Remuneration policy regarding the Managing Board and the Supervisory Board

This chapter comprises two parts. The first part outlines the remuneration policy as approved in 2010 by the Annual General Meeting of Shareholders. The second part contains details of the remuneration in 2010 and changes expected in 2011.

Remuneration policy

The objective of DSM’s remuneration policy is to attract, motivate and retain qualified and expert individuals that the company needs in order to achieve its strategic and operational objectives, whilst acknowledging the societal context around remuneration and recognizing the interests of DSM's stakeholders. The following elements are taken into consideration:

• 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 line with the DSM values and business principles as reflected in the DSM Code of Business Conduct. 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. As a result the structure of the remuneration package for the Managing Board is designed to balance short-term operational performance with the medium and long-term objective of creating sustainable value within the company, while taking account of the interests of its 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 and European) multinational companies that are similar to DSM in terms of size and complexity.
• 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, amended Dutch corporate governance clauses, societal and market trends and the interests of stakeholders.
• DSM’s policy is to offer the Managing Board a total direct compensation approaching the median of the labor-market peer group.

Labor-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 will take external reference data into account in determining adequate remuneration levels. For this purpose, a specific labor-market peer group has been defined which consists of a number of Dutch and European companies that are more or less comparable to DSM in terms of size, international scope and business portfolio.

The Supervisory Board regularly reviews the peer group to ensure that its composition is still appropriate.

The labor-market peer group currently consists of the following twelve companies:

As part of its remuneration policy DSM will benchmark its remuneration package against the packages offered by the labor-market peer group once every three years. In addition, the company will apply a yearly increase to the package based on the ‘general increase’ (market movement) for DSM executives in the Netherlands. The initial benchmarking of the remuneration policy will be conducted in Q1 2011.

Total Direct Compensation (TDC)

The total direct compensation of the Managing Board consists of:

1. Base salary
2. Variable income
   - Performance-related Short-Term Incentive (STI)
   - Performance-related Long-Term Incentive (LTI)

In addition to this total direct compensation, the members of the Managing Board participate in the Dutch pension scheme for DSM employees in the Netherlands and they are entitled to other benefits, such as a company car and representation allowance.

As a matter of policy, the balance between fixed income and variable income (Short-Term plus Long-Term Incentive) within total direct compensation (on target) will be 50% - 50%.

Value in % of Total Direct Compensation (on target):

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 based on a three-year remuneration benchmark. Adjustment of the base salary is at the discretion of the Supervisory Board.

Variable income

The variable income part of remuneration consists of the Short-Term and Long-Term Incentives.

As a matter of policy, the distribution between Short-Term and Long-Term Incentives for (on target) performance has been fixed at 50% - 50%. This results in a balance between short-term result and long-term value creation. As indicated above, the on-target incentive potential of the variable income (Short-Term and Long-Term Incentives) will be 100% of base salary.

The parameters relating to the various elements of the variable income part of the remuneration are established and where necessary adjusted by and at the discretion of the Supervisory Board, taking into account the general rules and principles of the remuneration policy itself.

Distribution of variable income (on target):

Short-Term Incentive (STI)

Managing Board members are eligible to participate in a Short-Term Incentive (STI) scheme. The scheme is designed to reward Short-Term operational performance with the long-term objective of creating sustainable value, taking account of the interests of all stakeholders.

The Short-Term Incentive opportunity amounts to 50% of the annual base salary for on-target performance (100% in the case of excellent performance). The part of the STI that is related to financial targets accounts for 25% of base salary and the other 25% relates to sustainability and other value-creating targets.

Short-Term Incentive (STI) linked to financial targets

The part of the STI that is linked to financial targets (25%) includes elements related to operational performance, being operating profit (EBIT), gross free cash flow and net sales growth (organic), reflecting short-term financial results.

The weighting given to the individual financial elements in the bonus is as follows: EBIT 10%, gross free cash flow 7.5% and organic net sales growth 7.5% of annual base salary for on-target performance.

The three financial-target-related Short-Term Incentive elements can be derived from the financial statements.

Short-Term Incentive (STI) linked to sustainability and other value-creating areas

The part of the STI that is linked to non-financial targets (25%) relates to sustainability and other value-creating areas.

For 2010/2011 three ‘first tier’ value-creating-performance measures have been defined in the area of sustainability. The distribution over these three targets is set by the Supervisory Board. On a regular basis, following proper evaluation further refinement/adaptations of performance measures in the area of sustainability and their weight will take place.

The following shared targets linked to sustainability have been defined for the STI:

• ECO+ products − Profitable ECO+ product development, consisting of:

• • Percentage of phase transitions from ‘Feasibility’ (phase 2) to ‘Development’ (phase 3) that meet ECO+ criteria
  • Percentage of successful product launches that meet ECO+ criteria

• Energy-efficiency improvement − linked to Triple P target of 20% increased energy efficiency in 2020 compared to 2008
• Employee Engagement Index− related to the High Performance norm in industry

The STI targets on sustainability can be defined as follows:

• ECO+ products − ECO+ solutions are products and services that, when considered over their whole life cycle, offer clear ecological benefits (in other words, a clearly lower eco-footprint) compared to the mainstream solutions they compete with. These ecological benefits can be created at any stage of the product life cycle − from raw material through manufacturing and use to potential re-use and end-of-life disposal. ECO+ solutions, in short, create more value with less environmental impact.
• Energy-efficiency improvement − Reduction of the amount of energy that is used per unit of product (known as energy efficiency).
• Engagement Index − An Employee Engagement Survey is conducted annually, focusing on a combination of perceptions that have a consistent impact on behavior and create a sense of ownership. Research has consistently shown that the four key elements (satisfaction, commitment, pride and advocacy) define engagement and link engagement to business performance metrics.

In addition to shared sustainability targets (20%), a limited number of individual non-financial targets (5%) will apply.

The 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.

The company does not disclose the actual targets, as they qualify as commercially sensitive information. However, full transparency will be given on target areas and definitions. Target setting and realization will be audited by external auditors.

Long-Term Incentives (LTI)

The Managing Board members will be eligible to receive performance-related shares. Stock options are no longer part of their Long-Term Incentive program.

Under the performance share plan, shares will conditionally be granted to Managing Board members. Vesting of these shares is conditional on the achievements of certain predetermined performance targets during a three-year period.

Two performance targets will apply for vesting of performance shares:

• Comparable Total Shareholder Return (TSR) performance versus a peer group
• Greenhouse-gas emissions (GHGE) reduction over volume related revenue

The LTI performance targets can be defined as follows:

• Total shareholder return (TSR)
  Used to compare the performance of different companies’ stocks and shares over time. It combines share price appreciation and dividends paid to show the total return to the shareholder. The relative TSR position reflects the market perception of overall performance relative to a reference group.
• Greenhouse-gas emissions (GHGE) reduction
  The definition of greenhouse gases (GHG) according to the Kyoto protocol includes carbon dioxide (CO₂), methane, nitrous oxide (N₂O), sulfur hexafluoride, hydrofluorocarbons and perfluorocarbons.

The scope for calculation of GHGE reduction is as follows:

1. 1. DSM’s direct emissions (on site or from DSM assets) mainly comprise CO₂ and N₂O (scope 1).
   2. DSM’s indirect emissions (emissions created on behalf of DSM in the generation of electricity or the delivery of energy via hot water or steam) relate to electricity from the grid. DSM relies on local suppliers (scope 2).
   3. DSM does not report in detail on scope 3 emissions (catch-all for remaining emissions that result from activities of the company (e.g. business travel)).

In the LTI plan, 50% of the performance-shares grant is linked to relative TSR, while 50% is based on GHGE reduction.

The policy level for the value of the Long-Term Incentive is set (on target) at 50% of base salary (75% in the case of excellent performance). The number of conditionally granted shares is set by dividing the policy level (50% of base salary) by a share price at the beginning of the year of the conditional grant. The annual grant level will fluctuate as a consequence of this mechanism.

In determining the number of shares to be conditionally granted, the Supervisory Board takes into account a discounted face value of shares. This method incorporates the actual share price and a fixed vesting probability multiplier.

Granting date

The shares are granted on the first ‘ex-dividend’ day following the Annual General Meeting of Shareholders at which DSM’s financial statements are adopted.

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 2010 consists of the following companies:

The TSR peer group reflects the relevant market in which DSM competes for shareholder preference. It includes sector-specific competitors that 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 (such as mergers and acquisitions) that determine the appropriateness of the composition of the performance peer group.

GHGE reduction as a performance measure

GHGE reduction over volume-related revenues in percentage points (over a 3 year period) will be used for the vesting of 50% of the performance shares.

Performance Incentive Zones

The number of shares that become unconditional after three years ('vesting') is determined on the basis of two equally weighted factors: DSM's performance relative to the average TSR performance of the peer group and DSM's GHGE reduction over volume-related revenue.

The following vesting schemes will apply:

The retention period for performance shares expires five years after the three-year vesting period or at termination of employment if this occurs earlier.

The final TSR 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 vesting period.

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 scheme of the Managing Board is equal to the pension scheme for the employees of DSM Executive Services B.V. and DSM employees in the Netherlands.

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. 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 Remuneration Committee 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 the Dutch corporate governance code (that is, 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).

Claw back / change in control

The Annual Report 2009 stated that DSM would implement claw-back and change-in-control clauses in the employment contracts for the Managing Board as soon as new legislation to this effect would enter into force. As this legislation has still not been approved by the Dutch parliament, the Supervisory Board has agreed that appropriate claw-back and change-in-control provisions will be introduced in the employment contracts, without waiting for the legislation in preparation.

Share ownership

The Supervisory Board will encourage the Managing Board to hold shares in the company to emphasize their confidence in the strategy and the company.

Loans

DSM does not provide any loans to members of the Managing Board.

Scenario analysis

The amended Dutch corporate governance code requires that the Supervisory Board ‘shall analyze possible outcomes of the variable income components and the effect on Managing Board remuneration’. Within DSM this analysis will be conducted at least every three years.

Remuneration in 2010

Remuneration of Managing Board in 2010

As part of its remuneration policy for the Managing Board DSM will benchmark its remuneration package against the packages offered by the labor-market peer group once every three years. In addition, the company will apply a yearly increase to the package based on the ‘general increase’ (market movement) for DSM executives in the Netherlands. The initial benchmarking of the Managing Board remuneration policy will be conducted in Q1 2011.

Base salary in 2010

The Supervisory Board reviewed whether circumstances justified an adjustment of the base-salary levels. Because of the uncertain economic circumstances, DSM paid close attention across the company to limiting salary increases. Against this background, the Supervisory Board granted the Managing Board's request not to increase their base salaries in 2010, just as they had requested for 2009. Managing Board base salaries were last increased at the beginning of 2008.

Short-Term Incentives (STI) for 2010

STI 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 STI level and pay-out

When they achieve all their targets, Managing Board members receive an incentive of 50% of their annual base salary. Outstanding performance can increase the STI level to 100% of the annual base salary.

The 2010 Integrated Annual Report presents the Short-Term Incentives that have been earned on the basis of results achieved in 2010. These Short-Term Incentives will be paid out in 2011.

The Supervisory Board has established the extent to which the targets for 2010 were achieved. The realization of the 2010 financial STI 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 STI targets. The average realization percentage was 89.13% of base salary. This reflects a prudent interpretation of the realization of the targets.

See the next page for a tabular overview of the actual Short-Term Incentive pay-out per individual Board member in 2010.

Performance shares in 2010

In 2010 performance shares were granted to the Managing Board on 6 April 2010. The following table shows the number of performance shares granted to the individual Board members:

For an overview of all granted and vested stock options and performance shares see Remuneration of the members of the Managing Board under note 10.

Pensions in 2010

The members of the Managing Board are participants in the Dutch pension fund Stichting Pensioenfonds DSM Nederland (PDN). The pension scheme (revised as of 1 January 2006) comprises the following elements:

• Retirement age 65 years (early retirement possible only by actuarial reduction of pension rights).
• The scheme includes a partner pension as well as a disability pension.
• Annual accrual of pension rights (old-age pension) over base salary exceeding €12,466 (reviewed annually) at a rate of 2%.
• Employee’s contribution of 2.5% of base salary up to €55,538 and 6.5% of pensionable salary above this amount (to be reviewed annually).
• Conditional defined benefit: indexation of pensions and pension rights, depending on PDN’s cover ratio.

Board members participate in the revised PDN pension plan (due to changed legislation on pre-pensions). For Mr. Sijbesma a transitional arrangement is applicable.

For DSM in the Netherlands, a new pension plan has been agreed with Labor Unions with effect from 1 January 2011. Among other changes, the new plan has a fixed employer contribution and is based on average pay and the pensionable age will be increased to 66 with effect from 1 January 2012. This pension plan is also applicable to members of the Managing Board.

Loans

DSM did not provide any loans to members of the Managing Board in 2010.

Purchasing shares

All members of the Managing Board have purchased shares in the company to emphasize their confidence in the strategy and the company. These share purchases are private transactions with private money. At 1 January 2011 the members of the Managing Board together held 45,556 shares in Royal DSM N.V. More information can be found in Information about the DSM share.

Total remuneration

The total remuneration paid (including pension costs relating to current and former Board members) of the Managing Board amounted to €3.7 million in 2010 (2009: €6.1 million). The decrease of €2.4 million was mainly due to the retirement of Mr. J. Zuidam and lower STI pay-outs over 2009 paid in 2010.

Overview of remuneration awarded to the Managing Board in 2010

The tables below show the remuneration awarded to the Managing Board in 2010.

Changes expected to the remuneration for the Managing Board in 2011

Base Salary

As base salaries for the Managing Board have not been increased since early 2008, the Supervisory Board will review an appropriate base salary increase in 2011 based on external benchmarking to be done in the first quarter of 2011.

Short-Term Incentive (STI)

After careful evaluation the Supervisory Board has decided to implement the following refinements and adaptations with effect from 2011:

Short-Term Incentive (STI) linked to financial targets

Instead of Operating profit as a financial performance measure, EBITDA will be used, in line with the targets of the new DSM Strategy.

The other financial measures remain unchanged.

Short-Term Incentive (STI) linked to sustainability and other value creating areas

- ECO+ products – instead of the two measures used in 2010, for 2011 only the percentage of successful product launches that meet ECO+ criteria will be used as a performance measure.

- Energy-efficiency improvement – given possible yearly volatility in this sustainability area, the Supervisory Board has decided to use a 3 year rolling average of energy-efficiency performance from 2011 onwards.

- Employee Engagement Index – remains as is.

The Supervisory Board reserves the right to include other sustainability targets which it considers relevant for DSM.

In addition to the shared sustainability targets for 20% of base salary on target pay-out, a limited number of individual non- financial targets (5%) will continue to apply.

Long-Term Incentives (LTI)

For 2011, the number of conditionally granted ordinary shares under the LTI program will be:
Chairman 24,000
Members 16,000

Supervisory Board remuneration in 2010

Remuneration policy for the Supervisory Board in 2010

The remuneration package for the Supervisory Board comprises an annual fixed fee and an annual committee-membership fee. The fixed fee for the Chairman of the Supervisory Board is €50,000. The members of the Supervisory Board each receive a fixed fee of €35,000.

Audit Committee membership is awarded €5,000 per member and € 7,500 for the Chairman. Nomination Committee and Remuneration Committee membership is awarded € 2,500 per member and € 3,750 for the Chairman. No fee is awarded to Corporate Social Responsibility Committee members since the related tasks are considered to be an extension of the Supervisory Board activities.

These fees were last increased in 2005.

Based on external benchmarking in the first quarter of 2011, the Supervisory Board will consider an appropriate increase in the remuneration of the Supervisory Board members.

In accordance with good corporate governance, the remuneration of the Supervisory Board is not dependent on the results of the company. This implies that neither stock options nor shares are granted to Supervisory Board members by way of remuneration.

If any shareholdings in DSM are held by Supervisory Board members, they serve as a long-term investment in the company. At year-end 2010 the members of the Supervisory Board held no shares in Royal DSM N.V.

DSM does not provide any loans to its Supervisory Board members.

Overview of remuneration awarded to the Supervisory Board in 2010

In the following table an overview is given of the remuneration awarded to the Supervisory Board in 2010.

DSM did not provide any loans to its Supervisory Board members in 2010.