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NOTE 35

Share-based payments

Options

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.

2007 option scheme

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:

  • 2007A 1 April 2010–30 April 2012
  • 2007B 1 April 2011–30 April 2013
  • 2007C 1 April 2012–30 April 2014

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.

Percentage of issued share options out of all shares and votes

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

Principal terms of the plans

2007 share options

 
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

 

2007 share options

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

 

Movements in the number of share options and their related exercise prices in 2010

 

2007 share options

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  

 

Fair value measurement

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

  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.

Share-based compensation plan

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.