Share-based compensation

Under the DSM Stock Incentive Plan, management share units (performance-related and non-performance-related) and (until 2016) stock options (performance-based and non-performance-based) or Share Appreciation Rights (SARs; until 2011) are, respectively have been granted to senior management. The grant date is the first day on which the DSM stock is quoted ex-dividend following the Annual General Meeting of Shareholders.

Since 2011, SARs are no longer used as share-based compensation. As of 2017, the stock options for senior management have been replaced by management share units. These share units vest after three years partially based upon the realization of predefined performance measures.

Stock options and SARs have a term of eight years and are subject to a vesting period of three years. Management share units have a term of three years. After this three-year period, one third of the management share units, stock options and SARs (non-performance-related) will vest and two thirds of the management share units, stock options and SARs that are related to performance will vest in whole, in part, or not at all. Options become exercisable upon vesting. The performance measurement of the 2017 series of the management share units 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) reduction. Stock options related to performance as granted in 2016 are subject to the same performance criteria (while vesting of performance-related stock options as granted in 2015 is subject to TSR only). Non-vested management share units, 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, LTI performance shares have been granted since 2010 (no longer stock options) and for other Executive Committee members since 2016. LTI performance shares vest after three years upon the realization of predefined performance measures.

For the LTI performance shares of the Managing Board please refer to Note 13 'Remuneration of Managing Board and Supervisory Board' to the Financial statements of the parent company.

All management share units, 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. 2016
In 2017
Outstanding at 31 Dec. 2017
Fair value on grant date (€)
Exercise price (€)
Expiry date
Granted
Exercised
Average
price (€)
Forfeited/
expired
          
2009
43,400
-
(43,400)
61.03
-
-
2.83
21.10
27 Mar. 2017
2010
224,500
-
(163,750)
67.85
-
60,750
6.07
33.10
6 Apr. 2018
2011
411,926
-
(214,563)
67.78
(2,500)
194,863
9.60
46.20
2 May 2019
2012
368,000
-
(166,100)
66.75
(3,750)
198,150
6.88
40.90
15 May 2020
2013
615,588
-
(242,438)
67.65
(6,250)
366,900
9.23
48.91
7 May 2021
20141,2
2,200,988
-
(756,853)
69.63
(728,012)3
716,123
10.66
52.00
9 May 2022
20151
2,578,875
-
(152,050)
68.38
(197,525)3
2,229,300
9.89
50.98
5 May 2023
20161
2,744,475
-
(52,800)
68.30
(246,525)3
2,445,150
9.36
52.57
3 May 2024
          
2017 Total
9,187,752
-
(1,791,954)
68.36
(1,184,562)
6,211,236
   
Of which vested
1,983,364
    
1,711,536
   
          
 
at 31 Dec. 2015
    
at 31 Dec. 2016
   
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
   

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 2014 vested only partially; the remaining part has been forfeited.

3 Number of forfeited options: 728,012 (2014), 197,525 (2015), and 246,525 (2016).

Overview of management share units

Year of issue
Outstanding at 31 Dec. 2016
In 2017
Outstanding at 31 Dec. 2017
Share price at date of grant (€)
Expiry date
Granted
Vested
Forfeited/
expired
        
2017
-
449,312
(4,206)
(4,963)
440,143
67.33
5 May 2020
        
2017 Total
-
449,312
(4,206)
(4,963)
440,143
  
        
 
at 31 Dec. 2015
   
at 31 Dec. 2016
  
2016 Total
-
-
-
-
-
  

Additionally, DSM grants certain members of senior management 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. Under this plan a total of 130,778 shares were granted of which at the end of 2017 84,683 shares vested and 15,344 were forfeited. The fair value of these shares is determined based on the average quoted market price in the first quarter of 2016.

Furthermore, 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. 2016
In 2017
Outstanding at 31 Dec. 2017
Fair value on grant date (€)
Exercise price (€)
Exercise period until
Granted
Exercised
Average
price (€)
Forfeited/expired
          
2012
58,045
-
(46,615)
64.17
(11,430)
-
6.79
40.90
May 2017
2013
68,770
-
(37,535)
68.04
(1,600)
29,635
6.51
48.91
May 2018
2014
116,550
-
(51,100)
67.59
(8,375)
57,075
5.68
52.00
May 2019
2015
50,250
-
(21,660)
67.59
(2,305)
26,285
4.50
50.98
May 2020
2016
257,615
-
(113,290)
67.50
(5,595)
138,730
4.38
52.57
May 2021
2017
-
433,505
(111,700)
76.52
(19,900)
301,905
6.14
67.33
May 2022
          
2017 Total
551,230
433,505
(381,900)
69.80
(49,205)
553,630
   
          
2016 Total
883,155
561,135
(851,940)
57.75
(41,120)
551,230
   

Measurement of fair value

The costs of LTI performance shares and management share units are measured by reference to the fair value of the DSM share at the date on which the performance shares and share units are granted, ex dividend as the performance shares and share units do not accumulate dividend during the three-year vesting period.

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).

Plan assumptions

The following assumptions were used to determine the fair value at grant date:

Plan assumptions

 
2017
2016
Management share units (2017) and options (2016)
  
Risk-free rate
(0.56%)
(0.23%)
Expected share unit / option life in years
3
6
Nominal share unit / option life in years
3
8
Share price
67.33
52.57
Exercise price
-
52.57
Volatility
-
29.5%
Expected dividend (2017 in €; 2016 in %)
5.25
3.14%
Fair value of share unit / option granted
62.08
9.36
   
Employee options
  
Risk-free rate
(0.56%)
(0.48%)
Expected option life in years
2.5
2.5
Nominal option life in years
5
5
Share price
67.33
52.57
Exercise price
67.33
52.57
Volatility
20.5%
20.0%
Expected dividend
2.60%
3.14%
Fair value of option granted
6.14
4.38

An amount of €23 million is included in the costs for wages and salaries for share-based compensation (2016: €24 million). The following table specifies the share-based compensation:

Share-based compensation

 
2017
2016
   
Stock options and management shares
19
18
Share appreciation rights
-
1
Performance shares
4
5
   
Total expense
23
24