Share based payments

Stock option plans
Pursuant to a stock option scheme, option rights have been granted to employees. The Company currently has two fixed stock option plans both included in the Framework plan, of which one, established in 2001, qualifies as a Time Accelerated Restricted Stock Award Plan (‘TARSAP’). In addition, the Company has a performance-based stock award plan (‘Restricted Share Plan’ or ‘RSP’) and a stock purchase plan.

In general, all options may only be exercised after a lock-up period of at least three years. If this lock-up period for legal or tax reasons is not possible, exercising of option rights during this three-year period is discouraged.
 
When options are exercised, the Company issues new shares.

Framework Plan
The Company established a stock option plan, the Framework Scheme Regarding the Grant of Options to Senior Management (the ‘Framework Plan’) in 1997, which enables the Company to issue options to purchase Bearer Depository Receipts (BDR’s) to eligible recipients. The purpose of the plan is to provide long-term incentives to our senior management. Over 300 senior management members qualify to receive options under the plan. Members of the Supervisory Board are not eligible to receive options.

The Board of Management annually determines grants of options under the plan. All such grants are subject to the terms and conditions of the plan, and must be approved by the Supervisory Board. The number of options permitted to be granted under the plan normally may not exceed 2% of the outstanding ordinary shares of the Company on the first day of the year in which the options are granted. The exercise price of an option granted under the plan must be at least equal to the market price of the BDRs at the time the option is granted. The option period is in the range of 5-10 years.

For grants made from 2001 up to and including 2003 under the TARSAP, the only variable is when the options will vest. Ultimately, all options granted will vest six years after the grant date. However, through achievement of certain predetermined performance criteria, an employee has the ability to accelerate the vesting date. Vesting is in principle subject to continued employment with the Group at the vesting date at all times. The performance criteria affect the timing of the restriction, but do not affect the total award. The measurement date for accounting purposes is the grant date.

Awards of options with performance criteria granted as of 2004 will vest only if and insofar as the relevant predetermined performance criteria have been met. The remainder will lapse.

Restricted Share Plan
In February 2001, the Board of Management, with the approval of the Supervisory Board, introduced an equity-based restricted share plan, pursuant to which a limited number of senior staff members and the members of the Board of Management may be granted newly issued or existing BDRs. All grants under this plan are free of charge for the participants, but subject to the achievement of specific predetermined performance targets in order to be earned. The vesting period is in the range of 3-5 years.

The maximum number of BDRs which may be granted under this plan in any one year normally may not exceed 1% of the outstanding ordinary shares of the Company on the first day of that year.

Share Appreciation Rights
Vedior also grants Share Appreciation Rights (SARs)  to employees in the United States. Regarding these Share Appreciation Rights the fair value of the amount payable to the employees is recognised as an expense with a corresponding increase in liabilities. The fair value is initially measured at grant date and spread over the period during which the employees become unconditionally entitled to payment. The fair value of the Share Appreciation Rights is measured based on a Black-Scholes model, taking into account the terms and conditions upon which the instruments were granted. The liability is remeasured at each balance sheet date and at settlement date.

 
Vedior Equity Plans Services B.V.
The operation and management of the Restricted Share Plan and the Framework Plan is performed by an independent company named Vedior Equity Plans Services B.V. This company also acts as the grantor to all participants, with the exception of participants in the United States of America and France, where Vedior Equity Plans Services B.V. may not act as such due to legal reasons. All grants are made upon the recommendation of Vedior.

The number of weighted average exercise prices of share options is as follows.

The options under the Framework Plan outstanding at 31 December 2005 have an exercise price in the range of €4 to €16 and a weighted average contractual life of 5.8 years. The options exercised in 2005 have a weighted average share price of €14.01.

The restricted shares vested under the Restricted Share Plan in 2005 had an average share price of €10.81.

The fair value of services received in return for stock options granted are measured by reference to the fair value of stock options granted. The estimate of the fair value of the services received is measured based on a Black and Scholes model. The contractual life of the option is used as an input into this model. Expectations of early exercise are incorporated into the model for the Framework Plan and SARs. For the Restricted Share Plan, the expected life is assumed the same as the remaining time until vesting.

The inputs into the Black-Scholes option pricing model were:

The expected dividends were based on projections for the coming three years made by several analysts of banks, and taken as a constant after these three years.

The risk free interest rate was based on the interest rate swap curve at the date of grant for the Framework Plan, SARs and the Restricted Share Plan. For each option the risk free rate is equal to the zero-coupon yield with corresponding maturity.

The expected volatility is based on the historic volatility calculated based on the weighted average remaining life of the stock options.

Stock options are granted under performance conditions and the condition of continued employment with the Company at the moment of vesting. The expected forfeiture estimates are based on historical practice and managements expectations of future employment and the realisation of performance targets within the Group.

For the grants under the Framework Plan and SARs a forfeiture of 10% is expected as a result of discontinued employment. The Framework Plan consists of performance related and non-performance related options. For all performance related options and SARs a forfeiture of 40% is expected due to non-achievement of performance conditions. For all grants in 2003, all remaining non-vested performance related options will vest at the last vesting date.

The grants under the Restricted Share Plan are all performance related. For each series a forfeiture of 10% is expected as a result of discontinued employment. For all grants a forfeiture of 25% is expected due to non-achievement of performance conditions.

Additionally, several share option arrangements granted before 7 November 2002 exist. The recognition and measurement principles in IFRS 2 have not been applied to these grants in accordance with the transitional provisions in IFRS 1 and IFRS 2.

Employee stock purchase plan
In March 2001, the Board of Management, with the approval of the Supervisory Board, introduced an employee stock purchase plan for United States employees only. The enactment of this plan for a period of three years was approved at the Annual General Meeting of shareholders held on 4 May 2001. The extension for another three year period was approved at the Annual General Meeting of shareholders held on on 7 May 2004. During the three year period, a maximum of 1,050,000 new or existing BDRs can be purchased by eligible employees for a consideration equal to 85% of the market price of the BDRs at either the date of purchase or the date of the beginning of the relevant six months purchase period, whichever is lower. In 2005, a total number of 63,182 (2004: 55,602) BDRs were purchased under this plan.

Share issuance agreements
In 2002 and 2003, as an alternative for the aforementioned option and share plans, ordinary shares were issued to certain members of the Board of Management at the market price on the date of issuance.
The Company granted interest free loans to these members of the Board of Management to finance the purchase of the ordinary shares. These loans may be partially or fully forgiven depending on the achievement of specific predetermined performance targets.

The table on this page shows the number of ordinary shares as at 31 December 2005 held by the one remaining participating member of the Board of Management, the price of the Company’s BDRs as at the purchase date (being the same price used for allocations to employees under the Company’s stock option plan) and the loans made to acquire such ordinary shares.