A company can only create value in the long term if it generates earnings that exceed the cost of the capital employed. This is why we encourage and support all employees in thinking and acting entrepreneurially in line with our value-based management concept. As of 2019, the return on capital employed (ROCE) replaces EBIT after cost of capital as the most important key performance indicator for steering the BASF Group.
We follow a value-oriented steering concept with our financial targets. As of 2019, we use the return on capital employed (ROCE) instead of EBIT after cost of capital for operational steering as a key target and management indicator for the BASF Group, its operating divisions and business units. As stated in our strategic goals, we aim to achieve a ROCE considerably above the cost of capital percentage every year. The change to ROCE means that the same logic and data is now used for internal management, external communication with the capital markets and variable compensation. This improves the consistency of the indicators used for BASF’s value-based management with variable compensation and pension systems, and our shareholders’ objectives.
ROCE is calculated as the EBIT of the segments as a percentage of the average cost of capital basis at each month-end.
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 divisions.
The cost of capital basis consists of the operating assets of the segments and is calculated using the month-end figures. Operating assets comprise the current and noncurrent asset items of the segments. These include tangible and intangible fixed assets, investments accounted for using the equity method, inventories, trade accounts receivable, other receivables and other assets generated by core business activities and, where appropriate, the assets of disposal groups. The cost of capital basis also includes customer and supplier financing.
The cost of capital percentage, which we have integrated into our ROCE target as a comparative figure, is determined using the weighted cost of capital from equity and borrowing costs (weighted average cost of capital, WACC). To calculate a pre-tax figure similar to EBIT, it is adjusted using the projected 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 2020 is 9% (2019: 10%).
An important part of our value management is the target agreement process, which aligns individual employee targets with BASF’s targets. As of 2019, the most important financial performance indicator in the operating units is ROCE. The other units’ contribution to value is also assessed according to effectiveness and efficiency on the basis of quality and cost targets.
We use ROCE as the BASF Group’s most important key performance indicator for measuring economic success as well as for steering the BASF Group and its operating units. EBIT before special items and capex (capital expenditure) are key performance indicators for BASF that have a direct impact on ROCE and as such, support its management.
Furthermore, we comment on and forecast sales at Group and segment level in our financial reporting as a significant driver for EBIT before special items and thus ROCE.
BASF’s sustainability targets are generally focused more on the long term. Moreover, as part of the implementation of our strategy, we have decided to also establish short-term steering mechanisms from January 1, 2020, such as incentives within the compensation system to steer the targets “CO2-neutral growth until 2030” and “Achieve €22 billion in Accelerator sales by 2025.”