Our Steering Concept

A performance-related variable compensation system based on financial and non-financial targets is an important part of our value-based management. The performance management system has been adapted in line with the increased autonomy of the business units. Already since 2024, variable compensation for senior executives has been based on targets derived from the key performance indicators for the steering of the respective business unit or the BASF Group respectively. As planned, we introduced this differentiated bonus system for the majority of employees worldwide over the course of 2025. As part of this enhanced performance management system, BASF takes into account not only the ROCE of the BASF Group, but also other financial and nonfinancial key performance indicators of the operating division in which the relevant person works. For employees who do not work in an operating division, the targets of the BASF Group and the nonfinancial targets of the respective unit apply. This means that variable compensation is linked to our ROCE target and the performance of the relevant BASF unit. This is a further step toward Differentiated Steering with a high degree of accountability on the part of the business units.

In line with the steering concept, in financial reporting we analyze, comment on and forecast the most important key performance indicators EBITDA before special items and free cash flow for the BASF Group, and EBITDA before special items and segment cash flow for the segments. We also forecast cash flows from operating activities and payments made for property, plant and equipment and intangible assets as key elements of free cash flow.

ROCE is managed as a medium-term target on the basis of factors that include capital expenditure in property, plant and equipment. These comprise additions to property, plant and equipment excluding additions from acquisitions, IT investments and restoration obligations as well as right-of-use assets arising from leases. Capital expenditure is therefore a key element of ROCE and is also forecast.

EBITDA is the result from income from operations reported in the Consolidated Financial Statements plus depreciation, amortization, impairments and reversals of impairments on property, plant and equipment and intangible assets. This is adjusted for special items that may arise from the integration of acquired businesses, from restructuring measures, from gains or losses resulting from divestitures and sales of shareholdings as well as from other expenses and income that may arise outside of ordinary business activities.

Segment cash flow measures the cash inflow and outflow of a segment and thus its contribution to the BASF Group’s free cash flow. It includes only those amounts that can be steered by the segment and is calculated from EBITDA, changes in inventories and trade accounts receivable, and other extraordinary adjustments (such as those related to divestitures), less payments made for intangible assets and property, plant and equipment. The BASF Group’s free cash flow also includes components of cash flows from operating activities that are not allocated to the segments as well as adjustments of other noncash effects.

Free cash flow is the cash flows from operating activities less payments made for intangible assets and property, plant and equipment.

Reconciliation of segment cash flow to free cash flow

^a These include changes in trade accounts payable, provisions, other operating assets, other operating liabilities and pension provisions as well as equity-accounted income, dividends received from equity-accounted investments and other noncash items.

We calculate the BASF Group’s absolute CO₂ emissions on the basis of greenhouse gas emissions, which are the sum of direct emissions from production processes and the generation of steam and electricity (Scope 1), as well as indirect emissions from the purchase of energy (Scope 2). For this target key figure, direct emissions from the generation of energy for third parties are not considered. Relevant emissions include other greenhouse gases according to the Greenhouse Gas Protocol, which are converted into CO₂ equivalents.

ROCE is calculated as the EBIT of the segments as a percentage of the average cost of capital basis.

To calculate the EBIT of the segments, we take the BASF Group’s EBIT and deduct the EBIT of activities recognized under Other, which are not allocated to the segments.

The cost of capital basis is calculated using the month-end figures and consists of the operating assets of the segments. They include property, plant and equipment as well as intangible fixed assets, integral investments accounted for using the equity method, inventories, trade accounts receivable, other receivables and miscellaneous assets as well as, if applicable, the assets of disposal groups, insofar as they are allocated to the segments. The cost of capital basis also includes customer and supplier financing.

We have integrated the cost of capital percentage into our ROCE target as a comparative figure. This is determined using the weighted cost of capital from equity and borrowing costs (weighted average cost of capital). To calculate a pretax figure similar to EBIT, the cost of capital is adjusted using the expected tax rate for the BASF Group for the business year. In addition, the projected net expense of Other is already provided for by an adjustment to the cost of capital percentage. The cost of equity is ascertained using the capital asset pricing model. Borrowing costs are determined based on the financing costs of the BASF Group. The cost of capital percentage for 2026 is 10% (2025: 10%).