Other financial notes

General guidelines for remuneration of the Board of Directors and the Executive Leadership Team of Novozymes A/S, assessed by the Board of Directors according to the recommendations of the Nomination and Remuneration Committee, are approved at the Annual Shareholders’ Meeting and can be found on Novozymes.com. Detailed information on Management remuneration is available in the Remuneration report found in the Governance section.

Executive Leadership Team

Remuneration of the Executive Leadership Team comprises a base salary, pension contributions, a cash bonus scheme, stock-based incentive programs and other benefits (car, telephone, etc.). The variable part of the total remuneration (cash bonus and stock-based incentive programs) is relatively large compared with the base salary, and is dependent on achievement of individual targets and Novozymes' targets for financial, social and environmental performance. The maximum annual cash bonus is equivalent to five months’ fixed base salary plus pension contributions. The stock-based incentive programs are described in Note 6.2.

Members of the Executive Leadership Team have contracts of employment containing standard conditions for executive officers of Danish listed companies, including the periods of notice that both parties are required to give and noncompetition clauses. If an executive officer’s contract of employment is terminated by the company without any misconduct on the part of the executive officer, the executive officer has a notice period of 12 months. In addition to the notice period, the executive officer has a right to compensation of between one and two years’ base salary and pension contributions, depending on the position held.

Board of Directors

The remuneration of the Board of Directors comprises a fixed fee and is not based on incentives.

Novozymes has established stock-based incentive programs for the Executive Leadership Team, vice presidents and directors, and other employees. The purpose of these programs is to ensure common goals for Management, employees and shareholders. Allocation of programs has been, and remains, dependent on profit, value-creation and, in some cases, sustainability targets being achieved. At the time of granting stock options, there is no difference between exercise price and share price. 

In 2017, a three-year incentive program for the Executive Leadership Team was established, covering the period 2017-2019. The program was a combination of stock options and stock. Half of the incentive program is allocated in stock options and half in stock, with the stock options being awarded annually in 2017, 2018 and 2019, while the stock was allocated in 2017 and will be released in 2020. The final grant will depend on accumulated economic profitEconomic profit is defined as adjusted operating profit (NOPAT) less (average invested capital * WACC). generated as well as average organic sales growth during the period.

• A total of up to 75% of the program will be allocated if economic profit accumulated for the three years attains DKK 7.5 billion. If economic profit of DKK 5.5 billion is generated over the period, 50% of the stock and stock options allocated to the economic profit pool will be awarded. Between these two points, stock options and stock will be granted proportionally. If the accumulated economic profit is below DKK 5.5 billion, no stock or stock options will be awarded under the economic profit pool

• A total of up to 25% of the program will be allocated if Novozymes achieves 6% organic sales growthSales growth from existing business, excluding sales from business acquisitions and divestments, measured in local currency. on average during the three years. If average organic sales growth of 3% is achieved, 50% of the stock and stock options allocated to the sales growth pool will be awarded. Between these two points, stock options and stock will be awarded proportionally. If the average sales growth is below 3%, no stock or stock options will be awarded under the sales growth pool

The total fair value of the program at grant date was DKK 162 million, which will be expensed over a six-year period. The value of the stock will be expensed over the three-year qualifying period (2017-2019). The stock options have a vesting period of four years, followed by an exercise period of five years. The fair value of the stock options will be expensed over a four-year period for each of the qualifying years (2017-2019). The recognition of the program expense is based on the expected target achievement, which is reassessed annually.

The program contains a maximum-value clause, allowing the Board of Directors to choose to limit the total allocation of stock and stock options if the intrinsic value of the program exceeds DKK 303 million at the end of the program in January 2020. The maximum-value clause has been adjusted to include the new Chief Financial Officer (CFO). The former CFO is no longer part of the program.

Furthermore, three-year programs were established in 2017 for vice presidents and directors covering the period 2017-2019 (approximately 182 vice presidents and directors). The total fair value at grant date was DKK 175 million, and the maximum-value clause is approximately DKK 350 million. The grant date fair value will be expensed over a six-year period, based on the expected target achievement, which is reassessed annually. The program for the vice presidents largely follows the same mechanisms as the program for the Executive Leadership Team. The program for directors is a stock option program with the same targets for sales and economic profit as the incentive program for the Executive Leadership Team. Furthermore, there are awards linked to annual EBITEarnings before interest and tax. See Operating profit and sustainability targets.

In previous years, stock option programs were established for all or selected groups of employees, conferring the right to purchase one share per stock option. Allocations were made on the basis of the individual employee’s base salary and achievement of a series of business targets – both financial and nonfinancial – set by the Board of Directors for each year. The stock options have a vesting period of four years, followed by an exercise period of five years. In order to exercise the options, the employee must still be employed on the exercise date. This does not apply to persons who have retired, taken a voluntary early retirement pension or been given notice.

During 2018, DKK 100 million arising from stock-based payment has been recognized in the income statement (2017: DKK 107 million), DKK 97 million of which is from equity-settled programs (2017: DKK 104 million) and DKK 3 million from cash-settled programs (2017: DKK 3 million).

Most programs are equity settled, and no liability is recognized for these. If allocations under the programs are made in countries where ownership of foreign stock is not permitted, the value of stock options is settled in cash instead, and a liability of DKK 11 million has been recognized for this in 2018 (2017: DKK 29 million). The intrinsic value of exercisable cash-settled programs in 2018 was DKK 6 million (2017: DKK 34 million). 

The fair value of employee services received is measured with reference to the fair value of the equity instruments granted. Fair value at grant date is measured in accordance with the Black–Scholes model, using the average exercise price, the option term and the following significant assumptions:

Furthermore, the options are assumed to be exercised two years after the vesting period, on average, or at the option’s expiry date if this is within one year. Volatility is estimated using the historical volatility over the last three years. The risk-free interest rate is based on Danish government bonds with a maturity equivalent to the option’s term to maturity.

Stock awards

The stock allocated under the three-year programs is stock awards. The majority of the stocks was allocated in 2017. In 2018, 41.577 stock awards with a fair value of DKK 12 million were granted to new employees enrolled in the programs (2017: DKK 125 million).

The total number of outstanding stock awards at December 31, 2018 was 495,005 (2017: 460,175). The fair value of these at December 31, 2018 was DKK 144 million (2017: DKK 163 million), which will be expensed over the three-year period (2017-2019).

Of this, commitments to related parties at December 31, 2018 amounted to DKK 23 million, compared with DKK 39 million at December 31, 2017. The above rental commitments relate to noncancelable operating leases, primarily for buildings and offices.

Contractual obligations to third parties relating to capital expenditure were significantly impacted in 2017 by the construction of Innovation campus, Lyngby in Denmark.

Pending litigation and arbitration

Novozymes is engaged in certain legal cases. In the opinion of the Board of Directors and Executive Leadership Team, settlement or continuation of these cases will not have a significant effect on the Group's financial position. A liability is recognized under Provisions where the risk of a loss on a legal case is considered more likely than not. 

Contract conditions 

Several of the partnership contracts to which Novozymes is a party could be terminated by the opposite party in the event of significant changes concerning ownership or control of Novozymes. Furthermore, a few contracts contain provisions that restrict Novozymes' licenses to use specific forms of technology in such situations.

Novozymes is committed to increasing production capacity in Latin America if a specific customer reaches certain milestones. The amount required to meet this commitment cannot be estimated reliably at the moment. 

Novozymes A/S is controlled by Novo Holdings A/S, domiciled in Hellerup, Denmark, which holds 71.7% of the votes in Novozymes A/S. The remaining stock is widely held. The ultimate parent of the Group is the Novo Nordisk Foundation (incorporated in Denmark).

Related parties are considered to be Novo Holdings A/S and the Novo Nordisk Foundation, and the Board of Directors and Executive Management of these entities together with their immediate families. Other related parties are considered to be the Novo Nordisk Foundation's subsidiaries and associates, such as the Novo Nordisk Group, the NNIT Group and the Chr. Hansen Group, associates of Novozymes A/S, as well as the Board of Directors and Executive Leadership Team of Novozymes A/S together with their immediate families. Related parties also include companies where the above persons have control or joint control.

All agreements relating to these transactions are based on market price (arm's length). The majority of the agreements are renegotiated regularly. The Group has had the following transactions with related parties:

There have not been any transactions with related parties other than the transactions described above, and normal remuneration of the Board of Directors and Executive Leadership Team, which is presented in Note 6.1.

Audit fee policy

It is Novozymes' policy that the annual fee for nonaudit services provided by the statutory auditor should not exceed the annual fee for statutory audit services measured at Group level. The audit fee ratio may only exceed 1 with the approval of the Audit Committee. 

In 2018, no such approval was given. In 2017, approval was given for extra advisory services of DKK 2.0 million related to applications for two major Bilateral Advance Pricing Agreements (BAPA).

Implementation of the EU audit reform has led to restrictions on the nonaudit services that the auditor elected at the Annual Shareholders’ Meeting may perform. The fee for nonaudit services performed for Novozymes by PricewaterhouseCoopers Statsautoriseret Revisionspartnerselskab is DKK 2 million (2017: DKK 3 million) and comprises audit of project accounts, tax advisory services concerning transfer pricing, and other general financial reporting and tax consultancy. None of the nonaudit services performed are prohibited. The EU audit reform will lead to future restrictions on the scope of the nonaudit services that the elected auditor may perform while conducting the audit.

To comply with the Danish Business Authority's recent interpretation of cash on demand, credit institutions has been reclassified from cash and cash equivalents to cash flow from financing activities with restatement of comparatives. The 2017 cash flow from financing activities has been restated from negative cash flows of DKK 2,815 million to negative DKK 2,553 million, and cash and cash equivalents as of January 1, 2017 and December 31, 2017 have been restated with increases of DKK 7 million and DKK 269 million respectively.

No events have occurred after the balance sheet date of importance to the consolidated financial statements.