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:

  • performance shares: rights to receive common shares in the future based on performance and service conditions;
  • restricted shares: rights to receive common shares in the future based on a service condition;
  • Options on its common shares, including the 2012 and 2013 Accelerate! grant.

Since 2013 the Board of Management and other members of the Executive Committee, executives and certain selected employees are granted performance shares. Restricted shares are granted only to new employees or certain selected employees. Prior to 2013 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.

Furthermore, as part of the Accelerate! program, the Company has granted options (Accelerate! options) and restricted shares (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. 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. Accelerate! shares fully vested at December 31, 2013.

Share-based compensation costs were EUR 85 million (2013: EUR 104 million, 2012: EUR 80 million). The amount recognized as an expense is adjusted for forfeiture. USD-denominated performance shares, restricted shares and options are granted to employees in the United States only.

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 amount recognized as an expense is adjusted for actual performance of adjusted Earnings Per Share growth since this is a non-market performance condition. It is not adjusted for non-vesting or extra vesting of performance shares due to a relative Total Shareholders’ Return performance that differs from the performance anticipated at the grant date, since this is a market-based performance condition.

The fair value of the performance shares is measured based on Monte-Carlo simulation, which takes into account dividend payments between the grant date and the vesting date by including reinvested dividends, the market conditions expected to impact relative Total Shareholders’ Return performance in relation to selected peers, and the following weighted-average assumptions:

Philips Group
Assumptions used in Monte-Carlo simulation for valuation in %
2014
 
2014
EUR-denominated
 
Risk-free interest rate
0.35%
Expected dividend yield
3.9%
Expected share price volatility
25%
 
 
USD-denominated
 
Risk-free interest rate
0.35%
Expected dividend yield
3.9%
Expected share price volatility
27%

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The assumptions were used for these calculations only and do not necessarily represent an indication of Management’s expectation of future developments for other purposes. 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, 2014 and changes during the year are presented below:

Philips Group
Performance share plans
2014
 
shares1)
weighted average grant-date fair value
EUR-denominated
 
 
Outstanding at January 1, 2014
3,442,923
23.53
Granted
3,405,781
22.36
Forfeited
544,702
23.29
Outstanding at December 31, 2014
6,304,002
22.92
 
 
 
USD-denominated
 
 
Outstanding at January 1, 2014
2,298,226
30.77
Granted
2,264,889
30.10
Forfeited
362,215
30.42
Outstanding at December 31, 2014
4,200,900
30.44
1)
Excludes dividend declared between grant date and vesting date (EUR-denominated: 332,757 and USD-denominated: 238,833)
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At December 31, 2014, a total of EUR 173 million of unrecognized compensation costs relate to non-vested performance shares. These costs are expected to be recognized over a weighted-average period of 2.0 years.

Restricted shares

The fair value of restricted shares is equal to the share price at grant date less the present value, using the risk-free interest rate, of estimated future 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, 2014 and changes during the year are presented below:

Philips Group
Restricted shares
2014
 
shares1)
weighted average grant-date fair value
EUR-denominated
 
 
Outstanding at January 1, 2014
1,065,169
15.31
Granted
169,800
21.93
Vested/Issued
657,566
16.19
Forfeited
51,941
14.66
Outstanding at December 31, 2014
525,462
16.44
 
 
 
USD-denominated
 
 
Outstanding at January 1, 2014
1,140,246
20.33
Granted
173,906
29.99
Vested/Issued
642,209
21.27
Forfeited
71,264
25.47
Outstanding at December 31, 2014
600,679
21.51
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
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At December 31, 2014, a total of EUR 12 million of unrecognized compensation costs relate to non-vested restricted shares. These costs are expected to be recognized over a weighted-average period of 1.5 years.

Option plans

The Company granted options that expire after 10 years. These options vest after 3 years, provided that the grantee is still employed with the Company. A limited number of options granted to certain employees of acquired business may contain accelerated vesting. As of December 31, 2014 there are no non-vested options which contain non-market performance conditions.

The following tables summarize information about the Company’s options as of December 31, 2014 and changes during the year:

Philips Group
Options on EUR-denominated listed share
2014
 
options
weighted average exercise price
Outstanding at January 1, 2014
18,657,828
21.63
Exercised
2,436,583
21.03
Forfeited
908,220
22.33
Expired
236,071
24.13
Outstanding at December 31, 2014
15,076,954
21.65
 
 
 
Exercisable at December 31, 2014
11,763,646
23.54

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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, 2014, was 4.6 years and 3.8 years, respectively. The aggregate intrinsic value of the options outstanding and options exercisable at December 31, 2014, was EUR 57 million and EUR 26 million, respectively.

The total intrinsic value of options exercised during 2014 was EUR 11 million (2013: EUR 15 million, 2012: EUR 3 million).

Philips Group
Options on USD-denominated listed share
2014
 
options
weighted average exercise price
Outstanding at January 1, 2014
13,449,570
29.74
Exercised
1,271,182
28.00
Forfeited
675,761
31.37
Expired
140,791
28.79
Outstanding at December 31, 2014
11,361,836
29.84
 
 
 
Exercisable at December 31, 2014
8,724,979
32.93

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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, 2014, was 4.6 years and 3.8 years, respectively. The aggregate intrinsic value of the options outstanding and options exercisable at December 31, 2014, was USD 34 million and USD 10 million, respectively.

The total intrinsic value of options exercised during 2014 was USD 9 million (2013: USD 17 million, 2012: USD 4 million).

At December 31, 2014, a total of EUR 2 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 0.3 years. Cash received from exercises under the Company’s option plans amounted to EUR 77 million in 2014 (2013: EUR 84 million, 2012: EUR 19 million. The actual tax deductions realized as a result of option exercises totaled approximately EUR 3 million in 2014 (2013: EUR 5 million, 2012: EUR 1 million).

The outstanding options as of December 31,2014 are categorized in exercise price ranges as follows:

Philips Group
Outstanding options
2014
exercise price
options
intrinsic value in millions
weighted average remaining contractual term
EUR-denominated
 
 
 
10-15
4,259,713
42
6.6 yrs
15-20
777,934
4
1.7 yrs
20-25
6,413,918
11
5.2 yrs
25-30
1,502,505
1.3 yrs
30-35
2,122,884
2.3 yrs
Outstanding options
15,076,954
57
4.6 yrs
 
 
 
 
USD-denominated
 
 
 
15-20
3,025,421
30
6.7 yrs
20-25
297,375
2
7.0 yrs
25-30
2,359,334
2
5.2 yrs
30-35
2,478,397
3.7 yrs
35-40
1,627,434
3.2 yrs
40-55
1,573,875
2.3 yrs
Outstanding options­
11,361,836
34
4.6 yrs

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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 2014 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, 2014.

The following table summarizes information about the Company’s Accelerate! options as of December 31, 2014 and changes during the year:

Philips Group
Accelerate! options
2014
 
options
weighted average exercise price
EUR-denominated
 
 
Outstanding at January 1, 2014
2,854,000
15.62
Exercised
1,048,117
15.24
Forfeited
37,083
15.24
Outstanding at December 31, 2014
1,768,800
15.86
 
 
 
Exercisable at December 31, 2014
1,616,800
15.24
 
 
 
USD-denominated
 
 
Outstanding at January 1, 2014
795,000
20.02
Exercised
336,200
20.02
Outstanding at December 31, 2014
458,800
20.02
 
 
 
Exercisable at December 31, 2014
458,800
20.02

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The exercise prices of the Accelerate! options are EUR 15.24 and EUR 22.43 for EUR-denominated options and is USD 20.02 for USD-denominated options. The weighted average remaining contractual term for EUR-denominated Accelerate! options outstanding and exercisable at December 31, 2014 is 7.2 and 7.1 years, respectively. The weighted average remaining contractual term for USD-Accelerate! options outstanding and exercisable at December 31, 2014 is 7.1 years. The aggregate intrinsic value of the EUR-denominated Accelerate! options outstanding and exercisable at December 31, 2014, was EUR 15 million and EUR 14 million, respectively. The aggregate intrinsic value of the USD-denominated Accelerate! options outstanding and exercisable at December 31, 2014, was USD 4 million and USD 4 million, respectively.

Cash received from exercises for EUR-denominated and USD-denominated Accelerate! options amounted to EUR 21 million in 2014. The actual tax deductions realized as a result of Accelerate! options exercises totaled approximately EUR 1 million in 2014.

The total intrinsic value of Accelerate! options exercised during 2014 was EUR 10 million for EUR-denominated options and USD 5 million for USD-denominated options.

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 1,326,548 shares were bought by employees in 2014 under the plan at an average price of EUR 24.94 (2013: 1,425,048 shares at EUR 21.92; 2012: 1,906,183 shares at EUR 15.69).

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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.

SF6 (Sulfur hexafluoride) is used in the electrical industry as a gaseous dielectric medium.

CO2-equivalent or carbon dioxide equivalent is a quantity that describes, for a given mixture and amount of greenhouse gas, the amount of CO2 that would have the same global warming potential (GWP), when measured over a specified timescale (generally 100 years).