Payroll expenses are the total disbursements relating to remuneration of personnel employed by the Group and of Group officers. These expenses comprise direct salaries and holiday pay, fees to Group officers, any bonuses paid, the accounting effects of employees’ share and option programmes, pension costs and public taxes/charges relating to the employment of personnel. Any benefits in kind such as a company car, telephone or the like are reported for tax purposes as wages, but are presented as operating expenses according to the nature of the expense.
| Amounts in NOK million | 2011 | 2010 | 2009 |
|---|---|---|---|
| Wages | (8,605) | (8,556) | (7,716) |
| Employer’s national insurance contribution | (1,561) | (1,455) | (1,551) |
| Pension costs1 | (455) | (480) | (507) |
| Other remuneration etc. | (47) | (98) | (152) |
| Payroll expenses | (10,668) | (10,589) | (9,926) |
| Average number of man-years (continuing operations) | 29,798 | 28,748 | 26,923 |
1 For detailed information about pension costs see Note 12.
BONUS SYSTEMS
Orkla has a system of annual bonuses that rewards improvement (operational excellence).
Under this system, a “good performance”, which is specifically defined for the various elements, can result in an annual bonus of 30% of an employee’s fixed pay, while the maximum bonus is 100% of the employee’s annual pay. This bonus system applied to approximately 300 senior executives in 2011.
Remuneration of the executive management
| 2011 | 2010 | 2009 | |||||||
|---|---|---|---|---|---|---|---|---|---|
| Benefits | Pension | Benefits | Pension | Benefits | Pension | ||||
| Amounts in NOK | Salary | in kind | costs | Salary | in kind | costs | Salary | in kind | costs |
| Remuneration to CEO | 6,864,407 | 189,937 | 1,498,189 | 6,756,130 | 196,127 | 1,335,389 | 6,070,179 | 235,085 | 1,038,482 |
| Remuneration to other members of the Group Executive Board | 24,410,610 | 1,042,053 | 4,055,200 | 22,920,294 | 935,399 | 4,877,529 | 18,747,115 | 928,738 | 2,143,502 |
| Number of options to CEO 31 December | 412,000 | 340,000 | 1,270,000 | ||||||
| Number of options to other members of the Group Executive Board 31 December | 1,085,000 | 1,750,000 | 1,710,000 | ||||||
For other matters relating to the remuneration of the executive management and members of the Board of Directors, reference is made to Note 6 to the Financial Statements for Orkla ASA.
Option programmes
In the light of the Group’s change in strategy, the Board proposes to limit the option programme to members of the Group Executive Board. A maximum of 1 million options is recommended (approximately 0.1% of shares outstanding). Group Executive Board members are expected to use 50% of their net proceeds from the exercise of options to purchase Orkla shares, until each member’s holding of Orkla shares has a market value equivalent to a minimum of one year’s gross annual salary. The President and CEO is expected to increase his shareholding until it reaches a market value of a minimum of two years’ gross annual salary.
Options are awarded on the day after the Annual General Meeting, if possible. Option awards at other times during the year may be made after the results for the following quarter are published. Options may not be exercised until, at the earliest, three years and, at the latest, four years after the award, and the ceiling related to the gain is limited to three years’ gross annual salary. All options are to be adjusted for dividends as from 2012.
Until now, options have been issued at 110% of the market price of the Orkla share. Options have had a maturity of six years, and it has been possible to exercise the option in the last three years. When an option is exercised, Orkla alternatively has the right to redeem the option by paying a cash amount equivalent to the difference between the exercise price and the price of the share on the day the option is exercised, but this is seldom done.
| 2011 | 2010 | |||
|---|---|---|---|---|
| No. | WAEP1 | No. | WAEP1 | |
| Outstanding at the beginning of the year | 19,769,500 | 59.71 | 14,967,000 | 61.11 |
| Granted during the year | 5,789,000 | 52.48 | 6,495,000 | 51.38 |
| Exercised during the year | (400,000) | 50.97 | (1,532,500) | 37.50 |
| Forfeited during the year | (2,507,000) | 51.23 | (160,000) | 65.20 |
| Outstanding at year end2 | 22,651,500 | 54.71 | 19,769,500 | 59.71 |
| Exercisable options at year end | 4,619,500 | 78.45 | 4,324,500 | 69.51 |
1 Weighted average exercise price. Amounts in NOK.
2 As a result of an extraordinary dividend, all exercise prices were reduced by NOK 5 on 4 November 2011.
The weighted average contractual life of outstanding options as of 31 December 2011 is 3.8 years.
Weighted average exercise price for outstanding options at year end:
| 2011 | 2010 | |||
|---|---|---|---|---|
| Expiry date | WAEP1,2 | No. | WAEP1 | No. |
| 28.02.2011 | 47.16 | 400,000 | ||
| 15.12.2011 | 56.66 | 1,920,000 | ||
| 20.02.2012 | 58.25 | 500,000 | 63.25 | 500,000 |
| 15.12.2012 | 88.94 | 1,084,500 | 93.94 | 1,104,500 |
| 20.02.2013 | 88.94 | 400,000 | 93.94 | 400,000 |
| 08.05.2014 | 76.40 | 2,610,000 | 81.40 | 2,645,000 |
| 14.08.2014 | 73.10 | 25,000 | 78.10 | 25,000 |
| 22.05.2015 | 47.36 | 6,090,000 | 52.36 | 6,280,000 |
| 10.05.2016 | 46.38 | 6,285,000 | 51.38 | 6,495,000 |
| 09.05.2017 | 52.53 | 5,587,000 | ||
| 31.10.2017 | 48.41 | 70,000 | ||
| Total | 22,651,500 | 19,769,500 | ||
1 Weighted average exercise price. Amounts in NOK.
2 As a result of an extraordinary dividend, all exercise prices were reduced by NOK 5 on 4 November 2011.
Orkla has used the Black-Scholes model when estimating the value of the options. The volatility is calculated on the basis of the past performance of the Orkla share price during the same period as the maturity of the options. In the model, new option awards have been based on the following assumptions:
| 2011 | 2010 | |
|---|---|---|
| Expected dividend-yield (%) | 6 | 5 |
| Expected volatility (%) | 40 | 39 |
| Historical volatility (%) | 40 | 39 |
| Risk-free return (%) | 2.0 | 2.6 |
| Expected life of option (years) | 5.6 | 5.5 |
| Weighted average share price (NOK) | 47.7 | 46.7 |
Effects of the option programme on the financial statements:
| Amounts in NOK million | 2011 | 2010 |
|---|---|---|
| Option costs in the vesting period | (86) | (78) |
| Change in provision for national insurance contribution | 19 | (1) |
| Net option costs | (67) | (79) |
| Liabilities1 | 0 | 19 |
1 Relates only to employer’s national insurance contributions.
Hedging
The costs of the option programme (employer’s national insurance contribution) are partly hedged by means of hedge contracts with a financial institution. As of 31 December 2011, there were open hedge contracts equivalent to the change in value of 600,000 underlying Orkla shares (600,000 in 2010) with an average exercise price of NOK 48 per share (NOK 48 in 2010). NOK 4 million was expensed for hedges in 2011 (NOK 1 million recognised as income in 2010). The capitalised value as of 31 December 2011 was NOK -2 million (NOK 5 million in 2010).