NOTE 35
The Group operates share option plans as part of management’s incentive and commitment plans. Each option gives its holder the right to subscribe for one Kesko Corporation B share at the price and during the period specified in the terms and conditions of the option plan. The options are forfeited if the employee leaves the company before the end of the vesting period, unless, in an individual case, the Board decides that the option recipient can keep all or some of the options under offering obligation.
On 26 March 2007, the Annual General Meeting decided to grant a total of 3,000,000 options for no consideration to the management of the Kesko Group, other key personnel, and a subsidiary wholly owned by Kesko Corporation. The Company had a weighty financial reason for granting the options because they are intended to be part of Kesko’s share-based incentive system. Each option entitles its holder to subscribe for one new Kesko Corporation B share. In addition, the option scheme also includes an obligation to buy company shares for permanent ownership for the value of 25% of the proceeds from the sale of options. The options have been marked with the symbols 2007A, 2007B and 2007C in units of 1,000,000 options each.
The options are exercisable as follows:
The original price of a share subscribed for with option 2007A was the trade volume weighted average quotation of a Kesko Corporation B share on the Helsinki Stock Exchange between 1 April and 30 April 2007 (€45.82), with option 2007B, between 1 April and 30 April 2008 (€26.57), and with option 2007C, between 1 April and 30 April 2009 (€16.84). The prices of shares subscribed for with options are reduced by the amount decided after the beginning of the period for the determination of the subscription price but before the subscription, as at the record date for each distribution of profits or other assets.
After the distribution of dividends for 2010, the price of a B share subscribed for with option 2007A was €41.02 at the end of 2011, with option 2007B €23.37, and with option 2007C €14.64. The option scheme covers approximately 130 people.
If all of the exercisable share options were exercised, the shares subscribed for with all of the 2007 options would account for 2.95% of all shares and for 0.77% of all votes. The subscriptions made with share options can raise the number of the company’s shares to 101,641,292. As a result of the subscriptions, the voting rights carried by all shares could increase to 387,274,355 votes.
Dividend rights and other shareholder rights carried by the shares will apply after the share capital increase has been entered in the Trade Register.
Share options in financial year 1 Jan. - 31 Dec. 2011 |
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| Principal terms of the plans | 2007 share options |
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| Grant date | 26 March 2007 | |||
| Instrument | share option | |||
| Target group | management, other key personnel | |||
| 2007A | 2007B | 2007C | ||
| Original number of options | 1,000,000 | 1,000,000 | 1,000,000 | |
| Number of shares per option | 1 | 1 | 1 | |
| Original exercise price | €45.82 | €26.57 | €16.84 | |
| Dividend adjustment | Yes | Yes | Yes | |
| Exercise price at 31 Dec. 2007 | €45.82 | - | - | |
| Exercise price at 31 Dec. 2008 | €44.22 | €26.57 | - | |
| Exercise price at 31 Dec. 2009 | €43.22 | €25.57 | €16.84 | |
| Exercise price at 31 Dec. 2010 | €42.32 | €24.67 | €15.94 | |
| Exercise price at 31 Dec. 2011 | €41.02 | €23.37 | €14.64 | |
| Fair value at grant date | ||||
| 17 Jul. 2007: 2007A | €50.25 | |||
| 19 Sep. 2007: 2007A | €45.02 | |||
| 12 Dec. 2007: 2007A | €39.42 | |||
| 13 Sep. 2010: 2007A | €32.57 | |||
| 29 May 2008: 2007B | €26.47 | |||
| 13 Sep. 2010: 2007B | €32.57 | |||
| 27 May 2009: 2007C | €20.12 | |||
| 13 Sep. 2010: 2007C | €32.57 | |||
| Fist allocation, date | 1 Apr. 2010 | 1 Apr. 2011 | 1 Apr. 2012 | |
| Expiry date | 30 Apr. 2012 | 30 Apr. 2013 | 30 Apr. 2014 | |
| Remaining vesting period, years | 0.3 | 1.3 | 2.3 | |
| Plan participants at end of financial year | 114 | 115 | 119 | |
Movements in the number of share options and their related exercise prices in 2011 |
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2007 share options |
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| 2011 | 2007A | 2007B | 2007C | Weighted average exercise price |
| Options outstanding at beginning of period | 728,700 | 700,200 | 752,700 | €27.55 |
| Options available for grant at beginning of period | 271,300 | 299,800 | 247,300 | €27.88 |
| Options granted during period | - | - | - | - |
| Options forfeited during period | 1,000 | 32,500 | €14.90 | |
| Options exercised during period | 3,750 | €23.37 | ||
| Options expired during period | ||||
| Options outstanding at end of period | 728,700 | 695,450 | 720,200 | €26.44 |
| Options exercisable at end of period | 1,000,000 | 1,000,000 | 1,000,000 | €26.34 |
| Average price weighted by grant date trading volume* | €32.48 | |||
| Kesko B share price at end of grant year | ||||
| 2007 | €37.72 | |||
| 2008 | €17.80 | |||
| 2009 | €23.08 | |||
| 2010 | €34.93 | €34.93 | €34.93 | |
* for 2007B: weighted average price of a B share in April -December 2011, for 2007A: shares were not subscribed for with 2007A options during the financial year |
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Movements in the number of share options and their related exercise prices in 2010 |
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2007 share options |
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| 2010 | 2007A | 2007B | 2007C | Weighted average exercise price |
| Options outstanding at beginning of period | 737,500 | 745,500 | 782,500 | €28.30 |
| Options available for grant at beginning of period | 262,500 | 254,500 | 217,500 | €29.29 |
| Options granted during period | 1,700 | 1,700 | 1,700 | €27.64 |
| Options forfeited during period | 10,500 | 47,000 | 31,500 | €23.66 |
| Options exercised during period | ||||
| Options expired during period | ||||
| Options outstanding at end of period | 728,700 | 700,200 | 752,700 | €27.55 |
| Options exercisable at end of period | 1,000,000 | 1,000,000 | 1,000,000 | €27.64 |
| Kesko B share price at end of grant year | ||||
| 2007 | €37.72 | |||
| 2008 | €17.80 | |||
| 2009 | €23.08 | |||
| 2010 | €34.93 | €34.93 | €34.93 | |
For fair value measurement of options, Kesko Corporation has consulted Evli Alexander Management Oy. The fair value of options has been determined using the Black&Scholes option pricing model. The fair value determined for options at grant date has been recognised as an expense over their vesting period.
In the financial year 1 January–31 December 2011, the options contributed €2.4 million (€5.0 million) to the Group’s profit
Black&Scholes model assumptions |
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| Granted in 2010 | Granted in 2009 | Granted in 2008 | Granted in 2007 | All options | |
| Number of options granted | 5,100 | 785,500 | 776,000 | 789,000 | 2,355,600 |
| B share average (weighted) price | €32.57 | €20.12 | €26.47 | €49.37 | €32.03 |
| Average (weighted) exercise price | €29.74 | €16.84 | €26.57 | €45.82 | €29.78 |
| Expected average (weighted) volatility | 34.7% | 32.0% | 27.4% | 21.7% | 27.0% |
| Average (weighted) vesting period | 2.6 yrs | 4.9 yrs | 4.9 yrs | 4.8 yrs | 4.9 yrs |
| Average (weighted) risk-free interest | 1.1% | 3.0% | 4.4% | 4.5% | 4.0% |
| Returned options (weighted average) | 0.0% | 4.4% | 10.0% | 6.1% | 6.7% |
| Total fair value, € | 51,173 | 6,065,836 | 6,002,804 | 11,697,744 | 24,424,787 |
The expected volatility of a Kesko B share has been estimated based on historic volatility using weekly changes over a period of time corresponding to the option’s vesting period. The risk-free interest rate is the government zero coupon bond interest rate at the measurement date with a maturity equalling the option vesting period.
Kesko’s share-based compensation plan 2011–2013, decided by the Board, is targeted to the Group’s management and other named key personnel, in which a maximum of 600,000 own B shares held by the company can be granted within a period of three years.
The share-based compensation plan includes three vesting periods, namely the calendar years 2011, 2012 and 2013. Kesko’ Board will decide on the target group and vesting criteria for each vesting period based on the proposal by the Remuneration Committee. The award possibly payable after the end of each vesting period is based on the attainment of the vesting criteria decided on by the Board for each vesting period. The criteria for vesting period 2011 are Kesko’s basic earnings per share (EPS) excluding non-recurring items, the Kesko Group’s sales performance exclusive of tax in 2011 and the percentage by which the total earnings of a Kesko B share exceeds the OMX Helsinki Benchmark Cap index.
The award possibly paid for a vesting period will be partly in Kesko B shares and partly in cash. The cash component will be used entirely to pay the taxes and tax-like charges incurred by the award.
A commitment period of three calendar years following each vesting period is attached to the shares issued in compensation, during which shares may not be assigned. If a person’s employment or service relationship ends prior to the expiry of a commitment period, he/she must return the shares under the assignment restriction for no consideration to Kesko or its designate.
By 31 December 2011, shares had not been assigned.
The assumptions in accounting for the share-based compensation plan are presented below.
| Share award grant dates and fair values for financial year 2011 | 2011 | ||
| Grant dates | 16 Feb.. | 27 Apr.. | 16 May |
| Grant date fair value of share award, € | 31.70 | 32.25 | 35.20 |
| Share price at grant date, € | 32.40 | 32.25 | 35.20 |
| Share-based compensation plan date | |||
| Vesting period start date | 1 Jan 2011 | ||
| Vesting period end date | 31 Dec 2011 | ||
| Commitment period end date | 31 Dec 2014 | ||
| Assumptions in the measurement of fair value of share award | |||
| Number of share awards granted at beginning of period, maximum | - | ||
| Amount of share awards granted during period, maximum | 239,000 | ||
| Changes in number of share awards granted at end of period, maximum | -11,900 | ||
| Number of share awards granted at end of period, maximum | 227,100 | ||
| Number of plan participants at end of period | 129 | ||
| Share price at balance sheet date, € | 25.96 | ||
| Assumed fulfilment of vesting criteria | 53.3% | ||
| Estimated number of share awards returned prior to the end of restriction period, % | 5% | ||
| Amount recognised as expense, € million | 3.9 |
The liability recognised in the balance sheet in respect of share-based compensation plan was €3.0 million. At 31 December 2011, the write-down expected to realise in financial years 2012–2014 is €2.7 million. The actual amount may be different from the estimate.