Management Report

Compensation Report

Compensation of the Board of Management

The compensation of the Board of Management basically comprises four components: a fixed annual salary, a short-term incentive award on a yearly basis in relation to a target amount, a long-term incentive award for a three-year period in relation to a target amount, and a company pension plan conferring pension entitlements that increase with years of service. Remuneration in kind and other benefits are also provided, such as the use of a company car for private purposes or reimbursement of the cost of health screening examinations.

The fixed salary consists of two parts: a base salary and a fixed supplement.

The variable bonus for 2007 is calculated partly according to the Group’s EBITDA margin before special items, and partly according to the weighted average target attainment of the HealthCare, CropScience and MaterialScience subgroups. The latter is based mainly on the subgroups’ target attainment measured by EBITDA before special items as well as on a qualitative appraisal in relation to the market and competitors. In addition, the variable bonus for 2007 includes a special one-time individual bonus linked to outstanding achievements in connection with the restructuring of the Bayer Group.

The directly effected remuneration of members of the Board of Management in 2007 (fixed salaries, short-term incentives and remuneration in kind) amounted to €8,882,552 (2006: €8,143,822), comprising €1,985,580 (2006: €2,260,400) in base salaries and €982,792 (2006: €1,096,556) in fixed supplements, €5,768,862 (2006: €4,644,475) in short-term incentive payments as well as €145,318 (2006: €142,391) of remuneration in kind and other benefits. Remuneration in kind mainly consists of values assigned to remuneration in kind and other benefits in accordance with German taxation guidelines.

The long-term incentive evolved in the following way: Through 2004, members of the Board of Management were permitted to participate in a cash-settlement-based stock option program. The last of the options were exercised in 2007, therefore no further claims existed under this program as of December 31, 2007.

Since 2005, the members of the Board of Management have participated in the long-term stock-based compensation program Aspire I (2005, 2006 and 2007 tranches). Further details of this program are provided under “Personnel commitments” in Note [26] to the consolidated financial statements.

The entitlements earned in 2007 relate to the 2007 parts of the respective three-year performance periods of the long-term stock-based compensation programs granted in current and previous years. The changes in the value of previously existing entitlements under long-term stock-based compensation programs that were earned prior to 2007 are shown separately. They result from the upward trend in the price of Bayer stock in 2007. Additionally, the fair value of the stock-based compensation as of the grant date in 2007 is given separately.

The table below shows the remuneration components of those individual members of our Board of Management who actively served in the course of 2007.

Remuneration of the members of the Board of Management

		Werner Wenning	Klaus Kühn	Udo Oels¹	Wolfgang Plischke²	Richard Pott	Total
€
Base salary	2007	748,872	412,236	-	412,236	412,236	1,985,580
Base salary	2006	748,872	412,236	343,526	343,530	412,236	2,260,400
Fixed supplement	2007	325,132	316,366	-	170,647	170,647	982,792
Fixed supplement	2006	325,132	316,366	142,205	142,206	170,647	1,096,556
Short-term incentive	2007	2,168,878	1,379,994	-	1,109,995	1,109,995	5,768,862
Short-term incentive	2006	1,525,086	1,034,615	567,335	689,745	827,694	4,644,475
Remuneration in kind and other benefits	2007	51,104	35,769	-	25,208	33,237	145,318
Remuneration in kind and other benefits	2006	47,926	35,571	9,594	18,163	31,137	142,391
Directly effected remuneration	2007	3,293,986	2,144,365	-	1,718,086	1,726,115	8,882,552
Directly effected remuneration	2006	2,647,016	1,798,788	1,062,660	1,193,644	1,441,714	8,143,822

Long-term incentive (stock-based compensation entitlements earned in the respective year)	2007	1,149,675	698,890	-	358,924	631,618	2,839,107
	2006	820,514	480,609	538,181	193,188	461,939	2,494,431
Change in value of existing entitlements	2007	889,725	510,121	-	100,950	491,935	1,992,731
Change in value of existing entitlements	2006	339,733	229,617	104,125	66,262	164,952	904,689

1 member of the Board of Management until April 28, 2006
2 member of the Board of Management effective March 1, 2006

The fair value of the stock-based compensation as of the grant dates for 2007 and 2006 is shown in the following table.

		Werner Wenning	Klaus Kühn	Udo Oels¹	Wolfgang Plischke²	Richard Pott	Total
€
Fair value of newly granted stock-based compensation as of grant date	2007	299,173	202,957	-	162,366	162,366	826,862
	2006	268,113	181,886	40,419	117,597	145,509	753,524

1 member of the Board of Management until April 28, 2006
2 member of the Board of Management effective March 1, 2006

The fair value of the entitlements to newly granted stock-based compensation already earned in the respective year is included in the preceding table under “Long-term incentive.”

The current members of the Board of Management are entitled to receive a pension from the age of 60 in an annual amount equal to at least 30 percent of the last yearly fixed salary. This percentage increases depending on years of service as a Board of Management member and, according to the inception of the respective service contract, is capped between 60 and 80 percent. We refer to the maximum such percentage a member of the Board of Management can reach as his final target pension level. Pension provisions for the current members of the Board of Management amounted to €25,810,477 (2006: €29,564,478).

The current service cost for the pension entitlements of the members of the Board of Management was as follows:

		Werner Wenning	Klaus Kühn	Udo Oels¹	Wolfgang Plischke²	Richard Pott	Total
€
Current service cost for pension entitlements earned in the respective year	2007	-	588,064	-	187,344	223,453	998,861
	2006	398,564	1,651,294	-	1,644,517	233,284	3,927,659

1 member of the Board of Management until April 28, 2006
2 member of the Board of Management effective March 1, 2006

For active Board of Management members a general severance indemnity clause applies if the service contract is terminated at the company’s instigation prior to a member’s 60th birthday. The basic principles according to this clause are as follows:

If a member of the Board of Management is not offered a new service contract upon expiration of his existing service contract because he is not reappointed to the Board of Management, or if the member is removed from the Board of Management prematurely during the term of his contract in the absence of grounds for termination without notice, he will receive a monthly bridging allowance amounting to 80 percent of his last monthly fixed salary for a period of 60 months from the date of expiration of his service contract less the period for which he was released from his duties on full pay or otherwise compensated. (If he were removed during the term of his contract, he would also receive the payment due for the rest of the term, though this would be reduced to the amount of his annual fixed salary plus the target amount for the short-term incentive payment for at least twelve months). His earnings from any new employment elsewhere would be offset against the bridging allowance. In the case of premature termination at the instigation of the company, further years of service might be credited under certain circumstances for the purpose of computing his Board of Management pension entitlement, though not beyond his 60th birthday. Special supplementary arrangements apply in the event of a change of control; for details see Information Required Under Takeover Law.

There were no loans to members of the Board of Management outstanding as of December 31, 2007, nor any repayments of such loans during the year.

We currently pay former and retired members of the Board of Management a monthly pension equal to 80 percent of the last monthly base salary received while in service. The pensions paid to former members of the Board of Management or their widows are normally reassessed every three years and adjusted taking into account the development of consumer prices. These benefits are in addition to any amounts they receive under previous employee pension arrangements. The pensions paid to retired members of the Board of Management and their surviving dependents amounted to €10,997,016 (2006: €10,924,768). Pension provisions for former members of the Board of Management and their surviving dependents amounted to €115,103,558 (2006: €117,866,846).

Compensation of the Supervisory Board

The compensation of the Supervisory Board is based on the provisions of the Articles of Incorporation, the current version of which was adopted by the stockholders at the Annual Stockholders’ Meeting on April 29, 2005. This provides that, in addition to reimbursement of their expenses, each member of the Supervisory Board receives fixed annual remuneration of €60,000 and a variable annual remuneration component. The variable remuneration component is based on corporate performance in terms of the gross cash flow reported in the Group financial statements for the fiscal year. The members of the Supervisory Board receive €2,000 for every €50,000,000 or part thereof by which the gross cash flow exceeds €3,100,000,000, but the variable component for each member may not exceed €30,000.

In accordance with the provisions of the German Corporate Governance Code, additional remuneration is paid to the Chairman and Vice Chairman of the Supervisory Board and for chairing and membership of committees. The Chairman of the Supervisory Board receives three times the basic remuneration, while the Vice Chairman receives one-and-a-half times the basic remuneration. Members of the Supervisory Board who are also members of a committee receive an additional one quarter of the amount, with those chairing a committee receiving a further quarter. However, no member of the Supervisory Board may receive total remuneration exceeding three times the basic remuneration. If changes are made to the Supervisory Board and its committees during the fiscal year, members receive remuneration on a pro-rated basis. No remuneration or benefits were paid for personal services, in particular, the provision of consultancy or intermediary services. The Company has purchased insurance for the members of the Supervisory Board to cover their legal liability arising from their service on the Supervisory Board.

In addition to their remuneration as members of the Supervisory Board, those employee representatives who are employees of Bayer Group companies receive compensation unrelated to their service on the Supervisory Board. The total amount of such compensation was €686,661 (2006: €647,813).

There were no loans to members of the Supervisory Board outstanding as of December 31, 2007, nor any repayments of such loans during the year.

The remuneration of the individual members of the Supervisory Board is shown in the table in the Corporate Governance Report.