21. Other Provisions

Changes in the various provision categories in 2018 were as follows:

Taxes

Provisions for taxes comprise provisions for other types of taxes amounting to €10 million (previous year: €5 million).

Environmental protection

Provisions for environmental protection mainly relate to the rehabilitation of contaminated land and recultivation of landfills as well as water protection measures at sites in the United States and Spain.

Restructuring

As of December 31, 2018, provisions for restructuring included €26 million (previous year: €3 million) for severance payments. The additions resulted primarily from the “Perspective” efficiency program, which aims to improve the cost structures in the medium term.

Personnel commitments

Personnel-related provisions are mainly those recorded for variable one-time, short-term and long-term incentive payments and other personnel-related provisions.

Long-term incentive programs

The long-term incentive programs of the Covestro Group entail commitments offered collectively to different groups of employees. In principle, all obligations from long-term compensation programs are covered by provisions. As of the reporting date, their amount corresponds to the fair value of the share of the respective commitments to the employee groups. All resulting valuation adjustments are recognized in profit or loss.

Senior executives and other managerial employees at Covestro have been entitled to participate in the stock-based compensation program Prisma. A percentage of the employee’s annual base salary – based on his/her position – is defined as a target for variable payments (Prisma target opportunity). The payout is calculated by multiplying the Prisma target opportunity by the total shareholder return (total of Covestro’s closing share price^[1] and all of the dividends distributed in the respective performance period divided by the opening share price) and the performance of Covestro stock relative to the STOXX^® Europe 600 Chemicals benchmark index. The payout is capped at 200% of the Prisma target opportunity. If Covestro’s shares were to significantly underperform the STOXX^® Europe 600 Chemicals index (e.g. if the price of the stock went down while the index increased in value), Prisma target attainment could amount to zero, in which case there would be no payout. Payouts are made regularly following each four-year performance period; the first award will be in January 2020 for the performance period ending on December 31, 2019.

In addition to Prisma, Covestro continues to run the Bayer Group’s formerly stock-based Aspire incentive program for performance periods that started prior to January 1, 2016. Senior executives were entitled to participate in Aspire I on the condition that they purchased a certain number of Bayer shares – determined for each individual according to specific guidelines – and retained them for the full term of the program. A percentage of the executive’s annual base salary – based on his/her position – was defined as a target for variable payments (Aspire target opportunity). Depending on the performance of Bayer stock, both in absolute terms and relative to the EURO STOXX^® 50 benchmark index during a four-year performance period, participants were granted an award of up to 300% of their individual Aspire target opportunity. Middle management and managerial employees were entitled to participate in Aspire II. The terms of Aspire II generally matched those of Aspire I, except that Aspire II did not require a personal investment in Bayer stock, and the exclusive performance measure was Bayer’s absolute share price performance. Aspire II payouts were capped at 250% of the Aspire target opportunity.

In order to decouple the Aspire payouts from Bayer’s share price performance, which can no longer be significantly influenced by the Covestro Group’s employees, the average price of Bayer stock and the benchmark calculated from the closing prices for the last 30 trading days of 2015 was stipulated as the binding closing price for the remaining Aspire I and Aspire II tranches. However, the vesting phase will continue to run until the end of the respective performance period. A minimum payout of 100% of the Aspire target opportunity was guaranteed for all tranches. As a result, the payout for the last remaining tranche 2015–2018, which was payable in January 2019, amounts to 100% for both Aspire programs.

The fair value of  the stock-based incentive program Prisma recognized in the provision amounted to €41 million as of December 31, 2018 (previous year: €36 million).

The fair value of the formerly stock-based incentive program Aspire recognized in the provision amounted to €16 million as of December 31, 2018 (previous year: €31 million) and was paid out at the beginning of 2019 (payout in the previous year: €18 million).

The net expense for all long-term incentive programs amounted to €11 million (previous year: €28 million), of which €4 million (previous year: €3 million) was attributable to the stock participation program Covestment, explained in greater detail in the following section.

The fair value of obligations under the Prisma program was calculated using the Monte Carlo simulation method on the basis of the following key parameters pertaining to the reporting date:

For the Aspire I and Aspire II long-term incentive programs, the fair value of the obligation was calculated based on a Monte Carlo simulation in previous years and until these programs were locked in 2015.

Stock participation program (Covestment)

Under the Covestment program, employees of selected Group companies could invest a fixed amount of their compensation in Covestro shares in 2018, which Covestro supplemented through an employer subsidy. The discount granted for 2018 was generally 30% of the subscription amount and is set every year. The total individual investment amount was capped at €3,600, depending on the Group company and the employee’s position. Overall, around 75% of Covestro’s global workforce was authorized to participate in Covestment.

Around 226,000 shares were purchased by employees under the Covestment program in 2018. Depending on the Group company, the purchased shares are subject to a vesting period of at least one year from the subscription date.