Financial statements
Notes to the financial statements
8 Share-based payments
The Group has a number of share schemes that allow employees to acquire shares in the Company.
The total cost recognised in the income statement is shown below:
| 2007 | 2006 | |
| £m | £m | |
|---|---|---|
| Share options* | 7.7 | 6.1 |
| Performance shares* | 1.1 | 0.6 |
| Share incentive plan | 0.8 | 0.7 |
| Deferred bonus shares | 2.2 | 0.6 |
| 11.8 | 8.0 | |
| *Credited to equity. | ||
The features of the Group's share schemes are set out below. For legal or regulatory reasons certain participants may be granted "phantom awards" under these schemes, which are intended to replicate the financial effects of a share award without entitling the participant to acquire shares.
Share options
(i)The 3i Group Discretionary Share Plan Options granted after 31 March 2001 were granted under the Discretionary Share Plan and are normally exercisable between the third and tenth anniversaries of the date of grant to the extent a performance target has been met over a performance period of three years from the date of grant. For options granted between 1 April 2001 and 31 March 2003 and for options granted to three Directors in June 2003, if the minimum threshold for vesting is not achieved in the first three years from grant, the performance period is extended to four and then five years from the date of grant. For options granted between 1 April 2003 and 31 March 2004 the performance period is extended only to four years from the date of grant. For options granted after 31 March 2004, there is no opportunity for the performance condition to be retested after the three-year performance period.
Options granted between 1 April 2001 and 31 March 2003 were subject to a performance condition that options would vest if the annual compound growth ("ACG") in net asset value per share with dividends re-invested was RPI plus 5%. If this target was achieved then 50% of the options would vest. If the ACG was in excess of RPI plus 10% then the maximum number of shares would vest. Options would vest pro rata if the ACG was between these two amounts. For options granted after 31 March 2003 the target ACG was RPI plus 3% with maximum vesting at RPI plus 8%, except for options granted to three Directors in June 2003 where the target ACG was RPI plus 5% with maximum vesting at RPI plus 10%.
(ii) The 3i Group 1994 Executive Share Option Plan Options granted before 31 March 2001 were granted under this plan and are normally exercisable between the third and tenth anniversaries of the date of grant provided that a performance condition has been met over a rolling three-year period. This requires that the adjusted net asset value per share (with dividends re-invested) at the end of the three-year period is equal to or in excess of the net asset value per share at the beginning of the period compounded annually over the period by the annual increase in the RPI plus 4%.
Details of share options outstanding during the year are as follows:
| 2007 | 2007 | 2006 | 2006 | |
| Number of share options |
Weighted average exercise price (pence) |
Number of share options |
Weighted average exercise price (pence) |
|
|---|---|---|---|---|
| Outstanding at start of the year | 25,304,158 | 745 | 24,943,522 | 739 |
| Granted | 1,411,173 | 839 | 3,597,145 | 692 |
| Exercised | (4,059,359) | 577 | (2,270,547) | 543 |
| Forfeited | (675,527) | 878 | (965,962) | 868 |
| Lapsed | (5,085,678) | 1,000 | – | – |
| Outstanding at end of the year | 16,894,767 | 712 | 25,304,158 | 745 |
| Exercisable at the end of the year | 7,636,530 | 742 | 4,860,952 | 837 |
Included within the total number of share options are options over 6 million (2006: 13 million) shares that have not been recognised in accordance with IFRS 2 as the options were granted on or before 7 November 2002. These options have not been subsequently modified and therefore do not need to be accounted for in accordance with IFRS 2.
The range of exercise prices for options outstanding at the year end was:
| Year ended 31 March | 2007 | 2007 | 2006 | 2006 |
| Year of grant | Weighted average exercise price (pence) |
Number | Weighted average exercise price (pence) |
Number |
|---|---|---|---|---|
| 1997 | – | – | 457 | 249,400 |
| 1998 | 505 | 277,622 | 513 | 964,373 |
| 1999 | 630 | 405,472 | 623 | 919,449 |
| 2000 | 884 | 756,975 | 810 | 1,235,026 |
| 2001 | 1,312 | 1,170,432 | 1,341 | 1,378,598 |
| 2002 | 895 | 21,026 | 999 | 5,119,104 |
| 2003 | 663 | 3,785,511 | 663 | 3,802,071 |
| 2004 | 571 | 1,414,290 | 570 | 3,694,970 |
| 2005 | 599 | 4,247,510 | 599 | 4,402,076 |
| 2006 | 692 | 3,409,732 | 692 | 3,539,091 |
| 2007 | 839 | 1,406,197 | – | – |
| 712 | 16,894,767 | 745 | 25,304,158 |
Options are exercisable at a price based on the market value of the Company's shares on the date of grant.
The weighted average share price at the date of exercise during the year was 1054p (2006: 850p). The options outstanding at the end of the year have a weighted average contractual life of 6.34 years (2006: 6.35 years). The cost of share options is spread over the vesting period of three to five years. The weighted average fair value of options granted during the year was 331p (2006: 218p). These fair values were calculated using the Black-Scholes option pricing model.
The inputs to this model were as follows:
| 2007 | 2006 | |
|---|---|---|
| Weighted average share price (pence) | 849 | 692 |
| Average expected volatility (%) | 29 | 27 |
| Expected life (years) | 8.5 | 8.5 |
| Average risk-free rate (%) | 4.6 | 4.3 |
| Average expected dividend yield (%) | 1.6 | 2.0 |
The expected life of the option is based on the best estimate of the Directors following a review of the profile of the award holders. Expected volatility was determined using an average of the implied volatility on grant and historic share price volatility of the preceding 8.5 years. No options have been repriced during the year (2006: nil).
Performance share awards
Performance share awards made under the 3i Group Discretionary Share Plan are awards of shares to executives which are transferred to the participant by the 3i Group Employee Trust on terms that the shares may, in certain circumstances, be forfeited. While the shares are subject to forfeiture they may not be sold, transferred or used as security. Awards are subject to a performance condition determining whether and to what extent the award will vest.
Non-vested shares are forfeited. Two types of awards have been made: standard awards and Super-performance Shares.
The performance condition for standard awards provides for shares to vest based on the Company's "percentage rank" by total shareholder return for the period of three years from grant (averaged over a 60 day period) compared to a comparator group.
The comparator group consists of the FTSE 100 Index constituents at the grant date (adjusted for mergers, demergers and delistings during the performance period). A company's percentage rank is its rank in the comparator group divided by the number of companies in the group at the end of the performance period expressed as a percentage. If the Company's percentage rank is less than 50% none of the shares vest. At a percentage rank of 50%, 35% of the shares vest and at 75% all the shares vest. Between these points shares vest pro rata.
The performance condition for Super-performance Shares provides for shares to vest based on a performance condition measured over a three-year period. To the extent the shares vest the shares remain subject to a further two-year holding period before they cease to be subject to forfeiture. The performance condition requires annual percentage compound growth in the net asset value per share (with dividends re-invested) over the three-year period of RPI plus 10 percentage points to achieve minimum vesting of 25% of the award and growth of RPI plus 17 percentage points for full vesting. Between these levels shares vest pro rata.
Share Incentive Plan Eligible UK employees may participate in an Inland Revenue approved Share Incentive Plan intended to encourage employees to invest in the Company's shares. Accordingly it is not subject to a performance condition. During the year participants could invest up to £125 per month from their pre-tax salaries in the Company's shares (referred to as partnership shares). For each share so acquired the Company grants two free additional shares (referred to as matching shares) which are normally subject to forfeiture if the employee ceases to be employed (other than by reason of retirement) within three years of grant. Dividends are re-invested on behalf of participants in further shares (referred to as dividend shares).
Deferred Bonus Share Plan Certain employees receive an element of their bonus as shares. These shares are held in trust for two years by the trustee of the 3i Group Employee Trust in a nominee capacity. The fair value of the deferred shares is the share price at date of the award.
Employee trust The Group has established the 3i Group Employee Trust which holds shares in 3i Group plc to meet its obligations under certain share schemes. The share schemes which use this trust are the 3i Group Discretionary Share Plan and the Deferred Bonus Share Plan.