28. Long-Term Incentive Plans

Summary of terms of long-term incentive plans

Certain members of senior management participate in the long-term incentive plan (LTIP). Under the long-term incentive plan, there are two different arrangements, which are described below:

Type of arrangement

Real share plan

Phantom plan

Date of grant(s)

In May of each year since 2005

In May of each year since 2009

Contractual life

6 years or indefinite

5 or 6 years

Vesting conditions

3, 4 or 5 years of service

3 or 4 years of service

Method of settlement

Equity-settled

Cash-settled

Basis for value at settlement

The listed share price of GrandVision N.V. on Euronext Amsterdam (GVNV.AS)

The listed share price of GrandVision N.V. on Euronext Amsterdam (GVNV.AS)

Historical treatment of long-term incentive plans

The plans are structured in such a way that, until an IPO became probable, the fair value of the awards was based on an internal measure. Accordingly, these plans have been accounted for under IAS 19 in the previous financial statements, including and up to the annual financial statements ending on 31 December 2013.

In the event of a listing (or when it is probable that a listing will occur), the fair value of the shares becomes based on a market measure (the listed share price) and represents the fair value of the Company’s share price. During 2014 management updated their best estimate and determined that the probability threshold that a listing would occur had been met. The listing indeed occurred on 6 February 2015. The change in the settlement of the awards and options as a result of a probable listing has therefore moved the scope of the awards and options from IAS 19 to IFRS 2, as the settlement is now in shares that are not redeemable or cash equal to the listed share price and future grants will be based on the current listed share price.

Real share plan

The real share plan provides the possibility to participants to purchase shares in the Company which they are required to keep for a holding period. After the holding period the Company makes an offer for 50% of the shares after a certain period of time – typically four years – and another offer for the remaining 50% of the shares on the fifth-year anniversary of grant. However, this redemption option has been canceled upon listing of the Company’s shares and the plan has become equity-settled. Vesting of awards granted under the real share plan is based on a service condition that can vary from 3 to 5 years.

The real share plan has historically been accounted for under IAS 19 and classified as a liability, as the plan was settled in cash to be paid by the Company upon exercise of the awards. Upon listing, the requirement for the Company to offer to settle the shares in cash has been eliminated. The awards exercised are now to be settled in equity.

Under IFRS 2, for equity-settled arrangements, the fair value of options or shares granted to employees is measured at grant date. The costs of share-based compensation plans are determined based on the fair value of the shares and the number of shares expected to vest. The fair value is recognized as costs in the Income Statement over the vesting period of the shares against an increase in equity for equity-settled share-based compensation plans.

Upon transition from IAS 19 to IFRS 2, the expense recognition under the LTIP arrangements was adjusted to reflect the expense recognition that would have occurred if the arrangements had been accounted for under IFRS 2 from the respective grant dates. As the Company’s shares were not listed, management has estimated the grant date fair value. This estimate is based on a combination of a market approach and income approach. The results of the share valuations and the related share-based payment expenses are dependent on the model and input parameters used. Even though management considers the fair values reasonable and defensible based on the methodologies applied and the information available, others might derive at a different fair market value for the awards granted under the Company’s share-based payment plans. This resulted in an incremental income (reversal of expense) of €2,531 driven by higher fair values using the internal measure versus the grant date fair value. This income is recognized general and administrative costs in the Income Statement during 2014 and classified under non-recurring items (refer to note 35).

On 21 May 2011, the real share plan was modified so that all shares were settled as shares in GrandVision BV. As the plan is now classified as equity-settled under IFRS 2, this event is now considered to be a modification, and any incremental fair value granted to the participants has been considered. An amount of €2,309 in incremental fair value was provided to the participants as part of this modification event and incremental expense was therefore recorded upon transition of the plan from IAS 19 to IFRS 2 during 2014.

The table below shows the movements in the number of shares of the real share plan for key management and employees:

Th. A. Kiesselbach (CEO)

P.J. de Castro Fernandes (CFO)

Employees

Total

Outstanding at 1 January 2014

51,720

12,551

104,405

168,676

Granted

-

-

19,388

19,388

Settled

- 1,027

-

- 5,560

- 6,587

Outstanding at 31 December 2014

50,693

12,551

118,233

181,477

Of those shares outstanding under the real share plan at 31 December 2014, for 76,319 shares the holding period has ended.

On 20 January 2015 the Group issued 241,721,553 ordinary shares and the above amounts were adjusted accordingly without an impact on the value.

Phantom plan

The phantom plan provides participants with the right to receive cash based on the appreciation in the Company’s share price between the date of grant and the vesting date. Participants are granted phantom shares as well as phantom options under the phantom plan. Phantom shares and options are cash-settled and contain a service condition of 3-5 years and can contain in addition performance conditions based on the results of certain Company targets. Under IFRS 2, for cash-settled plans, the fair value of the liability for the awards granted is remeasured at each reporting date and upon settlement. Furthermore, the amount of expense each period is recognized over the vesting period. The phantom option plan can contain performance conditions that are based on the performance targets of respective business units in the organization. The amount of expense recognized takes into account the best available estimate of the number of equity instruments expected to vest under the service and performance conditions ascribed to each phantom share and option granted.

The estimate for the liability (and corresponding expense recognition) has been affected by the increase in the probability of a listing, since the estimated fair value of the Company’s shares is higher than the value of the shares determined by the formula used before the application of IFRS 2. As the probability of the listing increased, the estimate for the total fair value of liability increased in proportion. This resulted in an incremental expense of €20,975, which was recognized in general and administrative costs in the Income Statement during 2014 and classified among non-recurring items (refer to note 35). The estimate for the liability will change with the corresponding changes in the probability of an IPO occurring, with the changes being recognized during those periods in which the change in estimate occurs. Also, the liability will be increased and expense recognized as the vesting of phantom shares and options occurs over time.

The table below shows the movements in the phantom plan for key managements and employees:

Th. A. Kiesselbach (CEO)

P.J. de Castro Fernandes (CFO)

Employees

Total phantom shares and options

Outstanding at 1 January 2014

6,462

3,720

173,195

183,377

Adjusted for performance conditions at vesting

-

-

- 4,662

- 4,662

Granted

5,142

1,150

32,412

38,704

Forfeited

-

-

- 24,667

- 24,667

Outstanding at 31 December 2014

11,603

4,870

176,278

192,751

Phantom shares

Phantom options

Weighted average exercise price in EUR per share

At 1 January 2014

48,096

135,281

142.54

Adjusted for performance conditions at vesting

- 1,430

- 3,232

127.59

Granted

34,954

3,750

129.30

Forfeited

- 6,802

- 17,865

140.27

At 31 December 2014

74,817

117,934

142.87

Of those phantom shares outstanding under the phantom plan at 31 December 2014, 8,840 were vested.

Of those phantom options outstanding under the phantom plan at 31 December 2014, 26,162 were exercisable. As of 31 December 2014 the weighted average remaining contractual life for outstanding phantom options was 2.9 years.

The total fair value of all phantom stock options granted as of 31 December 2014 was €28,218. The fair value was determined on the reporting date based on the Black-Scholes-Merton option pricing formula. The following assumptions were used:

Phantom options

31 December 2014

Exercise price in EUR

119.51 – 205.15

Share price in EUR*

400.00

Volatility

21.9% – 34.7%

Dividend yield

1.50%

Expected remaining option life in years

0.4 – 4.4

Annual risk-free interest rate %

-0.11% – 0.01%

* Share price before additional issuance of shares. Restated share price: 20 EUR

The expected volatility used is based on the weighted average historical, annualized volatilities of a group of comparable, listed companies. The share price used is based on the IPO price at 6 February 2015.

The table below presents the total expense of the share-based payment plans in 2014 as well as the movements in the liability and equity triggered by the change to the estimate of the probability of an IPO, resulting in the plans being classified as IFRS 2 share-based compensation plans:

in thousands of EUR

Real share plan

Phantom plan

Liability

Equity

Liability

1 January 2014

25,079

-

5,280

Expenses

7,712

500

10,918

Settlements

- 1,019

-

- 715

Incremental expense for transition from IAS 19 to IFRS 2

- 31,772

29,241

20,975

31 December 2014

-

29,741

36,458

The phantom plans issued in 2011, 2012, 2013 and 2014 have been converted from cash-settled to equity-settled in the listing of GrandVision N.V. on Euronext Amsterdam at 6 February 2015. The phantom plans issued in 2009 and 2010 remained cash-settled. On 20 January 2015 new shares were issued that increased the number of shares held by the participants without an impact on the value of GrandVision.