The Company

Creating value for the future

Health care, nutrition and high-tech materials are our core competencies. In all three areas Bayer pursues a clear objective: to offer innovative products and services that help people and improve their quality of life, to provide society with high value-added and to create corporate value – for the benefit of our stockholders, our employees, and the community in every country in which we operate.

Our commercial success

2008 was a successful year for Bayer in an increasingly difficult economic environment. Our diversified product portfolio generated sales of €32.9 billion, an increase of 1.6 percent compared with 2007. After taxes and income attributable to non-controlling interests, Group net income was €1.7 billion

* Not directly allocable to the subgroups, e. g. sales of the service companies

Our stock

Caught up in the global market turbulence in 2008, Bayer stock dropped 33.6 percent over the year. Including the dividend of €1.35 per share paid in May, its performance in 2008 amounted to minus 31.9 percent. Despite the drop in the share price, Bayer’s performance was in the top third of the DAX 30 companies. The stockholders’ equity of the Bayer Group as of December 31, 2008 was €16.34 billion, of which €77 million was attributable to Bayer AG stockholders.

Our stockholder structure continues to be highly international: According to a survey on institutional investors’ shareholdings in 2008, 80 percent of the identified capital is held by investors based outside Germany. 43 percent is held by investors whose base is in the United States. Our Board of Management and Investor Relations Department engage in regular dialogue with private and institutional investors. The Annual Stockholders’ Meeting, investor conferences, forums for private investors and roadshows are important tools for this.

The U.S. index provider Morgan Stanley Capital International (MSCI) reclassified Bayer stock from the “Diversified Chemicals” category of the “Materials” sector to the “Pharmaceuticals” category of the “HealthCare” sector with effect from July 1, 2008, reflecting our new focus on the health care business.

Our acquisitions, investments and payments to stockholders in 2008

Bayer HealthCare acquired the Eastern European OTC business of Sagmel Inc. for €265 million in 2008. Disbursements of €695 million were also made for the acquisition of the remaining interest in Bayer Schering Pharma AG, Berlin, Germany. Following the entry of the squeeze-out in the commercial register, the remaining minority stockholders received cash compensation of €98.98 per share for their stock.

Bayer CropScience invested in expansion of herbicide production capacity at its sites in Frankfurt and Knapsack in Germany and in a new formulating plant for insecticides in Hangzhou, China

Bayer MaterialScience started up the world’s largest production facility for diphenylmethane diisocyanate (MDI) in Shanghai, China, in October 2008. This subgroup also started construction of a pilot plant for the production of carbon nanotubes.

Our Annual Report 2008 gives an overview of the main investments and further acquisitions that were made in the period under review.

Our corporate structure

The present Bayer AG traces its roots to a company established in Wuppertal, Germany, in 1863 and has been headquartered in Leverkusen since 1912. Today, the Group comprises around 320 companies on five continents. The Bayer 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.

Our corporate governance

Under the German Codetermination Act, the Supervisory Board of Bayer AG comprises ten representatives of the stockholders and ten representatives of the workforce. In compliance with its statutory obligations, in 2008 the Supervisory Board fulfilled its role of advising and continuously overseeing the Board of Management.

The ongoing development of corporate governance at Bayer and the amendments to the German Corporate Governance Code in June 2008 were among the central issues discussed by the Supervisory Board in 2008. In December the Board of Management and Supervisory Board renewed their declaration that Bayer AG fully complies with the recommendations of the German Corporate Governance Code.

Our compensation policy

The compensation of the Board of Management basically comprises four components: a fixed annual salary, a short-term incentive award on a yearly basis in relation to a target amount, a long-term incentive award for a three-year period in relation to 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 fixed salary consists of two parts: a base salary and a fixed supplement. The short-term incentive award for 2008 is calculated partly according to the Group’s EBITDA margin before special items, and partly according to the weighted average target attainment of the HealthCare, CropScience and MaterialScience subgroups. The latter is based mainly on the subgroups’ target attainment measured by EBITDA before special items as well as a qualitative appraisal in relation to the market and competitors.

The compensation of the Supervisory Board is determined according to the provisions of the Articles of Incorporation, which provisions were approved by the Annual Stockholders’ Meeting on April 29, 2005. This provides that, in addition to reimbursement of their expenses, each member of the Supervisory Board receives fixed annual remuneration of €60,000 and a variable remuneration component. The variable remuneration component is based on corporate performance in terms of 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 million or part thereof by which the gross cash flow exceeds €3.1 billion, but the variable component for 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.

In order to link the variable remuneration of Bayer executives directly to success in the sustainability arena, we have also started to include sustainability criteria in their annual personal performance targets. Our aim is to ensure a close link between sustainability targets and variable compensation components throughout the Group.

Our global workforce

Bayer’s success is based on the daily commitment of our 108,600 employees (2007: 106,200) around the world, around 34 percent (2007: 36.8 percent) of whom work at our sites in Germany. Globally, around 74 percent (2007: 76.5 percent) of our employees are in countries that belong to the Organisation for Economic Co-operation and Development (OECD). Almost 26 percent (2007: 23.5 percent) work in a total of 43 non-OECD countries. The largest of these is China, where we have around 6,800 employees, followed by India (3,500) and Brazil (3,300).

The Bayer Group

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

The Bayer Group in 2008 in figures (values for previous year in brackets)

	North America	Latin America / Africa / Middle East	Europe	Asia / Pacific	Total
Sales (€ million)	8,026 (8,161)	4,958 (4,660)	14,549 (14,353)	5,385 (5,211)	32,918 (32,385)
Employees	17,000 (16,800)	15,300 (14,300)	55,500 (56,200)	20,800 (18,900)	108,600 (106,200)
R&D expenditures (€ million)	459 (581)	36 (35)	2,014 (1,836)	144 (126)	2,653 (2,578)
No. of fully consolidated companies	45 (47)	46 (51)	167 (168)	58 (60)	316 (326)