Amounts in millions of EUR 2009 2008
Salaries and wages 1,763 2,056
Pension charges (incl. Social Plan 2001) 148 -64
Social security contributions 204 230
Total employee benefits 2,115 2,222
Reference is made to Note 34 ‘Segment Reporting’ for further information on the average number of employees.
Pension charges in 2008 include a release of pension obligations of EUR 199 million. This is a consequence of an agreement with the trade unions in the Netherlands with respect to the change in pension indexation for KPN’s main pension plans.
This indexation is now based on price inflation instead of KPN’s salary increases. For more information about pensions, reference is made to Note 22 ‘Provisions for retirement benefit obligations’.
Board of Management and Supervisory Board
The Remuneration and Organizational Development Report included in this Annual Report contains required information comprising ‘Details on all remuneration per individual’ and ‘Supervisory Board Remuneration 2009’, which are deemed part of these financial statements.
Share option plans
KPN has granted stock options on its shares to members of the Board of Management, Senior Management and employees in the Netherlands with a collective labor agreement. Total costs related to these share option plans amounted to
EUR 0.1 million in 2009 (EUR 1 million in 2008) and is included in salaries and wages.
KPN Annual Report 2009 www.kpn.com 5 All options granted are granted with an exercise price equal to market share price at grant date, are equity-settled and are forfeited when employees leave KPN for reasons other than retirement, disability or death (except for some personnel plans). The other main features of the option plans granted to KPN staff and management are:
Exercise price
(in EUR) Maximum
term Exercisable (after
grant date) Vesting period
Profits in escrow if exercised
within 3 years1 Performance related2
2004 CEO 6.45 5 years immediate 3 years yes no
Management 6.07 – 6.45 8 years 3 years 3 years - yes
Management 6.45 8 years 3 years 3 years - no
Management Belgium 6.45 8 years 3.7 years 3 years - no
Personnel3 6.45 5 years 3 years none - no
2005 CEO 6.73 5 years immediate 3 years yes no
Management 6.73 – 7.18 8 years 3 years 3 years - yes
Management 6.73 8 years 3 years 3 years - no
Management Belgium 6.73 8 years 3.7 years 3 years - no
Personnel3 6.73 5 years 3 years 3 years - no
2006 CEO 9.29 5 years immediate 3 years yes no
2007 CEO 12.09 5 years immediate 3 years yes no
1) If options are exercisable immediately, the profits from any exercise prior to the third anniversary of the date of issue will be held in escrow until the third anniversary of the issue, at which time such profits will be released to the relevant option holder, provided that the option holder remains employed by KPN.
2) The number of options that vested after the three-year vesting period depended on KPN’s Total Shareholder Return (stock appreciation plus dividend pay-out; TSR) relative to a peer group of European telecommunication companies. At the end of 2007, KPN held the third position with respect to the 2005 option grant, which led to a vesting percentage of 200% of the options that vested in April 2008.
3) Personnel means all Dutch employees subject to the KPN collective labor agreement. When employees leave before the third anniversary after grant date, options are exercisable from this date and expire three months later (except for April 2005 option plans:
options forfeit when leaving before the third anniversary).
Summary of options outstanding as of December 31, 2009
Granted in: Number outstanding
December 31, 2009 Exercise price per option
Weighted average remaining contractual life (years)
Weighted average fair value at the date of grant
2004 682,152 6.45 2.3 3.16
2005 2,640,131 6.73 – 7.18 1.5 2.14
2006 215,278 9.29 1.3 1.20
2007 165,410 12.09 2.3 1.70
Total 3,702,971
Summary of the changes in outstanding options
2009 2008
Number of options
Weighted average exercise price per
option in EUR Number of options
Weighted average exercise price per option in EUR
Outstanding at the beginning of the year 7,0,0 6. 10,25,21 6.35
Options granted - - -
-Options additional (TSR based) - - 695,350 6.75
Options exercised -3,349,988 6.59 -3,773,721 6.42
Options expired - - -
-Options forfeited -35,849 6.53 -87,102 6.46
Outstanding at the end of the year 3,702,971 7.07 7,0,0 6.
– of which: exercisable 3,702,971 7.07 7,085,308 6.84
The actual number of options is adjusted, for the actual vesting percentages after the performance period. The average KPN stock price in 2009 was EUR 10.60. The fair value of each option is estimated at the date of grant using a binomial model.
6 KPN Annual Report 2009
Consolidated Financial Statements
Consolidated Financial Statements Performance share plan
Since 2006, KPN has granted shares and share-based awards on its shares to members of the Board of Management, and Senior Management.
The Performance Share Plan (‘PSP’) was reviewed at the end of 2006 in light of changing Dutch tax regulations that became effective as of January 2007. As a result, the type of settlement from the PSP changed from equity-settled to cash- settled as of 2007 onwards. The structure and value of this element of pay for each individual did not change. The change in type of settlement was approved by the Annual General Meeting of Shareholders in April 2007. In April 2008
shareholders approved an adjustment of the PSP from a cash-settlement to an equity-settlement for members of the Board of Management.
The conditionally granted PSP award will vest after three years if the employee is still employed with KPN. The vesting is subject to whether the Company achieves a pre-set level of TSR relative to a peer group of telecommunication companies with which the Company competes. The performance vesting period of the shares granted to the CEO in 2008 and 2009 is one year and the shares cannot be sold until July 2011.
An exception to the holding period is made with respect to shares that were sold upon vesting to cover the tax obligation on the vested shares. The cash-based PSP awards will be settled in cash and no holding restrictions apply.
The main features of the awards granted under the PSP plan to KPN management are summarized below:
Maximum
term Settlement
type Vesting period
Holding period after vesting of/until 2006 Board of Management (excl CEO), Senior
Management 5 years Equity-based 3 years 2 years
2007 Board of Management, Senior Management 3 years Cash-based 3 years
-2008 CEO Until July 2011 Equity-based 1 year Until July 2011
Board of Management (excl CEO) 5 years Equity-based 3 years 2 years
Senior Management 3 years Cash-based 3 years
-2009 CEO Until July 2011 Equity-based 1 year Until July 2011
Board of Management (excl CEO) 5 years Equity-based 3 years 2 years
Senior Management 3 years Cash-based 3 years
-The number of share-based awards which vest depends on KPN’s TSR position ranking relative to its peer group of European telecommunications companies (including KPN). The list of companies included in the peer groups can be found under ‘Long-term incentives’ in the ‘Remuneration and Organizational Development Report’ section.
The vesting schedule for share-based awards is as follows:
Vesting % 2008 and 2009 awards
Position 8 to 14 No vesting takes place
Position 7 100% of the shares vest
Position 6 125% of the shares vest
Position 5 150% of the shares vest
Position 4 175% of the shares vest
Position 3 200% of the shares vest
Position 2 200% of the shares vest
Position 1 200% of the shares vest
The total compensation expense associated with the PSP was EUR 30 million in 2009 (2008: EUR 21 million) and the related liability (for cash-settlement) at December 31, 2009, was EUR 49 million (2008: EUR 18 million). This liability is included under Other payables and deferred income. During 2009 KPN granted 2,706,806 shares and share-based awards under the PSP (2008: 2,352,315) to members of the Board of Management and Senior Management.
The following table presents the share-based awards under the PSP for the year ended December 31, 2009. The fair value is calculated using a Monte Carlo Simulation model. This model simulates share prices, TSR ranking and fair value calculation for KPN and its peer companies.
KPN Annual Report 2009 www.kpn.com 7
Senior Management 2007
Share-based awards 2006
Shares
Granted 436,651 CEO 16.87 /
Others 14.30 1,749,621 14.30 166,0434 15.16 -Exercised
Forfeited - -49,987 -170,587 -77,578
Total at December 31,
200 36,651 1,699,63 1.32 1,3,356 15.5 7,9
Granted 471,079 CEO 7.28 /
Others 8.46 2,156,307 8.46 177,1215 8,668 - 1,020,8455
Exercised - - - -49,794 -772,232
Forfeited - -35,065 -63,502 -105,627 -80,362 -260,284
Total at December 31,
2009 71,079 2,121,22 11.003 550,270 1,602,675 1.713 1,30,200 21.673 772,1
– of which:
Non-Vested 471,079 2,121,242 196,028 1,602,675 1,308,200
-1) On the basis of 100% grant.
2) Weighted average fair value at grant date. The fair value is calculated using a Monte Carlo Simulation model.
3) At December 31, 2009, the fair value of each cash-settled share-based award was measured based on the most recent available share price of KPN and its performance compared to peer companies at the moment of valuation (i.e. closing share prices as at December 31, 2009).
4) In 2008 an additional amount of the 2007 share based award was granted which was agreed upon in 2007 and executed in 2008.
5) At the end of 2008, KPN held the second position with respect to the 2006 share grant, which led to a vesting percentage of 200% of the shares that vested in April 2009. At the end of 2008, KPN held the first position with respect to the 2008 share grant, which led to a vesting percentage of 200% of the shares of the CEO that vested in April 2009.
6) In the 2009 figures the uplift to the LTI entitlements is not included. The uplift will result in a LTI value determination of 200% (instead of 150%) of base salary for the CEO and 125% (instead of 75%) of base salary for the other members of the Board of Management. The uplift in LTI will be granted if the financial targets in 2009 and 2010 are met and KPN will reach a number 1,2 or 3 position in the TSR peer-group ranking. Please refer to the Renumeration and Organizational Development Report for further explanation on the uplift to the LTI entitlement.
The fair value of each share at the grant date is determined using the following assumptions:
2009 PSP 2008 PSP
Risk-free interest rate based on euro governments bonds with a remaining time to maturity of three years (CEO 2008 grant remaining time to maturity
of one year) 2.1%
(CEO 1.6%) 4.4%
(CEO 4.8%) Expected dividend for KPN (based on one year’s historical
daily data preceding the date of award) 5.7% 4.6%
Expected volatility (based on three-years’ daily historical daily data) 27.3% 21.6%
Share price at date of award (closing at grant date) 9.55 11.42
After vesting, the holder is able to sell a number of unconditional granted shares (equity-settled) only up to the amount necessary to settle the wage taxes liability relating to the profit made on the stock compensation plan.
iBasis Stock Option Plans
The Consolidated Financial Statements of KPN include iBasis which had stock option plans under which stock options were issued as an equity incentive to employees and independent directors. The stock options issued under iBasis’ stock option plans were generally for a fixed number of shares with an exercise price equal to the market value of its stock on the date of grant. The employee stock option grants generally vested quarterly in equal instalments over four years, provided that no options vested during the employee’s first year of employment, and had a term of ten years. In 2009, 1,329,000 shares of stock options were granted, 50,425 shares were exercised and 546,572 shares were cancelled. As a result of the completion of KPN’s acquisition of all of the outstanding stock of iBasis on December 21, 2009, for any unexercised stock options that had an exercise price of less than USD 3.00 per share, iBasis made a cash payment to option holders, totalling EUR 2.5 million, for the difference between the tender offer price of USD 3.00 per share and the exercise price of the employee’s stock options. On December 18, 2009, 4,977,639 shares of stock options were outstanding, of which 3,350,625
KPN Annual Report 2009
Consolidated Financial Statements
Consolidated Financial Statements
shares were exercisable. Of the total shares outstanding on December 18, 2009, 2,487,796 shares had an exercise price of less that USD 3.00 per share. The weighted average exercise price of the total stock options outstanding at December 18, 2009, was USD 3.58 and the weighted average stock price during 2009 was USD 1.63. The following assumptions were applied to estimate the fair value of the stock options granted during 2009 using the Black-Scholes model: risk free rate 2.0%, dividend yield 0%, expected volatility 100% and expected remaining life 6.25 years. The total compensation expense associated with the iBasis Option Plans was EUR 3.2 million in 2009 and EUR 2 million in 2008. Total compensation expense of EUR 3.2 million in 2009 includes EUR 1.5 million of compensation expense related to the accelerated vesting of iBasis stock options on December 18, 2009. The accelerated vesting of stock options related to the completion of KPN’s acquisition of all of the outstanding stock of iBasis and the subsequent cancellation of the iBasis stock option plans and payment to employees.