Annual Report and Accounts 2008
8 Share-based payment
The charge in respect of share-based payment transactions included in the Group’s income statement for the year is as follows:
| 2008 £m |
2007 £m |
|
|---|---|---|
| Expense arising from share and share option plans – continuing operations | 4.3 | 3.1 |
The share-based payment charge in respect of discontinued operations was £0.1m (2007: £0.1m).
During the year ended 31 December 2008, the Group had seven share-based payment arrangements, which are described in note 7(b).
For the following disclosure, share options with a nil exercise price have been disclosed separately to avoid distorting the weighted average exercise prices. The number of share options in existence during the year was as follows:
| 2008 | 2007 | |||||
|---|---|---|---|---|---|---|
| Number of share options |
Weighted average exercise price p |
Number of share options |
Weighted average exercise price p |
|||
| Options without a nil exercise price: | ||||||
| At 1 January | 394,452 | 814 | 1,385,998 | 738 | ||
| Granted during the year | 1,130,599 | 923 | 19,343 | 1,108 | ||
| Lapsed during the year | (70,219) | 846 | (62,908) | 762 | ||
| Exercised during the year | (75,841) | 746 | (947,981) | 713 | ||
| Outstanding at 31 December(1) | 1,378,991 | 906 | 394,452 | 814 | ||
| Exercisable at 31 December | 221,904 | 794 | 307,795 | 773 | ||
| Options with a nil exercise price: | ||||||
| At 1 January | 1,514,355 | nil | 1,424,804 | nil | ||
| Granted during the year | 651,199 | nil | 497,584 | nil | ||
| Lapsed during the year | (323,727) | nil | (347,557) | nil | ||
| Exercised during the year | (399,972) | nil | (60,476) | nil | ||
| Outstanding at 31 December | 1,441,855 | nil | 1,514,355 | nil | ||
| Exercisable at 31 December | 3,647 | nil | – | – | ||
| Total outstanding at 31 December | 2,820,846 | 1,908,807 | ||||
| Total exercisable at 31 December | 225,551 | 307,795 | ||||
(1)Included within this balance are options over 112,760 (2007: 180,920) shares for which no expense has been recognised in accordance with the transitional provisions of IFRS 2 as the options were granted before 7 November 2002 and have not been subsequently modified.
The options outstanding at 31 December 2008 had exercise prices that were between 398p and 1163p (2007: between 398p and 1224p) excluding options with a nil exercise price. The range of exercise prices for options was as follows:
| Exercise price (p) | 2008 | 2007 |
|---|---|---|
| 350–650 | 57,196 | 71,150 |
| 650–950 | 1,231,999 | 231,059 |
| 950–1250 | 89,796 | 92,243 |
| 1,378,991 | 394,452 |
The options have a weighted average contractual life of three years (2007: three years). Options were exercised regularly throughout the year and the weighted average share price at exercise was 891p (2007: 1153p).
The weighted average fair value of the share options granted during the year was calculated using a stochastic model, with the following assumptions and inputs:
| Share options without nil exercise price | Share options with nil exercise price | |||||
|---|---|---|---|---|---|---|
| 2008 | 2007 | 2008 | 2007 | |||
| Risk free interest rate | 4.2%–4.9% | 5.0%–5.2% | – | – | ||
| Expected volatility | 26.8%–27.2% | 27.0%–27.3% | 25.1%–32.0% | 19.0% | ||
| Peer group volatility | – | – | 30.8% | 25.7%–25.9% | ||
| Expected option life in years | 3–6 years | 6 years | 3 years | 3 years | ||
| Expected dividend yield | 3.4%–4.0% | 3.1% | 3.8%–7.2% | 2.7%–2.8% | ||
| Weighted average share price | 884p–1135p | 1071p–1175p | 547p–972p | 1236p–1295p | ||
| Weighted average exercise price | 922p–1163p | 1093p–1153p | 0p | 0p | ||
| Weighted average fair value of options granted | 140p–211p | 215p–262p | 166p–868p | 684p–1194p | ||
Experience to date has shown that approximately 15% (2007: 15%) of options are exercised early, principally due to redundancies. This has been incorporated into the calculation of the expected option life for the share options without nil exercise price.
Expected volatility in the table above was determined from historic volatility over the last nine years, adjusted for one-off events that were not considered to be reflective of the volatility of the share price going forward. The expected dividend yield represents the dividends declared in the 12 months preceding the date of the grant divided by the average share price in the month preceding the date of the grant.
For share options granted during the year under the LTIP, the TSR targets have been reflected in the calculation of the fair value of the options above.