Tesco 2008 Annual Report Download - page 84

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Note 23 Share-based payments continued
Share options were exercised on a regular basis throughout the year. The average share price during the year to 23 February 2008 was 443.59p
(2007 – 369.70p).
The fair value of share options is estimated at the date of grant using the Black-Scholes option pricing model. The following table gives the assumptions
applied to the options granted in the respective periods shown. No assumption has been made to incorporate the effects of expected early exercise.
2008 2007
Savings- Savings-
related Executive related Executive
share share Nil cost share share Nil cost
option option option option option option
schemes schemes schemes schemes schemes schemes
Expected dividend yield (%) 2.4% 2.4% 0.0% 2.7% 3.0% 2.7%
Expected volatility (%) 20-21% 24% 24-27% 28% 28% 28%
Risk-free interest rate (%) 4.8% 5.0-5.3% 4.7-4.9% 4.8% 4.7% 4.6%
Expected life of option (years) 3 or 5 6 6-9 3 or 5 6 6
Weighted average fair value of options granted (pence) 116.35 119.96 469.17 122.02 81.63 282.97
Probability of forfeiture (%) 20-25% 10% 0% 20-25% 10% 0%
Share price (pence) 470.00 471.12 469.17 383.80 318.60 332.74
Weighted average exercise price (pence) 410.00 471.12 0.00 307.00 318.60 0.0
Volatility is a measure of the amount by which a price is expected to fluctuate during a period. The measure of volatility used in Tesco PLC option pricing
models is the annualised standard deviation of the continuously compounded rates of return on the share over a period of time. In estimating the future
volatility of the Company’s share price, the Board consider the historical volatility of the share price over the most recent period that is generally commensurate
with the expected term of the option, taking into account the remaining contractual life of the option.
b) Share bonus schemes
Eligible UK employees are able to participate in Shares in Success, an all-employee profit-sharing scheme. Each year, shares are awarded as a percentage
of earnings up to a statutory maximum of £3,000.
Senior management also participate in performance-related bonus schemes. The amount paid to employees is based on a percentage of salary and is
paid partly in cash and partly in shares. Bonuses are awarded to eligible employees who have completed a required service period and depend on the
achievement of corporate targets. The accrued cash element of the bonus at the Balance Sheet date is £26m (2007 – £17m).
Selected senior management participate in the senior management Performance Share Plan. Awards made under this plan will normally vest three years
after the date of the award for nil consideration. Vesting will normally be conditional on the achievement of specified performance targets related to the
return on capital employed over a three year performance period.
Senior management in the US business also participate in the US Long-Term Incentive Plan (2007) which was adopted on 29 June 2007. The awards
made under this Plan will normally vest in four tranches: four, five, six and seven years after the date of award, for nil consideration. Vesting will normally
be conditional on the achievement of specified performance targets related to the return on capital employed in the US business over the seven-year plan.
The Executive Directors participate in short-term and long-term bonus schemes designed to align their interests with those of shareholders. Full details
of these schemes can be found in the Directors’ Remuneration Report.
The fair value of shares awarded under these schemes is their market value on the date of award. Expected dividends are not incorporated into the fair
value except for awards under the US Long-Term Incentive Plan.
The number and weighted average fair value (WAFV) of share bonuses awarded during the period were:
2008 2007
Shares WAFV Shares WAFV
number pence number pence
Shares in Success 18,019,768 470.45 24,062,964 319.65
Executive Incentive Scheme 10,012,950 456.11 11,878,791 316.88
Performance Share Plan 1,292,172 466.21 1,885,288 346.25
US Long-Term Incentive Plan 4,817,720 471.10 ––
Tesco PLC Annual Report and
Financial Statements 2008
82
Notes to the Group financial statements continued
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