Pick n Pay Group of Companies financial statements

notes to the group financial statements

5.

SHARE-BASED PAYMENTS
 

The Group operates two employee share incentive schemes for the benefit of its executive directors, senior management and employees. These are the 1997 Employee Share Option Scheme and the Pick n Pay Stores Limited Forfeitable Share Plan. Both schemes incentivise executive directors, senior management and employees by providing them with an opportunity to acquire shares in the Group, thereby aligning interests with shareholders and encouraging employee retention.

 
 

the 1997 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 share 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).
 

Pick n Pay Holdings Limited RF (PWK) shares
 

Long-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. There are no vesting conditions – long-service share options may be taken up immediately on granting.
 

Pick n Pay Stores Limited (PIK) shares
 

Status share options – are granted to employees who attain manager grade and further options are granted at each promotion to higher levels of management. In order to encourage employee retention, status shares vest in three instalments (vesting periods) as follows:

  • 40% after three years
  • 30% after five years
  • 30% after seven years
 

There are no performance conditions attached to these share options. Vesting is only dependent on the employee meeting the service requirement of remaining in the employ of the Group over the specified vesting period. If the employee leaves before the vesting period is complete, all the unvested share options will lapse.
 

Retention share options – these share options specifically encourage the retention of key individuals and have longer vesting periods of up to 10 years.
 

Performance share options – executives may be eligible for a performance “top-up”, as recognition of their valuable contribution to the Group. These options vest in the same manner as status share options.
 

Binary share options (share options with performance conditions) – these are granted to key senior management. These three- to five-year options may only be taken up when prescribed performance conditions linked to the growth of the PIK 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.
 

Forfeitable share plan for top executives (FSP)
 

The FSP recognises those key senior management who have a significant role to play in delivering the Group’s strategy and ensuring the growth and sustainability of the business in the future.
 

Forfeitable shares are performance shares. Shares awarded under the FSP will always have performance conditions attached. If the performance conditions are not met within the specified time period (the vesting period), the employee will forfeit the shares.
 

Refer to the remuneration report for more information on the FSP.
 

For details of share options held by directors and forfeitable share plan shares issued to directors refer to the remuneration report.
 

The directors have received approval to utilise up to 63 892 844 shares of the issued share capital of Pick n Pay Stores Limited and 92 268 589 shares of the issued share capital of Pick n Pay Holdings Limited RF for the purpose of managing both employee share schemes.
 
       

Pick n Pay Stores Group

    

Pick n Pay Holdings Group
       

52 weeks

1 March

2015

Number

of options

000’s

52 weeks

2 March

2014

Number

of options

000’s

   

52 weeks

1 March

2015

Number

of options

000’s

52 weeks

2 March

2014

Number

of options

000’s

5.1

Outstanding share options

            
 

Movement in the total number of share options granted is as follows:

            
 

At beginning of period

50 156.0

52 849.6

   

15 264.6

13 955.3

 

New options granted*

2 949.9

2 582.0

   

3 208.1

2 159.0

 

Options taken up**

(6 492.5)

(2 172.2)

    

(1 837.2)

(849.7)
 

Options forfeited

(12 738.8)

(3 103.4)

    

—

—
 

At end of period

33 874.6

50 156.0

   

16 635.5

15 264.6

 

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

            
 

2016

R31.38

R14.41

17 710.2

28 400.7

   

16 635.5

15 264.6

 

2017

R36.31

  

4 577.0

6 199.5

   

—

—
 

2018

R40.67

  

5 386.4

5 440.6

   

—

—
 

2019

R35.68

  

2 869.5

4 514.1

   

—

—
 

2020 and thereafter

R46.83

  

3 331.5

5 601.1

   

—

—
   

33 874.6

50 156.0

   

16 635.5

15 264.6

 

Percentage of issued shares

7.0%

10.4%

    

3.2%

2.9%
 

* Average grant price of options granted during the period

R44.94

R44.13

    

R23.60

R17.85
 

** Average grant price of options taken up during the period

R33.50

R27.50

    

R16.27

R13.37
 

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 (refer to note 19)

1 746.9

1 974.5

   

9 257.8

9 193.8

 

On behalf of share purchase scheme participants

125.3

125.3

   

344.6

365.2

       

1 872.2

2 099.8

   

9 602.4

9 559.0


 
       

Pick n Pay Stores Group

    

Pick n Pay Holdings Group
       

52 weeks

1 March

2015

Number

of options

000’s

52 weeks

2 March

2014

Number

of options

000’s

   

52 weeks

1 March

2015

Number

of options

000’s

52 weeks

2 March

2014

Number

of options

000’s

5.2

Outstanding forfeitable shares

            
 

Movement in the total number of forfeitable shares granted is as follows:

            
 

At beginning of period

—

—

    

—

—
 

New shares granted*

6 925.0

—

    

—

—
 

At end of period

6 925.0

—

    

—

—
 

Percentage of issued shares

1.4%

—

    

—

—
 

* Average grant price of options granted during the period

—

—

    

—

—
 

Outstanding forfeitable shares may be taken up during the following financial periods:

            
   

Average grant price

            
 

Year

Pick n Pay

Stores

Group

Pick n Pay

Holdings

Group

            
 

2017

—

—

6 925.0

—

    

—

—

5.3

Total outstanding share awards

            
 

Share options

33 874.6

50 156.0

   

16 635.5

15 264.6

 

Forfeitable shares

6 925.0

—

    

—

—
 

Total

40 799.6

50 156.0

   

16 635.5

15 264.6

 

Total shares available for management of share schemes

63 892.4

63 892.4

   

92 268.6

92 268.6
 

Available for granting under current authorisations

23 092.8

13 736.4

    

75 633.1

77 004.0
 

For details of share options held by directors and forfeitable share plan shares issued to directors refer to the remuneration report.
 

5.4

Fair value – share options
 

The fair value of share options granted to employees are valued at the grant date and expensed through profit or loss over the vesting period of the option.
 

The fair value of each option granted in Pick n Pay Stores Limited (PIK) and Pick n Pay Holdings Limited RF (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
 volatility*

Expected
 dividend
 yield**

Risk-free
rate***
   

2014

PWK

2 159.0

1

R17.38 – R22.50

R16.93 – R20.86

22.73 – 23.93

2.81 – 3.40

6.60 – 8.50
   

2014

PIK

2 582.0

3 – 7

R38.29 – R52.00

R37.31 – R50.29

21.61 – 25.25

2.55 – 3.14

5.66 – 8.61
   

2015

PWK

3 208.1

1

R20.55 – R25.50

R19.95 – R24.51

23.21 – 23.92

2.23 – 2.77

7.15 – 8.27
   

2015

PIK

2 949.9

3 – 7

R45.14 – R59.01

R43.81 – R58.63

24.11 – 24.95

1.94 – 2.51

6.71 – 8.35
 

5.5

Fair value – forfeitable share plan
 

Shares granted to employees under the forfeitable share plan were valued on 22 August 2014 (the acceptance date) and will be expensed through profit or loss over the vesting period of the share.
 

The fair value of rights to shares granted under the forfeitable share plan has been estimated using an actuarial binomial option pricing model. The assumptions used in determining the fair value of the rights granted in the financial period are as follows:

 

Financial

period

of grant

Shares

granted

Number

of shares

granted

000’s

Expected

vesting

period

Share price at

grant date

Expected

volatility*

Expected

dividend

yield**

Risk-free rate***
 

2015

PIK

6 925.0

3

R55.59

23.54

—

6.86

   

Pick n Pay Stores Group

    

Pick n Pay Holdings Group
   

52 weeks

1 March

2015

Rm

52 weeks

2 March

2014

Rm

   

52 weeks

1 March

2015

Rm

52 weeks

2 March

2014

Rm

5.6

Share-based payment expense

            
 

Total expensed to date – beginning of period

570.6

499.1

   

570.6

499.1

 

Share-based payment expense (note 3.1)

139.9

71.5

   

139.9

71.5

 

Total expensed to date – end of period

710.5

570.6

   

710.5

570.6

 

Share options expense to be recognised in future financial periods, in respect of all outstanding options that have not yet completed the vesting period

            
 

Within one year

162.1

42.9

   

162.1

42.9

 

Within two to five years

236.7

59.3

   

236.7

59.3

 

After five years

1.9

2.5

   

1.9

2.5

 

Total expense to be recognised

400.7

104.7

   

400.7

104.7

 

Total current and future share-based payment expense

1 111.2

675.3

   

1 111.2

675.3

 

*

The expected volatility is determined based on the rolling historical volatility over the expected option term that prevailed at the grant date.

**

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. For the forfeitable share plan the expected dividend yield is zero as all participants have an unforfeitable right to future dividends.

***

The risk-free rate is the yield on zero-coupon South African government bonds of a term consistent with the estimated option term.