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5.4 Share-based compensation
Accounting policies
The costs relating to share-based payments are recorded in the income statement and the corresponding liability for share-based payments settled in cash is recognised in the balance sheet. The liability in the balance sheet is measured at fair value at each balance sheet date. For equity-settled share-based payment transactions, an increase corresponding to the expensed amount is recorded in equity.
The Company's Board of Directors has granted a share-based compensation plan to management under which an award consisting of B series shares and an amount in cash is paid upon fulfilling the plan’s terms. The fair value of the award paid in shares is the value of the share at the grant date and it is recognised as an expense on a straight-line basis over the vesting and commitment period of the plan. The expensed amount is based on the Group's estimate of the amount of award payable in shares at the end of the vesting period. The effects of non-market conditions are not included in the fair value of the awards. Instead, they are accounted for in the assumptions of the number of shares expected to vest at the end of the vesting period. A cash component is paid to cover the taxes and tax-like charges incurred under the award. The cash component is recognised as an expense during the vesting period. Changes in estimates are recorded in the income statement.
Share-based compensation plan
Kesko has five share-based compensation plans directed at members of the Group’s management and other specified key persons: the 2011−2013 plan, the 2014−2016 plan, and the plans decided in 2017, namely the performance share plan (PSP) and the transitional share-based incentive plan (Bridge Plan). Kesko’s Board has also decided on a restricted share pool (RSP), which is a complementary share plan for special situations. Under the 2011-2013 and 2014-2016 share-based compensation plans, a total maximum of 600,000 own B shares held by the Company as treasury shares could be granted over three years.
The 2011-2013 and the 2014-2016 share-based compensation plans had three vesting periods: the calendar years 2011, 2012 and 2013 and the calendar years 2014, 2015 and 2016. The vesting period for the new 2017 share plan is two years. The vesting period for the transitional share-based incentive plan (Bridge Plan) was year 2017. There were no events in the restricted share pool (RSP) in 2017. Kesko's Board has decided the vesting criteria, the target group and the maximum amounts of the share award separately for each vesting period based on the Remuneration Committee's proposal. The final amounts of Kesko B shares to be granted based on the fulfilment of the vesting criteria have been decided by the Board at the beginning of the year following the vesting period. The criteria for the 2011, 2012, 2013, 2014, 2015 and 2016 vesting periods were, with equal weightings, the growth percentage of Kesko Group's sales exclusive of tax, Kesko's basic comparable earnings per share (EPS), and the percentage by which the total shareholder return of a Kesko B share exceeds the OMX Helsinki Benchmark Cap index. In the 2017 plans (PSP and Bridge Plan) the criteria for the vesting period are, with equal weightings, the growth percentage of Kesko Group's sales exclusive of tax, the comparable return (%) on capital employed (ROCE), and the absolute total shareholder return (TSR, %) of a Kesko B share.
In all the plans, the award possibly paid for a vesting period is paid in Kesko B shares. In addition, in the 2011-2013 and 2014-2016 plans, a cash component at maximum equal to the value of the shares is paid to cover the taxes and tax-like charges incurred under the award. In the new plans initiated in 2017 (PSP and Bridge Plan), the possibly paid total award amount is the gross earning of shares from which the applicable withholding tax is deducted, and the remaining net amount is paid in shares.
A commitment period of three calendar years following each vesting period is attached to the shares granted (the 2011-2013 and 2014-2016 plans and Bridge Plan), during which the shares must not be pledged or transferred, but the other rights attached to the shares remain in force. In the 2017 performance share plan (PSP), the two-year vesting period is followed by a two-year commitment period. If a person's employment or service relationship terminates prior to the expiry of a commitment period, he/she must, as a rule, return the shares under transfer restriction to Kesko or its designate for no consideration. In individual cases, the Board may decide that the grantee can keep the shares under the return obligation, or some of them. If the grantee retires during the commitment period, he/she is entitled to keep the shares and other securities already received.
The assumptions used in accounting for the share-based compensation plan are presented in the following tables.
Share award grant dates and fair values, vesting period 2017 PSP Bridge Plan
Grant dates 1 Feb. 2017 1 Feb. 2017
Grant date fair value of share award, € 44.67 44.67
Share price at grant date, € 46.67 46.67
Share-based compensation plan duration
Vesting period start date 1 Jan. 2017 1 Jan. 2017
Vesting period end date 31 Dec. 2018 31 Dec. 2017
Commitment period end date 31 Dec. 2020 31 Dec. 2020
Share award grant dates and fair values Vesting period
2016
Vesting period
2015
Vesting period
2014
Vesting period
2013
Grant dates 3 Feb. 2016 9 Feb. 2015 3 Feb. 2014 5 Feb. 2013
Grant date fair value of share award, € 32.45 30.74 25.66 23.30
Share price at grant date, € 34.95 32.24 27.06 24.50
Share-based compensation plan duration
Vesting period start date 1 Jan. 2016 1 Jan. 2015 1 Jan. 2014 1 Jan. 2013
Vesting period end date 31 Dec. 2016 31 Dec. 2015 31 Dec. 2014 31 Dec. 2013
Commitment period end date 31 Dec. 2019 31 Dec. 2018 31 Dec. 2017 31 Dec. 2016
Assumptions applied in determining the fair value of share award Vesting period
2017
PSP
Vesting period
2017
Bridge plan
Vesting period
2016
Vesting period
2015
Vesting period
2014
Vesting period
2013
Number of share awards granted, maximum, pcs 325,300* 325,300* 263,000 262,800 278,400 263,600
Changes in the number of shares granted, pcs -34,900 -25,900 -9,800 -3,600 -2,000 -9,500
Actual amount of share award, pcs 192,822 139,724 120,022 50,520
Number of plan participants at end of financial year 125 126 131 142 143 134
Share price at balance sheet date, € 45.25 45.25 47.48 32.37 30.18 26.80
Assumed fulfilment of vesting criteria, % 40.0 40.0 56.7 53.4 43.4 20.0
Estimated number of share awards returned prior to the end of commitment period, % 2.5 2.5 5.0 5.0 5.0 5.0
*Gross number of shares from which the applicable withholding tax is deducted and the remaining net amount is paid in shares.
The impact of the above share-based compensation plans on the Group's profit for 2017 was €-9.8 million (€-12.3 million).
As at 31 December 2017, the amount to be recognised as expense for the financial years 2018−2020 is estimated at a total of €-9.8 million. The actual amount may differ from the estimate.