7. Share-based compensation

The group operates two equity-settled plans, as well as a cash-settled phantom share plan (previously referred to as 'performance share plan'). The purpose of the share-based compensation is to retain management and employees and align the interests of management and eligible employees with those of shareholders, by providing additional incentives to improve the group's performance on a long-term basis.

Stock option plans

The group has adopted stock option plans for members of the Management Board and eligible employees. Under the schemes, the General Meeting has granted options to members of the Management Board to subscribe for shares. The Management Board in turn has granted options to eligible employees.

Excel

(€ in thousands)

2014

2013

Opening balance

29,012

48,818

Stock compensation expense

3,898

4,196

Transfer to retained earnings

–937

–23,426

Stock options excercised

–3,006

–576

CLOSING BALANCE

28,967

29,012

The group stock option plan qualifies as an 'Equity-settled share-based payment plan'. The options granted from 2011 onwards under the 2009 plan will vest after three years (cliff vesting). The options cannot be transferred, pledged or charged and may be exercised only by the option holder over a period of seven years from the grant date but only after completion of the vesting period. Options expire after the exercise period. The options will be covered at the time of exercise by issuing new shares.

The following table summarises information about the stock options outstanding on 31 December 2014:

Excel

Year of grant

Number outstanding at 31-12-2014

Exercise price per share (€)

Weighted average remaining life

Number exercisable at 31-12-2014

Weighted average exercise price (€)

2009

3,744,880

5.71 - 6.00

1.46

3,744,880

5.75

2010

3,137,083

4.81 - 5.48

2.35

3,137,083

5.30

2011

1,634,300

6.08 - 6.20

3.36

1,509,300

6.11

2012

3,215,250

3.34 - 3.88

4.36

0

n.a.

2013

2,770,200

3.36 - 5.90

5.35

0

n.a.

2014

1,960,080

4.93 - 5.28

6.36

0

n.a.

A summary of the group's stock option plans and the movements during the years 2014 and 2013 are presented below:

Excel

Option plans

2014

2013

No.

Weighted average exercise price (€)

No.

Weighted average exercise price (€)

OUTSTANDING AS AT 1 JANUARY

17,182,090

5.39

17,682,662

7.21

Granted

1,960,080

5.24

3,006,000

3.52

Exercised

–1,363,610

5.96

–281,200

4.65

Expired

–691,485

8.30

–1,639,550

27.86

Forfeited

–625,282

5.21

–1,585,822

5.53

OUTSTANDING AS AT 31 DECEMBER

16,461,793

5.41

17,182,090

5.39

The fair value of the stock options granted in May 2014 and May 2013 was determined using the binomial tree model. This model contains the input variables, including the risk-free interest rate, volatility of the underlying share price, exercise price, and share price at the date of grant. The fair value calculated is allocated on a straight-line basis over the vesting period, based on the group's estimate of equity instruments that will eventually vest.

Excel

2014

2013

Share price at grant date (€)

5.28

3.52

Exercise price (€)

4.93-5.28

3.36-5.90

Expected volatility

45%

50%

Expected average option life in years

5.3

5.3

Weighted average risk-free rate

0.98%

0.72%

Expected dividends

Zero

Zero

The option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Volatility is determined using industry benchmarking for listed peer group companies, as well as the historic volatility of the TomTom NV stock. The group's employee stock options have characteristics that are significantly different from those of traded options, and changes in the subjective input assumptions can affect the fair value estimate.

Phantom share plan

The existing Phantom share plan was introduced in 2011. Under this plan, eligible employees are entitled to receive a cash payment equal to the value of the number of shares that have vested. These cash-settled phantom shares are conditional on the employee completing three years of service (the vesting period). On 31 December 2014 the outstanding liability with regard to the phantom share plan was €8.0 million (2013: €5.3 million).

The following table provides the movement in the number of phantom shares.

Excel

2014

2013

OUTSTANDING AS AT 1 JANUARY

2,356,730

1,407,750

Vested and paid out

–393,300

0

Granted

1,235,855

1,073,680

Forfeited

–204,955

–124,700

OUTSTANDING AS AT 31 DECEMBER

2,994,330

2,356,730

The fair value of the phantom shares was determined using the applicable share price at the grant date and subsequent reporting date.

Restricted stock plans

As from 2011, the group introduced a restricted stock plan to retain a selected group of talented employees. Each restricted-stock unit gives the right to receive one TomTom share after a three-year vesting period and qualifies as an equity-settled plan. The costs that arise from this plan are spread over the vesting period and have been determined based on TomTom's share price on the grant date. Total 2014 stock compensation expenses charged to the stock compensation reserve for this plan amounted to €228 thousand (2013: €245 thousand). As this plan is not material, no further disclosures are provided.

Accounting policy

Equity-settled share-based payments are measured at fair value at the date of grant. 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. The costs are determined based on the fair value of the granted instruments and the number expected to vest. At each balance sheet date, the group revises its estimates of the number of instruments expected to vest.

Cash-settled share-based payments are initially recognised at the fair value of the liability and are expensed over the vesting period. The liability is remeasured at each balance sheet date to its fair value, with all changes recognised immediately as either a profit or a loss.