Notes to the consolidated financial statements

31. Share-based compensation

In 2008, Ahold’s share-based compensation program consisted of a conditional share grant program (Global Reward Opportunity “GRO”). This program, introduced in 2006, replaced the Company’s share option plans. In addition, conditional shares are incidentally granted to employees outside the GRO program as part of their remuneration. In principle, plan rules will not be altered during the term of the plans. Total share-based compensation expenses were as follows:

Ahold’s share-based compensation programs are equity-settled. At December 28, 2008, the Company held 15,202,890 of its own shares for delivery under share-based compensation programs (December 30, 2007: 19,965,205).

The grant date fair value of the shares granted under the GRO program in 2008 was EUR 45 million, of which EUR 4 million related to Corporate Executive Board members. This fair value is expensed over the vesting period of the grants. For the share-based compensation expenses allocable to the individual Corporate Executive Board members, see Note 30.

GRO program

Main characteristics

Under the GRO program, Ahold shares are granted through a mid-term (three-year) and a long-term (five-year) program. The number of conditional shares to be granted depends on the at-target value, the annual incentive multiplier of the preceding year and the average share price for six months preceding the date of the grant. The shares are granted on the day after the Annual General Meeting of Shareholders and vest on the day after the publication of Ahold’s full-year results in the third year (mid-term component) or fifth year (long-term component) after the grant, provided the participant is still employed by Ahold. Shares granted to Corporate Executive Board members vest after three years (mid-term component) or five years (long-term component), subject to continued employment. Corporate Executive Board members are not allowed to sell their shares within a period of five years from the grant date, except to finance tax due at the date of vesting. For participants other than the Corporate Executive Board members, the mid-term component of the program contains a matching feature. For every five shares a participant holds for an additional two years after the vesting date, the participant will receive one additional share.

The conditional shares granted through the long-term component are subject to a performance condition. The number of shares that will ultimately vest depends on Ahold’s performance compared to 11 other retail companies (refer to “Remuneration” section of this Annual Report for the composition of the peer group), measured over a five-year period using the Total Shareholder Return (“TSR”, share price growth and dividends). The table below indicates the percentage of conditional shares that could vest based on the ranking of Ahold within the peer group:

As of the end of 2008, Ahold held the third position with respect to the 2006 share grant, the fourth position for the 2007 share grant and the fifth position for the 2008 share grant. These positions are not an indication of Ahold’s final ranking at the end of the performance periods, nor do they provide any information related to vesting of shares.

Upon termination of employment due to retirement, disability or death, the same vesting conditions as described above apply. Upon termination of employment without cause (e.g., restructuring or divestment), a pro rata part of the granted shares will vest on the date of termination of employment.

The following table summarizes the status of the GRO program during 2008 for the individual Corporate Executive Board members and for all other employees in the aggregate (with each year’s grant consisting of an equal number of shares granted under the three-year and five-year program):

Valuation model and input variables

The weighted average fair value of the conditional shares granted in 2008 amounted to EUR 9.00 and EUR 8.93 per share for the three-year and five-year component, respectively (2007: EUR 9.28 and EUR 9.05, respectively). The fair value of the three-year component is based on the share price on the grant date, reduced by the present value of dividends expected to be paid during the vesting period. The fair value of the five-year component is determined using a Monte Carlo simulation model. The most important assumptions used in the valuation were as follows:

Expected volatility has been determined as the average of the implied volatility and the historical volatility, whereby the extraordinarily volatile month after February 24, 2003 has been excluded.

Other conditional shares

In addition to the shares granted under the GRO program, Ahold granted an at-target number of 950,000 conditional shares in 2007. The fair value per share, determined in the same manner as the three-year GRO shares, was EUR 9.44. The shares vested at the end of 2008, after two years of continued employment. Half of these shares were subject to a performance condition. The final number of performance shares will be determined in 2009, based on the average annual incentive multiplier for 2007 and 2008.

Share option plans

In 2005, Ahold had one global share option plan with a uniform set of rules and conditions (the “2005 Plan”) for all participants, except members of the Corporate Executive Board. The term of the 2005 share options is eight years and the exercise of these options is conditional upon continued employment during a three-year vesting period. Upon termination of employment, share options that have vested can be exercised during four weeks after termination and are forfeited thereafter, while share options that have not vested will be forfeited immediately. In 2005, share options were granted on the first Monday in April and the exercise price of each share option equaled the closing market price of Ahold’s common shares on the last trading day prior to the grant date. A separate plan applies to members of the Corporate Executive Board. The share option grant made in 2005 to members of the Corporate Executive Board had a five- and ten-year term and was subject to a performance criterion at vesting, being the average economic value added improvement versus targeted improvement over the three financial years prior to vesting. The number of options that could vest was 80 percent to 120 percent of the targeted number of options depending on performance against the vesting criteria (with zero options vesting if performance against the vesting criteria would have been below 80 percent of target). In 2008, the final vesting percentage was determined at 96 percent. Other characteristics of the plan are the same as for the 2005 Plan described above.

Until January 2, 2005, Ahold had three share option plans (the Dutch, U.S., and International Share Option Plans – collectively the “Plans”). Under these Plans, participants were granted share options with either a five- or ten-year term, generally exercisable after three years. Share options were granted on the first business day of each year and the exercise price of each share option equaled the closing market price of Ahold’s common shares on the last trading day prior to the grant date. Upon termination of employment, all share options granted under the Dutch Plan can be exercised within four weeks after termination and are forfeited thereafter. Share options granted under the U.S. and International Plans can, upon termination of employment, be exercised within four weeks after termination provided they have vested and are forfeited thereafter, while share options that have not vested will be forfeited immediately.

Under all option plans, upon termination of employment due to retirement, disability or death, all share options are exercisable during their relevant exercise periods.

The following table summarizes the status of the share option plans during 2008 for the individual Corporate Executive Board members and for all other employees in the aggregate. After the introduction of GRO, options were discontinued as a remuneration component:

The following table summarizes information about the total number of outstanding share options at December 28, 2008: