We aim to earn a premium on our cost of capital in order to further increase BASF’s value. Our value-based management concept is a comprehensive approach that includes all functions within the company and supports and encourages all employees in acting in an entrepreneurial manner.
EBIT after cost of capital
Earnings before interest and taxes (EBIT) after cost of capital is the key performance and management indicator for our operating divisions and business units.
The BASF Group must achieve an EBIT at least as high as its cost of capital to meet the interest rates payable to providers of debt, to satisfy the returns expected by providers of equity, and to cover tax expenses.
|
Calculation of EBIT after cost of capital (million €) |
||||||
|---|---|---|---|---|---|---|
|
|
2007 | |||||
| ||||||
|
EBIT BASF Group |
7,316 | |||||
|
less EBIT for activities not assigned to the segments1 |
(293) | |||||
|
less noncompensable foreign income taxes for oil production |
1,302 | |||||
|
less cost of capital2 |
3,412 | |||||
|
2,895 | ||||||
Calculation of the cost of capital percentage
The cost of capital percentage depends primarily on three factors:
- the capital structure of the BASF group
- the level of interest rates on debt and
- the return expected by shareholders
We calculate our cost of equity on the basis of the market value of BASF shares; we calculate the cost of external financing based on book value. The cost of capital percentage is reviewed annually in the light of current data.
The cost of capital percentage for 2007 of 9% will be increased to 10% in 2008. This change is due to the higher, absolute capital costs resulting from BASF’s increased market capitalization. As a result of almost unchanged average assets in the segments, the average cost of capital percentage of the BASF Group is to be increased accordingly for 2008.
EBIT after cost of capital (million €)
Five-year summary
Value-based management throughout the company
Value-based management is only successful if it is firmly rooted in the company and consistently implemented. An important factor in ensuring its successful implementation is achieved by linking performance-related pay to the extent that employees achieve target agreements. In operating units EBIT after cost of capital is the most important performance indicator. The performance of functional units in other words of regions, sites, corporate units and competence centers are frequently hard to determine in monetary terms. Therefore value proposition has been defined as the highest goal for functional units. Two general value drivers upon which we evaluate the performance of our units result from this: efficiency and effectiveness.
A number of continuous training programs provide our employees worldwide with relevant information on value-based management. Our goal is to make our employees more aware of business contexts, thus furthering entrepreneurship at all levels of BASF. To do this, we use among others things, a business simulation game specially adapted for BASF, an interactive web-based program and a tailor-made range of seminars.
Several thousand employees from specialist and managerial positions applied the principles of value-based management to specific, practical examples. We have also developed a practice-oriented training on value-based management for employees from non-business backgrounds.
