27 Share-based payments
The Executive Share Option Scheme and Save As You Earn share option schemes were set up in order to provide executives and selected employees with options to purchase ordinary shares in the company. Under the Executive Share Option Scheme, exercise prices are determined according to the mid-market closing share price prevailing on the day before the date of grant. Share options granted under the Executive Share Option Scheme are also subject to performance criteria, being the fulfilment of earnings growth targets. Options vest after a period of three years, and have a maximum term of ten years.
Under the Performance Share Plan, the exercise price is the nominal cost of the company’s shares. Awards are subject to performance criteria, 50% of the award being based on fulfilment of earnings growth targets and 50% subject to a Total Shareholder Return target. Awards vest after a period of three years and must be exercised during the twelve-month period following vesting.
Under the Save As You Earn scheme, equity shares are issued following a vesting period of three years. Options may be exercised during a six-month period following the vesting date, and exercise prices are determined according to the mid-market closing share price prevailing on the day before the date of grant. There are no performance criteria associated with options granted under the Save As You Earn scheme.
Share options outstanding at the end of the period
| SAYE – Year of grant | Exercise price £ |
Exercise period |
2007 Number thousands |
2006 Number thousands |
||||||||
| 2003 | 4.69 | 2007 | – | 1 | ||||||||
| 2004 | 4.08 | 2008 | 12 | 97 | ||||||||
| 2005 | 5.89 | 2009 | 26 | 32 | ||||||||
| 2006 | 6.18 | 2010 | 58 | 64 | ||||||||
| 2007 | 8.37 | 2011 | 54 | – | ||||||||
| 150 | 194 | |||||||||||
| Executive Share Option Scheme – Year of grant | Exercise price £ |
Exercise period |
2007 Number thousands |
2006 Number thousands |
||||||||
| 1997 | 5.39 – 6.61 | 2000 – 2007 | – | 40 | ||||||||
| 1998 | 2.39 – 5.51 | 2001 – 2008 | 34 | 94 | ||||||||
| 1999 | 3.22 – 3.96 | 2002 – 2009 | 18 | 54 | ||||||||
| 2000 | 5.13 – 5.25 | 2003 – 2010 | 131 | 321 | ||||||||
| 2001 | 3.58 – 4.99 | 2004 – 2011 | 122 | 240 | ||||||||
| 2003 | 4.69 | 2006 – 2013 | – | 114 | ||||||||
| 2004 | 4.06 – 4.62 | 2007 – 2014 | 12 | 240 | ||||||||
| 2005 | 261 | 273 | ||||||||||
| 578 | 1376 | |||||||||||
| Performance Share Plan – Year of grant | Exercise price £ |
Exercise period |
2007 Number thousands |
2006 Number thousands |
||||||||
| 2006 | 0.05 | 2009 – 2010 | 186 | 197 | ||||||||
| 2007 | 0.05 | 2010 – 2011 | 487 | – | ||||||||
| 673 | 197 | |||||||||||
| Movements in the year | ||||||||||||
| 2007 | 2006 | |||||||||||
| SAYE | Number thousands |
Weighted average exercise price £ |
Value of shares £m |
Number thousands |
Weighted average exercise price £ |
Value of shares £m |
||||||
| At 1 January | 194 | 4.98 | 1.0 | 202 | 4.47 | 0.9 | ||||||
| Granted | 54 | 8.37 | 0.4 | 64 | 6.18 | 0.4 | ||||||
| Exercised | (81) | 4.12 | (0.4) | (49) | 4.61 | (0.2) | ||||||
| Lapsed | (17) | 5.18 | 0.1 | (23) | 4.64 | (0.1) | ||||||
| At 31 December | 150 | 7.33 | 1.1 | 194 | 4.98 | 1.0 | ||||||
| Exercisable at 31 December | 12 | 4.08 | 0.05 | 1 | 4.69 | – | ||||||
| 2007 | 2006 | |||||||||||
| Executive Share Option Scheme | Number thousands |
Weighted average exercise price £ |
Value of shares £m |
Number thousands |
Weighted average exercise price £ |
Value of shares £m |
||||||
| At 1 January | 1,376 | 4.84 | 6.7 | 3,034 | 4.61 | 14.0 | ||||||
| Granted | – | – | – | – | – | – | ||||||
| Exercised | (768) | 4.60 | (3.5) | (1,219) | 4.16 | (5.1) | ||||||
| Lapsed | (30) | 5.00 | (0.2) | (439) | 5.18 | (2.3) | ||||||
| At 31 December | 578 | 5.19 | 3.0 | 1,376 | 4.84 | 6.7 | ||||||
| Exercisable at 31 December | 317 | 4.52 | 1.4 | 863 | 4.64 | 4.0 | ||||||
| 2007 | 2006 | |||||||||||
| Performance Share Plan | Number thousands |
Weighted average exercise price £ |
Value of shares £m |
Number thousands |
Weighted average exercise price £ |
Value of shares £m |
||||||
| At 1 January | 197 | 0.05 | 0.01 | – | – | – | ||||||
| Granted | 494 | 0.05 | 0.02 | 198 | 0.05 | 0.01 | ||||||
| Lapsed | (18) | 0.05 | – | (1) | 0.05 | – | ||||||
| At 31 December | 673 | 0.05 | 0.03 | 197 | 0.05 | 0.01 | ||||||
| Exercisable at 31 December | – | – | – | – | – | – | ||||||
| Share-based payment expense | ||||||||||||
| Share options are valued using a stochastic option pricing model, with support from an independent remuneration consultant. The Total Shareholder Return (TSR) performance condition was included in the calculation of fair value under the Performance Share Plan. For options granted in 2007 and 2006, the fair value per option granted and the assumptions used in the calculation are as follows: | ||||||||||||
| SAYE | Executive
Share Option Scheme* |
Performance Share Plan |
||||||||||
| 2007 | 2006 | 2007 | 2006 | 2007 | 2006 | |||||||
| Weighted average share price (pence) | 889 | 642.5 | – | – | 865 – 899 | 620 – 640 | ||||||
| Weighted average exercise price (pence) | 837 | 618 | – | – | 5 | 5 | ||||||
| Expected volatility | 22.0% | 23.5% | – | – | 20.6% – 22.4% | 22.7% – 23.8% | ||||||
| Expected life | 3.25 yrs | 3.25 yrs | – | – | 3.0 yrs | 3.0 yrs | ||||||
| Risk-free rate | 5.1% | 4.9% | – | – | 4.95% – 5.19% | 4.7% – 4.8% | ||||||
| Expected dividends (expressed as a yield) | 2.1% | 2.5% | – | – | – | – | ||||||
| Fair value per option | 21.5% | 20.1% | – | – | – | – | ||||||
| Fair value per award – TSR condition | 59.7% – 65.6% | 42.8% – 51.1% | ||||||||||
| Fair value per award – profit condition | 99.5% | – | ||||||||||
| Fair value per award – EPS condition | 99.5% | 99.3% | ||||||||||
The expected volatility is based on historical volatility over the expected term. The expected life is the average expected period to exercise. The risk-free rate of return is the yield on zero-coupon UK Government bonds of a term consistent with the assumed option life.
* No options were granted in 2007 or 2006 under the Executive Share Option Scheme.
The group recognised total expenses of £0.9m related to equity settled share-based payment transactions in 2007 (2006: £0.6m).