No awards will vest unless threshold ROCE and cash flow per share targets are achieved. The performance measures are reviewed each year by the Committee, before a new grant is made, to ensure that they remain relevant and stretching.
The Committee determined that, for awards to be made in 2008/09, adjustments will be made to the way in which ROCE and cash flow per share performance is measured, as set out below.
ROCE is calculated based on shareholders’ proportion of underlying operating profit for the business. The capital employed figure excludes the one-off impact of capital spend in the year the calculation is made and also accounts for the net pension scheme surplus or deficit after deferred taxation.
The Committee determined that whilst management should be encouraged to reduce volatility in the overall pension position, this should not have an undue influence on the ROCE calculation, and that an appropriate focus should be retained on profit generation and operational efficiency. Therefore, the impact of the movement in the net pension schemes surplus or deficit on the performance multiplier will be capped at 0.5 times for future awards.
Total cash flow per share is calculated at the end of the performance period from two components:
- the underlying cash operating profit or loss for the business before depreciation and amortisation, less interest and taxes (adjusted to strip out the impact of one-off items) in the final year of the performance period. This reflects the Company’s improved ability to generate sustainable cash flows; plus
- the improvement in normalised working capital over the performance period. This reflects the Company’s aggregate contribution to cash from improvements in working capital over the three-year period.
These components are then added and expressed as a per share figure. The improvement in total cash flow per share is expressed as a percentage of cash operating profit per share in the base year and is annualised.
The working capital element will be capped so as not to comprise more than one-third of the total cash flow per share figure (the two components being considered on an absolute basis).
Vesting is calculated by applying a performance multiplier to the core award on a sliding scale up to four times. The performance matrix applying to Value Builder awards to be made in 2008 is set out below. Straight-line vesting will apply if performance falls between two points.
| ROCE | Total cash flow per share percentage | ||||
|---|---|---|---|---|---|
| 3% | 6% | 9% | 12% | 15% | |
| 15% | 1.5 | 2.5 | 3.0 | 3.5 | 4.0 |
| 14% | 1.0 | 1.5 | 2.0 | 3.0 | 3.5 |
| 13% | 0.5 | 1.0 | 1.5 | 2.0 | 3.0 |
| 12% | – | 0.5 | 1.0 | 1.5 | 2.5 |
| 11% | – | – | 0.5 | 1.0 | 1.5 |
Performance will be measured at the end of the performance period. If the required level of performance has been reached, 50 per cent of the award will be released at the end of year three. Subject to participants remaining in employment for a further year, the balance will be released on the fourth anniversary of the date of grant. The Committee has discretion to make adjustments to the calculation of the performance measures (for instance for material acquisitions and disposals) to ensure it remains a true and fair reflection of performance. Dividends will accrue on the shares that vest in the form of additional shares.
J Sainsbury plc Share Plan 2005
Following extensive investor consultation, the J Sainsbury Share Plan 2005 (known as the “Making Sainsbury’s Great Again Plan”) was designed to reward strong growth in sales and profitability. It is a one-off, self funded incentive arrangement and was closed to new entrants on 25 March 2006.
Over 1,000 colleagues received conditional core awards under this Plan, from the Chief Executive through to supermarket store managers, focused on identical targets. The levels of core award were scaled according to seniority; the maximum being 100 per cent of salary for the Chief Executive. In addition, all Executive Directors and Operating Board Directors committed to making a personal investment of 50 per cent of salary in the Plan - accordingly Justin King, Darren Shapland and Mike Coupe acquired 118,754, 70,224 and 73,891 shares respectively.
Performance is measured over a four-year period from the financial year ended 26 March 2005 until the year ending March 2009. Awards will vest if two stretching and co-dependent performance conditions are achieved: growth in sales and earnings per share (“EPS”). No awards will vest unless threshold levels of growth in both sales and EPS are achieved.
The maximum award available under the Plan is targeted towards sales growth of £2.5 billion (using a base figure of £13,588 million), and compound annual growth in EPS of at least 21 per cent over a four-year period. There is an opportunity for partial vesting of up to half the award if accelerated performance targets have been met at the end of year three (the year ended 22 March 2008). Performance will be tested in May 2008, and it is expected that awards will vest in full and that, in accordance with the accelerated vesting provisions, half of those awards will then be released.
The EPS base year and targets were originally set under the Plan in accordance with UK GAAP. However, following the introduction of IFRS the Committee concluded that, in order to ensure that calculations were measured consistently and transparently and by reference to audited figures, the UK GAAP methodology should be replaced by IFRS. After considering various possible ways of restating the EPS base and target figures, the Committee agreed that the base year EPS should be updated to reflect IFRS. As a result EPS is now measured with reference to underlying basic EPS. This reduced EPS for the base year from 8.6 pence per share to 8.3 pence per share. The third and fourth year targets will also be reduced by the same amount of 0.3 pence per share to maintain them at the same levels.
Vesting is calculated by applying a performance multiplier to the core award and personal investment; this is on a sliding scale from one times to five times and is plotted in a matrix format, as set out in note 32. Dividends will accrue on any shares that vest and will be released to participants in the form of additional shares at the point of vesting.
iii) Other share plans
In order to encourage wider employee share ownership, the Company provides two all employee share plans for colleagues, namely the Savings Related Share Option Scheme (“SAYE”) and the All Employee Share Ownership Plan. Executive Directors may participate in these plans in the same way as all other colleagues and Justin King is currently participating in both plans. Darren Shapland and Mike Coupe participate in the SAYE plan. As these are all employee plans there are no performance conditions.
The 2002 (five-year) SAYE plan reached maturity on 1 March 2008. Around 3,500 colleagues could use their savings and tax-free bonus to buy Sainsbury’s shares at the 239.0 pence option price. The 2004 (three-year) SAYE plan matured at the same time and a further 4,800 colleagues could use their savings and tax-free bonus to buy Sainsbury’s shares at the 217.0 pence option price. Using the market price on the date of the first exercise, the value of all the shares subject to the maturity was in excess of £21.3 million.
We currently have over 25,000 colleagues participating in the SAYE plan with over 49,300 individual savings contracts.
In 2003 we gave some free shares under our All Employee Share Ownership Plan to all colleagues who had one financial year’s service. These shares were held in a trust for five years and on 4 June 2008, 1.4 million shares will be released to 39,600 colleagues.