Philips 2006 Annual Report Download - page 228

Philips Annual Report 2006228
the Board of Management was adopted by the 2004 General Meeting
of Shareholders, and lastly amended by the 2006 General Meeting of
Shareholders and is published on the Company’s website. A full and
detailed description of the composition of the remuneration of the
individual members of the Board of Management is included in the
chapter Report of the Supervisory Board of this Annual Report
and other parts of this Annual Report.
The remuneration structure, including severance pay, is such that it
promotes the interests of the Company in the medium and long-term,
does not encourage members of the Board of Management to act
in their own interests and neglect the interests of the Company, and
does not reward failing members of the Board of Management upon
termination of their employment. The level and structure of remuneration
shall be determined in the light of factors such as the results, the share
price performance and other developments relevant to the Company.
The main elements of the contract of employment of a new member
of the Board of Management - including the amount of the (fi xed) base
salary, the structure and amount of the variable remuneration component,
any severance plan, pension arrangements and the general performance
criteria - shall be made public no later than at the time of issuance of
the notice convening the General Meeting of Shareholders in which
a proposal for appointment of that member of the Board of Management
has been placed on the agenda. From August 1, 2003 onwards, for new
members of the Board of Management the term of their contract of
employment is set at a maximum period of four years, and in case of
termination, severance payment is limited to a maximum of one year’s
base salary subject to mandatory Dutch law, to the extent applicable;
if the maximum of one-year’s salary would be manifestly unreasonable
for a member of the Board of Management who is dismissed during
his fi rst term of offi ce, the member of the Board of Management shall
be eligible for a severance payment not exceeding twice the annual
salary. The Company does not grant personal loans, guarantees or the
like to members of the Board of Management, and no such (remissions
of) loans and guarantees were granted to such members in 2006, nor
are outstanding as per December 31, 2006.
In 2003, Philips adopted a Long-Term Incentive Plan (‘LTIP’ or the
‘Plan’)
consisting of a mix of restricted shares and stock options
for members of the Board of Management, the Group Management
Committee, Philips executives and other key employees. This Plan
was approved by the 2003 General Meeting of Shareholders. Future
substantial changes to the Plan applicable to members of the Board
of Management will be submitted to the General Meeting of
Shareholders for approval. As from 2002, the Company grants fi xed
stock options that expire after ten years to members of the Board of
Management (and other grantees). The options vest after three years
and may not be exercised in the fi rst three years after they have been
granted. Options are granted at fair market value, based on the closing
price of Euronext Amsterdam on the date of grant, and neither the
exercise price nor the other conditions regarding the granted options
can be modifi ed during the term of the options, except in certain
exceptional circumstances in accordance with established market
practice. The value of the options granted to members of the Board
of Management and other personnel and the method followed in
calculating this value are stated in the notes to the annual accounts.
Philips is one of the fi rst companies to have introduced restricted
shares as part of the LTIP. A grantee will receive the restricted shares
in three equal installments in three successive years, provided he/she
is still with Philips on the respective delivery dates. If the grantee still
holds the shares after three years from the delivery date, Philips will
grant 20% additional (premium) shares, provided he/she is still with
Philips. The Plan is designed to stimulate long-term investment in
Philips shares. To further align the interests of members of the Board
of Management and shareholders, restricted shares granted to these
members of the Board of Management shall be retained for a period
of at least fi ve years, instead for a period of three years, or until
at least the end of employment, if this period is shorter.
The actual number of long-term incentives (both stock options
and restricted shares) that are to be granted to the members of the
Board of Management will be determined by the Supervisory Board
and depends on the achievement of the set team targets in the areas
of responsibility monitored by the individual members of the Board
of Management 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 composition of this group is described in
the chapter Report of the Supervisory Board of this Annual Report. 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 to
1.2 and depends on the quintile in which the Philips TSR result falls.
Every individual grant, the size of which depends on the positions and
performance of the individuals, will be multiplied by the multiplier.
Members of the Board of Management hold shares in the Company
for the purpose of long-term investment and are required to refrain
from short-term transactions in Philips securities. According to the
Philips’ Rules of Conduct on Inside Information, members of the Board
of Management are only allowed to trade in Philips securities (including
the exercise of stock options) during ‘windows’ of ten business days
following the publication of annual and quarterly results (provided the
person involved has no ‘inside information’ regarding Philips at that
time) unless an exemption is available. Furthermore, the Rules of
Procedure of the Board of Management contain provisions concerning
ownership of and transactions in non-Philips securities by members
of the Board of Management and the annual notifi cation to the Philips
Compliance Offi cer of any changes in a member’s holdings of securities
related to Dutch listed companies. In order to avoid the impression
that the Company should or could take corrective action in respect
of a certain transaction in securities in another company by a member
of the Board of Management and the unnecessary administrative burden,
the Supervisory Board and the Board of Management consider this
annual notifi cation to be in line with best practices and suffi cient to reach
an adequate level of transparency; however, it does not fully comply
with the Dutch Corporate Governance Code recommendation II.2.6
which requires notifi cation on a quarterly basis. Members of the Board
of Management are prohibited from trading, directly or indirectly, in
securities in any of the companies belonging to the above mentioned
peer group of 24 leading multinational electronics / electrical companies.
Indemnifi cation of members of the Board of Management
and Supervisory Board
Unless the law provides otherwise, the members of the Board of
Management and of the Supervisory Board shall be reimbursed by
the Company for various costs and expenses, such as the reasonable
costs of defending claims, as formalized in the articles of association.
Under certain circumstances, described in the articles of association,
such as an act or failure to act by a member of the Board of Management
or a member of the Supervisory Board that can be characterized as
intentional (“opzettelijk”), intentionally reckless (“bewust roekeloos”)
or seriously culpable (“ernstig verwijtbaar”), there will be no entitlement
to this reimbursement. The Company has also taken out liability insurance
(D&O - Directors & Offi cers) for the persons concerned.
Supervisory Board
General
The Supervisory Board supervises the policies of the Board of
Management and the general course of affairs of Philips and advises
the executive management thereon. The Supervisory Board, in the
two-tier corporate structure under Dutch law, is a separate body that
is independent of the Board of Management. Its independent character
is also refl ected in the requirement that members of the Supervisory
Board can be neither a member of the Board of Management nor an
employee of the Company. The Supervisory Board considers all its
members to be independent under the applicable US Securities and
Exchange Commission standards and pursuant to the Dutch
Corporate Governance Code.
The Supervisory Board, acting in the interests of the Company and the
Group and taking into account the relevant interest of the Company’s
stakeholders, supervises and advises the Board of Management in
performing its management tasks and setting the direction of the Group’s
business, including (a) achievement of the Company’s objectives, (b)
corporate strategy and the risks inherent in the business activities, (c)
the structure and operation of the internal risk management and control
systems, (d) the fi nancial reporting process, and (e) compliance with
legislation and regulations. Major management decisions and the Group’s
112 Group fi nancial statements 172 IFRS information 218 Company fi nancial statements