Employees

(33) Provisions for employee benefits

Provisions for employee benefits are composed as follows:

Provisions for other employee benefits included provisions for share-based payments, which are discussed in greater detail in the section on share-based payments in this note.

Provisions for pensions and other post-employment benefits

Different retirement benefit systems are provided for employees depending on the legal, economic and fiscal circumstances prevailing in each country. Newly hired employees are only offered plans whose benefits are based on contributions and the return on their investments. Some of these plans require the employer to guarantee a minimum return on investment. Other plans are generally based on the employee’s years of service and salary. Pension obligations comprised both obligations from current pensions and accrued benefits for pensions payable in the future.

The value recognized in the consolidated balance sheet for pensions and other post-employment benefits was derived as follows:

The defined benefit obligations were based on the following types of benefits provided by the respective plan:

The vast majority of defined benefit obligations of German entities were attributable to plans that encompass old-age, disability and surviving dependent pensions. These obligations were based on benefit rules comprising benefit commitments dependent on years of service and final salary, as well as two different direct commitments for employees newly hired since January 1, 2005, that were not based on final salary. The benefit entitlement for new members from January 1, 2005, to December 31, 2020, resulted from the cumulative total of annually determined pension components calculated on the basis of a defined benefit expense and an age-based annuity table. The benefit entitlement for new members from January 1, 2021, resulted from the performance of salary-based employer contributions and voluntary employee contributions, topped up by the employer, to an external fund. A minimum return on contributions has been guaranteed by the Group. There were no statutory minimum funding obligations in Germany.

Pension obligations in Switzerland mainly comprised retirement, disability and surviving dependent benefits regulated by law. The employer and the employees made contributions to the plans. Statutory minimum funding obligations existed.

Pension obligations in the United Kingdom resulted primarily from benefit plans which are based on years of service and final salary and which have been closed to newly hired employees since 2006. The agreed benefits comprised retirement, disability and surviving dependent benefits. The employer and the employees made contributions to the plans. Statutory minimum funding obligations existed. Merck KGaA, Darmstadt, Germany, provided guarantees in respect of the trustees of two pension plans in the United Kingdom that were largely fully funded. These amounted to € 160 million as of December 31, 2024 (December 31, 2023: € 153 million). The guarantees apply in the event that the sponsoring undertakings for these pension plans, which are included in these consolidated financial statements, are unable to reduce potential underfunding by providing additional funding; this eventuality is considered to be unlikely.

The development of the net defined benefit liability was as follows:

The actual income from plan assets amounted to € 138 million in the year under review (2023: € 147 million).

Covering the benefit obligations with financial assets represents a means of providing for future cash outflows, which are required by law in some countries (for example, Switzerland and the United Kingdom) and voluntarily in other countries (for example, Germany).

The fair value of the plan assets was allocated to the following categories:

Plan assets did not directly include financial instruments issued by Group companies or assets used by Group companies.

Employer contributions to plan assets and direct payments to plan beneficiaries for the next year are expected to amount to € 50 million (2023: € 48 million) and € 99 million (2023: € 96 million), respectively.

The expected payments of undiscounted benefits under the plans were as follows:

The weighted duration of defined benefit obligations amounted to 17 years (2023: 17 years).

Other employee benefit provisions

Other employee benefit provisions developed as follows:

Share-based payments

The existing share-based compensation programs with exclusive cash settlement in the Group are aligned with target achievement based on key performance indicators as well as the long-term performance of the shares of Merck KGaA, Darmstadt, Germany. Certain employees are 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 individual grant 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 performance cycle (reference price). When the three-year performance cycle ends, the number of MSUs to then be granted is determined based on the development of defined financial key performance indicators (KPIs) and a sustainability factor.

The calculation is based on the performance of the share price of Merck KGaA, Darmstadt, Germany, compared to the performance of the DAX® with a weighting of 50%, the development of the EBITDA pre margin during the performance cycle as a proportion of a defined target value with a weighting of 25%, and the development of organic sales growth as a proportion of a defined target value, also with a weighting of 25%. At the end of the respective performance cycle, the eligible participants are granted between 0% and 150% of the MSUs they could be eligible to receive, depending on the development of these financial KPIs. The target values for the KPIs are defined by the Executive Board.

The MSUs measured on the basis of financial targets are then multiplied by a sustainability factor composed of the three sustainability criteria: “Dedicated to human progress”, “Partnering for sustainable business impact”, and “Reducing our ecological footprint”. 

The weighting of the three sustainability criteria for the 2024 LTIP tranche is as follows:

• “Dedicated to human progress”   30%
• “Partnering for sustainable business impact” 30%
• “Reducing our ecological footprint”   40%

The sustainability factor can range from 0.8 to 1.2. This means that, depending on the result of the financial KPIs (0% to 150%) and the sustainability factor, the eligible participants are granted between 0% and 180% of the MSUs they could be eligible to receive at the end of the respective performance cycle.

A cash payment is made based on the MSUs granted after the three-year performance cycle has ended. The value of a granted MSU, which is relevant for payment, corresponds to the average closing price of the shares of Merck KGaA, Darmstadt, Germany, in Xetra® trading during the last 60 trading days prior to the end of the performance cycle. The payout amounts of the respective tranches are limited to two and a half times the individual grant.

The following table presents the key parameters as well as the development of the potential number of Share Units of Merck KGaA, Darmstadt, Germany (MSUs), for the individual tranches:

The total value of the obligations for share-based payments was € 72 million as of December 31, 2024 (December 31, 2023: € 61 million), of which € 15 million was included in provisions as of December 31, 2024 (December 31, 2023: € 7 million). Net expenses of € 64 million were recorded in fiscal 2024 (2023: net income of € 35 million). The three-year tranche issued in fiscal 2021 ended at the end of fiscal 2023; an amount of € 54 million was paid out in fiscal 2024. The three-year tranche issued in fiscal 2022 ended at the end of 2024 and was reclassified from current provisions for employee benefits to other current non-financial liabilities as of December 31, 2024. Based on a decision by the Executive Board, the expected payout for this tranche was increased by a mid-double-digit million-euro amount, in line with the terms of the plan. The tranche is expected to result in a total payout of € 57 million in fiscal 2025. At the reporting date, the average closing prices of the shares of Merck KGaA, Darmstadt, Germany, in Xetra^® trading over the last 60 trading days was € 149.81.