor.

The sustainability factor target achievement can range between 0.8 and 1.2 and is determined by the predefined sustainability key indicators. Thus, the total number of MSUs actually allocated can amount to a maximum of 180% of the provisionally granted MSUs.

The target achievement cycle is followed by a one-year holding period. The final payout amount may be between 0% and a maximum of 250% of the amount originally granted and depends on the number of MSUs actually allocated and the reference share price at the end of the performance cycle.

Financial key performance indicators

The relevant financial key performance indicators are:

• The performance of the share price of Merck KGaA, Darmstadt, Germany, compared with the performance of the DAX^® with a weighting of 50%,
• The EBITDA pre margin as a proportion of a defined target value with a weighting of 25%, and
• The organic sales growth of the Group as a proportion of a predefined target value with a weighting of 25%.

The number of MSUs actually allocated after the end of the target achievement cycle is based on the following target achievement curves. The targets and thresholds for the key performance indicators of the EBITDA pre margin and organic sales growth are defined by the Personnel Committee at the start of the performance cycle and subsequently published in the Compensation Report.

Non-financial key indicators of the sustainability factor

With the introduction of the sustainability factor in fiscal 2022, our sustainability strategy also becomes incorporated into the LTIP. On the basis of the sustainability goals (“Dedicated to human progress”, “Partnering for sustainable business impact” and “Reducing our ecological footprint”), the Personnel Committee defines corresponding specific and measurable sustainability key indicators as well as associated target and threshold values at the beginning of each tranche of the LTIP. These values are used to calculate target achievement at the end of the relevant target achievement cycle. The following sustainability criteria were defined for the selection of the sustainability key indicators:

• Relevance and influence of the sustainability key indicators on the three overarching sustainability goals of the sustainability strategy
• Internal and external influence of the sustainability key indicators by management
• Good measurability and operationalization
• Sustained impact to support long-term solutions and not incentivize short-term actions

In addition, the Personnel Committee determines the weighting of the individual sustainability goal for each tranche of the LTIP to emphasize priorities.

The Personnel Committee has defined the following sustainability key indicators and weightings for the 2023 tranche of the LTIP:

The following table shows the target corridor ex ante for the respective sustainability key indicators of the three overarching goals for the 2023 LTI tranche.

• “Dedicated to human progress”
  
  We are convinced that with the help of science and technology, we can contribute to solving many global challenges. In this context, our Healthcare business sector measures how many people worldwide will be treated with our company’s medical products. On the one hand, we look at the number of people treated with products from the Healthcare business sector and, on the other hand we consider patients who are offered treatment with our praziquantel tablets as part of the schistosomiasis control program. For the LTIP tranche 2023, an additional sustainability key indicator has been introduced that relates to our Life Science business sector. It covers people who are treated with drugs and medical products which are that are manufactured using our key Life Science technologies and products. We intend to continuously increase this sustainability goal and thus contribute to a significant improvement in medical care and the health status of as many people as possible.
  
  
• “Partnering for sustainable business impact”
  
  We measure our progress in embedding sustainability in our supply chains. We achieve this by increasing the transparency of our supply chains and subjecting more suppliers to a sustainability assessment. We are focusing particularly on suppliers for which we see a sustainability risks in the supply chain and those suppliers who cover a relevant share of our supplier spend. In connection with this sustainability assessment, it is important for us to increase the number of suppliers with a valid sustainability assessment.
  
  
• “Reducing our ecological footprint”
  
  On our path to climate neutrality, we have already joined the Science Based Targets Initiative and aim to reduce both direct (Scope 1) and indirect emissions (Scope 2) by 50% by 2030 compared with 2020. This target is to be achieved through the reduction of process-related emissions, energy efficiency measures, and increased purchase of electricity from renewable sources. Particularly in the case of process emissions (Scope 1), we aim to significantly reduce emissions by using new technologies.

Target Achievement Long-Term Incentive Plan

The LTIP tranche allocated in fiscal 2021 was still without a sustainability factor but already included the one-year holding period. Accordingly, the performance cycle is four years, consisting of the target achievement cycle of three years and the one-year holding period which will continue to be influenced by the share price development. Consequently, the target achievement cycle started on January 1, 2021, and was running until December 31, 2023. The final payout amounts of the LTIP Tranche 2021 will be determined after calculating the base price following the holding period and will be paid out in April 2025. The payout amounts will be published in the next compensation report.

The LTIP tranche 2020 was structured according to the former model without a one-year holding period and without a sustainability factor. Consequently, the LTIP tranche 2020 has been paid out in April 2023.

The targets and thresholds, the actual amounts, and the resulting target achievement for the LTI tranche 2020 are as follows:

The resulting final number of MSUs and the payout amounts of the LTIP tranche 2020 are shown in the following table.

The performance cycle of the LTIP tranche 2022 is still running until December 31, 2025, and will be paid out in April 2026.

Share Ownership Guideline

Since 2017, the members of the Executive Board are obliged to invest in and hold shares of Merck KGaA, Darmstadt, Germany, as part of the Share Ownership Guideline (SOG) valid until fiscal 2021. Since the introduction of the new compensation system at the beginning of fiscal 2021, the share ownership obligation has been linked to the variable compensation element of profit sharing. Under the revised SOG, members of the Executive Board are required to hold one-third of the net profit-sharing payout in shares for at least four years. The shareholding obligation thus builds up gradually over the first four fiscal years after the introduction of the new compensation system. The aim is that the Chairperson holds 200% of the base salary and the members of the Executive Board to hold 100% of the base salary in shares of Merck KGaA, Darmstadt, Germany. A corresponding investment was made after payout of the profit sharing 2022 in fiscal 2023 as part of an automated purchase via an external provider.

The Share Ownership Guideline promotes an even stronger alignment of the interests of the members of the Executive Board with the sustainable interests of our shareholders and additionally increases the corporate responsibility of the members of the Executive Board in addition to their status as general partners.

The following table illustrates the investment volume of the members of the Executive Board in accordance with the SOG. The numbers show the shareholding obligation arising from the profit-sharing. No conclusions can be drawn as to the individual shareholdings.

Malus and clawback provisions

Through their status as personally liable general partners of Merck KGaA, Darmstadt, Germany, and E. Merck KG, Darmstadt, Germany, the Executive Board members bear a unique entrepreneurial responsibility. This is also reflected by the malus criteria set forth in profit sharing and by the German statutory regulations on liability for damages stipulated in section 93 of the German Stock Corporation Act (AktG). In order to take even greater account of the prominent position of entrepreneurial responsibility in compensation, a clawback provision is implemented for the LTIP. Cases in which the clawback provision may be applied include violations of internal rules and regulations (Code of Conduct), legislation, other binding external requirements in responsibility, significant breaches of duty of care within the meaning of section 93 AktG, and other grossly non-compliant or unethical behavior or actions that are contradictory to our company values. In these cases, amounts that have already been allocated under the Long-Term Incentive Plan may be retained. The Personnel Committee is entitled to demand the repayment of profit sharing and LTIP payouts from a member of the Executive Board if it subsequently transpires that the payout was made wrongfully, either in full or in part. For example, this is the case when targets are not actually met or are not met to the extent assumed when the payout was calculated due to incorrect information being applied. The extent of these claims for restitution is based on section 818 of the German Civil Code (BGB). The Personnel Committee may agree deadlines for the assertion of claims for restitution with the members of the Executive Board.

Neither the malus provision nor the clawback provision were exercised in fiscal 2023.

Compensation-related transactions

Contracts with the members of the Executive Board are usually concluded for a period of five years. If a contract begins during the year, the fixed compensation, profit sharing and individual LTIP tranches are paid on a pro rata basis.

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

Obligations in connection with the termination of Executive Board membership

The contracts of the Executive Board members do not provide for ordinary termination. The right to extraordinary termination for good cause in accordance with section 626 BGB is available to both parties without observing a notice period.

The contracts of the Executive Board members may provide for the continued payment of fixed compensation to surviving dependents for a limited period in the event of death. Above and beyond existing pension obligations, no further obligations are provided for in the event of the termination of the contractual relationships of the Executive Board members.

The amounts payable to Executive Board members are capped in the event of the early termination of the contract without good cause justifying such termination. Pursuant to this, payments in connection with the termination of an Executive Board member’s duties shall not exceed twice the annual total compensation or constitute compensation for more than the remaining term of the employment contract (severance cap). If an Executive Board member’s membership terminates due to the termination of the contract either by the company or the Executive Board member before the four-year performance cycle of an open LTIP tranche expires, the obligations resulting from the LTIP shall continue if there are specific reasons for the termination, such as the contract is not renewed after it expires or if the Board of Partners determines this to be appropriate at its own discretion; otherwise, the obligations shall expire.

Should obligations resulting from the LTIP continue to apply, any early severance payout is excluded. Likewise, no early payout or severance for the profit-sharing payment is granted. If the compensation in the fiscal year in which the Executive Board member’s duties cease is expected to be significantly higher or lower than in the previous fiscal year, the Board of Partners may decide to adjust the amount applied as the member’s total compensation at its own discretion.

In fiscal 2023, a termination agreement was reached with Marcus Kuhnert regarding the early termination of his membership in the Executive Board with effect from June 30, 2023. Initially, the term of his contract would have ended on July 31, 2024. In accordance with the contract as well as with the compensation system, the termination agreement regulates the continued payment of the fixed compensation of € 100,000 per month as well as the payment of profit-sharing and LTI for the initial contract term until July 31, 2024. Furthermore, the additional benefits will be paid out. It was stipulated that the variable compensation elements shall be calculated and paid out according to the initial contractual terms and conditions. As a consequence, Marcus Kuhnert shall receive the pro-rated amount of € 1,566,732 from profit-sharing for the time period from July 1, 2023, until December 31, 2023. According to the Share Ownership Guideline the amount of one third must be invested in our shares and must be held for four years. Regarding fiscal 2024 the respective payout amounts will be calculated at the end of the year and will be published in the Compensation Report 2024.

During the fiscal year, no adjustments or changes were made to the employment contracts of the Executive Board. In particular, the terms of the termination agreement with Marcus Kuhnert did not result in any adjustments or changes to the original contract with Marcus Kuhnert.

Post-contractual non-competition

Post contractual non-competition clauses have been agreed with the members of the Executive Board except for Marcus Kuhnert. His contract provided for the option to agree on a post-contractual non-compete in the event of termination of his membership of the Executive Board. In general, the post-contractual non-competition clause involves the payment of compensation amounting to 50% of the member’s average compensation within the last twelve months and is paid for a period of two years. Other earnings, pension payments and any severance payments are offset against this amount.

Owing to his early termination, a post-contractual non-compete was agreed with Marcus Kuhnert with effect until July 31, 2024. As compensation, the post-contractual non-compete agreement provides for the payment of the fixed compensation as well as for the payment of the variable compensation until July 31, 2024, which means for the regular remaining term of his contract. Further compensation will not be granted.

There was also a post-contractual non-competition agreement with Stefan Oschmann which came into force upon the termination of his membership of the Executive Board. The parties agreed on a monthly compensation of € 343,184 for the period from May 1, 2021, to April 30, 2023. The monthly pension of € 51,569 as well as further additional income has been offset against this amount.

Loans, advances, payments by affiliates of the Group

In fiscal 2023, E. Merck Beteiligungen KG, Darmstadt, Germany, a related party of E. Merck KG, Darmstadt, Germany, granted a loan of € 560,640.00 to Helene von Roeder. The loan bore interest at 4% per annum and had to be repaid within three years of disbursement. The loan was fully repaid in fiscal 2023.

Besides this, neither loans or advances were paid to other members of the Executive Board during fiscal 2023, nor any payments by affiliated companies.