Notes to the annual financial statements

Pick n Pay Stores Limited
 
     
 

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 to the volume-weighted average market price (VWAP) for the 20 trading days preceding the option grant date.

Following the AGM on 11 June 2008, the Share Trust implemented 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 three to 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.
        GROUP
        2011  
Number of  
options  
000’s  		     2010  
Number of  
options  
000’s  
4.1   Outstanding share options            
  Movement in the total number of share options is as follows:            
  At 1 March       48 371.7       44 789.7  
  New options granted*       17 425.6       8 366.8  
  Options taken up**     (8 763.1)      (3 336.0) 
  Options forfeited       (3 885.4)      (1 448.8) 
  At 28 February       53 148.8       48 371.7  
  Outstanding options may be taken up during the following financial years:            
  Year   Average grant price            
  2012   R23.87     12 759.5        
  2013   R32.38     5 849.8        
  2014   R29.90     4 481.9        
  2015   R39.73     18 230.1        
  2016 and thereafter   R30.02     11 827.5        
        53 148.8        
  Percentage of issued shares       11.1%       10.1%  
  Options available for granting under current authorisation       10 744.0       15 521.1  
  *Average grant price of options granted during the year       R41.14       R34.89  
  **Average grant price of options taken up during the year       R21.84       R17.47  
  For the movement in the number of Pick n Pay Holdings Limited (PIKWIK) share options granted, please refer to note 7 of the Pick n Pay Holdings Limited financial statements.            
  For details of share options held by directors refer to note 3.2.            
        2011  
Number of  
shares  
000’s  		     2010  
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     3 411.6       6 780.5  
  On behalf of share purchase scheme participants       145.6       159.6  
        3 557.2       6 940.1  

4.2

Fair value

The Group accounts for its share option expense 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 statement of comprehensive income 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  
votalitilitya		 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 – 35.60   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   2 – 10   R26.00 – R38.05   R24.15 – R33.95   22.78 – 42.29   3.10 – 4.35   7.16 – 13.46  
  2010   PWK   655.8   1   R13.10   R12.20   30.81   5.07   6.52  
  2010   PIK   8 366.8   2 – 7   R29.50 – R41.60   R28.20 – R39.19   25.40 – 27.37   4.39 – 4.82   7.27 – 9.19  
  2011   PWK   1 893.0   1   R16.00   R16.91   21.91   5.51   7.13  
  2011   PIK   17 425.6   2 – 7   R38.00 – R49.41   R40.00 – R46.10   24.44 – 27.36   4.41 – 4.82   6.67 – 9.05  
 
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
      2011  
Rm  		     2010  
Rm  
4.3   Share-based payment expense            
  Total expensed to date – 1 March     238.3       172.3  
  Share options expense for the year     73.8       66.0  
  Continuing operations     73.8       65.2  
  Discontinued operations     —       0.8  
  Total expensed to date – 28 February     312.1       238.3  
  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     78.8       55.5  
  Within 2 to 5 years     150.1       102.7  
  After 5 years     7.7       13.9  
  Total expense still to be recognised     236.6       172.1  
  Total financial impact of share-based payments     548.7       410.4  
 
 

 

  
 
Integrated Annual Report 2011|www.picknpay.co.za