- prev: 26 Minority interest
- next: 28 Financial instruments
- back: Notes to financial statements menu
Share-based payment plans in operation during the period
The Group had the following share-based payment plans in operation during the period:
Performance Share Plan (PSP)
This plan involves the award of shares to participants subject to performance conditions. Vesting of the performance shares is based on the achievement of both non-market based conditions (EPS and cash flow per share) and a market based performance condition (TSR). Further information regarding the operation of the plan can be found in the Directors' remuneration report.
Sharesave share option plan
Based on a three or five year monthly savings contract, eligible employees are granted share options with an exercise price of up to 20 per cent below the share price when the contract is entered into. Vesting of the options is not subject to the achievement of a performance target. In the UK, the plan is Inland Revenue approved. Overseas, employees in 28 countries participate in sharesave plans through arrangements broadly comparable to the UK plan. A small proportion of the sharesave options are settled in cash. Further information regarding the operation of the plan can be found in the Directors' remuneration report.
Executive Share Option Plan (ESOP)
This plan involves the grant of market value share options to participants. The options are subject to a non-market based performance condition (growth in EPS). The options have a maximum contractual life of ten years. Further information regarding the operation of the plan can be found in of the Directors' remuneration report. There was no grant of executive share options in 2004 or 2005. Following the introduction of the PSP, it is not intended to grant any further executive share options.
Annual Performance Related Award plan (APRA) deferred shares
Deferred shares awarded as part of the APRA. One third of the value of any annual bonus is delivered in the form of a deferred share award. The release of deferred share awards is not dependent on the achievement of any further performance conditions other than that participants remain an employee of the Group for two years from the date of the award in order to retain the full number of shares. During the two year deferral period, participants are entitled to receive dividends on the deferred shares.
Share Incentive Plan (SIP)
The 'Free Share' element of the Share Incentive Plan (SIP). Eligible employees receive shares with a value of up to one week's salary. There are no conditions attached to the shares.
In accordance with the transitional provisions of IFRS 2, the Group has recognised an expense in respect of all grants under these plans made after November 7, 2002 and unvested at January 1, 2005.
The Group recognised a total expense of £26m (2004 £19m).
The movement in options to subscribe for shares under the Group's various share plans is shown in the tables below. A further breakdown of the options outstanding at the year end is also provided.
| Number of shares awarded |
||
|---|---|---|
| PSP | 2005 Millions |
2004 Millions |
| Outstanding at beginning of the year | 6 | — |
| Awarded during the year | 5 | 6 |
| Forfeited during the year | — | — |
| Vested during the year | — | — |
| Outstanding at December 31 | 11 | 6 |
| 2005 | 2004 | ||||
|---|---|---|---|---|---|
| Sharesave | Number of share options Millions |
Weighted average exercise price Pence |
Number of share options Millions |
Weighted average exercise price Pence |
|
| Outstanding at beginning of the year | 74 | 130p | 78 | 130p | |
| Granted during the year | 12 | 298p | — | — | |
| Forfeited during the year | (1) | 139p | (3) | 131p | |
| Exercised during the year | (20) | 140p | (1) | 122p | |
| Outstanding at December 31 | 65 | 157p | 74 | 130p | |
| Exercisable at December 31 | — | — | — | — | |
| 2005 | 2004 | ||||
|---|---|---|---|---|---|
| ESOP | Number of share options Millions |
Weighted average exercise price Pence |
Number of share options Millions |
Weighted average exercise price Pence |
|
| Outstanding at beginning of the year | 80 | 149p | 89 | 150p | |
| Granted during the year | — | — | — | — | |
| Forfeited during the year | (3) | 169p | (5) | 167p | |
| Exercised during the year | — | — | (4) | 162p | |
| Outstanding at December 31 | 77 | 148p | 80 | 149p | |
| Exercisable at December 31 | — | — | — | — | |
| Number of shares awarded |
||
|---|---|---|
| Deferred shares under APRA | 2005 Millions |
2004 Millions |
| Outstanding at beginning of the year | 12 | 14 |
| Awarded during the year | 3 | 3 |
| Forfeited during the year | — | (1) |
| Vested during the year | (7) | (4) |
| Outstanding at December 31 | 8 | 12 |
| Number of shares awarded |
||
|---|---|---|
| Free Shares under SIP | 2005 Millions |
2004 Millions |
| Awarded during the year | 1 | 1 |
Options were exercised on a regular basis during the year. The average share price during the year was 310p.
Fair values
The weighted average fair values for PSP awards, Sharesave grants, APRA deferred share awards, and SIP Free Share awards made during the year are as follows:
| 2005 Pence |
2004 Pence |
|
|---|---|---|
| PSP | 282p | 249p |
| Sharesave - 3 year | 131p | — |
| Sharesave - 5 year | 154p | — |
| APRA deferred share awards | 260p | 220p |
| SIP Free Share awards | 257p | 231p |
Details of the assumptions used in the calculation of these fair values are set out below. Expected volatility was based on the historical volatility of the Company's share price over the seven years prior to the grant or award date. Expected dividends were based on the Company's payments to shareholders over the five years prior to the grant or award date.
PSP awards
The fair value of shares awarded under the PSP are calculated using the market value of shares at the time of the award adjusted to take into account non-entitlement to dividends during the vesting period and the TSR performance condition. The PSP fair values were calculated using the following assumptions:
| 2005 | 2004 | |
|---|---|---|
| Weighted average share price | 262p | 233p |
| Expected dividends | 7.81p | 7.61p |
| Volatility | 34% | 35% |
| Correlation | 19% | 22% |
| Expected life | 3 years | 3 years |
| Risk free interest rate | 4.9% | 5.2% |
As explained in the Directors' remuneration report, the PSP has a Total Shareholder Return (TSR) market-based performance condition, such that the Company's TSR over the performance period will be compared with the TSR of the companies constituting the FTSE 100 index on the date of grant. If the Company's TSR exceeds the median TSR of the FTSE 100, the number of shares that vest will be increased by 25 per cent. The fair value of an award of shares under the PSP has been adjusted to take into account this market-based performance condition using a pricing model based on expectations about volatility and the correlation of share price returns in the group of FTSE 100 companies and which incorporates into the valuation the interdependency between share price performance and TSR vesting. This adjustment increases the fair value relative to the share price at the date of grant.
Sharesave awards
The fair value of options granted under the Sharesave plan are calculated using a binomial pricing model with the following assumptions:
| 2005 | 2004 | |
|---|---|---|
| Weighted average share price | 351p | — |
| Exercise price | 298p | — |
| Volatility | 40% | — |
| Expected dividends | 7.86p | — |
| Expected life1 - 3 year Sharesave | 3.3-3.8 years | — |
| Expected life1 - 5 year Sharesave | 5.3-5.8 years | — |
| Close periods: | ||
| From January 1 | 6 weeks | 6 weeks |
| From July 1 | 1 month | 1 month |
| Risk free interest rate | 4.4% | — |
- The binomial pricing model assumes that participants will exercise options at the beginning of the six month window if the share price is greater than the exercise price. Otherwise it assumes that options are held until the expiration of their contractual term. This results in an expected life that falls somewhere between the start and end of the exercise window.
Deferred shares under APRA and Free Shares under SIP
The fair value of shares awarded under these plans is calculated as the share price on the date of award.
Fair values of options granted in 2003
The charge under IFRS 2 for the current period includes a charge for options granted under the ESOP and Sharesave plans during the year ended December 31, 2003, with the following grant date fair values:
| 2003 | |
|---|---|
| ESOP | 22.7p |
| Sharesave - 3 year | 61p |
| Sharesave - 5 year | 71p |
These fair values were calculated using the binomial model and the following assumptions:
| ESOP | Sharesave | |
|---|---|---|
| Weighted average share price | 79p | 173p |
| Weighted average exercise price | 78p | 142p |
| Volatility | 43% | 43% |
| Expected dividends | 7.61p | 7.61p |
| Expected life1 – 3 year Sharesave | 3.15-3.65 years | |
| Expected life1 – 5 year Sharesave | 5.15-5.65 years | |
| Expected life1 – ESOP | 4.5 years | |
| Close periods: | ||
| From January 1 | 6 weeks | 6 weeks |
| From July 1 | 1 month | 1 month |
| Risk free interest rate | 4.1% | 4.6% |
- For the Sharesave options, the binomial pricing model assumes that participants will exercise options at the beginning of the six month window if the share price is greater than the exercise price. Otherwise it assumes that options are held until the expiration of their contractual term. This results in an expected life that falls somewhere between the start and end of the exercise window.
At December 31, 2005, the following ordinary shares were subject to options:
| Date of grant |
Number | Exercise price |
Exercisable dates |
|
|---|---|---|---|---|
| Executive share option scheme | 1996 | 50,400 | 238p | 2006 |
| Executive share option plan | 1999 | 906,416 | 269p | 2006-2009 |
| 1999 | 206,801 | 216p | 2006-2009 | |
| 2000 | 4,775,649 | 194p | 2006-2010 | |
| 2000 | 1,473,793 | 194p | 2006-2010 | |
| 2000 | 18,404 | 163p | 2006-2010 | |
| 2000 | 86,658 | 163p | 2006-2010 | |
| 2000 | 11,731 | 170p | 2006-2010 | |
| 2001 | 794,363 | 216p | 2006-2011 | |
| 2001 | 7,542,313 | 216p | 2006-2011 | |
| 2001 | 13,516,053 | 216p | 2007-2011 | |
| 2001 | 27,522 | 218p | 2006-2011 | |
| 2001 | 233,141 | 218p | 2006-2011 | |
| 2002 | 12,418,730 | 188p | 2006-2012 | |
| 2002 | 579,537 | 188p | 2006-2012 | |
| 2002 | 581,312 | 216p | 2007-2012 | |
| 2003 | 34,285,557 | 77p | 2006-2013 | |
| 2003 | 11,340 | 170p | 2006-2013 | |
| 2003 | 166,391 | 170p | 2006-2013 | |
| Sharesave plans | 1999 | 1,981,389 | 194p | 2007 |
| 2001 | 27,447,270 | 108p | 2007/2009 | |
| 2003 | 23,268,198 | 141p | 2006/2009 | |
| 2005 | 11,990,112 | 298p | 2009/2011 |
Under the terms of the Rolls-Royce plc Executive Share Option Scheme and the Rolls-Royce 1999 Executive Share Option Plan, options granted to 504 directors and senior executives were outstanding at December 31, 2005.