Long-Term Incentive Plan (LTIP)

Long-Term Incentive tranche for the fiscal year 2022

The Long-Term Incentive Plan is designed as a virtual performance share plan. It is based on a four-year future-oriented performance cycle that is composed of a three-year target achievement cycle and, since the 2021 tranche, a subsequent one-year holding period. As of fiscal year 2022, sustainability targets are taken into consideration by supplementing the LTIP by a sustainability factor in addition to three financial performance indicators. The sustainability factor has a range of 0.8 to 1.2 and can increase or reduce the target achievement resulting from the financial key performance indicators by up to 20%. The following graphic illustrates the calculation of the Share Units of Merck KGaA, Darmstadt, Germany (MSUs) as well as the functionality of the sustainability factor.

Calculation of the MSUs

The members of the Executive Board are provisionally granted a certain number of virtual shares, so-called share units of Merck KGaA, Darmstadt, Germany ("MSUs"). The number of MSUs is calculated as follows: An individual grant in Euros is set for each Executive Board member. Every year, this grant is divided by the definitive reference share price at the beginning of the performance cycle, resulting in the number of MSUs that the respective member is provisionally entitled to receive.

In fiscal year 2022, the allocation of the LTIP tranche 2022 was made on the basis of the following parameters:

The number of MSUs actually allocated to the Executive Board members after the end of the target achievement cycle depends on the development of the financial performance indicators and the sustainability factor during the three-year target achievement period.

Based on the three financial performance indicators, the number of MSUs allocated may be between 0% and 150% of the provisionally granted MSUs. The resulting number of MSUs will then be multiplied by the sustainability factor.

The sustainability factor target achievement can range between 0.8 and 1.2 and is determined by the predefined sustainability key indicators. Thus, the total number of MSUs actually allocated can amount to a maximum of 180% of the provisionally granted MSUs.

The target achievement period is followed by a one-year holding period. The final payout amount may be between 0% and a maximum of 250% of the amount originally granted and depends on the number of MSUs actually allocated and the reference share price at the end of the performance cycle.

Financial key performance indicators

The relevant financial key performance indicators are:

• The performance of the share price of Merck KGaA, Darmstadt, Germany, compared with the performance of the DAX^® with a weighting of 50%,
• The EBITDA pre margin as a proportion of a defined target value with a weighting of 25%, and
• The organic sales growth of the Group as a proportion of a defined target value with a weighting of 25%.

The number of MSUs actually allocated after the end of the target achievement cycle is based on the following target achievement curves. The targets and thresholds for the key performance indicators of EBITDA pre margin and organic sales growth are defined by the Personnel Committee at the start of the performance period and subsequently published in the compensation report.

Non-financial key indicators of the sustainability factor

As a result of implementing the sustainability factor starting from fiscal year 2022, our sustainability strategy will be even more firmly incorporated into the compensation system for the members of the Executive Board. On the basis of the sustainability goals ("Human Progress" "Creating sustainable value chains” and "Reducing our ecological footprint"), the Personnel Committee defines corresponding concrete and measurable sustainability key indicators as well as associated target and threshold values at the beginning of each tranche of the LTIP. These values are used to calculate target achievement at the end of the relevant target achievement cycle. The following criteria were defined for the selection of the sustainability key indicators:

Relevance and influence of the sustainability key indicators on the three overarching sustainability goals of the sustainability strategy

Internal and external influence of the sustainability key indicators by management

Good measurability and operationalization

Sustained impact to support long-term solutions and not incentivize short-term actions

In addition, the Personnel Committee determines the weighting of the individual sustainability goal for each tranche of the LTIP in order to emphasize priorities.

The Personnel Committee has defined the following sustainability key indicators and weightings for the 2022 tranche of the LTIP:

The following table shows the target corridor ex ante for the respective sustainability key indicators of the three overarching goals for the 2022 LTI tranche.

• “Dedicated to Human Progress”
  We are convinced that, with the help of science and technology, we can make a contribution to solving many global challenges. In our Healthcare business sector, we measure the number of people worldwide who can be treated with our company’s medical products. This includes measuring the number of people who can be treated with Healthcare products in general and particularly with praziquantel against schistosomiasis as part of our donation program. We plan to continuously increase this number and thus contribute to a significant improvement in medical care and the health status of as many people as possible. It is planned to also include a sustainability key indicator for the Life Science business sector for the LTIP 2023. This is intended to cover patients treated with medical products that are enabled by our key Life Science technologies.
• “Creating sustainable value chains”
  We measure our progress in embedding sustainability in our supply chains. We achieve this by increasing the transparency of our supply chains and subjecting more suppliers to a sustainability assessment. We are focusing particularly on suppliers where we see a sustainability risks in the supply chain and those suppliers who cover a relevant share of our supplier spend. In connection with this sustainability assessment, it is important for us to increase the number of suppliers audited.
• “Reducing our ecological footprint”
  On our path to climate neutrality, we have already joined the Science Based Targets Initiative and aim to reduce both direct (Scope 1) and indirect emissions (Scope 2) by 50% by 2030 compared to 2020. This target is to be achieved through the reduction of process-related emissions, energy efficiency measures, and the increased purchase of electricity from renewable sources. Particularly in the case of process emissions (Scope 1), we aim to significantly reduce emissions through the use of new technologies.

LTI tranches allocated prior to fiscal year 2021

The tranche allocated in fiscal year 2021 is already designed with the one-year holding period but still without the sustainability factor introduced with the 2022 LTIP tranche. Accordingly, the performance period is four years and comprises the target achievement period of three years and the holding period of one year. Consequently, the performance period of the LTI 2021 runs from January 1, 2021 to December 31, 2024, with payment in April 2025.

The 2019 and 2020 tranches were structured according to the former model without a one-year holding period and without a sustainability factor. Accordingly, the performance period of the 2019 and 2020 tranches is still three years without a subsequent one-year holding period. This means that the 2019 LTIP was paid out in April of fiscal year 2022, with the performance period running from January 1, 2019, to December 31, 2021. The performance period of the 2020 LTIP ended in fiscal year 2022, with the performance period running from January 1, 2020 to December 31, 2022. It will be paid out in April 2023.

The targets and thresholds, the actual amounts, and the resulting target achievement for the 2019 and 2020 tranches can be summarized as follows:

The resulting payouts are as follows:

Share Ownership Guideline

Since 2017, the members of the Executive Board are obliged to invest in and hold shares of Merck KGaA, Darmstadt, Germany, as part of the Share Ownership Guideline (SOG) valid until fiscal 2021. Since the introduction of the new compensation system at the beginning of fiscal 2021, the share ownership obligation has been linked to the variable compensation element of profit sharing. Under the revised SOG, members of the Executive Board are required to hold one-third of the net profit-sharing payout in shares for at least four years. The shareholding obligation thus builds up gradually over the first four fiscal years after the introduction of the new compensation system. A corresponding investment was made for the first time after payment of the 2021 profit sharing in the fiscal year 2022 as part of an automated purchase via an external provider.

The following table illustrates the investment volume of the members of the Executive Board in accordance with the revised SOG. The numbers are the gross investment amounts from the corresponding profit sharing payout. No conclusions can be drawn as to the actual individual shareholdings.

The Share Ownership Guideline promotes an even stronger alignment of the interests of the members of the Executive Board with the sustainable interests of our shareholders and additionally increases the corporate responsibility of the members of the Executive Board in addition to their status as general partners.

Malus and clawback provisions

Through their status as personally liable general partners of Merck KGaA, Darmstadt, Germany, and E. Merck KG, Darmstadt, Germany, the Executive Board members bear a unique entrepreneurial responsibility. This is also reflected by the penalty criteria set forth in profit sharing and by the German statutory regulations on liability for damages stipulated in section 93 AktG. In order to take even greater account of the prominent position of entrepreneurial responsibility in compensation, a clawback provision is implemented for the LTIP. Cases in which the clawback provision may be applied include violations of internal rules and regulations (Code of Conduct), legislation, other binding external requirements in responsibility, significant breaches of duty of care within the meaning of section 93 AktG, and other grossly non-compliant or unethical behavior or actions that are contradictory to our company values. In these cases, amounts that have already been allocated under the Long-Term Incentive Plan may be retained. The Personnel Committee is entitled to demand the repayment of profit sharing and LTIP payouts from a member of the Executive Board if it subsequently transpires that the payout was made wrongfully, either in full or in part. For example, this is the case when targets are not actually met or are not met to the extent assumed when the payout was calculated due to incorrect information being applied. The extent of these claims for restitution is based on section 818 of the German Civil Code (BGB). The Personnel Committee may agree deadlines for the assertion of claims for restitution with the members of the Executive Board.

Neither the malus provision nor the clawback provision were exercised in the fiscal year 2022.

Compensation-related transactions

Contracts with the members of the Executive Board are usually concluded for a period of five years. When an employment contract begins or ends during the year, the fixed compensation, profit sharing and individual LTIP tranches are paid on a pro rata basis. In fiscal year 2022 no adjustments or changes have been made to the contracts of the members of the Executive Board.

Should members of the Executive Board be held liable for financial losses while executing their duties, this liability risk is covered by a D&O insurance policy under certain circumstances. The D&O insurance policy has a deductible in accordance with the legal requirements.

Post-contractual non-competition clause

Post contractual non-competition clauses have been agreed with all Executive Board members except for Marcus Kuhnert. With him it has been agreed to conclude an agreement about a post-contractual non-competition clause if required. The post-contractual non-competition clause involves the payment of compensation amounting to 50% of the member’s average compensation within the last twelve months and is paid for a period of two years. Other earnings, pension payments and any severance payments are offset against this amount.

A post-contractual non-competition clause was agreed with Stefan Oschmann. As compensation there is a monthly payment of € 343,184 in the period from May 1, 2021, to April 30, 2023. His monthly pension of € 46,667 was taken into account in determining the amount of this compensation. During the period of the non-competition clause, further income of other work is offset against this amount.

Obligations in connection with the cessation of Executive Board membership

The contracts of the Executive Board members do not provide for ordinary termination. The right to extraordinary termination for good cause in accordance with section 626 BGB is available to both parties without observing a notice period.

The contracts of the Executive Board members may provide for the continued payment of fixed compensation to surviving dependents for a limited period in the event of death. Above and beyond existing pension obligations, no further obligations are provided for in the event of the termination of the contractual relationships of the Executive Board members.

There is a cap on the amounts payable to Executive Board members in the event of the early termination of the contract without good cause justifying such termination. Pursuant to this, payments in connection with the termination of an Executive Board member’s duties shall not exceed twice the annual total compensation or constitute compensation for more than the remaining term of the employment contract (severance cap). If an Executive Board member’s duties cease due to the termination of the employment contract either by the company or the Executive Board member before the four-year performance cycle of an open tranche in the Long-Term Incentive Plan expires, the obligations resulting from the plan continue to apply if there are specific grounds for the termination, e.g., if the employment contract is not renewed after it expires or if the Board of Partners determines this to be appropriate at its own discretion; otherwise, the obligations no longer apply. Should obligations resulting from the plan continue to apply any early payout is excluded. If the compensation in the fiscal year in which the Executive Board member’s duties cease is expected to be significantly higher or lower than in the previous fiscal year, the Board of Partners may decide to adjust the amount applied as the member’s total compensation at its own discretion.

Loans, advances, payments by affiliates of the Group

None of the members of the Executive Board received any loans or advances, nor any payments by affiliates of the group in fiscal year 2022.

Payments to former Executive Board members and their surviving dependents

Payments to former members of the Executive Board and their surviving dependents are made as pension payments, as temporary continuation of basic compensation in the event of death, as part of the profit-sharing and the LTIP, and as compensation for a post-contractual non-competition clause. They amounted to € 21.7 million in the fiscal year 2022 (previous year: € 30.7 million). Provisions for defined benefit pension commitments in accordance with IAS 19 amounted to € 123.1 million as of December 31, 2022 (December 31, 2021: € 155.1 million).