Note 25 – Share-Based Payments

Long-Term Incentive Plan (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 150% 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 have a target of 125% and the CEO has a target of 150% 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 and target setting is determined at the beginning of the three-year performance period. For 2018 the plan design included minimum, target and stretch goals. The 2018 LTIP budget value for the Executive Committee was approved as submitted at the AGM 2018 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 2018 LTIP the performance metrics were CORE earnings per share (EPS) and return on invested capital (ROIC) 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 year 2018, 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 ROIC achieved during Lonza’s three fiscal years.

For the year 2017, 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 2018 (LTIP 2018):

CORE EPS is an internal, sensitive financial target. For competitive and ad hoc publicity reasons, Lonza does not disclose at this stage the absolute CORE EPS target at year-end 2020. The target was recommended by the Nomination and Compensation Committee and approved by the Board of Directors on 7 March 2018 to approximate the CORE EPS required to meet Lonza’s challenging strategic goals and support Lonza’s mid-term plan.

  • The minimum threshold to be reached at year-end 2020 as determined by the Nomination and Compensation Committee, is approved by the Board of Directors, and is set at a higher level than the CORE EPS basic achieved on 31 December 2017. If the minimum threshold is not reached at year-end 2020, the pay-out will be 0. If the threshold is reached, 50% of the equity awards granted under the CORE EPS vesting condition will vest.
  • The threshold was determined to approximate 109% of the CORE EPS of the threshold set for the performance target for the LTIP 2017-2019. If such level of CORE EPS is reached, 50% of the equity awards granted under the CORE EPS vesting conditions will vest.
  • If the target is reached, 100% of the equity awards granted under the CORE EPS vesting condition will vest. In the event that the maximum defined target level were to be achieved, 200% of the equity awards granted under the CORE EPS vesting conditions would vest.
  • The maximum was determined to be above the prorated 2022 Mid-Term Guidance and is a double-digit figure above the threshold. In the event that the maximum defined target level were to be achieved, 200% of the equity awards granted under the CORE EPS vesting conditions would vest.

Performance Metrics for CORE ROIC Approved at AGM 2018 (LTIP 2018):

  • Following consultations during the fall of 2017, investors indicated a preference to replace CORE RONOA, return on net operating assets, with another return measure as long-term performance indicator. This change is driven mainly by Lonza’s acquisitions in recent years.
  • ROIC, return on invested capital, is defined as adjusted operating profit divided by invested capital. This measures the return the company generates on its investments both organic (e.g. capital projects such as the biological manufacturing in IbexTM Solutions in Visp, (CH) expansions in single-use bioreactors in Singapore and cell and gene therapy in Portsmouth, NH and Houston, TX (USA) and inorganic (e.g. goodwill and intangibles from acquisitions). The measure is a reflection of the results from decisions taken by EC members and senior management over the course of the LTIP plan period.
  • The minimum threshold to be reached at year-end 2020 is determined by the Nomination and Compensation Committee and is approved by the Board of Directors at a higher level than at year-end 2017.
  • If the minimum threshold is not reached, 0% of the equity awards granted under the ROIC vesting conditions will vest. In the event that the maximum defined target level were to be achieved, 200% of the equity awards granted under the ROIC vesting conditions would vest.

A potential vesting of 200% of the LTIP equity awards granted would require the achievement at year-end 2020 of CORE EPS and ROIC at challenging levels versus our 2022 Mid-Term Guidance (pro rata). As shown in the past, Lonza has consistently set challenging LTIP targets in application of the pay-for-performance principle. The performance required for maximum vesting for both criteria is set above the prorated mid-term guidance and is a double-digit figure above the threshold performance. Targets and target achievement will be fully disclosed in the 2020 Remuneration Report.

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 2016

The total 2015 LTIP payout equaled 200%.

Performance under the 2016 LTIP exceeded the target for CORE EPS, generating a 200% payout on 50% of the total award. Performance under the 2016 LTIP exceeded also the target for CORE RONOA, generating a 200% payout on the remaining 50% of the total award. The total 2016 LTIP payout equaled 200%. The financial impact of the Capsugel integration was excluded from the CORE results ,which are relevant for the LTIP payout.

2016 LTIP

 

 

Actual performance

 

Payout in %

 

 

 

 

 

1

CORE results exclude exceptional items such as restructuring charges, impairments and amortization of acquisition-related intangible assets, which can differ from year to year. CORE metrics are not IFRS metrics, but are used by management in addition to IFRS to assess performance

CORE EPS (earnings per share)1

 

CHF 11.23

 

200

CORE RONOA (return on net operating assets)1

 

28.01%

 

200

Total payout

 

 

 

200

Details of Long-Term Incentive Plans

 

 

Grant date

 

Share price

 

Granted equity awards

 

Fair value at grant date

 

Vesting date

 

 

 

 

CHF

 

CHF

 

CHF

 

 

 

 

 

 

 

 

 

 

 

 

 

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

LTIP 2018

 

01 02 2018

 

258.90

 

106,893

 

29,888,566

 

31 01 2021

Vesting Conditions at Grant Date

 

 

Market
price

 

Granted
equity
awards

 

Fair value
of equity
awards

 

Expected EPS /
RONOA / ROIC at grant date

 

Probability
minimum
targets

 

Volatility
employees

 

Total
probability

 

Total cost at grant date

 

 

CHF

 

 

 

CHF

 

 

 

 

 

 

 

 

 

CHF

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

LTIP 2018 ROIC

 

258.90

 

53,447

 

258.90

 

120%

 

100%

 

10%

 

90%

 

14,944,423

LTIP 2018 CORE EPS

 

258.90

 

53,446

 

258.90

 

120%

 

100%

 

10%

 

90%

 

14,944,143

Development within 2018 of the LTIP

 

 

Equity awards
outstanding
01 01 2018

 

Equity awards
granted
during 2018

 

Equity awards
forfeited
during 2018

 

Vested equity
awards
during 2018

 

Equity awards
lapsed
during 2018

 

Equity awards
outstanding
31 12 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

LTIP 2015

 

103,223

 

0

 

0

 

(103,113)

 

(110)

 

0

LTIP 2016

 

104,667

 

0

 

(6,142)

 

0

 

0

 

98,525

LTIP 2017

 

106,578

 

0

 

(3,603)

 

0

 

0

 

102,975

LTIP 2017 Capsugel

 

76,641

 

0

 

(5,847)

 

0

 

0

 

70,794

LTIP 2018

 

0

 

106,893

 

(636)

 

0

 

0

 

106,257

Total equity awards

 

391,109

 

106,893

 

(16,228)

 

(103,113)

 

(110)

 

378,551

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

The estimated fair value of the granted equity awards in 2018 was CHF 279.61 (2017: CHF 182.47). The weighted average share price of the vested shares in 2018 was CHF 109.20 (2017: CHF 91.15). The outstanding granted equity awards on 31 December 2018 had a weighted average share price of CHF 221.20 (2017: CHF 175.16) and a remaining weighted average contractual life of 19 months (2017: 15 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 year 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 achieved, 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 of 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 of control.

Non-Vested RSUs

 

 

Grant date

 

Share price

 

Granted share units

 

Vesting date

 

 

 

 

CHF

 

 

 

 

 

 

 

 

 

 

 

 

 

E-STIP 2014

 

31 03 2015

 

121.50

 

20,418

 

31 03 2018

Development Within 2018 of E-STIP

 

 

Share units
outstanding
01 01 2018

 

Share units granted
during 2018

 

Share units
forfeited
during 2018

 

Share units vested
during 2018

 

Share units
lapsed
during 2018

 

Share units
outstanding
31 12 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

E-STIP 2014

 

17,465

 

0

 

0

 

(17,103)

 

(362)

 

0

Total

 

17,465

 

0

 

0

 

(17,103)

 

(362)

 

0

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

No RSUs were granted in 2018. The weighted average share price of the vested share unit in 2018 was CHF 121.50 (2017: CHF 91.26). No outstanding share units on 31 December 2018.

Fair Value at Grant Date

CHF

 

 

 

 

 

E-STIP 2014

 

2,406,363

Compensation of the Board of Directors

Objective and Benchmarks

The 2017 benchmark data that the NCC reviewed and applied for the Board of Directors’ compensation assessment was based on Swiss companies (various sectors) that are comparable in type of business, complexity, size and global presence to Lonza. 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 amended in 2017 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 AGM 2018 to the AGM 2019, 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 Board of Directors AGM 2018 to 20191

CHF

 

Annual fee

 

Additional committee membership fee

 

Additional committee
chairperson fee

 

 

 

 

 

 

 

1

Refer to section 3.3 of the Remuneration Report regarding total compensation (including national employer social contributions) provided to the Board of Directors in the 2018 financial year. The table above represents the period from AGM 2018 to AGM 2019 and does not include social contributions of the employer.

Board of Directors member

 

200,000

 

40,000

 

80,000

Chairperson of the Board of Directors

 

600,000

 

 

 

 

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

Board of Directors’ compensation for 2018 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 2018

 

 

Grant date

 

Total number
of shares

 

Share price

 

Fair values
of shares

 

1Cash

 

Total

 

Blocked until

 

 

 

 

 

 

CHF

 

CHF

 

CHF

 

CHF

 

 

1

Excluding social security and withholding tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

31 03 2018

 

1,537

 

225.84

 

347,116

 

348,750

 

695,866

 

31 03 2021

 

 

30 06 2018

 

1,368

 

262.58

 

359,209

 

360,000

 

719,209

 

30 06 2021

 

 

30 09 2018

 

1,091

 

329.54

 

359,528

 

360,000

 

719,528

 

30 09 2021

 

 

31 12 2018

 

1,369

 

261.62

 

358,158

 

360,000

 

718,158

 

31 12 2021

Total

 

 

 

5,365

 

265.43

 

1,424,011

 

1,428,750

 

2,852,761

 

 

The amount of CHF 2,862,338 was recognized as an expense in the year 2018.

Development of Compensation for Board of Directors in 2017

 

 

Grant date

 

Total number
of shares

 

Share price

 

Fair values
of shares

 

1Cash

 

Total

 

Blocked until

 

 

 

 

 

 

CHF

 

CHF

 

CHF

 

CHF

 

 

1

Excluding social security and withholding tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

Fair values
of shares

 

1Cash

 

Total

 

Blocked until

 

 

 

 

 

 

CHF

 

CHF

 

CHF

 

CHF

 

 

1

Excluding social security and withholding tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

Fair values
of shares

 

1Cash

 

Total

 

Blocked until

 

 

 

 

 

 

CHF

 

CHF

 

CHF

 

CHF

 

 

1

Excluding social security and withholding tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

30 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.

Recognition in the Consolidated Financial Statements

All of the equity-settled share-based payments had an impact on the 2018 «Profit before income taxes» amounting to an expense of CHF 29 million (2017: CHF 29 million).