Annual report and financial statements 2008

Notes to the financial statements

12 Share-based payments

The charge for share-based payments for the year was £29.0m (last year £27.3m). Further details of the option and share schemes that the Group operates are provided in the Remuneration report.

A Save As You Earn Share Option Scheme

Under the terms of the scheme, the Board may offer options to purchase ordinary shares in the Company once in each financial year to those employees who enter into an HM Revenue & Customs (HMRC) approved Save As You Earn (SAYE) savings contract. HMRC rules limit the maximum amount saved to £250 per month. The price at which options may be offered is 80% of the average mid-market price for three consecutive dealing days preceding the offer date. The options may normally be exercised during the period of six months after the completion of the SAYE contract, either three or five years after entering the scheme.

  2008 2007
  Number of options Weighted
average
exercise
price		 Number of
options		 Weighted
average
exercise
price
Outstanding at beginning of the period 33,241,616 327.6p 40,403,625 261.6p
Granted 7,716,437 517.0p 6,569,527 559.0p
Exercised (10,212,015) 234.8p (11,814,068) 232.4p
Forfeited (2,207,700) 450.7p (1,637,012) 325.5p
Expired (93,578) 235.2p (280,456) 258.0p
Outstanding at end of the period 28,444,760 403.1p 33,241,616 327.6p
Exercisable at end of period 948,372 262.9p 726,615 243.4p

 

For SAYE share options exercised during the period, the weighted average share price at the date of exercise was 535.2p (last year 698.8p).

The fair values of the options granted during the year have been calculated using the Black-Scholes model assuming the inputs shown below:

  2008 2007
  3-year plan 5-year plan 3-year plan 5-year plan
Grant date Nov 07 Nov 07 Nov 06 Nov 06
Share price at grant date 646p 646p 698p 698p
Exercise price 517p 517p 559p 559p
Option life in years 3 years 5 years 3 years 5 years
Risk-free rate 4.6% 4.6% 5.4% 5.3%
Expected volatility 21.6% 25.2% 21.5% 27.5%
Expected dividend yield 2.7% 2.7% 2.2% 2.2%
Fair value of option 167.5p 201.8p 200.6p 247.8p

 

Volatility has been estimated by taking the historic volatility in the Company’s share price over a three- or five-year period.

The resulting fair value is expensed over the service period of three or five years on the assumption that 20% of options will lapse over the service period as employees leave the Group.

Outstanding options granted under the UK Employees’ SAYE Scheme are as follows:

  Number of options Weighted average remaining contractual life (years)  
Options granted 2008 2007 2008 2007 Option price
January 2000 – 161,410 – 0.3 223p
January 2001 338,682 3,948,712 0.3 1.3 156p
January 2002 – 227,479 – 0.3 250p
January 2003 371,017 3,495,809 0.3 1.3 283p
January 2004 4,078,721 4,484,581 1.3 2.2 228p
January 2005 3,703,910 6,834,424 2.1 2.3 280p
January 2006 7,164,101 7,713,616 2.1 3.1 349p
January 2007 5,434,588 6,375,585 3.0 4.0 559p
January 2008 7,353,741 – 4.0 – 517p
  28,444,760 33,241,616 2.6 2.5 328p

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B Executive Share Option Scheme

Under the terms of the Executive Share Option Scheme, last approved by shareholders in 2005, the Board may offer options to purchase ordinary shares in the Company to executive directors and senior managers at the market price on a date to be determined prior to the date of the offer. No further options may be granted under any schemes other than the 2005 scheme. No awards have been made under the 2005 scheme. Further details are set out in the Remuneration report.

Performance targets are assessed over a three-year period from the date of grant with no ability to retest any grants. Once options have vested they can be exercised during the period up to 10 years from grant date.

  2008 2007
  Number of options Weighted
average
exercise
price		 Number of options Weighted
average
exercise
price
Outstanding at beginning of the period 12,017,117 341.2p 18,135,466 333.5p
Exercised (2,235,209) 341.0p (5,522,018) 316.6p
Forfeited (152,698) 348.6p (589,781) 334.8p
Expired (5,692) 527.0p (6,550) 458.0p
Outstanding at end of the period 9,623,518 341.0p 12,017,117 341.2p
Exercisable at end of the period 8,444,937 339.4p 3,537,471 328.4p

 

For executive share options exercised during the period, the weighted average share price at the date of exercise was 645.5p (last year 632.3p).

The resulting fair value is expensed over the expected service period of five years on the assumption that 30% of options will lapse over the service period as employees leave the Company.

Outstanding options granted under all Executive Share Option Schemes are as follows:

  Number of options Weighted average remaining contractual life (years)  
Options granted 2008 2007 2008 2007 Option price
1984 Scheme          
June 1997 – 5,692 – 0.2 527p
1997 Scheme          
June 1998 161,863 247,778 0.2 1.2 557p
November 1998 7,425 7,425 0.6 1.6 404p
June 1999 98,880 127,521 1.2 2.2 358p
2000 Scheme          
September 2000 232 3,445 2.5 3.4 215p
June 2001 135,989 196,303 3.3 4.2 256p
December 2001 71,658 74,161 3.7 4.7 350p
2002 Scheme          
June 2002 659,465 760,394 4.2 5.2 350p
November 2002 47,150 66,980 4.7 5.6 353p
June 2003 1,502,053 1,975,461 5.2 6.2 297p
November 2003 36,109 77,078 5.7 6.6 270p
February 2004 33,111 33,111 5.8 6.8 270p
July 2004 4,831,318 6,236,497 6.3 7.3 347p
November 2004 859,684 868,599 6.7 7.6 337p
June 2005 1,178,581 1,336,672 7.2 8.2 352p
  9,623,518 12,017,117 5.9 6.8 335p

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C Performance Share Plan

The Performance Share Plan is the primary long-term incentive plan for approximately 100 of the most senior managers and was first approved by shareholders in 2005. Under the plan, annual awards, based on a percentage of salary, may be offered. The extent to which the awards vest is based on adjusted earnings per share growth over three years. The value of any dividends earned on the vested shares during the three years will also be paid on vesting. Further details are set out in the Remuneration report. Awards under this scheme have been made in each year since 2005.

During the year, 3,414,413 shares (last year 3,511,040) were awarded under the plan. The weighted average fair value of the shares awarded was 704.0p (last year 572.9p).

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D Deferred Share Bonus Plan

The Deferred Share Bonus Plan was introduced in 2005/06 as part of the annual bonus scheme for approximately 450 of the most senior managers. As part of the bonus scheme, the managers are required to defer a proportion of any bonus paid into shares which will be held for three years. There are no further performance conditions on these shares, other than continued employment, and the value of any dividends earned during the deferred period will be paid on vesting.

During the year, 2,182,379 shares were awarded under the plan in relation to the 2006/07 annual bonus. The fair value of the shares awarded was 706.6p.

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E Restricted Share Plan

The Restricted Share Plan was established in 2000 as part of the reward strategy for retention and recruitment of senior managers who are vital to the success of the business. The plan operates for senior managers below executive director level. Awards under the plan are made as part of ongoing reviews of reward packages, and for recruitment. The shares are held in trust for a period of between one and three years, at which point they are released to the employee, subject to them still being in employment. The value of any dividends earned during the restricted period will also be paid at the time of vesting.

During the year, 328,165 shares (last year 38,622) have been awarded under the plan. The weighted average fair value of the shares awarded was 604.6p (last year 578.0p).

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F United Kingdom Share Incentive Plan

The Share Incentive Plan is a discretionary, all-employee plan, approved by HMRC, under which Freeshares may be allocated by the Company. The last award was made in June 2003, which will vest in June 2008.

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G Share Matching Deal Plan

The Share Matching Deal Plan was introduced in 2006 for those employees who were eligible to receive a cash-only bonus. The scheme was not open to those employees who participated in the Deferred Share Bonus Plan. The Plan allows employees to invest a proportion of their bonus in shares of the Company. These investment shares must be held by the participant for three years, during which time they will receive dividends. At the end of the three-year holding period, if the participant is still in employment with the Company, and still holds the investment shares, they will receive one matching share for every four that they bought.

During the year, 26,603 (last year 41,086) matching shares have been awarded under the Share Matching Deal Plan, at a fair value of 609.3p (last year 596.4p).

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H Marks and Spencer Employee Benefit Trust

The Marks and Spencer Employee Benefit Trust (the Trust) holds 8,795,896 (last year 4,767,449) shares with a book value of £60.0m (last year £28.1m) and a market value of £34.9m (last year £32.3m). These shares were acquired by the Trust in the market. In addition, the Trust has entered into a call option to purchase up to 8.1 million of the Company’s shares. The Trust used funds provided by Marks and Spencer plc to meet the Group’s obligations. Awards are granted to employees at the discretion of Marks and Spencer plc and shares are awarded to employees by the Trust in accordance with the wishes of Marks and Spencer plc under senior executive share schemes, including the Restricted Share Plan. Dividends are waived on all of these plans except for the Deferred Bonus Share Plan and Restricted Share Plan where dividends are paid via a Dividend Reinvestment Plan for awards made in the form of forfeitable shares.

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