Tesco 2012 Annual Report Download - page 137

STRATEGIC REVIEW PERFORMANCE REVIEW GOVERNANCE FINANCIAL STATEMENTS OVERVIEW
Note 25 Share-based payments continued
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.
2012 2011
Savings-related
share option
schemes
Executive
share option
schemes
Nil cost
option
schemes
Savings-related
share option
schemes
Executive
share option
schemes
Nil cost
share option
schemes
Expected dividend yield (%) 4.1% 4.1% 0.0% 3.5% 3.5% 0.0%
Expected volatility (%) 23 – 27% 26% 26% 26 – 30% 25% 25%
Risk-free interest rate (%) 1.5 – 1.8% 2.0% 2.6% 1.6 – 2.2% 2.3 – 3.2% 2.7%
Expected life of option (years) 3 or 5 6 6 3 or 5 6 6
Weighted average fair value of options granted (pence) 69.85 62.91 408.14 93.41 77.86 414.06
Probability of forfeiture (%) 14 – 16% 10% 0% 14 – 16% 10% 0%
Share price (pence) 404.00 402.75 408.14 436.00 419.89 414.06
Weighted average exercise price (pence) 364.00 402.75 0.00 386.00 419.89 0.00
Volatility is a measure of the amount by which a price is expected to fluctuate during a period. The measure of volatility used in the Group’s 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 considers 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.
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 maximum of £3,000. Eligible Republic of Ireland employees are able to participate in a Share Bonus Scheme, an all-employee profit-
sharing scheme. Each year, employees receive a percentage of their earnings as either cash or shares.
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 £13m (2011: £38m).
Selected senior management participate in the selected 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 participate in the senior management Performance Share Plan (2011). 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 and earnings per share 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 financial year were:
2012 2011
Number of
shares
WAFV
pence
Number of
shares
WAFV
pence
Shares in Success 26,597,598 416.26 25,360,677 416.23
Irish Share Bonus Scheme 156,313 419.50 141,970 397.70
Executive Incentive Scheme 9,482,746 415.89 12,765,004 398.68
Performance Share Plan 21,075,604 389.13 2,405,730 399.78
US Long-Term Incentive Plan 132,786 405.63 192,078 433.05
Tesco PLC Annual Report and Financial Statements 2012 133