Note 6: Employee benefits

The average number of employees working outside the Netherlands was 32,500 (2017: 33,600).

At year-end 2018, the number of employees decreased by 3% to 34,500 people (year-end 2017: 35,700 people). Acquisitions of 2018 added around 850 people.

Share-based compensation

Share-based compensation relates to the equity-settled performance-related and the restricted share plan, as well as the share-matching plan. Charges recognized in the 2018 statement of income for share-based compensation amounted to €19 million and are included in salaries and wages (2017: €22 million). The share-based compensation expenses for the executives of Specialty Chemicals, included in discontinued operations, amounted to €14 million (2017: €12 million).

Performance-related and restricted share plan

Under the performance-related share and the restricted share plans, a number of conditional shares are granted to the members of the Board of Management, members of the Executive Committee and executives each year. The number of participants of the performance-related and the restricted share plan at year-end 2018 was 326 (2017: 348).

The shares of the performance-related series 2015-2017 have vested and were delivered to the participants in 2018.

The 2016 and 2017 conditional grants of performance-related shares originally were linked to AkzoNobel’s return on investment (ROI), the company’s ranking in the RobecoSAM benchmark and its relative TSR performance when compared to the peer group. These targets were set by the Supervisory Board for AkzoNobel prior to the divestment of the Specialty Chemicals business. However, these performance targets have become not relevant or applicable anymore after the sale of the Specialty Chemicals business. Therefore, the Supervisory Board decided to instead apply the average historic performance of 85% for the 2016-2018 and the 2017-2019 series. For the 2018-2020 plan of the members of the Board of Management and the Executive Committee, the conditional grant of shares is linked for 50% to the relative TSR performance of the company compared with the peer group and 50% to the ROI performance of the company, after which a two-year holding restriction will apply. The 2018-2020 plan for the executives is a restricted share plan without any performance conditions, whereby the conditional grant of shares will only vest when the executives remain in service with the company during the three-year vesting period, after which a one-year holding restriction will apply.

The conditional shares of the 2016-2018 series for the AkzoNobel participants vested for 85% (series 2015-2017: 81.80%), including extraordinary dividend shares of 5.48%, the final vesting percentage amounted to 89.66% (series 2015-2017: 92.65%).

The conditional shares of the executives of the Specialty Chemicals business (part of discontinued operations), granted under the 2016-2018, 2017-2019 and 2018- 2020 plans have vested on October 1, 2018, taking into account the 85% vesting percentages for the 2016-2018 and 2017-2019 plans and pro-rated for the time passed since the grant date when compared to the 3-year vesting period. Thus the vested shares have been delivered early October 2018.

The share price of a common AkzoNobel share at year-end amounted to €70.40 (2017: €73.02).

Fair value of performance-related shares

The fair value of the restricted shares of the 2018-2020 grant, amounting to €67.64, is based on the share price on January 2, 2019, of €72.76 and the expected dividend yield of 2.41%.

The fair value of the performance-related shares of the 2018-2020 grant is for 50% based on a market condition (TSR) and for 50% based on non-market-based performance condition (ROI).

The original fair value of the performance-related shares of the 2016-2018 and 2017-2019 grants was for 35% based on a market condition (TSR) and for 65% based on non-market based performance conditions (ROI and RobecoSAM). Due to the plan modification, for the 2016-2018 plan there was a step-up in fair value for the TSR component as the change was beneficial to the participants. This step-up for the TSR component (which weigh for 35% in the vesting) amounted to €14.66 for the participants who knew about the Supervisory Board decision on the modification on March 7, 2018, and €35.27 for all other participants who were informed on July 3, 2018 through the general announcement of the plan modification. For the 2017-2019 plan, the fair value was not amended as this change was not beneficial on either date.

The TSR part of the award is valued applying a Monte Carlo simulation model and the other part is valued based on the share price at grant date.

The parameters applied for the fair value calculations are: share price at grant date (opening of first trading date from grant date), expected volatility (based on the share price development over the past three years of AkzoNobel), and risk-free interest rate (based on a Dutch zero-coupon government bond).

Share-matching plan

The members of the Board of Management and the members of the Executive Committee are eligible to participate in the share-matching plan in 2018; they will not be eligible for the years 2019, 2020 and 2021.

Under certain conditions, members who invest part of their short-term incentive in AkzoNobel shares may have such shares matched by the company. The investment in Akzo Nobel N.V. shares in 2018 resulted in a total of 5,233 granted potential matching shares. During 2018, 7,817 potential matching shares were matched and 2,512 were forfeited, leading to a total of 7,729 potential matching shares at December 31, 2018.

Fair value of matching shares

The fair value of the matching shares (€69.05) was based on the share price on the investment date, discounted for expected dividends over the holding period (2017: €72.56).

The parameters applied for the fair value calculations are: share price at purchase date of voluntary investment (April 24, 2018): €76.20; expected dividend yield: 3.23%.

For an overview of the matching shares outstanding for the members of the Board of Management as of December 31, 2018, we refer to Note 24.