Long-Term Incentive Plan
Introduction
Please find below the main features of the Long-Term Incentive Plan (LTIP), approved by the
General Meeting of Shareholder. Future substantial changes to the LTIP applicable to members
of the Board of Management will be submitted to the General Meeting of Shareholders.
Features of the Long-Term Incentive Plan
Type of plan
The long-term incentive plan (‘LTI Plan’) allows for the award of performance-related shares
(‘performance shares’), without the facility to grant options.
Eligibility
Under the LTI Plan members of the Board of Management will be eligible. A similar plan will
apply to senior management and key employees.
Size of awards
The annual award size is set by reference to a multiple of base salary (compared to a fixed
number of options and restricted share rights in previous years under the current LTI Plan).
For the CEO the annual award size is set at 120% of base salary. For the other members of the
Board of Management the annual award size is set at 100% of base salary1. This is considered to
be a mid-market level against leading European listed companies.
1 For
members of the Board of Management from the United States of America, the size of the award
can be doubled.
Long-Term Incentive Plan 2
The actual number of performance shares to be awarded is determined by reference to the
average closing price of the Philips share on the day of publication of the quarterly results and
the four subsequent dealing days.
Vesting schedule
A cliff-vesting three years after the date of grant applies, dependent upon the achievement of
the performance conditions (compared to a three-year tranched vesting for restricted share
rights granted in previous years under the current LTI Plan).
During the vesting period, the value of dividends will be added to the performance shares in
the form of shares. These dividend equivalent shares will only be delivered to the extent that
the award actually vests. Unlike the current LTI Plan, no premium shares will be awarded under
the proposed LTI Plan.
Performance conditions
Vesting of the performance shares is based on two equally weighted performance conditions:
• 50% Relative Total Shareholder Return (‘TSR’); and
• 50% Adjusted Earnings per Share growth (‘EPS’).
TSR
A ranking approach to TSR applies with Philips itself excluded from the peer group to permit
interpolation. The TSR peer group is extended from 11 to 21 companies2 . To the current 11
peer companies, 10 companies are added that together reflect the portfolio of Philips and are
comparable in terms of industry, market capitalization, revenues and number of employees.
The performance incentive-zone is outlined in the table below:
TSR
≥21 ≥20 ≥19 ≥18 ≥17 ≥16 ≥15 ≥14 ≥13 ≥12 ≥11 ≥10 ≥9 ≥8 ≥7 ≥6 ≥5 ≥4 ≥3 ≥2 ≥1
Philips
Pay-out 0% 0% 0% 0% 0% 0% 0% 0% 60% 60% 100% 120% 140% 160% 180% 200% 200% 200% 200% 200% 200%
For performance between 50th percentile and 25th percentile a ranking method with straight-
line interpolation would apply.
pay-out
200%
200%
pay-out
150%
100%
PAY-OUT %
pay-out
100%
60%
pay-out
50%
0%
pay-out
0% 60th 50th 25th
percentile percentile percentile
Company Company Company Company
21 - 14 13 & 12 11 - 6 6-1
2 ABB, Covidien, Danaher, Eaton, Electrolux, Emerson Electric, General Electric, Hitachi, Honeywell
International Inc, Johnson Control, Johnson & Johnson, Le Grand, LG Electronics, Matsushita,
Medtronic, Procter & Gamble, Schneider Electric, Siemens, Toshiba Corp, Smiths Group, 3M.
Long-Term Incentive Plan 3
The performance incentive-zone with zero vesting below the 60th percentile and 200% vesting
for performance levels above the 25th percentile is considerably steeper than in the current
LTI Plan. The Supervisory Board will review over time the possibility to further reduce the
vesting for below median performance.
EPS
EPS growth is calculated applying the simple point-to-point method at year-end.
Earnings are the income from continued operations attributable to shareholders as reported in
the annual report.
To eliminate the impact of any share buyback, stock dividend etcetera, the number of shares
to be used for the purpose of the EPS realization will be the number of common shares
outstanding (after deduction of treasury shares) on the day prior to the beginning of the
performance period.
Earnings are adjusted for changes in accounting policies during the performance period.
The Supervisory Board has discretion to include further adjustments in extraordinary
circumstances (e.g. impairments, restructuring activities, pension items) with a significant
impact.
The following performance incentive-zone applies for EPS:
Below
Adjusted EPS growth Philips Threshold Target Maximum
threshold
Pay-out 0% 40% 100% 200%
The EPS targets will be set by the Supervisory Board annually. EPS targets are considered
to be company sensitive therefore these will be disclosed retrospectively at the end of the
performance period. EPS targets and the achieved performance will be published in the first
annual report after the relevant performance period. The Supervisory Board will review over
time the possibility to move to ex ante disclosure at the start of the performance period.
Long-Term Incentive Plan 4
Example*
In year 1 a member of the Board of Management receives X performance shares.
At the end of the three year performance period Philips’ TSR performance is exactly equal to the TSR
performance of the peer company ranking 10, resulting in a vesting of 120% for the TSR part.
The EPS performance equals the target performance, resulting in 100% vesting for the EPS part.
The total vesting for this award will be:
50% x 120% + 50% x 100% = 110% of the number of performance shares awarded in year 1
Year 1 Year 2 Year 3 Year 4
Award of X Delivery of
performance 110% * X
shares shares
* Example is excluding the effect for stock dividend added during the performance period.
Grant dates
There are four dates of grant per year, which will be on the last day of the five-day averaging
period after publication of the annual results and the quarterly results. The main grant will be
once a year after publication of the first-quarter results; other dates of grant can be used in
exceptional circumstances, for example in the event of initial grants to new employees. In 2013,
as an exception the grant will be made on May 3 after approval of the LTI Plan by the Annual
General Meeting of Shareholders.
Claw-back
As stated in the Corporate Governance section of the annual report, as of 2009 the so-called
claw-back clause of the Dutch Corporate Governance Code is applicable to LTI grants to
members of the Board of Management. For grants as of 2013, the claw-back clause will be
extended to include cases of a serious violation of the Philips General Business Principles or
applicable law.
Change of control
In the event of a change of control of the Company, the Supervisory Board at its sole discretion
can decide to accelerate the vesting of any unvested awards, subject to the achievement of the
performance conditions to the date of completion of the change of control in accordance with
the performance incentive-zone in place, taking into account the principles of reasonableness
and fairness and, unless the Supervisory Board determines otherwise, the shares which vest
will in principle be reduced on a time pro-rated basis.
Mandatory share ownership
Simultaneously with the introduction of the proposed LTI Plan, the guideline for members of
the Board of Management to hold a certain number of shares in the company is tightened,
i.e. 300% of base salary for the CEO and 200% of base salary for the other members of the
Board of Management. The guideline is to retain all after-tax shares and not to require own
purchases.
Long-Term Incentive Plan 5
Annual pool size
The maximum number of shares to be granted on a yearly basis in aggregate to all employees
under LTI Plans will not exceed the current pool size of 17.5 million (excluding dividend
equivalent shares or vesting above 100%) of which 3% is available for the members of the Board
of Management.
Changes to the plan
Substantial changes to the LTI Plan applicable to the Board of Management will be submitted
to the General Meeting of Shareholders for approval, such as changes in the peer group - for
reasons such as delisting of a peer company or a substantial change of its activities - exceeding
two companies on an annual basis (for instance due to a merger of two peer companies) or
four companies in total.
Deviations on elements of this plan in extraordinary circumstances, when deemed necessary
in the interests of the Company, will be disclosed in the annual report or, in case of an
appointment, in good time prior to the appointment of the individual.
