28 » Share-Based Payment

Equity-settled share-based payment transactions with employees

In 2016, adidas announced the introduction of an open-ended employee stock purchase plan (the ‘plan’). The plan is operated on a quarterly basis, with each calendar quarter referred to as an ‘investment quarter’.

The plan enables employees to purchase adidas AG shares with a 15% discount (‘investment shares’) and to benefit from free matching shares. Currently, eligible employees of adidas AG and seventeen other subsidiaries can participate in the plan. Up to two weeks before the start of an investment quarter each eligible employee can enroll for the plan. The company accepts enrolment requests on the first day of the relevant investment quarter. This is the grant date for the investment and matching shares. The fair value at the vesting date is equivalent to the fair value of the granted equity instruments at this date. The employees invest an amount up to 10% of their gross base salary per quarter in the plan. A few days after the end of the investment quarter the shares are purchased on the market at fair market value and transferred to the employees. Thereby the amount invested during the quarter plus the top-up from adidas is used. These shares can be sold at any time by the employee. If the shares are held for a period of one year after the last day of an investment quarter, employees will receive one-time free matching shares (one matching share for every six adidas AG shares acquired). This plan currently constitutes an equity-settled share-based payment for both elements. For the component of the matching shares relating to the specific period of service an appropriate discount is taken into account. The effects are presented in the following table:

The number of forfeited matching shares during the period amounted to 4,059 (2018: 3,473).

As at December 31, 2019, the total expenses recognized relating to investment shares amounted to € 3.1 million (2018: € 3.2 million).

Expenses recognized relating to vesting of matching shares amounted to € 2.8 million in 2019 (2018: € 2.5 million).

As at December 31, 2019, a total amount of € 5 million (2018: € 5 million) was invested by the participants in the stock purchase plan and was not yet transferred into shares by the end of December 2019. Therefore, this amount has been included in ‘Other current financial liabilities’. See note 19

Further information about the purchase of shares for the employee stock purchase plan is provided in these Notes.See note 27

Equity-settled share-based payment transactions with third parties

In 2016, adidas entered into a promotion and advertising contract which includes a share-based payment transaction with third parties. The contract has a duration of five years and will end in 2021.

The first part of the agreement grants a transfer of basic shares over five years which correspond to a value of US $ 5million each year. Based on the contractual terms, the third transfer in 2019 equated to 21,256 shares. The shares from the fifth tranche of repurchased shares with an average price of € 198.91 per share were used as a consideration. See note 27

As at January 1, 2019 (grant date), an amount of US $ 5 million was recognized as expenses for basic shares over the vesting period of twelve months.

The second part of the agreement grants bonus shares of US $ 5 million if certain conditions are fulfilled. This option can be granted twice. As at December 31, 2019, it was likely that the bonus shares will be issued. Therefore, expenses recognized for bonus shares amounting to € 2 million were accrued in 2019 (2018: € 5 million).

Cash-settled share-based payment transactions with employees

In 2017, adidas implemented a Long-Term Incentive (LTI) Plan, which is a share-based remuneration scheme with cash settlement. RSUs (Restricted Stock Units) are granted on the condition that the beneficiary is employed for three or four years by adidas AG or one of its subsidiaries in a position where he or she is not under notice during that period. This minimum period of employment pertains to the calendar year in which the RSUs are granted and the three subsequent calendar years.

The total value of the cash remuneration payable to senior management is recalculated on each reporting date and on the settlement date, based on the fair value of the RSUs, and recognized through an appropriate increase in the provision as personnel expenses that are spread over the period of service of the beneficiary. Furthermore, social security contributions are considered in the calculation of the fair value, if appropriate for the respective country regulations and the seniority of the participants. All changes to the subsequent measurement of this provision are reported under personnel expenses.

Once a year, one tranche with a three-year term and another with a four-year term are issued. The number of RSUs granted depends on the seniority of the beneficiaries. In addition, for the four-year plan, the number of RSUs also depends on the achievement of a target figure which is based on the growth of the diluted earnings per share from continuing operations.

The value of one RSU is the average price of the adidas AG share as quoted for the first 20 stock exchange trading days in January of the respective financial year. The effects are presented in the following table:

The fair value is based on the closing price of the adidas AG share on December 31, 2019, adjusted for future dividend payments.

In 2019, this resulted in an expense of € 170 million (2018: € 53 million). The corresponding provision amounted to € 254 million (2018: € 84 million).