Tesco 2014 Annual Report Download - page 115

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.
2014 2013
Savings-
related
share option
schemes
Executive
share option
schemes
Nil cost
option
schemes
Savings-
related
share option
schemes
Executive
share option
schemes
Nil cost
option
schemes
Expected dividend yield (%) 4.6% –0.0% 5.0% –0.0%
Expected volatility (%) 21 – 23% – 27% 21 – 28% – 27%
Risk-free interest rate (%) 1.2 – 1.8% –1.7% 0.7 – 1.0% – 1.3%
Expected life of option (years) 3 or 5 – 6 3 or 5 – 6
Weighted average fair value of options granted (pence) 47.6 4 – 364.85 43.45 – 317.72
Probability of forfeiture (%) 14 – 16% – 0% 14 – 16% – 0%
Share price (pence) 362.00 –364.85 312.00 –317.72
Weighted average exercise price (pence) 322.00 –0.00 282.00 –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 colleagues are able to participate in Shares In Success, an all-employee profit-sharing scheme. Each year, shares may be awarded to colleagues
as a percentage of earnings, up to a statutory maximum of £3,000 per annum. Eligible Republic of Ireland colleagues are able to participate in a Share Bonus
Scheme, an all-employee profit-sharing scheme. Each year, colleagues receive an award of either cash or shares based on a percentage of their earnings.
Selected executives participate in the Group Bonus Plan, a performance-related bonus scheme. The amount paid to colleagues is based on a percentage of
salary and is paid partly in cash and partly in shares. Bonuses are awarded to selected executives who have completed a required service period and depend
on the achievement of corporate targets.
Selected senior executives participate in the 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. No further awards will be granted under this scheme and it has been replaced by the Performance Share
Plan ( 2011).
Selected executives participate in the 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.
Selected executives 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.
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:
2014 2013
Number of
shares
WAFV
pence
Number of
shares
WAFV
pence
Shares In Success 14,776, 516 383.55 – –
Irish Share Bonus Scheme 96,668 384.55 110, 234 301.08
Executive Incentive Scheme 598,842 375.18 4,591,717 301.13
Performance Share Plan 30,506,080 361.13 27,025, 617 317. 34
US Long-Term Incentive Plan – – 178,914 314.91
Note 26 Post-employment benefits
Pensions
The Group operates a variety of post-employment benefit arrangements, covering both funded and unfunded defined benefit schemes and funded defined
contribution schemes. The most significant of these are the funded defined benefit pension schemes for the Group’s employees in the UK, the Republic of
Ireland, Thailand and South Korea. Of these schemes, the UK represents 95% of the defined benefit obligation (2013: 95%).
Defined contribution plans
The contributions payable for defined contribution schemes of £32m (2013: £19m) have been recognised in the Group Income Statement.
Note 25 Share-based payments continued
112 Tesco PLC Annual Report and Financial Statements 2014
Notes to the Group financial statements continued