Purchases of goods and services 130 143 85 Receivables from related parties 13 39 14 Payables to related parties 4 4 4 Non-recourse financing of third-party receivables provided by an associate amounted to EUR 103 million in 2014 (2013: EUR 84 million; 2012: EUR 52 million). In light of the composition of the Executive Committee, the Company considers the members of the Executive Committee and the Supervisory board to be the key management personnel as defined in IAS 24 ‘Related parties’.
For remuneration details of the Executive Committee, the Board of Management and the Supervisory Board see note 29, Information on remuneration.
For employee benefit plans see note 20, Post- employment benefits.
28
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.
Group financial statements 12.9
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 valuationin % 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% 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)
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
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 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 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 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
29 Group financial statements 12.9
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).
29
Information on remuneration
Remuneration of the Executive Committee
In 2014, the total remuneration costs relating to the members of the Executive Committee (including the members of the Board of Management) amounted to EUR 16,878,909 (2013: EUR 24,773,537, 2012: EUR 18,585,112) consisting of the elements in the table below.
Philips Group
Remuneration costs of the Executive Committee in EUR 2012 - 2014 2012 2013 2014 Salary 5,640,090 6,011,557 6,513,027 Annual incentive1) 4,839,949 4,422,732 1,526,658 Performance shares2) 1,049,205 6,478,554 3,357,142 Stock options2) 1,194,444 2,020,040 583,755
Restricted share rights2) 1,566,448 1,115,504 409,809
Pension costs 2,054,516 2,277,705 2,458,759
Other compensation3) 2,240,460 2,447,445 2,029,759
1) The annual incentives are related to the performance in the year reported which are paid out in the subsequent year
2) Costs of performance shares, stock options and restricted share rights are based on accounting standards (IFRS) and do not reflect the value of stock options at the end of the lock up period and the value of performance shares and restricted share rights at the vesting/release date. Costs for the Accelerate! Grant are included in 2012 and 2013
3) The stated amounts mainly concern (share of) allowances to members of the Executive Committee that can be considered as remuneration. In a situation where such a share of an allowance can be considered as (indirect) remuneration (for example, private use of the company car), then the share is both valued and accounted for here. The method employed by the fiscal authorities in the Netherlands is the starting point for the value stated. In 2012 and 2013 a crisis levy tax has been imposed by the Dutch government, amounting in total to EUR 1,245,944 for 2013 and to EUR 702,940 for 2012. These amounts are included in the amounts stated under Other compensation.
At December 31, 2014, the members of the Executive Committee (including the members of the Board of Management) held 1,050,080 (2013: 1,479,498, 2012: 1,376,913) stock options at a weighted average exercise price of EUR 18.53 (2013: EUR 18.69, 2012: EUR 18.23).
Remuneration of the Board of Management
In 2014, the total remuneration costs relating to the members of the Board of Management amounted to EUR 6,635,334 (2013: EUR 10,928,951, 2012: EUR 7,301,335).
At December 31, 2014, the members of the Board of Management held 586,500 stock options (2013: 586,500; 2012: 454,500) at a weighted average exercise price of EUR 19.60 (2013: EUR 19.60; 2012: EUR 18.78).
Philips Group
Remuneration costs of individual members of the Board of Managementin EUR 2012 - 2014
salary incentiveannual 1) performanceshares2) optionsstock 2)
restricted share