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Employees

(30) Number of employees

As of December 31, 2019, the number of employees at the Group stood at 57,036 (December 31, 2018: 51,713 employees).

The following table provides the annual average number of employees by function. The 2018 figure also included the share of employees at the Consumer Health business which was divested as of December 1, 2018.

4.1 KBEXCEL
  2019 2018
Production 16,455 16,239
Administration 10,338 9,856
Research and development 7,559 7,243
Supply chain 4,109 4,012
Marketing and sales 13,939 15,445
Other 1,207 965
Average number of employees 53,607 53,760

(31) Personnel expenses

Personnel expenses comprised the following:

3.94 KBEXCEL
€ million 2019 2018
Wages and salaries 4,293 4,111
Compulsory social security contributions and other costs 631 594
Pension expenses 357 319
Personnel expenses 5,281 5,024

Personnel expenses comprised expenses of € 152 million (2018: € 130 million) for defined contribution plans which are funded exclusively using external funds and therefore do not represent any obligation for the Group other than making contribution payments. In addition, employer contributions amounting to € 86 million (2018: € 81 million) were transferred to the German statutory pension insurance system and € 68 million (2018: € 65 million) to statutory pension insurance systems abroad.

(32) Provisions for pensions and other post-employment benefits

Accounting and measurement policies

The present value of the defined benefit obligation is determined by expert third parties who prepare actuarial appraisals for this purpose.

The actuarial assumptions which are used as the basis for the calculation of the defined benefit obligation, e.g. discount rates, rates of salary increases, and pension trends, were determined on a country-by-country basis in line with the economic conditions prevailing in each country. Furthermore, the latest country-specific mortality tables are used. The respective discount rates are generally determined on the basis of the returns on high-quality corporate bonds issued with adequate maturities and currencies. For euro-denominated obligations, bonds with ratings of at least “AA” or comparable from one of the leading rating agencies as of the reporting date, and a euro swap rate of adequate duration serve as the basis for the data.

Apart from the net balance of interest expense on the defined benefit obligations and interest income from the plan assets, which is recorded under the financial result, the expenses for defined benefit pension systems are allocated to the individual functional areas in the consolidated income statement.

The calculation of the defined benefit obligations was based on the following actuarial parameters:

4.41 KBEXCEL
Germany Switzerland United Kingdom Other countries
  2019 2018 2019 2018 2019 2018 2019 2018
Discount rate 1.30% 1.97% 0.17% 1.00% 2.06% 2.95% 2.36% 3.16%
Future salary increases 2.50% 2.51% 1.74% 1.74% 2.00% 3.22% 3.21%
Future pension increases 1.74% 1.75% 2.65% 2.94% 1.56% 1.77%

These were average values weighted by the present value of the respective defined benefit obligation.

Significant discretionary decisions and sources of estimation uncertainty

Determining the present value of the obligation

The determination of the present value of the obligation from defined benefit pension plans primarily requires discretionary judgment as regards the selection of methods to determine the discount rate and to select suitable mortality tables, as well as estimates of future salary and pension increases.

The following overview shows how the present value of all defined benefit obligations would have been impacted by changes to relevant actuarial assumptions.

4.14 KBEXCEL
€ million Dec. 31, 2019 Dec. 31, 2018
Increase (+)/decrease (–) in present value of all defined benefit obligations if    
the discount rate were 50 basis points higher -550 -435
the discount rate were 50 basis points lower 626 503
the expected rate of future salary increase were 50 basis points higher 175 151
the expected rate of future salary increase were 50 basis points lower -160 -130
the expected rate of future pension increase were 50 basis points higher 291 251
the expected rate of future pension increase were 50 basis points lower -234 -196

Sensitivities are determined on the basis of the respective parameters in question, with all other measurement assumptions remaining unchanged.

Depending on the legal, economic, and fiscal circumstances prevailing in each country, different retirement benefit systems are provided for the employees. Generally, these systems are based on the years of service and salaries of the employees. Pension obligations comprise both obligations from current pensions and accrued benefits for pensions payable in the future.

In order to limit the risks of changing capital market conditions and other developments, for the past number of years newly hired employees have been offered plans that are not based on final salary.

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

4.28 KBEXCEL
€ million Dec. 31, 2019 Dec. 31, 2018
Present value of all defined benefit obligations 5,644 4,719
     
Fair value of the plan assets -2,692 -2,391
Funded status 2,952 2,328
     
Effects of the asset ceilings 1 1
Net defined benefit liability 2,953 2,329
     
Assets from defined benefit plans 4 7
Provisions for pensions and other post-employment benefits 2,957 2,336

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

5.05 KBEXCEL
Dec. 31, 2019
€ million Germany Switzerland United Kingdom Other countries Total
Benefit based on final salary          
Annuity 3,081 1 530 99 3,711
Lump sum 139 139
Installments 1 1
Benefit not based on final salary          
Annuity 677 942 85 1,704
Lump sum 6 38 44
Installments 6 6
Other 10 10
Medical plan 29 29
Present value of defined benefit obligations 3,765 943 536 400 5,644
Fair value of the plan assets 1,222 778 518 174 2,692

The vast majority of defined benefit obligations of German entities were attributable to plans that encompass old-age, disability, and surviving dependent pensions. On the one hand, these obligations were based on benefit rules comprising benefit commitments dependent upon years of service and final salary from which newly hired employees have been excluded. On the other hand, the benefit rules applicable to employees newly hired since January 1, 2005, comprise a direct commitment that is not based on the final salary. The benefit entitlement resulted from the cumulative total of annually determined pension components that were calculated based on a defined benefit expense and an age-dependent annuity table. Statutory minimum funding obligations did not exist.

Pension obligations in Switzerland mainly comprised old-age, disability, and surviving dependent benefits regulated by law. The employer and the employees made contributions to the plans. The Group had to observe the existing statutory minimum funding obligations.

Pension obligations in the United Kingdom resulted primarily from benefit plans which are based on years of service and final salary and were closed to newly hired employees in 2006. The agreed benefits comprised old-age, disability, and surviving dependent benefits. The employer and the employees made contributions to the plans. The Group had to observe the existing statutory minimum funding obligations.

The following table shows the development of the net defined benefit liability:

6.49 KBEXCEL
€ million Present value of all defined benefit obligations Fair value of the plan assets Effects of the asset ceilings Net defined benefit liability
Jan. 1, 2019 -4,719 2,391 -1 -2,329
         
Current service cost -162 -162
Interest expense -93 -93
Interest income 46 46
Plan administration costs recognized in income -2 -2
Past service cost -3 -3
Gains (+) or losses (–) on settlement
Currency effects recognized through profit or loss -21 17 -4
Other effects recognized through profit or loss -2 -2
Items recognized through profit or loss -281 61 -220
         
Remeasurements of defined benefit obligations        
Actuarial gains (+)/losses (–) arising from changes in demographic assumptions 5 5
Actuarial gains (+)/losses (–) arising from changes in financial assumptions -727 -727
Actuarial gains (+)/losses (–) arising from experience adjustments 35 35
Remeasurement of plan assets        
Actuarial gains (+)/losses (–) arising from experience adjustments 199 199
Change in effects of the asset ceilings        
Actuarial gains (+)/losses (–)
Actuarial gains (+)/losses (–) -687 199 -488
         
Payments made 125 -49 76
Employer contributions 37 37
Employee contributions -15 15
Payment transactions 110 3 113
         
Changes in scope of consolidation -30 6 -24
Reclassification to liabilities directly related to assets held for sale
Currency translation differences recognized in equity -42 37 -5
Other changes 5 -5
Other -67 38 -29
         
Dec. 31, 2019 -5,644 2,692 -1 -2,953
6.57 KBEXCEL
€ million Present value of all defined benefit obligations Fair value of the plan assets Effects of the asset ceilings Net defined benefit liability
Jan. 1, 2018 -4,707 2,452 -1 -2,256
         
Current service cost -161 -161
Interest expense -85 -85
Interest income 42 42
Plan administration costs recognized in income -2 -2
Past service cost 4 4
Gains (+) or losses (–) on settlement
Currency effects recognized through profit or loss -17 14 -3
Other effects recognized through profit or loss 3 3
Items recognized through profit or loss -256 54 -202
thereof: attributable to the divested Consumer Health business -7 2 -5
         
Remeasurements of defined benefit obligations        
Actuarial gains (+)/losses (–) arising from changes in demographic assumptions -40 -40
Actuarial gains (+)/losses (–) arising from changes in financial assumptions 139 139
Actuarial gains (+)/losses (–) arising from experience adjustments -18 -18
Remeasurement of plan assets        
Actuarial gains (+)/losses (–) arising from experience adjustments -115 -115
Change in effects of the asset ceilings        
Actuarial gains (+)/losses (–)
Actuarial gains (+)/losses (–) 81 -115 -34
         
Payments made 124 -49 75
Employer contributions 48 48
Employee contributions -14 14
Payment transactions 110 13 123
         
Changes in scope of consolidation
Reclassification to liabilities directly related to assets held for sale 48 -5 43
Currency translation differences recognized in equity -10 5 -5
Other changes 15 -13 2
Other 53 -13 40
         
Dec. 31, 2018 -4,719 2,391 -1 -2,329

The actual income from plan assets amounted to € 245 million (2018: loss of € 73 million).

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

Both the benefit obligations as well as the plan assets are subject to fluctuations over time. The reasons for such fluctuations could include changes in market interest rates and thus the discount rate, as well as adjustments to other actuarial assumptions (such as life expectancy or expected future increases in pension). This could lead to – or cause an increase in – underfunding. Depending on statutory regulations, it could become necessary in some countries to reduce underfunding through additions of liquid assets.

In order to minimize fluctuations of the net defined benefit liability, in managing its plan assets, the Group also pays attention to potential fluctuations in liabilities. The portfolio is structured in such a way that, in the ideal scenario, plan assets and defined benefit obligations develop in opposing directions when exposed to exogenous factors. This applies in particular to interest rate fluctuations – thus creating a natural defense against these factors.

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

4.86 KBEXCEL  
             
Dec. 31, 2019 Dec. 31, 2018
€ million Quoted market price in an active market No quoted market price in an active market Total Quoted market price in an active market No quoted market price in an active market Total
Cash and cash equivalents 191 191 147 147
Equity instruments 609 609 592 592
Debt instruments 1,273 1,273 993 993
Direct investments in real estate 121 121 105 105
Investment funds 395 1 396 458 458
Insurance contracts 77 77 77 77
Other 19 6 25 19 19
Fair value of the plan assets 2,487 205 2,692 2,209 182 2,391

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

Employer contributions to plan assets and direct payments to plan beneficiaries are expected to amount to € 37 million and € 79 million, respectively, next year.

The weighted duration of defined benefit obligations amounted to 22 years.

(33) Share-based payments

Accounting and measurement policies

Corresponding provisions are recognized for the current share-based compensation program with cash settlement at the Group (the Long-Term Incentive Plan of the Group) and reported under employee benefits (see Note (26) “Other provisions”).

The fair value of the obligations is recalculated by an external expert using a Monte Carlo simulation on each balance sheet date. The main parameters in the measurement of the share-based compensation programs with cash-settlement are long-term indicators of company performance and the price movement of shares of Merck KGaA, Darmstadt, Germany, in relation to the DAX®.

The expected volatilities are based on the implicit volatility of shares of Merck KGaA, Darmstadt, Germany, and the DAX® in accordance with the remaining term of the respective tranche. The dividend payments incorporated into the valuation model are based on medium-term dividend expectations.

Changes to the intrinsic value of share-based compensation programs are allocated to the respective functional costs according to the causation principle. Fair value changes are recognized in financial income or finance costs.

Significant discretionary decisions and sources of estimation uncertainty

The measurement of long-term share-based compensation programs implies extensive estimation uncertainty. The following overview shows the amounts by which the non-current provisions (carrying amount as of December 31, 2019: € 63 million / carrying amount as of December 31, 2018: € 54 million) would have been impacted by changes in the DAX® or the closing price of the share of Merck KGaA, Darmstadt, Germany, on the balance sheet date. The amounts stated would have led to a corresponding reduction or increase in profit before income tax.

4.15 KBEXCEL
Increase (+)/decrease (–) of the provision
€ million   Dec. 31, 2019 Dec. 31, 2018
Variation of share price of Merc KGaA, Darmstadt, Germany 10% 16 14
-10% -16 -15
Change in the DAX® 10% -9 -10
-10% 9 8

Sensitivities were determined on the basis of the respective parameters in question, with all other measurement assumptions remaining unchanged. The 2017 tranche reported under current provisions will not be subject to any value fluctuations between December 31, 2019, and the payout date and was therefore excluded from the sensitivity analysis (December 31, 2018: exclusion of 2016 tranche).

These share-based compensation programs with cash settlement in place at the Group are aligned not only with target achievement based on key performance indicators, but above all with the long-term performance of shares of Merck KGaA, Darmstadt, Germany. Certain executives and employees could be 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 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). An obligatory personal investment is not a precondition to receive payments apart from Executive Board members. When the three-year performance cycle ends, the number of MSUs to then be granted is determined based on the development of defined key performance indicators (KPIs).

These KPIs are 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%.

Depending on the development of the KPIs, 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. Based on the MSUs granted, the eligible participants receive a cash payment at a specified point in time in the year 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 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 Executive Board members have their own Long-Term Incentive Plan, the conditions of which largely correspond to the Long-Term Incentive Plan described here. A description of the plan for the Executive Board can be found in the compensation report, which is part of the Statement on Corporate Governance.

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.

5.03 KBEXCEL
2017 tranche 2018 tranche 2019 tranche
Performance cycle Jan. 1, 2017 – Dec. 31, 2019 Jan. 1, 2018 – Dec. 31, 2020 Jan. 1, 2019 – Dec. 31, 2021
Term 3 years 3 years 3 years
Reference price of shares of Merck KGaA, Darmstadt, Germany, in € (60-day average share price of Merck KGaA, Darmstadt, Germany, prior to the start of the performance cycle) 95.63 91.73 93.75
DAX® value (60-day average of the DAX® prior to the start of the performance cycle) 10,822.06 13,089.39 11,304.33
       
Potential number of MSUs      
Potential number offered for the first time in 2017 853,624
Forfeited 24,897
Dec. 31, 2017 828,727
Potential number offered for the first time in 2018 891,345
Forfeited 13,988 37,953
Transferred as part of the divestment of the Consumer Health business 39,889 23,760
Dec. 31, 2018 774,850 829,632
Potential number offered for the first time in 2019 876,061
Forfeited 54,512 52,957 37,122
Dec. 31, 2019 720,338 776,675 838,939

The value of the provisions as of December 31, 2019, was € 113 million (December 31, 2018: € 114 million). Net expenses of € 60 million were incurred in fiscal 2019 (2018: net expenses of € 92 million). The three-year tranche issued in 2016 ended at the end of 2018; an amount of € 60 million was paid out in 2019. The three-year tranche issued in fiscal 2017 ended at the end of 2019; a payout of € 50 million is expected for 2020.