Notes to the Group annual financial statements

for the period ended 3 March 2013
4.   Share-based payments  
  The Group operates an Employee Share Option Scheme (the Scheme). The Scheme is administered by the Employee Share Purchase Trust (the share 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.  
  All options are granted at the volume-weighted average market price (VWAP) for the 20 trading days preceding the option grant date. No discount is applied.  
  All share options granted after 11 June 2008 will, at the time of exercise by the employee, be automatically net settled by Pick n Pay Stores Limited. 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 (gross settle).  
  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 in Pick n Pay Holdings Limited – are granted to all permanent employees who have been with the Group for 5 years and further options are granted every 5 years thereafter.  
  Service share options may be taken up immediately on granting.  
  Status share options in Pick n Pay Stores Limited – are granted to employees who attain manager status and further options are granted at each promotion to higher levels of management.  
  Status share options may be taken up in 3 tranches as follows:  
40% after 3 years  
30% after 5 years  
30% after 7 years  
  Retention share options in Pick n Pay Stores Limited – further share allocations are also made for the retention of key executives, with longer vesting dates of up to 10 years.  
  Executive share options in Pick n Pay Stores Limited – are granted to senior executives. These 5 year options may only be taken up when prescribed performance conditions linked to the growth of Pick n Pay Stores Limited’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. Refer to the remuneration report here for further details.  
    Pick n Pay Stores
Group		 Pick n Pay HOLDINGS
Group
    2013  
Number  
of options  
000’s  		 2012  
Number  
of options  
000’s  		 2013  
Number  
of options  
000’s  		 2012  
Number  
of options  
000’s  
4.1   Outstanding share options          
  Movement in the total number of share options granted is as follows:          
  At beginning of period   54 244.9   53 148.8   12 107.4   9 824.6  
  New options granted*   6 022.4   6 287.5   3 159.8   3 230.4  
  Options taken up**   (5 298.9)  (2 442.5)  (892.9)  (918.8) 
  Options forfeited   (2 118.8)  (2 748.9)  (419.0)  (28.8) 
  At end of period   52 849.6   54 244.9   13 955.3   12 107.4  
  Outstanding options may be taken up during the following financial periods:              
    Average grant price          
  Year   Pick n Pay
Stores
Group		 Pick n Pay
Holdings
Group		        
  2014   R34.48 R12.02 31 999.2     13 955.3    
  2015   R34.04   6 618.2     —    
  2016   R34.89   5 100.9     —    
  2017   R37.98   4 637.9     —    
  2018 and thereafter   R37.24   4 493.4     —    
        52 849.6     13 955.3    
  Percentage of issued shares   11.0%   11.3%   2.6%   2.1%  
  Options available for granting under current authorisation (000’s)  11 043.0   9 647.9   78 313.3   80 161.2  
 
*   Average grant price of options granted during the period  
R44.85   R41.58   R15.36   R15.35  
 
**   Average grant price of options taken up during the period  
R27.94   R24.48   R12.68   R10.93  
  For details of share options held by directors refer to the remuneration reports here and here.          
    000’s   000’s   000’s   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, reflected as treasury shares   2 046.6   2 482.2   9 115.8   9 011.0  
  On behalf of share purchase scheme participants   133.1   144.3   389.8   426.2  
    2 179.7   2 626.5   9 505.6   9 437.2  
4.2   Fair value  
  The fair value of share options granted to employees are 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 period are as follows:  
  Financial  
period  
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
  2012   PWK   2 230.4   1   R16.50   R16.50   20.66   4.49   5.60  
  2012   PIK   6 287.5   3 – 7   R37.36 – R47.23   R37.29 – R47.10   24.24 – 25.72   3.68 – 4.16   6.40 – 8.38  
  2013   PWK   3 159.8   1   R19.58 – R20.41   R18.00 – R20.04   22.82 – 23.85   3.61 – 4.04   5.69 – 6.97  
  2013   PIK   6 022.4   3 – 7   R37.00 – R48.49   R32.65 – R46.37   22.24 – 24.74   3.24 – 3.62   5.76 – 7.94  
  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
    2013   2012  
    Rm   Rm  
4.3   Share-based payment expense      
  Total expensed to date – beginning of period   407.8   312.1  
  Share options expense for the period   91.3   95.7  
  Total expensed to date – end of period   499.1   407.8  
  Share options expense to be recognised in future financial periods, in respect of all options granted since 2003, is:      
  Within 1 year   74.3   75.5  
  Within 2 to 5 years   82.6   110.0  
  After 5 years   3.9   3.9  
  Total expense to be recognised   160.8   189.4  
  Total current and future share-based payment expense   659.9   597.2