31 Share-based payment plans and arrangements
The Group has three share-based long-term incentive plans for certain members of management. The members of the Board of Directors receive a part of their total compensation under share-based payment arrangements. These plans and arrangements have an insignificant impact on the Group’s result. The Group expects to settle its obligations under these plans and arrangements by using own shares (treasury shares) – see note 24.
Share-based long-term incentive plans for SIG management
Performance share unit plan
Since 2019, the Group grants performance share units (“PSUs”) annually to the members of the Group Executive Board and certain other members of management. The terms and vesting conditions of the 2020 PSU plan are equivalent to the terms and vesting conditions of the 2019 PSU plan.
One PSU represents the contingent right to receive one SIG share. The number of granted PSUs is determined by dividing each participant’s award under the plan by the fair value of one PSU at the grant date. Vesting of the PSUs occurs three years after the grant date. The exact number of PSUs that vests depends on the long-term performance of SIG during the vesting period. The plan includes the following vesting conditions:
- Service condition: Employment at the vesting date.
- Two non-market performance conditions: Achievement of a cumulative diluted adjusted earnings per share target and a cumulative free cash flow target.
- One market performance condition: Achievement of a relative total shareholder return target, measured relative to the SPI® ICB Industry Industrials Index (with a vesting factor capped at 1.0 for a negative absolute TSR).
At vesting, the three performance conditions are first assessed individually to determine the level of achievement of the set targets (in a range from 0% to 200%). The achievement percentage of each performance condition is then combined based on a relative weighting of the performance conditions (50% for the total shareholder return target and 25% each for the earnings per share and cash flow targets). The combined vesting multiple determines how many shares the participants are entitled to at the end of the vesting period.
The fair value of one PSU is calculated based on a Monte Carlo simulation model, which reflects the probability of over- or underachieving the market performance condition. The model also takes into account various inputs such as the closing share price of one SIG share on the grant date and adjusts for expected dividends (discounted at a risk-free interest rate) to which the participants of the plan are not entitled until the PSUs vest after three years.
The grant date for the 2020 PSU plan was 1 April 2020 (1 April 2019 for the 2019 PSU plan). Under the 2020 PSU plan, eight employees were granted in total 342,198 PSUs, of which 325,586 PSUs relate to members of the Group Executive Board. Under the 2019 PSU plan, nine employees were granted in total 537,414 PSUs, of which 495,263 PSUs related to members of the Group Executive Board. For the 2020 plan, the fair value of one PSU was CHF 15.05 as of grant date (CHF 9.49 for the 2019 plan).
Three members of the Group Executive Board left the Company in the year ended 31 December 2020 (see further note 29). As a result, the total number of PSUs for both the 2019 and 2020 plans was reduced by 341,414 PSUs. These forfeited PSUs had an impact on the share-based payment expense recognised for the year ended 31 December 2020. As of 31 December 2020, a total of 538,198 PSUs were outstanding.
Restricted share unit plan
Since 2019, the Group annually grants restricted share units (“RSUs”) to a small number of selected employees. One RSU represents the contingent right to receive one SIG share, subject to the fulfilment of a three-year service vesting condition. The fair value of one RSU is calculated based on the closing share price of one SIG share on the grant date and adjusted for expected dividends (discounted at a risk-free interest rate) to which the participants of the plan are not entitled until the RSUs vest after three years.
The grant date for the 2020 RSU award was 1 April 2020 (1 April 2019 for the 2019 RSU plan). Under both the 2020 and 2019 RSU plans, two employees were granted a small number of RSUs. For the 2020 plan, the fair value of one RSU was CHF 13.60 as of grant date (CHF 9.27 for the 2019 plan).
Equity investment plan
In 2020, the Group introduced an equity investment plan (“EIP”) for a wider group of management in leadership positions under which the participants have the choice to invest in SIG shares at market value. The shares are blocked for three years. For each purchased share, the Group grants the participants two matching options to purchase another two shares at a pre-defined exercise price at the end of a three-year vesting period.
The grant date for the 2020 EIP award was 31 May 2020. 66 employees were granted in total 220,588 options. The fair value of one option, calculated using the Black-Scholes model, was CHF 2.82 as of grant date.
Share-based payment arrangements for members of the Board of Directors
The members of the Board of Directors receive 40% of their total compensation under share-based payment arrangements. The compensation amount is fixed. The share-based payment compensation is paid out in SIG shares that are blocked for three years. In the year ended 31 December 2019, a couple of members received RSUs instead of blocked shares. The grant date is the date of the Annual General Meeting (generally held in April), when the total compensation package for the next term of office is approved. The compensation is paid out four times during the one-year long term of office (i.e. there are four award dates, each relating to work performed during the quarter before the respective award date). The number of blocked shares is determined by dividing each board member’s individual compensation amount for one award cycle by the average closing price of the SIG share of the first ten trading days of the third month of the quarter for which the blocked shares are granted. The fair value of one blocked share is calculated based on the closing share price of one SIG share on the grant date.
The Group granted 39,884 blocked shares to the members of the Board of Directors in the year ended 31 December 2020 (40,842 blocked shares and 14,236 RSUs in the year ended 31 December 2019). The blocked shares have been delivered by using treasury shares (see note 24). The fair value of one granted instrument was CHF 14.93 as of grant date (CHF 10.02 for the year ended 31 December 2019).
Share-based payment expense
The share-based payment expense recognised as a personnel expense in the year ended 31 December 2020 relating to the PSU, RSU and equity investment plans for SIG management amounts to €2.6 million, of which €2.1 million relates to members of the Group Executive Board (€1.2 million for the year ended 31 December 2019, of which €1.1 million related to members of the Group Executive Board).
The share-based payment expense recognised as part of general and administrative expenses in the same period relating to the arrangement for the Board of Directors amounts to €0.6 million (€0.6 million for the year ended 31 December 2019).
The Group’s share-based payment plans and arrangements are all equity-settled payment arrangements. The grant date fair value of the awards is recognised as an expense, with a corresponding increase in equity (retained earnings), over the vesting period of the awards. The amount recognised as an expense is adjusted to reflect the number of awarded instruments for which the related service and any non-market performance conditions are expected to be met, such that the amount ultimately recognised is based on the number of awarded instruments that meet the related service and any non-market performance conditions at the vesting date. Any market performance conditions are reflected in the grant date fair valuation of the awarded instruments and there is no true-up during the vesting period or at the vesting date for differences between expected and actual outcomes. If there is no vesting period, the grant date fair value is immediately recognised as an expense.