Long-Term Incentive Plan

The LTIP consists of a mix of stock options and restricted share rights. It aims to align the interests of the participating employees with the shareholders’ interests and to attract, motivate and retain participating employees.

The stock option plan vests three years after grant, dependent on employment upon the vesting date. The exercise price is the share price upon grant, and the total option term is 10 years.

A restricted share right is a right to receive a share, subject to being employed with Philips upon the vesting date. Vesting occurs in 3 equal tranches respectively 1, 2 and 3 years after grant. An additional 20% of the restricted share rights grant is deferred, subject to the condition that released shares are held for three years after vesting, and employment with Philips is continued during this period.

The actual number of stock options and restricted share rights to be granted to the board members is performance related and depends on the ranking of Philips in the Total Shareholder Return (TSR) peer group and the realization of the team targets of the Board of Management. The peer group comprises the following companies: Electrolux, Emerson Electric, General Electric, Hitachi, Honeywell International, Johnson & Johnson, Matsushita, Philips, Schneider, Siemens, Toshiba and 3M.

The TSR ranking is the basis for the two different multipliers that apply to the grant of stock options and restricted share rights. The multipliers are determined in line with the table below.

Based on the Philips’ share performance over the period December 2005 - December 2008, Philips ranked 8^th in its peer group.

To further align the interests of the members of the Board of Management and shareholders, restricted shares granted to the members of the Board of Management shall be retained for a period of at least five years or until at least the end of their employment, if this period is shorter. Similarly, for other Philips Senior Executives compulsory share ownership was introduced in 2004.

In 2009, members of the Board of Management were granted 259,200 stock options and 69,132 restricted share rights under the LTIP (excluding 20% premium shares deferred for a three-year holding period).

For more details of the LTIP, see note (30) Share-based compensation.