Stock option plans

20. Stock option plans

Stock option plans of Pirelli & C. S.p.A.

During the year ended December 31, 2007, the Company did not introduce any stock option plans.

Pirelli & C. S.p.A. has two stock option plans in place for senior executives and staff of Pirelli & C. S.p.A. and other companies of the Group who were granted option rights, not transferable to third parties, for the subscription/purchase of Pirelli & C. S.p.A. ordinary shares.

IFRS 2 “Share-based payment” has not been applied to these plans, since the option rights were awarded prior to November 7, 2002.

The following disclosure is provided on the above-mentioned plans called Pirelli to People and Group Senior Executives.

Pirelli to People

Group Senior Executives

Plan features

Option rights granted, non-transferable to third parties, for the subscription of future new issues of Pirelli & C. ordinary shares or, as decided by the latter, for the purchase of treasury shares of Pirelli & C..

Option rights granted, non-transferable to third parties, for the subscription of future new issues of Pirelli & C. ordinary shares or, as decided by the latter, for the purchase of treasury shares of Pirelli & C..

Recipients at December 31, 2007

255 employees (senior executives, cadres, key employees) of the companies of the Group.
Originally 725 persons at the date of approval of the plan.

25 senior executives of the companies of the Group.

Originally 51 persons at the date of approval of the plan.

Conditions for exercising options

Continuance of employment.

(a) continuance of employment, and (b) the reaching, in the two-year period 2001-2002, of specific targets, assigned to each recipient.

Subscription/purchase price per share

Each option right granted gives the right to subscribe/purchase one Pirelli & C. ordinary share at the price of Euros 1.150 1.

Each option right granted gives the right to subscribe/purchase one Pirelli & C. ordinary share at the price of Euros 1.150 1.

Vesting period of options

Up to nine years from the date the options are granted (which took place on November 5, 2001), but not before one year has passed from that date for 50 percent of the options granted, two years for another 25 percent and three years for the remaining 25 percent.

As regards the options granted on November 5, 2001, up to nine years from the date the options are granted, but not before one year has passed from that date for 50 percent of the options, two years for another 25 percent and three years for the remaining 25 percent. For the options granted definitively on May 10, 2002, up to May 31, 2009 but not before June 1, 2002 for 50 percent of the options and not before January 1, 2003 for the remaining 50 percent.

Maximum number
of options for which
the offer was open
at December 31, 2006

20,389,204 options equal to about 0.39 percent of outstanding ordinary shares destined for 288 recipients.

12,397,548 options equal to about 0.24 percent of outstanding ordinary shares destined for 28 recipients.

Maximum number
of options for which
the offer was open
at December 31, 2007

18,175,604 options equal to about 0.35 percent of outstanding ordinary shares destined for 255 recipients.

11,541,015 options equal to about 0.22 percent of outstanding ordinary shares destined for 25 recipients.

Options forfeit during 2007 as a result of persons
leaving the Group

2,213,600

856,533

Shares issued during
the period

None

None

1 This amount was changed (from Euros 1.284) on the basis of the adjustment factor established by AIAF on February 7, 2005 following the capital increase approved by the special shareholders’ meeting held on January 21, 2005, in accordance with the Regulations of those Stock Option Plans in the event of transactions involving share capital. Following the resolution passed by the shareholders’ meeting held on December 12, 2007 for the reduction of share capital, this amount will be reduced to Euros 0.996.

The following table shows the changes in the above plans, the number of option rights and the exercise price.

Pirelli to people

Table 1

2007

2006

Number of shares

Average
exercise price in Euro

Market price
in Euro

Number of shares

Average
exercise price in Euro

Market price
in Euro

Rights existing at 1/1/2007

20,389,204

1.15 (¹)

0.75

21,693,205

1.15 (¹)

0.77

Rights granted during year

-

-

-

-

-

-

(rights exercised during year)

-

-

-

-

-

-

(Rights forfeit during the year 2007 as a result of persons leaving the Group)

2,213,600

-

-

1,304,001

-

-

Rights existing at December 31, 2007

18,175,604

1.15 (¹)

0.75

20,389,204

1.15 (¹)

0.75

Table 2

Exercise price

Rights granted – existing at December 31, 2007

Remaining contractual life

Of which exercisable

>2 years *

Total

From 11/5/2004

Euro 1.15 (¹)

18,175,604

18,175,604

18,175,604

* Until 05/31/2009

1 This amount was changed to Euros 1.150 on the basis of the adjustment factor established by AIAF on February 7, 2005 following the capital increase approved by the special shareholders’ meeting held on January 21, 2005, in accordance with the Regulations of those Stock Option Plans in the event of transactions involving share capital. Following the resolution passed by the shareholders’ meeting held on December 12, 2007 for the reduction of share capital, this amount will be reduced to Euros 0.996.

Group Senior Executives

TaBLE 1

2007

2006

Number of shares

Average
exercise price in Euro

Market price
in Euro

Number of shares

Average
exercise price in Euro

Market price
in Euro

Rights existing at 1/1/2007

12,397,548

1.15 (¹)

0.75

13,986,882

1.15 (¹)

0.77

Rights granted during year

-

-

-

-

-

-

(rights exercised during year)

-

-

-

-

-

-

(Rights forfeit during the year 2007 as a result of persons leaving the Group)

856,533

-

-

1,589,334

-

-

Rights existing at December 31, 2007

11,541,015

1.15 (¹)

0.75

12,397,548

1.15 (¹)

0.75

TaBLE 2

Exercise price

Rights granted – existing at December 31, 2007

Remaining contractual life

Of which exercisable

> 1 year *

Total

From 11/5/2004

Euro 1.15 (1)

11,541,015

11,541,015

11,541,015

* until 05/31/2009

1 This amount was changed to Euros 1.150 on the basis of the adjustment factor established by AIAF on February 7, 2005 following the capital increase approved by the special shareholders’ meeting held on January 21, 2005, in accordance with the Regulations of those Stock Option Plans in the event of transactions involving share capital. Following the resolution passed by the shareholders’ meeting held on December 12, 2007 for the reduction of share capital, this amount will be reduced to Euros 0.996.

The following table indicates the number of rights granted under the above-described incentive plans, held at December 31, 2007, directly and indirectly, by the members of the board of directors, the board of statutory auditors, general managers and key managers of the company and the companies controlled by it.

Name

Rights held

at 1/1/2007

Rights granted
during year 2007

Rights exercised
during year 2007

Rights held

at 12/31/2007

No.
of rights

Average exercise price

No.
of rights

Average exercise price

No.
of rights

Average exercise price

No.
of rights

Average exercise price

Claudio De Conto

778,774(¹)

1.15 (³)

-

-

-

-

778,774(¹)

1.15 (³)

410,667(²)

1.15 (³)

-

-

-

-

410,667(²)

1.15 (³)

Luciano Gobbi

778,774(¹)

1.15 (³)

-

-

-

-

778,774(¹)

1.15 (³)

360,000(²)

1.15 (³)

-

-

-

-

360,000(²)

1.15 (³)

Francesco Gori (4)

533,334(¹)

1.15 (³)

-

-

-

-

533,334(¹)

1.15 (³)

666,667 (²)

1.15 (³)

-

-

-

-

666,667 (²)

1.15 (³)

1 Group Senior Executives incentive plan.

2 Pirelli to People incentive plan.

3 This amount was changed to Euros 1.150 on the basis of the adjustment factor established by AIAF on February 7, 2005 following the capital increase approved by the special shareholders’ meeting held on January 21, 2005, in accordance with the Regulations of those Stock Option Plans in the event of transactions involving share capital. Following the resolution passed by the shareholders’ meeting held on December 12, 2007 for the reduction of share capital, this amount will be reduced to Euros 0.996.

4 Francesco Gori, starting from July 1, 2006, took over the post of chief executive officer and general manager of the subsidiary Pirelli Tyre S.p.A..
The deputy chairman Carlo Alessandro Puri Negri is the grantee of stock options as the chief executive officer of Pirelli & C. Real Estate S.p.A..
Carlo Buora, starting November 6, 2006 – after relinquishing all the posts held in the Company – is no longer a grantee of any option rights.

Giovanni Ferrario (chief executive officer and general manager of the Company to December 2004) holds 1,333,334 option rights granting the right to subscribe/purchase the same number of Pirelli & C. ordinary shares at the price of Euros 1.15 each.

Valerio Battista (general manager of the Company to June 2005) holds 1,650,134 option rights granting the right to subscribe/purchase the same number of Pirelli & C. ordinary shares at the price of Euros 1.15 each.

Plans of the subsidiary Pirelli & C. Real Estate S.p.A.

Pirelli & C. Real Estate S.p.A. at December 31, 2007 has only one stock option plan in place for directors and employees of Pirelli & C. Real Estate S.p.A. and other companies of the Group who were granted option rights, not transferable to third parties, for the subscription/purchase of Pirelli & C. Real Estate S.p.A. ordinary shares.

Information on the above plan called “Plan 2006”, is provided as follows:

Plan 2006

Plan features

Option rights granted, non-transferable to third parties, for the purchase of Pirelli & C. Real Estate S.p.A. ordinary shares held by the company (treasury shares )

Recipients at December 31, 2007

60 persons (directors, general managers and other key resources) of Pirelli & C. Real Estate S.p.A. and its subsidiaries.

Originally 60 persons at the date of approval of the plan.

Conditions for exercising options

(a) continuance of the employment relationship or status as a director in the companies of the Pirelli Group;

(b) the reaching/exceeding, when the rights are exercised, of a minimum market price of the Pirelli RE share, not less than Euros 55.00 [market restriction];

(c) average annual growth of the Operating Result Parameter (PBIT) + Income from investment holdings (IEP) not less than 10 percent [operating restriction ].

Subscription/purchase prices per share

Each option right granted gives the right to subscribe/purchase one Pirelli & C. Real Estate ordinary share at the price of Euros 46.50, which corresponds to the fair value of the share on the grant date; this price may vary as a result of share capital increases or other extraordinary transactions, but in every case ensuring the equivalent rights held by the grantees before those transactions.

Vesting period of options

40 percent (or a part thereof) of the options can be exercised from July 1, 2008 to December 15, 2009 (first tranche) and the remaining 60 percent from July 1, 2009 to December 15, 2009 (second tranche); all options must be exercised by December 15, 2009. The options may be exercised in advance, in the event of a "change of control” and, as a result of which, Pirelli & C. S.p.A. would no longer be the majority shareholder of the company. However, the market and operating restrictions remain in place, with predetermined criteria to be applied in relation to the exercise of the options if the event should occur.

Maximum number of options for which the offer was open at December 31, 2006

1,800,000 options equal to about 0.04 percent of outstanding ordinary shares destined for 60 recipients .

Maximum number of options for which the offer was open at December 31, 2007

1,800,000 options equal to about 0.04 percent of outstanding ordinary shares destined for 60 recipients.

Options forfeit during 2007 as a result of persons leaving the Group

None

Shares issued during the period

None

The fair value of the options on the grant date, equal to Euros 5.39 for the first tranche and Euros 5.27 for the second tranche, was determined using the Black-Scholes model.

The assumptions which were considered in the valuation model can be summarized as follows:

  • weighted average price of shares at the grant date equal to Euros 46.50, equal to their per share exercise price;
  • estimated volatility of 23 percent determined on the basis of the historical volatility of the price of the shares from the time Pirelli & C. Real Estate S.p.A. was listed up to the grant date of this plan;
  • estimated period of the rights equal to 3 years and 3 months for the first tranche and 3 years and 9 months for the second;
  • estimated dividends equal to 5 percent;
  • risk-free interest rate equal to 3.07 percent.

The table below – in conformity with Scheme 2 of Attachment 3C of Consob Regulation 11971/1999 – shows the changes in the stock options held by the directors and general managers of Pirelli & C. Real Estate S.p.A. during 2007.

Name

Position

Rights held at

1/1/2007

Rights granted
in 2007

Rights exercised
in 2007

Rights expired/forfeit in 2007

Rights held at

12/31/2007

(A)

(B)

(1)

(2)

(3)

(4)

(5)

(6)

(7)

(8)

(9)

(10)

(11)
=(1)+(4)-
-(7)(10)

(12)

Number
of options

Average exercise price

Expiration

Number
of options

Average exercise price

Expiration

Number
of options

Average exercise price

Average exercise market price

Number
of options

Number
of options

Average exercise price

Carlo Alessandro
Puri Negri

Deputy Chairman and Chief Executive Officer

427,500

40.61

12/15/09

-

-

-

-

-

-

127,500

300,000

46.5

Carlo Bianco

Deputy Chairman

183,000

41.86

12/15/09

-

-

-

43,000

26.75

39.47

-

140,000

46.5

Emilio Biffi

Managing Director - Chief Technical Officer - General Manager

143,000

41.86

12/15/09

-

-

-

-

-

73,000

70,000

46.5

Olivier
De Puolpiquet

Chief Executive Officer - Investment & Assets Management

300,000

39.92

12/15/09

-

-

-

100,000

26.75

39.76

-

200,000

46.5

At December 31, 2007, there are no stock option plans of the subsidiaries of Pirelli & C. Real Estate S.p.A. in existence.

Plans of the subsidiary Pirelli & C. Ambiente S.p.A. and its subsidiaries

During 2007, there were no changes in the stock option plan approved by the boards of directors of Pirelli & C. Ambiente Renewable Energy S.p.A. (ex-Pirelli & C. Ambiente S.p.A.) and its parent Pirelli & C. Ambiente S.p.A. (ex-Pirelli & C. Ambiente Holding S.p.A.), in effect from January 2006. The plan calls for the grant to nine recipients of options for the purchase of a total of 306,000 Pirelli & C. Ambiente Renewable Energy S.p.A. shares, equal to 10 percent of the share capital of this company, at the per share price of Euros 1.85, on the basis of an appraisal carried out for this purpose.

All the above options can be exercised in the month of April 2009, subject to reaching specific corporate targets by the date of December 31, 2008, or, in the month of September 2009, in the case those same targets are reached by June 30, 2009. The shares from exercising the options can be sold by the recipients to Pirelli & C. Ambiente S.p.A. within one month of exercising the options at a price that will take into account the revaluation of the net asset value of the company during the period.

At December 31, 2007, the cost of the cash-settled stock option plan, recorded in the income statement, amounts to Euros 270 thousand. This has been calculated on the basis of the projection of the economic capital of the company to which the stock option plan refers.