Note 24 – Share-Based Payments Audited

Equity-Settled Share Schemes

Employee Share Purchase Plan (ESPP)

In keeping with its vision and culture, Lonza has continuously encouraged employee participation in the company through stock ownership. In 2005 the former Employee Share Purchase Plan (ESPP) was updated. Under the 2005 plan, ESPP Plus, employees were given the opportunity – but not the obligation – to purchase Lonza shares in multiples of three with a price reduction of 30%. The shares purchased in this manner remain blocked for three years and are eligible for a dividend. After this blocking period, participants are entirely free to do as they wish with the shares. If participants keep their shares for a further two years in a blocked deposit, they will then – after this holding period is over – receive one additional free share for every three shares purchased. Due to cost-saving measures, the reissue of the share purchase plan was interrupted in 2013.

In 2014, the former Employee Share Purchase Plan was updated. During November of 2014, the ESPP was offered to the majority of active permanent employees (including Executive Committee members). Under the terms of the 2014 ESPP, employees were given the opportunity to purchase shares of Lonza stock at a price of CHF 77.99. This price represents a discount of 30% from the average weighted price of Lonza shares on the SIX Swiss Stock Exchange for the period from 24 November 2014 to 5 December 2014, which was CHF 111.42. The minimum investment amount is CHF 500 and the maximum CHF 3,000. All shares purchased under the 2014 ESPP are blocked from any disposal for a three-year period. During the blocking period, participants are the entitled beneficiaries of the shares and all attached rights. The ESPP 2014 does not include any additional free shares. This plan was not offered in 2015 and 2016.

The purchase conditions to participate in the ESPP Plus were as follows:

  • 2011: ranging from 6 shares to 198 shares
  • 2012: ranging from 9 shares to 318 shares
  • 2014: ranging from CHF 500 to CHF 3,000

The ESPP is not part of an incentive program. The plan is intended as a long-term share-savings scheme to provide employees with an incentive to strengthen teamwork and personal commitment.
 

Details of Share Purchase Plans

  Purchased Ratio Granted share awards Plan expiry date Price at grant date CHF
           
ESPP 2011 Plus 74,526 3:1 24,842 30 05 2016 75.76
ESPP 2012 Plus 200,802 3:1 66,934 30 05 2017 38.34
ESPP 2014 22,300 n.a. 0 01 12 2017 77.99

 

Development Within 2016 of the ESPP Plus

  Share awards
outstanding
01 01 2016
Share awards
granted
during 2016
Share awards
forfeited
during 2016
Shares vested
during 2016
Share awards
lapsed
during 2016
Share awards
outstanding
31 12 16
             
ESPP 2011 Plus 17,543 0 0 (14,799) (2,744) 0
ESPP 2012 Plus 58,603 0 (14,017) (220) 0 44,366
Total shares 76,146 0 (14,017) (15,019) (2,744) 44,366

 

Development Within 2015 of the ESPP Plus

  Share awards
outstanding
01 01 2015
Share awards
granted
during 2015
Share awards
forfeited
during 2015
Shares vested
during 2015
Share awards
lapsed
during 2015
Share awards
outstanding
31 12 15
             
ESPP 2010 Plus 22,811 0 0 (15,237) (7,574) 0
ESPP 2011 Plus 23,458 0 (5,911) (4) 0 17,543
ESPP 2012 Plus 63,233 0 (4,630) 0 0 58,603
Total shares 109,502 0 (10,541) (15,241) (7,574) 76,146

 

No share awards were granted in 2016. The weighted average share price of the vested shares in 2016 was CHF 75.21 (2015: CHF 76.81). The outstanding share awards on 31 December 2016 had a weighted average share price of CHF 38.34 (2015: CHF 46.96) and a remaining weighted average contractual life of 5 months (2015: 14 months).

The fair value of shares granted were calculated using the market price at grant date. The discount on the purchase price of shares is expensed at the moment the employees acquire Lonza shares. The fair value of the free shares is expensed on a straight-line basis over the vesting period, based on estimates of shares that will eventually vest.

 

Fair Value at Grant Date

in CHF  
   
ESPP 2011  1,505,624
ESPP 2011 discount 1,693,827
ESPP 2012  2,053,000
ESPP 2012 discount 2,309,625
ESPP 2014 discount 2,484,666

 

Long-Term Incentive (LTIP)

History and Participation

The LTIP is an equity-based plan introduced in 2006 for the Executive Committee and a segment of key employees (see Section 4.6 – Long-Term Incentive (LTIP) in the Remuneration Report).

Objective

The LTIP has been designed to align the interests of participants with those of Lonza’s shareholders and to serve as a retention tool. LTIP participants are eligible to receive a number of Lonza shares at the end of the vesting period, provided that certain challenging performance conditions are met at the end of the three-year performance period.

Equity Awards

Under the LTIP, participants are awarded the right to receive a number of registered shares of Lonza in the future. Depending on the level of the job, the target equity award grant is between 10% and 100% of the annual base salary. The grant is made at target and the payout level can be between 0% and 200%. The Executive Committee members, including the CEO, have a target of 100% of base salary with payout levels between 0% and 200% maximum.  Any proration is applied against the entire length of the three-year performance period.

The LTIP plan design is determined at the beginning of the three-year performance period. For 2016 the plan design included minimum, target and stretch goals. The 2016 LTIP budget value for the Executive Committee was approved as submitted at the AGM 2016 and administered in accordance with this approval.

Vesting will depend on achievement of the performance conditions and cannot exceed the maximum amount of granted equity awards.

Restriction and Vesting  

The central feature of the plan is that key employees will only receive title and ownership of the shares after a three-year vesting period and only if the performance metrics required for vesting are partially or fully met.

Vesting Targets  

For the 2014 LTIP, the performance metrics were CORE EPS and CORE RONOA with 50% weight for each measure.

For the 2015 and 2016 LTIP, the performance metrics are CORE EPS and CORE RONOA with 50% weight for each measure.

With the payout value directly linked to these key financial metrics, these two measures focus on Lonza’s financial performance that will drive the valuation of Lonza with investors. The value of the LTIP will be ultimately driven by the share price at the time of payout, further linking the LTIP to the interests of the shareholders.

Overview of Vesting Conditions for LTIP

For the years 2015 and 2016, the vesting of up to 50% of the granted equity awards depends on growth of CORE EPS achieved during Lonza’s three fiscal years and the vesting of up to 50% of the granted equity awards depends on growth of CORE RONOA achieved during Lonza’s three fiscal years.

Performance Metrics for CORE EPS Approved at AGM 2016 (LTIP 2016)

  • The minimum threshold to be reached at year-end 2018 was determined by the NCC to be significantly higher than the CORE EPS achieved on 31 December 2015 (which was CHF 6.81). If this minimum threshold is not reached, the payout will be zero. If this threshold is reached, 50% of the equity awards granted under CORE EPS will vest.
  • If the target is reached, 100% of the equity awards granted under CORE EPS will vest. CORE EPS is an internal, sensitive financial target which is not disclosed at this time.
  • The maximum was determined to approximate 115% of the CORE EPS at target. If such a level of CORE EPS is reached, 200% of the equity awards granted under CORE EPS will vest.

Performance Metrics for CORE RONOA Approved at AGM 2016 (LTIP 2016)

  • The minimum threshold to be reached at year-end 2018 was determined by the NCC to be significantly higher than the CORE RONOA achieved on 31 December 2015 (which was 16.4%). If this minimum threshold is not reached, the payout will be zero. If this threshold is reached, 50% of the equity awards granted under CORE RONOA will vest.
  • If the target is reached, 100% of the equity awards granted under CORE RONOA will vest. CORE RONOA is an internal, sensitive financial target which is not disclosed at this time.
  • The maximum was determined to approximate 117.5% of the CORE RONOA at target. If such a level of CORE RONOA is reached, 200% of the equity awards granted under CORE RONOA will vest.

Treatment of LTIP of Change of Control Situations  

Under the LTIP rules, if a Change of Control occurs, all unvested granted shares shall immediately vest and the granted price shall be the price at which the shares are sold in the transaction resulting in the Change of Control.

Actual Performance and Payout for the LTIP 2014 and 2013   

Performance under the 2013 LTIP exceeded the maximum for EPS generating a 100% payout on 50% of the total award. Performance under the 2013 LTIP achieved the maximum target for TSR generating a 100% payout on the remaining 50% of the total award. The total 2013 LTIP payout equals 100%.

Performance under the 2014 LTIP exceeded the target for CORE EPS generating a 100% payout on 50% of the total award. Performance under the 2014 LTIP exceeded the target for CORE RONOA generating a 100% payout on the remaining 50% of the total award. The total 2014 LTIP payout equals 100%.

Overview of Vesting Conditions for the LTIP

2014 LTIP

  Actual performance  Payout in %
     
CORE EPS (Earnings Per Share)1 CHF 8.15 100
CORE RONOA (Return on Net Operating Assets)1 20.97% 100
Total payout   100

 

Details of Long-Term Incentive Plans

  Grant date Share price
CHF
Granted
equity awards
Fair value at
grant date
Vesting date
           
LTIP 2013 01 02 2013 53.60 204,653 5,484,728 31 01 2016
LTIP 2014 01 02 2014 91.15 137,180 6,251,978 31 01 2017
LTIP 2015 01 02 2015 109.20 116,907 12,766,244 31 01 2018
LTIP 2016 01 02 2016 156.30 108,744 24,730,180 31 01 2019

 

Vesting Conditions at Grant Date

  Market price
CHF
Granted
equity awards
Fair value of
equity awards
Expected
EVA /
EPS / RONOA
at grant date
Probability
minimum
targets
Volatility
employees
Total
probability
Total cost
at grant date
CHF
                 
LTIP 2013 TSR 53.60 102,327 26.80   100% 3% 97% 2,660,093
LTIP 2013 EPS 53.60 102,327 53.60 50% 100% 3% 97% 2,660,093
LTIP 2014 CORE RONOA 91.15 68,590 91.15 50% 100% 3% 97% 3,032,210
LTIP 2014 CORE EPS 91.15 68,590 91.15 50% 100% 3% 97% 3,032,210
LTIP 2015 CORE RONOA 109.20 58,453 109.20 100% 100% 3% 97% 6,191,576
LTIP 2015 CORE EPS 109.20 58,454 109.20 100% 100% 3% 97% 6,191,681
LTIP 2016 CORE RONOA 156.30 54,372 156.30 150% 150% 3% 97% 12,365,090
LTIP 2016 CORE EPS 156.30 54,372 156.30 150% 150% 3% 97% 12,365,090

 

Development within 2016 of the LTIP

  Equity awards
outstanding
01 01 2016
Equity awards
granted
during 2016
Equity awards
forfeited
during 2016
Vested equity
awards
during 2016
Equity awards
 lapsed
during 2016
Equity awards
 outstanding
 31 12 2016
             
LTIP 2013 189,672 0 0 (183,985) (5,687) 0
LTIP 2014 137,411 0 (12,731) 0 0 124,680
LTIP 2015 116,907 0 (1,998) 0 0 114,909
LTIP 2016 0 108,744 0 0 0 108,744
Total equity awards 443,990 108,744 (14,729) (183,985) (5,687) 348,333

 

Development within 2015 of the LTIP

  Equity awards
outstanding
01 01 2015
Equity awards
granted
during 2015
Equity awards
forfeited
during 2015
Vested equity
awards
during 2015
Equity awards
lapsed
during 2015
Equity awards
outstanding
31 12 2015
             
LTIP 2012 276,754 0 0 (222,677) (54,077) 0
LTIP 2013 204,653 0 (14,981) 0 0 189,672
LTIP 2014 137,180 1,557 (1,326) 0 0 137,411
LTIP 2015 0 116,907 0 0 0 116,907
Total equity awards 618,587 118,464 (16,307) (222,677) (54,077) 443,990

 

The estimated fair value of the granted equity awards in 2016 was CHF 227.42 (2015: CHF 108.66). The weighted average share price of the vested shares in 2016 was CHF 53.60 (2015: CHF 49.69). The outstanding granted equity awards on 31 December 2016 had a weighted average share price of CHF 123.33 (2015: CHF 54.31) and a remaining weighted average contractual life of 12 months (2015: 11 months). The costs were calculated using the market price at grant date, including probabilities as per conditions of vesting. The amounts for equity awards are expensed on a straight-line basis over the vesting period, based on estimates of equity awards that will eventually vest.

Fair Value at Grant Date

CHF  
   
LTIP 2013 5,484,728
LTIP 2014 6,251,978
LTIP 2015 12,766,244
LTIP 2016 24,730,180

 

Extended Short-Term Incentive Plan (E-STIP)

Relationship to STIP

For the years 2012, 2013 and 2014 the company provided the members of the Executive Committee and Senior Management with Short-Term Incentive Plans, of which two-thirds is paid in cash (Cash STIP) and one-third in restriced share units (RSUs) (E-STIP) which vest after three years. Performance metrics are defined for each financial year; achievement determines the payout of STIP. The performance metrics for the STIP (Cash STIP and E-STIP) are the same.

E-STIP

   
Targeted E-STIP amount as % of base salary – 26.7% for the Chief Executive Officer
– 25% for other Executive Committee members
– 10% to 20 % for Senior Management
E-STIP targets weighting – 50% CORE EBIT (Financial)
– 15% Lonza Sales (Financial)
– 15% Operational Free Cash Flow (Financial)
– 20% Personal targets are linked back to the financial targets (10% weighting for CORE EBIT, 5% weighting for Sales and 5% weighting for Operational Free Cash Flow)
Maximum potential payout Depending on the financial results achievement, the Cash STIP payout may range between
0% and 200% for the financial targets and 0% and 150% for personal targets.
Total maximum payout opportunity is 190% (80% financial × 200% + 20% personal × 150% = 190%)

 

Alignment on Share Price

The value of the plan is strongly dependent on Lonza's future share price, thereby further reinforcing the link to shareholders' interests. The E-STIP is awarded in the form of RSUs, which are subject to a three-year vesting requirement.

Grant Timing

The grant of the RSUs under the E-STIP 2014 took place in April 2015 following shareholder approval at the AGM (E-STIP 2013 on 31 March 2014), on which date the number of RSUs was determined based on the closing stock price of the last business day in March. These RSUs vest after three years.

Dividend and Voting Rights

The E-STIP RSUs, do not qualify for dividends and voting rights until vested.

Treatment of E-STIP RSUs in Change of Control Situation

Under the outstanding E-STIP plan rules, if a change in control occurs, all unvested RSUs shall immediately vest and the granted price shall be the price at which the shares are sold in the transaction resulting in the change in control.

Non-Vested RSUs

  Grant date Share price Granted
share units
Vesting date
         
E-STIP 2012 31 03 2013 61.60 41,405 31 03 2016
E-STIP 2013 31 03 2014 90.15 19,771 31 03 2017
E-STIP 2014 31 03 2015 121.50 20,418 31 03 2018

 

Development Within 2016 of E-STIP

  Share units outstanding
01 01 2016
Share units granted during 2016 Share units forfeited during 2016 Share units vested during 2016 Share units lapsed during 2016 Share units outstanding
31 12 2016
             
E-STIP 2012 28,445 0 0 (29,437) 992 0
E-STIP 2013 17,829 0 (380) (530) 0 16,919
E-STIP 2014 19,718 0 (356) (405) 0 18,957
Total 65,992 0 (736) (30,372) 992 35,876

 

Development Within 2015 of E-STIP

  Share units outstanding
1 1 2015
Share units granted during 2015 Share units forfeited during 2015 Share units vested during 2015 Share units lapsed during 2015 Share units outstanding
31 12 2015
             
E-STIP 2011 32,001 0 0 (13,536) (18,465) 0
E-STIP 2012 38,565 0 (9,121) (999) 0 28,445
E-STIP 2013 19,250 0 0 (1,421) 0 17,829
E-STIP 2014 0 20,418 0 (700) 0 19,718
Total  89,816 20,418 (9,121) (16,656) (18,465) 65,992


No RSUs were granted in 2016. The estimated fair value of the RSUs 2014 granted in 2015 was CHF 121.50. The weighted average share price of the vested share unit in 2016 was CHF 62.90 (2015: CHF 54.41). The outstanding share units on 31 December 2016 had a weighted average share price of CHF 106.72 (2015: CHF 87.21) and a remaining weighted average contractual life of 9 months (2015: 13 months).

The fair value was calculated using the market price at grant date. The amounts for share units were expensed on a straight-line basis over the vesting period, based on estimates of share units that will eventually vest. The expected volatility was 3%.
 

Fair Value at Grant Date

CHF  
   
E-STIP 2012 2,474,032
E-STIP 2013 1,728,885
E-STIP 2014 2,406,363

Compensation of the Board of Directors

Objective and Benchmarks  

The NCC determined that they would again use benchmark data of Swiss companies (various sectors) that are comparable in type of business, complexity, size and global presence to Lonza in determining competitive Board of Directors’ Compensation. Lonza’s objective is to pay the members of the Board of Directors at the median of this benchmark group in accordance with their respective duties and responsibilities 1.

For the period from the Annual General Meeting (AGM) 2016 to the AGM 2017, the members of the Board of Directors receive fixed gross compensation for Board of Directors membership and additional compensation for committee chairperson and committee memberships as described below:

Compensation for  Board of Directors AGM 2016 to AGM 2017 2

CHF Annual fee Additional committee membership fee Additional committee chairperson fee
       
Board of Directors Member 200,000 40,000 80,000
Chairman of the Board of Directors 450,000    

The compensation of the Chairman of the Board of Directors includes his remuneration as a member of the Innovation and Technology Committee of the Board of Directors.

The total compensation of the Committee chairpersons amounts to CHF 280,000 and includes the Committee membership fee.

Board of Directors’ compensation for 2016 is paid quarterly; 50% of the compensation is paid in cash and 50% in performance shares. The number of shares granted for Board of Directors’ compensation is based on the average closing share price of the last five business days of each quarter. Share restrictions lapse after three years from the grant date. Shares are eligible for a dividend. This structure of Board of Directors compensation is closely aligned with our shareholders’ interests.

The members of the Board of Directors do not receive variable compensation. The members of the Board of Directors are reimbursed for travel and other related expenses associated with their responsibilities as members of the Board of Directors of Lonza.

Development of Compensation for Board of Directors in 2016

  Grant date Total number
of shares
Share price
in CHF
Fair values
of shares
Cash 1
CHF
Total
CHF
Blocked until
               
  31 03 2016 1,930 160.98 310,690 311,250 621,940 31 03 2019
  30 06 2016 2,149 158.38 340,359 341,250 681,609 30 06 2019
  30 09 2016 1,847 184.14 340,107 341,250 681,357 30 09 2019
  31 12 2016 1,937 175.48 339,905 341,250 681,155 31 12 2019
Total   7,863 169.28 1,331,061 1,335,000 2,666,061  

The amount of CHF 2,666,061 was recognized as an expense in the year 2016.

 

Development of Compensation for Board of Directors in 2015

  Grant date Total number
of shares
Share price
CHF
Fair values
of shares
Cash 1
CHF
Total
CHF
Blocked until
               
  31 03 2015 2,600 122.08 317,408 311,250 628,658 31 03 2018
  30 06 2015 2,316 126.96 294,039 311,250 605,289 30 06 2018
  30 09 2015 2,409 128.86 310,424 311,250 621,674 31 09 2018
  31 12 2015 1,939 160.32 310,860 311,250 622,110 31 12 2018
Total   9,264 133.07 1,232,731 1,245,000 2,477,731  

The amount of CHF 2,477,731 was recognized as an expense in the year 2015.

 

Development of Compensation for Board of Directors in 2014

  Grant date Total number
of shares
Share price
CHF
Fair values
of shares
Cash 1
CHF
Total
CHF
Blocked until
               
  31 03 2014 3,442 89.98 309,711 275,000 584,711 31 03 2017
  30 06 2014 3,576 96.22 344,083 311,250 655,333 30 06 2017
  30 09 2014 2,966 114.92 340,853 311,250 652,103 30 09 2017
  31 12 2014 3,076 111.28 342,297 311,250 653,547 31 12 2017
Total   13,060 102.37 1,336,944 1,208,750 2,545,694  

The amount of CHF 2,545,694 was recognized as an expense in the year 2014.

  Grant date Total number
of shares
Share price
CHF
Fair values
of shares
Cash 1
CHF
Total
CHF
Blocked until
               
  31 03 2013 8,146 61.33 499,594 165,000 664,594 31 03 2016
  30 06 2013 4,221 69.96 295,301 262,500 557,801 30 06 2016
  30 09 2013 3,961 74.30 294,302 262,500 556,802 30 09 2016
  31 12 2013 3,688 83.98 309,718 275,000 584,718 31 12 2016
Total   20,016 69.89 1,398,915 965,000 2,363,915  

The amount of CHF 2,363,915 was recognized as an expense in the year 2013.

 

Recognition in the Consolidated Financial Statements

All the equity-settled share-based payments had an impact on the 2016 "Profit before income taxes" amounting to an expense of CHF 28 million (2015: CHF 17 million).