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Share-based compensation

12 Months Ended

Dec. 31, 2019

Disclosure of share-based payment arrangements [text block]

26Share-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; and
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 are only granted performance shares. Performance shares as well as restricted shares can be granted to executives, certain selected employees and new employees. Prior to 2013 options were also granted.

Under the terms of employee stock purchase plans established by the company in various countries, employees are eligible to purchase a limited number of Philips shares at discounted prices through payroll withholdings.

Share-based compensation costs were EUR 105 million (2018: EUR 102 million; 2017: EUR 122 million). This includes the employee stock purchase plan of EUR 7 million, which is not a share-based compensation that affects equity. In the Consolidated statements of changes in equity EUR 101 million is recognized in 2019 and represent the costs of the share-based compensation plans, including EUR 3 million of costs of former Philips employees which are now employed with Signify. 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 20 companies including Philips (2018: 20 companies, 2017; 20 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. The following weighted-average assumptions were used for the 2019 grants:

Risk-free rate: (0.58)%
Expected share price volatility: 20%

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, 2019 and changes during the year are presented below:

Philips Group

Performance shares

2019

	shares	weighted average grant-date fair value
EUR-denominated
Outstanding at January 1, 2019	4,738,099	32.54
Granted	1,183,900	40.38
Notional dividends¹⁾	90,183	39.15
Vested/Issued	3,187,475	24.81
Forfeited	246,510	37.24
Adjusted quantity²⁾	882,604	21.34
Outstanding at December 31, 2019	3,460,802	39.32

USD-denominated
Outstanding at January 1, 2019	2,878,048	37.74
Granted	808,652	45.28
Notional dividends¹⁾	57,569	44.82
Vested/Issued	1,865,456	28.36
Forfeited	174,758	44.36
Adjusted quantity²⁾	509,908	24.71
Outstanding at December 31, 2019	2,213,962	45.06

¹⁾Dividend declared in 2019 on outstanding shares.

²⁾Adjusted quantity includes the adjustments made to performance shares outstanding due to updates on the actual and expected EPS.

At December 31, 2019, a total of EUR 106 million of unrecognized compensation costs relate to non-vested performance shares (at December 31, 2018 EUR 111 million; at December 31, 2017 EUR 103 million). These costs are expected to be recognized over a weighted-average period of 1.87 years.

Restricted shares

The fair value of restricted shares is equal to the share price at grant date. The Company issues restricted shares that, in general, have a 3 year cliff-vesting period.

A summary of the status of the Company’s restricted shares as of December 31, 2019 and changes during the year are presented below:

Philips Group

Restricted shares

2019

	shares	weighted average grant-date fair value
EUR-denominated
Outstanding at January 1, 2019¹⁾	2,220,891	29.69
Granted	641,485	37.22
Notional dividends²⁾	45,433	34.44
Vested/Issued	920,463	24.65
Forfeited	120,481	33.50
Outstanding at December 31, 2019	1,866,864	34.63

USD-denominated
Outstanding at January 1, 2019¹⁾	1,905,867	33.58
Granted	614,062	41.83
Notional dividends²⁾	42,465	38.07
Vested/Issued	688,010	28.67
Forfeited	142,407	37.71
Outstanding at December 31, 2019	1,731,978	38.22

¹⁾Excludes premium shares on Restricted shares granted before 2013. (20% additional (premium) shares that may be received if shares delivered under the plan are not sold for three-year period).

²⁾Dividend declared in 2019 on outstanding shares.

At December 31, 2019, a total of EUR 59 million of unrecognized compensation costs relate to non-vested restricted shares (at December 31, 2018 EUR 59 million; at December 31, 2017 EUR 40 million). These costs are expected to be recognized over a weighted-average period of 1.82 years.

Option plans

The Company granted options that expire after ten years. These options vest after three years, provided that the grantee is still employed with the company. All outstanding options have vested as of December 31, 2019.

The following tables summarize information about the Company’s options as of December 31, 2019 and changes during the year:

Philips Group

Options on EUR-denominated listed share

2019

	options	weighted average exercise price
Outstanding at January 1, 2019	1,648,720	18.90
Exercised	659,128	18.86
Expired	54,885	15.42
Outstanding at December 31, 2019	934,707	19.14

Exercisable at December 31, 2019	934,707	19.14

The exercise prices range from EUR 12.63 to EUR 24.90. The weighted average remaining contractual term for options outstanding and options exercisable at December 31, 2019, was 1.5 years. The aggregate intrinsic value of the options outstanding and options exercisable at December 31, 2019, was EUR 23 million.

The total intrinsic value of options exercised during 2019 was EUR 13 million (2018: EUR 15 million, 2017: EUR 29 million),

Philips Group

Options on USD-denominated listed share

2019

	options	weighted average exercise price
Outstanding at January 1, 2019	1,633,868	26.13
Exercised	663,191	26.20
Expired	41,702	22.13
Outstanding at December 31, 2019	928,975	26.26

Exercisable at December 31, 2019	928,975	26.26

The exercise prices range from USD 16.76 to USD 33.51. The weighted average remaining contractual term for options outstanding and options exercisable at December 31, 2019, was 1.5 years. The aggregate intrinsic value of the options outstanding and options exercisable at December 31, 2019, was USD 21 million.

The total intrinsic value of options exercised during 2019 was USD 11 million (2018; USD 16 million, 2017: USD 22 million).

At December 31, 2019 there were no unrecognized compensation costs related to outstanding options. Cash received from exercises under the Company’s option plans amounted to EUR 28 million in 2019 (2018: EUR 57 million, 2017: EUR 128 million), The actual tax deductions realized as a result of USD option exercises totaled approximately EUR 2 million in 2019 (2018: EUR 3 million, 2017: EUR 5 million).

The outstanding options as of December 31, 2019 are categorized in exercise price ranges as follows:

Philips Group

Outstanding options

in millions of EUR unless otherwise stated

2019

	options	intrinsic value in millions	weighted average remaining contractual term
EUR-denominated
10-15	370,115	10.6	2.3 yrs
15-20	16,461	0.4	2.2 yrs
20-25	548,131	11.7	1.0 yrs
Outstanding options	934,707	22.8	1.5 yrs

USD-denominated
15-20	360,625	10.6	2.3 yrs
20-25	20,550	0.6	2.0 yrs
25-30	354,350	6.8	1.3 yrs
30-35	193,450	3.0	0.4 yrs
Outstanding options	928,975	20.9	1.5 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 2019 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, 2019.

The following table summarizes information about the Company’s Accelerate! options as of December 31, 2019 and changes during the year:

Philips Group

Accelerate! options

2019

	options	weighted average exercise price
EUR-denominated
Outstanding at January 1, 2019	296,750	16.57
Exercised	76,550	15.24
Outstanding at December 31, 2019	220,200	17.04

Exercisable at December 31, 2019	220,200	17.04

USD-denominated
Outstanding at January 1, 2019	123,300	20.02
Exercised	40,800	20.02
Expired	7,500	20.02
Outstanding at December 31, 2019	75,000	20.02

Exercisable at December 31, 2019	75,000	20.02

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, 2019 was 2.3 years. The weighted average remaining contractual term for USD-Accelerate! options outstanding and exercisable at December 31, 2019 was 2.1 years. The aggregate intrinsic value of the EUR-denominated Accelerate! options outstanding and exercisable at December 31, 2019, was EUR 5.8 million. The aggregate intrinsic value of the USD-denominated Accelerate! options outstanding and exercisable at December 31, 2019 was USD 2.2 million.

The total intrinsic value of Accelerate! options exercised during 2019 was EUR 2 million for EUR-denominated options (2018: EUR 4 million) and USD 1 million for USD-denominated options (2018: USD 1 million).

Cash received from exercises for EUR-denominated and USD-denominated Accelerate! options amounted to EUR 2 million in 2019 (2018: EUR 4 million). The actual tax deductions realized as a result of Accelerate! USD options exercises totaled approximately EUR 0.2 million in 2019 (2018: EUR 0.2 million).