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28 Share-based compensation - Annual Report 2015 - DSM

28 Share-based compensation

Under the DSM Stock Incentive Plan, performance-based and non-performance-based stock options or Share Appreciation Rights (SARs) are granted to senior management. Such a grant takes place on the first day on which the DSM stock is quoted ex-dividend following the Annual General Meeting of Shareholders. The opening price of the DSM stock on that day is the exercise price of the stock options and SARs.

Since 2011, only stock options have been granted, and Share Appreciation Rights are no longer used as share-based compensation.

Stock Options and SARs have a term of eight years and are subject to a vesting period of three years. After this three-year period, one third of the stock options and SARs (non-performance-related) will vest and two thirds of the stock options and SARs that are performance-based will become exercisable in whole, in part, or not at all, depending on the total shareholder return (TSR) achieved by DSM in comparison with a peer group. Non-vested performance based stock options and SARs will be forfeited. If employment is terminated prior to the vesting date, specific rules regarding vesting and forfeitures apply. The exercise of stock incentives is regulated.

For members of the Managing Board specifically, only LTI performance shares have been granted since 2010 (no longer stock options). LTI performance shares vest after three years upon the realization of a predefined performance measure. The performance schedule is the same as that for stock options.

For LTI performance shares, see note 9 to the financial statements of the parent company.

All stock options and LTI performance shares are settled by physical delivery of DSM shares, while SARs are settled in cash.

Table 1: Overview of stock options and Share Appreciation Rights for management

Overview of stock options and Share Appreciation Rights for management
Year of issue
Outstanding at 31 Dec. 2014
In 2015
Outstanding at 31 Dec. 2015
Fair value on grant date (€)
Exercise price (€)
Expiry date
Granted
Exercised
Average
price (€)
Forfeited/
expired
                   
2007
103,188
-
(103,188)
51.04
-
-
7.69
33.60
30 Mar. 2015
2008
337,904
-
(103,750)
51.46
(3,125)
231,029
5.73
29.79
28 Mar. 2016
2009
327,700
-
(42,800)
51.38
(3,100)
281,800
2.83
21.10
27 Mar. 2017
2010
520,625
-
(64,500)
52.00
-
456,125
6.07
33.10
6 Apr. 2018
2011
1,118,508
-
(194,525)
52.69
(2,500)
921,483
9.60
46.20
2 May 2019
20121,2
2,665,163
-
(277,875)
52.96
(1,631,025)3
756,263
6.88
40.90
15 May 2020
20131
3,047,663
-
(29,000)
53.97
(270,625)3
2,748,038
9.23
48.91
7 May 2021
20141
2,967,613
-
-
-
(316,000)3
2,651,613
10.66
52.00
9 May 2022
20151
-
3,115,000
-
-
(143,250)3
2,971,750
9.89
50.98
5 May 2023
                   
2015 Total
11,088,364
3,115,000
(815,638)
52.34
(2,369,625)
11,018,101
     
Of which vested
2,767,500
       
3,188,150
     
                   
 
at 31 Dec. 2013
       
at 31 Dec. 2014
     
2014 Total
10,353,506
3,018,463
(599,375)
51.55
(1,684,230)
11,088,364
     
Of which vested
1,823,017
       
2,767,500
     
1 Stock options will partly vest, and may therefore be immediately exercised, upon termination of employment in connection with divestments, retirement or early retirement. The remaining term to exercise stock options or SARs after their vesting as a result of divestments, retirement or early retirement is limited to three years (the remaining term to exercise in the case of regular vesting is five years).
2 Based on TSR performance, the stock incentives tied to performance granted in 2012 did only partially vest; the remaining part has been forfeited.
3 Number of forfeited options: 1,631,025 (2012), 270,625 (2013), 316,000 (2014) and 126,750 (2015).

Certain employees in the Netherlands are entitled to employee stock options that are granted on the first day on which the DSM stock is quoted ex-dividend following the Annual General Meeting of Shareholders. The opening price of the DSM stock on that day is the exercise price of the stock options. Employee stock options can immediately be exercised and have a term of five years.

Table 2: Overview of stock options for employees

Overview of stock options for employees
Year of issue1
Outstanding at 31 Dec. 2014
In 2015
Outstanding at 31 Dec. 2015
Fair value on grant date (€)
Exercise price (€)
Exercise period until
Granted
Exercised
Average
price (€)
Forfeited/expired
                   
2011
236,675
-
(41,830)
52.84
(2,470)
192,375
10.35
46.20
May 2016
2012
194,060
-
(32,755)
52.50
(2,460)
158,845
6.79
40.90
May 2017
2013
188,295
-
(28,875)
53.35
(3,855)
155,565
6.51
48.91
May 2018
2014
308,460
-
(33,185)
54.05
(12,970)
262,305
5.68
52.00
May 2019
2015
-
130,385
(15,765)
53.84
(555)
114,065
4.50
50.98
May 2020
                   
2015 Total
927,490
130,385
(152,410)
53.23
(22,310)
883,155
     
                   
2014 Total
708,387
314,660
(74,797)
49.88
(20,760)
927,490
     
1 Based on the 2009 result, no employee option rights were granted in 2010
Measurement of fair value

The costs of option plans are measured by reference to the fair value of the options at the date at which the options are granted. The fair value is determined using the Black-Scholes model, taking into account market conditions linked to the price of the DSM share. Stock-price volatility is determined on the basis of historical volatilities of the DSM share price measured each month over a period equal to the expected option life. The costs of these options are recognized in the income statement (Employee benefits costs).

The following assumptions were used in the Black-Scholes model to determine the fair value at grant date:

Table 3

 
2015
2014
Management options
   
Risk-free rate
0.18%
0.76%
Expected option life in years
6
6
Nominal option life in years
8
8
Share price
50.98
52.00
Exercise price
50.98
52.00
Volatility
31%
31%
Expected dividend
3.24%
3.17%
Fair value of option granted
9.89
10.66
     
Employee options
   
Risk-free rate
(0.12%)
0.22%
Expected option life in years
2.5
2.5
Nominal option life in years
5
5
Share price
50.98
52.00
Exercise price
50.98
52.00
Volatility
20.5%
23.5%
Expected dividend
3.24%
3.17%
Fair value of option granted
4.50
5.68

In the costs for wages and salaries an amount of €21 million is included for share-based compensation (2014: €19 million).The following table specifies the share-based compensation:

Table 4: Share-based compensation

Share-based compensation
 
2015
2014
     
Stock options
18
18
Share appreciation rights
-
(1)
Performance shares
3
2
     
Total expense
21
19