27 Share-based payments

The Group operates several equity-based and cash-based compensation plans, including a stock option plan, a stock appreciation rights plan, a stock award plan and a performance share plan to compensate employees for services rendered.

The stock option plan, the stock award plan and the performance share plan are equity-settled, whereas the stock appreciation rights plan is a cash-settled plan. Besides these plans, the Group also operates employee stock purchase plans in the U.K. and the U.S. and phantom share plans. The expenses incurred for these plans are immaterial.

27.1 Stock option plan and stock appreciation rights plan

The Governance, Nomination and Compensation Committee (GNCC) granted options on UCB SA shares to the Executive Committee members, the senior executives and the senior directors of the UCB Group. The exercise price of the granted options under these plans is equal to the lowest of the following two values:

  • the average of the closing price of the UCB shares on Euronext Brussels, during the 30 days preceding the offer; or
  • the closing price of the UCB shares on Euronext Brussels the day before the grant.

A different exercise price is determined for those eligible employees subject to legislation which requires a different exercise price in order to benefit from reduced taxation. The options become exercisable after a vesting period of three years, except for those eligible employees subject to legislation which requires a longer vesting period in order to benefit from reduced taxation. If an employee leaves the Group, his/her options usually lapse upon expiry of a period of six months. Options do not lapse in case of death or retirement and in case of involuntary termination when taxes have been paid upon grant. The Group has no obligation to repurchase or settle the options in cash.

The options are not transferable (except in case of death).

The Stock Appreciation Rights (S.A.R.’s) plan has similar characteristics to the stock option plan, except that it is reserved for UCB employees in the U.S. This plan is cash-settled.

27.2 Stock award plan

The GNCC granted free UCB SA shares to the Executive Committee members, the senior executives and the senior and middle management of the UCB Group. The free shares have service conditions attached to them whereby beneficiaries are required to remain in service for three years post grant date. Stock awards lapse upon leaving the Group, except upon leaving on retirement or death in which case they vest immediately. The beneficiary is not entitled to dividends during the vesting period.

27.3 Performance share plan

The GNCC granted performance shares to senior executives for specific achievements aligned with company strategic priorities. The performance shares are conditional on the beneficiary completing three years of service (the vesting period) and the number of shares award is adjusted at the end of the vesting period based on the company’s performance against its goals.

Performance Shares lapse upon leaving the Group, except upon leaving on retirement or death in which case they vest immediately. The beneficiary is not entitled to dividends during the vesting period.

27.4 Phantom stock option, stock award and performance share plans

The Group also has phantom stock option, phantom stock award and phantom performance share plans (collectively referred to as phantom plans). These phantom plans apply to certain employees who have an employment contract with certain affiliates of the Group and are governed under similar rules to the Group stock option, stock award and performance share plans except for their settlement. As of 31 December 2018, these plans had 238 participants (2017: 269) and the share-based payment expense incurred for these plans is immaterial.

27.5 Employee stock purchase plans in the U.S.

The plan is intended to provide employees of UCB affiliates in the U.S. with an opportunity to purchase common stock of the Group. Shares are acquired at a discount of 15% which is funded by UCB. Employees save a defined percentage of their salary through payroll deduction and shares will be purchased with after-tax employee contributions. The shares are held by an independent third-party banking institution in an account in the employee’s name.

The limit placed on employees’ participation in the plan is as follows:

  • between 1% and 10% of each participant’s compensation;
  • USD 25 000 per year per participant;
  • maximum of USD 5 million total ownership by U.S. employees in all forms of share plans over a rolling period of 12 months.

As of 31 December 2018, the plan had 559 participants (2017: 514). There are no specific vesting conditions and the share-based payment expense incurred for this plan is immaterial.

27.6 Stock savings plan in the U.K.

The purpose of this plan is to encourage the holding of UCB shares by employees in the U.K. Participants save a certain portion of their salary through payroll deductions and UCB matches every 5 shares bought by each participant with 1 free share. Shares are held in an account in the employee’s name by an independent company that acts as a trustee. Employee contributions to the plan are limited to the lower of:

  • 10% of each participant’s compensation;
  • GBP 1 500 per year per participant.

As of 31 December 2018, the plan had 238 participants (2017: 180) and the share-based payment expense incurred for this plan is immaterial.

27.7 Share-based payment expense

The total share-based payment expense incurred for the Group amounted to € 65 million (2017: € 88 million), and has been included in the relevant functional lines within the income statement as follows:

 

 

 

€ million

2018

2017

Cost of sales

5

4

Marketing and selling expenses

25

47

Research and development expenses

25

19

General and administrative expenses

10

18

Other operating expenses

Total operating expense

65

88

Of which, equity-settled:

 

 

Stock option plans

7

6

Stock award plans

43

59

Performance share plan

7

13

Of which, cash-settled:

 

 

Stock appreciation rights plan

4

5

Phantom stock option, stock award and performance share plans

4

5

 

 

 

27.8 Stock option plans

The movements in the number of stock options outstanding and their related weighted average exercise prices as at 31 December are:

 

 

 

 

 

 

 

 

2018

2017

€ million

Weighted average fair value (€)

Weighted average exercise price (€)

Number of stock options

Weighted average fair value (€)

Weighted average exercise price (€)

Number of stock options

Outstanding at 1 January

10.01

47.91

4 807 210

9.66

44.40

5 312 229

+ New options granted

11.55

66.18

563 267

12.79

70.29

501 278

(-) Options forfeited

11.79

65.38

47 382

10.49

58.49

60 880

(-) Options exercised

8.88

37.82

1 103 701

9.43

38.67

823 317

(-) Options expired

4.33

22.01

21 960

9.14

43.57

81 700

Outstanding at 31 December

10.53

52.95

4 197 434

10.01

47.91

4 807 210

Number of options fully vested:

 

 

 

 

 

 

At 1 January

 

 

3 011 624

 

 

3 326 315

At 31 December

 

 

2 362 106

 

 

3 011 624

 

 

 

 

 

 

 

The stock options outstanding as at 31 December 2018 with the following last exercise dates and exercise prices are:

 

 

 

Last exercise date

Range of exercise prices (€)

Number of stock options

31 March 2019

[21.38–22.75]

55 800

31 March 2020

31.62

199 300

31 March 2021

[25.32–26.80]

344 100

31 March 2022

32.36

599 779

31 March 2023

[48.69–49.80]

709 200

31 March 2024

58.12

353 577

31 March 2025

67.35

435 639

31 March 2026

67.23

461 996

31 March 2027

[70.26–72.71]

481 076

31 March 2028

66.18

556 967

Total outstanding

 

4 197 434

 

 

 

The fair value has been determined based on the Black-Scholes valuation model.

The volatility was determined primarily by reference to historically observed share prices of UCB over the last five years. The probability of early exercise is reflected in the expected life of the options. The expected forfeiture rate is based on actual turnover of employees for categories eligible for stock option compensation.

The significant assumptions used in the measurement of the fair value of the stock options granted in 2018 and 2017 are:

 

 

 

 

 

 

2018

2017

Share price at grant date

65.98

72.53

Weighted average exercise price

66.18

70.29

Expected volatility

%

25.78

24.06

Expected option life

Years

5.00

5.00

Expected dividend yield

%

1.79

1.59

Risk free interest rate

%

-0.05

-0.14

Expected annual forfeiture rate

%

7.00

7.00

 

 

 

 

27.9 Stock appreciation rights (S.A.R.’s) plan

The movements of the S.A.R.’s and the model inputs as at 31 December 2018 can be found in the table below.

The fair value of the S.A.R.’s at grant date is determined using the Black-Scholes model. The fair value of the liability is remeasured at each reporting date.

 

 

 

 

 

 

2018

2017

Outstanding rights as of 1 January

 

1 142 697

1 320 926

+ New rights granted

 

163 378

167 809

(-) Rights forfeited

 

77 422

51 232

(-) Rights exercised

 

249 193

292 106

(-) Rights expired

 

2 500

2 700

Outstanding rights as of 31 December

 

976 960

1 142 697

The significant assumptions used in the measurement of the fair value of the stock appreciation rights are:

 

 

 

Share price at year end

71.30

66.18

Exercise price

66.18

70.26

Expected volatility

%

25.59

25.66

Expected option life

Years

5.00

5.00

Expected dividend yield

%

1.65

1.74

Risk free interest rate

%

-0.03

-0.14

Expected annual forfeiture rate

%

7.00

7.00

 

 

 

 

27.10 Stock award plans

The share-based payment expense related to these stock awards is spread over the vesting period of three years.

The beneficiaries are not entitled to dividends during the vesting period. The movement in the number of stock awards outstanding at 31 December is as follows:

 

 

 

 

 

 

2018

2017

 

Number of stock awards

Weighted average fair value (€)

Number of stock awards

Weighted average fair value (€)

Outstanding at 1 January

1 965 445

69.59

1 850 490

64.76

+ New stock awards granted

851 379

66.08

865 475

72.26

(-) Awards forfeited

165 637

69.15

123 441

68.21

(-) Awards converted in phantom plans

0

0

44 729

63.09

(-) Awards vested and paid out

569 658

67.00

582 350

58.99

Outstanding at 31 December

2 081 529

68.60

1 965 445

69.59

 

 

 

 

 

27.11 Performance share plans

The movement in the number of performance shares outstanding at 31 December is as follows:

 

 

 

 

 

 

2018

2017

 

Number of shares

Weighted average fair value (€)

Number of shares

Weighted average fair value (€)

Outstanding at 1 January

334 967

69.66

322 861

63.92

+ New performance shares granted

137 785

65.99

152 653

72.53

+ Shares converted from pension plan

0

0

77 714

64.61

(-) Performance shares forfeited

14 717

70.29

28 561

68.65

(-) Performance shares vested

91 160

67.30

189 700

59.43

Outstanding at 31 December

366 875

68.84

334 967

69.66