Notes to the consolidated financial statements - supplementary information
35. Share options and reward plans
We operate four principal forms of share option and share reward plans. These plans include an employee Sharesave scheme, a Performance Share Plan (PSP), the Deferred Share Plan and the Retention Award Plans. In any ten year period, the maximum number of shares that may be issued or issuable pursuant to these share plans may not exceed 10% of the issued ordinary share capital.
Active share plans
The Sharesave scheme is savings related where, under normal circumstances, share options are exercisable on completion of a three and/or five year Save As You Earn contract. The exercise price of options granted represents 80% of the market price at the time of the invitation.
Under the PSP, awards have been made to Executive Directors and approximately 400 senior employees. Awards made from 2005 have criteria of 50% based on the Company’s total shareholder return (TSR) performance when compared to the FTSE 100 and 50% based on the annualised growth of the Company’s EPS compared to the growth in RPI (the general index of retail prices for all items). Awards are delivered in National Grid plc shares (ADSs for US participants).
Under the Deferred Share Plan, one half of any Annual Performance Plan awarded to the Executive Directors and a predetermined part of any Annual Performance award earned by senior employees is automatically deferred into National Grid shares (ADSs for US participants). The shares/ADSs are held in trust for three years before release.
Retention Awards have been made to a small number of senior employees across the Company. Awards were made predominately to senior US employees following the acquisition of KeySpan. Awards vest in equal tranches over two and four years, provided the employee remains employed by the Company. The Retention Awards are conditional awards with no performance conditions attached.
Additional information in respect of active share plans
| 2010 millions | 2009 millions | 2008 millions |
|
|---|---|---|---|
| Performance Share Plan | |||
| Awards of ordinary share equivalents at 1 April | 9.5 | 7.5 | 8.0 |
| Awards made | 4.1 | 3.5 | 3.1 |
| Lapses/forfeits | (0.8) | (0.7) | (3.4) |
| Awards vested | (3.8) | (0.8) | (0.2) |
| Awards of ordinary share equivalents at 31 March | 9.0 | 9.5 | 7.5 |
| Conditional awards available for release at 31 March | 0.1 | 1.8 | – |
| Deferred Share Plan | |||
| Awards of ordinary share equivalents at 1 April | 1.0 | 0.5 | 0.4 |
| Awards made | 0.5 | 0.6 | 0.2 |
| Awards vested | (0.6) | (0.1) | (0.1) |
| Awards of ordinary share equivalents at 31 March | 0.9 | 1.0 | 0.5 |
| Conditional awards available for release at 31 March | – | – | – |
| Retention Award Plans | |||
| Awards of ordinary share equivalents at 1 April | 0.5 | 0.8 | – |
| Awards made | 0.1 | – | 0.8 |
| Lapses/forfeits | (0.1) | – | – |
| Awards vested | (0.2) | (0.3) | – |
| Awards of ordinary share equivalents at 31 March | 0.3 | 0.5 | 0.8 |
| Conditional awards available for release at 31 March | – | – | – |
Non-active share plans
We also have a number of historical plans where awards are still outstanding but no further awards will be granted. These include the Executive Share Option Plan and the Share Matching Plan.
The Executive Share Option Plan applied to senior executives, including Executive Directors. Options granted were subject to the achievement of performance targets related to TSR over a three year period and those for 2000 were subject to a final retest on 31 March 2010 and the performance condition was not met. This award has therefore lapsed. The share options are generally exercisable between the third and tenth anniversaries of the date of grant if the relevant performance target is achieved.
The Share Matching Plan applied to Executive Directors and other senior employees whereby a predetermined part of each participant’s bonus entitlement was automatically deferred into National Grid plc shares (known as qualifying shares) and a matching award may be exercised under the Plan after a three year period provided the Director or senior employee remains employed by the Company or its subsidiary undertakings.
Additional information in respect of non-active share plans
| 2010 000s | 2009 000s | 2008 000s |
|
|---|---|---|---|
| Share Matching Plan | |||
| Awards at 1 April | 89 | 201 | 384 |
| Awards exercised | (18) | (112) | (183) |
| Awards at 31 March | 71 | 89 | 201 |
| Options exercisable at 31 March | 71 | 89 | 109 |
| Transitional Share Awards/Special Share Awards | |||
| Awards of ordinary share equivalents at 1 April | – | 3 | 77 |
| Lapses/forfeits | – | – | (1) |
| Awards vested | – | (3) | (73) |
| Awards of ordinary share equivalents at 31 March | – | – | 3 |
| Conditional awards available for release at 31 March | – | – | 3 |
Share options
Movement in options to subscribe for ordinary shares under the Company’s various options schemes for the three years ended 31 March 2010 is shown below and includes those options related to shares issued by employee benefit trusts:
| Sharesave scheme options | Executive Plan options | |||||
|---|---|---|---|---|---|---|
| Weighted average price £ | millions | Weighted average price £ | millions | Total options millions |
||
| At 31 March 2007 | 4.07 | 21.3 | 4.74 | 3.2 | 24.5 | |
| Granted | 6.55 | 2.9 | – | – | 2.9 | |
| Lapsed – expired | 4.43 | (1.0) | 5.31 | (0.1) | (1.1) | |
| Exercised | 3.37 | (6.3) | 4.45 | (1.1) | (7.4) | |
| At 31 March 2008 | 4.74 | 16.9 | 4.87 | 2.0 | 18.9 | |
| Granted | 4.88 | 7.4 | – | – | 7.4 | |
| Lapsed – expired | 6.07 | (2.2) | 4.16 | (0.1) | (2.3) | |
| Exercised | 3.81 | (2.0) | 4.81 | (0.4) | (2.4) | |
| At 31 March 2009 | 4.74 | 20.1 | 4.95 | 1.5 | 21.6 | |
| Granted | 5.20 | 3.7 | – | – | 3.7 | |
| Lapsed – expired | 5.38 | (0.9) | 5.24 | (0.1) | (1.0) | |
| Exercised | 3.77 | (4.5) | 4.93 | (0.5) | (5.0) | |
| At 31 March 2010 | 5.05 | 18.4 | 4.92 | 0.9 | 19.3 | |
Included within options outstanding were the following options that were exercisable:
| At 31 March 2010 | 4.98 | 0.8 | 4.71 | 0.5 | 1.3 |
| At 31 March 2009 | 4.57 | 0.1 | 4.81 | 1.0 | 1.1 |
| At 31 March 2008 | 3.74 | 0.5 | 4.78 | 1.3 | 1.8 |
The weighted average remaining contractual life of options in the employee Sharesave scheme at 31 March 2010 was 2 years and 6 months. These options have exercise prices between £3.17 and £6.55 per ordinary share.
The weighted average share price at the exercise dates was as follows:
| 2010 £ | 2009 £ | 2008 £ |
|
|---|---|---|---|
| Sharesave scheme options | 5.74 | 6.99 | 7.79 |
| Executive Plan options | 6.03 | 6.81 | 7.68 |
Additional information in respect of share options
| 2010 £m | 2009 £m | 2008 £m |
|
|---|---|---|---|
| Share options exercised | |||
| Cash received on exercise of all share options during the year | 18 | 8 | 23 |
| Tax benefits realised from share options exercised during the year | 8 | 4 | 10 |
Options outstanding and exercisable and their weighted average exercise prices for the respective ranges of exercise prices and years at 31 March 2010 are as follows:
| Weighted average exercise price of exercisable options £ | Number exercisable millions | Weighted average exercise price of outstanding options £ | Number outstanding millions | Exercise price per share pence | Normal dates of exercise years |
|
|---|---|---|---|---|---|---|
| Executive Plan options | 5.27 | 0.1 | 5.28 | 0.4 | 526.0-531.5 | 2004-2011 |
| 4.62 | 0.4 | 4.62 | 0.5 | 434.5-481.5 | 2006-2013 | |
| 4.71 | 0.5 | 4.92 | 0.9 |
The aggregate intrinsic value of all options outstanding and exercisable at 31 March 2010 amounted to £30m and £2m respectively.
Share-based payment charges
The charge to the income statement for the year ended 31 March 2010 was £25m (2009: £22m; 2008: £18m). The related tax charge recognised in the income statement was £1m (2009: £1m credit; 2008: £1m charge).
Awards under share option plans
The average share prices at the date of options being granted, the average exercise prices of the options granted and the estimated average fair values of the options granted during each of the three financial years ended 31 March were as follows:
| 2010 | 2009 | 2008 | |
|---|---|---|---|
| Average share price | 676.0p | 684.0p | 846.0p |
| Average exercise price | 520.0p | 488.0p | 655.0p |
| Average fair value | 161.1p | 153.7p | 190.0p |
These amounts have been calculated in respect of options where the exercise price is less than the market price at the date of grant.
The fair values of the options granted were estimated using the following principal assumptions:
| 2010 | 2009 | 2008 | |
|---|---|---|---|
| Dividend yield (%) | 5.0 | 5.0 | 4.5 |
| Volatility (%) | 22.4-26.1 | 22.4-26.1 | 15.6-18.9 |
| Risk-free investment rate (%) | 2.5 | 2.5 | 4.2 |
| Average life (years) | 4.0 | 4.2 | 4.1 |
The fair values of awards under the Sharesave scheme have been calculated using the Black-Scholes European model. This is considered appropriate given the short exercise window of Sharesave options. A Black-Scholes European model calculation is carried out every three years. In the intervening years fair values are calculated by reference to the previous full calculation. Consequently, the fair value of awards made in 2010 have been calculated by reference to the 2009 Black-Scholes European model calculation and the fair values of awards made in 2008 have been calculated by reference to the 2006 Black-Scholes European model calculation.
Volatility was derived based on the following, and is assumed to revert from its current implied level to its long-run mean based on historical volatility under (ii) below:
- (i)
- implied volatility in traded options over the Company’s shares;
- (ii)
- historical volatility of the Company’s shares over a term commensurate with the expected life of each option; and
- (iii)
- implied volatility of comparator companies where options in their shares are traded.
Awards under other share plans
The average share prices and fair values at the date share awards were granted during each of the three financial years ended 31 March were as follows:
| 2010 | 2009 | 2008 | |
|---|---|---|---|
| Average share price | 598.2p | 670.1p | 766.9p |
| Average fair value | 355.6p | 458.1p | 522.8p |
The fair values of the awards granted were estimated using the following principal assumptions:
| 2010 | 2009 | 2008 | |
|---|---|---|---|
| Dividend yield (%) | 4.4 | 4.4 | 4.4 |
| Risk-free investment rate (%) | 2.5 | 2.5 | 4.1 |
Fair values have been calculated using a Monte Carlo simulation model for awards with total shareholder return performance conditions. A Monte Carlo simulation model calculation is carried out every three years. In the intervening years fair values are calculated by reference to the previous full Monte Carlo simulation model calculation. Consequently, the fair value of awards made in 2010 have been calculated by reference to the 2009 Monte Carlo simulation model calculation and the fair value of awards made in 2008 have been calculated by reference to the 2006 Monte Carlo simulation model calculation. Fair values of awards with performance conditions based on earnings per share have been calculated using the share price at date of grant less the present value of dividends foregone during the performance period.
For other share scheme awards, where the primary vesting condition is that employees complete a specified number of years’ service, the fair value has been calculated as the share price at date of grant, adjusted to recognise the extent to which participants do not receive dividends over the vesting period. Volatility for share awards has been calculated on the same basis as used for share options, as described above.