Moving into the future with innovations

In 2009, Bayer was successful in a difficult environment. We achieved the third-highest earnings level in the company’s history, with EBITDA before special items amounting to €6.5 billion, and came close to achieving our ambitious goal of limiting the decline in earnings against the record 2008 level to approximately 5 percent. Moreover, the net cash flow improved by 49 percent to a record €5.4 billion. Net financial debt declined further than expected, dropping €4.5 billion to €9.7 billion. Net income in 2009 was €1.4 billion.

In 2009, Bayer stock outperformed the DAX and EURO STOXX 50 indices for the third consecutive year, gaining 34.7 percent over the year. Including the dividend of €1.40 per share paid in May 2009, the share price performance was 39.8 percent. Bayer shares ended 2009 at €55.96, very close to their high for the year. A long-term investor who purchased Bayer shares for €10,000 five years ago and reinvested all dividends would have seen the value of the position grow to €27,247 as of December 31, 2009. That corresponds to an average annual return of 22.2 percent.

Equity was €18,951 million as of December 31, 2009, including €54 million attributable to non-controlling interests. Our stockholder structure is still very international: according to a survey of shareholdings by institutional stockholders conducted in 2009, around 28.60 percent of the identified capital is held by investors based in the United States and Canada, while 25.74 percent is held by investors based in Germany. 8.48 percent of investors are based in France, Spain, Italy and Portugal, 7.10 percent in the United Kingdom and Ireland, 4.57 percent in the Benelux countries, 4.56 percent in Austria, Switzerland and Liechtenstein, and 3.11 percent in Denmark, Finland, Norway and Sweden. All other countries together account for 0.26 percent of institutional investors. The survey covered all but 17.58 percent of the capital stock.

The Board of Management and Investor Relations Department maintain a regular dialogue with private and institutional investors, for example through the Annual Stockholders’ Meeting, investors’ conferences, private investment forums and roadshows. Bayer also explained its commitment to sustainability at one-on-one meetings and conferences with investors.

Following the resolution adopted at the Annual Stockholders’ Meeting on May 12, 2009, Bayer AG converted its entire capital stock of 826,947,808 bearer shares into registered shares at a ratio of 1:1 in September 2009. Listing our stockholders in the share register is intended to facilitate contact with them and increase transparency.

* Not directly allocated to the subgroups; mainly sales of the service companies

Bayer HealthCare acquired two dermatology product lines from the U.S. company SkinMedica, Inc. of Carlsbad, United States, for €43 million in 2009. Bayer CropScience acquired Athenix Corp., United States, a privately held biotech company headquartered in Triangle Park, United States, for €286 million in 2009. In June 2009, Bayer MaterialScience acquired the remaining 10 percent of shares in Bayer Polymers (Shanghai) Co. Ltd., China, for €24 million. Our Annual Report 2009 gives an overview of the main investments and further acquisitions that were made in the period under review.

Bayer was founded in Wuppertal, Germany, in 1863 and has been headquartered in Leverkusen, Germany, since 1912. Today, the Bayer Group comprises around 300 consolidated companies on five continents. The Group is headed by a management holding company. This sets the strategic framework for the subgroups and service companies, which operate as separate legal entities. The operational business is divided among three subgroups: Bayer HealthCare, Bayer CropScience and Bayer MaterialScience. Our three service companies – Bayer Business Services GmbH, Bayer Technology Services GmbH and Currenta GmbH & Co. OHG – provide services for both internal and external customers.

Under the German Codetermination Act, the Supervisory Board of Bayer AG comprises 10 representatives of the stockholders and 10 representatives of the workforce. In compliance with statutory obligations, the Supervisory Board fulfilled its role of advising and continuously overseeing the Board of Management in 2009. Key elements of the Supervisory Board’s work in 2009 were the ongoing development of corporate governance at Bayer, the amendments to the German Corporate Governance Code in June 2009 and revised legislation on the appropriateness of the compensation of members of management boards. In December 2009, the Board of Management and Supervisory Board renewed their declaration that Bayer AG had fully complied with the recommendations of the German Corporate Governance Code and would continue to do so in the future, with one temporary exception .

The compensation of the Board of Management basically comprises four components: a fixed annual salary, a short-term incentive award on a yearly basis based on a target amount, a long-term incentive award for a three-year period based on a target amount, and a company pension plan conferring pension entitlements that increase with years of service. Remuneration in kind and other benefits are also provided, such as the use of a company car for private purposes or reimbursement of the cost of health screening examinations. The short-term incentive award for 2009 is calculated partly on the Group’s EBITDA margin before special items, and partly on the weighted average target attainment of the HealthCare, CropScience and MaterialScience subgroups. The target attainment of the subgroups is measured chiefly in terms of their EBITDA before special items. A qualitative appraisal in relation to the market and competitors is also taken into account.

The compensation system for the Board of Management was already aligned to sustainability and complied with the recommendations of the German Corporate Governance Code. It also met many of the demands made by the new legislation on the appropriateness of the compensation of members of management boards, which was passed in August 2009. In December 2009, the Supervisory Board resolved on adjustments to ensure that the compensation of Bayer’s Board of Management continues to comply fully with the requirements of the new legislation and the recommendations of the German Corporate Governance Code .

The remuneration of the Supervisory Board is based on the relevant provisions of the Articles of Incorporation, which were last amended by a resolution of the Annual Stockholders’ Meeting on April 29, 2005. This provides that, in addition to reimbursement of their expenses, each member of Bayer’s Supervisory Board receives fixed and variable remuneration. The fixed annual remuneration is €60,000, while the variable component is based on corporate performance measured by the gross cash flow reported in the consolidated financial statements of the Bayer Group for the respective fiscal year. The members of the Supervisory Board receive €2,000 for every €50,000,000 or part thereof by which the gross cash flow exceeds €3.1 billion, but the total variable remuneration of each member may not exceed €30,000. In accordance with the provisions of the German Corporate Governance Code, additional remuneration is paid to the Chairman and Vice Chairman of the Supervisory Board and for chairing and membership of committees. The Chairman of the Supervisory Board receives three times the basic remuneration, while the Vice Chairman receives one-and-a-half times the basic remuneration. Members of the Supervisory Board who are also members of a committee receive an additional one quarter of the amount, with those chairing a committee receiving a further quarter. However, no member of the Supervisory Board may receive total remuneration exceeding three times the basic remuneration. It has been agreed that no additional remuneration shall be paid for membership of the Nominations Committee. If changes are made to the Supervisory Board and its committees during the fiscal year, members receive remuneration on a pro-rated basis. Details of remuneration received by individual members of the Board of Management and Supervisory Board are disclosed in our Annual Report.

We have started to link the variable remuneration of Bayer executives directly to success in the sustainability arena by including sustainability criteria in their annual personal performance objectives. Our aim is to ensure a close link between sustainability targets and variable compensation components throughout the Group.

Bayer’s success is based on the day-to-day commitment of our 108,400 employees around the world (2008: 108,600). Around 34 percent (2008: 34 percent) of them work at our sites in Germany. Globally, around 72 percent of our employees (2008: 74 percent) are in countries that belong to the Organisation for Economic Co-operation and Development (OECD). Almost 28 percent (2008: 26 percent) work in a total of 43 non-OECD countries. The largest of these is China, where we have around 7,435 employees, followed by India (3,688) and Brazil (3,370).

The Bayer Group is a global enterprise with companies all over the world. The map shows some of our most important locations.