Philips 2004 Annual Report Download - page 25

performance, as well as to the team targets. The financial targets,
based on US GAAP financial measures, pursue value creation as
the main business objective and are set aiming for year-over-year
improvement.
The on-target Annual Incentive percentage is set at 60% of base
salary, and the maximum Annual Incentive achievable is 90% of the
annual base salary. In exceptional circumstances, the
Remuneration Committee may decide to increase this percentage
by 20% (resulting in an Annual Incentive percentage of 108%). The
Annual Incentive pay-out in any year relates to the achievements
of the preceding financial year versus agreed targets. As a result,
Annual Incentives paid in 2004 relate to the salary levels and the
performance in the year 2003. Similarly, the Annual Incentive
payable in 2005 will be calculated on the basis of the 2004 annual
results.
The 2003 results led to an annual incentive pay-out in 2004, based
on the degree of achievement of the financial target and team
targets for 2003. The Annual Incentive pay-out in 2004 and for the
previous two years is shown in the next table.
Pay-out in 2002 Pay-out in 2003 Pay-out in 2004
Members Board of
Management 1)
Realized
Annual
Incentive
asa%of
base salary
(2001)
Realized
Annual
Incentive
asa%of
base salary
(2002)
Realized
Annual
Incentive
asa%of
base salary
(2003)
G.J. Kleisterlee 0 0% 229,640 27.8% 867,600 86.8%
J.H.M. Hommen 0 0% 187,213 27.8% 711,432 86.8%
G.H.A. Dutiné n.a.3) n.a.3) 158,0002) 42.1% 438,138 86.8%
A. Huijser n.a.3) n.a.3) 93,9442) 27.8% 433,800 86.8%
1) Reference date for Board membership is December 31, 2004
2) Related to period April – December 2002
3) Not applicable due to the fact that respective member was not a member of the Board of
Management at that time
The differences in pay-out are related to the level of performance
in each year.
Long-Term Incentive Plan
For many years Philips has operated a Long-Term Incentive Plan
(LTIP), which has served to align the interests of the participating
employees with the shareholders’ interests and to attract,
motivate and retain participating employees. Until 2002 the
long-term incentive awards consisted exclusively of stock options,
but since 2003 a LTIP approved by the General Meeting of
Shareholders has been in place consisting of a mix of restricted
share rights and stock options.
For grantees, this LTIP results in less volatility in their income. For
the Company the plan reduces the impact of future share
overhang, because restricted share rights will partly replace the
original number of stock options in each grant (1 restricted share
right for 3 stock options).
By granting additional (premium) shares after the grantees have
held the restricted shares for 3 years after delivery, provided they
are still in service, grantees will be more stimulated to focus on the
longer term as shareholders of the Company.
The actual number of long-term incentives that will be granted to
the Members of the Board of Management, the other members of
the Group Management Committee, Executives and other key
employees depends on the team and/or individual performance of
the team/individual and on the share performance of Philips.
The share performance of Philips is measured on the basis of the
Philips Total Shareholder Return (TSR) compared to the TSR of a
peer group of 24 leading multinational electronics/electrical
equipment companies over a three-year period*. The TSR
performance of Philips and the companies in the peer group is
divided into quintiles. Based on this relative TSR position at the
end of December, the Supervisory Board establishes a multiplier
which varies from 0.8 – 1.2 and depends on the quintile in which
the Philips TSR results fall. For 2004 the Supervisory Board has
applied a multiplier of 1.0, based on the Philips share performance
over the period from the last working day in December 2000 to
December 31, 2003. Based on this calculation method, the
General Meeting of Shareholders approved a pool of 12 million
stock options and 4 million restricted share rights (based on a
multiplier of 1.1 but excluding premium shares).
Every individual grant, the size of which depends on the positions
(often job grade) and performance of the individuals, will be
multiplied by the outcome of the multiplier.
*Electrolux, Emerson Electric, Ericsson, General Electric, Gillette, Hitachi, IBM, Intel, LG
Electronics, Lucent, Marconi, Matsushita, Motorola, NEC, Nokia, Philips, Samsung, Sanyo
Electric, Sharp, Siemens, Sony, Texas Instruments, Tyco International, Whirlpool
In 2004, 6,735,850 stock options and 2,239,816 restricted share
rights were granted under the LTIP (excluding the premium shares
to be delivered after a three-year holding period); in 2003,
7,522,845 stock options and 2,463,512 restricted share rights
were granted.
This LTIP will be continued in 2005 and subsequent years. If
substantial changes are to be made, Philips will again seek
shareholder approval.
24 Philips Annual Report 2004
Supervisory Board Report