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. Final vesting of the performance-based stock options depends on the total shareholder return (TSR) achieved by DSM in comparison with a peer group. The performance measurement of the 2016 option series is based on four equally weighted factors: Relative Total Shareholder Return (TSR) performance versus a peer group, Return on Capital Employed (ROCE) growth, Energy Efficiency Improvement (EEI), and Greenhouse-gas Emissions (GHGE) Efficiency Improvement. 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 12 'Remuneration of Managing Board and Supervisory Board' 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.

Overview of stock options and Share Appreciation Rights for management

Year of issue
Outstanding at 31 Dec. 2015
In 2016
Outstanding at 31 Dec. 2016
Fair value on grant date (€)
Exercise price (€)
Expiry date
Granted
Exercised
Average
price (€)
Forfeited/
expired
          
2008
231,029
-
(229,779)
46.58
(1,250)
-
5.73
29.79
28 Mar. 2016
2009
281,800
-
(238,400)
57.12
-
43,400
2.83
21.10
27 Mar. 2017
2010
456,125
-
(231,625)
57.31
-
224,500
6.07
33.10
6 Apr. 2018
2011
921,483
-
(494,432)
57.48
(15,125)
411,926
9.60
46.20
2 May 2019
2012
756,263
-
(387,013)
56.29
(1,250)
368,000
6.88
40.90
15 May 2020
20131,2
2,748,038
-
(536,675)
58.46
(1,595,775)3
615,588
9.23
48.91
7 May 2021
20141
2,651,613
-
(139,000)
59.30
(311,625)3
2,200,988
10.66
52.00
9 May 2022
20151
2,971,750
-
(78,750)
58.52
(314,125)3
2,578,875
9.89
50.98
5 May 2023
20161
-
2,815,225
(4,500)
61.77
(66,250)3
2,744,475
9.36
52.57
3 May 2024
          
2016 Total
11,018,101
2,815,225
(2,340,174)
56.54
(2,305,400)
9,187,752
   
Of which vested
3,188,150
    
1,983,364
   
          
 
at 31 Dec. 2014
    
at 31 Dec. 2015
   
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
   

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 2013 did not vest and have been forfeited.

3 Number of forfeited options: 1,595,025 (2013), 300,375 (2014), 302,875 (2015) and 66,250 (2016).

DSM grants certain members of senior management performance shares based on EBITDA and ROCE performance targets set for 2016 and 2017. Settlement in shares takes place after this two-year period. If employment is terminated prior to the settlement date, specific rules regarding vesting and forfeitures apply. In 2016, DSM granted 42,791 shares under this plan against a fair value of €45.22 per share. The fair value of these shares is determined based on the average quoted market price in Q1 2016. No shares forfeited in 2016.

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.

Overview of stock options for employees

Year of issue
Outstanding at 31 Dec. 2015
In 2016
Outstanding at 31 Dec. 2016
Fair value on grant date (€)
Exercise price (€)
Exercise period until
Granted
Exercised
Average
price (€)
Forfeited/expired
          
2011
192,375
-
(166,260)
51.65
(26,115)
-
10.35
46.20
May 2016
2012
158,845
-
(99,740)
57.03
(1,060)
58,045
6.79
40.90
May 2017
2013
155,565
-
(84,105)
59.38
(2,690)
68,770
6.51
48.91
May 2018
2014
262,305
-
(141,010)
59.64
(4,745)
116,550
5.68
52.00
May 2019
2015
114,065
-
(61,515)
59.52
(2,300)
50,250
4.50
50.98
May 2020
2016
-
561,135
(299,310)
59.67
(4,210)
257,615
4.38
52.57
May 2021
          
2016 Total
883,155
561,135
(851,940)
57.75
(41,120)
551,230
   
          
2015 Total
927,490
130,385
(152,410)
53.23
(22,310)
883,155
   

Measurement of fair value

The costs of option plans are measured by reference to the fair value of the options at the date on 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:

 
2016
2015
Management options
  
Risk-free rate
(0.23%)
0.18%
Expected option life in years
6
6
Nominal option life in years
8
8
Share price
52.57
50.98
Exercise price
52.57
50.98
Volatility
29.5%
31%
Expected dividend
3.14%
3.24%
Fair value of option granted
9.36
9.89
   
Employee options
  
Risk-free rate
(0.48%)
(0.12%)
Expected option life in years
2.5
2.5
Nominal option life in years
5
5
Share price
52.57
50.98
Exercise price
52.57
50.98
Volatility
20.0%
20.5%
Expected dividend
3.14%
3.24%
Fair value of option granted
4.38
4.50

An amount of €24 million is included in the costs for wages and salaries for share-based compensation (2015: €23 million). The following table specifies the share-based compensation:

Share-based compensation

 
2016
2015
   
Stock options
18
20
Share appreciation rights
1
-
Performance shares
5
3
   
Total expense
24
23