For the short period 1 April 2006 to 3 March 2007
(a) Impact on the Group’s share-based payment schemes from
the demerger
A number of Home Retail Group plc employees participated in old GUS
plc share-based payment schemes. As part of the demerger, some of these schemes
had early vesting with vesting occurring prior to completion of the demerger,
while others were modified by rolling them over to become Home Retail Group
plc share-based payment schemes. Additionally, a number of new schemes have
been established by Home Retail Group plc after the demerger from GUS plc
including a number of schemes specifically related to the demerger (“Demerger
Incentive Schemes”).
Specifically, all Executive Share Option Schemes in operation following the demerger from GUS plc on 11 October 2006 have been rolled over from a GUS plc share option arrangement to a Home Retail Group plc arrangement. Furthermore, certain share grant schemes (namely Co-investment and Performance Share Plan) which originally operated as GUS share grant schemes, have been rolled over as Home Retail Group plc share grant schemes.
Under IFRS 2, these changes have been treated as modifications to the schemes and hence revalued as at the demerger date.
During the period of the demerger from GUS plc, Home Retail Group plc employees within the “save as you earn” (SAYE) scheme had the option of vesting at the demerger date or to continue contributing to the scheme until January 2007.
Comparative information is included in the financial statements to assist users in understanding trends and developments from the previous accounting period. Due to the demerger, comparative information is not considered meaningful for all information provided in the share-based payment disclosure note. This is the case for some information relating directly to Home Retail Group plc shares in the current period and GUS plc shares in the comparative period, e.g. key assumptions used for valuing share options and grants such as the share price on grant date, exercise price and expected volatility. Such information would not be comparable as it would compare assumptions relating to two different shares, i.e. Home Retail Group plc and GUS plc shares respectively.
As management believes that providing comparative information in these areas is likely to create confusion instead of assisting users, information has been omitted as allowed under IFRS.Where comparative information has been omitted, this has been clearly indicated.
(b) Summary of the total cost of share-based compensation in respect of ordinary shares in the Company
| 2007 £m |
2006 £m |
|
| Share option awards | (5.0) | (6.4) |
| Share grant awards | (11.3) | (2.8) |
| Total expense recognised (all equity settled) | (16.3) | (9.2) |
The total IFRS 2 charge for 2007 of £16.3m includes an increase in fair value of £0.2m relating to the rolled over share option schemes, £2.4m relating to the accelerated vesting of certain schemes and £5.1m relating to demerger incentive schemes. The accelerated vesting charge due to early vesting has been classified as an exceptional item in line with Home Retail Group plc’s accounting policies.
The cost of demerger incentive schemes of £5.1m, together with national insurance costs of £0.7m, in total £5.8m, are excluded from benchmark profit before tax.
(c) Options in respect of the ordinary shares of the Company
(i) Summary of arrangements
During the year ended 3 March 2007, Home Retail Group plc had two share option
arrangements for its employees.
Details of these share option arrangements are as follows:
| Arrangements | The 1998 approved and
non-approved executive share option schemes |
Savings related share option schemes |
||
| Nature | Grant of options (modified scheme) | ‘Save as you earn’ scheme | ||
| Vesting conditions | ||||
| – Service period | 3 years | 3 or 5 years | ||
| – Performance/other | EPS growth performance condition1 | Saving obligation over the vesting period |
||
| Expected outcome of meeting performance criteria (at grant date) |
Condition is satisfied | n/a | ||
| Maximum term | 10 years | 3.5 or 5.5 years | ||
| Method of settlement | Share distribution | Share distribution | ||
| Expected departures (at grant date) | 5% | 3 years – 30% 5 years – 50% |
||
| Option exercise price calculation | Market price over the 3 dealing days preceding grant | 20% discount to market price over the 3 dealing days preceding grant |
1 The performance condition for the Executive Share Option Scheme requires EPS compound annual growth to exceed compound annual retail price inflation by 4% per annum over a continuous three-year period. This is not a market-based performance condition as defined by IFRS 2.
(ii) Information relating to option valuation techniques
The Company uses the Black-Scholes Option Pricing model to determine an appropriate
value of the option grants.Where a scheme has been modified, a revaluation
is performed at the date of modification. Any increase in fair value is charged
to the income statement over the remaining life of the scheme.
The estimated fair values and inputs into the option pricing model are as follows:
| Arrangements | The 1998 Approved
and Non-Approved Executive Share Option Schemes |
|
| Weighted average: | Home Retail Group |
GUS plc |
| Fair value (£) | 0.97 | 2.06 |
| Share price on grant date (£) | 4.17 | 9.35 |
| Exercise price (£) | 3.88 | 9.26 |
| Expected volatility | 26.6% | 29.4% |
| Expected dividend yield | 3.0% | 3.5% |
| Risk free interest rate | 4.8% | 4.7% |
| Expected option life to exercise | 4 years | 4 years |
Expected volatility for Home Retail Group – calculated as an average over the expected life. As no implied or historical volatility exists for Home Retail Group, an average of volatilities has been calculated from comparator companies.
Expected volatility for GUS plc – calculated as an average over the expected life with an assumption made for volatility in each year of the expected life. Volatility in the first year is assumed to be the same as implied volatility on grant date. Volatility for year 4 and beyond is assumed to remain at the long run (10 year observed) historic volatility. Linear interpolation is assumed for years 2 and 3.
(iii) Reconciliation of movement in the number of share optionsNumber of |
Weighted average exercise price £ |
||
| Outstanding at beginning of year (GUS shares) | 12,160,041 | 6.87 | |
| New grants | 1,829,272 | 9.26 | |
| Forfeitures | (1,044,528) | 6.60 | |
| Exercised options | (4,744,024) | 5.71 | |
| Expired options | (206,099) | 6.21 | |
| Transferred from GUS on demerger | 555,300 | 6.96 | |
| Outstanding at demerger date (GUS shares) | 8,549,962 | 7.77 | |
| Rollover adjustment to Home Retail Group shares | 14,439,212 | 3.44 | |
| Forfeitures | (1,209,606) | 2.93 | |
| Exercised options | (3,271,348) | 2.84 | |
| Outstanding at end of year (Home Retail Group shares) | 9,958,258 | 3.70 | |
| Exercisable at end of year (Home Retail Group shares) | 445,921 | 3.19 |
Comparatives have been excluded as the movements in the prior year refer to GUS plc shares only and would not directly compare to the movements of the current year.
The weighted average share price for share options exercised following demerger was £4.17.
(iv) Share options outstanding at the end of the year
Comparative information for share options at the end of the year has been
omitted as it only relates to GUS plc shares providing no meaningful comparison
for the current year.
Share options at the end of the year had the following exercise prices and remaining contractual lives:
| As at March 3 2007 | |||||||
| Weighted average | Weighted average remaining lives | ||||||
| Range of exercise
prices £ |
Number of options |
exercise price £ |
Expected years |
Contractual years |
|||
| 1.57 – 3.17 | 215,829 | 2.80 | 0.1 | 0.5 | |||
| 3.18 – 3.64 | 4,027,506 | 3.57 | 2.1 | 8.1 | |||
| 3.65 – 3.88 | 5,714,923 | 3.83 | 3.1 | 9.1 | |||
(d) Share awards in respect of ordinary shares of the Company
(i) Summary of arrangements
Existing schemes
| Arrangements | Co-investment Plan – Matching Shares |
Performance Share Plan |
||
| Nature of arrangement | Grant of shares1 | Grant of shares | ||
| Vesting conditions | ||||
| – Service period | 4 years3 | 3 years | ||
| – Performance | Benchmark operating profit of the Group assessed against specific targets |
Distribution percentage determined by ranking total shareholder return relative to a comparator group. |
||
| Expected outcome of meeting performance criteria (at grant date) |
Participants meet target performance |
Currently 60%2 | ||
| Maximum term | 6 years | 3 years | ||
| Method of settlement | Share distribution | Share distribution | ||
| Expected departures (at grant date) | 7% | 5% |
New share award schemes
| Performance share plan |
Re-investment plan – matching shares |
Long-term investment plan – matching shares |
Share incentive plan |
|||||
| Nature of arrangement | Grant of shares | Grant of shares1 | Grant of shares1 | Grant of shares | ||||
| Vesting conditions | ||||||||
| – Service period | 3 years | A 3-part scheme running over 3,4 and 5 years |
3 years | 3 years | ||||
| – Performance | n/a | a) Time vesting b) Total share- holder return c) Return on invested capital |
n/a | n/a | ||||
| Expected outcome of meeting performance criteria (at grant date) |
n/a | Participants meet target performance except for total shareholder return, currently 51%2 |
n/a | n/a | ||||
| Maximum term | 3 years | 3, 4 and 5 years | 5 years | 5 years | ||||
| Method of settlement | Share distribution | Share distribution | Share distribution | Share distribution | ||||
| Expected departures (at grant date) | 10% | 0% | 10% | 30% |
1The Matching Shares are a nil consideration option and have been classified as an award of shares because the nature of the award is the same.
2 The performance share plan and re-investment plan - The total shareholder return performance condition is considered a ‘market-based’ performance condition under IFRS 2. Both schemes have been valued using a Monte Carlo simulation with historic volatilities and correlations measured over the three year period preceding valuation. The performance share plan valuation was performed during the time when the scheme was operated as a GUS scheme. The re-investment plan has a fair value award of 51% of the share price at the date of grant.
3 The grant date for the co-investment plan is the start of the financial year in which performance is assessed. This may be up to one year before the quantity of shares award is determined. The underlying value of the award is known at grant date, subject to the outcome of the performance condition. The value of awarded shares reflects the performance outcome at the date of issue to participants.
(ii) Information relating to share grant valuation techniques
The value of the awards is determined as the observed market closing rate
on the date awarded grants are issued to participants. For the co-investment
plan, this occurs after the first year of performance is assessed. The performance
share plan’s and the re-investment plan’s market-based performance
condition is included in the fair value measurement on grant date and is not
revised for actual performance.
Under the share awards, the participants have an entitlement to dividend distributions from issue date until point of vesting. The observed market rate on the day of valuation is considered inclusive of future dividend distributions.
There were 8,879,440 ordinary share awards granted during 2007 with a weighted average fair value of £3.57.