46 Share-based payment

Share Matching Plan

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

Specific executives are contractually obligated to invest between a minimum of 10 % and a maximum of 50 % 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. 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.

Further executives in certain management groups who were not contractually obligated to participate in the Share Matching Plan are 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. To participate, the executives invest between a minimum of 10 % a maximum of 50 % of the target amount (100 %) of the short-term variable remuneration component (Short-Term Incentive) in shares of Deutsche Telekom AG. Deutsche Telekom AG will award additional shares for the shares 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 2022 financial year, a total of 0.9 million (2021: 0.9 million) matching shares were allocated to beneficiaries of the plan at a weighted average fair value of EUR 15.37 (2021: EUR 13.20). The cost is to be recognized against the capital reserves pro rata temporis until the end of the service period and amounted to EUR 11 million in total for all tranches as of December 31, 2022 (December 31, 2021: EUR 10 million). In the reporting year, reserves were reduced by transfers of shares to plan participants in a total value of EUR 8 million (2021: EUR 6 million). The capital reserves recognized for the Share Matching Plan as of December 31, 2022 amounted to EUR 26 million (December 31, 2021: EUR 23 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 bundle of phantom shares of Deutsche Telekom AG, the value of which is contingent on the management group to which they have been assigned, and the achievement of the collective targets (financial and strategic targets) of the organizational unit to which the executive belongs. The value of the phantom shares received lies between 10 % and 43 % of the participant’s annual target salary.

The initial number of phantom shares is contingent on the share price in a reference period at the inception of the plan. 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 plan 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 at the measurement date 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 payment amount of 200 %. This maximum payment amount does generally not apply for other executives. In the 2022 financial year, a total of 4.87 million (2021: 4.93 million) phantom shares were granted at a weighted average fair value of EUR 16.12 (2021: EUR 14.92). 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 128 million for all tranches in the reporting year (2021: EUR 85 million). In 2022, the provision was utilized in the amount of EUR 59 million (2021: EUR 50 million). In addition, the carrying amount decreased by EUR 5 million as a result of increased interest rates. Following a reclassification of EUR 2 million (2021: EUR 1 million) to liabilities directly associated with non-current assets and disposal groups held for sale, the provision amounted to EUR 248 million as of December 31, 2022 (December 31, 2021: EUR 186 million).

For detailed information on Board of Management member remuneration, please refer to the remuneration report published separately by the Board of Management and the Supervisory Board.

“Shares2You” shares program for employees

Since the 2021 financial year, employees in Germany, and since the 2022 financial year, employees of some Group companies in other countries have been given the option to voluntarily invest an amount of between EUR 50 and EUR 1,000 per year in shares in Deutsche Telekom AG. Each participating employee receives one additional free share in Deutsche Telekom AG for every two shares acquired by way of this personal investment (Shares2You). The shares acquired by participants, including the free shares, are subject to a four-year lock-up period during which they cannot be sold. 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, the shares were issued to plan participants before the end of the financial year. A total of 1.0 million free shares were granted 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.

In 2022, the investment phase for employees in Germany ended later, on December 8, 2022. Employees declared their intention to invest EUR 35 million as personal investment. This resulted in an expense of EUR 17 million for the provision of the free shares. The number of shares and their fair value will be determined on the allocation date February 24, 2023.

In addition, in 2022, Shares2You was introduced in three Group companies in the Czech Republic and Slovakia for the first time. A total of 94,776 shares at a value of EUR 1.8 million were transferred from Deutsche Telekom AG as of November 16, 2022, from the 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, 2022, there were around 15 million T‑Mobile US shares of common stock (December 31, 2021: 20 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 655 million as of December 31, 2022 (December 31, 2021: EUR 540 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 7 million (USD 7 million) in the 2022 financial year (2021: EUR 9 million (USD 10 million)).