Note 25 – 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.

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

  • 2012: ranging from 9 shares to 318 shares

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 2012 Plus 200,802 3:1 66,934 30 05 2017 38.34

 

Development Within 2017 of the ESPP Plus

  Share awards
outstanding
01 01 2017
Share awards
granted
during 2017
Share awards
forfeited
during 2017
Shares vested
during 2017
Share awards
lapsed
during 2017
Share awards
outstanding
31 12 17
             
ESPP 2012 Plus 44,366 0 0 (39,700) (4,666) 0
Total shares 44,366 0 0 (39,700) (4,666) 0

 

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

 

The weighted average share price of the vested shares in 2017 was CHF 38.34 (2016: CHF 75.21).

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 2012  2,053,000
ESPP 2012 discount 2,309,625

 

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.

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 Lonza registered shares 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 in relation to 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 2017 the plan design included minimum, target and stretch goals. The 2017 LTIP budget value for the Executive Committee was approved as submitted at the AGM 2017 and administered in accordance with this approval.

Vesting will depend on achievement of the performance conditions and cannot exceed the maximum amount (200%) of granted equity awards.

Restriction and Vesting  


The central feature of the plan is that key participants 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 2017 and 2016 LTIP the performance metrics were 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 2017 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 2017 (LTIP 2017)1

 

  • The minimum threshold to be reached at year-­end 2019 was determined by the NCC to be significantly higher than the CORE EPS achieved on 31 December 2016 (which was CHF 7.81). 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 110% of the CORE EPS at target. If such 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 2017 (LTIP 2017)1

 

  • The minimum threshold to be reached at year­-end 2019 was determined by the NCC to be significantly higher than the CORE RONOA achieved on 31 December 2016 (which was 21.5%). 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 110% of the CORE RONOA at target. If such level of CORE RONOA is reached, 200% of the equity awards granted under CORE RONOA will vest. 

Treatment of LTIP in 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 2015 
 

The total 2014 LTIP payout equaled 100%.

Performance under the 2015 LTIP exceeded the target for CORE EPS, generating a 200% payout on 50% of the total award. Performance under the 2015 LTIP exceeded the target for Core RONOA, generating a 200% payout on the remaining 50% of the total award. The total 2015 LTIP payout equals 200%.  The financial impact of the Capsugel integration were excluded from the Core results which are relevant for the LTIP payout. 

2015 LTIP

  Actual performance  Payout in %
     
CORE EPS (Earnings Per Share)1 CHF 11.10 200
CORE RONOA (Return on Net Operating Assets)1 27.1% 200
Total payout   200

Details of Long-Term Incentive Plans

  Grant date Share price
CHF
Granted
equity awards
Fair value at
grant date
Vesting date
           
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
LTIP 2017 01 02 2017 180.90 106,578 17,353,964 31 01 2020
LTIP 2017 Capsugel 27 07 2017 233.10 76,641 16,078,516 31 01 2020

 

Vesting Conditions at Grant Date

  Market price
CHF
Granted
equity awards
Fair value of
equity awards
Expected
EPS / RONOA
at grant date
Probability
minimum
targets
Volatility
employees
Total
probability
Total cost
at grant date
CHF
                 
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
LTIP 2017 CORE RONOA 180.90 53,289 180.90 100% 100% 10% 90% 8,676,982
LTIP 2017 CORE EPS 180.90 53,289 180.90 100% 100% 10% 90% 8,676,982
LTIP 2017 CAPSUGEL CORE RONOA 233.10 38,321 233.10 100% 100% 10% 90% 8,039,363
LTIP 2017 CAPSUGEL CORE EPS 233.10 38,320 233.10 100% 100% 10% 90% 8,039,153

 

Development within 2017 of the LTIP

  Equity awards
outstanding
01 01 2017
Equity awards
granted
during 2017
Equity awards
forfeited
during 2017
Vested equity
awards
during 2017
Equity awards
 lapsed
during 2017
Equity awards
 outstanding
 31 12 2017
             
LTIP 2014 124,680 0 0 (108,682) (15,998) 0
LTIP 2015 114,909 0 (11,686) 0 0 103,223
LTIP 2016 108,744 3,051 (7,128) 0 0 104,667
LTIP 2017 0 106,578 0 0 0 106,578
LTIP 2017 CAPSUGEL 0 76,641 0 0 0 76,641
Total equity awards 348,333 186,270 (18,814) (108,682) (15,998) 391,109

 

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

 

The estimated fair value of the granted equity awards in 2017 was CHF 162.82 for LTIP 2017 and CHF 209.79 for LTIP 2017 Capsugel (2016: CHF 227.42). The weighted average share price of the vested shares in 2017 was CHF 91.15 (2016: CHF 53.60). The outstanding granted equity awards on 31 December 2017 had a weighted average share price of CHF 175.16 (2016: CHF 123.33) and a remaining weighted average contractual life of 15 months (2016: 12 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.

Extended Short-Term Incentive Plan (E-STIP)

Relationship to STIP

 

For the years 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 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 2017 of E-STIP

  Share units outstanding
01 01 2017
Share units granted during 2017 Share units forfeited during 2017 Share units vested during 2017 Share units lapsed during 2017 Share units outstanding
31 12 2017
             
E-STIP 2013 16,919 0 0 (16,379) (540) 0
E-STIP 2014 18,957 0 (892) (600) 0 17,465
Total 35,876 0 (892) (16,979) (540) 17,465

 

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


No RSUs were granted in 2017. The weighted average share price of the vested share unit in 2017 was CHF 91.26 (2016: CHF 62.90). The outstanding share units on 31 December 2017 had a weighted average share price of CHF 121.50 (2016: CHF 106.72) and a remaining weighted average contractual life of 3 months (2016: 9 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 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 in 2017 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.  The NCC and Board of Directors recently amended the peer group to reflect Lonza’s inclusion in the SMI (Swiss Market Index for the Twenty Largest Listed Swiss Companies).  The amended peer group more directly reflects our strategic business direction along the healthcare continuum as well as the transformational organic and inorganic growth of the Company.

For the period from the Annual General Meeting (AGM) 2017 to the AGM 2018, 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 in the table below.  
 

Compensation for Board of Directors AGM 2017 to AGM 20181

CHF Annual fee Additional committee membership fee Additional committee chairperson fee
       
Board of Directors Member  200,000 40,000 80,000
Vice-Chairperson of the Board of Directors 300 000    
Chairperson of the Board of Directors 450 000    

The compensation of the Chairperson of the Board of Directors includes his remuneration as a member of the Innovation and Technology Committee of the Board of Directors.  The compensation of the Vice-Chairperson of the Board of Directors includes remuneration for guest participation in any Committee meetings.

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

Board of Directors’ compensation for 2017 is paid quarterly; 50% of the compensation is paid in cash and 50% in Lonza restricted 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 2017

  Grant date Total number
of shares
Share price
in CHF
Fair values
of shares
Cash 1
CHF
Total
CHF
Blocked until
               
  31 03 2017 1,832 185.72 340,239 341,250 681,489 31 03 2020
  30 06 2017 1,679 207.06 347,654 348,750 696,404 30 06 2020
  30 09 2017 1,380 252.04 347,815 348,750 696,565 30 09 2020
  31 12 2017 1,325 262.68 348,051 348,750 696,801 31 12 2020
Total   6,216 222.61 1,383,759 1,387,500 2,771,259  

The amount of CHF 2,771,259 was recognized as an expense in the year 2017.

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.

Recognition in the Consolidated Financial Statements

All the equity-settled share-based payments had an impact on the 2017 "Profit before income taxes" amounting to an expense of CHF 29 million (2016: CHF 28 million).