Notes to the financial statements
32 Share-based payments
The Group recognised £53 million (2007: £38 million) of employee costs (note 6) related to share-based payment transactions made during the financial year. Of these, £2 million (2007: £nil) are cash-settled.
National insurance contributions are payable in respect of certain share-based payment transactions and are treated as cash-settled transactions. At 22 March 2008, the carrying amount of national insurance contributions payable was £13 million (2007: £14 million) of which £nil (2007: £2 million) was in respect of vested grants.
The Group operates various share-based payment schemes as set out below:
(a) Savings Related Share Option Scheme (“SAYE”)
The Group operates a Savings Related Share Option Scheme, which is open to all UK employees with more than three months’ continuous service. This is an approved HMRC Scheme and was established in 1980. Under the SAYE scheme, participants remaining in the Group’s employment at the end of the three-year or five-year savings period are entitled to use their savings to purchase shares in the Company at a stated exercise price. Employees leaving for certain reasons are able to use their savings to purchase shares within six months of their leaving.
At 22 March 2008, UK employees held 22,074 five-year savings contracts (2007: 21,833) in respect of options over 20.6 million shares (2007: 20.5 million) and 28,332 three-year savings contracts (2007: 24,919) in respect of options over 15.3 million shares (2007: 14.1 million).
A reconciliation of option movements is shown below:
| 2008 Number of options million |
2008 Weighted average exercise price pence |
2007 Number of options million |
2007 Weighted average exercise price pence |
|
|---|---|---|---|---|
| Outstanding at beginning of year | 34.5 | 256 | 35.4 | 237 |
| Granted | 10.0 | 331 | 9.1 | 328 |
| Forfeited | (3.4) | 233 | (4.3) | 236 |
| Exercised | (4.9) | 233 | (4.4) | 272 |
| Expired | (0.3) | 266 | (1.3) | 278 |
| Outstanding at end of year | 35.9 | 278 | 34.5 | 256 |
Exercisable at end of year |
2.0 | 227 | 3.4 | 247 |
The weighted average share price during the period for options exercised over the year was 377 pence (2007: 510 pence).
Details of options at 22 March 2008 are set out below:
| Date of grant | Date of expiry | Exercise price pence |
Options outstanding 2008 million |
Options outstanding 2007 million |
|---|---|---|---|---|
| 20 December 2001 (5 year period) | 31 August 2007 | 302 | - | 0.4 |
| 3 January 2003 (5 year period) | 31 August 2008 | 239 | 0.9 | 3.0 |
| 17 December 2003 (3 year period) | 31 August 2007 | 241 | - | 0.4 |
| 17 December 2003 (5 year period) | 31 August 2009 | 241 | 2.8 | 3.0 |
| 15 December 2004 (3 year period) | 31 August 2008 | 217 | 1.1 | 3.5 |
| 15 December 2004 (5 year period) | 31 August 2010 | 217 | 4.0 | 4.3 |
| 15 December 2005 (3 year period) | 31 August 2009 | 231 | 4.6 | 5.3 |
| 15 December 2005 (5 year period) | 31 August 2011 | 231 | 5.0 | 5.6 |
| 15 December 2006 (3 year period) | 31 August 2010 | 328 | 4.0 | 4.8 |
| 15 December 2006 (5 year period) | 31 August 2012 | 328 | 3.7 | 4.2 |
| 20 December 2007 (3 year period) | 31 August 2011 | 331 | 5.6 | – |
| 20 December 2007 (5 year period) | 31 August 2013 | 331 | 4.2 | – |
| 35.9 | 34.5 |
Options granted during the year were valued using the Black-Scholes option-pricing model. No performance conditions were included in the fair value calculations. The fair value per option granted during the year and the assumptions used in the calculation are as follows:
| 2008 | 2007 | ||
|---|---|---|---|
| Share price at grant date (pence) | 413 | 409 | |
| Exercise price (pence) | 331 | 328 | |
| Expected volatility | - 3 year period (%) | 23.5 | 18.0 |
| - 5 year period (%) | 25.3 | 25.5 | |
| Option life | - 3 year period (years) | 3.2 | 3.2 |
| - 5 year period (years) | 5.2 | 5.2 | |
| Expected dividends (expressed as dividend yield %) | 1.9 | 2.3 | |
| Risk-free interest rate | - 3 year period (%) | 4.5 | 4.2 |
| - 5 year period (%) | 4.7 | 4.2 | |
| Fair value per option | - 3 year period (pence) | 122 | 105 |
| - 5 year period (pence) | 144 | 132 | |
The expected volatility is based on the standard deviation of the Group’s share price for the period immediately prior to the date of grant of award, over the period identical to the vesting period of the award, adjusted for management’s view of future volatility of the share price.
(b) Colleague Share Option Plan (“CSOP”)
The Colleague Share Option Plan operates under the rules of the HMRC Approved Discretionary Share Option Scheme. Under the CSOP, participants are granted options to purchase shares of the Company at a stated exercise price. The exercise of options is conditional upon participants remaining in the employment of the Group for a three-year period after date of grant. Colleagues leaving employment for certain reasons have six months from their leaving date to exercise their options.
At 22 March 2008, a total of 10,547 UK employees (2007: 17,793) participated in the plan and held options over 3.4 million shares (2007: 5.7 million). Options are exercisable between three and ten years from the date of the grant of option. It is intended that there will be no further options granted under this plan.
A reconciliation of option movements is shown below:
| 2008 Number of options million |
2008 Weighted average exercise price pence |
2007 Number of options million |
2007 Weighted average exercise price pence |
|
|---|---|---|---|---|
| Outstanding at beginning of year | 5.7 | 365 | 18.6 | 366 |
| Forfeited | (0.3) | 352 | (4.8) | 363 |
| Exercised | (2.0) | 370 | (7.9) | 369 |
| Expired | – | – | (0.2) | 371 |
| Outstanding at end of year | 3.4 | 363 | 5.7 | 365 |
Exercisable at end of year |
3.4 | 363 | 5.7 | 365 |
The weighted average share price during the period for options exercised over the year was 553 pence (2007: 500 pence).
Details of options at 22 March 2008 are set out below:
| Date of grant | Date of expiry | Exercise price pence |
Options outstanding 2008 million |
Options outstanding 2007 million |
|---|---|---|---|---|
| 2 August 1999 | 1 August 2009 | 378 | 2.9 | 5.0 |
| 2 June 2000 | 1 June 2010 | 272 | 0.5 | 0.7 |
| 3.4 | 5.7 |
(c) Executive Share Option Plan (“ESOP”)
Under the Executive Share Option Plan, participants were granted options to purchase shares in the Company at a stated exercise price. The maximum annual option award was two times basic salary and the grants were agreed by the Remuneration Committee according to the assessed performance and potential of participants.
The exercise of options is conditional upon a performance target based on the growth in the Company’s underlying earnings per share (“EPS”) relative to inflation over a three-year period. EPS is measured against a fixed starting point over the performance period beginning with the year in which the option was granted. To the extent that the condition is not satisfied in full after three years, it will be retested on a fixed-point basis over four and then five financial years. To the extent the condition is not met after five financial years, the option will lapse.
Once the options vest, participants remaining in the Group’s employment or leaving for certain reasons, are entitled to exercise the options between vesting date (normally at the end of the three-year performance period) and the option expiry date, which is ten years from date of grant.
It is intended that there will be no further options granted under this plan.
A reconciliation of option movements is shown below:
| 2008 Number of options million |
2008 Weighted average exercise price pence |
2007 Number of options million |
2007 Weighted average exercise price pence |
|
|---|---|---|---|---|
| Outstanding at beginning of year | 20.4 | 362 | 36.8 | 358 |
| Forfeited | (6.3) | 332 | (0.5) | 400 |
| Exercised | (5.9) | 405 | (11.5) | 356 |
| Expired | (4.1) | 294 | (4.4) | 343 |
| Outstanding at end of year | 4.1 | 411 | 20.4 | 362 |
Exercisable at end of year |
3.5 | 437 | 12.2 | 420 |
The weighted average share price during the period for options exercised over the year was 546 pence (2007: 460 pence).
Details of options at 22 March 2008 are set out below:
| Date of grant | Date of expiry | Exercise price pence |
Options outstanding 2008 million |
Options outstanding 2007 million |
|---|---|---|---|---|
| 20 May 1997 | 19 May 2007 | 367 | - | 0.7 |
| 11 November 1997 | 10 November 2007 | 489 | - | 0.1 |
| 10 November 1998 | 9 November 2008 | 545 | 1.0 | 2.4 |
| 2 August 1999 | 1 August 2009 | 378 | 0.4 | 1.8 |
| 2 June 2000 | 1 June 2010 | 272 | 0.3 | 1.1 |
| 7 June 2001 | 6 June 2011 | 427 | 0.9 | 2.9 |
| 26 July 2001 | 25 July 2011 | 407 | 0.9 | 3.2 |
| 25 July 2002 | 24 July 2012 | 287 | - | 3.7 |
| 22 May 2003 | 21 May 2013 | 257 | 0.4 | 3.1 |
| 20 May 2004 | 19 May 2014 | 275 | 0.2 | 1.4 |
| 4.1 | 20.4 |
(d) Performance Share Plan (“PSP”)
The Performance Share Plan was a long-term incentive scheme through which shares were awarded to senior managers on a conditional basis. Under the PSP, participants remaining in the Group’s employment or leaving for certain reasons, were entitled to receive a grant of options after a performance period of three years to acquire the shares awarded to them, at any time during the ten years following the date of grant.
The participant’s entitlement to receive the grant depended on the Company’s Total Shareholder Return (“TSR”) - being the increase in the value of a share, including reinvested dividends, compared with a peer group of 11 companies (namely Ahold, Alliance Boots, Carrefour, Casino, DSG International, Kingfisher, Loblaw, Marks & Spencer, Morrisons, Next and Tesco), over the three-year performance period.
If the median performance of the TSR against the comparator group was not achieved at the end of the three-year performance period, the entitlement to receive the grant of options lapsed. At median level, shares to the value of 30 per cent of salary would be released and the award will be pro rated at every position between the median and first position in the comparator group. The maximum allocation for Directors was a conditional grant of shares equal to 75 per cent of salary.
No further allocations will be made under this plan.
A reconciliation of the number of shares conditionally allocated is shown below:
| Number of shares 2008 million |
Number of shares 2007 million |
|
|---|---|---|
| Outstanding at beginning of year | 0.9 | 2.2 |
| Forfeited | – | (0.2) |
| Released to participants | (0.7) | (0.6) |
| Lapsed | (0.2) | (0.5) |
| Outstanding at end of year | - | 0.9 |
Details of shares conditionally allocated at 22 March 2008 are set out below:
| Shares conditionally allocated 2008 million |
Shares conditionally allocated 2007 million |
|
|---|---|---|
| 20 May 2004 | – | 0.9 |
| – | 0.9 |
Conditional awards of shares that have fulfilled all conditions at the end of the performance period are represented by options granted to participants to acquire the shares awarded to them. Details of the options outstanding at year-end are set out below:
| Date of grant | Date of expiry | Exercise price pence |
2008 Options |
2008 Shares in respect of options granted |
2007 Options |
2007 Shares in respect of options granted |
|---|---|---|---|---|---|---|
| 17 May 20061 | 16 May 2016 | – | - | - | 1 | 13,187 |
| 16 May 2007 | 15 May 2017 | – | 2 | 37,627 | – | – |
| 2 | 37,627 | 1 | 13,187 |
- Options granted in respect of shares conditionally allocated on 22 May 2003.
(e) All-Employee Share Ownership Plan
In June 2003, under the All-Employee Share Ownership Plan, free shares were awarded to UK employees with more than 12 months’ continuous service. The free shares are being held in a trust on behalf of participants and will be forfeited if participants cease to remain in the Group’s employment for a period of three years. Shares are released to participants within the first three years for certain reasons. After the three-year period, the shares continue to be held by the trust for a further holding period of two years, unless they are released to participants upon cessation of employment with the Group.
A reconciliation of shares held in the trust is shown below:
| Number of shares 2008 million |
Number of shares 2007 million |
|
|---|---|---|
| Outstanding at beginning of year | 1.5 | 1.7 |
| Forfeited | - | (0.1) |
| Released to participants | (0.1) | (0.1) |
| Outstanding at end of year | 1.4 | 1.5 |
(f) J Sainsbury plc Share Plan 2005
Under the J Sainsbury plc Share Plan 2005, shares were awarded to participants on the conditional basis that the performance targets are achieved within the four-year performance period, from the financial year beginning 27 March 2005 until the financial year ending March 2009. The levels of awards are scaled according to seniority and there is an opportunity for Executive Directors and eligible Operating Board members to make a personal investment of up to 50 per cent of salary in the plan.
The awards will vest if stretching sales and earnings per share (“EPS”) targets are achieved, as shown in table 1 below. The relevant performance multiplier, which is on a sliding scale up to a maximum of five times, will be calculated and applied to the core award of shares, as well as the personal investment of shares i.e. shares acquired by Executive Directors and eligible Operating Board members. Further, there is an opportunity for partial vesting of up to half the award, if the accelerated performance targets have been met at the end of year three (i.e. financial year ended March 2008) as shown in table 2. No awards will vest unless threshold levels of growth in both sales and EPS are achieved.
Once performance targets have been achieved, options will be granted to participants remaining in the Group’s employment or leaving for certain reasons to acquire the shares awarded to them, at nil cost. The options will expire within a year after the end of the four-year performance period. Dividends will accrue on the shares that vest in the form of additional shares.
In order to participate in the plan, participants agreed to surrender options granted to them under the Company’s Executive Share Option Plan in 2002, 2003 and 2004.
Table 1 - Maturity vesting (multiplier applied to the shares)
| 4 year EPS growth (compound annual) | ||||||
|---|---|---|---|---|---|---|
| Sales growth in £ billion | <5% | 5% | 10% | 14% | 17% | 21% |
| 2.50 | 0.0 | 1.0 | 2.0 | 3.0 | 4.5 | 5.0 |
| 2.25 | 0.0 | 1.0 | 1.5 | 2.5 | 4.0 | 5.0 |
| 2.00 | 0.0 | 0.0 | 1.5 | 2.0 | 3.0 | 4.5 |
| 1.75 | 0.0 | 0.0 | 1.5 | 2.0 | 2.5 | 4.0 |
| 1.50 | 0.0 | 0.0 | 1.0 | 1.5 | 2.0 | 3.0 |
| 1.25 | 0.0 | 0.0 | 0.0 | 1.0 | 1.5 | 2.5 |
| 1.00 | 0.0 | 0.0 | 0.0 | 0.0 | 1.0 | 2.0 |
Table 2 - Interim vesting (multiplier applied to 50% of the shares)
| 3 year EPS growth (compound annual) | ||||||
|---|---|---|---|---|---|---|
| Sales growth in £ billion | <5% | 5% | 10% | 15% | 20% | 25% |
| 2.50 | 0.0 | 1.0 | 2.0 | 3.0 | 4.5 | 5.0 |
| 2.25 | 0.0 | 1.0 | 1.5 | 2.5 | 4.0 | 5.0 |
| 2.00 | 0.0 | 0.0 | 1.5 | 2.0 | 3.0 | 4.5 |
| 1.75 | 0.0 | 0.0 | 1.5 | 2.0 | 2.5 | 4.0 |
| 1.50 | 0.0 | 0.0 | 1.0 | 1.5 | 2.0 | 3.0 |
| 1.25 | 0.0 | 0.0 | 0.0 | 1.0 | 1.5 | 2.5 |
| 1.00 | 0.0 | 0.0 | 0.0 | 0.0 | 1.0 | 2.0 |
A reconciliation of the number of shares conditionally allocated is shown below:
| Number of shares 2008 million |
Number of shares 2007 million |
|
|---|---|---|
| Outstanding at beginning of year | 6.5 | 7.0 |
| Forfeited | (0.4) | (0.5) |
| Outstanding at end of year | 6.1 | 6.5 |
Details of shares conditionally allocated at 22 March 2008 are set out below:
| Date of conditional award | Shares conditionally allocated 2008 million |
Shares conditionally allocated 2007 million |
|---|---|---|
| 13 July 2005 | 6.1 | 6.5 |
(g) Long-Term Incentive Plan 2006
Under the Long-Term Incentive Plan 2006, shares were conditionally awarded to the top 1,000 managers in the Company, from the Chief Executive to the supermarket store managers. The core awards are calculated as a percentage of the participants’ salaries and scaled according to grades.
The awards will vest if the threshold levels of two co-dependent performance conditions - Return on Capital Employed (“ROCE”) and growth in cash flow per share, are achieved over the three-year performance period. As set out in table 3 below, the core award can grow by up to four times, dependent on the level of performance. Straight-line vesting will apply if performance falls between two points.
Performance will be measured at the end of the three-year performance period. If the required level of performance has been reached, the awards vest and 50 per cent of the award will be released. Subject to participants remaining in employment for a further year, the balance will be released on the fourth anniversary of the date of award. Options granted to acquire the award of shares will expire two years from vesting date. Dividends will accrue on the shares that vest in the form of additional shares.
Table 3 - Level of awards
| 3 year cash flow per share growth (compound annual) | |||||
|---|---|---|---|---|---|
| ROCE | 6% | 9% | 12% | 15% | >18% |
| >=14% | 1.5 | 2.5 | 3.0 | 3.5 | 4.0 |
| 13% | 1.0 | 1.5 | 2.0 | 3.0 | 3.5 |
| 12% | 0.5 | 1.0 | 1.5 | 2.0 | 3.0 |
| 11% | 0.0 | 0.5 | 1.0 | 1.5 | 2.5 |
| 10% | 0.0 | 0.0 | 0.5 | 1.0 | 1.5 |
A reconciliation of the number of shares conditionally allocated is shown below:
| Number of shares 2008 million |
Number of shares 2007 million |
|
|---|---|---|
| Outstanding at beginning of year | 2.5 | – |
| Conditionally allocated | 2.1 | 2.6 |
| Forfeited | (0.1) | (0.1) |
| Outstanding at end of year | 4.5 | 2.5 |
Details of shares conditionally awarded at 22 March 2008 are set out below:
| Date of conditional award | Shares conditionally allocated 2008 million |
Shares conditionally allocated 2007 million |
|---|---|---|
| 13 July 2006 | 2.4 | 2.5 |
| 20 June 2007 | 2.1 | – |
| 4.5 | 2.5 |
Options to acquire the award of shares were valued using the Black-Scholes option-pricing model. No performance conditions were included in the fair value calculations. The fair value per option granted during the year and the assumptions used in the calculation are as follows:
| 2008 | 2007 | |
|---|---|---|
| Share price at grant date (pence) | 558 | 335 |
| Exercise price (pence) | - | – |
| Expected volatility (%) | 19.0 | 29.0 |
| Option life (years) | 4.2 | 4.1 |
| Expected dividends (expressed as dividend yield %) | - | – |
| Risk-free interest rate (%) | 5.6 | 4.7 |
| Fair value per option (pence) | 558 | 335 |
The expected volatility is based on the standard deviation of the Group’s share price for the period immediately prior to the date of grant of award, over the period identical to the vesting period of the award, adjusted for management’s view of future volatility of the share price.
(h) Deferred Annual Bonus Plan
The Deferred Annual Bonus Plan, applies to the top levels of management including Executive Directors and currently comprises around 40 participants in total. The first deferral took place in June 2007, in respect of the bonus awards for the financial year ended 24 March 2007. The next deferral will take place in June 2008.
The Plan measures the Company’s TSR performance over a three-year period against a bespoke UK and European retail comparator group comprising: Ahold, Carrefour, Casino, Delhaize, DSG International, Home Retail Group, Kingfisher, Marks & Spencer, Metro, Morrisons, Next and Tesco. Alliance Boots was removed from the comparator group following its de-listing.
Up to two matched shares may be awarded for each share deferred depending on the extent to which the TSR measure is achieved. No shares are awarded for below median performance, and the full match will only apply where the Company achieves first place within the comparator group. At median position the match will be 0.5 shares for each deferred bonus share and the share match will be pro rated at every position between median and first place.
To the extent that the performance condition is met at the end of the three-year performance period, the matched shares will be added to the deferred bonus shares. The deferred bonus shares and half of the matched shares can be accessed immediately, while the remainder will be held over for a further year. Dividends or the equivalents will accrue on shares that vest.
A reconciliation of the number of shares conditionally allocated is shown below:
| Number of shares 2008 million |
Number of shares 2007 million |
|
|---|---|---|
| Outstanding at beginning of year | - | – |
| Granted during the year | 0.6 | – |
| Outstanding at end of year | 0.6 | – |
Details of shares allocated at 22 March 2008 are set out below:
| Date of award | Shares conditionally allocated 2008 million |
Shares conditionally allocated 2007 million |
|---|---|---|
| 20 June 2007 | 0.6 | – |