44 Share-based payment

Share Matching Plan

Since the 2021 financial year, members of the Board of Management have a contractual obligation to invest one third of the Short-Term Incentive (STI) set by the Supervisory Board in shares of Deutsche Telekom AG. There is an option to voluntarily increase the investment volume to up to 50 % of the STI. Deutsche Telekom AG will transfer one additional share for every share acquired as part of this Board of Management member’s aforementioned personal investment (Share Matching Plan – SMP) on expiration of the four-year lock-up period starting from the date of purchase. The functioning of STI and SMP is set out in the following chart.

Functioning of the Share Matching Plan and the Short-Term Incentive for Board of Management members

Since the 2011 financial year, specific executives have been contractually obligated to invest a minimum of 10 % of their short-term variable remuneration component, which is based on the achievement of targets set for each person for the financial year (Short-Term Incentive), in Deutsche Telekom AG shares. In the 2019 financial year, the upper limit for personal investment was raised from 33.3 % to 50 % of the short-term variable remuneration component paid. 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, further executives who are not contractually obligated to participate in the Share Matching Plan have been given the opportunity to participate on a voluntary basis. This offer is only made when the Group’s free cash flow target for the preceding year has been achieved. The conditions of participation in the voluntary Share Matching Plan were updated in the 2019 financial year. Since then, participation has been open to all executives in certain management groups. To participate, the executives invest at least 10 % and – since the 2019 financial year – a maximum of 50 % of the target amount (100 %) of the short-term remuneration component (Short-Term Incentive) in shares of Deutsche Telekom AG. Deutsche Telekom AG will award additional shares for every share acquired as part of this executive’s aforementioned personal investment (Share Matching Plan). The number of additional shares granted will depend on the management group to which the executive is assigned. The additional shares will be allotted to the beneficiaries of this plan on expiration of the four-year lock-up period.

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 2021 financial year, a total of 0.9 million (2020: 1.0 million) matching shares were allocated to beneficiaries of the plan at a weighted average fair value of EUR 13.20 (2020: EUR 12.22). The cost is to be recognized against the capital reserves pro rata temporis until the end of the service period and amounted to EUR 10.1 million in total for all tranches as of December 31, 2021 (December 31, 2020: EUR 9.0 million). In the reporting year, reserves were reduced by transfers of shares to plan participants in a total value of EUR 5.8 million (2020: EUR 7.0 million). The capital reserves recognized for the Share Matching Plan as of December 31, 2021 amounted to EUR 23.4 million (December 31, 2020: EUR 19.1 million).

Long-Term Incentive Plan

Since the introduction of the new Board of Management remuneration system in 2021, Board of Management members also participate in the Group’s existing Long-Term Incentive Plan (LTI). The amount of the annual participation is contractually defined individually for each Board of Management member. The functioning of the LTI is summarized below:

Functioning of the Long-Term Incentive Plan for Board of Management members

Executives from the Deutsche Telekom AG Group also participate in the LTI provided they meet certain eligibility requirements or have an individual contractual commitment. At the inception of the plan, the participating executives receive a package of phantom shares with a value between 10 and 43 % of the participant’s annual target salary depending on the extent to which defined criteria are fulfilled. The number of phantom shares is contingent on the participant’s annual target salary, management group assignment, and, since the 2019 financial year, on the achievement of the collective targets (financial and strategic targets) of the organizational unit to which the executive is assigned.

Over the term of the four-year plan, the value of the phantom shares changes in line with Deutsche Telekom AG’s share price development. The number of phantom shares will change in line with the achievement of the targets for four equally weighted key performance indicators (return on capital employed, adjusted earnings per share, employee satisfaction, and customer satisfaction), to be determined at the end of each year. In addition, a dividend is granted for the phantom shares over the term of the plan. This dividend is reinvested in phantom shares, increasing the number of phantom shares held by each plan participant. At the end of the four-year plan term, the final number of phantom shares will be converted on the basis of a share price calculated in a reference period at the end of the plan and paid out in cash together with the dividend for the last year of the plan, which is not converted into phantom shares.

The individual LTIs are each recognized for the first time at fair value on the grant date. The fair value of a plan is calculated by multiplying the number of phantom shares by Deutsche Telekom AG’s share price discounted to the reporting date. For members of the Board of Management of Deutsche Telekom AG, the fair value is calculated on the grant date taking into account a discount for a maximum payout volume of 200 %. This maximum payout volume does generally not apply for other executives. In the 2021 financial year, a total of 4.93 million (2020: 3.91 million) phantom shares were granted at a weighted average fair value of EUR 14.92 (2020: EUR 14.76). A plan must be remeasured at every reporting date until the end of the service period and expensed pro rata temporis. The cost of the LTI plans amounted to EUR 85 million for all tranches in the reporting year (2020: EUR 77 million). In 2021, the provision was utilized in the amount of EUR 50 million (2020: EUR 47 million). Following a reclassification of EUR 1 million (2020: EUR 2 million) to liabilities directly associated with non-current assets and disposal groups held for sale, the provision amounted to EUR 186 million as of December 31, 2021 (December 31, 2020: EUR 152 million).

Detailed information on the remuneration of the Board of Management and the Supervisory Board is published in the separate remuneration report.

Shares2You share ownership program

Since the 2021 financial year, employees in Germany have been given the option to invest an amount of between EUR 50 and EUR 1,000 in shares in Deutsche Telekom AG. Each eligible employee receives one additional free share in Deutsche Telekom AG for every two shares acquired by way of this personal investment (Shares2You). Once the investment amount has been paid in, ownership of the shares, which carry dividend and voting rights, is transferred to the employee. However, a lock-up period of another four years applies, for example, with regard to sale. The program is not subject to any minimum service period or performance conditions.

The cost for the free shares must be recognized against the capital reserves at the inception of the plan. In 2021, plan participants were granted a total of 1.0 million free shares at a fair value of EUR 16.72. A corresponding expense of EUR 17.0 million was recognized as of December 31, 2021. A total of 3.1 million shares at a value of EUR 51.1 million were reclassified from treasury shares to the capital reserve as of December 31, 2021, from personal investment and for the free shares.

Stock-based compensation at T‑Mobile US

Under T‑Mobile US’ Omnibus 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, 2021, there were around 20 million T‑Mobile US shares of common stock (December 31, 2020: 25 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-based restricted stock units (PRSUs) 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 of up to three years. PRSUs entitle the holder to receive shares of T‑Mobile’ US common stock at the end of a vesting period of 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 PRSU plans resulted in the following share-related development:

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 PRSUs was determined using the Monte Carlo model. Stock-based compensation expense was EUR 540 million as of December 31, 2021 (December 31, 2020: EUR 628 million).

The outstanding stock options mainly relate to the stock option plans of MetroPCS and Sprint, both of which were set up prior to the business combinations with T- Mobile US. No new awards may be granted under these plans.

The plans resulted in the following development of the T‑Mobile US stock options:

The exercise of stock options generated cash inflows of EUR 9 million (USD 10 million) in the 2021 financial year (2020: EUR 42 million (USD 48 million)).