Pick n Pay Stores Limited and its subsidiaries
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4. SHARE-BASED PAYMENTS
 

The Group operates the 1997 Employee Share Option Scheme (“the Scheme”) in order to facilitate broad-based employee share ownership and to foster trust and loyalty amongst employees. The Scheme incentivises key management and staff by providing them with an opportunity to acquire shares in the Group thereby aligning their interests with shareholders and at the same time encouraging employee retention.

The Scheme is administered by the Employee Share Purchase Trust and its Board of Trustees. All options are granted in accordance with the rules of the Scheme, which have been approved by the shareholders and the JSE Limited.

All options are granted at a 5% discount (10% discount in prior year) to the volume-weighted average market price (VWAP) for the 20 trading days preceding the option grant date.

At the Group’s AGM on 11 June 2008, certain amendments to the Share Scheme were approved by shareholders. One of the amendments introduced the “net-settling” of share options. All share options granted after 11 June 2008 will, at the time of exercise by the employee, be automatically net-settled by the Company. This means that at the time of the exercise of an option, the employee will only receive so many shares (at current value) as represents the gain in the value of the option. For all options granted prior to 11 June 2008, the employee can choose whether to net-settle the options, or whether to pay the purchase price in full to take-up the total allotment of shares.

All vested share options have to be exercised, paid for (or net-settled) and taken up within 10 years of the grant date. The directors are authorised to utilise up to 13.3% of the issued share capital for the Scheme.

The Scheme grants the following options to employees:

Service Share Options – are granted to all permanent employees who have been with the Group for five years and further options are granted every five years thereafter.

Service share options may be taken up immediately on granting.

Status Share Options – are granted to employees who attain floor manager status and further options are granted at each promotion to higher levels of management.

Status share options may be taken up in three tranches as follows:
40% after 3 years
30% after 5 years
30% after 7 years

Further share allocations are also made for the retention of key executives, with longer vesting dates of up to 10 years.

Executive Share Options – are granted to senior executives. These five-year options may only be taken up when prescribed performance conditions linked to the growth of the Company’s share price are met. If the conditions are not met, these options are automatically forfeited. Should further performance hurdles be achieved, discounted grant prices may apply.
        COMPANY
           
        2009  
Number of  
options  
000’s  		   2008
Number of
options
000’s
4.1 Outstanding share options        
  Movement in the total number of share options granted is as follows:        
  At 1 March     32 891.5     29 478.4
  New options granted*     15 969.8     7 201.7
  Options taken up**     (2 891.0)    (3 042.8)
  Options forfeited     (1 180.6)    (745.8)
  At 28 February     44 789.7     32 891.5
  Outstanding options may be taken up during the following financial years:        
  Year Average grant price      
  2010 R21.35   21 548.0      
  2011 R26.54   5 351.0      
  2012 R29.34   3 335.3      
  2013 R26.95   3 755.5      
  2014 and thereafter R27.27   10 799.9      
        44 789.7      
  Percentage of issued shares     8.8%     6.5%
  Options available for granting under current authorisation     22 526.1     34 424.3
  *Average grant price of options granted during the year     R26.44     R30.96
  **Average grant price of options taken up during the year     R11.28     R10.85
 

For the movement in the number of Pick n Pay Holdings Limited (PIKWIK) share options granted, please refer to note 6 of the Pick n Pay Holdings Limited financial statements.

For details of share options held by directors refer to note 3.2.

        
        2009  
Number of  
shares  
000’s  		   2008
Number of
shares
000’s
  The Employee Share Purchase Trust, which administers the 1997 Employee Share Option Scheme, holds the following number of ordinary shares:        
  As a hedge against share options granted or to be granted by that Scheme, reflected as treasury shares     7 614.6     9 723.7
  On behalf of share purchase scheme participants     189.1     223.4
        7 803.7     9 947.1
 
4.2 Fair value
 

The Group accounts for share option expenses in accordance with IFRS 2: Share-based Payments, which requires the fair value of share options granted to employees to be valued at the grant date and expensed through the income statement over the vesting period of the option.

The fair value of each option grant in Pick n Pay Stores Limited (PIK) and Pick n Pay Holdings Limited (PWK) has been estimated on the grant date using an actuarial binomial option-pricing model. The assumptions used in determining the fair value of the options granted in each financial year are as follows:
  Financial
year of
grant		 Options
granted		 Number of
options
granted
000’s		 Expected
life of
options
Years		 Share price
at grant date		 Grant
price		 Expected  
volatilitya		 Expected  
dividend  
yieldb		 Risk-free  
ratec
  2003 PIK 617.6 4 – 8 R12.15 – R13.90 R11.00 – R12.50 39.74 – 39.78   3.32 – 3.70   9.88 – 10.52  
  2004 PWK 862.4 1 – 8 R5.43 – R5.85 R5.10 – R5.25 19.34 – 41.65   3.24 – 5.66   9.67 – 10.96  
  2004 PIK 5 232.3 2 – 8 R11.67 – R16.35 R10.50 – R14.85 30.66 – 39.78   3.79 – 3.86   8.70 – 10.62  
  2005 PIK 4 381.5 2 – 8 R17.16 – R23.10 R16.00 – R21.00 28.48 – 39.33   3.76 – 4.32   7.58 – 9.95  
  2006 PIK 12 969.7 2 – 8 R23.25 – R31.00 R21.00 – R27.90 22.61 – 35.94   3.80 – 4.23   7.15 – 8.01  
  2007 PWK 860.8 1 R14.84 R13.25 18.94   3.98   8.37  
  2007 PIK 5 866.5 2 – 7 R25.80 – R34.10 R25.00 – R29.75 22.35 – 35.50   3.65 – 4.34   6.97 – 8.70  
  2008 PWK 708.8 1 R14.84 R13.25 19.41   3.98   8.37  
  2008 PIK 7 201.7 2 – 8 R32.15 – R38.22 R29.75 – R33.95 23.00 – 39.78   3.61 – 3.70   7.40 – 8.86  
  2009 PWK 787.0 1 R12.90 R11.33 20.56   4.31   9.94  
  2009 PIK 15 969.8 3 – 10 R26.00 – R38.05 R24.15 – R33.95 22.78 – 42.29   3.10 – 4.35   7.16 – 13.46  
  a   The expected volatility is determined based on the rolling historical volatility over the expected option term that prevailed at the grant date.
  b   The expected dividend yield is the best estimate of the forward-looking dividend yield over the expected life of the option. This has been estimated by reference to the historical average dividend yield during the period preceding the grant, equal to the vesting period of the grant.
  c   The risk-free rate is the yield on zero-coupon South African Government bonds of a term consistent with the estimated option term.
    GROUP
       
    2009  
Rm  		   2008  
Rm  
4.3 Share-based payment expense    
  Total expensed to date – 1 March 113.2     68.0  
  Share options expense for the year 59.1     45.2  
  Total expensed to date – 28 February 172.3     113.2  
       
  At 28 February, the share options expense to be recognised in future financial years, in respect of all options granted since 2003, is:    
  Within 1 year 56.9     41.0  
  Within 2 to 5 years 94.1     66.5  
  After 5 years 18.2     3.7  
  Total expense still to be recognised 169.2     111.2  
  Total financial impact of share-based payments 341.5     224.4