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Note 21 Employee variable compensation and equity incentive schemes
The costs of all employee-related share-based payments are charged to the Consolidated Income Statement as personnel expenses over the vesting period. The share programmes are hedged by Total Return Swaps (TRS) which are settled with cash payments, allowing the Company to receive cash compensation to partially offset any change in the share price between the grant and settlement dates.
The fair value of employee services received in exchange for share awards is accounted for in a manner that is consistent with the method of settlement. The group will withhold from an employee’s compensation, by reducing the number of shares issued to the employee, an amount to satisfy the employee’s tax liability incurred as a result of the transaction. That tax-related amount is accounted for as a cash-settled share-based compensation. The amount of shares delivered to the employee is accounted for as an equity-settled transaction.
Short Term Incentive (STI) programmes
Salaries for senior management are negotiated individually. Stora Enso has incentive plans that take into account the performance, development and results of both business units and individual employees. This performance-based variable compensation system is based on profitability as well as on attaining key business targets.
Group Executives, division and business unit management have STI programmes in which the payment is calculated as a percentage of annual base salary with a maximum level ranging from 7% to 75%. Non-management employees participate in a STI programme with a maximum incentive level of 7%. All incentives are discretionary. These performance-based programmes cover most employees globally, where allowed by local practice and regulations. For performance year 2016, the annual incentive programmes were based on financial targets as well as individually set key targets. The financial success metrics in the STI programme are Operational EBITDA and Operative Working Capital to sales.
Long Term Incentive (LTI) programmes
Starting in 2004, the Board approved the implementation of two share-based programmes (Restrictive and Performance Share programmes). From 2005 to 2016, new share-based programmes have been launched each year. Since 2009, new long-term incentive programmes for executives have been mainly performance share programmes. The 2009 to 2013 Performance Share programmes vest in portions over three years, based on annually defined targets set by the Remuneration Committee. The 2014 to 2016 programmes have three year targets and vest in only one portion after three years. Previous programmes, launched in 2009 to 2011 vested up to an absolute maximum vesting level of 150% of the number of shares awarded, provided that the result of the performance criterion exceeded the target. In programmes since 2012, the absolute maximum vesting level is 100% of the number of shares awarded.
Three quarters (75%) of the awards under the 2014 to 2016 programmes are in Performance Shares, where shares will vest in accordance with performance criteria proposed by the Remuneration Committee and approved by the Board of Directors. The financial success metric in the 2016 Performance Share Plan is 3-year Economic Value Added (EVA) for the Stora Enso Group. One quarter (25%) of the awards under the 2014 to 2016 programmes are in Restricted Shares, for which vesting is only subject to continued employment.
The fair value of employee services received in exchange for share awards is accounted for in a manner that is consistent with the method of settlement. The group will withhold from an employee’s compensation, by reducing the number of shares issued to the employee, an amount to satisfy the employee’s tax liability incurred as a result of the transaction. That tax-related amount is accounted for as a cash-settled share-based compensation. The amount of shares delivered to the employees is accounted for as an equity-settled transaction.
The resulting cash-settled liability related to expected tax to be paid is remeasured at each reporting date to its fair value using estimates of the number of share awards that are expected to be issued and the latest fair valuations by using the Stora Enso R share year-end closing price of EUR 10.21 (EUR 8.39), adjusted for the present value of expected dividends, with all changes recognised immediately in the Income Statement. The equity-settled share awards, net of tax, are measured at the fair value of the equity instruments at the grant date, adjusted for the present value of expected dividends. The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the estimate of equity instruments that will eventually vest, with a corresponding increase in equity.
The outstanding restricted and performance share awards are shown below.
Share awards at 31 December 2016
Estimated Delivery of Outstanding Restricted and Performance Share Awards at Year End
Number of shares
1 015 271
1 015 271
1 391 479
1 403 087
1 164 989
1 164 989
1 026 879
1 391 479
1 164 989
3 583 347
The costs of the Stora Enso Share-based Programmes are recognised as costs over the vesting period, being the period between grant and award. The total impact of share-based programmes in the income statement amounted to an expense of EUR 6 (EUR 8) million, all related to restricted and performance share awards, of which the expense of EUR 2 (EUR 4) million relates to equity-settled share awards programmes. The year end liability of EUR 8 (EUR 5) million is shown in non-current operative liabilities and is all related to the restricted and performance share awards.
The share programmes are hedged by Total Return Swaps (TRS) which are settled with cash payments, allowing the Company to receive cash compensation to partially offset any change in the share price between the grant and settlement dates. Group TRS instruments do not qualify for hedge accounting and therefore periodic changes to their fair value are recorded in the Income Statement in operative costs alongside the share-based programme costs to which they relate.
At the year end, there were TRS instruments outstanding covering 2 700 000 (2 900 000) underlying Stora Enso Oyj R shares recorded at a net fair value asset of EUR 3 (liability EUR 3) million. The change from a net liability of EUR 3 million to a net asset of EUR 3 million is due to a fair value change of EUR 6 million due to the increase in share price from EUR 8.39 at 31 December 2015 to EUR 10.21 at 31 December 2016.
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