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Review of fiscal 2023

Fiscal 2023 was a challenging year, which ended with a satisfactory business result despite difficult macroeconomic conditions. These challenging conditions were also evident in the share price development.

Ultimately, the diversified business model had a positive impact on our business results. The Life Science business sector faced a noticeable decline in demand for products and services related to the Covid-19 pandemic and the destocking of our Process Solutions customers, which lasted longer than expected. At the same time, the Electronics business sector was impacted by a prolonged downcycle in Semiconductor Solutions and low customer utilization in Display Solutions. The Healthcare business sector made a positive contribution to the company’s success in fiscal 2023. Our new healthcare products led to robust growth. In particular, sales of multiple sclerosis drugs and oncology drugs achieved good sales in our opinion.

In fiscal 2023, we continued to focus on achieving our three core sustainability targets. In the long term, we want to fully integrate sustainability into our value chains, contribute to human progress for more than one billion people through sustainable science and technology, continue to reduce our resource consumption, and achieve climate neutrality. To encourage the implementation of our long-term sustainability targets, corresponding key sustainability indicators and targets were also integrated in the sustainability factor of the Long-term Incentive Plan granted in 2023 (LTIP 2023).

For the members of the Executive Board, the contractually agreed compensation remained unchanged and there were no increases in fiscal 2023. In 2021, the LTIP was revised with a term of four years (previously three years). This extension of the performance cycle results in a one-time payout gap. As a consequence, the members of the Executive Board will not receive any payout from the Long-Term Incentive Plan for fiscal 2023 and there will also be no other payment to bridge the gap. We will report on the target achievement and payout of the LTIP tranche 2021, which runs until December 31, 2024, in the next Compensation Report.

The profit sharing ensures that the Members of the Executive Board act in line with the interests of both the shareholders and owners. It is based on the average of the profit after tax of The Group of E. Merck KG, Darmstadt, Germany, of the current year and the two previous years, to ensure a long-term orientation. Thus, the profit sharing for the 2023 financial year considers the very successful years 2021, 2022 as well as the current challenging year 2023.

In fiscal 2023, Marcus Kuhnert stepped down as Chief Financial Officer and Member of the Executive Board of Merck KGaA, Darmstadt, Germany as of June 30, 2023. On July 1, 2023, Helene von Roeder took over the position of Chief Financial Officer. Since 2019, she had been a member of both the Supervisory Board of Merck KGaA, Darmstadt, Germany, and the Board of Partners of E. Merck KG, Darmstadt, Germany. During that time, she was also Chair of the Audit and Finance Committee. She has resigned from these mandates and left the Supervisory Board effective April 17, 2023. Barbara Lambert was appointed to the Supervisory Board with effect from August 11, 2023.

Approval of the Compensation Report 2022

At the Annual General Meeting 2023, the Compensation Report 2022 was approved with a voting result of 84.63% in accordance with section 120a (4) AktG. Only shareholders of Merck KGaA, Darmstadt, Germany, are entitled to vote at the Annual General Meeting.

In the course of the Annual General Meeting 2023 and in numerous discussions thereafter, we received feedback from investors, all relevant shareholder associations and proxy advisors on the compensation of the Executive Board as well as the presentation of the Compensation Report.

As in the previous year, we are following suggestions from our investors, we are publishing the target corridor of the respective key performance indicators of the sustainability factor for the second time at the beginning of the performance cycle of the Long-Term Incentive Plan (LTIP).

To provide a complete overview of the compensation system, we continue to describe the most important components of the Compensation Report in detail and at the same time have improved the presentation. In addition, we have further clarified the description of the maximum compensation, illustrating how the different compensation components are limited.

Some discussions with investors focused on the level of the compensation of the Executive Board compared with other companies. In this context, it should be noted that the position of the members of the Executive Board as personally liable partners does explain a different level and structure of compensation. On a regular basis, we initiate a compensation benchmark to assess the level of our compensation. To consider, the criteria of country, size and industry as well as our global business activities and the various business sectors, two peer groups were used for comparison: the DAX® companies and a peer group of international competitors. The latter peer group of international competitors represents our three business sectors (Life Science, Healthcare and Electronics) and includes companies which are headquartered in Europe as well as in the USA.

In addition, we have again decided to follow the presentation and interpretation of section 162 (1) of the German Stock Corporation Act (AktG) chosen last year for the compensation tables. In this context, we also monitor the practices of other companies to align with common market practice where necessary.

The exchange with our investors is an important and continuous process. During the Annual General Meeting 2024 and also as part of the review of the compensation system for the Annual General Meeting 2025, we will regularly continue to obtain feedback and stay in dialogue with investors. In this way, we can ensure that we receive constructive and valuable feedback, which can be considered in the upcoming review and potential adjustment to the compensation system and decisions of the Personnel Committee. Accordingly, we will report on the feedback received in the next compensation report.

Compensation for fiscal 2023 – Summary

For fiscal 2023, no payment will be made from the LTIP. In 2021, an LTIP was introduced, with a performance period of four years in total (previously three years). As a result, there is a one-time payout gap without bridging payments. The LTIP is therefore not considered in the following graphics below. As a result, the maximum values represent the sum of the base salary, additional benefits and service costs for fiscal 2023 as well as the maximum amount of profit sharing.

Summary of the compensation for the Executive Board members’ performance up to December 31, 2023 (see page 8 below “Executive Board Compensation for 2023”)

Summary of the compensation for the Executive Board members’ performance up to December 31, 2022 – voluntary diclosure (Infographic)
1 The average calculation includes the compensation of Kai Beckmann, Peter Guenter and Matthias Heinzel. Peter Guenter’s compensation payment is not illustrated. Since Marcus Kuhnert left the Executive Board and Helene von Roeder became a member of the Executive Board during the year, their pro-rated compensation would distort the illustration and have therefore not been considered.

Compensation for fiscal 20231 – Chronological overview

Compensation for fiscal year 2022 – Chronological overview (Infographic)
1 In 2021, the revised LTIP with a performance cycle of four years (previously three years) was introduced which resulted in a one-time payout gap without bridging payments. The LTIP tranche 2021 runs until December 31, 2024, and will be paid out in April 2025 due to the one-year holding period. That is the reason why the LTIP tranche 2021 is not included in the chronological overview.

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