Managing Board's remuneration

This section comprises two parts. The first part outlines the remuneration policy as approved by the Annual General Meeting of Shareholders on 6 April 2005. The second part contains details of the remuneration in 2006.

Remuneration policy

The objective of DSM’s remuneration policy is to attract, motivate and retain the qualified and expert individuals that the company needs in order to achieve its strategic and operational objectives.

• DSM strives for a high performance in the field of sustainability and aims to maintain a good balance between economic gain, respect for people and concern for the environment in accordance with the Triple P concept (People, Planet, Profit). The remuneration policy reflects a balance between the interests of DSM’s main stakeholders as well as a balance between the Company’s short-term and long-term strategy. In the light of the remuneration policy, the structure of the remuneration package for the Managing Board is designed to balance short-term operational performance with the long-term objective of creating sustainable value within the company, while taking account of the interests of all stakeholders.
• To ensure that highly skilled and qualified senior executives can be attracted and retained, DSM aims for a total remuneration level that is comparable to levels provided by other Dutch multinational companies that are similar to DSM in terms of size and complexity. For that purpose, external reference data are used.
• The remuneration policy for the members of the Managing Board is aligned with the remuneration of other senior executives of DSM.
• In designing and setting the levels of remuneration for the Managing Board, the Supervisory Board also takes into account the relevant provisions of statutory requirements, corporate governance guidelines and other best practices applicable to DSM.

Labour market peer group

In order to be able to recruit the right caliber of people for the Managing Board and to secure long-term retention of the current Board members, DSM has taken external reference data into account in determining adequate salary levels. For that purpose, a specific labor market peer group has been defined which consists of Dutch companies that are headquartered in the Netherlands and are more or less comparable to DSM in terms of size, international scope and complexity of industrial operations.

The labor market peer group consists of the following ten companies:

Professional independent remuneration experts (Towers Perrin, Amsterdam) have modified the raw data of the peer-group companies using a statistical empirical model, so as to make them comparable with a company the size of DSM, with the associated scope and responsibilities of the Managing Board. Peer-group data are updated on an annual basis.

DSM operates in a competitive international industry. Therefore, DSM will also closely monitor industry and company-specific international developments with respect to remuneration.

Below, the various remuneration components are addressed separately.

Base salary

On joining the Board, the Managing Board members receive a base salary that is comparable with the median of the labor market peer group. Every year base salary levels are reviewed. Adjustment of the base salary is at the discretion of the Supervisory Board, which takes into account external and internal developments.

Bonus

Managing Board members can earn a bonus amounting to 60% of their annual base salary for on-target performance. Under the bonus plan, the part of the bonus that is related to financial targets accounts for 42% of base salary, which can increase to 63% in the case of an exceptionally good financial performance.

The part of the bonus that is not related to financial targets accounts for 18% of the base salary and cannot increase beyond that. Targets are defined in the areas of the strategic development of the company and Triple P.

Bonus part linked to financial targets

Besides the CFROI, the part of the bonus that is linked to financial targets includes elements related to operational performance, being operating profit and free cash flow, reflecting short-term financial results. The weighting given to the individual financial elements in the bonus is as follows: CFROI 21%, operating profit 12% and free cash 9% of annual base salary for on-target performance.

CFROI

The definition of CFROI has been established in such a way that the realization of the CFROI target can be derived from the financial information in the annual report and is as follows:

      Recurring EBITDA – Related annual tax – Economic depreciation (1%)

       __________________________________________________________

                   Gross asset base (incl. working capital)

CFROI focuses on value realization and creation compared with the Weighted Average Cost of Capital (WACC) established for DSM.

Operational performance

There are two financial-target-related bonus elements that allow for a focus on short-term operational targets: operating profit and free cash. These can be derived from the financial statements and are defined as follows:

• Operating profit: EBIT before exceptional items
• Free cash, defined as cash from operating activities minus capital expenditure (as shown in the cash flow statement) and minus the average dividend paid in the previous three years

The company is of the opinion that the combination of CFROI (value realization and creation), operating profit and free cash adequately reflects the company’s financial performance. Targets are determined each year by the Supervisory Board, based on historical performance, the operational and strategic outlook of the company in the short term and expectations of the company’s management and stakeholders, among other things. The targets contribute to the realization of the objective of long-term value creation.

In determining the realization of the operating-profit target, a (partial) adjustment mechanism for sensitivity to the euro / dollar ratio will apply. The company does not disclose the actual targets, as they qualify as commercially sensitive information.

Stock Incentives

The Managing Board Members are eligible to performance related stock options and shares. Both stock options and performance shares operate on the basis of the same performance schedule.

The vesting of stock options and performance shares is conditional on the achievement after three years of previously determined target levels of total shareholder return (TSR) compared to the peer group.

The Chairman will receive 10,000 performance shares and 37,500 performance options; the members of the Managing Board will receive 8,000 performance shares and 30,000 performance options.

Exercise price

The stock options and shares are granted on the first ‘ex dividend’ day following the Annual General Meeting at which DSM’s financial statements are adopted. The exercise price of the stock incentives is equal to the opening price of the share on the date of grant at the Amsterdam Stock Exchange.

TSR as a performance measure

DSM’s TSR performance is compared to the average TSR performance of a set of pre-defined peer companies.

The TSR peer group for 2006 consists of the following companies:

The peer group used for benchmarking total-shareholder-return performance reflects the relevant market in which DSM competes for shareholder preference¬. It includes sector-specific competitors which the Supervisory Board considers to be suitable benchmarks for DSM.

The peer group is verified by the Supervisory Board each year based on market circumstances (mergers, acquisitions) which determine the appropriateness of the composition of the performance peer group. Depending on DSM’s performance compared to the peer group a certain number of options will become exercisable and a certain number of shares will be unconditionally awarded. The stock options can be kept for a maximum of eight years (including the three-year vesting period) while the shares shall be retained by the members of the Managing Board for a period of at least five years (after the three-year vesting period) or at least until termination of employment if this period is shorter. The final performance of DSM versus its peers will be determined and validated by a bank and audited by the external auditor at the end of the performance period.

Performance incentive zone

The number of options and shares that become unconditional after three years is determined on the basis of DSM’s performance relative to the average TSR performance of the peer group. The difference between DSM’s performance and the peer group’s performance (in percentage points) determines the vesting.

The following table gives an overview of the vesting conditions.

Pensions

The members of the Managing Board are participants in the Dutch pension fund ‘Stichting Pensioenfonds DSM Nederland’ (PDN). PDN operates similar pension plans for various DSM companies. The pension provision of the Managing Board is equal to the pension provision for the employees of DSM Limburg BV and executives employed in the Limburg area.

Due to changes in legislation with respect to pre-pensions, the pension plans of PDN have been revised with effect from 1 January 2006. Since the Managing Board members are participants in the PDN pension plans, these changes are applicable to the Managing Board as well.

For members of the Managing Board born before 1 January 1950 (Peter Elverding and Jan Zuidam) continuation of the old pension plans is possible. Continuation of the old plans is not possible for other Board members. For Feike Sijbesma a transitional arrangement is applicable, which makes retirement before the age of 65 possible.

Employment Contracts

Term of employment
The employment contracts of the members of the Managing Board appointed before 1 January 2005 have been entered into for an indefinite period of time. Newly appointed members of the Managing Board are also offered an employment contract for an indefinite period of time. The employment contract ends on the date of retirement or by notice of either party.

Term of appointment
Members of the Managing Board appointed before 1 January 2005 are appointed for an indefinite period of time. New members of the Managing Board (appointed after 1 January 2005) will be appointed for a period of four years as Board Member. Newly appointed members are subject to reappointment by the shareholders after a period of four years

Notice period
Termination of employment by a member of the Managing Board is subject to three months’ notice. A notice period of six months will for legal reasons be applicable in the case of termination by the company.

Severance arrangement
There are no specific contractual exit arrangements for the members of the Managing Board appointed before 1 January 2005. Should a situation arise in which a severance payment is appropriate for these Board members, the Nomination and Remuneration Committee of the Supervisory Board will recommend the terms and conditions. The Supervisory Board will decide upon this, taking into account usual practices for these types of situations, as well as applicable laws and corporate governance requirements.

The employment contracts of newly appointed members of the Managing Board (appointed after 1 January 2005) include an exit arrangement provision which is in accordance with best practice provision II.2.7. of the Dutch corporate governance code (i.e. a sum equivalent to the fixed annual salary, or if this is manifestly unreasonable in the case of dismissal during the first term of office, two times the fixed annual salary).

Remuneration 2006

The remuneration package for the Managing Board is subject to annual review. The market competitiveness of the remuneration package of the Managing Board for 2006 was reviewed, based on the Dutch labor market peer group. The data reflect the July 2006 remuneration levels. All values are denominated in euros.

On target bonus and stock incentive grants are expressed as a percentage of base salary. The remuneration data are regressed to reflect the size and scope of DSM. Stock incentive valuations are based on the Black-Scholes model.

Furthermore, data is presented as median actual levels.

Benchmark against Dutch labor market peer group 2006.

Base salary in 2006

The Supervisory Board reviewed whether circumstances justified an adjustment of the base salary levels. Based on the benchmark against the peer group, it was concluded that the base salary for the chairman was at the lower quartile whilst the salaries of the other members of the Managing Board were around the median level. DSM’s policy is to offer the Managing Board a base salary comparable with the median of the Dutch labor market peer group.

In order to move closer towards the median level of the benchmark a 5% extra increase in the base salary of the chairman took place as of 1 January 2006. It is the intention to close the gap with the median of the benchmark by 2008 at the latest. For other Board members no extra increase was required.

External and internal circumstances justified a general increase of the base salary of the Managing Board of 2.5% as of 1 July 2006 to cope with inflation and labor market developments.

Bonus for 2006

Bonus targets are revised annually so as to ensure that they are stretching but realistic. Considerations regarding the performance targets are influenced by the operational and strategic course taken by the company and are directly linked to the company´s ambitions. The targets are determined at the beginning of the year for each Board member.

Target bonus level and pay-out

When they achieve all their targets, Managing Board members receive a bonus of 60% of their annual base salary. Outstanding financial performance can increase the bonus level to 81% of the annual base salary.

The 2006 annual report presents the bonuses that have been earned on the basis of results achieved in 2006. These bonuses will be paid out in 2007.

The Supervisory Board has established the extent to which the targets for 2006 were achieved. The realization of the 2006 financial bonus targets has been reviewed by Ernst & Young Accountants. Furthermore, Ernst & Young has reviewed the process with respect to the target setting and realization of the non-financial bonus targets. The targets relating to the group’s financial performance were met, with the exception of free cash. The other, non-financial targets were fully achieved. The average realization percentage was 49.00%.

Stock options and performance shares in 2006

In 2006 performance-related stock options and performance shares were granted to the Managing Board on 31 March 2006 at an exercise price of €38.30. The table below shows the number of stock incentives granted to the individual Managing Board members:

Pensions in 2006

The members of the Managing Board are participants in the Dutch pension fund ‘Stichting Pensioenfonds DSM Nederland’ (PDN).

As of 1 January 2006 the pension scheme comprises the following elements:

• Retirement age 65 years (early retirement possible only by actuarial reduction of pension rights).
• The scheme includes a spouse pension as well as a disability pension.
• Annual accrual of pension rights (old age pension) over base salary exceeding €11,354 (reviewed annually) at a rate of 2%.
• Employee’s contribution of 2.5% of base salary up to €50,810 and 6.5% of the pensionable salary above this amount (to be reviewed annually).
• Conditional defined benefit: indexation of pensions and pension rights is conditional, depending on PDN’s financial returns.

Loans

The company does not provide any loans to members of the Managing Board. There are therefore no loans outstanding.

Total remuneration

The total remuneration (including pension costs relating to current and former Board members) of the Managing Board amounted to €4.3 million in 2006 (2005: €3.9 million). The increase of €0.4 million was mainly due to a higher bonus pay out in 2006.

Overview of remuneration awarded to the Managing Board in 2006

(1) Bonus paid in 2006 based on results achieved in 2005
(2) Based on results achieved in 2006 and therefore payable in 2007
(3) Pro-rated bonus based on estimated results achieved in Q1 2006
(4) Pro-rated bonus