Directors and Senior Management

      In accordance with the German Stock Corporation Act ( Aktiengesetz ), Bayer AG has both a Board of Management ( Vorstand ) and a Supervisory Board ( Aufsichtsrat ). The Board of Management is responsible for the management of our business; the Supervisory Board supervises the Board of Management and appoints its members. The two boards are separate, and no individual may simultaneously be a member of both boards.

      Members of both the Board of Management and the Supervisory Board owe a duty of loyalty and care to Bayer AG. In exercising their duties, the applicable standard of care is that of a diligent and prudent businessperson. Members of both boards must take into account a broad range of considerations when making decisions, including the interests of Bayer AG and its shareholders as well as of employees and creditors.

      The members of the Board of Management and the Supervisory Board may be held personally liable to Bayer AG for breaches of their duties of loyalty and care. Bayer AG must bring an action for breach of duty against the Board of Management or Supervisory Board upon a resolution of the shareholders’ meeting passed by a simple majority of votes cast, or upon the request of shareholders holding, as a group, at least 10 percent of the outstanding share capital. With the exception of shareholders of companies that (unlike Bayer AG) are under the control of another company, individual shareholders of German companies cannot sue directors on behalf of the company in a manner analogous to a shareholder’s derivative action under U.S. law. Under German law, directors may be liable for breach of duty to shareholders (as opposed to a duty to the company itself) only where a breach of duty to the company also constitutes a breach of a statutory provision enacted specifically for the protection of shareholders. As a practical matter, shareholders are able to assert liability against directors for breaches of this sort only in unusual circumstances.

Board of Management

      The Board of Management is responsible for managing the business of Bayer AG in accordance with the German Stock Corporation Act and Bayer AG’s Articles of Association. It also represents Bayer AG in its dealings with third parties and in court. According to the Articles of Association, the Board of Management consists of a minimum of two members. The Supervisory Board determines the number of and appoints the members of the Board of Management. Members of the Board of Management are appointed for a maximum term of five years and are eligible for reappointment after the completion of their term in office.

      Bayer AG is legally represented by two members of the Board of Management acting together, or by one member of the Board of Management together with a person possessing a special power of attorney ( Prokura ).

      The Board of Management must report regularly to the Supervisory Board, particularly on proposed business policy and strategy, on profitability and on the current business of Bayer AG, as well as on any exceptional matters that may arise from time to time. If not otherwise required by law, the Board of Management decides with a simple majority of the votes cast. In case of deadlock, the vote of the chairman is the relevant vote.

      Under certain circumstances, such as a serious breach of duty or a vote of no confidence by the shareholders in an annual meeting, a member of the Board of Management may be removed by the Supervisory Board prior to the expiration of his term. A member of the Board of Management may not deal with, or vote on, matters relating to proposals, arrangements or contracts between him/herself and Bayer AG.

      Individual Board members serve as representatives with primary responsibility for our various corporate functions and as representatives for the various geographic regions in which we operate.

107

Table of Contents

      The following table shows the members of our current Board of Management, their ages, positions and the years in which their current terms expire.

     Werner Wenning became chairman of our Board of Management in April 2002. He has served on the Board since 1997. Prior to becoming chairman, he served as chief financial officer and was a member of the Corporate Coordination and Human Resources Committees. From 1996 until he joined the Board in 1997, Mr. Wenning was head of Corporate Planning and Controlling. In addition to his responsibilities on the Board, he is a member of the supervisory boards of Gerling-Konzern Versicherungs-Beteiligungs AG and Henkel KGaA.

      Dr. Udo Oels joined the Board of Management in 1996 and currently is responsible for the corporate functions innovation, technology and environment. In addition to his responsibilities on the Board, he is a member of the supervisory boards of Bayer Chemicals AG and ThyssenKrupp Services AG.

      Klaus Kühn is Bayer’s chief financial officer. Prior to joining the Board in May 2002, Mr. Kühn was head of Bayer’s Finance Division. Prior to that appointment, he oversaw the spin-off of Bayer’s former Agfa division. Before joining Bayer in 1998, Mr. Kühn worked with Schering AG, most recently as head of finance. He is also the vice president of the Deutsches Aktieninstitut e.V. In addition to his responsibilities on the Board, he is chairman of the supervisory board of Bayer CropScience AG.

      Dr. Richard Pott joined the Board in May 2002. He had previously served as General Manager of our Specialty Products business group. Before assuming responsibility for Specialty Products, he served Bayer in a number of positions, most recently as head of the Strategic Planning Department and then as head of Corporate Planning and Controlling. Dr. Pott oversees strategy and human resources and serves as Arbeitsdirektor . In addition to his responsibilities on the Board, he is a member of the supervisory board of Bayer HealthCare AG.

Supervisory Board

      Under the German Stock Corporation Act, the German Co-Determination Act ( Mitbestimmungsgesetz ) of 1976 and our Articles of Association, the Supervisory Board consists of 20 members. The principal function of the Supervisory Board is to supervise the Board of Management and to appoint its members. The Supervisory Board oversees our business policy, corporate planning and strategy. It also approves the annual budget and the financial statements of Bayer AG and of the Bayer Group. The Supervisory Board may not make management decisions, but the Board of Management’s Standard Operating Procedures ( Geschäftsordnung ) may require the prior consent of the Supervisory Board for specified transactions above a specified threshold, including:

      Our shareholders elect ten members of the Supervisory Board at the annual meeting of shareholders. Pursuant to the Co-Determination Act of 1976, our employees elect the remaining ten members. The term of a Supervisory Board member expires at the end of the annual meeting of shareholders in which the shareholders discharge Supervisory Board members for the fourth fiscal year following the year in which the member was elected. There is no compulsory retirement age for members of the Supervisory Board. However, in accordance

108

Table of Contents

      Any member elected by the shareholders at the annual meeting of shareholders may be removed by a majority of three quarters of the votes cast by the shareholders in such meeting. Any member elected by the employees may be removed by a majority of three quarters of the votes cast by the employees. Unless otherwise required by law or by the Articles of Association of Bayer AG, resolutions of the Supervisory Board are passed by simple majority of the votes cast. According to the Articles of Association, in the case of a deadlock, a second vote is held in which the chairman of the Supervisory Board is entitled to one additional vote. In order to constitute a quorum, at least half of the total members of the Supervisory Board must participate in the voting.

      All of the current shareholder representatives on the Supervisory Board were elected by the shareholders at the annual meeting of shareholders held on April 26, 2002, with the exception of Dr. Jürgen Weber, who was elected on April 25, 2003.

      The following table shows the current members of our Supervisory Board, their principal occupations and the year in which they were first elected or appointed. Employee representatives are identified by an asterisk.

109

Table of Contents

Supervisory Board Committees

      Currently, the Supervisory Board has the following committees:

Share Ownership

      Because the shares of Bayer AG are in bearer form, we cannot obtain precise information as to their holders. To the best of our knowledge, however, no member of the Supervisory Board or the Board of Management beneficially owns shares of Bayer AG totaling one percent or more of all outstanding shares.

Compensation

      The members of our Board of Management receive a base salary, a fixed supplement and a variable bonus. Beginning in 2003, the variable bonus for a given year is tied to the attainment of our Group gross cash flow target. In addition, the members of our Board of Management may participate in a cash-settlement-based stock option program if they place shares of their own into a special deposit account. In 2003, we paid salary and bonus compensation totaling € 4,590,646 (2002: € 5,700,737) to the members of our Board of Management. Of this amount, € 4,431,023 was paid to members who were active on the Board as of December 31, 2003. With respect to their periods of active membership, an additional € 159,623 was paid to members of the Board who resigned. Of the amount paid to members who were active on the Board as of December 31, 2003, € 2,248,676 represented base salary and fixed supplement and € 2,081,169 represented variable bonus. The Board members who were

110

Table of Contents

      Emoluments to retired members of the Board of Management and their surviving dependents amounted to € 10,184,254 (2002: € 14,383,353). We pay former and retired members of the Board of Management a monthly pension equal to 80 percent of the last monthly base salary received while in service. If we increase the base salary of current members of the Board of Management, we adjust the pension payments to retired members accordingly. These amounts are in addition to any amounts they receive as a result of their participation in the Bayer pension plan described below. See —  Employee Pension Plan .

      In 2000, we implemented our Stock Option Program, under which we may grant “option rights” to members of the Board of Management. The cash value that these option rights entitle holders to receive will vary substantially depending on certain performance benchmarks; if minimum benchmarks are not reached, the holder is not entitled to exercise the option rights. From the 2003 tranche of the Stock Option Program, the members of the Board of Management received a total of 30,300 option rights on the basis of their own investments. These rights are initially blocked for three years, followed by a two-year exercise period. See below, —  Employee option plans  —  Stock Option Program .

      The following table shows the remuneration paid to those individual members of our Board of Management who were active on the Board as of December 31, 2003.

Remuneration of the Members of the Board of Management

111

Table of Contents

      The following table shows the remuneration paid to individual members of the Supervisory Board who were active on the Board as of December 31, 2003. Employee representatives, who receive salaries from us unrelated to their work on the Supervisory Board, are identified by an asterisk. The aggregate amount of the salaries they received in 2003 in their capacities other than as members of the Supervisory Board is € 574,823.

Remuneration of the Members of the Supervisory Board

      There were no loans to members of the Board of Management or to members of the Supervisory Board outstanding as of December 31, 2003.

Board of Management severance plan

      Beginning in 2001, we established a severance plan for the members of Bayer AG’s Board of Management. This plan provides for payments to Board members if their relationship with Bayer AG is terminated following a change of control. “Change of control”, for the purposes of this plan, is defined as the acquisition by a third party of 25 percent or more of Bayer AG’s outstanding shares or transactions that would have a similar effect. A Board member is generally eligible for payment under the plan if his or her relationship with Bayer AG ends within 12 months of the change of control, other than in the case of termination for cause or termination of a Board member aged 62 or more at the time of termination.

      Under the plan, former Board members are entitled to receive the present value of the compensation they would have received through the normal expiration date of their employment contracts, discounted by 25 percent for a duration of more than three years. In addition, they are entitled to receive a severance payment equal to the sum of two to four years’ annual compensation. The basic amount of these severance payments is equal to two years’ compensation. If the former Board member is 50 or older at the time of termination, the payment increases by one year’s compensation or by two years’ compensation if, in addition, the former Board member’s length of service with the company was at least 30 years or his or her tenure on the Board was at least ten years. Total payments under the plan are, however, capped at an amount equal to five times the former Board member’s annual compensation. In addition, the former Board member retains full pension rights.

112

Table of Contents

Employee option plans

      In May 2000, we implemented a three-tier program to provide employees and management with an opportunity to earn Bayer AG shares. We offer the stock option program for members of the Board of Management and senior executives, the stock incentive program for middle management and equivalent employees and the stock participation program for junior management and other employees.

      To make use of the stock option program, the stock incentive program and Module 1 of the stock participation program (described below), participants must place Bayer AG shares of their own into a special deposit account. Participants do not pay an exercise price for the shares they receive under these programs. Rather, they receive the shares as bonus shares or as cash payments or, in the case of Module 2 of the stock participation program, have the opportunity to purchase shares at a discounted price.

      We may implement our employee option programs in annual tranches. Each tranche has separate terms, holding periods and other key parameters as described below for 2003, in each case keyed to the starting date of that tranche.

      Members of the Board of Management and senior executives who wish to participate in the stock option program must place Bayer AG shares of their own in a special deposit account. We determine on an individual basis the maximum number of shares each participant may deposit; the participant receives between one and three option rights for each share deposited. The exact number of option rights per share is dependent on relative performance of the company or the subgroups, in comparison to selected competitors during the three years preceding the tranche, as well as on the participant’s individual performance. These deposited shares are “locked up”, meaning that the participant may not sell them during the following three-year holding period. After the end of these three years, a two-year exercise period begins. During this period, the participant may exercise the option rights if the performance criteria are fulfilled. Any unexercised option rights expire at the end of this two-year period.

      We apply two criteria, one based on performance and one based on outperformance, to determine whether the participant is eligible to exercise option rights granted in any given tranche and, if so, the cash value to be received upon exercise. These criteria measure the absolute and relative performance of the Bayer AG share.

      The weighting for each of the two criteria is set such that the market values of both components are equal at the start of the tranche. We multiply the contributions resulting from both the Performance and the Outperformance criterion by the respective weighting factors. The sum of both products is the cash value to which the participant is entitled.

      In 2003, participants in our stock option program received a total of 196,987 option rights. The current tranche started on August 31, 2003. Based on this start date, an “outset value” was calculated at € 19.75 by averaging the Bayer share price over the ten trading days immediately preceding August 31, 2003. Based hereon, the performance criterion will start to pay off at a price of € 24.69 ( € 19.75 + 25 percent).

113

Table of Contents

      Like the stock option program, our stock incentive program for middle management requires participants to deposit Bayer AG shares in a special deposit account. In any given annual tranche, a participant may deposit shares with a maximum aggregate value of half of his or her performance-related bonus for the preceding fiscal year. The amount of incentive payment the participant receives depends on the number of Bayer AG shares deposited at the start of the tranche as well as on the price performance of the Bayer AG share. Unlike the stock option program, the stock incentive program does not “lock up” deposited shares. Participants may sell their deposited shares during the term of the tranche, but any deposited shares they sell are no longer counted in calculating the number of incentive shares for subsequent distribution dates. In the 2003 fiscal year, participants were allowed to deposit shares in a maximum aggregate value equal to 50 percent of their performance-related bonus for the 2002 fiscal year.

      Each tranche of the stock incentive program has a ten-year term. There are three incentive payment distribution dates during this period. On these dates, the participant receives an incentive payment based on the price (at that time) of a defined number of Bayer AG shares as follows:

      Participants receive incentive payments only if the price increase of the Bayer AG share has outperformed the Dow Jones EURO STOXX 50 ^(SM) price index on the relevant distribution date, as calculated from the starting date of the tranche.

      Based on the number of Bayer AG shares that participants in the stock incentive program deposited in the tranche for 2003, participants are eligible to receive a total of 32,010 shares on the tranche’s future distribution dates, assuming satisfaction of the performance criterion on each such date and assuming that these participants do not remove any shares from deposit during the term of the tranche.

      Our stock participation program has two components, Module 1 and Module 2. Employees not covered by the stock option program or stock incentive program may generally participate in both Module 1 and Module 2.

      The Module 1 program, like the stock incentive program, requires participants to deposit Bayer AG shares in a special account. As with the stock incentive program, participants in the stock participation program may sell their deposited Bayer AG shares during the term of the tranche; any shares they sell are no longer counted in calculating the amount of incentive payments on subsequent distribution dates for that tranche. Participants may deposit shares in a total value equal to half their performance-related bonus for the previous year. In the 2003 fiscal year, junior management participants were allowed to deposit shares in a maximum aggregate value equal to 50 percent of their performance-related bonus for the 2002 fiscal year.

      Each tranche of Module 1 has a term of ten years and entitles the participant to receive incentive payments on three distribution dates based on the number of shares he or she has deposited. Unlike the stock incentive program, Module 1 does not impose a share performance criterion. The participant receives an incentive payment based on the price (at that time) of a defined number of Bayer AG shares as follows on the distribution dates:

      Based on the number of Bayer AG shares that participants in Module 1 of the stock participation program have deposited in the tranche for 2003, participants are eligible to receive the financial equivalent of a total of

114

Table of Contents

      In addition, under the 2003 tranche of Module 2, each participant may purchase 20 Bayer AG shares per year at a tax-free discount of € 7.70 per share under the then market price. These shares may not be sold until December 31, 2004. Participants may not include shares that they purchase under Module 2 among the shares they deposit under Module 1.

Employees

      The following tables set forth the average number of employees in continuing operations during 2003, 2002 and 2001 by area of primary activity and an approximate breakdown of employees as of December 31, 2003, 2002 and 2001 by geographical region:

Labor Relations

      The union-organized employees at our German facilities belong to several unions, the most important of which is IG BCE, the German Mining, Chemical and Energy Industrial Union. We do not negotiate collective bargaining agreements directly with these unions to cover our employees. Instead, in accordance with German practice, unions negotiate agreements with industry-wide employers’ associations, in our case, the German Chemical Industry Association.

      In Germany, employers’ associations and unions typically negotiate collective bargaining agreements annually. However, collective bargaining agreements may be entered into for longer term. The current agreement that covers our employees has a term of 13 months, beginning April 2003. It grants employees a lump-sum payment of € 40 in the first month of the agreement and a subsequent 2.6 percent pay increase over the life of the agreement. A German collective bargaining agreement governs the employment of all employees up to a certain level organized in the relevant union. At Bayer, for these employee groups, even the employees who are not union members are granted rights under the collective bargaining agreements by way of individual agreement.

      There are 13 pay grades, based on job description, for our employees in positions governed by collective bargaining agreements. Our management employees, who have individual employment or service contracts, are organized in six contract levels. The Chemical Industry has a union for academics (Verband der angestellten Akademiker (VAA)). Apart from a specific collective bargaining agreement for young academics at entry level, management contracts are not subject to collective bargaining agreements.

      Each Bayer facility in Germany has a works council ( Betriebsrat ), elected by all non-management employees. Members serve a four-year term; the last elections took place in March 2002. The works councils facilitate communications between management and staff at the facility level. A joint works council ( Gesamtbetriebsrat ) serves a similar purpose at the company-wide level and the same applies to the Group works council ( Konzernbetriebsrat ) at Group level, Germany-wide. The rights and responsibilities of works councils are set forth in the German Works Council Constitution Act ( Betriebsverfassungsgesetz ). Within the given framework

115

Table of Contents

      A works council has generally no authority, however, to negotiate with an employer on wage and salary compensation or other issues included in or typically included in collective bargaining agreements between employers’ associations and labor unions, unless the relevant collective bargaining agreement provides otherwise. Under German labor law, employees may not legitimately strike during the term of the collective bargaining agreements. The provisions of the applicable collective bargaining agreements determine whether the right to strike in request of issues not covered by the applicable collective bargaining agreements is also excluded during such term. Works councils generally have no legal authority to call a work stoppage. On the European level, we put in practice a customized procedure for information and consultation of employee representatives based on a voluntary agreement between Bayer AG and the Group works council (Europaforum).

      Associated with restructuring measures within the Bayer Group, on November 7, 2003, the Board of Management and the employee representatives of the Supervisory Board agreed, subject to the approval of the competent employee representative bodies, upon principles for the extension of the existing agreement with the joint works council dated December 12, 2000 for safeguarding employment at several of our major German sites, taking effect January 1, 2004. Under these principles, an act of solidarity by all employees at German Bayer locations allows us to maintain 1,000 full time equivalent (FTE) positions more than previously planned. By reducing the performance-related variable income by up to 10 percent, personnel costs of those employees who are temporarily unassigned are covered. On this basis, we agreed that we would not, except in exceptional circumstances, lay off employees at our Leverkusen, Dormagen, Uerdingen, Elberfeld and Brunsbüttel sites for operational reasons before December 31, 2007. If exceptional circumstances arise that are beyond our control and lead to an overcapacity of employees, we have agreed to negotiate with the joint works council in order to find a solution that will serve the interests of the company and the employees to the greatest possible extent.

Employee Pension Plan

      All employees who have not reached the age of 55 before entering into employment with Bayer AG must join Bayer AG’s pension fund ( Bayer-Pensionskasse ). As a member of the Pensionskasse, an employee makes a monthly contribution of 2 percent of his or her monthly salary (up to the threshold for the statutory pension insurance ( gesetzliche Rentenversicherung ), which for 2003 is € 5,100 per month or € 61,200 per year) to the pension fund. These contributions are withheld from the member’s salary. Bayer AG also contributes to the Pensionskasse . Upon retirement, the employee is entitled to receive a monthly basic pension payment ( Grundrente ) from the Pensionskasse if the employee was employed by Bayer AG, or was a member of the Pensionskasse, for at least five years. Employees whose annual salary exceeds the annual salary threshold for statutory pension insurance ( gesetzliche Rentenversicherung ) as set forth above by up to € 45,700 are entitled to receive an additional monthly pension payment from an additional pension plan ( Zusatzrente ), for which book reserves are included in the balance sheet. Employees whose annual earnings exceed the total of € 61,200 plus € 45,700 may become eligible for the grant of an individual pension promise. Bayer AG includes these individual pension entitlements also as book reserves in the balance sheet.

116

Table of Contents