Annual Report 2011

Adecco Group –
Notes to consolidated financial statements
in millions, except share and per share information

Note 9 – Stock-based compensation

As of December 31, 2011, the Company had non-vested share awards and options outstanding relating to its common shares under several existing plans. Compensation expense of EUR 12, EUR 5, and EUR 1 was recognised in 2011, 2010, and 2009, respectively in connection with the non-vested share awards granted in 2011, 2010, and 2009. No compensation expense was recognised in 2011, 2010 or 2009 in connection with the stock option plans as all options outstanding are fully vested. The total income tax benefit recognised related to stock compensation amounted to EUR 4 in 2011, EUR 1 in 2010, and was less than EUR 1 in 2009.

Non-vested share award plans

Performance share awards were granted in March 2011 and 2010 to the members of the Executive Committee and in March and April 2009 to the members of the Executive Committee and to a further group of senior managers (21 individuals in total) under the Company’s long-term incentive plan (“LTIP”). The awards contain an undertaking to deliver a number of Adecco S.A. shares to the participants of the plan after the end of the performance period (end of performance period for the 2011, 2010, and 2009 awards: December 31, 2013, December 31, 2012, and December 31, 2011, respectively). For 2011 and 2010 awards, the requisite service period represents three calendar years starting on January 1, 2011, and January 1, 2010, respectively, and for 2009 awards, it coincides with the performance period. The delivery of the shares will be made provided and to the extent that the predefined market and performance targets are met.

The targets for awards granted in 2011 and 2010 relate to:

  • the relative change in the Company‘s shareholder value including reinvested dividends (total shareholder return: “TSR” element), compared to that of a predefined group of peers (“relative TSR awards”);
  • the Company’s TSR measured as the compound annual growth rate in the Company’s shareholder value including reinvested dividends (“absolute TSR awards”); and
  • simultaneous achievement of the targets related to relative TSR awards and absolute TSR awards and the degree of overachievement of the relative TSR target (“additional TSR awards”).

The targets for awards granted in 2009 relate to:

  • financial performance (earnings per share development: “EPS” element) of the Company (“EPS awards”); and
  • the relative change in the Company‘s shareholder value including reinvested dividends (TSR), compared to that of a predefined group of peers (“relative TSR awards”).

In addition, service condition awards (restricted share unit awards: “RSU awards”) were granted in 2011 and 2010 to the members of the Executive Committee and to a further group of senior managers (251 individuals in total in 2011 and 233 individuals in total in 2010) under the LTIP. The vesting of the RSU awards is not subject to performance targets, but to forfeiture provisions. Provided that the employment relationship continues, RSU awards will vest in equal portions over a period of three years at the anniversaries of the date of grant. For RSU awards, the requisite service period represents three calendar years starting on January 1, 2011 for the 2011 awards and January 1, 2010 for the 2010 awards. RSU awards granted to French employees cliff-vest at the second anniversary of the date of grant and their requisite service period represents two calendar years starting on January 1, 2011 for 2011 awards and January 1, 2010 for 2010 awards.

Participants who terminate their employment with the Company at their own will and those who receive notice of termination for cause before the end of the performance period (in case of performance share awards) and before the end of the vesting period (in case of RSU awards), will no longer be entitled to the vesting of the awards. In case of an involuntary termination without cause before the end of the performance period a time-weighted pro rata portion of the unvested performance share awards granted in 2011 and 2010 will vest at the regular vesting date, depending on the level of target achievement. Performance share awards granted in 2009 are not subject to the time-weighted pro rata reduction. In case of an involuntary termination without cause before the end of the vesting period a time-weighted pro rata portion of the unvested RSU awards will vest at the regular vesting date.

TSR share awards
The fair value of the relative, absolute, and additional TSR awards (collectively “TSR awards”) is estimated on the date of grant using a binomial model. This model runs a very large number of share price simulations based on various parameters (share prices, volatilities, dividends, maturity, correlation, etc). The average result of these simulations provides the probability that the Company‘s TSR targets will be achieved. The implied volatility was determined by reference to the implied volatilities of various listed options in the listed option market (“Eurex”) and interpolated by calculation models. The expected dividend yield is based on expectations for future dividends from research analysts as well as implied dividend yields obtained from option prices traded in the Eurex. The risk-free rate is extracted from the Swiss government bond yield curve, which is constructed by interpolation out of the observed trading prices of various Swiss government bonds. The assumptions used are as follows:

 

2011

2010

2009

 

 

 

 

Assumptions used for the estimation of the fair value of the TSR awards

 

 

 

Implied at-the-money volatility

27.6%

28.7%

54.2%

Expected dividend yield

2.0%

1.5%

3.8%

Expected term (in years)

2.8 years

2.8 years

2.8 years

Risk-free rate

0.88%

1.08%

1.06%

Since the probability of the market condition being met is considered in the fair value of the TSR share awards, the compensation expense is recognised on a straight-line basis over the requisite service period regardless of fulfilment of the market condition, taking into account estimated employee forfeitures.

A summary of the status of the Company’s TSR non-vested share plan as of December 31, 2011, December 31, 2010 and December 31, 2009, and changes during those years are as follows:

 

Relative TSR awards

Absolute TSR awards

Additional TSR awards

 

Number

of shares

Weighted-
average grant
date fair value
per share
(in CHF)

Number

of shares

Weighted-
average grant
date fair value
per share
(in CHF)

Number

of shares

Weighted-
average grant
date fair value
per share
(in CHF)

 

 

 

 

 

 

 

Summary of the TSR non-vested share awards

 

 

 

 

 

 

Granted

210,836

15

 

 

 

 

Forfeited

(58,771)

15

 

 

 

 

Non-vested share awards outstanding
as of December 31, 2009

152,065

15

 

 

 

 

Granted

24,267

23

24,267

14

24,267

8

Forfeited

(4,473)

15

 

 

 

 

Increase in percentage of guaranteed awards

(1,875)

15

 

 

 

 

Non-vested share awards outstanding
as of December 31, 2010

169,984

16

24,267

14

24,267

8

Granted

20,645

22

20,645

15

20,645

10

Forfeited

(2,343)

22

(2,343)

14

(2,343)

9

Non-vested share awards outstanding
as of December 31, 2011

188,286

17

42,569

14

42,569

9

1,875 relative TSR share awards were modified in 2010 to guarantee their vesting irrespective of the achievement of the targets. Such awards were reclassified to the service condition awards category. The incremental expense related to the modification was not significant.

RSU share awards
The fair value of the RSU share awards is determined based on the grant date market price of the Adecco S.A. share less a discount for not being entitled to any dividends over the vesting period. The compensation expense of such service condition share awards is recognised on a straight-line basis over the requisite service period, taking into account estimated employee forfeitures.

A summary of the status of the Company’s RSU non-vested share plan as of December 31, 2011 and December 31, 2010, and changes during those years are as follows:

 

Number
of shares

Weighted-
average grant
date fair value
per share
(in CHF)

 

 

 

Summary of RSU non-vested share awards

 

 

Granted

325,486

56

Forfeited

(16,739)

57

Non-vested share awards outstanding as of December 31, 2010

308,747

56

Granted

269,319

55

Vested

(96,506)

57

Forfeited

(19,866)

54

Non-vested share awards outstanding as of December 31, 2011

461,694

55

EPS share awards
The fair value of the EPS share awards was determined based on the grant date market price of the Adecco S.A. share, and assumes that the EPS performance conditions of the plan will be met. Compensation expense is recognised over the requisite service period for the awards expected to vest, according to the internal EPS projections. The estimate of the number of awards expected to vest is reassessed at each reporting date, and the new estimate is recognised, to the extent the estimate changes, taking into account the service already rendered.

A summary of the status of the Company’s EPS non-vested share plan as of December 31, 2011, December 31, 2010, and December 31, 2009, and changes during those years are as follows:

 

Number
of shares

Weighted-
average grant
date fair value
per share
(in CHF)

 

 

 

Summary of EPS non-vested share awards

 

 

Granted

120,771

35

Forfeited

(32,250)

35

Non-vested share awards outstanding as of December 31, 2009

88,521

35

Forfeited

(2,454)

35

Increase in percentage of guaranteed awards

(1,875)

35

Non-vested share awards outstanding as of December 31, 2010

84,192

35

Non-vested share awards outstanding as of December 31, 2011

84,192

35

1,875 EPS share awards were modified in 2010 to guarantee their vesting irrespective of the achievement of the targets. Such awards were reclassified to the service condition awards category. The incremental expense related to the modification was not significant.

Guaranteed TSR and EPS share awards
Certain awards were granted in 2009, in addition to those described above, which are guaranteed to vest irrespective of the EPS and TSR conditions being met, provided that the requisite service has been rendered.

A summary of the status of these service condition share awards, including the impact of the TSR and EPS awards modified in 2010 as described above, as of December 31, 2011, December 31, 2010, and December 31, 2009, and changes during those years are as follows:

 

Number
of shares

Weighted-
average grant
date fair value
per share
(in CHF)

 

 

 

Summary of the service condition non-vested share awards

 

 

Granted

22,500

36

Non-vested share awards outstanding as of December 31, 2009

22,500

36

Increase in percentage of guaranteed awards

3,750

36

Non-vested share awards outstanding as of December 31, 2010

26,250

36

Non-vested share awards outstanding as of December 31, 2011

26,250

36

As of December 31, 2011, the total unrecognised compensation expense related to non-vested share awards amounted to EUR 12. The cost is expected to be recognised over a weighted-average period of two years. The total fair value of RSU awards vested in 2011 amounted to EUR 4. The excess tax benefits resulting from vesting of RSU awards in 2011 were not significant, and were reported as cash flows from financing activities. No awards vested in 2010 or 2009.

Option plans

Under several option plans, options vested and became exercisable in instalments, generally on a rateable basis up to four years beginning on the date of grant or one year after the date of grant, and have a contractual life of three to ten years. Options were typically granted with an exercise price equal to or above the fair market value of the Adecco S.A. share on the date of grant. No options have been granted since 2004.

Certain options granted under the plans were tradable on the SIX Swiss Exchange. The options were granted to employees or members of the Board of Directors of the Company and gave the optionee a choice of selling the option on the market or exercising the option to receive an Adecco S.A. share. If the option holder chose to sell the option on the market, the options could be held by a non-employee or non-director of the Company. As of December 31, 2010 and December 31, 2009, the number of stock options outstanding sold on the market was 106,391 and 935,852, respectively. There were no tradable stock options outstanding as of December 31, 2011. The trading and valuation of the tradable options were managed by a Swiss bank.

The Company used the Black-Scholes model to estimate the fair value of stock options granted to employees. Management believes that this model appropriately approximates the fair value of the stock option. The fair value of the option award, as calculated using the Black-Scholes model, was expensed for non-tradable stock options on a straight-line basis.

A summary of the status of the Company’s stock option plans as of December 31, 2011, December 31, 2010, and December 31, 2009, and changes during those years are presented below:

 

Number
of shares

Weighted-
average
exercise price
per share
(in CHF)

Weighted-
average
remaining life
(in years)

Aggregate
intrinsic value
(in CHF millions)

 

 

 

 

 

Summary of stock option plans

 

 

 

 

Options outstanding and vested as of January 1, 2009

4,070,125

76

1.5

 

Forfeited

(113,350)

81

 

 

Expired

(2,194,056)

81

 

 

Options outstanding and vested as of December 31, 2009

1,762,719

68

1.2

 

Exercised

(614,153)

60

 

 

Forfeited

(22,582)

81

 

 

Expired

(686,425)

71

 

 

Options outstanding and vested as of December 31, 2010

439,559

76

1.1

 

Exercised

(172)

60

 

 

Forfeited

(6,278)

73

 

 

Expired

(329,969)

76

 

 

Options outstanding and vested as of December 31, 2011

103,140

78

1.0

 

The aggregate intrinsic value as of December 31, 2011 of the outstanding stock options in the table above is zero and represents the total pre-tax intrinsic value (the difference between the Company’s closing share price on the last trading day of 2011 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on the last trading day of 2011. This amount changes based on the fair market value of Adecco S.A. shares.