35 Share-based payment

Share Matching Plan

Since the 2011 financial year, specific executives have been contractually obligated to invest a minimum of 10 percent and a maximum of 33.3 percent of their variable short-term remuneration component, which is based on the achievement of targets set for each person for the financial year (Variable I), in Deutsche Telekom AG shares. Deutsche Telekom AG will award one additional share for every share acquired as part of this executive’s aforementioned personal investment (Share Matching Plan). These shares will be allotted to the beneficiaries of this plan on expiration of the four-year lock-up period.

Since the 2015 financial year, executives who are not contractually obligated to participate in the Share Matching Plan have been given the opportunity to participate on a voluntary basis. To participate, the executives invested a minimum of 10 percent and a maximum of 33.3 percent of their variable short-term remuneration component, which is based on the achievement of targets set for each person for the financial year (Variable I), in Deutsche Telekom AG shares. Deutsche Telekom AG will award additional shares for every share acquired as part of this executive’s aforementioned personal investment (Share Matching Plan). Participation in the Share Matching Plan and the number of additional shares granted are contingent on the executive’s individual performance. The additional shares will be allotted to the beneficiaries of this plan on expiration of the four-year lock-up period. The offer to executives to participate voluntarily in the Share Matching Plan is only made in the years in which the previous year’s free cash flow target was achieved.

The individual Share Matching Plans are each recognized for the first time at fair value on the grant date. To determine the fair value, the expected dividend entitlements are deducted from Deutsche Telekom AG’s share price, as there are no dividend entitlements until the matching shares have been allocated. In the 2017 financial year, a total of 0.5 million (2016: 0.6 million) matching shares were allocated to beneficiaries of the plan at a weighted average fair value of EUR 14.05 (2016: EUR 12.97). The cost is to be recognized against the capital reserves pro rata temporis until the end of the service period and amounted to EUR 5.1 million in total for all tranches as of December 31, 2017 (December 31, 2016: EUR 3.4 million). In the reporting period, reserves were reduced by transfers of shares to plan participants in a total value of EUR 5.5 million. The capital reserves recognized for the Share Matching Plan as of December 31, 2017 amounted to EUR 11.1 million (December 31, 2016: EUR 11.5 million).

For the compensation system of Board of Management members who also participate in the Share Matching Plan, please refer to the “Compensation report” in the combined management report.

Long-term incentive plan

In the 2015 financial year, executives who had not yet made a contractual commitment to participate in the long-term incentive plan were given the first-time opportunity to participate. The participating executives receive a package of virtual shares at the inception of the plan. The number of virtual shares is contingent on the participant’s management group assignment, individual performance, and annual target salary. Taking these factors into account, the value of the package of virtual shares at the inception of the plan is between 10 and 43 percent of the participant’s annual target salary.

Over the term of the four-year plan, the value of the virtual shares changes in line with Deutsche Telekom AG’s share price development. The number of virtual shares will change on achievement of the targets for four equally weighted performance indicators (return on capital employed, adjusted earnings per share, employee satisfaction, and customer satisfaction), to be determined at the end of each year. At the end of the four-year plan, the results of each of the four years will be added together and the virtual shares will be converted on the basis of a share price calculated in a reference period and paid out in cash.

The long-term incentive plan was measured at fair value on the grant date. The fair value of the plan is calculated by multiplying the number of virtual shares by Deutsche Telekom AG’s share price discounted to the reporting date. In the 2017 financial year, a total of 3.17 million (2016: 3.3 million) virtual shares were granted at a weighted average fair value of EUR 16.15 (2016: EUR 16.50). The plan must be remeasured at every reporting date until the end of the service period and expensed pro rata temporis. As of December 31, 2017, the cost of the long-term incentive plan amounted to EUR 42 million in total for all tranches (December 31, 2016: EUR 29 million). The provision totaled EUR 89 million as of December 31, 2017 (December 31, 2016: EUR 47 million).

Share-based payment at T-Mobile US

T-Mobile US maintains the 2013 Omnibus Incentive Plan, which authorized the issuance of up to 63 million shares of common stock of T-Mobile US. Under the incentive plan, the company may grant stock options, stock appreciation rights, restricted stock, restricted stock units (RSUs), and performance awards to employees, consultants, advisors, and non-­employee directors. As of December 31, 2017, there were 15 million T-Mobile US shares of common stock (December 31, 2016: 22 million shares) available for future grants under the incentive plan.

T-Mobile US grants RSUs to eligible employees and certain non-employee directors, and performance stock units (PSUs) to eligible key executives of the company. RSUs entitle the grantee to receive shares of T - Mobile US common stock at the end of a vesting period up to three years. PSUs entitle the holder to receive shares of T - Mobile US common stock at the end of a vesting period up to three years if a specific performance goal is achieved. The number of shares ultimately received is dependent on the actual performance of T-Mobile US measured against a defined performance target.

The RSU and PSU plans resulted in the following share-related development:

 
  Number of shares Weighted average fair value at grant
date
USD
Non-vested as of
January 1, 2017
15,715,391 37.93
Granted 7,133,359 60.21
Vested (8,338,271) 35.47
Forfeited (814,936) 49.02
Non-vested as of
December 31, 2017
13,695,543 50.38

The program is measured at fair value on the grant date and recognized as expense, net of expected forfeitures, following a graded vesting schedule over the related service period. The fair value of stock awards for the RSUs is based on the closing price of
T-Mobile US’ common stock on the date of grant. The fair value of stock awards for the PSUs was determined using the Monte Carlo model. Stock-based compensation expense was EUR 330 million as of December 31, 2017 (December 31, 2016: EUR 255 million).

Prior to the business combination, MetroPCS had established various stock option plans (predecessor plans). The MetroPCS stock options were adjusted in connection with the business combination. Following stockholder approval of T-Mobile US’ 2013 Omnibus Incentive Plan, no new awards may be granted under the predecessor plan.

The plan resulted in the following development of the T-Mobile US stock options:

 
  Number of shares Weighted average exercise price
USD
Weighted average remaining contractual life
(years)
Stock options outstanding/exercisable
January 1, 2017
833,931 31.75 2.3
Exercised (450,873) 44.18  
Forfeited (9,900) 45.76  
Stock options outstanding/exercisable
December 31, 2017
373,158 16.36 2.8

The exercise of stock options generated cash inflows of EUR 18 million (USD 21 million) in the 2017 financial year (2016: EUR 26 million (USD 29 million)).