Remuneration & Organizational Development Report

Remuneration & Organizational Development Rapport

We are pleased to present to you the report of the Remuneration and Organizational Development
Committee (‘the Committee’).

The Committee assists the Supervisory Board with establishing and reviewing the Company’s pay policy to ensure that members of the Board of Management are compensated consistently with that policy. In addition, the Committee supervises and counsels the Company on Organizational & Management Development and reviews the succession plans for the members of the Board of Management and other senior managers.

We aim to foster an action-oriented culture aimed at delivering results, and our pay programs therefore emphasize variable pay and long-term value creation. The target pay aims at 30–40% of pay in base salary, and 60–70% in variable pay in order to maintain a strong alignment with the Company’s annual financial performance goals and long-term value creation strategy. In our judgment, this relationship and ratio between base salary and performance-related pay adequately reflects the balance between the Company’s objectives and its entrepreneurial spirit. Moreover, we are confident that in general the level and structure of the Board of Management pay is in line with management development goals and pay differentials within the Company.

During 2010, the Company’s remuneration policy was re-assessed, leading to amendment proposals. The underlying principles of the proposed amendments were predominantly based on shifting the emphasis of the variable compensation more towards the longer term, to simplify the Long-Term Incentive grant and to add non-financial targets to the LTI, such as energy reduction
and reputation related targets. In view of the competitive remuneration developments in the market combined with an increased workload and responsibility for Supervisory Board members, the remuneration policy of the Supervisory Board was also re-assessed during 2010, resulting in a proposal to adjust the remuneration levels of the Supervisory Board. The proposals to amend both the Company’s remuneration policy and the remuneration levels of the Supervisory Board were both approved by the General Meeting of Shareholders on April 6, 2011.

Besides assessing management performance and setting targets for the coming years, topics discussed by the Committee included the balance between risk and reward and alignment with the Company’s strategic objectives and the Company’s efforts and progress in the domain of talent management for senior executives in the organization.

On behalf of the Supervisory Board, we are committed to preserving your confidence and trust by presenting an accountable and transparent implementation of our pay policy that further aligns the interests of our Board of Management with those of our shareholders and other stakeholders.

The Chairman and members of the Remuneration and Organizational Development Committee are appointed by the Supervisory Board.

The Committee currently consists of Mr. Routs (Chairman), Mr. Risseeuw, Mr. Streppel and Ms. Hooymans.

For convenience purposes, we have structured this report as follows:

A. Executive pay at a glance

What are the objectives and principles of KPN’s pay policy?

How are executives rewarded?

The pay mix for executives consists of the following four elements:

What is the ratio between fixed and variable reward?

The ratio between fixed and variable pay is influenced by the extent to which targets are met. The top pie chart represents the pay mix for the CEO in case of an on-target performance, whereas the bottom pie chart represents the pay mix for the other Board members in case of an on-target performance.

How is the level of compensation established?

KPN’s pay levels are benchmarked with other companies in order to ensure that KPN’s total level of compensation, based on the pay mix, is in line with KPN’s pay policy and objectives, as described above. In order to benchmark pay levels, KPN uses an employment peer group of companies against which KPN competes for talent. The peer employment group consists of the largest Dutch
AEX-listed and European sector-specific companies.

The advice of an independent external consultant (separate from the consultant used by the Company) is used by the Committee to ensure an objective benchmark for KPN’s levels of pay.

Are incentives aligned with strategy?

On May 10, 2011, KPN presented its new strategy for the coming years until 2015. KPN aims to strengthen, simplify and grow its businesses. The focus of the new strategy will be on improving quality, service and technology, to become the best service provider and strengthen its market position in the Netherlands. Internationally, the focus will be on further growth in revenues and profitability. The goals and objectives of the new strategy are reflected in the short-term targets (both financial and non-financial) and long-term targets (both financial and non-financial), which are used to compensate executives for their performance.

Is the level of variable compensation aligned with the Company’s risk profile?

KPN aligns incentives with its long-term Company strategy, but it also needs to focus on short-term success in order to achieve further growth. The Company’s risk profile is embedded in the short-term and long-term incentive structure which is assured by KPN’s standards of internal control over financial reporting.

What was rewarded to executives in 2011?

The bar chart below shows the actual components of pay. All figures are in thousands of euro.

B. Duties and activities of the Committee

Duties of the Committee

The Committee assists the Supervisory Board with:

• Establishing and reviewing the Company’s pay policy (based amongst others, on national and international benchmark standards);
• Ensuring that members of the Board of Management are compensated consistently with that policy;
• Reviewing and, if appropriate, recommending changes to the pay of the Supervisory Board;
• Supervising and counseling the Company on Organizational and Management Development;
• Holding an annual review of senior managers; and
• Reviewing the succession plans for the members of the Board of Management and other senior managers.

Members of the Supervisory Board regularly liaise with senior management below Board level.

In performing its duties, the Committee is assisted by an external remuneration consultancy firm (separate from the consultant used by the Company). The Committee is fully independent in the execution of its assigned responsibilities and ensures that the external remuneration consultancy firm acts on the instructions of the Committee and on a basis in which conflicts of interest are avoided.

Activities during 2011

The Committee met eight times in 2011, with all members present at each meeting. Consistent with its charter, the Committee has been involved in several aspects, such as:

• Reviewing the pay policy and recommending adjustments subject to adoption by the Annual Meeting of Shareholders, taking into account KPN’s risk profile, pay trends in the Netherlands and abroad as well as trends in Corporate Governance;
• Reviewing the need for adjustments in pay levels (where applicable, and in order to ensure a consistent pay structure for the individual members of the Board of Management);
• Proposing targets and performance criteria for the STI plan 2011 and LTI plan 2011 and ensuring that the targets are in line with the basic principles and objectives of the pay policy;
• Monitoring the internal and external auditing of the results and procedures to verify the mathematical accuracy of the STI and LTI plans;
• Recommending the agreed upon terms and conditions with regard to changes in the composition of the Board of Management;
• Defining the energy reduction target for 2011–2013 as part of the non-financial targets for the LTI plan 2011;
• Reviewing the terms of reference of the Committee and provide input for any proposed adjustments;
• Reviewing whether performance of the Committee is in line with the Committee’s charter;
• Preparing the Remuneration and Organizational Development Report to be included in KPN’s Annual Report;
• Reviewing and ensuring the Company’s efforts and achievements in the domain of talent development for senior management.

C. Executive pay policy – detailed overview

Objectives of KPN’s pay policy

KPN is dedicated to foster a strongly action-oriented culture aimed at delivering results. KPN’s pay programs therefore emphasize variable pay and long-term value creation. KPN’s plans are designed to achieve the following objectives:

• Attracting and retaining the necessary leadership talent in order to sustain and expand KPN’s unique competencies and capabilities;
• Driving performance that generates long-term profitable growth;
• Promoting behavior that reinforces the business strategy and desired culture;
• Encouraging teamwork across business units and functional areas;
• Strongly linking rewards to value creation for shareholders and other stakeholders;
• Complying with best practice in corporate governance; and
• General acceptance by all stakeholders.

Principles of KPN’s pay policy

KPN’s pay policy is guided by three broad principles:

• Paying competitively: this is achieved through benchmarking against an employment-market peer group consisting of companies with whom KPN generally competes for talent;
• Pay-for-performance: target pay aims at 30–40% of pay in base salary, and 60–70% in variable pay in order to maintain a strong alignment with the Company’s annual financial performance goals and long-term value creation strategy; and
• Differentiating by experience and responsibility: this is achieved through alignment of the pay with the responsibilities, relevant experience, required competence and performance of individual jobholders. Consequently, there can be substantial differentials in pay levels, despite employees having similar job titles.

These principles apply to all levels of senior management. The Company’s pay policy is compliant with the relevant legal requirements and the principles of the Dutch Corporate Governance Code.

Composition of employment-market peer group and market assessment

To ensure the overall competitiveness of KPN’s pay levels, these levels are benchmarked against an employment market peer group. The Committee uses one peer group consisting of AEX-listed companies and European sector-specific companies. The table below shows the current composition of KPN’s employment peer group:

The Committee regularly reviews the peer group to ensure that the composition is still appropriate. The composition of the peer group might be adjusted as a result of mergers or other corporate activities.

It should be noted that KPN ranks, on average, between the median and upper quartile level in terms of revenues, market capitalization and number of employees. This relative size of KPN is taken into account when determining whether KPN ‘pays competitively’.

Base salary

The Committee determines appropriate base salary levels based on KPN’s relative positioning in the peer group. In line with KPN’s pay-for-performance principle, base salary is targeted at the low end of the market-competitive range. Each year the Supervisory Board considers whether circumstances justify an adjustment in base salary within the market-competitive target range for individual members of the Board of Management.

Short-term incentives (STI)

General
At the beginning of each year, the Supervisory Board sets financial and non-financial target ranges for the Board of Management. These ranges are based on the Company’s business plan. At the end of the year, the Supervisory Board reviews the Company’s performance against the target ranges. The Company’s external auditor has been engaged to perform procedures to verify a consistent application of the approved calculation method, the mathematical accuracy of the STI calculations and a reconciliation of the source data used in the financial statements. Members of the Board of Management are eligible for an annual cash incentive only if Company performance is at or above the predetermined ranges.

Objectives
The objective of this STI scheme is to ensure that the Board of Management is well incentivized to achieve Company performance targets in the shorter term. Specific details on targets cannot be disclosed for all performance measures, as this would require providing commercially sensitive information.

Performance incentive zone
The target ranges for financial and operational performance comprise:

• A ‘threshold’ below which no incentive is paid;
• An ‘on-target’ performance level at which an ‘on-target’ incentive is paid; and
• A ‘maximum’ at which the maximum incentive is paid.

The STI is designed to strike a balance between the Company’s risk profile and the incentive to achieve ambitious targets. The payout methodology is based on a payout approach for each of the financial and non-financial targets.

The Supervisory Board’s ability to apply a discretionary factor ranges between 0.7 (i.e. cutting the cash incentive by 30%) and 1.3 (i.e. increasing the cash incentive by 30%). With this discretionary factor, the Supervisory Board is able to express the assessment of the overall individual performance of each member of the Board of Management. The ability to apply a discretionary factor does not increase average achievement levels. It does, however, allow the Supervisory Board some discretion in differentiating on the basis of individual contributions to Company performance.

The Supervisory Board has the discretionary authority to reward extraordinary management achievement that outperforms the regular business plan(s) and has created substantial additional value for the Company and its shareholders. Other than that, discretion both upwards and downwards can be applied by the Supervisory Board if the outcome of the STI scheme would produce an unfair result or if the outcome would not be considered to reflect the basic objectives and principles of pay as outlined in this section.

Actual payout levels
For 2011, amongst other targets, Revenues were above threshold, broadband market share was below threshold and Profit before Tax was below threshold. The Supervisory Board considers the STI amounts awarded to the CEO and the members of the Board of Management a fair reflection of their contribution to the performance of the Company during 2011.

Long-term incentives (LTI)

General
In addition to the base salary and the short-term annual cash incentive described above, a long-term incentive based on performance shares is used to ensure that the interests of management are aligned with those of its long-term (or prospective) shareholders and to provide an incentive for members of the Board of Management to continue their employment relationship with the Company.

The number of shares granted under this plan is based on fixed numbers as shown in the following table.

As from 2011, the number of shares that actually vest is conditional on the extent to which the returns to KPN shareholders outperform the returns to shareholders of a peer group of Western European telecommunications companies (75% weighting) and for 25% on the achievement of the assigned non-financial parameters. The actual vesting of the 2009 and 2010 LTI plans are solely based on KPN’s relative TSR performance. It is felt that comparing KPN with a wider group of companies (either geographically or with other industries) is not meaningful. Variations in returns would most likely be attributed largely to macroeconomic events and/or sector shifts rather than to variations in management actions. Therefore, benchmarking TSR achievements relative to other, similar companies emphasizes rewarding for specific KPN performance. The non-financial parameters set for 2011 are based on energy reduction targets and a reputation dashboard. Please refer to KPN’s Sustainability Report 2011 for detailed information about the energy reduction targets. Vesting of the non-financial parameters will only take place if KPN’s ranking position in the TSR peer group is at least position 7.

Vesting is also subject to the condition that the member of the Board of Management has not resigned within three years of the date of the initial grant.

The performance period of the LTI plan is set at three years. The Committee uses scenario analysis to estimate the possible outcomes of the value of the shares vesting in coming years and decides whether a correct risk incentive is set for the Management Board members with respect to the overall level of pay and pay differentials within the Company.

In addition to the information provided in the Remuneration Report, please refer to Note 3 of the Consolidated Financial Statements for a further description and valuation of the option and share plans.

Performance-measuring and peer group performance

Vesting of the shares is for 75% conditional on KPN’s relative shareholder return and for 25% based on non-financial parameters. The table below provides an overview of KPN’s performance peer group to determine KPN’s relative shareholder return.

The table to the right provides an overview of the final ranking of the 2009 share plan that vests in 2012.

Please note that the peer group used for relative TSR reflects the relevant competitive market in which KPN competes for investor preference. As such, it is different from the employment-market peer group, which is used to determine pay levels for the CEO and members of the Board of Management. The peer group may be adjusted if an individual company no longer qualifies as a relevant peer company.

Performance incentive zone
Since 2008, the design of KPN’s LTI plan ensures that shares are rewarded for ‘above average’ returns while no shares are rewarded for ‘below average’ returns. Once vested, the shares will have to be held for a minimum period of two years. An exception to this rule is made for shares that are sold to cover income tax obligations in relation to the vested shares (typically the value taxed as income equals the amount of shares vested multiplied by the share price at the time of vesting).

The external remuneration consultant calculates the end-of-year TSR peer group position and the number of shares vested and makes certain that calculations are performed objectively and independently.

The Supervisory Board has the discretionary authority to reward extraordinary management achievement that outperforms the regular business plan(s) and has created substantial additional value for the Company and its shareholders. Other than that, discretion both upwards and downwards can be applied by the Supervisory Board if the outcome of the LTI incentive scheme would produce an unfair result or if the outcome would not be considered to reflect the basic objectives and principles of pay as outlined in this section.

It is KPN’s policy to remunerate management in the event of a change of control in a manner which encourages management to take into account the interests of all stakeholders of the enterprise as is required under Dutch law. An amendment to the remuneration of the members of the Board of Management in case of a change in control was adopted by the AGM in April, 2010.

Actual payout levels
KPN’s performance over the period 2009–2011 resulted in the 8th position in the TSR performance peer group with respect to the 2009 share award, which does not lead to vesting of the granted shares in April 2012.

Special LTI

As presented in the 2009 AGM, the Supervisory Board agreed to an uplift of the LTI entitlements for 2009 and 2010 in order to reflect the extremely high ambitions of the ‘Back to Growth’ strategy. This will result in an uplift of 50% of the LTI value determination for members of the Board of Management. The uplift in LTI will be rewarded if the challenging financial targets in 2009 and 2010 are met and KPN would reach a number 1, 2 or 3 position in the TSR peer group ranking. The uplift for 2009 is not rewarded. After the three-year performance period at the end of 2012 the Committee will review if the uplift for 2010 will be rewarded.

Claw-back clause

The Supervisory Board has committed itself to the claw-back clause since 2009. This clause provides for the ability to recover variable pay based on incorrect financial or other data.

Benefits

Pensions
Members of the Board of Management are eligible for a defined contribution pension plan with a contribution based on the fiscal defined contribution table that corresponds to a retirement age of 65 and an annual accrual rate of 2.25%. Mr. Dirks will remain eligible for pension benefits (combined defined benefit and defined contribution) as part of his current German pension arrangement with a retirement age of 65.

Additional arrangements
The additional arrangements, such as expense allowances, use of cellphones and Company car provisions needed for the execution of their roles, are broadly in line with other companies of similar size and complexity, as well as with market practice.

Loans
Company policy does not allow loans to be granted to members of the Board of Management.

Terms of employment
All members of the Board of Management have a permanent employment contract for an indefinite
period of time.

Members of the Board are appointed for a period of four years, which is in line with requirements of the Dutch Corporate Governance Code.

Severance arrangements
Severance payments for the CEO and members of the Board of Management are aligned with the Dutch Corporate Governance Code (one year base salary), with the exception of Mr. Dirks. Please refer to the ‘Change in composition and responsibilities of the Board of Management’ section of this report for further explanation.

Change in composition and responsibilities of the Board of Management

Mr. Blok became Chief Executive Officer on April 6, 2011.

The appointment of Mr. Dirks as a member of the Board of Management came into effect as of KPN’s EGM on November 7, 2011. Mr. Dirks is Chairman of the Board of Management (Geschaftsfuhrung) of E-Plus and CEO of Mobile International. The conditions of Mr. Dirks’ contract largely fit within KPN’s remuneration policy as approved by the General Meeting of Shareholders. Given his current and continued position as Chairman of the Board of Management of E-Plus his aggregated remuneration package will be implemented with two contracts: his current contract with E-Plus (as amended) and a separate contract with KPN.

Mr. Dirks will earn a total base salary of EUR 650,000 per year. Furthermore, he is eligible to short- and long-term variable incentives, which are dependent on the performance of KPN versus the Company’s financial and/or non-financial targets. He will be subject to German social security arrangements, including retirement benefits.

The conditions deviate in two respects from KPN’s remuneration policy. Given the short remaining period until the end of 2011, Mr. Dirks continued to be eligible for the variable incentives for 2011 as agreed under his current contract. These incentives put more focus on the shorter term, but – dependent on the level of realization of the targets – do not substantially deviate from the amounts he could receive under the incentive schemes foreseen under the remuneration policy. Mr. Dirks’ existing German contract furthermore contains a non-competition clause for which he will, as required by German law, receive compensation equal to 50% of his (German) salary (base and short-term incentive) during a maximum period of 12 months. In case of termination of his German contract he will receive this compensation on top of the severance pay of 12 months base salary as may be due in accordance with KPN’s remuneration policy and the Dutch Corporate Governance Code.

Mr. Coopmans will leave the Company by mutual agreement with the Supervisory Board as at April 1, 2012. Mr. Coopmans will receive a severance payment compliant with the Dutch Corporate Governance Code amounting to one year’s base salary (EUR 590,000). Mrs. Smits-Nusteling will leave the Company as at April 1, 2012 and at her request a severance payment will not be applicable. Any conditional shares granted under the LTI plan that have not yet vested will be treated in accordance with the applicable plan rules.

Outlook for 2012

No material adjustments to the pay policy are considered for 2012.

D. Details of actual payout

The pay of the current members of the Board of Management is set out below.

The pay of the former members of the Board of Management is provided below.

The following table summarizes the shares/share-based awards granted to current and former members of the Board of Management, granted (un)conditional shares/share-based awards held by them during 2011, granted shares sold during 2011, and granted (un)conditional shares/share-based awards held by them as of December 31, 2011.

The following table summarizes the options granted to current and former members of the Board of Management under previous policies, granted options exercised by them during 2011, and unexercised options held by them as of December 31, 2011. Options issued carry an entitlement to one KPN share.

The exercise price of the options equals the market value of KPN’s share on the grant date. These options are performance related. As contractually agreed at the time of appointment, the stock options for the former CEO are not linked to performance. See Note 3 of the Consolidated Financial Statements for a description of the option plans.

Stock ownership Board of Management

The table on the left shows the shares held by members of the Board of Management (including vested shares in lock-up period).

Share ownership relates to normal shares. In 2006, Mr. Coopmans privately purchased 200 options on 100 shares on the stock market.

In 2011 a share ownership recommendation was introduced whereby the members of the Board of Management are encouraged to acquire Company shares equal to one times the annual fixed compensation for members of the Board of Management (excluding CEO) and two times the annual fixed compensation for the CEO. Retained shares as part of the LTI will be included in the share ownership recommendation.

E. Supervisory Board pay

The Committee is responsible for reviewing and, if appropriate, recommending changes to the pay of the Supervisory Board. Any recommended changes to Supervisory Board pay must be submitted to the AGM for approval. In view of the competitive remuneration developments in the market combined with an increased workload and responsibility for Supervisory Board members, the remuneration policy of the Supervisory Board was re-assessed during 2010, resulting in a proposal
to adjust the remuneration levels of the Supervisory Board. This proposal was approved by the General Meeting of Shareholders on April 6, 2011. Please refer to the table for further details. Members receive an additional fee if a meeting is held in a country other than the member’s
country of residence.

Shareholdings in the Company held by Supervisory Board members serve as a long-term investment in the Company and help to align their interest with those of KPN’s other shareholders. No Supervisory Board member is granted stock options or shares as a form of pay. No member of the Supervisory Board held any stock options in the Company. As a policy, the Company does not provide loans to its Supervisory Board members.

The table below shows the payout to Supervisory Board members in 2011 and fixed Committee fees on an annual basis. The remuneration levels were adjusted as of April 6, 2011 (AGM).

The table below shows the actual fee received by each member of the Supervisory Board.

The pay of the former Supervisory Board members is provided below.

Stock ownership Supervisory Board

The table below shows the shares held by members of the Supervisory Board.