Share-based compensation

The purpose of the share-based compensation plans is to align the interests of management with those of shareholders by providing incentives to improve the Company’s performance on a long-term basis, thereby increasing shareholder value.

The Company has the following plans:

  • options on its common shares;
  • rights to receive common shares in the future based on a service condition (restricted shares);
  • rights to receive common shares in the future based on performance and service conditions (performance shares).

Restricted shares and options were granted to members of the Board of Management and other members of the Executive Committee, executives and certain selected employees. Options were last granted in January 2013. Restricted shares are still granted to new employees or certain selected employees.

Furthermore, in January 2012 and 2013, as part of the Accelerate! program, the Company has granted the following:

  • options on its common shares (Accelerate! options);
  • rights to receive common shares in the future (Accelerate! shares).

These Accelerate! options and shares were granted to a group of approximately 500 key employees below the level of Board of Management in January 2012 and to the Board of Management in January 2013.

In May 2013 a new long-term incentive plan was approved at the Annual General Meeting of Shareholders granting performance shares to members of the Board of Management and other members of the Executive Committee, executives and certain selected employees.

USD-denominated options, restricted and performance shares are granted to employees in the United States only.

Share-based compensation costs were EUR 109 million (EUR 91 million, net of tax), EUR 86 million (EUR 75 million, net of tax) and EUR 55 million (EUR 57 million, net of tax) in 2013, 2012 and 2011, respectively.

Option plans

Under the Company’s plans, options are granted at fair market value on the date of grant.

The Company granted options that expire after 10 years. Generally, these options vest after 3 years, provided the grantee is still employed with the Company. A limited number of options granted to certain employees of acquired businesses may contain accelerated vesting. As of December 31, 2013 there are no non-vested options which contain non-market performance conditions.

The fair values of the Company’s 2013, 2012 and 2011 option grants were estimated using a Black-Scholes option valuation model and the following weighted average assumptions:

 
 
2011
2012
2013
 
 
 
 
EUR-denominated
 
 
 
Risk-free interest rate
2.89%
1.87%
1.20%
Expected dividend yield
3.3%
4.7%
4.5%
Expected option life
6.5 yrs
6.5 yrs
6.5 yrs
Expected share price volatility
30%
32%
33%
 
 
 
 
USD-denominated
 
 
 
Risk-free interest rate
2.78%
1.23%
1.32%
Expected dividend yield
3.6%
4.5%
4.6%
Expected option life
6.5 yrs
6.5 yrs
6.5 yrs
Expected share price volatility
34%
38%
39%

The fair value of the Company’s 2013 and 2012 Accelerate! option grants were estimated using a Black-Scholes option valuation model and the following assumptions:

 
 
2012
2013
 
 
 
EUR-denominated
 
 
Risk-free interest rate
1.52%
0.89%
Expected dividend yield
4.3%
3.9%
Expected option life
6.5 yrs
6.5 yrs
Expected share price volatility
32%
32%
 
 
 
USD-denominated
 
 
Risk-free interest rate
1.19%
Expected dividend yield
4.0%
Expected option life
6.5 yrs
Expected share price volatility
38%

The assumptions were used for these calculations only and do not necessarily represent an indication of Management’s expectations of future developments.

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of subjective assumptions, including the expected price volatility.

The Company has based its volatility assumptions on historical experience for a period equal to the expected life of the options. The expected life of the options is also based upon historical experience.

The Company’s employee stock options have characteristics significantly different from those of traded options, and changes in the assumptions can materially affect the fair value estimate.

The following tables summarize information about the Company’s options as of December 31, 2013 and changes during the year:

Option plans (excluding Accelerate! options)
EUR-denominated
 
options
weighted average exercise price
 
 
 
Outstanding at January 1, 2013
23,109,265
21.43
Granted
35,193
22.28
Exercised
2,664,550
18.45
Forfeited
1,807,077
23.74
Expired
15,003
22.12
Outstanding at December 31, 2013
18,657,828
21.63
 
 
 
Exercisable at December 31, 2013
11,657,060
23.99

The exercise prices range from EUR 12.63 to EUR 32.04. The weighted average remaining contractual term for options outstanding and options exercisable at December 31, 2013, was 5.3 years and 3.8 years, respectively. The aggregate intrinsic value of the options outstanding and options exercisable at December 31, 2013, was EUR 104 million and EUR 41 million, respectively.

The weighted average grant-date fair value of options granted during 2013, 2012, and 2011 was EUR 4.21, EUR 2.84 and EUR 4.82, respectively. The total intrinsic value of options exercised during 2013, 2012, and 2011 was approximately EUR 15 million, EUR 3 million and EUR 1 million, respectively.

Option plans (excluding Accelerate! options)
USD-denominated
 
options
weighted average exercise price
 
 
 
Outstanding at January 1, 2013
16,606,652
29.04
Granted
22,275
28.69
Exercised
1,969,901
23.27
Forfeited
1,209,456
30.66
Expired
Outstanding at December 31, 2013
13,449,570
29.74
 
 
 
Exercisable at December 31, 2013
8,313,489
33.26

The exercise prices range from USD 16.76 to USD 44.15. The weighted average remaining contractual term for options outstanding and options exercisable at December 31, 2013, was 5.4 years and 3.9 years, respectively. The aggregate intrinsic value of the options outstanding and options exercisable at December 31, 2013, was USD 106 million and USD 40 million, respectively.

The weighted average grant-date fair value of options granted during 2013, 2012 and 2011 was USD 6.70, USD 4.56 and USD 7.47, respectively. The total intrinsic value of options exercised during 2013, 2012 and 2011 was USD 17 million, USD 4 million and USD 4 million.

At December 31, 2013, a total of EUR 9 million of unrecognized compensation costs relate to non-vested EUR and USD denominated options. These costs are expected to be recognized over a weighted-average period of 1.0 years. Cash received from exercises under the Company’s option plans amounted to EUR 84 million, EUR 19 million and EUR 20 million in 2013, 2012, and 2011, respectively. The actual tax deductions realized as a result of option exercises totaled approximately EUR 5 million, EUR 1 million and EUR 1 million, in 2013, 2012, and 2011, respectively.

The outstanding options are categorized in exercise price ranges as follows:

Option plans (excluding Accelerate! options)
exercise price
options
intrinsic value in millions
weighted average remaining contractual term
 
 
 
 
EUR-denominated
 
 
 
10-15
4,967,645
61
7.4 yrs
15-20
1,104,222
9
2.5 yrs
20-25
8,547,886
33
5.6 yrs
25-30
1,693,773
1
2.3 yrs
30-35
2,344,302
3.3 yrs
 
18,657,828
104
5.3 yrs
 
 
 
 
USD-denominated
 
 
 
15-20
3,406,981
62
7.6 yrs
20-25
335,769
5
7.8 yrs
25-30
3,220,919
26
5.3 yrs
30-35
2,943,429
12
4.7 yrs
35-40
1,813,212
1
4.2 yrs
40-55
1,729,260
3.3 yrs
­
13,449,570
106
5.4 yrs

The aggregate intrinsic value in the tables and text above represents the total pre-tax intrinsic value (the difference between the Company’s closing share price on the last trading day of 2013 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders if the options had been exercised on December 31, 2013.

The following table summarizes information about the Company’s Accelerate! options as of December 31, 2013 and changes during the year:

Accelerate! options
 
options
weighted average exercise price
 
 
 
EUR-denominated
 
 
Outstanding at January 1, 2013
2,927,000
15.24
Granted
152,000
22.43
Forfeited
225,000
15.24
Outstanding at December 31, 2013
2,854,000
15.62
 
 
 
Exercisable at December 31, 2013
2,722,000
15.29
 
 
 
USD-denominated
 
 
Outstanding at January 1, 2013
860,000
20.02
Granted
Forfeited
65,000
20.02
Outstanding at December 31, 2013
795,000
20.02
 
 
 
Exercisable at December 31, 2013
795,000
20.02

The exercise price of the Accelerate! options granted in 2012 are EUR 15.24 and USD 20.02 and in 2013 EUR 22.43. The weighted average remaining contractual term for EUR and USD Accelerate! options outstanding and exercisable at December 31, 2013 was 8.1 years. The aggregate intrinsic value of the Accelerate! options outstanding at December 31, 2013, was EUR 31 million and USD 13 million, respectively.

The grant-date fair value of Accelerate! options granted during 2013 was EUR 4.41 per option. At December 31, 2013 there are no unrecognized compensation costs related to both EUR and USD Accelerate! options. At December 31, 2013 all performance targets under the Accelerate! program, which were based on the 2013 mid-term financial targets, have been met.

Restricted and Accelerate! shares

The fair value of restricted and Accelerate! shares is equal to the fair value of the share at grant date less the present value, using the risk-free interest rate, of dividends which will not be received up to the vesting date.

The Company issues restricted shares that, in general, vest in equal annual installments over a three-year period, starting one year after the date of grant. For grants up to and including January 2013 the Company granted 20% additional (premium) shares, provided the grantee still holds the shares after three years from the delivery date and the grantee is still with the Company on the respective delivery dates.

A summary of the status of the Company’s restricted shares as of December 31, 2013 and changes during the year are presented below:

Restricted shares (excluding Accelerate! shares)1)
 
shares
weighted average grant-date fair value
 
 
 
EUR-denominated
 
 
Outstanding at January 1, 2013
1,954,985
16.45
Granted
85,296
21.90
Vested/Issued
885,733
18.07
Forfeited
89,379
16.01
Outstanding at December 31, 2013
1,065,169
15.31
 
 
 
USD-denominated
 
 
Outstanding at January 1, 2013
1,924,156
20.99
Granted
114,127
31.48
Vested/Issued
795,668
23.14
Forfeited
102,369
20.18
Outstanding at December 31, 2013
1,140,246
20.33
1)
Excludes 20% additional (premium) shares that may be received if shares delivered under the restricted share rights plan are not sold for a three-year period

At December 31, 2013, a total of EUR 16 million of unrecognized compensation costs relate to non-vested restricted shares. These costs are expected to be recognized over a weighted-average period of 1.8 years.

A summary of the status of the Company’s Accelerate! shares as of December 31, 2013 and changes during the year are presented below:

Accelerate! shares
 
shares
weighted average grant-date fair value
 
 
 
EUR-denominated
 
 
Outstanding at January 1, 2013
2,927,000
13.75
Granted
152,000
21.68
Forfeited
225,000
13.75
Vested
2,854,000
14.17
Outstanding at December 31, 2013
 
 
 
USD-denominated
 
 
Outstanding at January 1, 2013
860,000
18.05
Granted
Forfeited
65,000
18.05
Vested
795,000
18.05
Outstanding at December 31, 2013

On January 28, 2014 the Supervisory Board resolved that all performance targets under the Accelerate! program, which were based on the 2013 mid-term financial targets, have been met. This means that in accordance with IFRS accounting requirements the Accelerate! shares vested and that at December 31, 2013 there are no unrecognized compensation costs to both EUR and USD Accelerate! shares. After delivery an additional two-year holding period applies, except for Accelerate! shares granted to the Board of Management of which after delivery an additional four-year holding period applies.

Performance shares

The performance is measured over a three-year performance period. The performance shares have two performance conditions, relative Total Shareholders’ Return compared to a peer group of 21 companies and adjusted Earnings Per Share growth. The performance shares vest three years after the grant date. The number of performance shares that will vest is dependent on achieving the two performance conditions, which are equally weighted, and provided that the grantee is still employed with the Company.

The fair value of the performance shares is measured based on Monte-Carlo simulation and the following weighted average assumptions:

 
 
2013
 
 
EUR-denominated
 
Risk-free interest rate
0.55%
Expected dividend yield
3.7%
Expected share price volatility
27%
 
 
USD-denominated
 
Risk-free interest rate
0.55%
Expected dividend yield
3.7%
Expected share price volatility
30%

The Company has based its volatility assumptions on historical experience measured over a ten-year period.

A summary of the status of the Company’s performance share plans as of December 31, 2013 and changes during the year are presented below:

 
 
shares
weighted average grant-date fair value
 
 
 
EUR-denominated
 
 
Granted
3,509,518
23.53
Forfeited
66,595
23.45
Outstanding at December 31, 2013
3,442,923
23.53
 
 
 
USD-denominated
 
 
Granted
2,419,445
30.77
Forfeited
121,219
30.70
Outstanding at December 31, 2013
2,298,226
30.77

At December 31, 2013, a total of EUR 116 million of unrecognized compensation costs relate to non-vested performance shares. These costs are expected to be recognized over a weighted-average period of 2.3 years.

Other plans

Employee share purchase plan

Under the terms of employee stock purchase plans established by the Company in various countries, substantially all employees in those countries are eligible to purchase a limited number of Philips shares at discounted prices through payroll withholdings, of which the maximum ranges from 10% to 20% of total salary. Generally, the discount provided to the employees is in the range of 10% to 20%. A total of 1,425,048 shares were bought by employees in 2013 under the plan at an average price of EUR 21.92 (2012: 1,906,183 shares at EUR 15.69; 2011: 1,851,718 shares at EUR 17.93).

Convertible personnel debentures

In the Netherlands, the Company issued personnel debentures with a 2-year right of conversion into its common shares starting three years after the date of issuance, with a conversion price equal to the share price on that date. The last issuance of this particular plan was in December 2008. From 2009 onwards, employees in the Netherlands are able to join an employee share purchase plan as described in the previous paragraph. In 2013, 509,195 shares were issued in conjunction with conversions at an average price of EUR 14.21 (2012: 270,827 shares at an average price of EUR 14.22; 2011: 1,079 shares at an average price of EUR 24.66).

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This is an interactive electronic version of the Philips Annual Report 2013 and also contains certain information in summarized form. The contents of this version are qualified in their entirety by reference to the printed version of the full Philips Annual Report 2013. This printed version is available as a PDF file on this website. Information about: forward-looking statements, third-party market share data, fair value information, IFRS basis of presentation, use of non-GAAP information, statutory financial statements and management report, reclassifications and analysis of 2013 compared to 2012.

The dividend yield is the annual dividend payment divided by Philips’ market capitalization. All references to dividend yield are as of December 31 of the previous year.