Notes to the financial statements – Group
6. Share-based employee remuneration
As at 31 December 2010 the Group maintained six share-based payment schemes for employee remuneration.
The Mears Group PLC Long-term Incentive Plan 2008 (LTIP)
The LTIP was introduced in October 2008 following shareholder approval. The award of options is offered to a small number of key senior management. The principal terms of the LTIP are detailed below:
| Principal terms of LTIP | |
| Number of options | Maximum award limit under the plan will be 200% of salary per annum. |
| Exercise price | Nil |
| Performance period | 3 years |
| Performance conditions | There are two performance targets attaching to the LTIP Award. 50% of the LTIP Award will relate to an EPS growth target. The other 50% of the LTIP Award relates to the Company′s TSR against the return of the FTSE All Share Support Services Sector. |
| Expiry conditions | Options are forfeited if the employee leaves the Group before the options have vested. |
| Performance conditions of LTIP | ||||
| EPS growth target | TSR target | |||
| Performance levels | Level of vesting | Performance levels | Level of vesting | |
| 10.0% | 10% | Below index return | 0% | |
| 12.5% | 30% | Equal to index | 30% | |
| 17.5% | 100% | 10% outperformance of the index per annum | 100% | |
The Mears Group PLC Long-term Incentive Plan 2009 (LTIP)
The LTIP was introduced in October 2008 following shareholder approval. The award of options is offered to a small number of key senior management. The principal terms of the LTIP are detailed below:
| Principal terms of LTIP | |
| Number of options | Maximum award limit under the plan will be 200% of salary per annum. |
| Exercise price | Nil |
| Performance period | 3 years |
| Performance conditions | There are two performance targets attaching to the LTIP Award. 75% of the LTIP Award will relate to an EPS growth target. The other 25% of the LTIP Award relates to the Company′s TSR against the return of the FTSE All Share Support Services Sector. |
| Expiry conditions | Options are forfeited if the employee leaves the Group before the options have vested. |
| Performance conditions of LTIP | ||||
| EPS growth target | TSR target | |||
| Performance levels | Level of vesting | Performance levels | Level of vesting | |
| 10.0% | 10% | Below index return | 0% | |
| 12.5% | 30% | Equal to index | 30% | |
| 17.5% | 100% | 10% outperformance of the index per annum | 100% | |
The Mears Group PLC Long-term Incentive Plan 2010 (LTIP)
The LTIP was introduced in October 2008 following shareholder approval. The award of options is offered to a small number of key senior management. The principal terms of the LTIP are detailed below:
| Principal terms of LTIP | |
| Number of options | Maximum award limit under the plan will be 200% of salary per annum. |
| Exercise price | Nil |
| Performance period | 3 years |
| Performance conditions | There are two performance targets attaching to the LTIP Award. 75% of the LTIP Award will relate to an EPS growth target. The other 25% of the LTIP Award relates to the Company′s TSR against the return of the FTSE All Share Support Services Sector. |
| Expiry conditions | Options are forfeited if the employee leaves the Group before the options have vested. |
| Performance conditions of LTIP | ||||
| EPS growth target | TSR target | |||
| Performance levels | Level of vesting | Performance levels | Level of vesting | |
| 8.0% | 10% | Below index return | 0% | |
| 12.5% | 30% | Equal to index | 30% | |
| 17.5% | 100% | 10% outperformance of the index per annum | 100% | |
Approved share option plan
Options are exercisable at a price equal to the average quoted market price of the Company′s shares on the three dealing days prior to the date of grant. The vesting period is three years. If the options remain unexercised after a period of ten years from the date of grant, the options expire. Options are forfeited if the employee leaves the Mears Group before the options vest.
Enterprise management incentive plan
Options are exercisable at a price equal to the average quoted market price of the Company′s shares on the three dealing days prior to the date of grant. The vesting period is three years. If the options remain unexercised after a period of ten years from the date of grant, the options expire. Options are forfeited if the employee leaves the Mears Group before the options vest.
Unapproved share option plan
Options are exercisable at a price equal to the average quoted market price of the Company′s shares on the three dealing days prior to the date of grant. The vesting period is three years. If the options remain unexercised after a period of ten years from the date of grant, the options expire. Options are forfeited if the employee leaves the Mears Group before the options vest. With the introduction of the LTIP in 2008, the Remuneration Committee has decided that no further awards will be made under the unapproved share option plan.
In October 2008, shareholders approved a proposal to cancel outstanding unapproved market-priced options (subject to approval by option holders) and replace them with a lower number of nil-cost options with the same expected value and terms and conditions. The nil-cost options will only be able to be exercised if the share price is greater than the original exercise price of the market-priced options. This significantly reduced the current levels of dilution and ensures that the Group will be able to manage the overall levels of dilution within the accepted limits endorsed by the Association of British Insurers and which are recognised by institutional investors as best practice.
Save As You Earn (SAYE) scheme
Options are available to all employees. Options are granted for a period of either three or five years. Options are exercisable at a price based on the quoted market price of the Company′s shares at the time of invitation, discounted by up to 20%. Options are forfeited if the employee leaves the Mears Group before the options vest which results in an acceleration of the share-based payment charge.
Special Incentive Plan 2007 (SIP)
The SIP was introduced in 2007 to reward the Chief Executive Officer with premium priced options linked to long-term performance. The terms and conditions were subsequently amended on 3 July 2009. The principal terms of the SIP and performance conditions are detailed below:
| Principal terms of SIP | |
| Number of options | 2,500,000 |
| Exercise price | Nil |
| Performance conditions | Average real EPS growth attained over three financial years with the base period for calculating EPS being 31 December 2006. EPS was calculated before amortisation and IFRS 2 costs. The performance was measured at the end of the three-year period. The performance conditions relating to this award were satisfied in full. |
| Vesting conditions | The award vested in full in November 2010, 60% became exercisable in November 2010, 20% will become exercisable in November 2011 and the remaining 20% will become exercisable in November 2012. |
| Performance conditions of SIP | |
| Performance levels | Level of vesting |
| 5% + RPI per annum | 10% |
| 10% + RPI per annum | 50% |
| 15% + RPI per annum | 100% |
Details of the share options outstanding (excluding those issued under the SIP) are as follows:
| 2010 | 2009 | ||||
| Number '000 |
Weighted average exercise price p |
Number '000 |
Weighted average exercise price p |
||
| Outstanding at 1 January | 7,142 | 126 | 6,850 | 131 | |
| Granted | 875 | — | 995 | — | |
| Forfeited | (177) | 148 | (313) | 163 | |
| Exercised | (338) | 121 | (390) | 146 | |
| Outstanding at 31 December | 7,502 | 75 | 7,142 | 126 | |
The weighted average share price at the date of exercise for share options exercised during the period was 121p. The options outstanding at 31 December 2010, excluding the SIP Award, were exercisable at prices between 1p and 300p and had a weighted average remaining contractual life of five years and eleven months.
The fair values of options granted were determined using the Binomial and Monte Carlo option pricing models. Significant inputs into the calculation include the market price at the date of grant and exercise prices. Furthermore, the calculation takes into account the future dividend yield, the share price volatility rate and the risk-free interest rate.
The underlying expected share price volatility was determined by reference to historical data. The Company expects the volatility of its share price to reduce as it matures. The risk-free interest rate was determined by the implied yield available on a zero-coupon Government bond at the date of grant. Adjustments are made to reflect expected and actual forfeitures during the vesting period due to failure to satisfy service conditions. In the case of the SAYE scheme the expected forfeitures takes account of the requirement to save throughout the life of the scheme. The inputs into the option pricing model are as follows:
| 2010 | 2009 | |
| Share price (p) | 275 | 275 |
| Exercise price (p) | 1–300 | 1–300 |
| Expected volatility (%) | 20 | 20 |
| Expected life (years) | 3–5 | 3–5 |
| Risk-free rate (%) | 1.97 | 1.97 |
177,000 options lapsed during the year. The market price at 31 December 2010 was 303p and the range during 2010 was 227p to 315.5p.
At 31 December 2010, 2.9m options had vested and were still exercisable at a weighted average exercise price of 103p.
All share-based employee remuneration will be settled in equity. The Group has no legal obligation to repurchase or settle the options.
The Group recognises the following expenses related to share-based payments:
| 2010 £'000 |
2009 £'000 |
|
| LTIP | 101 | 11 |
| Approved share option plan | 35 | 52 |
| Unapproved share option plan | 108 | 181 |
| SAYE | 20 | 18 |
| SIP | 486 | 238 |
| 750 | 500 |
In total, £0.75m of employee remuneration expense has been included in the Consolidated Income Statement for 2010 (2009: £0.5m), which gave rise to additional share-based payment reserves. No liabilities were recognised due to share-based payment transactions.