Notes to the financial statements
For the 52 weeks ended 1 March 2008
30. Share-based payment arrangements
The Group operates a number of share–based payment schemes. These can be analysed into three categories, being those rolled over from old GUS plc schemes as a result of the demerger from GUS on 11 October 2006, incentive schemes specifically related to the demerger (‘Demerger Incentive Schemes’) and new Home Retail Group plc schemes subsequent to the demerger.
Prior to 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. Specifically, all executive share option schemes in operation following the demerger from GUS plc were 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 plc 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.
Summary of the total cost of share-based compensation in respect of ordinary shares in the Company
| 52 weeks ended 1 March 2008 £m |
Short period ended 3 March 2007 £m |
|
|---|---|---|
| Share option awards | (5.3) | (5.0) |
| Share grant awards | (16.3) | (11.3) |
| Total expense recognised (all equity settled) | (21.6) | (16.3) |
The total share-based payments charge of £21.6m (2007: £16.3m) includes £10.4m (2007: £5.1m) relating to demerger incentive schemes which, together with national insurance costs of £1.3m (2007: £0.7m) total £11.7m (2007: £5.8m), and are excluded from benchmark profit before tax. In 2007, the total share-based payments charge also included an increase in fair value of £0.2m relating to the rolled over share option schemes and £2.4m relating to the early vesting of certain schemes. The accelerated charge due to early vesting was classified as an exceptional item in line with the Group’s accounting policies.
Options in respect of the ordinary shares of the Company
Summary of arrangements
During the year ended 1 March 2008, 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 (rolled over GUS plc schemes) |
Savings related share option schemes (new Home Retail Group plc schemes) |
|---|---|---|
| Nature of arrangement | Grant of options (modified scheme) | ‘Sharesave’ 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) | 100% | 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 – 15% 5 years – 25% |
| Option exercise price calculation | Market price over the three dealing days preceding grant | 20% discount to market price over the three dealing days preceding invitation to participants |
Notes:
- 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.
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:
| Options granted in the 52 weeks ended 1 March 2008 | The Home Retail Group Sharesave Scheme |
|
|---|---|---|
| Weighted average: | Home Retail Group plc shares | |
| Fair value (£) | 1.35 | |
| Share price on grant date (£) | 4.70 | |
| Exercise price (£) | 3.79 | |
| Expected volatility | 24.3% | |
| Expected dividend yield | 3.1% | |
| Risk free interest rate | 5.43% | |
| Expected option life to exercise | 3.8 years | |
| Options granted in the short period ended 3 March 2007 | The 1998 Approved and Non-Approved Executive Share Option Schemes |
|
|---|---|---|
| Weighted average: | Home Retail Group plc shares |
GUS plc shares |
| 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 plc shares – calculated as an average over the expected life. As limited historical volatility exists for Home Retail Group, an average of volatilities has been calculated from comparator companies.
Expected volatility for GUS plc shares – 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.
Reconciliation of movement in the number of share options
| Number of options |
Weighted average exercise price £ |
|
|---|---|---|
| Outstanding at 4 March 2007 | 9,958,258 | 3.70 |
| New grants | 9,777,675 | 3.79 |
| Forfeitures | (1,801,009) | 3.77 |
| Exercised options | (679,050) | 3.45 |
| Expired options | (95,818) | 3.36 |
| Outstanding at 1 March 2008 | 17,160,056 | 3.76 |
| Exercisable at 1 March 2008 | 462,044 | 3.39 |
The weighted average share price for share options exercised during the year was £4.44.
| Number of options |
Weighted average exercise price £ |
|
|---|---|---|
| Outstanding at 1 April 2006 (GUS plc 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 plc on demerger | 555,300 | 6.96 |
| Outstanding at demerger date (GUS plc shares) | 8,549,962 | 7.77 |
| Rollover adjustment to Home Retail Group plc shares | 14,439,212 | 3.44 |
| Forfeitures | (1,209,606) | 2.93 |
| Exercised options | (3,271,348) | 2.84 |
| Outstanding at 3 March 2007 (Home Retail Group plc shares) | 9,958,258 | 3.70 |
| Exercisable at 3 March 2007 (Home Retail Group plc shares) | 445,921 | 3.19 |
The weighted average share price for share options exercised following demerger was £4.17.
Share options outstanding at the end of the year
Share options at the end of the year had the following exercise prices and remaining contractual lives:
| 2008 | 2007 | |
|---|---|---|
| Number of options | 17,160,056 | 9,958,258 |
| Weighted average share price | £3.76 | £3.70 |
| Weighted average remaining lives: | ||
| – Expected years | 2.5 | 2.6 |
| – Contractual years | 5.8 | 8.5 |
| Range of exercise prices | £2.74 – £3.88 | £2.13 – £3.88 |
Share awards in respect of ordinary shares of the Company
Summary of arrangements
Rolled over from old GUS plc schemes
| Arrangements | Performance share plan | Co-investment plan – matching shares |
|---|---|---|
| Nature of arrangement | Grant of shares | Grant of shares1 |
| Vesting conditions | ||
| – Service period | 3 years | 4 years |
| – Performance | Distribution percentage determined by ranking total shareholder return relative to a comparator group | Benchmark operating profit of the Group assessed against specific targets |
| Expected outcome of meeting performance criteria (at grant date) | 60%2 | 100% |
| Maximum term | 3 years | 6 years |
| Method of settlement | Share distribution | Share distribution |
| Expected departures (at grant date) | 5% | 7% |
Demerger incentive schemes
| Arrangements | Performance share plan |
Re-investment plan – matching shares |
Long-term incentive 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 years3 | 3 years |
| – Performance | n/a | a) Time vesting b) Total shareholder return c) Return on invested capital |
n/a | n/a |
| Expected outcome of meeting performance criteria (at grant date) | n/a | a) 100% b) 51%2 c) 100% |
n/a | n/a |
| Maximum term | 3 years | 4, 5 and 6 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% |
New Home Retail Group plc schemes
| Arrangements | Performance share plan |
Co-investment plan – matching shares (period ended 3 March 2007) |
Co-investment plan – matching shares (period ended 1 March 2008) |
|---|---|---|---|
| Nature of arrangement | Grant of shares | Grant of shares1 | Grant of shares1 |
| Vesting conditions | |||
| – Service period | 3 years | 4 years3 | 4 years3 |
| – Performance | Distribution percentage determined by ranking total shareholder return relative to a comparator group | Benchmark operating profit of the Group assessed against specific targets | a) Benchmark operating profit of the Group assessed against specific targets in
year 1 b) EPS growth in years 2-4 c) Return on invested capital in years 2-4 |
| Expected outcome of meeting performance criteria (at grant date) | 51%2 | 100% | 50% |
| Maximum term | 3 years | 6 years | 6 years |
| Method of settlement | Share distribution | Share distribution | Share distribution |
| Expected departures (at grant date) | 10% | 0% | 0% |
Notes:
- The 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.
- The performance share plan and re-investment plan – The total shareholder return performance condition is considered a ‘market-based’ performance condition under IFRS 2. These schemes have been valued using a Monte Carlo simulation with historic volatilities and correlations measured over the three-year period preceding valuation.
- The grant date for the co-investment plan and the long-term incentive 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 awarded 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.
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 3,962,197 ordinary share awards (2007: 8,879,440) granted during the period with a weighted average fair value of £3.14 (2007: £3.57).
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